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Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
Analysis of financial statements prof rishi
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Analysis of financial statements prof rishi

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  • DuPont Chart and Equation - Tie the Ratios Together Shows how profit margin, asset turnover ratio, and equity multiplier determine ROE Shows how expense control (profit margin), efficient use of assets in production (asset turnover) and capital structure (equity multiplier) affect return on equity. Ties together all aspects of firm - production and financing.
  • Transcript

    • 1. Prof. Rishi ChourasiaManagement Vikalp www.managementvikalp.co.in 1
    • 2. Accounting Accounting is the process of measuring, interpreting, andcommunicating financial information to support internal and external business decision making. www.managementvikalp.co.in 2
    • 3. Business Activities Involving Accounting Financing activities provide necessary funds to start a business and expand it after it begins operating. Investing activities provide valuable assets required to run a business. Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management. www.managementvikalp.co.in 3
    • 4. The Foundation of Accounting Systems• Generally accepted accounting principles ( GAAP) encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time.• Financial Accounting Standards Board ( FASB) is primarily responsible for evaluating, setting, or modifying GAAP in the U.S.• Sarbanes-Oxley Act responded to cases of accounting fraud. – Created the Public Accounting Oversight Board , which sets audit standards and investigates and sanctions accounting firms that certify the books of publicly traded firms. – Senior executives must personally certify that the financial information reported by the company is correct. – Resulted in increase in demand for accountants. www.managementvikalp.co.in 4
    • 5. The Accounting CycleAccounting process - set of activities involved in converting information about transactions into financial statements. www.managementvikalp.co.in 5
    • 6. The Accounting Equation• Assets - anything of value owned or leased by a business.• Liability - claim against a firm’s assets by a creditor.• Owner’s equity - all claims of the proprietor, partners, or stockholders against the assets of a firm, equal to the excess of assets over liabilities.• Basic accounting equation - relationship that states that assets equal liabilities plus owners’ equity.• Double-entry bookkeeping - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction. www.managementvikalp.co.in 6
    • 7. Business Entity Concept Money Measurement concept Going concern concept Historical cost Concept Matching concept Conservatism Consistency Disclosure www.managementvikalp.co.in 7
    • 8.  Financial analysis refers to an assessment and evaluation of the viability, stability and profitability of a business, sub-business or project. Financial analysis is to evaluate & assess enterprises for its net worth, profitability and viability; more particularly financial condition and performance Done to find firm’s financial strengths and weaknesses Primary Tools:  Financial Statements  Comparison of financial ratios to past, industry, sector and all firms Financial analysis process/ applications  Planning  Budgeting  Monitoring (MIS)  Forecasting  Ratio Analysis www.managementvikalp.co.in 8
    • 9.  Balance Sheet Profit & Loss Account Cash flow Statement (AS-3) Notes to Account and Accounting Policies Presentation Conventional – (now obsolete) Vertical form www.managementvikalp.co.in 9
    • 10.  Annual reports ◦ Company websites, Stock exchanges, Financial websites Published collections of data ◦ e.g., Dun and Bradstreet or Robert Morris Investment sites on the web ◦ Examples  http://www.moneycontrol.com  http://www.reuters.com and many others www.managementvikalp.co.in 10
    • 11. Traditional / Conventional Liabilities  Assets Share Capital & Reserves  Fixed Assets Loan Funds  Tangible Assets Current Liabilities  Intangible Assets  Investments  Current Assets  Debtors  Inventories  Cash/ Bank  Loans & Advances www.managementvikalp.co.in 11
    • 12. SOURCES OF FUNDSShareholders FundsI) Equity Share Holders Fund Equity Share Capital xx Reserves & Surplus xx xx Less: - P& L A/c xx Misc Exp not w/off xx (xx) xxII) Borrowed Fund: (i) Debentures (ii) Institutional Borrowing xx TOTAL SOURCES OF FUNDS XXX www.managementvikalp.co.in 12
    • 13. APPLICATION OF FUNDSI) Fixed Asset (Cost) Gross Block XX Less: - Depreciation (XX) Net Block XXXII) Investment XXXIII) Current Assets (1) Accrued Incomes/ Stores XX (2) Sundry Debtors (Net) XX (3) Stock/Inventory XX (4) Cash/ Bank Balance XX (5) Advances / Deposits XX XXXIV) Less: - Current Liabilities/ Provisions: (1) Current Liabilities XX (2) Provisions XX (XXX)TOTAL APPLICATION OF FUNDS XXXX www.managementvikalp.co.in 13
    • 14.  Gross Profit Gross Profit = Sales - Costs of Goods Sold EBITDA (Earnings before Interest, Tax, Depreciation & Amortization) = Gross Profit - Cash Operating Expenses EBIT = EBDIT - Depreciation – Amortization PBT = EBIT - Interest PAT = PBT- Taxes PAT (or Net Income) is a primary determinant of the firm’s earnings and, thus, the value of the firm’s shares www.managementvikalp.co.in 14
    • 15. GROSS PROFIT (I) Sales xx (II) Other Income xx Total Receipts xxxLess: - (I) Purchases xx (II) Increase / Decrease In Inventory xxRaw Materials Consumed xxx (III) Manufacturing Expenses (xx) (xxx)Gross Profit xxxLess: - (I) Admin Exp (Excluding Depreciation) xx (II) Selling Exp xx (III) Financial Exp (Excluding Int) xxOperating Expenses (xxx) (IV) Profit Before Dep / Int/ Tax xxxx EBITDA (V) Depreciation (xxx)Profit Before Int / Tax xxxx EBIT www.managementvikalp.co.in 15
    • 16. Less: - Interest (XXX)Net Profit Before Tax (NPBT) XXXLess: - Provision For Tax (XXX)Net Profit After Tax (NPAT) XXXDeffered Tax AdjustmentsBalance b/f XXXProfits Available For Appropriation XXXLess: - Appropriations / Transfers XXXProfit available for distribution XXXLess: - Dividend / Interim Dividend XXX Dividend Tax XXX XXXBalance c/f to Balance Sheet XXXX www.managementvikalp.co.in 16
    • 17. www.managementvikalp.co.in 17
    • 18. Balance Sheet as at _____ITEM C. Y P. Y. Inc Dec rease % Change rease www.managementvikalp.co.in 18
    • 19. Balance Sheet as at _____Particulars CO A CO B In . % In % Change % CO A CO B XXX XXX XXX XXX www.managementvikalp.co.in 19
    • 20. Trend Analysis Balance Sheet as at _____ ITEM Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 % % % % %Eq. ShareCapitalPref Sh capRes. & SurplusBorrowingsTotal of Sources 100 100 100 100 100 www.managementvikalp.co.in 20
    • 21. Assets are the Resources Owned and controlled by the enterprise. Assts enable an Enterprise to exploit and get economic benefits in future. The economic benefit from the assets can be derived in any of the following ways:  .Used to produced goods and services, which the enterprise can sell.  .Used to Exchange the asset for another asset.  .Used to settle a Liability.  .Used to distribute amongst the owners.  Assets arise due to spending/giving economic benefit in the past and would be realized by harvesting economic benefit in the future. Most Assets are Reported at Historical Cost Historical Cost is Objective & Verifiable Therefore, not subject to bias However, historical cost is not particularly “relevant” to most readers of the balance sheet “Relevance vs. Reliability” is an important issue with accountants. www.managementvikalp.co.in 21
    • 22.  Release of assets would result in to cash inflows. Asset can either be in Physical form or Intangible (Non-Physical) form. Land, Building, Plant and Machinery, Goods, Receivables etc. are the examples of Tangible/Physical Assets. Patents, Copyrights, Licenses, Goodwill etc. are the examples of Intangible assets. To acquire any asset that enterprise has to incur expenditure/payment, but all expenses/payments need not necessarily result in to generation of an asset. An asset is recognized in the Balance Sheet when it is sure to generate economic benefit in future and that such cost of asset and value of future economic benefit is measurable. www.managementvikalp.co.in 22
    • 23. Liabilities are the obligation of the enterprise. They are what the enterprise Owes to others i.e. the debts of the enterprise. Liabilities arise on account of the benefits availed by the enterprise in the past. Liabilities are settled / paid off by giving economic benefits in future. Examples of Liabilities are Creditors, Secured and Unsecured Lenders, Owners Fund. Liabilities can be settled in any of the following ways:  .Cash Payment  .Adjustment/Barter with other asset.  .Providing goods and services.  .Exchange of one liability with another liability.  .Extinguishments/Waiver of liability.  Discharge of liability would result in to cash outflow. A liability is recognized in the balance sheet only when it has crystallized and ascertained. Contingent liabilities are not recognized in the balance sheet but are disclosed as a footnote. www.managementvikalp.co.in 23
    • 24. Incomes are the revenue that arises to the enterprise in the ordinary course of business by providing goods and services. Income arises by use of the Assets of the Enterprise as also due to incurring expenses to earn such incomes. Income results in to increase in the economic benefit to the enterprise either by way of increase in assets or decrease in liabilities. It would also include those gains that may arise to the enterprise from non core business activity such as Rent income, Interest receipts, profit on sale of investments etc. www.managementvikalp.co.in 24
    • 25. Expenses are the losses or outflows that arise during the ordinary course of business. Expenses result in to outflow and reduction in assets. Expenses would also include losses, which are not in normal course of business e.g. Loss by Fire, Flood or natural calamity, Loss by theft, loss on account of foreign exchange fluctuations etc. Expenses would also include such expenses where there is no physical flow of cash but on account of fall in value of assets e.g. Depreciation. www.managementvikalp.co.in 25
    • 26. Capital is the amount invested by the Owners in the Enterprise. It would include the amount invested at the starting of the business, as also the additional amount invested from time to time and the retained profits in the business. Anybody who invests money in a business enterprise does so primarily with the intention to earn profits on his investment. This results in to the concept of CAPITAL MAINTENANCE.  FINANCIAL CAPITAL MAINTENANCE is the financial/monitory profits, which the enterprise has earned over a period of time. In simple terms it is the net profit for the year arising due to difference between the income and expenses of the enterprise. PHYSICAL CAPITAL MAINTENANCE is something, which is not immediate and apparent. It is the sustenance or advancement in the future profit earning ability of an enterprise. www.managementvikalp.co.in 26
    • 27. A fixed asset is an asset of a business intended for continuing use which includes: Tangible Assets  Infrastructure like land & building  plant & machinery  Vehicles  Furniture & fixtures Intangible Assets  Preliminary & Preoperative expenses  Deferred Revenue Expenditure  Goodwill  Trade mark  Patents www.managementvikalp.co.in 27
    • 28.  DETERMINES THE REVENUE GENERATING CAPACITY Examines the age and condition of each major asset category The costs of replacing old assets to determine the output levels, downtime and temporary discontinuance. Depreciation is a key concept analysts use when analyzing fixed assets and the examination of depreciation helps to clarify the useful life of assets. Companies benefit from fixed asset analysis by taking control of their fixed assets and maintaining their condition in order to ensure proper operation www.managementvikalp.co.in 28
    • 29. What Does Inventory Mean? The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a businesss assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover inventory represents one of the primary sources of revenue generation and subsequent earnings for the company‘s shareholders/owners www.managementvikalp.co.in 29
    • 30.  Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage, obsolescence and spoilage costs However, possessing too little inventory isnt good either, because the business runs the risk of losing out on potential sales and potential market share as well Inventory management forecasts and strategies, such as a just-in-time inventory system, can help minimize inventory costs because goods are created or received as inventory only when needed Inventory Carrying cost ◦ High Inventory ◦ Low Inventory ◦ Just in Time (JIT) Inventory www.managementvikalp.co.in 30
    • 31.  Investments consist of ◦ Shares And Securities of  Subsidiary Companies  Associates Companies ◦ Marketable securities-listed securities (shares and units) ◦ Treasury bills, Government securities Analysis ◦ While analyzing balance sheet we can analyze necessity of such investments ◦ Also movement in investments helps us to understand the fund requirements of a company ◦ Helps us to understand how much liquidity a company has ◦ Holding company structure www.managementvikalp.co.in 31
    • 32.  Reports the value of a companys assets that are cash or can be converted into cash immediately Examples ◦ Cash on hand ◦ Term deposits with banks/finance companies ◦ bank accounts Analysis ◦ Helps us to understand how much liquidity a company has ◦ Fund requirements of a company ◦ Money kept as margin money – will not be available as free cash to the company www.managementvikalp.co.in 32
    • 33.  An individual or organization that owes a debt or has an obligation to another party Debtor Ageing Analysis ◦ A listing of debtors accounts , usually produced monthly, which analyses the age of the debts by splitting them into such categories as those up to one month old, two months old, and more than two months old. The debtor ageing ratio indicates the average time it takes your business to collect its debts ◦ Need- As a basic part of the credit control system, the analysis should be regularly examined so that any appropriate follow-up action may be taken ◦ Important determinant of Pricing policy ◦ Its worth looking at this ratio over a number of financial years to monitor performance trends. ◦ Risk Factors www.managementvikalp.co.in 33
    • 34.  Creditors Ageing Analysis ◦ Similar to debtors ageing analysis, only with Creditors ◦ Need ◦ Indirect financing of business ◦ Cash flow can be eased This could be a useful tool to schedule your payments to your creditors Credit negotiation Ability to bargain for discounts www.managementvikalp.co.in 34
    • 35.  A firm has resources. It converts resources into profits through production of goods and services sales of goods and services Ratios Measure relationships between resources and financial flows Show ways in which firm’s situation deviates from Its own past Other firms The industry All firms www.managementvikalp.co.in 35
    • 36.  Diagnostic tool for financial health Standardize financial information for comparisons Evaluate current operations Compare performance with past performance Compare performance against other firms or industry standards Study the efficiency of operations Study the risk of operations www.managementvikalp.co.in 36
    • 37.  A firm’s industry category is often difficult to identify Published industry averages are only guidelines Accounting practices differ across firms Sometimes difficult to interpret deviations in ratios Industry ratios may not be desirable targets Seasonality affects ratios Relative, not absolute www.managementvikalp.co.in 37
    • 38. The important ratios that arise from the BalanceSheet includeLiquidity ratios -Current ratio -Quick ratioDebtors turnover ratioCreditors turnover ratioReturn on assets ratioReturn on equity ratioReturn on investment ratio www.managementvikalp.co.in 38
    • 39. Objective of Analysis Ratio Formula Standard Ratio Immediate Liquidity Quick Ratio Quick Assets / Quick Liabilities 1:1 Short Term Current Ratio Current assets / Current Liabilities 2:1 Liquidity Liquidity of Stock Stock Working Stock *100 / Working Capital 100% Capital   Stock COGS / Average Stock Company Standard Turnover     Average Stock = (Op. St+ Cl St )/ 2   Liquidity of Debtors Debtors (Debtors +B. R.) / Daily Credit Sales Normal Credit Turnover Allowed Liquidity of Creditors (Creditors +B.P)/ Daily Credit Purchases Company Standard Creditors Turnover Long Term Proprietary Proprietors Funds *100/ Total Assets 65% to 75% Solvency & Stability Ratio  Debt-Equity Borrowed Funds/ Proprietors Funds 2:1 Ratio www.managementvikalp.co.in 39
    • 40. Operating or trading Gross Profit GP * 100 Company efficiency Ratio Net sales Standard  Operating (COGS+ Operating Exp) * 100 Company Ratio Net Sales Standard  Operating Net Operating Net Profit * 100 Company Profit Ratio Net Sales Standard  Expenses Expenses * 100 Company Ratio Net Sales Standard  Net Profit Net Profit * 100 Company Ratio Net Sales StandardOverall Profitability Return on NP (before int. & Tax) *100 Company Capital Capital Employed Standard Employed  Return on NP (after tax) * 100 Company Propreitors Proprietors Funds Standard Funds  Return on NP (after tax & Pref Div) * 100 Company Equity (Equity Cap + Reserves) StandardCapital Structure Capital (Pref Capital + Debn+Loan) Company Gearing (Equity + Reserves) Standard  Debt-Equity Debt   Ratio Equity  Proprietory Proprietors Funds *100 65% to 75% Ratio Total Assets www.managementvikalp.co.in 40
    • 41. Overtrading or Proprietory Ratio Proprietors Funds *100 Low Ratio:undertrading / Total Assets Overtrading, High Ratio: undertrading  Stock Cost of Goods Sold *100/ Average Stock High Ratio: Turnover Overtrading, Low Ratio:undertradi ng  Current Ratio Current assets/ Current Liabilities Low Ratio: Overtrading, High Ratio:undertradi ngCoverage Dividend Equity dividend * 100/ Profit for Equity Company Standard Payout Shareholders  Interest PBIT / Interest Company Standard Coverage www.managementvikalp.co.in 41
    • 42. Objective of Ratio to be computed Formula Standard RatioAnalysisImmediate Liquidity Quick Ratio Quick Assets/ Quick Liabilities 1:1Short Term Liquidity Current Ratio Current assets/ Current Liabilities 2:1Liquidity of Stock Stock Working Capital Stock *100/ Working Capital 100%  Stock Turnover COGS/ Average Stock Company Standard    Average Stock = (Op. St+ Cl St)/2  Liquidity of Debtors Debtors Turnover (Debtors +Bills Receivable)/ Daily Credit Sales Normal Credit AllowedLiquidity of Creditors Creditors Turnover (Creditors +Bills Payable)/ Daily Credit Purchases Company StandardLong Term Solvency Proprietary Ratio Proprietors Funds *100/ Total Assets 65% to 75%& Stability  Debt-Equity Ratio Borrowed Funds/ Proprietors Funds 2:1Operating or trading Gross Profit Ratio GP * 100/ Net Sales Company Standardefficiency  Operating Ratio (COGS+ Operating Exp) * 100/ Net Sales Company Standard  Operating Net Profit Ratio Operating Net Profit * 100/ Net Sales Company Standard  Expenses Ratio Expenses * 100/ Net Sales Company Standard  Net Profit Ratio Net Profit * 100/ Net Sales Company StandardOverall Profitability Return on Capital Employed NP (before int. & Tax) *100/ Capital Employed Company Standard  Return on Propreitors Funds NP (after tax) *100/ Proprietors Funds Company Standard  Return on Equity NP (after tax & Pref Div) *100/ (Equity Cap + Reserves) Company StandardCapital Structure Capital Gearing (Pref Capital + Debn+Loan)/ (Equity + Reserves) Company Standard  Debt-Equity Ratio Debt/ Equity    Proprietory Ratio Proprietors Funds *100/ Total Assets 65% to 75%Overtrading or Proprietory Ratio Proprietors Funds *100/ Total Assets Low Ratio: Overtrading,undertrading High Ratio:undertrading  Stock Turnover Cost of Goods Sold *100/ Average Stock High Ratio: Overtrading, Low Ratio:undertrading  Current Ratio Current assets/ Current Liabilities Low Ratio: Overtrading, High Ratio:undertradingCoverage Dividend Payout Equity dividend * 100/ Profit for Equity Shareholders Company Standard  Interest Coverage PBIT / Interest Company Standard www.managementvikalp.co.in 42
    • 43. Objective of Analysis Ratio Formula Standard Ratio PROFITABILITY Return on  = NPAT Du Pont  Equity (ROE) Capital + Reserves- (def Exp) analysis Earnings Per  Net Profit- (Pref Div)   ERR Share(EPS) No of Equity shares Price Earning   Av. Market price per share Industry  Ratio(EPS) Earnings per share standard Return on  P B T /       X   100 ERR Industry  Investemnts( Capital Employed standard ROI) Return on  N PA T                X  100 Assets(ROA) Av. Total Assets Credit Risk  Debt service  Earnings Availble for service of debt (EBITDA) Ratio  (DSR) Interest + Instalments   www.managementvikalp.co.in 43
    • 44.  A class of financial metrics that is used to determine a companys ability to pay off its short-terms debts obligations.  Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts Current ratio ◦ A liquidity ratio that measures a companys ability to pay short-term obligations. The Current Ratio formula is: Current ratio= Current assets Current liabilities Quick ratio/ Acid Test Ratio ◦ The quick ratio measures a companys ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. ◦ The quick ratio is calculated as= Current assets -Inventories Current Liabilities www.managementvikalp.co.in 44
    • 45.  It is also known as receivables turnover ratio. An accounting measure used to quantify a firms effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Formula: Accounts receivable turnover= Net credit sale Average accounts receivable Some company report only Total Sales. This can affect the ratio depending on the size of the cash sales This ratio indicates how well debtors are being collected. If debtors are not collected reasonably in accordance with their terms, you should rethink your collection policy. If debtors are excessively slow in being converted to cash, liquidity will be severely affected. It may also be calculated as Debtors turnover (in days) = Debtors* 365 days Net credit sales www.managementvikalp.co.in 45
    • 46.  It is also known as Accounts Payable Turnover Ratio. A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. Formula Accounts payable turnover = Total credit purchases Average accounts payable It may also be calculated as, Creditors turnover (in days) = Creditors*365 days Net credit purchases www.managementvikalp.co.in 46
    • 47. What Does Return On Total Assets (ROA) Mean? It measures a companys earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. ROA= EBIT_____ Total net assets This measures how efficiently profits are being generated from the assets employed in the business, when compared with the ratio of firms in a similar business. A low ratio in comparison with the averages in the industry indicates inefficient use of the business assets. The return on assets ratio is also calculated as follows: Return on assets = Net profit before tax Total Assets www.managementvikalp.co.in 47
    • 48.  What Does Operating Margin Mean? A ratio used to measure a companys pricing strategy and operating efficiency. Calculated as: Operating margin = Operating income Net sales Operating margin is a measurement of what proportion of a companys revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. www.managementvikalp.co.in 48
    • 49. What Does Return On Equity - ROE Mean?The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested.   ROE is expressed as a percentage and calculated as = __Net income__ Share holders equity www.managementvikalp.co.in 49
    • 50. What Does Return On Investment - ROI Mean?A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio The return on investment formula: ROI = (Net Profit Before Tax ) Capital Employed This ratio tells you whether or not all the effort and time put into the business has been worthwhile. www.managementvikalp.co.in 50
    • 51.  If the ROI is less than the rate of return on an alternative risk free investment, such as a bank savings account or other secure bank investments, then you may be wiser to sell the business and put the money into that investment The ROI is also calculated is follows: Return on Investment = Net profit before tax Net worth www.managementvikalp.co.in 51
    • 52.  Every public limited co share calculate and disclose the EPS in accordance with AS 20. EPS is a financial ratio indicating the amount of profit/ loss for the period attributable to each equity share Basic EPS = Net Profit After Tax (Pref Dividend) Wtd Average Eq. Share Diluted EPS = ___Diluted Earnings_____________ Wtd. Avg. of the Eq. Shares+ Wtd Avg. Addl Eq Shares www.managementvikalp.co.in 52
    • 53.  The portion of a companys profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a companys profitability. Calculated as: = Net income- Dividends on preferred stock Average outstanding shares Earnings per share is generally considered to be the single most important variable in determining a shares price.  It is also a major component used to calculate the price-to- earnings valuation ratio.  www.managementvikalp.co.in 53
    • 54. Price-Earnings Ratio - P/E Ratio (Contd) A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E Its usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the companys own historical P/E. www.managementvikalp.co.in 54
    • 55.  A valuation ratio of a companys current share price compared to its per-share earnings. Calculated as: = Market value per share Earnings per share   EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters known as price multiple or earnings multiple www.managementvikalp.co.in 55
    • 56.  What Does Debt/Equity Ratio Mean? A measure of a companys financial leverage calculated by dividing its total liabilities by stockholders equity. It indicates what proportion of equity and debt the company is using to finance its assets. Calculated as= Total liabilities Share holders equity  Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. www.managementvikalp.co.in 56
    • 57. Du-Pont Analysis It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming. www.managementvikalp.co.in 57
    • 58. RO E RO A E q u it y M u lt ip lie rP r o f it M a r g in T o ta l A s s e t T u rn o v e r www.managementvikalp.co.in 58
    • 59. R O E R O A E q u it y M u lt ip lie r P r o fit M a r g in T o ta l A s s e t T u rn o v e rROE = Profit Margin × Total Asset Turnover × Equity Multiplier Net Income Sales Total Assets = × × Sales Total Assets Common Equity www.managementvikalp.co.in 59
    • 60.  Method to breakdown ROE into: ◦ ROA and Equity Multiplier ROA is further broken down as: ◦ Profit Margin and Asset Turnover Helps to identify sources of strength and weakness in current performance Helps to focus attention on value drivers www.managementvikalp.co.in 60
    • 61. What Does Leverage Mean? The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. The amount of debt used to finance a firms assets. A firm with significantly more debt than equity is considered to be highly leveraged. Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. www.managementvikalp.co.in 61
    • 62. 1. Any ratio used to calculate the financial leverage of a company to get an idea of the companys methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.2. A ratio used to measure a companys mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. www.managementvikalp.co.in 62
    • 63.  Cash flow statements shall disclose movements in Cash and Cash equivalents. It reflects the inflow and out flow of cash equivalents. The Cash flow is reflected in 3 distinct areas of Activity CASH FLOW AS 3 OPERATING INVESTING FINANACING ACTIVITIES ACTIVITIES ACTIVITIES Revenue Generating Acquisition and Disposal Increase decrease in Activities of Capital Sales, incomes royalties Long Term Assets Increase decrease in fees. Borrowings Payments Purchases, net Profit and loss profit on sales of assets NON CASH incomes to be excluded credits/debits to be excluded www.managementvikalp.co.in 63
    • 64. Direct Method Cash Flow Statement (Rs. ‘000) Cash Flows from Operating activities 2009 Cash receipts from customers 30,150 Cash paid to suppliers & employees -27,600 Cash generated from operations 2,550 Income Taxes paid -860 Cash flow before extraordinary items 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,870 Cash flows from investing activities Purchase of fixed assets -350 Proceeds from sale of equipment 20 Interest received 200 Dividends received 160 Net cash from investing activities 30 Cash flows from financing activities Proceeds from issuance of share capital 250 Proceeds from long term borrowings 250 Repayment of long term borrowings -180 Interest paid -270 Dividends paid -1,200 Net cash used in financing activities -1,150 Net increase in cash and cash equivalents 750 Cash and cash equivalents at the beginning of the period 160 Cash and cash equivalents at the end of the period 910Direct Method: Whereby major classes of gross cash receipts and gross cash payments are disclosed 1.Cash flow from operating activities 2.Cash flow from investing activities 3. Cash flow from financing activities www.managementvikalp.co.in 64
    • 65. Indirect Method Cash Flow Statement (Rs. ‘000) Cash flows from operating activities 2009 Net profit before tax and extraordinary items 3,350 Adjustments for: Depreciation 450 Foreign exchange loss 40 Interest income -300 Dividend income -200 Interest expense 400 Operating profit before working capital changes 3,740 Increase in sundry debtors -500 Decrease in inventories 1,050 Decrease in sundry creditors -1,740 Cash generated from operations 2,550 Income taxes paid -860 Cash flow before extraordinary items 1,690 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,870 Cash flows from investing activities Purchase of fixed assets -350 Proceeds from sale of equipment 20 Interest received 200 Dividend received 160 Net cash from investing activities 30 Cash flows from financing activities Proceeds from issuance of share capital 250 Proceeds from long term borrowings 250 Repayment of long term borrowings -180 Interest paid -270 Dividends paid -1,200 Net cash used in financing activities -1,150 Net increase in cash and cash equivalents 750 Cash and cash equivalents at the beginning of the 160 period Cash and cash equivalents at the end of the period 910Indirect Method: Whereby net profit or loss is adjusted for the effects of a transactions of a non-cash nature, any deferral or accruals of past or future operating cash receipts or payments anditems of income or expense associated with investing of financing cash flows. www.managementvikalp.co.in 65
    • 66. 1) Window dressing is to present a bright picture of your financial statement than what actually is.2) Balance Sheet projects an “unfair view” of the state of affairs.3) “True” but not Fair4) Figures are distorted5) May comply with legal provisions in form but not in Substance “Substance Over Form” – “In Essence”. www.managementvikalp.co.in 66
    • 67.  Not providing for liabilities / expenses which exist. Deferment of expenses Over valuation / of assets. Under valuation/ over valuation of inventory. Excess provision for doubtful debts Fictitious / distress sales on approval Recall advances. Cheque in transit. www.managementvikalp.co.in 67
    • 68.  Obligations that are contingent liabilities of a bank, and thus do not appear on its balance sheet. In general, off- balance sheet items include the following: direct credit substitutes in which a bank substitutes its own credit for a third party, including standby letters of credit; irrevocable letters of credit that guarantee repayment of commercial paper or tax-exempt securities; risk participations in bankers acceptances; sale and repurchase agreements; asset sales with recourse against the seller; interest rate swaps; interest rate options and currency options www.managementvikalp.co.in 68

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