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ROLL: 37
Computation, analysis & interpretation of ratios from company's financial

Turnover ratios:
Inventory turnover ratio = Cost of goods sold/Average inventory
For 2012 =
2 / ) 17568 17653 (

= 3.1664
for 2011 =
939)/2 12 17568 (

= 3.281
Average no. days inventory in stock = 365/Inventory turnover
for 2012 =
1664 . 3
= 115.272days
for 2011 =
281 . 3
= 111.3465days
From the above ratios the inventory turnover has not changed much it is around
3 times a year. The average holding period has also not changed much, there is
only 4 days of difference. in 2011 though sales are low the inventory turnover is
high than 2012 because of low opening stock, that will decrease the average

Receivables turnover = Sales/Average Trade receivables
for 2012 =
2 / ) 16783 15960 (

= 5.5299
for 2011 =
2 / ) 13318 16783 (

= 5.3953
Average no. days receivable Outstanding = 365/receivables turnover
for 2012 =
5299 . 5
= 66.0048
for 2011 =
3953 . 5
= 67.6515
From the above ratios the receivables turnover ratio is around 5 for both the
years this means they collect around 5 times a year. there is not much change in
the collection period. They are collecting at an average 66 to 67 days which is a
good sign for the company.

Payables Turnover = Purchases/Average Accounts Payable
For 2012 =
2 / ) 7696 6700 (

= 7.8876
For 2011 =
2 / ) 6398 7696 (

= 6.9182
Average Payables Outstanding = 365/Payables turnover ratio
For 2012 =
8876 . 7
= 46.2751
For 2011 =
9182 . 6
= 52.7594
From the above ratios the payables ratio is more than the receivables ratio
which is not the good sign for the company as the cash outflow is more when
compared to cash in flow. They are paying more & collecting less, on an
average they are collecting in 66 days where in they are paying in 46 days in
2012. The company is paying at a faster rate in 2012 when compared to 2011.

Working Capital Turnover = Sales/Average Working capital
for 2012 =
for 2011 =
5 . 21480
= 3.7803
As shown above working capital ratio given an account of how much times of
the working capital is the net sales. This shows the net investment in current
assets and liabilities to generate revenue. Since the working capital decreased in
the year 2012 when compared to 2011 the ratio shows an decreasing to nearly
3.5 times the working capital. Thus, high investments lesser revenue.

Fixed Assets Turnover = Sales/Average Fixed assets
for 2012 =
5 . 28290
= 3.2
for 2011 =
= 3.0572
This ratio gives a view of the revenue in terms of the fixed assets. It shows how
many times of its fixed asset (Operating Assets) does the company generate
revenue. In 2011 it was above 3 however with the more proportionately
decrease of fixed asset as compared to the profits before tax the ratio increased
to 3.2 in 2012. It shows that the company is utilizing its assets to the fullest. The
reason can be a increased in demand or more competition from its peers

Total Asset Turnover = Sales/Average Total Assets
for 2012 =
= 1.1588
for 2011 =
5 . 73365
= 1.1068
As shown above the total asset turnover is increased slightly. Further, it shows
that 1.1588 of the total assets is generated through sales. It is a positive
indication that whatever the company is investing in its assets it gets back
1.1588 as revenue from sales.

Working Capital Ratios:
Current Ratio = Current Assets/Current Liabilities
For 2012 =
= 2.4449
for 2011 =
= 1.8606

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current
For 2011 =
= 1.6237
For 2011 =
= 1.1664

Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
for 2012 =
= 1.3199
for 2011 =
= 0.8884

Cash Flow from Operations Ratio = Cash Flow from Operation/Current
for 2012 =
= 0.6430
for 2011 =
= 0.3325
The Current ratio of Atlas Copco is increasing from 1.8606 to 2.4449 from 2011
to 2012. This was due to an decrease in trade payables and provisions created
while there was an increase in assets. Similarly the Quick Ratio also followed
the same trend as the Current Ratio. The Cash is also increased from 0.888 to
1.31 of the current liability which is strong to meet the liabilities.
Cash from Operating Activities to Current Liability is the ratio which shows
how much cash is generated from operations to meet the current liabilities. As it
is also increased it is enough to meet the Current Liability.
The Current Ratio is maintained at a level of 2 on an average which is healthy
for a company.

Defensive Interval:
= 365*[(Cash + Marketable Securities + Accounts Receivable)/
Projected Expenses]
For 2012 =
*365 = 164.3849 days
For 2011 =
*365 = 155.6038days

Solvency Analysis:
Debt to Total Capital = Total Debt(current + Long term)/ Total Capital (Debt +
For 2012 =
= 0.3746
For 2011 =
= 0.4147
The debt to total capital gives an account of how much debt constitutes to the
total capital employed. 0.3746 ratios show that 37.46% of the total capital is
debt. It is good for a company to maintain low debt to its total capital as the
finance cost decreases which in turn raises profits for share holders.

Debt to Equity = Total debt/ Total Equity
for 2012 =
= 0.6001
for 2011 =
= 0.7086
The debt equity ratio on an average is 0.67 over the period. This is healthy for
the company as low debt will leads to more financial leverage and fixed
charges. In 2011 & 2012 the ratio decreased & is less than one which is a
positive sign for the company.

Interest Coverage Ratio:
Times Interest Earned = EBIT/ Interest Expense
for 2012 =
= 17.5118
for 2011 =
= 16.5348
As their major income is from operating activities the EBIT is high and is
around 17 times of its total interest expenses. they have decreased the cost of
operations when compared to sales in 2011 so their EBIT was still high.

Times Interest Earned (cash basis) = Adjusted operating cash flow/Interest
for 2012 =
= 17.8734
for 2011 =
= 11.7853

Capital Expenditure Ratio = CFO/Capital Expenditure
for 2012 =
= 3.7675
for 2011 =
= 1.7837
The capital expenditure ratio denotes how much cash is spent in purchasing
capital as compared to the cash flow from operating activities. It shows how
much of the cash is generated from operating activity as compare to the amount
spent in the fixed assets.

CFO to debt = CFO/ Total debt
for 2012 =
= 0.6566
for 2011 =
= 0.4121
This shows how much cash flow from operations has been generated as
compared to debt taken by the company. As we see that Atlas Copco is doing
better from 2011 to 2013in generating cash from operations to meet its debt.

Profitability Analysis:
Gross Margin = Gross Profit / Sales
for 2012 =
= 0.3839
for 2011 =
= 0.3836

Operating Margin = Operating Income / Sales
for 2012 =
= 0.2124
for 2011 =
= 0.2162
The operating profit gives the profit after deduction of all the direct expenses.
Although the sales have been increased from 2011 to 2012 there is not much
increase in the ratio because proportional increase in direct expenses is same as
increase in sales and therefore the profits don’t increase.

Pretax margin = EBT / Sales
for 2012 =
= 0.2048
for 2011 =
= 0.2127
The profit before tax margin is almost same as the operating profit margin
because there is financial expenses deducted from the operating activity. Thus it
decrease and thereby will not be much difference in funds available to the
shareholders funds. The better the percent the better it is for the company.

Profit Margin = Net Income / Sales
for 2012 =
= 0.1537
for 2011 =
= 0.1599
Although the net profit is above 15% on an average. This is due to decrease in
expenses as well as decrease tax expenses.

Return On Investment:
ROA = EBIT / (Average Total Assets)
for 2012 =
= 0.2461
for 2011 =
5 . 73365
= 0.2393
Return on Assets shows how much return on the assets employed by the
company. Atlas Copco gives a return on an average of 24% on the operating
assets. It also increased from 2011 to 2012 which is a good implication to the
company as they are not keeping their assets free.

ROTC = EBIT / Average (Total Debt + Stock Holders Equity)
for 2012 =
= 0.3646
for 2011 =
= 0.3567
Return on capital employed is given by EBIT/Total Capital. This ratio given in
account of how much the company is earning through the funds of the share
holders and borrowed funds. The greater it is the better and Atlas Copco is
giving good returns on its capital employed. In fact it is giving around 36%
return on the capital. Which is really a good run.

ROE = Pretax Income / Average stock holders' equity
for 2012 =
= 0.5795
For 2011 =
= 0.5941

ROE = Net Income / Average stock holders' equity
for 2012 =
= 0.435
for 2011 =
= 0.4466
The return on share holders fund shows the profitability for the shareholders
investments in the given year. The greater it is the more trust worthy the
company is for the shareholders. on on average it is giving around 45% returns.
But is decreased from 2011 to 2012 this is because They have increased their
equity more and couldn't make the desired income on that.

ROCE = (NET Income- Preference Dividends)/ Average Common Equity
Since there are no preference shares ROCE = ROE
Contribution Margin Ratio = 1- (Variable costs/Sales)
for 2012 = 1-
= 0.3856
for 2011 = 1-
= 0.3856

OLE = Contribution / Operating Income
for 2012 =
= 1.8155
for 2011 =
= 1.7834

FLE = Operating Income / Net Income
For 2012 =
for 2011 =
= 1.352
for 2012 = 1.8155*1.3819 = 2.5088
for 2011 = 1.7834*1.352 = 2.4111

Disaggregation of ROA:
ROA = (Sales / Assets) X (Operating Income / Sales)
for 2012 =
X = 0.2376
for 2011 =
X = 0.2338

Du Pont Analysis:
ROE = (Net Income/ EBT)X(EBT/EBIT) X (EBIT/Sales)X(Sales/Avg Total
Assets)X(Avg Total Assets/ Avg common Equity)
For 2012 =
X X X X = 0.435
for 2011 =
5 . 73365
5 . 73365
X X X X = 0.4466
The DU-PONT analysis gives the breakup of the different ratios just to show
how each and every ratio is important in calculating the other. Thus we see that
the figure is similar to that of the ROE calculated separately. ROE gives the
profit earned on shareholders fund. The greater the ratio the better it is. Atlas
Copco is doing well but decreased when compared to previous year in its
returns to share.

Financial statements are useful because they help investors and
creditors make better economic decision. Understanding of the financial reports
offer improved decision making. But financial statements are, at best, only an
approximation of economic reality because of selective reporting of economic
events. The tendency to delay accounting recognition of some transactions and
valuation changes means that financial statements tend to lag behind reality
But the way to prepare financial statements are not standard
throughout the world it may vary according to their convenience and the nature
of the business. GAAP principles are key for preparing these statements,
According to their convenience they follow various significant accounting
Financial statements are the only way through which we can
access the performance of the firm. The main classes of the users are:
1. Credit and equity investors
2. Government, Regulatory bodies, and Tax authorities
3. General public and special interest groups, labour unions and
consumer groups
The underlying objective of financial analysis is the
comparative measurement of Risk and Return to make investment and Credit
decisions. These decisions require estimates of the future, to be month, a year,
or a decade
The financial statements that generates information to the outsiders are
Balance sheet
Income statement
Statement of comprehensive income
Statement of cash flows and
Statement of stockholders equity
Equity investors: The equity investors are primarily interested in long-term
earning power of the firm, its ability to grow, its ability to pay dividends and
increase the value i.e.; the YOY growth of profit (quality earning), Dividend
payout ratio, Eps, and sometimes intangible assets also gives a positive opinion
about a company. This information is available in these financial statements, but
proper analysis is required with sufficient knowledge about the financial
statements and their terms.
Creditors and Bankers: Creditors need somewhat different analytical
approaches. Short term creditors, such as banks and trade creditors, place more
emphasis on the immediate liquidity of the business because they seek an early
payback of their investment. Long term investors in bonds, such as insurance
companies and pension funds, are primarily concerned with long term asset
position and earning power of the company i.e.; current ratio, cash flow from
various activities, various coverage ratios and assets of the company. Based on
the requirement of the user the required information varies which is available in
these financial statements. Based on the information and their analysis about the
company they decide whether to credit or invest in the company or not.

2( A).
Management Discussion and analysis (MD& A)

1. The purpose of an MD&A is to provide an objective and easily readable
analysis of the Companies’ financial activities based on currently known facts,
decisions, or conditions.
2. The MD&A can provide taxpayers with readable information surrounding
management’s framework for decision making. MD&A is provided as a
supplement to, and should be read in conjunction with, our financial statements
and the accompanying Notes to Financial Statements to understand better about
the company.
3. It will give information about the company and the activities like
a) Industry Trends
b) Key Opportunities and Investments
c) Economic Conditions, Challenges, and Risks
d) Seasonality
Industry trends: what is the nature of the company business and about their
competition and the transformation taking place in the course of the business
and how there are doing.

Key opportunities and investments: What are their key opportunities for them
and how they are going to utilizing them and the investment opportunities for
them in the course of their business development. Opportunities in terms of
their operational efficiency and also product development if any
Economic Conditions, Challenges, and Risks: This will also give information
about the current economic condition around the world impacting their business
and their way of approaching to various conditions existing in the country, and
the challenges they are facing and their risks and how they are going to face
these challenges and risks and about their research and development department
and their ideas to implant .
Seasonality: This will give the peak time of their business in term of their
revenue and their operations
It will also provide guidance about the
1. Liquidity and capital resources.
2. Discussion on discontinued operations, extraordinary items and other
unexpected items information.

3 (A).
We take an example and show how depreciation accounting policy is used to
window dress the financial statements of a corporate.
Let's do depreciation in 2 methods:
 Straight line method
 Written down value method

Straight line method:
Year Asset value at
Asset value at end
1 500 100 400
2 400 100 300
3 300 100 200
4 200 100 100
5 100 100 0

So the salvage value is zero; depreciation rate is 20%.
Written down value method:
year Asset value at
Asset value at end
1 500 100 400
2 400 80 320
3 320 64 256
4 256 51.2 204.8
5 204.8 40.96 163.84

salvage value is 163.84;

Window dressing using depreciation accounting policy:
The use of different depreciation accounting policies
will have different effects on the financial reports of the company .Consider an
example (amount in rupees)
Value of an asset: 500.
Scrap value: 0.
Life of the asset is 5 years.
1.straight line method:
Here in this method the depreciation amount is equal through the years (divided
Implications: 1.Here the depreciation amount is same in all the years.
2. If you use this method then amount of profit shown is more hence ROE is
high, EPS is also high.
3. The amount of assets shown is also high hence assets turnover ratio is low.
4. As the depreciation amount is low, tax is more.
2.written down method: If you use this method then the depreciation amount
in the starting years is more when compared to the next years.
The implications are:
1. It charges the large part of the assets in the early years hence assets shown is
less hence assets turnover ratio high.
2. As the amount of depreciation is high in early years the profit shown is low
hence EPS is low, ROE is also low.
3. As we are showing low income tax is also low.
4. As the assets are low it might effect the current ratios also.

4. (A)
Statement of stockholder equity:
This report gives the information about the total shareholders
capital through stock purchase, about the retained earnings, amount of dividends
paid for the stock, and other comprehensive amount details.
This shows how the company is performing (how equity is
growing whether good are bad).By calculating the growth of the equity through
the years we can assess the company’s performance, but the increase in the
equity should be quality earnings i.e.; through the performance of the company
but not through issuing of the additional shares or other financing activities.
This will give information to the existing shareholders about the
company growing and the guide for the investors to know about the company
and to arrive at the investment decision.
This statement reports he amount and changes in equity from capital
transactions with owners and may include the following components:
Preferred shares
Common shares
Additional paid-in capital
Retained earnings
Employee stock ownership plan etc.

5. (A)
Companies prepare financial statements of the company at the end
of each accounting year. They are:
1 .Balance sheet
2. Income statement
3. Statement of comprehensive income
4. Statement of cash flows and
5 .Statement of stockholders equity
The management and other financial analysts use these financial
statements to analyse the company’s performance over the period. There are
different tools available to analyse these financial results by
1 .Ratios
2. Comparative statements
Comparative statements provide several advantages regarding the analysis of
information about the financial statements.
The company study of financial statements is the comparison of financial
statement of business with the previous year financial statements. It enables the
identification of weak points and applying corrective measures through
analyzing balance statement and income statement.
The comparative income statement provides the results of
the operations of the business. It gives an idea about the progress of the business
over a period of time.
The Comparative balance sheet Shows the different
assets and liability of the firm of different dates to make comparison of balances
from one date to other.
Cash flow statements also give the information about the
cash inflows and outflows occurred from various activities over the years.
By these statements analysis we can know about the profitability, efficiency and
financial soundness of the company over the years.
By the comparative statements we can also calculate the percentage change in
each item of the financial reports and calculate the YOY growth for the years.
By this it will give a vivid picture about the company’s performance.
The other way of analyzing is drawing the trend analysis based on the ratios
by this we can draw the trend line which gives the performance chart of the
company over the years and sometimes it is possible to predict the behavior of
the company. These are also useful to compare the other companies
performance also.
6(A): Off-balance Sheet items
Operating leases have been widely used over the years, although
the accounting rules have been tightened to lessen the use. For example, a
company can rent or lease a piece of equipment and then buy the equipment at
the end of the lease period for a minimal amount of money, or it can buy the
equipment outright. In both cases, a company will eventually own the
equipment or building.
The difference is in how a company accounts for the purchase. In
an operating lease the company records only the rental expense for the
equipment rather than the full cost of buying it outright. When a company buys
it outright, it records the asset (the equipment) and the liability (the purchase
price). So by using the operating lease, the company is recording only rental
expense, which is significantly lower than booking the entire purchase price,
resulting in a cleaner balance sheet.
Partnerships are another common off balance sheet financing
item, and this is the way Enron hid its liabilities. When a company engages in a
partnership, even if the company has a controlling interest, it does not have to
show the partnership’s liabilities on its balance sheet, again resulting in a
cleaner balance sheet.
This is very attractive to all companies, but especially to those
that are already highly levered. For a company that has high debt to equity,
increasing its debt may be problematic for several reasons. This can often create
liquidity for a company. For example, if a company uses an operating lease,
capital is not tied up in buying the equipment since only rental expense is paid
out. Exchange rate is also an off balance sheet item.

In order to compute the quality of the cash flows, the net operating cash flows
are 13823 for the year 2012 and 8421 for the year 2011. So as both are positive
and is the major cash flows among all the three activities i.e. operating activity
is generating the income for the company so it is a good sign for the company.

for 2012
FCF1 = CFO - Capital Expenditure
= 13823 - 3669
FCF2 can't be found as Investing activity is negative.

For 2011
FCF1 = 8421 - 5101
= 3320
FCF2 can't be found as Investing activity is Negative.
It is a good sign to the company as well as share holders that free cash flows are
positive. They have generated a good amount of operating cash flows even after
their capital expenditure they remain in positive cash flows.
The Cash flows generated from financial activities are also Negative. This is a
good implication from the point of share holders as the company is paying their
dividends well. Bu not good implication from the point of company as they hav
to spend their cash from operating activities to the shareholders resulting in net
cash decrease.