Analysis & Interpretation of Financial Statements Financial statement analysis helps businesses, investors, and stakeholders assess a company's performance, profitability, and financial health. The three main financial statements analyzed are: Income Statement (Profit & Loss Statement) – Shows revenue, expenses, and profit over a period. Balance Sheet – Provides a snapshot of assets, liabilities, and equity at a given point in time. Cash Flow Statement – Tracks cash inflows and outflows, showing liquidity and financial health. Key Financial Analysis Methods 1. Horizontal & Vertical Analysis 📌 Horizontal Analysis – Compares financial data over multiple periods to identify trends. 📌 Vertical Analysis – Expresses each item as a percentage of total revenue (Income Statement) or total assets (Balance Sheet). 2. Ratio Analysis Financial ratios help interpret financial data and compare performance across companies or industries. ✅ Profitability Ratios – Measure a company's ability to generate profit. Gross Profit Margin = (Gross Profit / Revenue) × 100 Net Profit Margin = (Net Income / Revenue) × 100 Return on Assets (ROA) = (Net Income / Total Assets) × 100 Return on Equity (ROE) = (Net Income / Shareholder’s Equity) × 100 ✅ Liquidity Ratios – Assess the company’s ability to meet short-term obligations. Current Ratio = Current Assets / Current Liabilities Quick Ratio (Acid Test Ratio) = (Current Assets – Inventory) / Current Liabilities ✅ Solvency (Leverage) Ratios – Evaluate long-term financial stability. Debt-to-Equity Ratio = Total Debt / Shareholder’s Equity Interest Coverage Ratio = EBIT / Interest Expense ✅ Efficiency Ratios – Measure how efficiently a company uses assets. Inventory Turnover = Cost of Goods Sold / Average Inventory Receivables Turnover = Revenue / Accounts Receivable ✅ Market Value Ratios – Relevant for investors assessing stock performance. Earnings Per Share (EPS) = Net Income / Total Shares Outstanding Price-to-Earnings Ratio (P/E) = Market Price per Share / EPS Interpreting Financial Statements 🔹 Growing revenue with stable expenses → Positive performance. 🔹 High debt levels compared to equity → Risky financial structure. 🔹 Low liquidity ratios → Potential cash flow issues. 🔹 Declining profitability ratios → May indicate rising costs or reduced efficiency.

1. Financial Statement
Analysis: A Guide for
Business Professionals
This presentation explores financial statement analysis,
a crucial tool for evaluating a company's performance
and financial health. We'll cover key methods and
ratios, offering valuable insights for business
professionals, investors, and finance students.
Dr.P.Manochithra

2. Understanding Financial Statements
Income Statement
This statement, also known as
the profit and loss
statement, summarizes a
company's revenue, expenses,
and profit over a specific
period. It reveals how much
money a company has made and
where it went.
Balance Sheet
A snapshot of a company's
financial position at a
particular point in time, it
showcases assets,
liabilities, and equity. It
helps understand the
company's financial structure
and how it is funded.
Cash Flow Statement
This statement tracks the
movement of cash in and out
of a company, revealing its
liquidity and financial
health. It helps assess the
company's ability to generate
cash and meet financial
obligations.

3. Horizontal & Vertical
Analysis
1 Horizontal Analysis
This method compares financial data across
multiple periods. It helps identify trends, assess
growth, and understand the reasons behind changes
in financial performance.
2 Vertical Analysis
This approach expresses each item in a financial
statement as a percentage of a specific base
amount. For the Income Statement, it's usually
total revenue, while for the Balance Sheet, it's
total assets.

4. Ratio Analysis: A Deeper Dive
Profitability Ratios
These ratios measure a company's ability to
generate profit from its operations. Examples
include Gross Profit Margin, Net Profit
Margin, Return on Assets (ROA), and Return on
Equity (ROE).
Liquidity Ratios
These ratios assess a company's ability to
meet short-term financial obligations. Common
examples are the Current Ratio and the Quick
Ratio (Acid Test Ratio).

5. Analyzing Solvency & Efficiency
Solvency (Leverage) Ratios
These ratios evaluate a company's long-term
financial stability and ability to meet its
long-term debt obligations. Key examples are
the Debt-to-Equity Ratio and the Interest
Coverage Ratio.
Efficiency Ratios
These ratios measure how efficiently a company
uses its assets to generate sales and profits.
Examples include Inventory Turnover and
Receivables Turnover.

6. Market Value Ratios: Investor Perspective
Earnings Per Share (EPS)
EPS represents the net income earned by each
share of outstanding stock. Investors use EPS
to assess profitability and compare the
performance of different companies.
Price-to-Earnings Ratio (P/E)
This ratio, also known as the P/E ratio,
indicates the market value of a share relative
to its earnings per share. Investors use this
ratio to assess the valuation of a company and
compare its price against its earnings.

7. Interpreting Financial Statement
Analysis
Growing Revenue with Stable Expenses
Indicates positive performance, as the company is increasing its revenue
while managing its expenses effectively, resulting in improved
profitability.
High Debt Levels Compared to Equity
Signifies a risky financial structure, as the company relies heavily on
debt financing, making it more vulnerable to financial instability and
interest rate fluctuations.
Low Liquidity Ratios
Suggests potential cash flow issues, as the company may struggle to meet
its short-term financial obligations, potentially leading to financial
distress.
Declining Profitability Ratios
May indicate rising costs, reduced efficiency, or changes in market
conditions, potentially harming a company's ability to generate profits.

8. Key Takeaways & Next
Steps
Financial statement analysis is a powerful tool for
understanding a company's performance and financial
health. It helps investors, stakeholders, and business
professionals make informed decisions. The analysis is
an ongoing process, requiring constant monitoring and
updates to keep track of changing financial trends.
Moving forward, delve into specific company analyses,
explore industry-specific ratios, and consider using
financial modeling tools for more complex assessments.
Continuous learning and application of these tools are
crucial for informed decision-making in the business
world.