Republic of the Philippines

DEL SUR GOOD SHEPHERD COLLEGE INC.

Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”
MODULE 1: Week 9 – 14 Code: ACCTG211
Course: Financial Statement Analysis Date: April 10, 2025
Instructor: Anne Virginia R. Sedenio annevirginiasedenio@
gmail.com
Lesson/Topic:
1. Analysis of Financial Statement Quality
2. Forecasting and Projections
3. Industry and Comparative Analysis
4. Valuation Techniques
5. Case Studies and Applications
6. Ethical Considerations in Financial Analysis

Week 9: Analysis of Financial Statement Quality

I. Introduction to Financial Statement Quality

Financial statement quality refers to the degree to which financial

statements accurately reflect a company's true financial position and
performance. High-quality statements are:

 Transparent: Clear and understandable

 Reliable: Free from material errors
 Relevant: Useful for decision-making

II. Red Flags in Financial Statements

Watch for these warning signs of low-quality statements:

1. Earnings Management

o Smoothing earnings to meet targets

o Using aggressive revenue recognition
o Example: Recognizing revenue before delivery is complete
2. Unusual Fluctuations

o Sudden changes in key ratios (e.g., inventory turnover drops

sharply)
o Example: Receivables growing faster than sales
3. Cash Flow Mismatches

o Net income rising while operating cash flow declines

o Example: Company reports profits but can't pay bills
4. Related-Party Transactions

o Deals with company insiders that may not be at arm's length

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

o Example: Selling assets to a CEO-owned company at inflated

prices

III. Detecting Financial Manipulation

1. Benford's Law Analysis

o Tests whether financial numbers follow natural distribution

patterns
o Example: Unusual frequency of numbers starting with "7"
2. Ratio Analysis

o Compare key ratios to industry benchmarks

o Example: Gross margin significantly higher than competitors
3. Cash Flow Verification

o Reconcile net income to operating cash flow

o Formula:
Quality of Earnings = Operating Cash Flow/Net Income

A ratio < 1 may indicate earnings manipulation

IV. Case Study: Philippine Example

Company X Red Flags:

 Revenue grew 50% while industry grew 10%

 Accounts receivable increased by 80%
 Operating cash flow has been negative for 3 straight years
Outcome: SEC investigation revealed inflated sales figures

Activities for Week 9

Activity 1: Red Flag Identification

Instructions:

1. Analyze the following financial data and identify 3 red flags:

o Net income: 2022 - ₱50M, 2023 - ₱55M

o Operating cash flow: 2022 - ₱45M, 2023 - ₱30M
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

o Accounts receivable: 2022 - ₱20M, 2023 - ₱40M

Activity 2: Ratio Analysis

Instructions:

1. Calculate the quality of earnings ratio for:

o Company A: Operating CF ₱120M, Net Income ₱100M

o Company B: Operating CF ₱80M, Net Income ₱100M

Activity 3: Fraud Detection

Instructions:

1. Given these digit frequencies from expense reports, does it suggest

manipulation?
Leading Actual Benford's
Digit % Law %

1 20% 30.1%

2 35% 17.6%

Activity 4: Case Study Discussion

Instructions:
1. Read SEC findings on a Philippine corporate fraud case
2. Identify which red flags were present
3. Propose detection methods

Week 10: Forecasting and Projections

I. Introduction to Financial Forecasting

Financial forecasting predicts future financial performance using historical

data and assumptions. Key purposes:

 Budgeting and planning

 Valuation of businesses
 Risk assessment

Types of Forecasts:

1. Short-term (1 year): Cash flow projections

2. Medium-term (2-5 years): Income statement forecasts
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

3. Long-term (5+ years): Strategic planning

II. Forecasting Methods

1. Percentage of Sales Method

o Assumes most items grow proportionally with sales

o Formula:
Forecasted Item=(Item/Sales) ×Projected Sales

2. Time Series Analysis

o Uses historical trends to predict future values

o Example: 3-year moving average
3. Regression Analysis

o Identifies relationships between variables (e.g., sales vs. GDP

growth)

III. Building a 3-Statement Model

Step-by-Step Process:

1. Sales Forecast:

o Based on market growth, historical trends

o Example: 10% annual growth for the retail sector
2. Income Statement Projections:

o COGS as % of sales
o Operating expenses as fixed + variable
3. Balance Sheet Projections:

o Assets: Grow with sales (e.g., receivables at 15% of revenue)

o Liabilities: Accounts payable at 10% of COGS
4. Cash Flow Reconciliation:

o Link net income to operating cash flow

o Incorporate capex and financing activities

IV. Sensitivity Analysis

Tests how changes in key assumptions impact results:

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

 Best/Worst Case Scenarios:

o Vary sales growth ±5%

o Adjust gross margin ±3%
 Data Table Example:
Sales Net
Growth Income

5% ₱1.2M

10% ₱1.5M

15% ₱1.8M

Activities for Week 10

Activity 1: Percentage of Sales Forecast

Instructions:

1. Project next year's financials using:

o Current sales: ₱10M (expected to grow 12%)
o COGS = 60% of sales
o Operating expenses = ₱2M fixed + 5% of sales

Activity 2: Scenario Analysis

Instructions:

1. Calculate net income under:

o Base case: 8% sales growth, 55% gross margin
o Pessimistic case: 5% growth, 50% margin
o Optimistic case: 12% growth, 58% margin

Activity 3: Philippine Case Study

Instructions:

1. Analyze Jollibee Foods Corp's historical growth (2019-2023)

2. Project 2024 revenue using:
o 3-year moving average
o Industry growth rate +2%

Activity 4: Excel Modeling

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

Instructions:

1. Build a simple 3-statement model with:

o Revenue driver (cell B2)
o Formula-based COGS (B2 × 60%)
o Dynamic charts

Week 11: Industry and Comparative Analysis

I. Introduction to Industry Analysis

Purpose:

 Benchmark company performance against peers

 Identify competitive advantages/disadvantages
 Inform investment or strategic decisions

Key Analysis Tools:

1. Porter's Five Forces

o Industry rivalry
o Threat of substitutes
o Buyer power
o Supplier power
o Barriers to entry
2. SWOT Analysis

o Strengths, Weaknesses, Opportunities, Threats

II. Comparative Financial Analysis

Step 1: Select Peer Companies

 Same industry/sector
 Similar size (market cap/revenue)
 Example: Compare Jollibee vs. McDonald's Philippines

Step 2: Key Comparison Metrics

Compan Compan Industry

Ratio
yA yB Avg

Gross 55% 60% 58%

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

Compan Compan Industry

Ratio
yA yB Avg

Margin

Debt-to-
0.8 1.2 1.0
Equity

ROE 18% 15% 16%

Step 3: Interpretation

 Company A: Higher profitability but lower leverage

 Company B: More aggressive growth strategy

III. Philippine Industry Benchmarks

2023 Data (Sample):

Industr Avg. Gross Avg. P/E

y Margin Ratio

Banking 65% 12.5

Retail 45% 18.2

Real
55% 15.8
Estate

IV. Case Study: Philippine Telecom Industry

Comparison: PLDT vs Globe

1. Revenue Growth: PLDT 5% vs Globe 7%

2. Profit Margins: PLDT 22% vs Globe 18%
3. Capex/Sales: PLDT 25% vs Globe 30%

Key Insight:
Globe invests more aggressively in infrastructure but has lower margins.

Activities for Week 11

Activity 1: Peer Selection

Instructions:
1. Select 3 Philippine companies in the same industry
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”
2. Justify your selection based on:
o Business model similarity
o Market capitalization

Activity 2: Ratio Comparison

Instructions:

1. Compare the following for Ayala Land vs SM Prime:

o Debt-to-Equity
o Inventory Turnover
o ROE

Data Provided:

Ayala SM
Metric
Land Prime

Debt-to-Equity 1.1 1.4

Inventory
5.2x 4.8x
Turnover

ROE 14% 12%

Analysis Questions:

1. Which company uses more debt financing?

2. Which manages inventory more efficiently?

Activity 3: Porter's Five Forces

Instructions:

1. Analyze the Philippine airline industry using:

o Threat of substitutes (buses, ferries)
o Competitive rivalry (PAL vs Cebu Pacific)

Activity 4: SWOT Analysis

Instructions:

1. Conduct SWOT for a Philippine retail company of your choice

Example (Puregold):
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

 Strength: Strong distribution network

 Weakness: Low online presence
 Opportunity: E-commerce expansion
 Threat: Competition from foreign retailers

Week 12: Valuation Techniques

1. Introduction to Business Valuation

Purpose:

 Determine a company's economic worth

 Support investment decisions, M&A, or financial reporting

Key Valuation Approaches:

1. Income Approach: Discounted Cash Flow (DCF)

2. Market Approach: Comparable Company Analysis
3. Asset Approach: Book Value or Liquidation Value

II. Discounted Cash Flow (DCF) Method

Step-by-Step Process:

1. Project Free Cash Flows (FCF)

FCF=Operating Cash Flow−Capital Expenditures

2. Determine Discount Rate (WACC)

WACC= (E/V × Re) +( D/V × Rd×(1−T))

Where:

o E = Equity value
o D= Debt value
o Re= Cost of equity
o Rd= Cost of debt
o T= Tax rate
3. Calculate Terminal Value
Terminal Value=FCFn+1/(WACC−g)

Where g = perpetual growth rate

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

4. Compute Present Value

Enterprise Value=∑ FCFt /(1+WACC) t +
Terminal Value(1+WACC) n

III. Comparable Company Analysis

Key Metrics:

1. Price-to-Earnings (P/E) Ratio

P/E=Stock Price/Earnings per Share (EPS)

2. Enterprise Value-to-EBITDA (EV/EBITDA)

EV/EBITDA=Enterprise Value/EBITDA

Philippine Industry Multiples (2023 Example):

Industr Avg Avg

y P/E EV/EBITDA

Banking 12.5x 8.7x

Retail 18.2x 12.4x

Real
15.8x 10.5x
Estate

IV. Case Study: Valuing a Philippine Company

Example: Jollibee Foods Corporation

1. DCF Inputs:

o Projected FCF: ₱5B (Year 1), growing at 7%

o WACC: 10%
o Terminal growth: 3%
2. Comparables:

o Industry P/E: 20x

o JFC EPS: ₱8.50

Activities for Week 12

Activity 1: DCF Calculation

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

Instructions:

1. Compute the enterprise value using:

o FCF Year 1-3: ₱2B, ₱2.2B, ₱2.4B

o WACC: 12%
o Terminal growth: 2.5%

Activity 2: Comparable Analysis

Instructions:

1. Value Company X using:

o Industry P/E: 15x
o Net Income: ₱1.2B
o Shares Outstanding: 100M

Activity 3: Sensitivity Analysis

Instructions:

1. Test how WACC (9%-11%) and growth (2%-4%) affect DCF valuation:

Activity 4: Philippine Company Valuation

Instructions:

1. Select a Philippine-listed company

2. Estimate value using both DCF and comparable
3. Compare to actual market cap

Week 13: Case Studies and Applications

I. Real-World Financial Analysis Framework

4-Step Methodology:

1. Company Background

o Industry positioning
o Business model
o Recent performance
2. Financial Statement Deep Dive

o 3-statement analysis
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

o Key ratio trends

3. Valuation Assessment

o DCF model
o Comparable analysis
4. Strategic Recommendations

o SWOT analysis
o Investment thesis

II. Philippine Case Study #1: Jollibee Foods Corp

Financial Snapshot (2023):

Amou Industry
Metric
nt Avg

Revenue
+12% +8%
Growth

Gross Margin 55% 50%

Debt-to-
1.2x 1.5x
Equity

Key Issues:

 High expansion costs in international markets

 Supply chain inefficiencies

III. Philippine Case Study #2: Ayala Land

Ratio Analysis (2023):

20 20 20
Ratio
21 22 23

11 13
ROE 9%
% %

Inventory 4.2 4.5 5.1

Turnover x x x

Strategic Moves:

 Shift to mixed-use developments

 Digital transformation initiatives
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

IV. Cross-Industry Comparison

Performance Metrics:

P/ EV/ ROI
Company
E EBITDA C

18
SM Prime 15x 12%
x

Globe 14
8x 9%
Telecom x

BDO 10
6x 15%
Unibank x

Activities for Week 13

Activity 1: Financial Statement Forensics

Instructions:

1. Analyze the following red flags in Company X's financials:

o Receivables ↑ 25% while revenue ↑ 5%

o Operating cash flow < net income for 3 years

Activity 2: Valuation Challenge

Instructions:

1. Calculate Jollibee's implied share price using:

o 2023 EPS: ₱8.50
o Industry P/E range: 18-22x

Activity 4: Investment Pitch

Instructions:

1. Prepare a 3-minute pitch for either:

o Buy, hold, or sell recommendation
o Must reference financial analysis

Week 14: Ethical Considerations in Financial Analysis

I. Ethics in Financial Reporting

Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

Key Principles:

1. Transparency: Full disclosure of material information

2. Integrity: Avoidance of misleading representations
3. Objectivity: Unbiased analysis and reporting

Philippine Regulatory Framework:

 SEC Memorandum Circular No. 15 (Financial Reporting Standards)

 Anti-Fraud and Corruption Laws (RA 3019, RA 6713)

II. Common Ethical Violations

Violation Example Consequences

Earnings SEC sanctions, stock

"Cookie jar" reserves
Manipulation decline

Trading on unreleased
Insider Trading Criminal charges
results

Analyst owns company

Conflict of Interest License revocation
stock

Case Study: 2019 PH Stock Market Insider Trading Scandal

III. Ethical Decision-Making Model

5-Step Process:

1. Identify ethical issue

2. Gather facts
3. Evaluate alternatives
4. Make decision
5. Implement and monitor

Checklist:
☐ Is this action legal?
☐ Would I want this disclosed publicly?
☐ Who could this harm?
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

IV. Corporate Governance in PH

Best Practices:

 Independent board members

 Audit committee oversight
 Whistleblower protections

PSEDC Scorecard:

Governance Ayala
Jollibee
Aspect Corp

Board
80% 90%
Independence

Transparency ★★★★
★★★★★
Score ☆

Activities for Week 14

Activity 1: Ethical Dilemma Analysis

Scenario:
As an analyst, you discover your firm is overweight on a stock you just found
may have accounting irregularities.

Tasks:

1. Identify stakeholders
2. Apply ethical decision model
3. Recommended action

Activity 2: Code of Ethics Drafting

4. Instructions:
Create a 5-point ethics code for financial analysts:

Activity 3: Governance Evaluation

Instructions:
Evaluate SM Investments' governance using:
Republic of the Philippines
DEL SUR GOOD SHEPHERD COLLEGE INC.
Brgy. Extension Wao, Lanao Del Dur 9716
@DSGSCI.edu

DEL SUR GOOD SHEPHERD COLLEGE INC

“WHERE DREAMS ARE FORMED AND GOALS ARE ACHIEVED”

 Board composition
 Disclosure practices
 Shareholder rights