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Financial statement analysis[1]
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Financial statement analysis[1]

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  • 1. Financial Statement Analysis
  • 2. Rationale of Financial StatementAnalysis Financial statement – summary offigures as of any given date To identify relevant information Draw meaningful interpretations
  • 3. Process of Analysis Identification of significantinformation Highlight significant relationships Interpretation
  • 4. Tools of Financial Analysis Fund flow Statement Cash Flow Statement Ratio Analysis Common size statements
  • 5. Balance Sheet Overview-ASSETSAssetsGross Block 3978.55Net Block 2790.57Capital WIP 66.72Investments 454.33Inventory 610.81Receivables 1546.81Other Current Assets 3673.67Balance Sheet Total 9142.92
  • 6. Balance Sheet Overview-LiabilitiesLiabilitiesEquity Share Capital 434.12Reserves 5815.65Total Debt 2096.69Creditors and Acceptances 393.91Other current liab/prov. 402.55Balance Sheet Total 9142.92
  • 7. Ratio Analysis Most widely used and significant tool Provides a basis for comparison Useful when benchmark ratios areknown Relationships between variables inthe financial statement
  • 8. Types of ratios Liquidity ratios Capital Structure ratios Profitability Ratios Activity/Efficiency ratios Integrated Analysis of ratios Growth ratios
  • 9. Overview of Balance SheetLIABILITIES EquityCapital/Owners’Funds Long TermBorrowings Current LiabilitiesASSETS Fixed Assets Current Assets
  • 10. Liquidity Ratios Measure the ability of firm to meetshort term obligations Reflect short term financial strength Why short term??- of interest tocreditors.. Ratios- Current ratio, Liquid ratio,Turnover ratios, cash flow fromoperation ratio
  • 11. Liquidity ratios Current Ratio= Current Assets/Current Liabilities Liquid ratio= Liquid Assets/CurrentLiabilities
  • 12. NEED FOR LIQUIDITY Assume stocks are bought on credit Converted to inventory Sales=0 Current Ratio?? Liquid Ratio?? Implications on liquidity-serious
  • 13. ACTIVITY 1 Calculate Current Ratio, Liquid ratio,Debtors Turnover and Creditors turnoverfrom the following informationAverage Debtors=1,00,000Average Creditors=75,000Cash= 5,000Inventory=75,000Credit Purchases=6,00,000Credit Sales=12,00,000
  • 14. Capital Structure ratios Helps to measure long term financialstrength Solvency of the firm Ability to service interest on loans Ability to service the principal
  • 15. Capital Structure Ratios Debt Equity ratio= Long TermDebt/Shareholders Equity Debt to total Capital= TotalDebt/Total Assets Interest Coverage Ratio= EarningsBefore Interest and Tax/Interest
  • 16. ACTIVITY 2 What happens when a firm is purelyfunded by equity? What happens when a firm is purelyfunded by debt? Which is riskier when profits are less? When equity is high and profits arehigh, what happens to ROI?
  • 17. Profitability ratios Related to Sales Ability of the firm to mark up on sales Ability of firm to convert margins toprofit Proportion of expense to income Analysis of income and expenses
  • 18. Profitability ratios Gross Profit Margin= Grossprofit/Sales*100 Operating Profit ratio= EarningsBefore Interest and taxes/Net Sales Net Profit Ratio= Earnings afterinterest and taxes/Net Sales Expenses ratio- Cost of Goods sold,Operating Ratio, Financial Expenses
  • 19. Ratios on Investments Related to investment Ability to generate return oninvestment Ultimate measure of profitability Ability of firm to generate wealth
  • 20. Profitability on Investment Return on Assets= Profit afterTaxes/Average total assets*100 Return on Capital Employed=EBIT/Average Total CapitalEmployed*100 Return on Shareholders Equity=Net profit after taxes/Averageshareholders’ equity*100
  • 21. ACTIVITY 3 Earnings Before Interest and Tax=Rs.5,00,000 Interest payment =Rs.75,000 Tax rate = 50% Calculate Earnings after Interest andtax
  • 22. Profitability on investment Earnings per share=Net Profitavailable to EquityShareholders/Number of ordinaryshares outstanding Price earning ratio= Market price ofshare/EPS
  • 23. ACTIVITY 4Calculate Gross Profit Margin and Netprofit Margin Sales 2,00,000 Cost of Goods Sold 1,00,000 Other operating expenses 50,000
  • 24. ACTIVITY 5Calculate Return on Assets Current Assets 4,00,000 Fixed Assets 6,00,000 Net Profit before taxes 2,50,000 Tax rate 50%
  • 25. Activity Ratios Concerned with measuring theefficiency Also the asset utilisation Rate at which assets are convertedinto sales Test of relationship of sales to variousassets of the firm
  • 26. Activity Ratios Turnover ratios Inventory turnover=Cost of GoodsSold/Average Inventory Debtors turnover=Net CreditSales/Average Debtors Creditors turnover=Net CreditPurchases/Average creditors Assets Turnover=Cost of Goodssold/Average total assets
  • 27. Activity ratios Turnover refers to the number oftimes the asset turned over Does faster turnover mean efficiency? What does a slow turnover ofinventory mean? Should inventory turnover behomogenous across industries?
  • 28. ACTIVITY 6 In which industries inventoryturnover is irrelevant? Which industries have seasonalturnover of inventory? Which are the industries whereturnover is not rapid? When will the Debtor Turnover beirrelevant?
  • 29. Integrated Analysis of ratios To understand the interrelationship ofratios Operating efficiency-combination ofvarious factors Tests the earning power of the firm
  • 30. Integrated Analysis Earning Power=EAT/Sales*Sales/Assets*Assets/Equity
  • 31. Growth ratios Growth that can be sustained withoutexternal funding Earnings that are retained andreinvested within the firm The two common measures used areInternal Growth rate-without raisingfunds Sustainable growth rate- Withoutaltering Debt Equity ratio
  • 32. ACTIVITY 7 Which ratios will you look for whenyou want to invest in a firm Which are the ratios a banker willlook for? Which ratios are relevant from thepoint of view of revenue? Which ratios are relevant if a supplieris contemplating to give credit to afirm?
  • 33. What you must remember whilecalculating ratios Nature of Industry-Service, Seasonal,Heavy Engineering, Infrastructure.. Age of the firm Industry benchmark Peculiarities in the business Risk Factors
  • 34. Importance of ratio Anlaysis Liquidity Solvency Operating efficiency Overall Profitability Interfirm Comparison Trend Analysis
  • 35. Limitations of ratio Analysis Individual accounting variations Impact of inflation Conceptual diversity Only quantifiable inputs can beevaluated

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