Balance Sheet and Income Statement Analysis: A Comprehensive Guide

I. Balance Sheet Analysis

Specifically, the following critical elements must be addressed:

I. Balance Sheet Analysis. In this section, use financial statements and accompanying notes to:

A. Analyze what the company’s current and prior year liquidity and debt-to-equity ratios say about the company’s financial health, justifying your response. Consider the appropriate level of debt and how this year’s performance compares to the previous year’s.

B. Consider normalization adjustments when adjusting the balance sheet to be comparable to competitors, when creating the prospective balance sheet, and when calculating the final company valuation as either a premium or discount. 

C. Analyze the company’s balance sheet for the current and previous year using a horizontal analysis. (Include your horizontal analysis spreadsheet in Excel as an appendix.) Explain your findings.

D. Comparison. Analyze the competitor’s balance sheet indicators for opportunities for the selected company to improve its own performance.

Justify your response using the financial statements of both the company and its competitor.

II. Income Statement and Cash Flow Analysis. In this section, use financial statements and accompanying notes to:

A. Analyze the profitability of your selected company using appropriate profitability ratio(s) and a vertical analysis of the company’s current and prior year income statement. (Include your vertical analysis spreadsheet in Excel as an appendix.) Be sure to explain your findings.

B. Normalization adjustments. Analyze historical income statements to determine whether there were any non-recurring or extraordinary items that should be removed from the income statement. An example would be aggressive expense recognition or conservative revenue recognition,which could either depress or inflate earnings. Adjusting these items will make the target company more comparable to the others.

C. Free cash flow. Analyze what your selected company’s free cash flow figures for the current and prior year say about the company’s financial health. Consider other sources or uses of available discretionary cash.

D. Dividend paying capacity of the company. Determine if the company is on track to pay out dividends this year and whether the dividend payout ratio increase or decrease.