Financial statements analysis with usage of computer application.

Pejic Bach, Mirjana ; Jakovic, Bozidar ; Misulic, Marko 等

1. INTRODUCTION

Financial statement analysis is a complicated process in itself. For one person to calculate fundamental and other financial ratios from a financial statement of a certain company it is necessary to copy all fields from the financial statement, which takes over an hour, and then make a calculation of the indicators from the data. The possibility of error during such of process of analyzing statements is considerable. Since having correct information at the right time is often a crucial factor in making investment decisions, especially in the dynamic capital market, procrastination can result in missing a great investment opportunity. By using the computer application, we can save a lot of time and get valuable information to our investors in time.

2. FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is an integral part of investment analysis the goal of which is to provide information on financial situation, management, plans and strategies which the company is undertaking as well as the business environment so that business decisions can be made based on information gathered (Wild at al., 2001).

The basic groundwork of the analysis: balance sheet, income statement, cash flow statement, (Zager et al., 2007). The quality of information that the financial statements contain implies that the financial standing of the company and business success is presented in a truthful and fair manner pertaining to all materially important points (Sever, 2007). The process of analysis contains of the application of analytical rules and techniques with the intention of deriving important and useful data which will be used when making financial decisions. The beneficiaries of these information can be the owners, creditors, auditors, the state and many others. The analysis determines the current state of the company, real and objective information on liquidity, financial stability debt and profitability; it defines causes and symptoms of financial problems within the company (Zager & Zager, 1999).

Financial statement analysis is one of the main sources of information for investors because it provides insight into the business and financial standings of a certain company.

3. AFI--COMPUTER APPLICATION

AFI--"Analiza financijskih izvjestaja" (Financial statement analysis) is a computer application that analyses financial statements of joint stock companies in Croatia that are available in Microsoft Excel format. MS Excel is a program that deals with data in tables. Data that is organized in tables ate possible to analyze and graphically present and thus generate estimates and various reports (Vlahovic & Jakovic, 2007). MS Excel is a very powerful tool that can be used for m any purposes. In his article, Abbott describes the application of MS Excel in resolving problems encountered when running a library (Abbott, 1990). It can be used for surveys (Foo, & Hepworth, 2000) or different data analysis (Granebring & Revay, 2007). In this article its use in financial statement analysis will be shown. The application is written in Visual Basic for Applications The AFI application has and empty module for entry of items from the financial statement which broadens the functionality of the program and enables the analysis of statements created outside Croatia. The main strength of the AFI application is that it is not necessary to copy data from the financial statement but only to upload the financial statement that you wish to analyze. During the analysis the data from the statement are automatically transferred and the result of the complete analysis is ready in less than a second. The user immediately receives an overview of the fundamental indicators and the financial standing of the company along with a graphic display of the key indicators.

4. APPLICATION PROCEDURES

The user interface enables the user easy access to program options; it is necessary to do only two things in order to analyze the uploaded financial statement. First the financial statement needs to be uploaded after which the user will see the fundamental indicators and the financial standing of the company for the current time period and for the same period the previous year. Based on the uploaded financial statement, the AFI application calculates the following indicators: Enterprise value, EBITDA, EBIT, BVPS, EPS, SPS, ROA, ROE, P/B, P/E, P/EBITDA, P/EBIT, P/S, EV/EBITDA, EV/EBIT, EBITDA margin, EBIT margin, gross profit margin, liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios, activity ratios, debt ratios ...

Since banks and insurance companies have different financial statement fields (Orsag, 2003), a special module is s provided for such companies within the application which computes the special indictors for such companies. Along with the calculation of said indicators, the application provides insight into the financial standing of the company (balance sheet, profit and loss statement, cash flow) as well as information on management, supervisory board and stock holders on the last day of reports. In order for the analysis to be complete it is only necessary to write the regular stock price in the field as well as the privileged stock price (if there is such a stock option) in order to get the accurate calculation of the indicators that use the market stock price as one of the variables.

5. TYPES OF ANALYSIS IN AFI APPLICATION

The AFI application enables you to make several types of financial statement analysis: (1) financial statement analysis of the company compared to the same period the previous year, (2) financial statement analysis compared to the last two periods--trend analysis, (3) comparative analysis--comparing the financial statement analysis of a certain company to financial statements of other companies in the same field of business which is especially practical when creating sector analysis, (4) Trailing analysis--indicators calculated on the basis of the last four quarter reports.

6. ADDITIONAL OPTIONS OF THE APPLICATION

In addition to the basic display of financial and fundamental indicators and the financial standing of the company, the user also has the graphic display of the information. The AFI application graphically shows the structures of the assets and liabilities, the ratio of the income and expenses and the net result. Furthermore, the AFI application enables the user to copy the results to Microsoft Word.

During the analysis of the financial statement of a certain company the user can change particular items of the financial standing of the company (balance sheet, profit and loss statement, cash flow report) and in that way see how the calculation of the indicators changes when they are altered. The user can predict and project certain items in the financial standing of the company in the future periods and observe the influence of his projections on the fundamental and financial indicators. The comparative analysis enabled the user to analyze financial statements of different companies and compare them. This option is particularly useful when making sector analysis and investigating and comparing companies that have the same or similar activities.

7. PROBLEMS ENCOUNTERED IN CREATING THE APPLICATION

One of the biggest challenges and problem in creating this application was limiting and preventing the actions of the user that could damage the functionality of the application and thus damage the regularity of the applications operations. The second problem was protecting the program code of the application which needed to be hidden so that it is not available to the public in order to prevent unauthorized duplicating and distributing of the application. The application is patented at the Croatian author agency, Centre for intellectual ownership.

8. LIMITATIONS AND POSSIBLE DEVELOPMENT OF THE APPLICATION IN THE FUTURE

The automated process of analysis of financial statements is limited on statements in Microsoft Excel format. If the proscribed format changes, the functionality of the application will be seriously undermined. The possibility of developing and upgrading the AFI application is extremely great. Development of the AFI application will enable the analysis of financial statements from other neighboring countries (Slovenia, Serbia, Montenegro, Bosnia and Herzegovina.) Before such a project can be realized, it is necessary to resolve a string of legal and technical issues--from different accounting standards to uneven structures and forms of financial statements in those countries. Our goal is to turn the existing AFI application into a Web service (Internet portal) that would offer its users the existing AFI applications and additional analytical tools used for stock analysis, technical studies, implications of stock price in comparison to similar stocks from the same sector, DCF model, automated information for users on the new financial statements in the base, daily capital market reports with added overview of the indicators for all stocks.

The other direction of AFI development relates to the modern portfolio theory and its application in practice. A tool would be made for selecting the optimal portfolio, calculating the risk index as well as many other models which are regularly used in developed markets.

9. CONCLUSION

Stock market development in Croatia and neighboring countries will result in a greater need for analytical tools when making investment decisions. Investigating companies and analyzing their financial statements is the only rational method and, of course, employing all other methods used in estimating fair value of stocks. Every device that will facilitate the process of conducting the analysis, such as the AFI application, will be an invaluable tool for any serious investor.

10. REFERENCES

Abbott, C. (1990). Program: electronic library and information systems. MCB UP Ltd, Volume: 24, Issue: 3, Page: 269-279, DOI: 10.1108/eb047062.

Brown, K. & Reilly, F. (2003). Investment analysis and portfolio management. Thomson--Southwestern, USA

Foo, A. & Hepworth, M. (2000). The implementation of an electronic survey tool to help determine the information needs of a knowledge-based organization. Information Management & Computer Security, Volume: 8 Issue: 2, Research paper.

Granebring, A. & Revay, P. (2007). Service-oriented architecture is a driver for daily decision support. Kybernetes, Volume: 36 Issue: 5/6, Case study.

Orsag, S. (2003). "Vrijednosni papiri". Securities, Revicon, Sarajevo. ISBN 9958-757-15-X

Sever, S. (2007). "Uloga financijskih i nefinancijskih pokazatelja u revizorovoj ocjeni kvalitete poslovanja, magistarski rad" (The role of financial and non-financial indicators in revisionist business quality estimation--Master's Thesis). Faculty of Economics and Business--Zagreb.

Vlahovic, N. & Jakovic, B. (2007). "Racunalne vjestine za ekonomiste: Prirucnik za vjezbe iz informatike" (Computer art for economists: Guidebook for practice in informatics), 1st issue, Mikrorad, Zagreb. ISBN: 978-953-6286-83-6.

Wild, J. J.; Bernstein, L. A., Subramanyam, K. R. (2001). Financial Statement Analysis. Seventh Edition, McGraw Hill-Irwin, New York, str. 12.

Zager, K. & Zager, L. (1999). "Analiza financijskih izvjestaja". (Financial statement analysis), Masmedia, Zagreb. ISBN 935-157-100-7.

Zager, K., Tusek, B., Vasicek, V. & Zager, L. (2007). "Osnove racunovodstva--racunovodstvo za neracunovode" (Basis of accounting--accounting for non-accounters), HZRFD, Zagreb. ISBN 978-953-6480-93-7