Part 1
Financial statement analysis is the process of reviewing, evaluating and analyzing the financial statements of a company so that the investors and the users of the financial statements are better able to make their economic decisions. The financial statements of the company include the balance sheet, income statement and the statement of cash flows along with statement of changes in equity. The financial statement ratios are used to analyze the trend of the company’s performance based on a range of areas(Gerald, 2001).
This helps the management and the users of the financial statements to evaluate the performance, risks, future prospects and the current financial health of the company. There are a number of stakeholders that make use of the financial statements and rely on financial statement analysis for meeting their needs. These stakeholders mayinclude government, public, equity investors, credit investors and a number of the members of the organization itself that want to make a number of decisions(Fridson, 2011).
Financial Statement Analysis Assignment Harvard Case Solution & Analysis
Before discussing the advantages and limitations of the financial statement analysis, we discuss and illustrate different ratios within the given major categories of financial statement analysis. We have illustrated these categories of ratio analysis by calculating the ratios for two competitor companies that are Air Canada and WestJet Inc. The financial statements for these companies have been taken from Yahoo Finance and we have computed the ratios for 2014 and 2015 for both companies. These are explained and illustrated below showing the use of financial statement analysis.
Market Ratios
The evaluation of both the companies has been performed based on market ratios and major balance sheet items. In terms of the EPS WestJet has much higher earnings per share than Air Canada, which might be due to the low cost operations of the company and higher net income. The operating expenses of WestJet are also lower than Air Canada, although they are increasing. The price over sales ratio for WestJet are much higher suggesting a higher value of the company as a multiple of its sales. This helps us to compare the magnitude of the sales of each company.
The level of debt of WestJet is much lower as previously stated however; its total equity is higher than Air Canada, which has negative equity in 2014. The revenues of both the companies are increasing however; the revenues of Air Canada are increasing at a much higher growth rate than WestJet Airline. Lastly, the PE ratios of Air Canada are significantly higher than WestJet but it has declined in 2015, which is probably due to declining share price of the company. The PE ratio for WestJet has also declined in 2015. The results are shown in the table below:
Illustration of Market Ratios | |||||
Formulas | Air Canada | WestJet | |||
2015 | 2014 | 2015 | 2014 | ||
Earnings Per Share | Taken from Annual Reports | 1.06 | 0.35 | 4.67 | 2.22 |
Share Prices Per Share (Year End) | Taken from Yahoo finance | 13.38 | 13.47 | 21.8 | 21.66 |
Price/Earnings ratio (yearend) | Price per share/Earning per share | 12.62 | 38.49 | 4.67 | 9.76 |
MC/Book Ratio | MC/Book Value | 0.001 | -0.113 | 0.382 | 0.383 |
Price/Sales Ratio | Taken from Morningstar | 0.26 | 0.24 | 0.7 | 0.5 |
Total Assets | Taken from Annual Reports | 13127 | 10648 | 5129 | 4646 |
Total Debt | Taken from Annual Reports | 13114 | 11849 | 3169 | 2869 |
Total Equity | Taken from Annual Reports | 13 | -1201 | 1960 | 1778 |
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