Income statement

The income statement (or profit and loss) shows revenue, cost of sales, expenses, interest and
tax, but does not show the cash flow for a business.

Balance sheet
The balance sheet shows the assets and liabilities for the business. On the balance sheet we can
see the cash balance at the start and end of the period. However, the details of all the cash flows
cannot be gleaned from the balance sheet.

Cash flow
The cash flow statement shows the cash flows for the business. Here we see the operating cash
flows, financing cash flows and investing cash flows.

All financial statements are essentially historically historical documents. They tell what
has happened during a particular period of time. However most users of financial statements are
concerned about what will happen in the future. Stockholders are concerned with future earnings
and dividends. Creditors are concerned with the company's future ability to repay its debts.
Managers are concerned  with the company's ability to finance future expansion. Despite the fact
that financial statements are historical documents, they can still provide valuable information
bearing on all of these concerns.

Financial statement analysis involves careful selection of data from financial statements
for the primary purpose of forecasting the financial health of the company. This is accomplished
by examining trends in key financial data, comparing financial data across companies, and
analyzing key financial ratios.

This section contains Pharmaceutical Suppliers that manufacture, import, export and/or

distribute Bulk Pharmaceuticals (APIs): Anaesthetics (General), Anaesthetics (Local),
Analgesic Agents, Anionic Surfactants (Soaps), Anthelmintics, Anti-Arrhythmic Agents, Anti-
allergic Agents, Anti-inflammatory Agents, Antibiotics (Aminoglycosides) etc.
This section contains Related Suppliers that offer Related Products & Services or Services to
the bulk pharmaceutical industry like: Chemicals, Clean Rooms, Intermediates for Bulk
Pharmaceuticals, Labaratory Analysis, Laboratory Supplies, Logistic Products, Packaging
Machines, Packagings, Pharmaceutical Consulting, Pharmaceutical Filters etc..

This section contains bulk pharmaceutical related events like: Pharmaceutical Conferences, Pharmaceutical Congresses,
Pharmaceutical Courses, Pharmaceutical Exhibitions, Pharmaceutical Forums, Pharmaceutical Meetings, Pharmaceutical
Symposiums.

Organizers of bulk pharmaceutical related events can register in the organizer section and add their events to our website,
completely free. The event will be listed in the bulk pharmaceuticalagenda section and will contain information about the
event as well as information about the organizer.

This section contains Pharmaceutical Suppliers that manufacture, import, export and/or distribute Bulk Pharmaceuticals
(APIs): Anaesthetics (General), Anaesthetics (Local), Analgesic Agents, Anionic Surfactants (Soaps), Anthelmintics, Anti-
Arrhythmic Agents, Anti-allergic Agents, Anti-inflammatory Agents, Antibiotics (Aminoglycosides) etc..

This section contains bulk pharmaceutical institutions like: Organizers, Pharmaceutical Associationses, Pharmaceutical
Organisations, Publishers, Registration Authorities, Universities.

Ind-Swift Ltd. is an existing profit making, dividend paying company

engaged in fromulation of injectables and opthalmic products at
Panchkula, Dist. Ambala (Haryana). It was incorporated as a limited
company on 06.06.1986 and was granted certificate of commencement of
business on 15.12.1986. In July'89 the Company got its project for
manufacture of injectables and trading of pharmaceutical products
appraised from Haryana Financial Corporation (HFC) which was
implemented in December'90 for a total cost of 49.77 lakhs.

The company has been promoted by Shri Anil Kumar Jain, Shri Sanjiv
Rai Mehta, Dr. Gopal Munjal & Associates.

The company is expanding its activities by setting up facilities for

manufacture of formulation (tablets and capsules).

2000 - Ind Swift Ltd, a Chandigarh-based pharmaceutical company, has

set up a unique
R&D centre having facilities for bio-equivalence
studies, clinical trials for Ist, IInd
and IIIrd phase, and toxicologial studies.

2001 - The Company has launched two new divisions, Super Speciality
Division and Healthcare
Division. These divisions have launched 20 products in
the fastest growing segments
viz. Diabetology, Neurology, Cardiology, Anti-AIDS,
Anti-Viral, etc.

2002-Ind Swift Ltd has informed that it has restructured its Board by
inducting three professional Directors on its Board. The three new
Directors are Dr R S Bedi, Dr J K Kakkar & Mr K M S Nambiar. The
Company's Board is gradually shifting from a closely held Board to
professionally held Board.

2003

-High Court appoves the scheme of amalgamation of Swift Formulation

Pvt Ltd and Mukur Pharmaceutical Company Pvt Ltd with Ind Swift Ltd.

- Allottement of 1227375 equity shares to Promoters & other Bodies

corporates upon the conversion of their preference shares into equity
shares.

-Out come of board meeting

Issuance of GDRs aggregating upto US $ 20 million
Preferential issue of upto 1.6 million equity shares at a premium of
Rs 80 per share to the promoters as well as other investors
Issuance of 350000 zero coupon fully convertible warrants to the
promoters
Increase in Authorised share capital of the company from Rs 100
million to Rs 150 million
Delisting of equity shares from Ahmedabad, Delhi & Jaipur Stock
Exchanges

2004

- Allotment of 3,50,000 zero coupon warrants to the promoters of the

company convertible into
equity shares on or before March 31, 2004.

- Allotment of 12,50,000 zero coupon warrants to the bodies corporate

convertible into equity shares on or before March 31, 2004.

- Allotment of 3,50,000 zero coupon warrants to the promoters of the

company convertible into equity shares at any time within 18 months
but not before April 1, 2004.

- Ind Swift Ltd ties up with Lupin Ltd for a Co-marketing pact to
launch Nitazoxanide, an anti-diarrhoeal / anti-helmintic drug for the
first time in India under the brand name Netazox and Nizonide
respectively

-Ind-Swift Laboratories Ltd. has informed that their Company has been
awarded the achievement award for the Best Performing Company in
Category E by the Express Pharma Pulse for the year 2004

-Ind Swift Ltd has informed that the Company has launches a new
Marketing Division under the name 'Resurgence' for Anesthesiology,
Oncology and Surgery Segment

-Ind Swift launches Novel Drug Delivery of Nitazoxanide

2010

- Ind-Swift Limited has informed vide its letter dated March 23, 2010
that:Pursuant to the provisions of Section 260 of The Companies Act,
1956 and Articles of Association of the company, Mr. Rishav Mehta has
been appointed as Additional Director of the company.

Financial Statement Analysis:

Learning Objectives:

1. Prepare and interpret financial statements in comparative and common-size form.

2. Compute and interpret financial ratios that would be most useful to a common stock
holder.

3. Compute and interpret financial ratios that would be most useful to a short-term
creditor
 4. Compute and interpret financial ratios that would be most useful to  long -term
creditors.

Definition and Explanation of Financial Statement Analysis:

Financial statement analysis is defined as the process of identifying financial strengths

and weaknesses of the firm by properly establishing relationship between the items of the
balance sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements,
such as comparative statements, schedule of changes in working capital, common size
percentages, funds analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for
decision making purposes. They play a dominant role in setting the framework of
managerial decisions. But the information provided in the financial statements is not an end
in itself as no meaningful conclusions can be drawn from these statements alone. However,
the information provided in the financial statements is of immense use in making decisions
through analysis and interpretation of financial statements.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis

2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis:

Comparison of two or more year's financial data is known as horizontal analysis, or trend
analysis. Horizontal analysis is facilitated by showing changes between years in both dollar
and percentage form. Click here to read full article.

Trend Percentage:

Horizontal analysis of  financial statements can also be carried out by computingtrend
percentages. Trend percentage states several years' financial data in terms of a base year.
The base year equals 100%, with all other years stated in some percentage of this
base. Click here to read full article.

Vertical Analysis:

Vertical analysis is the procedure of preparing and presenting common size

statements. Common size statement is one that shows the items appearing on it in
percentage form as well as in dollar form. Each item is stated as a percentage of some total
of which that item is a part. Key financial changes and trends can be highlighted by the use
of common size statements. Click here to read full article.

2. Ratios Analysis:
Accounting Ratios Definition, Advantages, Classification and Limitations:

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply
means one number expressed in terms of another. A ratio is a statistical yardstick by means
of which relationship between two or various figures can be compared or measured. Ratios
can be found out by dividing one number by another number. Ratios show how one number
is related to another. Click here to read full article.

Profitability Ratios:

Profitability ratios measure the results of business operations or overall performance and
effectiveness of the firm. Some of the most popular profitability ratios are as under:

 Gross profit ratio

 Net profit ratio
 Operating ratio
 Expense ratio
 Return on shareholders investment or net worth
 Return on equity capital
 Return on capital employed (ROCE) Ratio
 Dividend yield ratio
 Dividend payout ratio
 Earnings Per Share Ratio
 Price earning ratio

Liquidity Ratios:

Liquidity ratios measure the short term solvency of financial position of a firm. These ratios
are calculated to comment upon the short term paying capacity of a concern or the firm's
ability to meet its current obligations. Following are the most important liquidity ratios.

 Current ratio
 Liquid / Acid test / Quick ratio

Activity Ratios:

Activity ratios are calculated to measure the efficiency with which the resources of a firm
have been employed. These ratios are also called turnover ratios because they indicate the
speed with which assets are being turned over into sales. Following are the most important
activity ratios:
  Inventory / Stock turnover ratio
 Debtors / Receivables turnover ratio
 Average collection period
 Creditors / Payable turnover ratio
 Working capital turnover ratio
 Fixed assets turnover ratio
 Over and under trading

Long Term Solvency or Leverage Ratios:

Long term solvency or leverage ratios  convey a firm's ability to meet the interest costs and
payment schedules of its long term obligations. Following are some of the most important
long term solvency or leverage ratios.

 Debt-to-equity ratio
 Proprietary or Equity ratio
 Ratio of fixed assets to shareholders funds
 Ratio of current assets to shareholders funds
 Interest coverage ratio
 Capital gearing ratio
 Over and under capitalization

Financial-Accounting- Ratios Formulas:

A collection of financial ratios formulas which can help you calculate financial ratios in a
given problem. Click here

Limitations of Financial Statement Analysis:

Although financial statement analysis is highly useful tool, it has two limitations. These two
limitations involve the comparability of financial data between companies and the need to
look beyond ratios. Click here to read full article.

Advantages of Financial Statement Analysis:

There are various advantages of financial statements analysis. The majorbenefit is that

the investors get enough idea to decide about the investments of their funds in the specific
company. Secondly, regulatory authorities like International Accounting Standards Board
can ensure whether the company is following accounting standards or not. Thirdly, financial
statements analysis can help the government agencies to analyze the taxation due to the
company. Moreover, company can analyze its own performance over the period of time
through financial statements analysis.
 
BRIEF PROFILE OF IND SWIFT GROUP

Ind-Swift Ltd is an India-based pharmaceutical company. The company is engaged in the

manufacturing and marketing of pharmaceutical finished dosage. The products manufactured by
the company include cephalosporins, quinolones, aminoglycosides, macrolides,
chloramphenicol, tetracyclines, sulphonamides, antianaerobics and anti-fungals. The company
manufactures various dosage forms, including oral solutions and suspensions; dry syrups and
hard gelatin capsules; tablets; dermatologicals comprising creams, ointments, and gels; eye and
ear drops; and injectables. The company, through their different divisions, markets formulations
focusing on the needs of various therapeutic segments, such as diabetology, cardiovascular,
anesthesiology, oncology, ophthalmology, neuropsychiatry, gynecology, pediatric, ENT,
surgery, internal medicine, dermatology, urology, cardiology, and dental specialty.

Ind-Swift Ltd was incorporated in the year 1986. In the year 1991, the company set up a
manufacturing facility for injectables and eye/ear drops. In the year 1995, they incorporated Ind-
Swift Laboratories Ltd for initiating a backward integration into the manufacturing of APIs and
advanced intermediates. In the year 1997, the company commissioned a multipurpose plant with
five independent blocks erected as per US FDA standards, designed by Quara, Switzerland. In
addition, they launched a Marketing Division with the name Ind-Swift Health Care. In the year
2000, the company launched Super Specialty Division, which is focusing on Cardiology and
Diabetology segments. In the year 2001, they launched Pioglitazone and Candesartan, in which
the company is the second to launch this product in India. In addition, they launched
Institution/Hospital Division. In the year 2003, the company launched another division by the
name Ind-Swift Biosciences. They entered into formulations export to six countries and filed
patent in US for Clarithromycin. In the year 2004, the company launched Mukur Division with
focus on ophthalmology, neuropsychiatry and ENT. They launched Launched Nitazoxanide, an
antidiarrhoeal drug, first time in India after successful clinical trials. In addition, they launched
another division by the name Resurgence catering to the Anesthesiology and Oncology
segments. The company opened first overseas office in New Jersey, USA During the year 2004-
05, the company launched combination of Nitazoxanide and Ofloxacin, with the brand name
Netazox-OF, first time in Asia. They commenced commercial production in their new
formulation facility at Jammu, J&K. During the year 2005-06, the company introduced various
new product ranges in the domestic market through their nine marketing divisions. The new
product launches included the launch of a unique combination of the Quinoline derivative, anti-
diarrheal and anti-bacterial drug that was launched for the first time in India after completion of
the successful clinical trials. They also have launched the new marketing
division namely Institutions & Hospitals division to look after the institutional sales. During the
year, the company commissioned three new state of the art finished dosages facility at; Samba in
Jammu & Kashmir; 100% EOU at Jawaharpur and an internationally benchmarked plant at
Baddi in Himachal Pradesh. During the year 2006-07, the company developed and launched 65
new products and line extension. They launched their product in Kenya and Senegal. They also
launched three new marketing division to focus on marketing of products for personal healthcare,
veterinary and manufacturing and marketing of products for international companies. During the
year, the company entered into licensing agreements with number of international Pharma
companies for out licensing the technology of their patented products, Clarithromycin. They
received approval of the Drug Authorities of Uganda and Tanzania, which will pave the way for
the supply of their drugs in these countries. During the year 2007-08, the company's
manufacturing unit at Parwanoo was upgraded as per WHO standards. The company's Global
Business unit at Derabassi got MHRA & TGA approval. The manufacturing unit at Baddi
received WHO GMP certification for tablet/SVP/Liquid manufacturing. In August 2007, the
company commissioned a manufacturing facility at the same tax exempted zone and green plains
of Baddi. This facility is for soft Gelatin Encapsultation with an annual capacity of 36 crore. In
December 2007, they launched their new division 'Diagnozis' dealing in medical equipments &
devices. The company also launched animal health care, which is absolutely a new concept with
outsourced marketing.
A balance sheet, also known as a "statement of financial position", reveals a
company'sassets, liabilities and owners' equity (net worth). The balance sheet, together with theincome
statement and cash flow statement, make up the cornerstone of any company's financial statements. If
you are a shareholder of a company, it is important that you understand how the balance sheet is
structured, how to analyze it and how to read it. (To learn more, check out An Introduction To The
Balance Sheet from Investopedia Video.)

How the Balance Sheet Works

The balance sheet is divided into two parts that, based on the following equation, must equal each other,
or balance each other out. The main formula behind balance sheets is:

Assets = Liabilities + Shareholders' Equity

  

Watch: Balance Sheet

This means that assets, or the means used to operate the company, are balanced by a company's
financial obligations along with the equity investment brought into the company and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two sources
that support these assets. Owners' equity, referred to as shareholders' equity in a publicly traded
company, is the amount of money initially invested into the company plus any retained earnings, and it
represents a source of funding for the business.

It is important to note that a balance sheet is a snapshot of the company’s financial position at a single
point in time. (To learn more about reading financial statements, see What You Need To Know About
Financial Statements, What Is A Cash Flow Statement? andUnderstanding The Income Statement.)

Know the Types of Assets

 Current Assets
Current assets have a life span of one year or less, meaning they can be converted easily into
cash. Such assets classes include cash and cash equivalents, accounts receivable and inventory.
Cash, the most fundamental of current assets, also includes non-restricted bank accounts and
checks. Cash equivalents are very safe assets that can be readily converted into cash; U.S.
Treasuries are one such example. Accounts receivables consist of the short-term obligations
owed to the company by its clients. Companies often sell products or services to customers on
credit; these obligations are held in the current assets account until they are paid off by the
clients. Lastly, inventory represents the raw materials, work-in-progress goods and the company’s
 finished goods. Depending on the company, the exact makeup of the inventory account will differ.
For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm
caries none. The makeup of a retailer's inventory typically consists of goods purchased from
manufacturers and wholesalers. 

 Non-Current Assets
Non-current assets are assets that are not turned into cash easily, are expected to be turned into
cash within a year and/or have a life-span of more than a year. They can refer to tangible
assets such as machinery, computers, buildings and land. Non-current assets also can
be intangible assets, such as goodwill, patents or copyright. While these assets are not physical
in nature, they are often the resources that can make or break a company - the value of a brand
name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the
economic cost of the asset over its useful life.
Learn the Different Liabilities
On the other side of the balance sheet are the liabilities. These are the financial obligations a company
owes to outside parties. Like assets, they can be both current and long-term.Long-term liabilities are
debts and other non-debt financial obligations, which are due after a period of at least one year from the
date of the balance sheet. Current liabilities are the company’s liabilities which will come due, or must be
paid, within one year. This is includes both shorter term borrowings, such as accounts payables, along
with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan. 

Shareholders' Equity
Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal
year, a company decides to reinvest its net earnings into the company (after taxes), these retained
earnings will be transferred from the income statement onto the balance sheet into the shareholder’s
equity account. This account represents a company's total net worth. In order for the balance sheet to
balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.

Read the Balance Sheet

Below is an example of a balance sheet:
      Source: http://www.edgar-online.com

As you can see from the balance sheet above, it is broken into two sides. Assets are on the left side and
the right side contains the company’s liabilities and shareholders’ equity. It is also clear that this balance
sheet is in balance where the value of the assets equals the combined value of the liabilities and
shareholders’ equity.

Another interesting aspect of the balance sheet is how it is organized. The assets and liabilities sections
of the balance sheet are organized by how current the account is. So for the asset side, the accounts are
classified typically from most liquid to least liquid. For the liabilities side, the accounts are organized from
short to long-term borrowings and other obligations.

Analyze the Balance Sheet With Ratios

With a greater understanding of the balance sheet and how it is constructed, we can look now at some
techniques used to analyze the information contained within the balance sheet. The main way this is done
is through financial ratio analysis.

Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance
sheet, using financial ratios (like the debt-to-equity ratio) can show you a better idea of the company’s
financial condition along with its operational efficiency. It is important to note that some ratios will need
information from more than one financial statement, such as from the balance sheet and the income
statement.

The main types of ratios that use information from the balance sheet are financial strength ratios and
activity ratios. Financial strength ratios, such as the working capital and debt-to-equity ratios, provide
information on how well the company can meet its obligations and how they are leveraged. This can give
investors an idea of how financially stable the company is and how the company finances itself. Activity
ratios focus mainly on current accounts to show how well the company manages its operating cycle
(which include receivables, inventory and payables). These ratios can provide insight into the company's
operational efficiency.

There are a wide range of individual financial ratios that investors use to learn more about a company.
(To learn more about ratios and how to use them, see our Ratio Tutorial.)

Conclusion
The balance sheet, along with the income and cash flow statements, is an important tool for investors to
gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time
of the company’s accounts - covering its assets, liabilities and shareholders’ equity. The purpose of the
balance sheet is to give users an idea of the company’s financial position along with displaying what the
company owns and owes. It is important that all investors know how to use, analyze and read this
document.

To read more on balance sheets, see Breaking Down The Balance Sheet, Introduction To Fundamental
Analysis and How are a company's financial statements connected? 

P and l a/c

Particulars Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04

INCOME :            
Sales Turnover 592.74 452.43 356.11 323.42 229.03 158.39
Excise Duty 10.86 7.93 12.36 9.32 7.65 7.93
Net Sales 581.88 444.50 343.75 314.10 221.38 150.46
Other Income 6.74 10.68 2.88 12.89 11.00 10.11
Stock Adjustments 77.03 14.41 12.54 15.95 9.33 6.76
Total Income 665.65 469.59 359.17 342.94 241.71 167.33
EXPENDITURE :            
Raw Materials 470.79 321.00 239.54 232.52 163.01 122.56
Power & Fuel Cost 13.05 10.08 8.37 6.29 4.41 3.47
Employee Cost 14.53 11.58 9.24 6.39 3.54 2.44
Other Manufacturing Expenses 10.32 8.81 8.81 10.04 6.95 4.68
 Selling and Administration Expenses 25.06 18.15 19.57 21.24 17.49 10.17
Miscellaneous Expenses 9.16 16.64 10.09 5.02 2.13 2.44
Less: Pre-operative Expenses Capitalised 0.00 0.00 0.00 0.00 0.00 0.00
Total Expenditure 542.91 386.26 295.62 281.50 197.53 145.76
Operating Profit 122.74 83.33 63.55 61.44 44.18 21.57
Interest 46.95 29.27 25.88 12.45 8.30 7.08
Gross Profit 75.79 54.06 37.67 48.99 35.88 14.49
Depreciation 26.86 15.14 12.24 8.11 4.10 2.79
Profit Before Tax 48.93 38.92 25.43 40.88 31.78 11.70
Tax 5.65 6.55 3.20 3.61 2.60 0.76
Fringe Benefit tax 0.31 0.18 0.14 NA NA NA
Deferred Tax 3.18 1.17 2.73 2.42 2.71 3.25
Reported Net Profit 39.79 31.02 19.36 34.79 26.47 7.69
Extraordinary Items -1.40 -0.25 -0.53 -0.46 -0.15 -0.08
Adjusted Net Profit 41.19 31.27 19.89 35.25 26.62 7.77
Adjst. below Net Profit -11.41 -14.21 0.00 0.00 0.00 0.00
P & L Balance brought forward 88.70 76.25 69.52 41.16 19.48 14.36
Statutory Appropriations 0.00 0.00 0.00 0.00 0.00 0.00
Appropriations 5.03 4.36 12.63 6.43 4.79 2.57
P & L Balance carried down 112.05 88.70 76.25 69.52 41.16 19.48
Dividend 2.60 2.40 2.28 3.32 2.45 1.56
Preference Dividend 0.00 0.00 0.00 0.04 0.04 0.04
Equity Dividend % 10.00 10.00 10.00 15.00 15.00 10.00
Earnings Per Share-Unit Curr 15.57 12.74 8.31 15.93 14.19 4.77
Earnings Per Share(Adj)-Unit Curr 15.57 12.74 8.31 15.93 14.19 4.77
Book Value-Unit Curr 106.65 97.95 92.64 88.11 58.23 32.95

Balance sheet

Particulars Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04

SOURCES OF FUNDS :            
Share Capital 25.27 24.03 22.84 25.03 21.91 19.12
Reserves Total 338.28 309.06 290.14 168.10 88.74 35.82
Total Shareholders Funds 363.55 333.09 312.98 193.13 110.65 54.94
Secured Loans 353.67 274.37 263.45 194.58 120.49 53.62
Unsecured Loans 25.73 38.71 27.83 27.39 24.85 8.81
Total Debt 379.40 313.08 291.28 221.97 145.34 62.43
Total Liabilities 742.95 646.17 604.26 415.10 255.99 117.37
APPLICATION OF FUNDS :            
Gross Block 571.53 470.53 394.11 211.47 103.44 70.51
Less : Accumulated Depreciation 77.97 48.52 31.28 22.28 14.88 11.27
Less:Impairment of Assets 0.00 0.00 0.00 NA NA NA
Net Block 493.56 422.01 362.83 NA NA NA
Lease Adjustment 0.00 0.00 0.00 0.00 0.00 0.00
Capital Work in Progress 48.67 45.08 21.03 47.92 59.35 7.40
Investments 23.38 23.38 22.65 17.40 3.14 0.21
 Current Assets, Loans & Advances            
Inventories 203.31 113.11 87.46 82.65 69.47 54.69
Sundry Debtors 108.96 97.84 83.72 66.63 48.51 21.64
Cash and Bank 22.88 11.77 9.88 10.49 11.78 5.65
Loans and Advances 57.71 88.08 64.92 41.61 22.83 11.04
Total Current Assets 392.86 310.80 245.98 201.38 152.59 93.02
Less : Current Liabilities and Provisions            
Current Liabilities 158.32 112.97 71.73 60.18 48.73 33.98
Provisions 8.64 7.23 5.51 7.37 5.30 2.63
Total Current Liabilities 166.96 120.20 77.24 67.55 54.03 36.61
Net Current Assets 225.90 190.60 168.74 133.83 98.56 56.41
Miscellaneous Expenses not written off 0.73 1.17 48.28 41.57 18.77 3.79
Deferred Tax Assets 32.33 27.36 32.80 18.67 1.73 0.33
Deferred Tax Liability 79.84 60.26 50.34 33.48 14.12 10.01
Net Deferred Tax -47.51 -32.90 -17.54 -14.81 -12.39 -9.68
Total Assets 744.73 649.34 605.99 415.10 255.99 117.37
Contingent Liabilities 225.77 111.98 42.68 8.68 7.80 10.09

Cash flow

Particulars Mar-09 Mar-08 Mar-07

Cash and Cash Equivalents at Begining of the year 11.76 9.88 10.49
Net Cash from Operating Activities 97.84 57.97 46.30
Net Cash Used In Investing Activities -98.91 -65.70 -84.36
Net Cash Used In Financing Activities 12.19 9.61 37.45
Net Inc/(Dec) In Cash And Cash 11.12 1.88 -0.61
Cash And Cash Equivalents At End Of The Year 22.88 11.76 9.88

Key ratio
 ears Mar-09 Mar-08 Mar-07 Mar-06 Mar-05
Debt-Equity Ratio 1.4 1.3 1.3 1.2 1.3
Long Term Debt-Equity Ratio 1.0 1.0 1.0 1.0 1.0
Current Ratio 1.3 1.4 1.4 1.5 1.5
Fixed Assets 1.4 1.4 1.4 2.1 2.6
Inventory 3.8 4.5 4.2 4.3 3.7
Debtors 5.7 5.0 4.7 5.6 6.5
Interest Cover Ratio 2.0 2.3 2.0 4.3 4.8
PBIDTM (%) 20.7 18.4 17.9 19.0 19.3
PBITM (%) 16.2 15.1 14.4 16.5 17.5
PBDTM (%) 12.8 12.0 10.6 15.2 15.7
CPM (%) 11.2 10.2 8.9 13.3 13.4
APATM (%) 6.7 6.9 5.4 10.8 11.6
ROCE (%) 16.0 13.6 12.4 17.5 22.9
RONW (%) 15.6 13.7 9.6 23.4 33.3
PE 1.5 3.5 6.7 7.4 14.0
EBIDTA 122.7 83.3 63.6 61.4 44.2
DivYield 4.4 2.2 1.8 1.3 0.7
PBV 0.2 0.5 0.6 1.3 3.4

How To Analyze Your Business Using Financial Ratios

  --An Edward Lowe In-Depth Business Builder

Using a sample income statement and balance sheet, this guide shows you how to convert the raw
data on financial statements into information that will help you manage your business.

What You Should Know Before Getting Started

 Financial Ratio Analysis

 Types Of Ratios

Common Size Ratios

 Common Size Ratios from the Balance Sheet

 Common Size Ratios from the Income Statement

Liquidity Ratios
  Current Ratio

 Quick Ratio

Operating Ratios

 Inventory Turnover

 Sales-to-Receivables Ratios

 Days' Receivable Ratios

 Return on Assets

Solvency Ratios

 Debt-to-Worth Ratios

 Working Capital

 Net Sales to Working Capital

Z-Score

Checklist

Resources

What To Expect

Many small and mid-sized companies are run by entrepreneurs who are highly skilled in some key
aspect of their business—perhaps technology, marketing or sales—but are less savvy in financial
matters. The goal of this document is to help you become familiar with some of the most powerful
and widely-used tools for analyzing the financial health of your company.

Some of the names—"common size ratios" and "liquidity ratios," for example—may be unfamiliar.
But nothing in the following pages is actually very difficult to calculate or very complicated to use.
And the payoff to you can be enormous. The goal of this document is to provide you with some
handy ways to look at how your company is doing compared to earlier periods of time, and how its
performance compares to other companies in your industry. Once you get comfortable with these
tools you will be able to turn the raw numbers in your company's financial statements into
information that will help you to better manage your business.

What You Should Know Before Getting Started [top]

For most of us, accounting is not the easiest thing in the world to understand, and often the
terminology used by accountants is part of the problem. "Financial ratio analysis" sounds pretty
complicated. In fact, it is not. Think of it as "batting averages for business."
If you want to compare the ability of two Major League home-run sluggers, you are likely to look at
their batting averages. If one is hitting .357 and the other's average is .244, you immediately know
which is doing better, even if you don't know precisely how a batting average is calculated. In fact,
this classic sports statistic is a ratio: it's the number of hits made by the batter, divided by the number
of times the player was at bat. (For baseball purists, those are "official at-bats," which is total
appearances at the plate minus walks, sacrifice plays and any times the player was hit by a pitch.)

You can think of the batting average as a measure of a baseball player's productivity; it is the ratio of
hits made to the total opportunities to make a hit. Financial ratios measure your company's
productivity. There are many ratios you can use, but they all measure how good a job your company
is doing in using its assets, generating profits from each dollar of sales, turning over inventory, or
whatever aspect of your company's operation that you are evaluating.

Financial Ratio Analysis

The use of financial ratios is a time-tested method of analyzing a business. Wall Street investment
firms, bank loan officers and knowledgeable business owners all use financial ratio analysis to learn
more about a company's current financial health as well as its potential.

Although it may be somewhat unfamiliar to you, financial ratio analysis is neither sophisticated nor
complicated. It is nothing more than simple comparisons between specific pieces of information
pulled from your company's balance sheet and income statement.

A ratio, you will remember from grammar school, is the relationship between two numbers. As your
math teacher might have put it, it is "the relative size of two quantities, expressed as the quotient of
one divided by the other." If you are thinking about buying shares of a publicly-traded company, you
might look at its price-earnings ratio. If the stock is selling for $60 per share, and the company's
earnings are $2 per share, the ratio of price ($60) to earnings ($2) is 30 to 1. In common usage, we
would say the "P/E ratio is 30."

Financial ratio analysis can be used in two different but equally useful ways. You can use them to examine the
current performance of your company in comparison to past periods of time, from the prior quarter to years ago.
Frequently this can help you identify problems that need fixing. Even better, it can direct your attention to potential
problems that can be avoided. In addition, you can use these ratios to compare the performance of your company
against that of your competitors or other members of your industry.

Remember that the ratios you will be calculating are intended simply to show broad trends and thus
to help you with your decision-making. They need only be accurate enough to be useful to you. Don't
get bogged down calculating ratios to more than one or two decimal places. Any change that is
measured in hundredths of a percent will almost certainly have no meaning. Make sure your math is
correct, but don't agonize over it.

A ratio can be expressed in several ways. A ratio of two-to-one can be shown as:

2:1          2-to-1          2/1

In these pages, when we present a ratio in the text it will be written out, using the word "to." If the
ratio is in a formula, the slash sign (/) will be used to indicate division.

Types Of Ratios
As you use this guide you will become familiar with the following types of ratios:

 Common size ratios

 Liquidity ratios

 Efficiency ratios

 Solvency ratios

Common Size Ratios [top]

One of the most useful ways for the owner of a small business to look at the company's financial
statements is by using "common size" ratios. Common size ratios can be developed from both
balance sheet and income statement items. The phrase "common size ratio" may be unfamiliar to
you, but it is simple in concept and just as simple to create. You just calculate each line item on the
statement as a percentage of the total.

For example, each of the items on the income statement would be calculated as a percentage of
total sales. (Divide each line item by total sales, then multiply each one by 100 to turn it into a
percentage.) Similarly, items on the balance sheet would be calculated as percentages of total
assets (or total liabilities plus owner's equity.)

This simple process converts numbers on your financial statements into information that you can use
to make period-to-period and company-to-company comparisons. If you want to evaluate your cash
position compared to the cash position of one of your key competitors, you need more information
than what you have, say, $12,000 and he or she has $22,000. That's a lot less informative than
knowing that your company's cash is equal to 7% of total assets, while your competitor's cash is 9%
of their assets. Common size ratios make comparisons more meaningful; they provide a context for
your data.

Common Size Ratios From The Balance Sheet

To calculate common size ratios from your balance sheet, simply compute every asset category as a
percentage of total assets, and every liability account as a percentage of total liabilities plus owners'
equity.

Here is what a common size balance sheet looks like for the mythical Doobie Company:

ABC Company
Common Size Balance Sheet
For the year ending December 31, 200x

Assets $$ %

Current Assets    

     Cash 12,000 6.6%

     Marketable Securities 10,000 5.5%

Accounts Receivable (net of uncollectible accounts) 17,000 9.4%

     Inventory 22,000 12.2%

     Prepaid Expense 4,000 2.2%

     Total Current Assets 65,000 35.9%

Fixed Assets    

     Building and Equipment 105,000 58.3%

     Less Depreciation 30,000 16.6%

     Net Buildings and Equipment 75,000 41.6%

     Land 40,000 22.2%

     Total Fixed Assets 115,000 63.8%

Total Assets 180,000 100.0%

Liabilities    

Current Liabilities    

     Wages Payable 3,000 1.6%

     Accounts Payable 25,000 13.8%

     Taxes Payable 12,000 6.6%

     Total Current Liabilities 40,000 22.2%

Long-Term Liabilities    

     Mortgage Payable 70,000 38.8%

     Note Payable 15,000 8.3%

     Deferred Taxes 15,000 8.3%

     Total Long-Term Liabilities 100,000 55.5%

     Total Liabilities 140,000 77.7%

     Owner's Equity 40,000 22.2%

Total Liabilities and Owner's Equity 180,000 100.0%

In the example for Doobie Company, cash is shown as being 6.6% of total assets. This percentage
is the result of the following calculation:

12,000/180,000 X 100

(Multiplying by 100 converts the ratio into a percentage.)

Common size ratios translate data from the balance sheet, such as the fact that there is $12,000 in
cash, into the information that 6.6% of Doobie Company's total assets are in cash. Additional
information can be developed by adding relevant percentages together, such as the realization that
11.7% (6.6% + 5.1%) of Doobie's total assets are in cash and marketable securities.

Common size ratios are a simple but powerful way to learn more about your business. This type of
information should be computed and analyzed regularly.

As a small business owner, you should pay particular attention to trends in accounts receivables and
current liabilities. Receivables should not be tying up an undue amount of company assets. If you
see accounts receivables increasing dramatically over several periods, and it is not a planned
increase, you need to take action. This might mean stepping up your collection practices, or putting
tighter limits on the credit you extend to your customers.

As this example illustrates, the point of doing financial ratio analysis is not to collect statistics about
your company, but to use those numbers to spot the trends that are affecting your company. Ask
yourself why key ratios are up or down compared to prior periods or to your competitors. The
answers to those questions can make an important contribution to your decision-making about the
future of your company.

Current ratio analysis is also a very helpful way for you to evaluate how your company uses its cash.

Obviously it is vital to have enough cash to pay current liabilities, as your landlord and the electric
company will tell you. The balance sheet for the Doobie Company shows that the company can meet
current liabilities. The line items of "total current liabilities," $40,000, is substantially lower than "total
current assets," $65,000.

But you may wonder, "How do I know if my current ratio is out of line for my type of business?" You
can answer this question (and similar questions about any other ratio) by comparing your company
with others. You may be able to convince competitors to share information with you, or perhaps a
trade association for your industry publishes statistical information you can use. If not, you can use
any of the various published compilations of financial ratios. (See theResources section at the end of
this document.)

Because financial ratio comparisons are so important for bank loan officers who make loans to
businesses, RMA (formerly a bankers' trade association, Robert Morris Associates) has for many
years published a volume called "Annual Statement Studies." These contain ratios for more than 300
industries, broken down by asset size and sales size. RMA's "Annual Statement Studies" are
available in most public and academic libraries, or you may ask your banker to obtain the information
you need.
Another source of information is "Industry Norms and Key Business Ratios," published by Dun and
Bradstreet. It is compiled from D&B's vast databases of information on businesses. It lists financial
ratios for hundreds of industries, and is available in academic and public libraries that serve
business communities.

These and similar publications will give you an industry standard or "benchmark" you can use to
compare your firm to others. The ratios described in this guide, and many others, are included in
these publications. While period-to-period comparisons based on your own company's data are
helpful, comparing your company's performance with other similar businesses can be even more
informative.

Compute Common Size Ratios Using Your Company's Balance Sheet.

Common Size Ratios From The Income Statement

To prepare common size ratios from your income statement, simply calculate each income account
as a percentage of sales. This converts the income statement into a powerful analytical tool.

Here is what a common size income statement looks like for the fictional Doobie Company:

  $$ %

Sales $ 200,000 100%

Cost of goods sold 130,000 65%

Gross Profit 70,000 35%

Operating expenses    

Selling expenses 22,000 11%

General expenses 10,000 5%

Administrative expenses 4,000 2%

Total operating expenses 36,000 18%

Operating income 34,000 17%

Other income 2,500 1%

Interest expense 500 0%

Income before taxes 36,000 18%

Income taxes 1,800 1%

Net profit 34,200 17%

Common size ratios allow you to make knowledgeable comparisons with past financial statements
for your own company and to assess trends—both positive and negative—in your financial
statements.

The gross profit margin and the net profit margin ratios are two common size ratios to which small
business owners should pay particular attention. On a common size income statement, these
margins appear as the line items "gross profit" and "net profit." For the Doobie Company, the
common size ratios show that the gross profit margin is 35% of sales. This is computed by dividing
gross profit by sales (and multiplying by 100 to create a percentage.)

$70,000/200,000 X 100 = 35%

Even small changes of 1% or 2% in the gross profit margin can affect a business severely. After all,
if your profit margin drops from 5% of sales to 4%, that means your profits have declined by 20%.

Remember, your goal is to use the information provided by the common size ratios to start
asking why changes have occurred, and what you should do in response. For example, if profit
margins have declined unexpectedly, you probably will want to closely examine all expenses—
again, using the common size ratios for expense line items to help you spot significant changes.

Compute Common Size Ratios From Your Income Statement.

Look At The Gross Profit And Net Profit Margins As A Percentage Of Sales. Compare These
Percentages With The Same Items From Your Income Statement Of A Year Ago. Are Any
Fluctuations Favorable Or Not? Do You Know Why They Changed?

Liquidity Ratios [top]

Liquidity ratios measure your company's ability to cover its expenses. The two most common
liquidity ratios are the Current Ratio and the Quick Ratio. Both are based on balance sheet items.

Current Ratio

The current ratio is a reflection of financial strength. It is the number of times a company's current
assets exceed its current liabilities, which is an indication of the solvency of that business.

Here is the formula to compute the current ratio.

Current Ratio = Total Current Assets/total Current Liabilities

Using the earlier balance sheet data for the mythical Doobie Company, we can compute the
company's current ratio.

Doobie Company Current Ratio:

65,000/40,000 = 1.6

This tells the owners of the Doobie Company that current liabilities are covered by current assets 1.6
times. The current ratio answers the question, "Does the business have enough current assets to
meet the payment schedule of current liabilities, with a margin of safety?"
A common rule of thumb is that a "good" current ratio is 2 to 1. Of course, the adequacy of a current
ratio will depend on the nature of the business and the character of the current assets and current
liabilities. There is usually very little uncertainty about the amount of debts that are due, but there
can be considerable doubt about the quality of accounts receivable or the cash value of inventory.
That's why a safety margin is needed.

A current ratio can be improved by increasing current assets or by decreasing current liabilities.
Steps to accomplish an improvement include:

 Paying down debt.

 Acquiring a long-term loan (payable in more than 1 year's time).

 Selling a fixed asset.

 Putting profits back into the business.

A high current ratio may mean that cash is not being utilized in an optimal way. For example, the
excess cash might be better invested in equipment.

Quick Ratio

The Quick Ratio is also called the "acid test" ratio. That's because the quick ratio looks only at a
company's most liquid assets and compares them to current liabilities. The quick ratio tests whether
a business can meet its obligations even if adverse conditions occur.

Here is the formula for the quick ratio:

Quick Ratio = (Current Assets - Inventory)/Current Liabilities

Assets considered to be "quick" assets include cash, stocks and bonds, and accounts receivable (in
other words, all of the current assets on the balance sheet except inventory.)

Using the balance sheet data for the Doobie Company, we can compute the quick ratio for the
company.

Quick Ratio For The Doobie Company:

(65,000 - 22,000)/40,000 = 1.07

In general, quick ratios between 0.5 and 1 are considered satisfactory—as long as the collection of
receivables is not expected to slow. So the Doobie Company seems to have an adequate quick
ratio.

Compute A Current Ratio And A Quick Ratio Using Your Company's Balance Sheet Data.

Operating Ratios [top]
There are many types of ratios that you can use to measure the efficiency of your company's
operations. In this section we will look at four that are widely used. There may be others that are
common to your industry, or that you will want to create for a specific purpose within your company.

The four ratios we will look at are:

 Inventory Turnover Ratio

 Sales to Receivables Ratio

 Days' Receivables Ratio

 Return on Assets

Inventory Turnover

The inventory turnover ratio measures the number of times inventory "turned over" or was converted
into sales during a time period. It is also known as the cost-of-sales to inventory ratio. It is a good
indication of purchasing and production efficiency.

The data used to calculate this ratio come from both the company's income statement and balance
sheet. Here is the formula:

Inventory Ratio = Cost Of Goods Sold/inventory

Using the financial statements for the Doobie Company, we can compute the following inventory
turnover ratio for the company:

$130,000/22,000 = 5.91

In general, the higher a cost of sales to inventory ratio, the better. A high ratio shows that inventory
is turning over quickly and that little unused inventory is being stored.

Sales-to-receivables Ratio

The sales-to-receivables ratio measures the number of times accounts receivables turned over
during the period. The higher the turnover of receivables, the shorter the time between making sales
and collecting cash. The ratio is based on NET sales and NET receivables. (A reminder: net sales
equals sales less any allowances for returns or discounts. Net receivables equals accounts
receivable less any adjustments for bad debts.)

This ratio also uses information from both the balance sheet and the income statement. It is
calculated as follows:

Sales-to-receivables Ratio = Net Sales/Net Receivables

Using the financial statements for the Doobie Company (and assuming that the Sales reported on
their income statement is net Sales), we can compute the following sales-to-receivables ratio for the
company:
 Doobie Company Sales-to-receivables Ratio:

200,000/17,000 = 11.76

This means that receivables turned over nearly 12 times during the year. This is a ratio that you will
definitely want to compare to industry standards. Keep in mind that its significance depends on the
amount of cash sales a company has. For a company without many cash sales, it may not be
important. Also, it is a measure at only one point in time and does not take into account seasonal
fluctuations.

Days' Receivables Ratio

The days' receivables ratio measures how long accounts receivable are outstanding. Business
owners will want as low a days' receivables ratio as possible. After all, you want to use your cash to
build your company, not to finance your customers. Also, the likelihood of nonpayment typically
increases as time passes.

It is computed using the sales/receivables ratio. Here is the formula:

Days' Receivables Ratio = 365/Sales Receivables Ratio

The "365" in the formula is simply the number of days in the year. The sales receivable ratio is taken
from the calculation we did just a few paragraphs earlier.

Using the financial statements for the Doobie Company, we can compute the following day's
receivables ratio for the company.

Doobie Company Days' Receivables Ratio

365/11.76 = 31

This means that receivables are outstanding an average of 31 days. Again, the real meaning of the
number will only be clear if you compare your ratios to others in the industry.

Return On Assets

The return on assets ratio measures the relationship between profits your company generated and
assets that were used to generate those profits. Return on assets is one of the most common ratios
for business comparisons. It tells business owners whether they are earning a worthwhile return
from the wealth tied up in their companies. In addition, a low ratio in comparison to other companies
may indicate that your competitors have found ways to operate more efficiently. Publicly held
companies commonly report return on assets to shareholders; it tells them how well the company is
using its assets to produce income.

It is computed as follows:

Return On Assets = Net Income Before Taxes/total Assets X 100

(Multiplying by 100 turns the ratio into a percentage.)

Using the balance sheet and income statement for the Doobie Company, we can compute the return
on assets ratio for the company:

Doobie Company Return On Assets:

$36,000/180,000 X 100 = 20%

This is a ratio that you will certainly want to compare with other firms in your industry.

Solvency Ratios [top]

Solvency ratios measure the stability of a company and its ability to repay debt. These ratios are of
particular interest to bank loan officers. They should be of interest to you, too, since solvency ratios
give a strong indication of the financial health and viability of your business.

We will look at the following solvency ratios:

 Debt-To-Worth ratio

 Working capital

 Net sales to working capital

 Z-Score

Debt-To-Worth Ratio

The debt-to-worth ratio (or leverage ratio) is a measure of how dependent a company is on debt
financing as compared to owner's equity. It shows how much of a business is owned and how much
is owed.

The debt-to-worth ratio is computed as follows:

Debt-To-Worth Ratio = Total Liabilities/net Worth

(A reminder: Net Worth = Total Assets Minus Total Liabilities.)

Using balance sheet data for the Doobie Company, we can compute the debt-to-worth ratio for the
company.

Doobie Company debt-to-worth ratio:

$140,000/40,000 = 3.5

If the debt-to-worth ratio is greater than 1, the capital provided by lenders exceeds the capital
provided by owners. Bank loan officers will generally consider a company with a high debt-to-worth
ratio to be a greater risk. Debt-To-Worth ratios will vary with the type of business and the risk attitude
of management.

Working Capital
Working capital is a measure of cash flow, and not a real ratio. It represents the amount of capital
invested in resources that are subject to relatively rapid turnover (such as cash, accounts receivable
and inventories) less the amount provided by short-term creditors. Working capital should always be
a positive number. Lenders use it to evaluate a company's ability to weather hard times. Loan
agreements often specify that the borrower must maintain a specified level of working capital.

Working capital is computed as follows:

Working Capital = Total Current Assets - Total Current Liabilities

Using the balance sheet data for the Doobie Company, we can compute the working capital amount
for the company.

Doobie Company working capital:

$65,000 - 40,000 = $25,000

Doobie Company has $25,000 in working capital

Net Sales To Working Capital

The relationship between net sales and working capital is a measurement of the efficiency in the way
working capital is being used by the business. It shows how working capital is supporting sales.

It is computed as follows:

Net Sales To Working Capital Ratio = Net Sales/net Working Capital

Using balance sheet data for the Doobie Company and the working capital amount computed in the
previous calculation, we compute the net sales to working capital as follows:

Doobie Company Net Sales to Working Capital Ratio

$200,000/25,000 = 8

Again, this is a ratio that must be compared to others in your industry to be meaningful. In general, a
low ratio may indicate an inefficient use of working capital; that is, you could be doing more with your
resources, such as investing in equipment. A high ratio can be dangerous, since a drop in sales
which causes a serious cash shortage could leave your company vulnerable to creditors.

Z-score [top]

The Z-Score is at the end of our list neither because it is the least important, nor because it's at the
end of the alphabet. It's here because it's a bit more complicated to calculate. In return for doing a
little more arithmetic, however, you get a number—a Z-Score—which most experts regard as a very
accurate guide to your company's financial solvency. In blunt terms, a Z-Score of 1.81 or below
means you are headed for bankruptcy. One of 2.99 means your company is sound.

The Z-Score was developed by Edward I. Altman, a professor at the Leonard N. Stern School of Business at New
York University. Dr. Altman researched dozens of companies that had gone bankrupt, and others that were doing
well. He eventually focused on five key balance sheet ratios. He assigned a weight to each of the five, multiplying
each ratio by a number he derived from his research to indicate its relative importance. The sum of the weighted
ratios is the Z-Score.

Calculating The Z-score

Ratio Formula Weighting Factor Weighted Ratio

Earnings Before
Return on  
Interest and Taxes / x 3.3
Total Assets
Total Assets
Sales to Net Sales /  
x 0.999
Total Assets Total Assets
Equity to Debt Market Value of Equity / Total Liabilities x 0.6  

Working Capital Working Capital /  

x 1.2
to Total Assets Total Assets
Retained Earnings Retained Earnings /  
x 1.4
to Total Assets Total Assets
Total Of All Weighted Ratios = Z-score:  

Like many other ratios, the Z-Score can be used both to see how your company is doing on its own,
and how it compares to others in your industry.

For a worksheet on calculating your Z-Score. Click below:

Calculate the debt to worth ratio, working capital, and net sales to working capital ratio for
your company. how do your ratios compare to others in your industry?

Checklist [top]

This document has presented information on common size ratios for both the income statement and
the balance sheet, plus several additional financial ratios you can use to gain a better understanding
of the financial health of your business.

The ratios you will use most frequently are common size ratios from the income statement, the
current ratio, the quick ratio and return on assets. Your specific type of business may require you to
use some or all of the other ratios as well.

Financial ratio analysis is one way to turn financial statements, with their long columns of numbers,
into powerful business tools. Financial ratio analysis offers a simple solution to numbers overload.

Common Size Ratios

___ When computing common size ratios for your company's balance sheet, were percentages for
asset categories based on total assets? Were liability percentages based on total liabilities plus
owners' equity?

___ Have you examined at least one source of comparative financial ratios?

Liquidity Ratios
___ What does the current ratio you computed for your business tell you about your company's
ability to meet current liabilities?

___ Is your quick ratio between 0.5 and 1? If not, is there an explanation that is satisfactory to you?

Operating Ratios

___ When computing the sales-to-receivables ratio, did you remember to use NET sales and NET
receivables?

Solvency Ratios

___ Does the net sales-to-working capital ratio that you computed make sense for your business?
Are adjustments necessary?

Z-Score

___ Where is your company's Z-Score? If it is low, or the trend is down for recent years, do you
know what changes you need to make?

Resources [top]

Sources Of Information On Profitability Analysis

Budgeting and Finance (First Books for Business) by Peter Engel. (McGraw-Hill, 1996).

Fundamentals of Financial Management, 11th ed. by James C. Van Horne and John Martin
Wachowicz. (Prentice Hall, 2001).

Handbook of Financial Analysis for Corporate Managers, Revised ed. by Vincent Muro. (AMACOM,
1998).

How to Read and Interpret Financial Statements. (American Management Association, 1992).

Sources Of Information On Financial Ratios

RMA Annual Statement Studies, Risk Management Association. Data for 325 lines of business,
sorted by asset size and by sales volume to allow comparisons to companies of similar size in the
same industry. The "common size" (percentage of total assets or sales) is provided for each balance
sheet and income statement item.

Almanac of Business and Industrial Financial Ratios, annual, by Leo Troy. (Prentice-Hall, Inc.).
Information for 150 industries on 22 financial categories. Data is usually three years prior to the
publication date.

Financial Studies of the Small Business by Karen Goodman. Financial Research Associates.

Focusing on business with capitalizations under $1 million, providing financial ratios and other
information.
Media General Financial Services. Compare company-to-company, company-to-industry & industry-
to-industry; 215 industry groups; over 9,000 companies grouped within their industry; over 40 key
items listed on each company & industry; price, price change & relative price data; shareholdings
data; revenue, earnings & dividend data; ratio analysis; historical archives available back to May
1973.

Analyze Cash Flow The Easy Way

by Richard Loth (Contact Author | Biography)

Filed Under: Stocks

If you believe in the old adage, "it takes money to make money," then you can grasp the essence of cash
flow and what it means to a company. The statement of cash flows reveals how a company spends its
money (cash outflows) and where the money comes from (cash inflows). (To read more about cash flow
statements, see What Is A Cash Flow Statement?,Operating Cash Flow: Better Than Net
Income? and The Essentials Of Cash Flow.)

 
We know that a company's profitability, as shown by its net income, is an important investment evaluator.
It would be nice to be able to think of this net income figure as a quick and easy way to judge a
company's overall performance. However, although accrual accounting provides a basis for matching
revenues and expenses, this system does not actually reflect the amount the company has received from
the profits illustrated in this system. This can be a vital distinction. In this article, we'll explain what the
cash flow statement can tell you and show you where to look to find this information.

Difference Between Earnings and Cash

In an August 1995 article in Individual Investor, Jonathan Moreland provides a very succinct assessment
of the difference between earnings and cash. He says "at least as important as a company's profitability is
its liquidity - whether or not it's taking in enough money to meet its obligations. Companies, after all, go
bankrupt because they cannot pay their bills, not because they are unprofitable. Now, that's an obvious
point. Even so, many investors routinely ignore it. How? By looking only at a firm's income statement and
not the cash flow statement."

The Statement of Cash Flows

Cash flow statements have three distinct sections, each of which relates to a particular component -
operations, investing and financing - of a company's business activities. For the less-experienced
investor, making sense of a statement of cash flows is made easier by the use of literally-descriptive
account captions and the standardization of the terminology and presentation formats used by all
companies:

Cash Flow from Operations: This is the key source of a company's

cash generation. It is the cash that the company produces internally
as opposed to funds coming from outside investing and financing
activities. In this section of the cash flow statement, net income
 (income statement) is adjusted for non-cash charges and the
increases and decreases to working capital items - operating assets
and liabilities in the balance sheet's current position.

Cash Flow from Investing: For the most part, investing transactions

generate cash outflows, such as capital expenditures for plant,
property and equipment, business acquisitions and the purchase of
investment securities. Inflows come from the sale of assets,
businesses and investment securities. For investors, the most
important item in this category is capital expenditures (more on this
later). It's generally assumed that this use of cash is a prime
necessity for ensuring the proper maintenance of, and additions to, a
company's physical assets to support its efficient operation and
competitiveness.

Cash Flow from Financing: Debt and equity transactions dominate

this category. Companies continuously borrow and repay debt. The
issuance of stock is much less frequent. Here again, for investors,
particularly income investors, the most important item is cash
dividends paid. It's cash, not profits, that is used to pay dividends to
shareholders.

A Simplified Approach to Cash Flow Analysis

A company's cash flow can be defined as the number that appears in the cash flow statement as net cash
provided by operating activities, or "net operating cash flow", or some version of this caption. However,
there is no universally accepted definition. For instance, many financial professionals consider a
company's cash flow to be the sum of its net income and depreciation (a non-cash charge in the income
statement). While often coming close to net operating cash flow, this professional's short-cut can be way
off the mark and investors should stick with the net operating cash flow number.

While cash flow analysis can include several ratios, the following indicators provide a starting point for an
investor to measure the investment quality of a company's cash flow:

Operating Cash Flow / Net Sales: This ratio, which is expressed as

a percentage of a company's net operating cash flow to its net sales,
or revenue (from the income statement), tells us how many dollars of
cash we get for every dollar of sales.

There is no exact percentage to look for but obviously, the higher the
percentage the better. It should also be noted that industry and
company ratios will vary widely. Investors should track this indicator's
performance historically to detect significant variances from the
company's average cash flow/sales relationship along with how the
company's ratio compares to its peers. Also, keep an eye on how
cash flow increases as sales increase; it is important that they move
at a similar rate over time.
History of Free Cash Flow: Free cash flow is often defined as net
operating cash flow minus capital expenditures, which, as mentioned
previously, are considered obligatory. A steady, consistent
generation of free cash flow is a highly favorable investment quality –
so make sure to look for a company that shows steady and growing
free cash flow numbers.

For the sake of conservatism, you can go one step further by

expanding what is included in the free cash flow number. For
example, in addition to capital expenditures, you could also include
dividends for the amount to be subtracted from net operating cash
flow to get to get a more comprehensive sense of free cash flow.
This could then be compared to sales as was shown above.

As a practical matter, if a company has a history of dividend

payments, it cannot easily suspend or eliminate them without
causing shareholders some real pain. Even dividend payout
reductions, while less injurious, are problematic for many
shareholders. In general, the market considers dividend payments to
be in the same category as capital expenditures - as necessary cash
outlays.

But the important thing here is looking for stable levels. This shows
not only the company's ability to generate cash flow but it also
signals that the company should be able to continue funding its
operations. (To read more about cash flow, see Free Cash Flow:
Free, But Not Always Easy, Taking Stock Of Discounted Cash
Flow and Discounted Cash Flow Analysis.)

Comprehensive Free Cash Flow Coverage: You can calculate a

comprehensive free cash flow ratio by dividing the comprehensive
free cash flow by net operating cash flow to get a percentage ratio -
the higher the percentage the better.

Free cash flow is an important evaluative indicator for investors. It

captures all the positive qualities of internally produced cash from a
company's operations and subjects it to a critical use of cash - capital
expenditures. If a company's cash generation passes this test in a
positive way, it is in a strong position to avoid excessive borrowing,
expand its business, pay dividends and to weather hard times.

The term "cash cow," which is applied to companies with ample free
cash flow, is not a very elegant term, but it is certainly one of the
more appealing investment qualities you can apply to a company
with this characteristic. (Read more about cash cows in Spotting
 Cash Cows.) 

Conclusion
Once you understand the importance of how cash flow is generated and reported, you can use these
simple indicators to conduct an analysis on your own portfolio. The point, like Moreland said above, is to
stay away from "looking only at a firm's income statement and not the cash flow statement." This
approach will allow you to discover how a company is managing to pay its obligations and make money
for its investors. 

The Profit and Loss Statement: What Does It Mean?

CDFS-1153-96

Small Business Series

Marianne M. Huey

Overview

The Profit and Loss (P&L) Statement is also known as the Income Statement. It
shows how well a company buys and sells inventory (or services) to make a profit. A
firm must create a profit in order to survive and remain solvent. Careful analysis of
the components of a P&L is important in determining the cash flow available to repay
existing debt, finance additional debt (for business expansion), or to reinvest in the
company.

Just as the Balance Sheet (see Balance Sheet Fact Sheet, CDFS-1154) is a snapshot of
the financial condition of a company at a certain point in time, the Profit and Loss
statement shows the results of financial operations over a period of time. The amount
of time could be a month, a quarter of a year, a half year, or a year.

Profit and Loss Statement Format

The categories of a profit and loss statement are arranged in a specific order regardless
of the legal form of the business (i.e., sole proprietor, C corporation, etc.). Within
each category, revenues and expenses may be listed separately or grouped. Financial
reporting needs to remain consistent over a period of time. Listing the same type of
expense under different headings year after year may raise a red flag.

Expense Categories

The following is a typical P&L statement. Each expense category is made up of either
variable, fixed, or "discretionary" expenses.

The Cost of Goods Sold (COGS) is the general category for all production related
expenses which is subtracted first from sales. COGS is defined as:

COGS = (Beginning Inventory) + (Purchases of Inventory) - (Ending Inventory)

For the manufacturing firm, the "Purchases of Inventory" would include the raw
materials and direct labor used to produce a product.

Sales
- Cost of Goods Sold (variable)

= Gross Profit
- Selling & Gen. Admin. (fixed/period)

= Operating Profit
- Officer Salaries (discretionary)
- Interest (discretionary)
- Depreciation (discretionary)
- Rent (discretionary)
+/- Other Income/Expenses

= Earnings Before Tax

- Taxes

= Profit After Tax

Completing the computation results in the Gross Profit (Sales - COGS). At this point,

all production related expenses are covered and the remaining overhead costs
associated with business operations must be subtracted in order to determine the
company's Earnings Before Tax (EBTx).

The Selling, General and Administrative (SG&A) category contains fixed, variable,

and discretionary expenses and may include:
  Salaried personnel
 Travel and entertainment
 Rent
 Utilities
 Postage
 Printing
 Insurance
 Interest
 Depreciation
 Dues/Subscriptions
 Advertising

It is a mixture of many different things and thus, difficult to analyze. Most often, the
expenses listed under SG&A tend to remain fixed over a relevant range of time.
However, watch for variability as production levels increase significantly or sales
change.

Taking a Closer Look

Simply stated, profits are equal to the difference between revenues and expenses:

Profits = Revenues - Expenses

To understand how well a company buys and sells inventory or services to make a
profit, one must look at the types of expenses being charged against revenues and ask
whether or not these are being recorded accurately and consistently. For analysis
purposes, expenses are classified as variable, fixed, and discretionary.

Variable Expenses

Variable expenses are directly affected by sales. They are the production-related
expenses, such as raw materials, direct labor, commissions, and shipping. On the
P&L, they are listed as the "Cost of Goods Sold" (COGS) and are typically the largest
expense category.

Fixed Expenses

Fixed expenses are constant. They do not vary with sales or production. They are the
basic overhead costs of the company, such as utilities, insurance, postage, etc., which
are charged against revenues on a periodic basis (weekly, monthly, annually). On the
P&L, fixed expenses are listed under the heading, "Selling, General and
Administrative" (SGA) and may contain several different categories.

Discretionary Expenses

The National Development Council, specialists in economic development finance and

business credit analysis training, proposes a third type of expense classified as
"discretionary." Discretionary expenses are those which the business owner may
control in order to decrease the reported profits.

When looking at the P&L, the following expenses are separated from the SGA for
further analysis:

 Officers' Salaries
 Interest Expense
 Depreciation
 Rent

A closer look at these items provides one with the questions to ask the entrepreneur.

Officers' Salaries. As a specific line item in SG&A, has this amount increased or
decreased over the years? It is usually a difficult question to pose in as much as, how
much is too much for officers to be paid? Or, are they willing to decrease their salaries
in order to free up additional dollars in the company?

A careful analysis of the financial statements may reveal additional forms of officer
compensation including dividends, travel and entertainment expenses, rent expense
(officers own the facility where the company is housed), interest on officers' loans to
the company, pension fund investments, and others. When officer salaries are low,
there are usually other forms of compensation.

Interest. Interest is a discretionary expense item only when the amount of debt a

company carries increases, decreases, or is refinanced. If a company restructures
existing financing or pays off a loan, the interest expense may be less. However, this
may be offset by any additional debt the company incurs due to a business expansion
project (which is primarily interest expense in the early stages of the loan). Interest
expense should be looked at carefully because it is usually affected by new financing.

Depreciation. Depreciation is a non-cash expense which reflects the "wearing out" of

assets over time. When assets are purchased (with the exception of land), they are
useful to a company for a limited number of years. The cost of each asset is expensed
over the period of time during which services are received from the asset. The purpose
of depreciating an asset (even though no actual "cash" is paid) is because at the point
in time when the asset wears out, a new cash payment must be made in order to
replace the asset.

Different assets have different depreciation schedules (or "useful life" as defined by
the Internal Revenue Service). If a company is profitable, it may accelerate
depreciation in order to reduce reported profits. Because depreciation is a non-cash
expense, a cash payment is not made by the company to "Depreciation," and more
dollars are available to invest in new assets.

When analyzing depreciation, generally the total amount is not available for debt
service. Some depreciation should be allocated for replacement purposes and short-
term asset purchases.

Rent. Rent expense may be discretionary for several reasons. First, the company
officers may own the building or facility and rent it to the business. Typically, the
amount paid in rent is enough to cover the debt service on the building and other
associated expenses, such as real estate taxes and insurance, which may or may not be
included in the lease agreement.

If the amount charged to rent over a period of time (historical financials) has increased
significantly, questions should be raised. Have the expenses actually increased or is
the corporation attempting to decrease reported profits and thus, pay less in taxes?
Furthermore, is there any debt on the building or do the officers own the building free
and clear and simply rent it to the company? If this is the case, could they forego the
rent payment, leaving more cash in the company?

Second, the company could eliminate rent payment by purchasing the building they
are currently leasing. Cash which was used to make a monthly rent payment would be
available to the company.

Discretionary Expenses are "Fudgeable"

Carefully examining the expense categories of rent, officers' compensation, interest,

and depreciation may uncover "hidden" cash flow available to repay proposed new
debt. These particular expenses, when compared to other less flexible categories
grouped under Selling, General and Administrative, are fudgeable. In other words,
they may be manipulated to either reduce or overstate the reported earnings before tax
of a company.

A company may overstate expenses in order to reduce the amount of earning before
tax and thus, lower the company's tax liability, or a company may want to understate
officers' salaries and other expenses which would increase the earnings before tax
(overstate profits), and thus, give the illusion of debt capacity. A careful look at the
discretionary expenses and how they are controlled is critical to understanding the
profit and loss statement.

Purpose of the Income Statement

The primary purpose of the income statement is to report a company's earnings to investors over a specific period of time. Years
ago, the income statement was referred to as the Profit and Loss (or P&L) statement, and has since evolved into the most well-
known and widely used financial report on Wall Street. Many times, investors make decisions based entirely on the reported
earnings from the income statement without consulting the balance sheet or cash flow statements (which, while a mistake, is a
testament to how influential it is).

Using Income Statement Analysis to Calculate Expenses, Earnings, Financial Ratios and Profit Margins

To a serious investor, income statement analysis reveals much more than a company's earnings. It provides important insights
into how effectively management is controlling expenses, the amount of interest income and expense, and the taxes paid.
Investors can use income statement analysis to calculate financial ratios that will reveal the rate of return the business is earning
on the shareholders' retained earnings and assets (in other words, how well they are investing the money under their control).
They can also compare a company's profits to its competitors by examining various profit margins such as the gross profit
margin, operating profit margin, and net profit margin.

Beginning our Analysis of the Income Statement

As we progress through this series of investing lessons, you must remember John Burr William’s basic truth that a business is
only worth the profit that it will generate for its owners from now until doomsday, discounted back to the present, adjusted
for inflation. The income statement is the “report card” of those earnings, which ultimately determine the price you should be
willing to pay for a business.

Sit back in your chair, take out a copy of an annual report or 10K, flip to the consolidated income statement for the most recent
year, and let’s begin working through it. In the end, I think you’ll be surprised by how much you’ve learned. Towards the end of
this lesson, we will actually work through Abercrombie & and Brown Safety's income statements. As always, there will be quiz
following the lesson. You should be able to pass without missing more than two questions.