Chapter 10: Application of Financial Analysis Techniques

This chapter focuses on applying financial analysis techniques to evaluate a company’s historical performance, forecast future results, and support investment decisions. Readers are expected to assess how a company’s strategy is reflected in past financial performance, using ratio analysis and trend evaluation. Emphasis is placed on forecasting future net income and cash flows, with detailed instruction on projecting operating, investing, and financing cash flows accurately. The chapter highlights the role of financial statement analysis in credit assessment, outlining the four categories of items critical to evaluating credit quality. For equity analysis, students learn how to use financial ratios and trend data to identify potential investment opportunities. Analyst adjustments; including restatements, reclassifications, and standardizations; are emphasized to enable meaningful comparisons across firms. Students are guided through adjustments such as removing nonrecurring items, standardizing accounting policies, and preparing common-size statements, understanding how these affect key ratios used in valuation and credit analysis. Special attention is given to interpreting ratios correctly, recognizing methodological differences, and determining whether higher or lower values indicate stronger performance. The chapter also revisits the DuPont framework, demonstrating how decomposing return on equity into profitability, efficiency, and leverage components enhances understanding of financial performance. By combining ratio analysis, forecasting, credit evaluation, and analyst adjustments, this chapter equips students with the practical skills to analyze, compare, and interpret corporate financial information with rigor and insight.