Evaluate Past Financial Performance

Evaluate Past Financial Performance

The evaluation of a company’s past financial performance can serve many purposes. Among other things, this evaluation can assist with market-based valuations, provide a basis for forward-looking analysis, and can provide information useful for evaluating the quality of a company’s management. It can also indicate how a company’s financial performance reflects its strategy.

Evaluating Past Financial Performance

The data used in evaluating a company’s past financial performance may come from several sources. These sources include financial statements, corporate press releases, proxies, trade publications, and industry surveys. The data may be processed by common-sizing the financial statements, computing financial ratios, and reviewing or computing industry-specific metrics.

Companies enjoy discretion concerning their choice of accounting standards (IFRS, US GAAP, or other home-country GAAP), the assumptions they make, and the estimates that they rely on when preparing financial statements. This can significantly limit the comparability of financial data across companies. As a result, adjustments are sometimes made to a company’s financial statement data to facilitate comparison with other companies or with the overall industry.

A comparison of a company’s levels of financial performance and trend financial data can provide insight into how the company performed. The company’s management may also present views on the possible causes of this performance in the Management, Discussion, and Analysis (MD&A) section of the company’s annual report and during periodic conference calls with analysts and investors. Additional information may also be obtained from industry information or consumer surveys.

How Strategy is Reflected in Past Financial Performance

An analysis of a company’s financial performance over time can indicate how successful the company is in achieving its strategic objectives. For example:

  • strategies that focus on product differentiation, lower input costs, and/or a change in sales mix are usually intended to lead to a company recording higher gross margins;
  • liquidity management strategies aimed at, for example, (i) maintaining sufficient cash and cash equivalents to ensure that a company can meet its short-term obligations, (ii) avoiding excessive cash, and (iii) accumulating cash for acquisitions or other financing decisions, will be reflected in the company’s balance sheet composition and computed financial ratios.

Question 1

Which of the following statements is the least accurate?

  1. The evaluation of a company’s historical performance addresses the question of what happened.
  2. The evaluation of a company’s historical performance addresses the question of how the performance reflects the company’s strategy.
  3. The evaluation of a company’s historical performance may only be carried out using the company’s financial statements.

Solution

The correct answer is C.

The data used in evaluating past financial performance may be obtained from sources such as corporate press releases, trade publications, and industry surveys. Financial statements do not provide data for evaluating a company’s past or historical financial performance.

Options A and B are accurate statements.

Question 2

It is most suitable to forecast a company’s future financial performance based on its historical financial results if that company:

  1. is in the commodities business.
  2. operates in a single business segment; or
  3. is a large company operating in a mature industry.

Solution

The correct answer is C.

If a company operates in a stable industry and is considered large enough among its peers, its financial results should be stable over the years.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.