Equit-I Club Primer 2017

FINANCIAL
STATEMENT
ANALYSIS
AND
FINANCIAL
Finance Primer RATIOS
PGP Participants 2017-19
Prepared by finance club in association with placement preparation committee
FINANCIA
Brief Overview
L
of Equit-i, the
STATEMENT
Finance Club of
ANALYSIS
IIM Indore
AND
FINANCIAL
RATIOS
About Equit-i Finance Club, IIM Indore
Equit-I: The Finance Club, IIM Indore, is a PGP participants' initiative to create a finance oriented
learning environment within the campus that eventually helps the students' community brace up
for the industry rigor.
The club provides opportunities for hands on learning through workshops and mentorship
programs. Also, it facilitates a fun learning experience in the form of events and competitions
organized all year round.
Equit-I assists participants in exploring financial career opportunities by organizing interactive sessions
on various finance related topics and setting up career panels specifically for finance roles.
The club assists participants in preparing for their summer and final placements by publishing special
articles and newsletters. Also, Equit-I members conduct lectures on fundamentals of finance for the
PGP1 participants once they are inducted to the course.
Additionally, the club helps companies increase their brand equity and visibility on campus through
various initiatives like talks, newsletters and different on-campus competitions.
INTRODUCTION
TO BASICS OF
FINANCIAL
STATEMENTS

Income Statement Balance Sheet Ratios
The Income statement summarizes the

revenues earned and the expenses incurred by
the entity over a specified period of time
The primary purpose of income statement
is to show whether the entity made or lost
money during the specified period
The components of income statement are :
Revenues : Revenues primarily

demonstrate cash inflows and
enhancements in assets from the
companys ongoing operations during the
period
Expenses : Expenses involve cash
outflows, depreciation in the values of
assets or incurrence of liabilities from the
companys ongoing operations during the
period
Revenues - Expenses = Net Income
Balance Sheet gives the financial position of an

accounting entity at a specified moment in time. It is
also known as statement of financial position
Components of Balance Sheet -
Assets : Assets are economic resources that are

owned and controlled by the entity and whose cost
is objectively measurable. Economic resources are
those that provide future benefits to the entity
Liabilities : Liabilities are obligations of the entity to

transfer assets or provide services to outside parties
arising from events that have already happened
Owners Equity : This represents the amount

owners have invested in the entity. It consists of
paid-in capital(amount invested directly) and
retained earnings(earnings to the firm minus
dividends paid out by the firm)
Prepared by finance club in association with placement preparation committee Assets = Liabilities + OwnersEquity
FINANCIAL
STATEMENT
ANALYSIS
AND
FINANCIAL
RATIOS
COGS
FINANCIA
L
Linkages to
Balance
Sheet Main
STATEMENT
Operating
Revenue
Components
of the Income
Statement ANALYSIS
AND
EBITDA FINANCIAL
Operating
Profit

RATIOS
Cost of Goods Sold (COGS)

Comprises of :
A. Cost of Materials Consumed
B. Purchases of Finished Goods
C. Changes in Inventory
(Opening Stock - Closing Stock)
Traditional formula for COGS :
COGS = Opening stock of Raw Material (RM) +

Work In Progress (WIP) +
Finished Goods (FG)
(+) Purchases of RM+WIP+FG
(-) Closing Stock of RM+WIP+FG
COGS of HUL = 11,159.81 + 3350.19 - 166.38

= 14,343.62

Operating Revenue
Income from companys everyday business
operations
In Financials , comprises of :
(a) Revenue from Operations (-) Excise Duty (if any)
Operating Revenue for HUL
= 29,557.90 - 1638.77 = 28,019.13
Operating Profit
(b)
(c) Profit earned from Normal Business Operations
Operating Profit = Profit Before Exceptional Items
and Taxes
(-) Other income,
(+) Depreciation and Finance Cost
(Interest Expense)
Operating Profit of HUL
= 4,799.71 + (b) + (c) - (a) = 4,475.25

EBITDA
EBITDA is Earnings Before Interest, Tax,
Depreciation and Amortisation
In Financials,
EBITDA = Profit before exceptional items
and tax
(a)
(b) (+) Depreciation/Amortisation
(+) Finance Cost
EBITDA in HUL = 4,799.71 + (a) + (b)

= 5,096.29

Relationship Between the Income Statement and the Balance Sheet

Equity
Common stock of company, preferred stock.
In Financials :- Share Capital
Equity of HUL :- 216.27
Liabilities
Three conditions for defining liability:-
A. Obligation of the Firm
B. Obligation arises from past events
C. Results in transfer of economic
benefits
Type of Liabilities :-
A. Short-Term/Current Liabilities :- Liability
which is payable in Less than 1 year
B. Long-Term/Non-Current Liabilities :- Any
liability which is not short term
Long Term Liabilities of HUL:-
278.82 + 838.69 = 1,117.51
Short Term Liabilities of HUL :-
6,793.89 + 862.94 + 1,957.01 = 9,613.84
Contingent Liability
Three conditions for defining contingent
liability:-
A. May or may not be obligation of the firm.
B. Existence can be only confirmed by occurrence
or non-occurrence of future event
C. Reasonable estimate of liability is not known.
(b) In Financials :- Below the Balance Sheet
Contingent Liability of HUL :- 991.20 (As per
Note 24,25)
Working Capital :-
It is Current Assets (-) Current Liabilities
Working Capital of HUL = (a) - (b) =
Sum of Current Assets = 8,852.47
(a) (-) Sum of Current Liabilities = (8,603.84)
Working Capital = 248.63
(a)
Fixed Asset
Three Types of Fixed assets :
(a) Tangible :- Asset which has a physical form.
(b) Intangible :- Assets that are not physical in
nature eg :- goodwill, patents etc.
(c) Capital WIP/Intangible Assets under Development-
Assets which are under construction.
In Financials :- Tangible Assets + Intangible Assets +
Capital WIP + Intangibles under development.
Fixed Assets of HUL :-
(2,397.94 + 24.12 + 312.04 + 7.7 = 2,741.80)
Deferred Tax Asset/Liability
Difference between taxes on profit as per books of
accounts (Accounting Profit) and as per tax books.
In Financials :- Deferred Tax Asset/Liability Deferred Tax
Asset of HUL :- 161.73

Current Assets
Assets which are due to be received within a
period of 1 year.
Eg :- Short Term loans and advances, cash and
bank balance, trade receivables, debtors,
inventories etc.
In Financials :- Current Assets
Current Assets of HUL :- 8,852.47
Non Current Assets
Assets which do not fall under current
assets
Eg :- Long Term loans and advances.
In financials :- Non Current Assets + Long
Term
Non Current Assets :- 606.19

Financial ratio analysis is the use of relationships among financial statement

accounts to gauge the financial condition and performance of a company.
We can classify ratios based on the type of information the ratio provides:
Capital Activity/
Profitability
Liquidity Structure Turnover
Ratios
Ratios Ratios Ratios
Ability to Effectiveness Ability to Effectiveness
meet short- in financing manage in putting its
term, using expenses to asset
immediate different produce investment
obligations sources of profits from to use
funds sales

LIQUIDITY RATIO:-
Current Ratio:
Best measure of liquidity
Current Ratio :- Current Assets / Current Liabilities
Current Assets of HUL :- 8,852.47
Current Liabilities of HUL :- 8,603.84
Current Ratio of HUL :- 8852.47/8603.83 = 1.03
Quick Ratio/Acid Test Ratio:
Assets which do not fall under current assets
It is a more stricter version of the ratio as it takes
only the assets which are readily convertible in
cash i.e. inventory and prepaid expenses are
excluded.
Quick Assets of HUL :- 8,852.47 - 2,747.53
= 6,104.94
Quick liabilities of HUL :- 8,603.84
Quick Ratio :- 0.71
CAPITAL STRUCTURE RATIOS:-

Debt Equity Ratio:
Also Know of leverage ratio.
Indicates the proportion of debt to equity of the company
D/E Ratio = Debt / Equity
In Financials, Debt = Long Term Borrowings + Short term
borrowings
Equity = Equity Share Capital + Preference Share Capital+ Reserves &
Surplus
Debt of HUL :- 0 (Since there is no mention of long term/short term
borrowing)
Equity :- 216.27 + 3060.78 = 3,277.05
D/E of HUL :- 0/3,277.05 = 0
Capital Gearing Ratio:
Stricter version of D/E Ratio.
It treats preference share capital as a debt
Formula = (Debt + Preference share Capital) /Equity
In Financials, Equity = Equity Share Capital + Reserves & Surplus.
Capital Gearing Ratio of HUL = Debt + Pref. Cap Equity
Preference Share & Debt = 0 Hence Capital Gearing ratio of HUL

=0
PROFITABILITY RATIOS:-
Operating Profit Ratio:
Formula = Operating Profit/Sales
Operating Profit of HUL = 4,799.71+ (b) +
(c) - (a) = 4,475.25
Sales = Revenue from Operations Net =
28,019.13
Operating Profit Margin =
4,475.25/28,019.13 * 100 = 15.97%
Net Profit Ratio:
Formula = Net Profit / Sales
In Financials, Net Profit = Profit for the
year.
Net Profit of HUL = 3,867.49
Sales of HUL = 28,019.13
Net Profit Margin = 3,867.49 / 28,019.13 *
100 = 13.80 %

PROFITABILITY RATIO OWNERS POINT OF

VIEW:-
Return on Capital Employed (ROCE):
Formula = Total Earnings / Capital Employed
In Financials , total earnings = Profit Before
Exceptional Items and tax + Finance Cost
Capital Employed = Equity Share Cap + Pref. Share
Cap + Reserves & Surplus + Long Term Borrowings
Total Earnings of HUL = 4,799 + (a) = 4,835.7
Capital Employed of HUL = Equity Share cap +
Reserves & Surplus = 3,277.09
ROCE = 4,835.74 / 3,277.09 *100 =147.56%
Return on Equity (ROE):

Formula = Profit After Tax / (Equity Share Cap +
Reserves & Surplus)
In Financials, PAT = Profit for the year .
Return on Equity of HUL = 3,867.49 / 3,277.09*
100 = 118.01%
TURNOVER/PERFORMANCE RATIOS:-
Stock Turnover Ratio:
Explains how many times a
companys inventory is sold and
replaced over a period.
Formula = COGS / Average Inventory
Average Inventory =( Opening Stock
+ Closing stock) / 2
COGS as per HUL = 14,343.62
Average Inventory (Finished Goods) =
(1,344.83 + 1,280.66)/2 = 1,312.74
Stock Turnover ratio of HUL =
14,343.62 / 1,312.74 = 10.92 times

TURNOVER/PERFORMANCE RATIOS:-
Debtor Turnover Ratio:
Shows effectiveness in extending credit as well as
collecting debts
Formula = Net Credit Sales/ Average Debtors
(Also called Trade Receivable)
Average Debtors =( Opening Debtors + Closing Debtors)
/2
Net Credit Sales of HUL (Since credit sales is not
available, we take complete sales) = 28,019.13
Average Debtors =(816.43 + 833.48)/2 = 824.95
Debtors turnover ratio = 28,019.13/ 824.95 = 33.96
Creditors Turnover Ratio:
Similar to Debtors turnover ratio
Used to measure the rate at which
company pays off its creditors
Formula = Purchases / Average Creditor
(Also called Trade Payables)

Assignment to Gauge your Interest
You are required to download the consolidated Financial Statements of ITC Limited for the
year ended 31 March 2016 and calculate all the ratios which have been mentioned in the
primer for the year 2016 and 2015.
Few pointers:-
1. Make the calculation in an excel sheet. Word document or pdf containing the
calculation will not be considered for evaluation.
2. In case you differ from the ratio formula used in the primer, kindly write down the
formula that you have used as a note below the calculations in the excel sheet
3. Do attach the copy of the financial statements used by you for calculation of ratios
4. Naming Convention for the excel sheet: - Full Name_PGP2017-19.xls
Send your answers to equiti@iimidr.ac.in with your name and contact no
Deadline :- June 26th,2017 (EOD)
Winners will be announced on the Equit-I Facebook page

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FINANCIAL

Prepared by finance club in association with placement preparation committee

The Income statement summarizes the

The components of income statement are :

Revenues : Revenues primarily

Balance Sheet gives the financial position of an

Components of Balance Sheet -

Assets : Assets are economic resources that are

Liabilities : Liabilities are obligations of the entity to

Owners Equity : This represents the amount

Prepared by finance club in association with placement preparation committee

Cost of Goods Sold (COGS)

Traditional formula for COGS :

COGS = Opening stock of Raw Material (RM) +

COGS of HUL = 11,159.81 + 3350.19 - 166.38

Prepared by finance club in association with placement preparation committee

Prepared by finance club in association with placement preparation committee

EBITDA in HUL = 4,799.71 + (a) + (b)

Prepared by finance club in association with placement preparation committee

Prepared by finance club in association with placement preparation committee

Prepared by finance club in association with placement preparation committee

Prepared by finance club in association with placement preparation committee

Financial ratio analysis is the use of relationships among financial statement

Prepared by finance club in association with placement preparation committee

CAPITAL STRUCTURE RATIOS:-

Preference Share & Debt = 0 Hence Capital Gearing ratio of HUL

Prepared by finance club in association with placement preparation committee

PROFITABILITY RATIO OWNERS POINT OF

Return on Equity (ROE):

Prepared by finance club in association with placement preparation committee

Prepared by finance club in association with placement preparation committee

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