T Study Financial management

1. ANALYSIS OF FINANCIAL STATEMENT

2. COMMON SIZE ANALYSIS
 Common size analysis, also referred as vertical analysis, is a tool that financial managers use to analyze
financial statements. It evaluates financial statements by expressing each line item as a percentage of the
base amount for that period. The analysis helps to understand the impact of each item in the financial
statement and its contribution to the resulting figure.
 The technique can be used to analyze the three primary financial statements, i.e., balance sheet, income
statement and cash flow statement. In the balance sheet, the common base item to which other line
items are expressed is total assets, while in the income statement, it is total revenues.

5. RATIO ANALYSIS

6. FINANCIAL RATIOS: RATIONALE AND USE
 Ratios standardize numbers and facilitate comparisons.
 Ratios are used to highlight weaknesses and strengths.
 The end-users of financial ratio data would be anyone having a financial stake in the firm or who
advises potential investors about the firm:
 Stockholders
 Creditors
 Investment bankers and brokers
 Bond rating agencies

7. CATEGORIES OF FINANCIAL RATIOS
Activity Measure how efficiently a company performs day-to-day tasks,
such as collection of receivables, and inventory management.
Liquidity Measures ability to meet its short-term obligations.
Solvency Measures ability to meet its long-term obligations.
Profitability Measures ability to generate profit from its resources.
Valuation Measures the quality of an asset or flow associated with
ownership of a specified claim.

8. ACTIVITY RATIOS
Activity ratios Numerator Denominator
Inventory turnover COGS Average inventory
Days of inventory on hand (DOH) Number of days in period Inventory turnover
Receivable turnover Revenues Average receivable
Days of sales outstanding Number of days in period Receivable turnover
Payable turnover Purchases Average trade payables
Number of days of payables Number of days in period Payable turnover
Working capital turnover Revenues Average working capital
Fixed assets turnover Revenues Average net fixed assets
Total assets turnover Reveneus Average total assets

9. LIQUIDITY RATIOS
Liquidity ratios Numerator Denominator
Current ratio Current assets Current liabilities
Quick ratio Cash + short-term marketable
securities + receivables
Current liabilities
Cash ratio
Defensive interval ratio Cash + short-term marketable
securities + receivables
Daily cash expenditures
Cash conversion cycle DOH + DSO - PDP

10. SOLVENCY RATIOS
Solvency ratios Numerator Denominator
Debt-to-assets ratio Total debt Total assets
Debt-to –capital ratio Total debt Total debt + total shareholders
equity
Debt-to-equity ratio Total debt Total shareholders equity
Financial leverage ratio Average total assets Average total equity
Interest coverage EBIT Interest payments
Fixed charge coverage EBIT + Lease payments Interest payments + Lease
payments

11. PROFITABILITY RATIOS
Profitability ratios Numerator Denominator
Gross profit margin Gross profit Revenues
Operating profit margin Operating income or EBIT Revenues
Pretax margin EBT Revenues
Net profit margin Net income Revenues
Operating ROA Operating income Average total assets
ROA Net income /EAT Average total assets
Return on total capital EBIT Short and long-term debt and
equity
ROE Net income Average total equity
Return on common equity Net income – preferred dividends Average common equity

12. VALUATION RATIOS
Valuation ratios Numerator Denominator
P/E Price per share Earnings per share
P/CF Price per share Cash flow per share
P/S Price per share Sales per share
P/BV Price per share Book value per share
Basic EPS Net income minus preferred dividends Weighted average number of ordinary
shares
Diluted EPS
Adjusted income available for ordinary
shares, reflecting conversion of dilutive
securities
Weighted average of ordinary and
potential ordinary shares outstanding
Cash flow per share Cash flow from operations Weighted average number of ordinary
shares
EBITDA per share EBITDA Weighted average number of ordinary
shares
Dividend per share Common dividend declared Weighted average number of ordinary
shares