Fma7

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Fma7

  1. 1. Financial Analysis• Process of identifying y g• Financial strengths and weaknesses• By establishing relationships• Between the items of• B/S, P/L and CFS narain@fms.edu
  2. 2. Users of Financial Analysis• Trade creditors• Lenders• Investors I t• Management narain@fms.edu
  3. 3. Techniques of Financial Statement A l i St t t Analysis1. Horizontal Analysis y2. Trend Analysis3.3 Vertical Analysis4. Ratio Analysis narain@fms.edu
  4. 4. Nature of Ratio Analysis• A financial ratio is a relationship between p two accounting numbers.• Ratios help to make a qualitative judgement about the firm’s financial performance. narain@fms.edu
  5. 5. Standard of Comparison• Time series analysis• Inter-firm analysis• Industry analysis y y• Proforma financial statement analysis narain@fms.edu
  6. 6. Types of Financial Ratios• Liquidity ratios• Solvency ratios• Turnover ratios• Profitability ratios• Leverage ratios narain@fms.edu
  7. 7. Liquidity Ratios• Liquidity ratios measure a firm’s ability to firm s meet its current obligations. Current assets Current ratio = C t ti Current liabilities Current assets – Inventories Quick ratio = Current liabilities C t li biliti Cash + Marketable securities Cash ratio = Current liabilities C u rr e n t a s s e t s - I n v e n t o r y I n t e r v al M e a s u r e  A v e r a g e d a ily o p e r a ti n g e x p e n s e s N e t w o r ki n g c a p it a l N e t W o r ki n g C a p it a l R a ti o  narain@fms.edu N e t a s s e ts
  8. 8. Solvency Ratios• Solvency ratios measure the dependence of a firm on borrowed funds. Debt Debt-equity ratio  Equity (Net Worth) Debt Debt Debt ratio   Debt  Equity Capital employed Earnings before interest and tax Interest coverage  Interest I t t• Treatment of – • Preference Shares • Leases narain@fms.edu
  9. 9. Turnover Ratios• Turnover or Activity Ratios measure the firm’s efficiency in utilising its assets. Cost of goods sold or net salesInventory Turnover  Average (or closing) inventory Number of days in the year (say, 360) f inventory h ldi Days of i holding Inventory turnover Credit sales or net salesDebtors Turnover  Average (or closing) debtors Number of days in the year (say, 360)Collection period  Debtors turnover narain@fms.edu
  10. 10. Turnover Ratios Net salesCurrent assets turnover  Cu e t Current assets Net salesNet current assets turnover  Net current assets Net salesFixed assets turnover  Net fixed assets Net salesNet assets turnover  Net N t assets or capital employed t it l l d narain@fms.edu
  11. 11. Profitability Ratios• Profitability Ratios measure a firm’s overall firm s efficiency and effectiveness in generating profit. profit Profit before interest and tax (PBIT) Margin  Net sales Profit after tax (PAT) Net margin  Net sales PBIT Before tax return on investment  Net assets Profit after tax Return on equity  Equity (net worth) narain@fms.edu
  12. 12. Equity-related Ratios• Equity-related Ratios measure the shareholders’ return and value. Profit ft t P fit after tax EPS  Number of ordinary shares Dividends DPS  Number of ordinary shares DPS Dividends Payout ratio   EPS Pr ofit after tax DPS Dividend yield  Market value per share narain@fms.edu
  13. 13. Equity-related Ratios EPSEarnings yield  M arket value per share M arket value per shareP / E ratio = EPS Net N t worth thBook value per share  Number of ordinary shares M arket value per shareM B value  Book value per share M ar ket value of assetsT bi s q Tobin Economic value of assets narain@fms.edu
  14. 14. DuPont Analysis DuPont Analysisintegrates the important ratios to analyse a firms profitability. PBIT Sales PBIT RONA=   Net Assets Net Assets Sales PAT Sales PBIT  PAT Net Assets ROE      Net Worth Net Assets Sales  PBIT Net Worth   ROE  Assets turnover × Margin × Leverage g g narain@fms.edu
  15. 15. ISPAT INDUSTRIES LIMITED RATIO ANALYSISLiquidity ratios Current ratio 1.47 1.24 Quick ratio 0.05 0.06Activity ratios Sales/TA 0.30 0 30 0.22 0 22 Sales/FA 0.81 1.25 Sales/Debtors 5.75 5.69 Sales/Inventory 8.70 5.49Leverage ratiosL i Debt/Equity 2.85 2.50 Debt/TA 0.74 0.71 PBIT/Interest 1.90 1.04Profitability ratios PBIT/Sales 29.41% 7.30% Net profit/Sales 13.96% 0.26% PBIT/TA 8.68% 8 68% 1.59% 1 59% Net profit/NW 15.87% narain@fms.edu 0.21%
  16. 16. INFOSYSBalance Sheeet as at March 31 in Rs. 2,001 2,000SOURCES OF FUNDSSHAREHOLDERS FUNDSShare capital 330,792,085 330,755,000Reserves and surplus 13,565,599,903 8,002,273,248 Capital Employed 13,896,391,988 8,333,028,248APPLICATION OF FUNDSFIXED ASSETSOriginal cost 6,311,444,025 2,840,305,143Less: Depreciation 2,441,315,982 1,336,520,594Net book value 3,870,128,043 1,503,784,549Add: Capital work-in-progress 1,706,504,250 569,603,505 5,576,632,293 2,073,388,054INVESTMENTS 341,154,821 138,348,469CURRENT ASSETS, LOANS AND ADVANCESSundry debtors 3,023,702,417 1,361,781,253CashC h and b k b l d bank balances 3,850,610,285 3 850 610 285 4,317,935,730 4 317 935 730Loans and advances 4,302,793,623 2,101,277,161 11,177,106,325 7,780,994,144Less: Current liabilities 1,349,181,176 671,506,459 Provisions 1,849,320,275 1 849 320 275 988,195,960 988 195 960NET CURRENT ASSETS 7,978,604,874 6,121,291,725 Net Assets narain@fms.edu 13,896,391,988 8,333,028,248
  17. 17. INFOSYSProfit and Loss Account for the year ended March 31 in Rs. 2001 2000INCOMESoftware development services and products Overseas 18,740,266,421.00 8,696,980,931.00Domestic 265,392,386.00 126,256,042.00Other income 593,714,915.00 391,411,095.00 19,599,373,722.00 9,214,648,068.00EXPENDITURESoftware development expenses 9,581,766,650.00 4,662,684,578.00Administrative and other expenses 1,775,470,971.00 694,850,282.00Provision for investments 152,898,608.00Provision for contingencies 33,300,000.00Provision for e-inventing the company 35,000,000.00 11,510,136,229.00 11 510 136 229 00 5,425,834,860.00 5 425 834 860 00Operating profit (PBIDT) 8,089,237,493.00 3,788,813,208.00InterestDepreciation 1,128,945,152.00 532,327,389.00Profit before tax and extraordinary item 6,960,292,341.00 6 960 292 341 00 3,256,485,819.00 3 256 485 819 00Provision for tax earlier years 14,000,000.00 2,400,000.00 current year 713,100,000.00 394,600,000.00Profit after tax before extraordinary item y 6,233,192,341.00 , , , 2,859,485,819.00 , , ,Extraordinary item -- transfer of intellectual property right (net of tax) 54,944,000.00 -- provision no longer required narain@fms.edu 75,670,846.00Net profit after tax and extraordinary item 6,288,136,341.00 2,935,156,665.00AMOUNT AVAILABLE FOR APPROPRIATION 6,288,136,341.00 2,935,156,665.00
  18. 18. INFOSYSFinancial Ratios 2001 2000Activity Ratios Income/Assets I /A t 1.41 1 41 1.11 1 11 Income/Debtors 6.48 6.77Current Ratios CA/CL 3.49 4.69 CA/Assets 0.80 0.93 NCA/Assets 0.57 0.73Profitability RatiosMargin PBDIT/Income 41.27% 41.12% PBIT/Income 35.51% 35.34% PAT/Income 31.80% 31.03%Return on Investment PBDIT/Assets 58.21% 45.47% 58 21% 45 47% PBIT/Assets 50.09% 39.08% narain@fms.edu PAT/NW 44.85% 34.32%
  19. 19. SBU PROFIT & LOSS ACCOUNT, YTD 2002 ACCOUNTUSD in 000 % of YTD Re v.Tota l Re ve nue 14850 100.0% Onsite re ve nue 12600 84.8% Offshore re ve nue 2250 15.2% Se rvice Cre dit - Onsite Re ve nue % 85%CONTROLLABLE COSTSCGS ASa la rie s & Re la te d Costs: Onsite Sa la rie s O it S l i 6375 42.9% 42 9% Offshore Sa la rie sGRP Alloca te d 0 0.0%Offshore Sa la rie s 840 5.7%Othe r Sa la ry Ove rhe a ds 34 0.2%Subcontra ctor Costs Sa la rie s-Onsite s Onsite 0 0.0% Sa la rie s-Offshore 0 0.0%Fore ign Tra ve l 250 1.7%Ince ntive s Proje ct Ince ntive s 0 0.0% SBU Spe cia l Ince ntive s 0 0.0%Da ta Communica tion Cha rge s 0 0.0%Le ga l Immigra tion Fe e s 333 2.2%Othe r Profe ssiona l Fe e s 0 0.0%Tota l CGS A Cost 7832 52.7%CGS BDa ta Communica tion Cha rge s 90 0.6%Me dica l Insura nce 300 2.0%De pre cia tion: CGS 223 1.5% 1 5%Othe rs CGS 0 0.0%Tota l CGS B Cost 613 4.1%TOTAL CGS A + CGS B Costs narain@fms.edu 8445 56.9%Gross Ma rgin 6405 43.1%
  20. 20. Utility of Ratio Analysis• Assessment of the firm’s financial firm s conditions and capabilities.• Diagnosis of the firm’s problems firm s problems, weaknesses and strengths.• Credit analysis• Security analysis• C Comparative analysis ti l i• Time series analysis narain@fms.edu
  21. 21. Cautions in Using Ratio Analysis• Standards of comparisons• Company differences• Price level• Different definition• Changing situations• Past data narain@fms.edu

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