Financial ratios and their use in understanding Financial StatementsPranav Dedhia
An introduction and in-depth understanding on the importance of Financial ratios in understanding financial statements of business entities along with relevant examples
Financial ratios and their use in understanding Financial StatementsPranav Dedhia
An introduction and in-depth understanding on the importance of Financial ratios in understanding financial statements of business entities along with relevant examples
COMPANY ANALYSIS-HINDUSTAN UNILEVER LTDSaiLakshmi115
Introduction to company analysis# About the company in short # vision # mission # Standard of conduct # culture and value # business model of HUL # swot analysis of HUL # management and its structure # corporate culture and governance # Quantitative analysis of the company- HUL: Earnings, Leverages, competitive edge, production efficiency, financial analysis, cash flow, Ratio analysis # conclusion
for full text article go to : www.accountingchimp.com/ratio-analysis/
In this article of Ratio Analysis, you will learn how they can be used to analyze a company. Understand the meaning and formulas associated with Liquidity ratios, Profitability ratios, Turnover ratios, and Debt ratios
*Ratios provide a quick and simple means of assessing the financial health of a business
*Ratio relates one figure, say Net Profit, to another figure from the financial statements, say per employee
*Ratios summarise quite complex data into a small number of key indicators
*Ratios enable comparison of different businesses
*Ratios overcome issue of difference in scale of businesses
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COMPANY ANALYSIS-HINDUSTAN UNILEVER LTDSaiLakshmi115
Introduction to company analysis# About the company in short # vision # mission # Standard of conduct # culture and value # business model of HUL # swot analysis of HUL # management and its structure # corporate culture and governance # Quantitative analysis of the company- HUL: Earnings, Leverages, competitive edge, production efficiency, financial analysis, cash flow, Ratio analysis # conclusion
for full text article go to : www.accountingchimp.com/ratio-analysis/
In this article of Ratio Analysis, you will learn how they can be used to analyze a company. Understand the meaning and formulas associated with Liquidity ratios, Profitability ratios, Turnover ratios, and Debt ratios
*Ratios provide a quick and simple means of assessing the financial health of a business
*Ratio relates one figure, say Net Profit, to another figure from the financial statements, say per employee
*Ratios summarise quite complex data into a small number of key indicators
*Ratios enable comparison of different businesses
*Ratios overcome issue of difference in scale of businesses
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
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4. Outline
Purpose of Financial Analysis.
Types of Ratio Analysis.
Financial Statements.
Users of Financial Statements.
Ratio Analysis:
Liquidity Ratios.
Activity Ratios.
Profitability Ratios.
Capital Structure / Leverage Ratios.
Market Value Ratios.
Limitations of Ratio Analysis.
5. Purpose of Financial Analysis
Assessment of the firm’s past, present and
future financial conditions.
Find organization’s financial strengths and
weaknesses.
To make informed decisions about a
company.
Helps forecast its future profitability and risk.
Assists to improve non-financial performance
of the company.
6. Using Financial Ratios
Major tool for financial analysis.
Standardize numbers and facilitate
comparisons.
Analyze the firm’s financial position &
financial performance.
Ratios are used to highlight weaknesses
and strengths.
Better & easy to understand information
for the users.
7. Financial Statements
Income Statement (Profit & Loss Account )
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
Notes to the Accounts
Auditor’s Report / Director’s Report
8. Income Statement
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses (Selling & Administration)
Operating Income
Add: Other Incomes
Profit Before Interest & Tax
Financial Charges
Profit Before Tax
Provision for Taxation
Profit After Tax
Profit B/F
Profit Available for Appropriations
Transfer to General Reserves
Dividends
Profit C/F (Transferred to Balance Sheet)
Rs.
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9. Balance Sheet
Equity & Liabilities Rs. Assets & Properties Rs.
Share Capital &
Reserves:
Non-Current
Liabilities:
Current Liabilities:
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Non-Current
Assets:
Long Term
Investments:
Current Assets:
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13. Types of Ratio Analysis
Horizontal Analysis
Vertical Analysis
14. Horizontal OR Trend Analysis
The corresponding ratios of a same firm for
different periods.
The corresponding ratios for another firm.
The firm’s ratios compared with that of the
Industry’s Overall Average.
The ratios of one division/department of a
firm against another division or department.
The planned ratios for the period.
15. Vertical Analysis
Shows relationship of each item to a base
amount on financial statements.
Income statement – each item expressed
as percentage of net sales.
Balance sheet – each item expressed as
percentage of total assets.
16. Ratio Analysis
Financial Ratios can be classified into 5
main categories:
Liquidity OR Short-Term Solvency Ratios
Asset Management OR Activity Ratios
Profitability Ratios
Capital Structure OR Leverage Ratios
Market Test OR Market Value Ratios
17. What are the five major categories of ratios,
and what questions do they answer?
Liquidity: Can we make required payments?
Asset management: right amount of assets vs.
sales?
Debt management: Right mix of debt and
equity?
Profitability: Do sales prices exceed unit costs,
and are sales high enough as reflected in PM,
ROE, and ROA?
Market value: Do investors like what they see as
reflected in P/E and M/B ratios?
18. Liquidity OR Short-Term Solvency
Ratios
Net Working Capital =
Current Assets - Current Liabilities
Current Ratio = Current Assets
Current Liabilities
Acid Test/Liquid/Quick Ratio =
(Current Assets – Prepaid Expenses – Stock [Closing] – Loose Tools)
Current Liabilities
19. Activity OR Asset Management
Ratios
Stock Turnover Ratio: CGS
Avg. Stock
Debtors Turnover Ratio: Total Credit Sales
Average Debtors
Average Collection Period:
Average Debtors X 360
Total Credit Sales
20. Activity OR Asset Management
Ratios
Creditors Turnover : Total Credit Purchases
Average Creditors
Average Payment Period:
Average Creditors X 360
Total Credit Purchases
Total Assets Turnover Ratio:
CGS OR Sales
Total Assets
21. Profitability Ratios
Sales: Rate of return on net sales (Profit
Margin)
Investment (Assets): Rate of return on
total assets – how successful the business
is in using assets to earn a profit
22. Profitability Ratios (Sales)
GP Ratio: Gross Profit X 100
Net Sales
Net Profit Ratio: Profit After Tax X 100
Net Sales
Operating Profit Ratio:
Operating Profit X 100
Net Sales
23. Profitability Ratios (Sales)
Cost of Goods Sold Ratio:
CGS x 100
Net Sales
Operating Ratio:
CGS + Operating Expenses X 100
Net Sales
24. Profitability Ratios
{Investment (Assets)}
Return on Investment (ROI):
Profit After Tax X 100
Total Assets
Return on Equity Funds (ROE):
Profit After Tax – Preference Dividend X 100
Ordinary Shareholders Equity
25. Profitability Ratios
{Investment (Assets)}
DuPont Analysis
Three ways to ascertain Return on Equity:
(A) Return on Equity Funds (ROE):
Profit After Tax – Preference Dividend X 100
Ordinary Shareholders Equity
Ordinary Shareholders Funds/Equity: Ordinary Share
Capital + Reserves + Surplus
26. Profitability Ratios
{Investment (Assets)}
DuPont Analysis
(B) Return on Equity = N.P Margin x Total
Assets Turnover x Financial Leverage:
Net Income x Revenues x Avg. Total Assets
Revenues Avg. T. Assets Avg. Sh. Equity
ROE = (Profit margin) x (Asset turnover)
x (Equity multiplier)
27. Profitability Ratios
{Investment (Assets)}
DuPont Analysis
ROE = (Profit margin) x (Asset turnover)
x (Equity multiplier)
(Net profit/Sales) x Sales/Assets) x (Assets/Equity)
= (Net Profit/Equity)
Operating efficiency (measured by profit margin)
Asset use efficiency (measured by asset turnover)
Financial leverage (measured by equity multiplier)
28. Profitability Ratios
{Investment (Assets)}
Return on Capital Employed (ROCE):
Profit After Tax + Interest X 100
Total Capital Employed
Total Capital Employed: Ordinary Share Capital + Preference
Share Capital + Reserves (Capital & Revenue) + Surplus + Long
Term Liabilities
Return on Total Assets (ROA):
Profit After Tax + Interest X 100
Total Assets
29. Capital Structure OR Leverage OR
Long – Term Solvency Ratios
Debt – Asset Relationship (Balance
Sheet Based )
Coverage Ratios ( P & L A/C Based )
30. Debt – Asset Ratios
Debt – Equity Ratio: Long – Term Liabilities X 100
Equity Share Capital
Equity Share Capital => Ordinary Share Capital + Preference
Share Capital + Reserves + Surplus
Debt – Total Capital: Long – Term Liabilities X 100
Total Capital
Total Capital =>Equity Share Capital + Long Term Liabilities
31. Debt – Asset Ratios
Debt Ratio OR Debt to Total Assets:
Total Debts X 100
Total Assets
Total Debts => Long Term Liabilities + Short Term Liabilities
Capital Gearing Ratio:
Fixed Cost Capital X 100
Shareholders Equity + Long Term Liabilities
Fixed Cost Capital =>Preference Share Capital + Debentures +
Other Borrowed Funds.
If Capital Gearing Ratio is:
Greater Than 50% - High Geared.
Equal to 50% - Neutral Geared.
Lower Than 50% - Low Geared.
33. Market Value/Test Ratios
Earnings per share = Net Profit after tax
Number of issued ordinary shares
Dividend per share = Dividends
Number of issued ordinary shares
Market to Book Value (M/B) Ratio = Market price per share
Book value per share
Price Earnings (P/E) Ratio = Market price per share
Earnings per share
34. Limitations of Ratio Analysis
Basic financial data must be reliable or
the results may be misleading.
Ratio Analysis only considers financial
data financial data share the same
problems of financial data (such as
timeliness).
Different firms use different accounting
policies e.g. Depreciation method.
35. Limitations of Ratio Analysis
Comparing ratios over time is complicated by
the fact that economic conditions may change
also such as inflation, interest rate, prices etc.
Comparing ratios between two firms is
complicated by the fact that the firms may have
different economic environments or production
technologies even though they produce the
same product.
Ratio analysis is only numerical and calculated
values which may be based on accounting
estimates.