You are on page 1of 2

Financial Statement analysis:

The tools are:


1. Horizontal analysis (comparative statements)
2. Trend analysis
3. Vertical analysis (common size statements)
4. Ratio analysis
5. Fund flow analysis
6. Cash flow analysis
Horizontal analysis
Particulars:
1. Revenue, Operating profit, Interest, Depreciation and amortisation, Provision for Taxation, PAT from ordinary
activities, Dividend (inc. Dividend tax)
2. % change in parameters says expanses are more compared to increase in profit, taxation is high or tax benefits
lowered, Profit After Tax and dividends are not matching. So company should not pay high dividends.
Trend Analysis:
When compared with series of years
Vertical Analysis:
Sales: 100% (50,000Rs.) Convert in percentage or common size.
Less: Cost of goods and service hours =>Material 3000Rs, Wages 5000Rs, Factory Running Overheads , Admin charges, PBIDT,
Interest, Tax, depreciation NET profit.
Ratio Analysis:
Mostly between two companies with similar stats.
1. Proportion
2. Percentage
3. Turnover rate
Method: do a Trend analysis, compare with similar size team then do a ratio analysis.
Types of Ratio: Liquidity, Solvency, Activity, integrated, profitability.
1. Liquidity: Net working capital = Current Asset - Current liability, acid test(1:1 is good), current ratio, quick ratio,
super quick ratio.
2. Solvency or Leverage ratio: lender and creditors use it, ability to repay principal and interest loans when due.
[a]Capital structure ratio: debt equity, debt asset, proprietory ratio. [b]Coverage Ratios: interest coverage, dividend
coverage, cash flow coverage, debt services coverage.
3. profitability: gross profit, net profit, cost ratio, operating profit, expanse, ROCE (EBIT/Capital Employed)* capital
employed= owners funds and borrowers funds.
4. Activity or efficiency ratio: stock turnover ratio, debtors velocity turnover ratio / period, creditors turnover ratio /
period, Asset efficiency ratio, asset turnover, capital turnover ratio
Dupont chart: X,X,X
Fund flow analysis: Gross working capital, Net working capital.

Current assets: Assets which are receivable in FY. cash, bank deposit, sundry debtors, prepaid expenses,
investments with yield, bill receivable. Non current: Fixed,assets, goodwill, patents, manpower, , pnl, share and
debentures, advertising expenses, investments.

Current liabilities: To be Discharged Assets in FY. A/C payable, bank overdraft, unclaimed dividends, provision
of taxation, short term loans, interest, advance income.Non Current: Share capital, long term loans, taxation, depreciation
provisions, share premium.
1. Analysing changes in working capital
2. Computing funds from operations
3. Identifying sources and applications of funds
Understanding costs:
the amount of expenditure (actual or notional) incurred on or attributable to a given thing. costing = determine the cost.
1. Job costing: Batch costing (tablets), contract costing(housing), composite(aeroplane)
2. process costing: Unit costing (sugar industry), operating costing(hospital bed, student in school), operation
costing (basket ball with leather, similar product line)
3. cost center: where cost occurs
4. cost unit: unit of quantity of product, service, or time in which cost can be expressed
5. Historical, standard (industry benchmark, actual cost and variance), absorption or full costing (all cost both fixed
and variable are charged to the product, job, processes) , marginal costing: variable cost are charged & fixed costs are
written off against profits in the period. Uniform costing: Blue chip companies undertaking.
6. Material , Labour & Expanse (cost of hiring special machine, architects, patent, royalty, s/w license): direct &
indirect (indirect : factory machine oil, plant guards, foremen, clerks, heat, light, management salary)
7. Selling , marketing and distribution, admin overhead costs
8. Fixed: factory rent, property taxes, supervisor salary, deprecation of office infrastructure assets

Committed (plant machinery, rent), managed, Discretionary costs, Step costs


9.