The document discusses various techniques for financial statement analysis including common-size analysis, ratio analysis, and DuPont analysis. It provides details on calculating and interpreting different types of activity ratios such as inventory turnover, receivables turnover, and payables turnover. Specific ratios are calculated and compared for Meghna Cement and Confidence Cement to analyze inventory management and receivables collection efficiency between the two cement companies.

1. 1
Chapter 7: Financial Analysis
Techniques (Lecture 2)
Bushra Ferdous Khan
Standard Techniques of Financial
Statement Analysis
1. Common-size Analysis
1.1 Vertical Common-size Analysis
1.2 Horizontal Common-size Analysis
2. Ratio Analysis
2.1 Activity Ratios
2.2 Liquidity Ratios
2.3 Solvency Ratios
2.4 Profitability Ratios
2.5 Valuation Ratios
3. DuPont Analysis
Chapter 7; Lecture 1
Chapter 7; Lecture 2

2. 2
2. Ratio Analysis
• “Financial ratios can only be interpreted in the context of other
information, including benchmarks.”
• “In general, the financial ratios of a company are compared with those of its
major competitors (cross-sectional and trend analysis) and to the company’s
prior periods (trend analysis).”
• “The goal is to understand the underlying causes of divergence
between a company’s ratios and those of the industry.”
• Even ratios that remain consistent require understanding because
consistency can sometimes indicate accounting policies selected to smooth
earnings.”
Excerpts from: (Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)
2.1 Activity Ratios
• “Activity ratios measure how efficiently a company performs day-to-day
tasks, such as the collection of receivables and management of inventory.”
• “Activity ratios are analyzed as indicators of ongoing operational
performance—how effectively assets are used by a company.”
• “These ratios reflect the efficient management of both working capital
and longer term assets.”
• “Efficiency has a direct impact on liquidity (the ability of a company to meet its
short-term obligations), so some activity ratios are also useful in assessing
liquidity.”
Excerpts from: (Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)

3. 3
2.1 Activity Ratios
Activity Ratios Numerator Denominator
2.1.1 Inventory Turnover Cost of sales or Cost of Goods Sold Average Inventory
2.1.2 Days of Inventory on Hand (DOH) Number of Days in Period Inventory Turnover
2.1.3 Receivables Turnover Revenue Average Receivables
2.1.4 Days of Sales Outstanding Number of Days in Period Receivable Turnover
2.1.5 Payables Turnover Purchases Average Trade Payables
2.1.6 Number of Days of Payables Number of Days in Period Payables Turnover
2.1.7 Working Capital Turnover Revenue Average Working Capital
2.1.8 Fixed Asset Turnover Revenue Average Net Fixed Asset
2.1.9 Total Asset Turnover Revenue Average Total Assets
2.1Activity Ratios (2.1.1 and 2.1.2)
Activity Ratios Numerator Denominator
2.1.1 Inventory Turnover Cost of sales or Cost of Goods
Sold
Average Inventory
2.1.2 Days of Inventory on Hand (DOH) Number of Days in Period Inventory Turnover
• “A high inventory turnover ratio relative to industry MAY indicate effective management of inventory.”
(Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)
• “A high inventory turnover ratio MAY also indicate the company does not carry enough inventory causing loss of potential
sales.” (Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)
• Slow growth of revenue + High inventory turnover MAY indicate inadequate inventory levels.
• Slow growth revenue + Slow inventory turnover MAY indicate poor demand for product in the market.
• High growth of revenue + High inventory turnover MAY indicate good inventory management.
• High growth of revenue + Slow inventory turnover MAY indicate aggressive revenue recognition policy or high amounts of
obsolete inventory.
MAY is boldfaced to insist on the point that such analysis can only suggest possibilities, not
offer definitive answers

4. 4
Source: Emirates
Group Annual
Report 2019-20
Source: Emirates
Group Annual
Report 2019-20

5. 5
What is Emirates’ Inventory Turnover Ratio?
Source: Emirates
Group Annual
Report 2019-20

6. 6
• Emirates is a service sector firm. Their main business is
providing air-transport services.
• Thus, a high value of inventory turnover ratio is not a
particularly important thing for the firm, as selling things
included in their inventory is not their primary business.
Source: Meghna
Cement Annual
Report 2019

7. 7
Source: Meghna
Cement Annual
Report 2019
What is Meghna Cement’s Inventory Turnover
Ratio?

8. 8
Source: Confidence
Cement Annual
Report 2019
Source: Confidence
Cement Annual
Report 2019

9. 9
What is Confidence Cement’s Inventory
Turnover Ratio?
What is Meghna Cement’s Revenue Growth
Rate?

10. 10
What is Confidence Cement’s Revenue
Growth Rate?
• After calculating
• inventory turnover ratios for Meghna Cement and Confidence Cement; and
also
• revenue growth rates for the two firms;
go back to Slide No. 6 for discussion on how different combinations of
inventory turnover ratios and revenue growth rates (when compared
with comparable firms within the same industry of course!) MAY
indicate different things.
• MAY is boldfaced to insist on the point that such analysis can only
suggest possibilities, not offer definitive answers.

11. 11
Source: Meghna
Cement Annual
Report 2019
Source: Meghna
Cement Annual
Report 2019

12. 12
Source: Meghna
Cement Annual
Report 2019
What Would be Meghna Cement’s Inventory
Turnover Ratio if Stores and Spares are
Excluded from Inventory?

13. 13
Source: Confidence
Cement Annual
Report 2019
Source: Confidence
Cement Annual
Report 2019

14. 14
Source: Confidence
Cement Annual
Report 2019
What Would be Confidence Cement’s
Inventory Turnover Ratio if Stores and Spares
are Excluded from Inventory?

15. 15
• Looking closely at the composition of Meghna’s Inventory we see that 84% of
Meghna’s Inventory consists of Stores and Spares, which is included in Cost of
Sales as part of Factory Expense (or Manufacturing Overhead, MOH).
• Additionally, looking closely at the composition of Meghna’s Cost of Sales we see
that Factory Expense accounts for 10% of Cost of Sales
• Whereas, in case of Confidence 45.57% of the Inventory consists of Stores and
Spares (which, again of course, is included in Cost of Sales as part of Factory
Expense)
• 15.9% of Confidence’s Cost of Sales consists of Factory Expense
• This analysis provides us deeper insight for interpreting Inventory Turnover ratios
of the two firms.
Based on the closer look at the composition of
Meghna and Confidence’s Inventory and Cost of
Sales accounts, what is your interpretation of the
Inventory Turnover Ratios of Meghna Cement
and Confidence Cement that you have
calculated?
Here you need to compare and contrast
interpretation of the Inventory Turnover ratios
calculated including and excluding Stores and Spare.
Which firm do you think is actually selling their
product as a faster rate?

16. 16
2.1 Activity Ratios (2.1.3 and 2.1.4)
Activity Ratios Nemerator Denominator
2.1.3 Receivables Turnover Revenue Average Receivables
2.1.4 Days of Sales Outstanding
(DSO)
Number of Days in Period Receivables Turnover
• “A relatively high receivables turnover ratio (and commensurately low DSO) might indicate highly efficient
credit and collection.”
• “Alternatively, a high receivables turnover ratio could indicate that the company’s credit or collection policies
are too stringent, suggesting the possibility of sales being lost to competitors offering more lenient terms.”
• “A relatively low receivables turnover ratio would typically raise questions about the efficiency of the company’s
credit and collections procedures.”
• “As with inventory management, comparison of the company’s sales growth relative to the industry can help
the analyst assess whether sales are being lost due to stringent credit policies.”
Excerpts from: (Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)
What is Meghna Cement’s Receivables
Turnover Ratio?

17. 17
What is Confidence Cement’s Receivables
Turnover Ratio?
Source: Meghna Cement Annual Report 2019
Source: Confidence Cement Annual Report 2019

18. 18
• 48.96% of Meghna’s receivables in 2019 were aged over one
year.
• In 2018, 45% of their receivables were aged over one year.
• Even though the percentage of receivables aged over one year
increased in 2019 compared to 2018, the actual value of receivable
aged over one year decreased by BDT 63,602,797.2
Do similar analysis of Age of Receivables for Confidence.
Considering the Age of Receivables, what is
your interpretation of the Receivables
Turnover Ratios of Meghna Cement and
Confidence Cement you calculated?

19. 19
References
Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015.
International Financial Statement Analysis, Third Edition. CFA
Institute Investment Series. Wiley.
Meghna Cement Annual Report 2019
Confidence Cement Annual Report 2019
Emirates Annual Report 2018-19