FSA_ Class Discussion_Session 1

Relevance of FS
o Investors (Debt and equity)
Shareholder
Dividend
Change in price (Capital Gain)
For the shareholders point of view, the relevance
can be examined by testing the ability of the FS
to explain the change in the price
Let us assume that the price is a function of
the fundamentals of the company
o
o Management
o Credit rating agencies
o Customer
o Regulators
o Government (Tax Authorities)
o Employees
FSA:
Analysis of FS to answer questions raised about the
company
o What factors affect the Capital structure of a
company? (Determinants of DER)
o What are the drivers of ROI?
o What drives the change of price?
o Should the investors put money in the company?
o What is the value of the firm?

FSA_ Class Discussion_Session 1

Above questions can be answered by taking into account

following information
o Liquidity position
Ability to meet the short term obligations
o Solvency position
Ability to meet the long term obligations
o Efficiency position
Ability to use the assets efficiently
o Profitability position
Profit generating ability (PBIT)
Profit distributing ability (PAT)
FSA results in
o Liquidity Analysis
o Solvency Analysis
o Efficiency Analysis
o Profitability Anaysis
Tools ofFSA
o Common Size Statements
o Comparative Statements
o Ratio Analysis
o Trend Analysis
Comparison
o Inter Firm Comparison (industry comparison)
Infosys with Wipro
o Intra Firm Comparison ( With the company/ Time
Series analysis)

FSA_ Class Discussion_Session 1

Infosys for the last five years

Ratio
Relationship between two items
Classification of Ratios
o On the basis of source of items
Balance Sheet Ratios
DER
Income Statement Ratios
PAT/Sales
CFS ratios
CFO/Cash generation
Combination of FS
ROE
o Functional Classification
Liquidity Ratios
Solvency ratios
Efficiency Ratios
Profitability Ratios
Balance Sheet: Financial position on a particular date
Source = Assets
Equity + LTD +CL = FA + Investment + Ca
Equity + LTD = FA + Investment +WC
Capital Employed = FA + Investment + WC

FSA_ Class Discussion_Session 1

Equity = FA + Investments + WC LTD
Equity = Assets - libilities

Income Statement
Finanancial Performance for a particular period
Revenue COGS OPEX Dep Interest Tax
o PBDITA
o PBIT
o PBT
o PAT
Cash flow statement
Receipts Payments
o CFO
o CFF
o CFI
Cash Flow Statement
Receipts Payments
CFF
o Borrowing + Raising capital
o Less
o Repayments + BB + Interest + Dividend
CFI
o Sale of FA + Sale of investments +Dividend
+Interest
o Less

FSA_ Class Discussion_Session 1

o Purchase of FA + Investments
CFO
o Cash Sales +Collections +Advance from
customers
o Less
o Expenses paid + Cash purchases +Advance to the
suppliers + Payment to the creditors
Let us find the answer
Why is CFO not same as Profit?
o Non cash items (Dep/amortization/impairments)
o Non operating items ( interest paid, interest
received,dividend received, profit on sale of assets)
o Change in Working Capital (CA and CL)
CFO = Profit +/- (non cash items, non operating items ,
Change in WC)
o
o
o
o
o
o
o
o
o

Started business with capital =100000

12% Loan = 50000
Purchased goods for cash =75000
Sold goods =200000 on credit
Expenses due not paid = 30000
Interest paid =6000
Purchased plan for cash = 50000
Depreciation on plant = 5000
Tax = 30% paid

FSA_ Class Discussion_Session 1

Are the FS relevant?

Investors (Equity and Debt)
o Equity
Dividend
Capital Gain ( Change in price)
o The relevance of FS for the equity investors can be
examined by testing the ability of the FS to reflect the
change in price
Change in price = Function of fundamentals of
the company
Fundamentals of the company reflect the the
BD taken by the management
o FSA helps in undertaking Fundamenta
Analysis
Creditors
Tax authorities
Management
Regulators (
Rating agencies

FSA_ Class Discussion_Session 1

Employees

FSA
Analysis of FS to answer questions raised about the
company:
o Will the price increase?
o What the drivers of the profitability of the company?
o What are determinants of Capital structure (DER)?
o What is the value of a firm ? (PV of FCF)
Tools of FSA
Common size statements
Comparative statements
Ratio Analysis
Trend Analysis
What to analyse?
Liquidity position
o Ability to meet the short term obligation
Solvency position
o Ability to meet the long term obligations
Efficiency
o Ability to use the assets efficintly

FSA_ Class Discussion_Session 1

Profitability
o Ability to generate profit (PBIT)
o Ability to distribute profit (PAT)
Fundamental of a company = function (L, S, E, P)

Ratios
Relationship between two or more than two items of FS
o Classification of ratios
On the basis of the source of the financial items
Income statement ratios
o PAT/Sales
BS ratios
o DER
CFS ratios
o CFO/CIH
Combined ratios
o ROE
Functional Classification
Liquidity ratios
o CFO/TA
o CA/CL
Solvency ratios
o DER

FSA_ Class Discussion_Session 1

Efficiency ratios
o FA/Sales
Profitability ratios
o PGA ratios= PBIT/CE
o PDA ratios= PAT/E

FS
BS: Shows the financial position on a particular date
IS: Shows the financial performance over a period
CFS: shows the change in cash position (CFO/CFI/CFF)
CFF
Borrowing + Capital
Less
Dividend + interest +Repayment ofloans+ BB of shares
CFI
Sale of investments + FA + interest + Dividend
Less
Purchase of Inv + FA
CFO
Cash Sales + Collections + Advance from customers
Less

FSA_ Class Discussion_Session 1

Payment to the creditors + Adv t o the suppliers + Cash
purchases + Expenses paid
Why is CFO not same as Profit?
Non cash items (Dep/Amortisation/Impairments)
Non Operating items (Dividend received/interest/interest
paid/ Profit or loss on sale FA/investments)
Change in Working Capital (CA CL)
CFO = Profit +/- (non cash, non operating, change in WC)
sdf
Financial Statement Analysis
Are the FS relevant?
Investors (Debt and equity investors)
o Equity investor
Dividend
Capital gain (Change in price )
o Relevance of FS for the equity investors can be
examined by testing the ability of the FS to explain the
change in the Price
Change in price is a function of the fundamental
of a company
FS shows the Fundamental of a company
Government
Employees
Credit rating agencies

FSA_ Class Discussion_Session 1

Management
Regulators
FSA: Analysis of FS to answer questions relating to the
company:
What are the drivers of profitability (long term and Short
term)?
What are drivers of volatility of profit/price?
Will the company go bankrupt?
What is the value of the company? (PV of FCF)
Tools of FSA
Common size statements
Comparative Staements
Ratio Analysis
Trend Analysis
What to analyse?
Liquidity
o Ability to meet ST liability
Solvency
o Ability to meet LT liabilities
Efficiency
o Ability to use the assets efficiently
Profitability
o Ability to generate profit (PBIT)
o Ability to distribution profit (PAT)

FSA_ Class Discussion_Session 1

Ratios
Relationship two or more than two financial items
Classification ofRatios
o On the basis of source of the financial items
Income Statement Ratios
PAT/Sales
BS ratios
DER
CFS ratios
CFO/CIH
Combined ratios
ROE

o Functional classification
Liquidity ratios
Solvency ratios
Efficiency ratios
Profitability ratios
FS
BS:
o Financial Position on a particular date
IS
o Financial Performance during a particular period
CFS
o Shows changes in CIH
o CFO

FSA_ Class Discussion_Session 1

o CFI
o CFF
CFF:
Borrowing + Capital
Less
Inter and dividend paid +BB + Repayment
of debts
CFI
Sale of FA +Investment + Div/interest rec
Less
Purchase of FA + Investment

CFO
Sale of goods + Collections + Adv from
customers
Less
Expenses paid + Tax paid+ Stock purchases
+ Payment to the creditors
o Why is Profit not same of CFO?
Non cash items (Dep/amortization/impairments)
Non operating (interest/dividend/profit or loss on
the sale of FA/investment)
Change in Working capital (CA-CL)

FSA_ Class Discussion_Session 1