Methods Used In Analyzing Corporate Financial Statements

2.2.1.4. Notes to financial statements

Notes to financial statements are prepared to provide information on the production and business situation that is not yet included in the financial reporting system, and at the same time explain some indicators that are not yet presented in the financial statements to help readers and analysts of the indicators in the financial statements have a more specific and detailed view of changes in items in the balance sheet and business performance.

The form of financial statement explanation can be prescribed by the state, and can be partly prepared by the enterprise to facilitate the management and analysis of the enterprise's finances.

2.2.2. Methods used in analyzing corporate financial statements

Financial statement analysis methods include a system of tools and measures to approach and study financial statements in a comprehensive and detailed manner to assess the financial situation of an enterprise.

Maybe you are interested!

In theory, there are many methods of analyzing financial statements, but in practice, people often use the comparison method and the ratio method.

- Comparison method: to apply this method, it is necessary to ensure the conditions of comparability of financial indicators (unity in space, content, nature and unit of measurement...) and determine the basis of comparison according to the purpose of analysis. The basis of comparison chosen can be in space or time, the analysis period chosen can be the reporting period or the planning period, the comparison value can be chosen as absolute, relative or average number. The comparison content includes:

+ Compare the actual number of this period with the actual number of the previous period to see the trend of change in the financial situation of the enterprise. Evaluate the growth or decline of the enterprise.

+ Compare the number of implementation periods with the number of planned periods to see the level of effort of the business.

+ Compare the business's data with the industry average data of other businesses to assess whether the business's financial situation is good or bad.

+ Vertical comparison to consider the proportion of each indicator compared to the whole, horizontal comparison of many periods to see the change in both relative and absolute numbers of a certain indicator over consecutive accounting years.

- Ratio method: this method is based on the standards of ratios of financial quantities in financial relations. In principle, the ratio method requires determining thresholds and norms to comment on and evaluate the financial situation of the enterprise based on comparing the enterprise's ratios with the values of reference ratios.

In analyzing corporate financial statements, financial ratios are divided into specific ratio groups that reflect basic contents according to the business's operational goals. Each ratio group includes many individual ratios that reflect each part of financial activities.

When analyzing financial ratios, the analysis can be carried out according to the following steps:

Step 1: Determine the correct formula to measure the indicator to be analyzed.

Step 2: Identify the correct figures from the financial report to enter into the calculation formula. Step 3: Explain the meaning of the ratio just calculated.

Step 4: Evaluate the calculated ratio (high, low or appropriate). Step 5: Draw conclusions about the financial situation of the enterprise. Step 6: Analyze the factors affecting the financial ratio.

Step 7: Make recommendations to correct or improve financial ratios. Step 8: Write a report.

In addition to the main analysis methods above, people also use a number of other methods: graphical methods, chart methods, financial mathematics methods,... including methods of analyzing hypothetical situations.

In the process of overall analysis, the flexible application and interleaving of methods will bring higher results than when analyzing simply, because in financial analysis, the results that each indicator brings are only really meaningful when considering it in relation to other indicators. Therefore, an effective analysis method needs to go from general assessment to detailed parts, or in other words, at first we look at the financial situation on a broad scale, then go into analyzing and evaluating general indicators of the financial situation and to understand better, we will analyze the specific financial indicators of the enterprise, compare with previous years, and at the same time compare with the reference ratio to show the trend of fluctuations as well as the operating capacity of the enterprise compared to the industry average.

2.3. CONTENT OF ENTERPRISE FINANCIAL REPORT ANALYSIS

Financial statements present the financial position of a business at a point in time (balance sheet), or over a period of time (income statement), or both (cash flow statement). However, these statements provide only financial data and not much financial information. To obtain financial information, these statements must be analyzed.

2.3.1. Analysis of financial ratios of the enterprise

Based on the way the data is used to determine, financial ratios can be divided into three types: financial ratios determined from the balance sheet, financial ratios determined from the accounting records, and financial ratios determined from the accounting records.

determined from the income statement and financial ratios determined from both statements. Based on the analysis objective, financial ratios can be divided into liquidity ratios, debt ratios, debt and interest coverage ratios, operating efficiency ratios, profitability ratios and growth ratios.

In financial statement analysis, financial ratios are usually divided into four main groups. These are: solvency ratios, capital balance ratios, activity ratios, and profitability ratios. In general, the primary concern of financial analysts is whether the financial situation of the enterprise is healthy or not? Is the enterprise able to meet its debts when they are due? However, depending on the purpose of financial analysis, financial analysts pay more attention to this or that group of ratios. For example, short-term creditors are particularly interested in the borrower's solvency. Meanwhile, long-term investors are more interested in the ability to operate profitably and the efficiency of production and business. They also need to study the solvency situation to assess the enterprise's ability to meet current payment needs and consider profits to estimate the enterprise's final debt repayment ability. Besides, they also pay attention to the capital balance ratio because changes in this ratio will significantly affect their interests.

2.3.1.1. Solvency ratios

In the process of production and business activities, to finance their assets, enterprises not only rely on equity capital but also need other sources of funding, which are loans. This borrowing is done with many subjects and in many different forms. Regardless of the subject, to come to the decision of whether to lend to the enterprise or not, they are all interested in the enterprise's ability to pay.

The solvency of an enterprise reflects the financial relationship between the amounts that can be paid during the period and the amounts that must be paid during the period. Analyzing solvency ratios not only helps creditors reduce risks in credit relationships and preserve their capital, but also helps the enterprise itself see its actual solvency so that it can take timely measures to adjust asset items appropriately to improve solvency.

Solvency ratios include

a. General liquidity ratio (current – short term)

Is a ratio determined by dividing current assets by current liabilities. Current assets typically include cash, short-term financial investments, accounts receivable, and

receivables and reserves (inventories); short-term liabilities usually include short-term loans from banks and credit institutions, payables to suppliers, other payables... Both current assets and short-term liabilities have a term of less than one year. The general payment ratio is a measure of a business's short-term solvency, it shows the extent to which the debts of short-term creditors are covered by assets that can be converted into cash within a period corresponding to the term of those debts; that is, for each dong of short-term debt of the business, how many dong of current assets can be used to pay.

The formula for the general payment ratio is as follows:

General liquidity ratio = Current assets (3.1)

Short-term debt

When evaluating solvency using the general solvency ratio, the following cases may occur:

- In case the ratio decreases much or is too low compared to the normal level, it shows that the enterprise has potential financial difficulties in paying short-term debts. In particular, if this ratio is lower than 1, the ability to pay off debts in full is impossible, even if trying to collect all short-term debts, sell all short-term securities and reduce inventories to convert into cash.

- In case this ratio is too high, although the general payment ability is good (ready to pay short-term debt in full), but in terms of capital efficiency, it is not necessarily good because the business may have more outstanding receivables, high inventories, and excess cash and deposits.

Therefore, the assessment of general solvency must be based on the specific situation of the enterprise, first of all, whether the short-term debts are reasonable and whether the necessary and sufficient factors for debt payment are arranged.

Based on the balance sheet in section 2.1, it can be determined:

General payment ratio at the beginning of the year

General payment ratio at year end

 71,784,621,000

53,799,098,000

 118,693,420,000

102,898,840,000

 1.33

 1.15

This year's general payment ratio is lower than last year's. If this ratio of businesses in the same industry is usually 3, for example, then the business's payment ability is too low. The cause can be found from the factor of high inventory and too much receivable debt.

b. Quick ratio

A high general liquidity ratio does not accurately reflect whether a business can quickly meet short-term debts in a short period of time at low cost because it also depends on the liquidity of current assets and the structure of these items. Therefore, we need to consider the quick liquidity ratio of the business.

The quick ratio is determined by dividing quick assets by current liabilities. Quick assets are assets that can be quickly converted into cash, including cash, short-term financial investments, and accounts receivable. Inventories are assets that are more difficult to convert into cash in total current assets and are more likely to incur losses when sold. Therefore, the quick ratio indicates the ability to repay short-term debts regardless of the sale of inventories; that is, for each dollar of short-term debt, how many dollars of current assets can be mobilized immediately to pay.

Quick ratio = Or:

Quick ratio =

Cash + Short-term Investments + Accounts Receivable Short-term Debt

Current Assets – Inventory Value Current Liabilities

(3.2)

(3.3)

In general, this ratio usually fluctuates from 0.5 to 1. However, similar to the case of the current ratio, to conclude whether the value of the quick ratio is good or bad, it is necessary to consider the characteristics and business conditions of the enterprise. If this ratio is less than 0.5, the enterprise will have difficulty in paying its debts.

According to the balance sheet, with formula (3.3) we can calculate:

Quick ratio at the beginning of the year

Quick ratio at year end

 71,784,621,000 -15,445,985,000  1.05

53,799,098,000

 118,693,420,000 - 25,528,628,000  0.91

102,898,840,000

The year-end payment ratio has decreased and is lower than 1, showing the company's difficulty in paying short-term debts, even though short-term receivables are used as a basis for calculating debt repayment ability.

c. Instant payment ratio

The quick ratio does not fully reveal the solvency of a business because it only takes into account short-term debts. If long-term debts are due, the business

How to deal with it if there is no plan in advance and will it cause the business to lose its ability to pay? The current ratio tells us quite a bit about that situation, however, this ratio is very sensitive so businesses need to determine it appropriately because if the current ratio is lower than one, the business must sell other current assets such as short-term securities... to pay, and if the current ratio is too high, it means the business has too much cash in reserve, then the business misses the opportunity to make a profit.

The instant payout ratio is determined as follows:

Quick ratio = Cash (3.4)

Debt due

The current ratio shows the relationship between cash (cash and cash equivalents) and due debts. Due debts include short-term, medium-term, and long-term debts due. Creditors consider the average reasonable level for this ratio to be 0.5. When this ratio is greater than 0.5, the immediate payment ability of the enterprise is positive and vice versa.

From the Balance Sheet:

Beginning of year instant payout ratio

Year-end instant ratio

 5,280,476,000

53,799,098,000

 2,477,610,000

102,898,840,000

 0.1

 0.02

At both times (especially at the end of the year), the business's ability to pay is very low. If all creditors demand payment, the business will fall into a very difficult situation, having to delay debt payment or accept overdue debt.

3.3.1.2. Capital balance ratios

These ratios are used to measure the contribution of the owners of the business compared to the financing of the creditors for the business. It is also considered as financial leverage and has an important meaning in financial analysis. Because, the creditors look at the equity of the business to show the level of confidence in the safety of the debts. If the owners only contribute a small proportion of the total capital, the risks in production and business activities are borne by the creditors. On the other hand, by raising capital through debt, the business owners still have the right to control and operate the business. In addition, loans also create tax savings because the cost of debt is a pre-tax cost.

Firms with low debt ratios face less risk of loss in a recession and have lower expected profits than firms with high debt ratios in a booming economy. In other words, firms with high debt ratios

There is a high risk of loss but a chance of high returns. Although the expected returns are high, most investors are very risk averse. Therefore, the decision to use debt must be balanced between returns and risks.

Based on the analysis of capital structure, enterprises will understand their ability to self-finance, their level of initiative in production and business, or the difficulties they encounter in exploiting capital sources.

a. Debt ratio (Debt to total assets ratio)

Debt Ratio = Liabilities (3.5)

Total assets

The debt ratio reflects the level of debt used by the enterprise. This indicator is usually multiplied by 100% to get a percentage. This ratio shows (1) the level of debt used to finance the assets of the enterprise, (2) what percentage of the total capital of the enterprise is debt (because total assets equal total capital).

This ratio is used to determine the obligations of the business owner to the creditors who have contributed capital to the business. Usually, creditors prefer a moderate debt ratio because the lower the ratio, the more secure their debts are in case the business goes bankrupt. Meanwhile, owners prefer a high debt ratio because they want to increase profits quickly and want full control of the business, but if the debt ratio is too high, the business is likely to fall into a state of insolvency.

According to the company's data on the Balance Sheet, we have the following debt ratio:

53,700,258  0.62 or 62%

Debt ratio last year Debt ratio this year

85,883,723

102,096,313  0.75 or 75%

135,671,064

The company's debt ratio is quite high during the year, especially at the end of the year, debt accounts for 75% of business capital. This shows that the company depends too much on debt, and it is short-term debt, so the financial risk is quite high if the use of capital is not effective. Among short-term debt, the largest debts are short-term loans and debts payable to suppliers, these are debts with very short repayment periods, which is a difficulty for the business.

b. Interest payment capacity (Number of times interest can be paid)

Interest Coverage = Earnings Before Interest and Taxes (3.6)

Interest

Interest coverage ratio indicates the level of earnings that will cover annual interest payments. Failure to pay these debts can lead to bankruptcy. Along with the debt-to-asset ratio, interest coverage ratio provides an indication of how well a company is paying its debts. A high debt-to-asset ratio combined with a low interest coverage ratio compared to the industry average will make it difficult for a company to increase its debt.

If this ratio of a business is less than 1, there are two possibilities: (1) the business borrows too much and uses debt ineffectively, causing the profits generated to not be enough to pay interest, (2) the business's profitability is too low, causing the profits generated to not be enough to pay interest.

When calculating this index, it is important to note:

- Interest is included in the financial expenses of the enterprise, so when determining the profit before corporate income tax, the interest expense is deducted from the enterprise's income statement. Therefore, to calculate the profit before interest and tax, the profit before tax must be added to the interest expense.

- Interest payable during the period includes all interest payable on all types of loans.

The interest coverage ratio also indicates the level of financial risk of the enterprise, because if this ratio is too low, it means that the cost of paying interest is too high, even if it is lower than 1, it means that the enterprise is unable to pay all the interest on the loan (if it can pay all the interest, the enterprise will lose money).

Based on the company's documents on the business performance report, we calculate the interest coverage ratio as follows:

Last year's interest coverage ratio

Interest coverage ratio this year

 1,004,703  1,805,464  1.55

1,805,464

 1,255,715  703,264  2.78

703,264

The calculation results show that the enterprise is able to pay interest and still has profit after paying interest. This year (the year of analysis) the interest payment ratio is higher than last year, although the debt this year is higher, proving that the enterprise has used borrowed capital more effectively.

c. Ability to be financially independent

Financial independence = Equity (3.7)

Medium and long term capital

This ratio reflects the financial self-sufficiency and business initiative of the enterprise. The higher this ratio, the less assets the enterprise has.

Comment