Financial Statement Analysis

Birendra Bista

birendrabro@gmail.com

Productivity analysis:
a. Sales per employee =
b. Net added value per employee =
c. Labor equipment ratio per employee =
d. Wage distribution ratio = × 100%
e. Wage base per employee =
Profitability analysis:
a. Total capital profit ratio = × 100%
b. Gross profit margin = × 100%
c. Operating profit margin = × 100%
d. Net profit/Sales ratio (Profit margin ratio) = × 100%
e. Owned capital/Net profit ratio = × 100%
f. Adm., selling and distribution expense ratio = × 100%
g. Earning per share =
Activity (assets management/turnover/efficiency/ investment utilization) analysis:
X-item turnover =
‘Increasing turnover ratio is a sign of improved efficiency of resources.’
a. Current assets turnover ratio =
b. Inventory assets turnover ratio = or
c. Days’ inventory (Inventory cycle) =
d. Working capital turnover =
e. Account receivable turnover ratio =
f. Days sales outstanding (Days’ receivables / collection period) =
=
g. Fixed assets turnover ratio =
h. Total assets turnover =
i. Total capital turnover ratio = =
j. Equity turnover =
k. Capital intensity =
l. Days’ cash =
Test of financial condition/ Stability (Liquidity) analysis:
Short-term solvency (Liquidity) ratios
a. Interest expense ratio = × 100
b. Interest coverage ratio / Times interest earned = =
c. Current ratio =
d. Quick ratio (Acid test) = =
Long-term solvency (Debt equity and interest coverage)
a. Debt/equity ratio = =
b. Owned capital ratio = =
c. Ratio of fixed assets to long-term capital =
=
d. Debt/capitalization =
e. Cash flow/debt =
f. Financial leverage ratio =
Possibility/growth analysis:
Possibility - trend = = Percentage increase over the last year
a. Sales growth rate =
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 b. Added value growth rate =
c. Direct labor strength increase rate =
d. Total labor strength increase rate =
e. Total capital increase rate =
f. Net profit increase rate =
Note: Permanent capital = Shareholders equity + Long-term debt.
Net added value = Net sales - Input cost = Net sales - (Direct and indirect materials consumed)
Test of dividend policy:
a. Dividend yield ratio =
b. Dividend payout ratio =

Overall performance measure:

a. Price earning ratio =
b. Return on assets =
c. Return on invested capital =
d. Return on shareholder’s equity =

EXERCISES

01. Given below is the balance sheet of a company.

Non-current assets:
Property, plant and equipment: Rs. 36,000
Current assets:
Inventory 12,000
Debtors 8,000
Cash 30,000 50,000
Total assets: 86,000
Current liabilities:
Bank overdraft: 4,000
Creditors 16,000
Total current liabilities 20,000
Share capital 60,000 20,000
Retained earnings 6,000
Total equity 66,000
Total equity and liabilities 86,000
Required
Measure the short term solvency of the company and evaluate the performance of management.
02. The Sadiksha Company’s comparative balance sheet at December 31, 2006, and the income statement for
the year 2006 are as follows:
Sadiksha Company
Balance Sheet
At December 31
2006 2005
ASSETS:
Cash Rs.25,000 Rs.42,000
Accounts receivable 93,000 75,000
Inventory 63,000 75,000
Prepaid insurance 6,000 15,500
Investments (long-term) 0 25,000
Property, plant and equipment (net) 180,000 120,000
Total assets Rs.368,000 Rs.353,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

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 Accounts payable Rs.38,000 Rs.37,400
Accrued salaries payable 6,000 3,500
Notes payable, short-term 38,000 19,100
Mortgage payable (long-term) 80,000 105,000
Total liabilities 162,500 Rs.165,000
Stockholders’ equity:
Common stock Rs.120,000 Rs.100,000
Contributed capital in excess of par 26,000 20,000
Retained earnings 59,500 68,000
Total stockholders’ equity 205,500 Rs.188,000
Total liabilities and stockholders’ equity 368,000 Rs.353,000

Sadiksha Company
Income Statement
For the Year Ended December 31
2006 2005
Sales Rs.275,000 Rs.255,000
Cost of goods sold 208,000 183,000
Gross margin Rs.67,000 Rs.72,000
Expenses:
Salaries expense Rs.10,000 Rs.12,000
Rent expense 5,000 4,000
Depreciation expense 20,000 18,000
Other operating expenses 5,000 6,000
Interest expense 7,000 5,500
Total expenses Rs.47,000 Rs.45,500
Income before taxes Rs.20,000 Rs.26,500
Income tax expense 6,000 7,950
Net income Rs.14,000 Rs.18,550
Required:
1. Calculate the following ratio assuming during the year 2005 and 2006 the company averaged 50,000 and
55,000 shares of stock outstanding respectively.
(a) Earning per share
(b) Return on assets
(c) Profit margin
(d) Current ratio
(e) Quick ratio
(f) Debt to equity ratio
(g) Times interest earned ratio
(h) Receivable turnover ratio
(i) Inventory turnover ratio
(j) Assets turnover ratio

03. (Analysis of Financial Statement) Use the balance sheets, income statement, and the additional information
provided below to analyze the performance of the company.

HOOPLE COMPANY
Balance Sheets
At December 31, 2009 and December 31, 2008

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 (in thousands)
2009 2008
ASSETS:
Current Assets:
Cash Rs. 1,618 Rs. 1,220
Account Receivable 1,925 2,112
Merchandise Inventory 1,070 966
Prepaid Expenses 188 149
Total current assets Rs. 4,801 Rs. 4,447
Plant and Equipment:
Buildings Rs. 4,818 Rs. 3,292
Less: Accumulated Depreciation (361) (300)
Equipment, Net 1,293 1,045
Total Plant and Equipment Rs. 5,750 Rs.4,037
Total Assets Rs.10,551 Rs. 8,484
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable Rs. 1,818 Rs. 1,686
Notes Payable 900 1,100
Total Current Liabilities Rs. 2,718 Rs. 2,786
Long-Term Liabilities 2,500 2,000
Total Liabilities Rs. 5,218 Rs. 4,786
Stockholders' equity:
Common Stock, No Par Value Rs. 3,390 Rs. 2,041
Retained Earnings 1,943 1,657
Total Stockholders' Equity Rs. 5,333 Rs. 3,698
Total Liabilities and Stockholders' Equity Rs. 10,551 Rs. 8,484
Required:
1. Summarize the necessary financial ratios to evaluate the performance of the company for the purpose of
granting loan to it.
2. Would you provide the loan?
04. (Preparation of Cash Flow Statement) Use the balance sheets, income statement and the additional information
presented below to complete this problem.
AL MUZNY COMPANY
Balance Sheets
At December 31, 2008, and December 31, 2007
(in thousands)
2008 2007
ASSETS
Current Assets:
Cash Rs. 529 Rs. 660
Accounts Receivable 1,006 1,011
Merchandise Inventory 396 452
Prepaid Expenses 38 62
Total Current Assets Rs. 1,969 Rs. 2,185
Plant and Equipment:
Buildings Rs. 2,000 Rs. 1,681
Less: Accumulated Depreciation (176) (146)
Buildings, Net Rs. 1,824 Rs. 1,535
Equipment Rs. 809 Rs. 609
Less: Accumulated Depreciation (76) (61)
Equipment, Net 733 548
Total Plant and Equipment Rs. 2,557 Rs. 2,083
Total Assets Rs. 4,526 Rs. 4,268
LIABILITIES

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 Current Liabilities:
Accounts Payable Rs. 726 Rs. 809
Notes Payable 750 600
Total Current Liabilities Rs. 1,476 Rs. 1,409
Long-Term Liabilities 1,500 1,200
Total Liabilities Rs. 2,976 Rs. 2,609
STOCKHOLDERS' EQUITY & LIABILITY
Common Stock, No Par Value Rs. 1,300 Rs. 1,000
Retained Earnings 250 659
Total Stockholders' Equity Rs. 1,550 Rs. 1,659
Total Liabilities and Stockholders' Equity Rs. 4,526 Rs. 4,268
Required:
1. Summarize the necessary financial ratios to evaluate the performance of the company for the purpose of
purchasing common stock of the company.
2. Would you buy the common stock of the company?

05. (Preparation of Cash Flow Statement) Bangalamukhi Dairy has approached Nepal Bank Ltd. for a long-term loan for
expansion of the business. As a part of the loan application, the company has submitted the following financial
statements.
Bangalamukhi Dairy
Income Statement for the year ended Dec. 31st 2006
Sales and other incomes Rs. 12,045,750
Expenses (Interest being Rs. 252,000) 10,730,250
Profit before taxes 1,315,500
Taxes for the year 442,500
Profit after tax 873,000
Bangalamukhi Dairy
Balance Sheet as on Dec. 31st 2006
Non-current assets:
Fixed assets (Net) Rs. 3142,500
Investment 985,500
Current assets:
Inventories 816,000
Debtors 217,500
Cash and bank balance 112,500
Other current assets 21,000
Total assets 5,295,000
Current liabilities and provisions 570,000
Bonds 750,000
Long term Bank loan 1,200,000
Share capital @ Rs. 100 each 1,500,000
Reserve and surplus (Rs. 402,000 + Rs.873,000) 1,275,000
Total equities and liabilities 5,295,000
Industry averages for the selected ratios are:

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 Net profit margin 10.5%
Assets turnover 3.15 times
Return on assets 30%
Return on equity 42%
Earnings per share Rs. 75
Current ratio 2.7:1
Quick ratio 1.35:1
Total debt to equity 1.65:1
Interest coverage 7.5 times
Price-earning ratio 30 times
Required:
Considering the above information, you, as a consultant, should provide financial counseling to the following parties.
1. As the credit consultant of the bank, suggest whether the Bank should lend to such a company or not?
2. On behalf of a supplier, recommend him/her whether he/she should make a supply contract with this
company, or not?
3. As a consultant, recommend your investors, whether they should invest in the Dairy or not. Support your
answer with the necessary calculations.

06. Presented below are the comparative balance sheets for Ratna Company at December 31, 2006 and 2005 and the income
statements for the years ended December 31, 2006 and 2005.
Ratna Company
Balance Sheets
December 31,2006, and December 31, 2005
(in thousands)
2006 2005
ASSETS:
Current Assets:
Cash Rs. 1,292 Rs. 980
Accounts Receivable 1,068 1,112
Merchandise Inventory 970 906
Prepaid Expenses 88 109
Total Current Assets Rs. 3,418 Rs. 3,107
Plant and Equipment:
Building, Net Rs. 3,457 Rs. 2,442
Equipment, Net 993 945
Total Plant and Equipment Rs. 4,450 Rs. 3,387
Total Assets Rs. 7,868 Rs. 6,494
LIABILITIES:
Current Liabilities:
Accounts Payable Rs. 998 Rs. 786
Notes Payable 600 500
Total Current Liabilities Rs. 1,598 Rs. 1,286
Long-Term Liabilities 837 467
Total Liabilities Rs. 2,435 Rs. 1,753
STOCKHOLDERS’ EQUITY:
Common Stock, No Par Value Rs. 2,490 Rs. 2,000
Retained Earnings 2,943 2,741
Total Stockholders Equity Rs. 5,433 Rs. 4.741
Total Liabilities and Stockholders’ Equity Rs. 7,868 Rs. 6,494

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 Ratna Company
Income Statements
For the Years Ended December 31, 2006 and 2005
(in thousands)
2006 2005
Sales Revenue Rs. 9,228 Rs. 8,765
Less: Cost of Goods Sold 6,751 6,097
Gross Profit on Sales Rs. 2,477 Rs. 2,668
Less: Operating Expenses:
Depreciation-Building and Equipment Rs. 80 Rs. 56
Other Selling and Administrative 1,667 1,442
Total Expenses Rs. 1,747 Rs. 1,498
Income Before Interest and Taxes Rs. 730 Rs. 1,170
Less: Interest Expense 98 89
Income Before Taxes Rs. 632 Rs. 1,081
Income Taxes 190 357
Net Income Rs. 442 Rs. 724
Required:
1. Calculate the following ratios for 2006 and 2005:
a. Return on assets
b. Profit margin
c. Total asset turnover
d. Return on equity
e. Current ratio
f. Net sales to working capital
g. Receivables turnover
h. Inventory turnover
i. Debt equity ratio
j. Total liabilities to net worth
2. Using the ratios you calculated in the previous requirement, make the comparison of Ratna’s ratios to
those of its entire industry.
Total Industry Ratna
Current ratio 1.46
Net sales to working capital 6.42
Total asset turnover 1.76
Inventory turnover 5.73
Receivables turnover 7.83
Total liabilities to net worth 1.94
Debt equity ratio 65.99
Return on assets 9.30
Return on equity 6.12
Profit margin 6.27

3. What do you think about the performance and financial health of Ratna? Explain with your earlier calculations
and analyses.

07. The Sadiksha Company’s comparative balance sheet at December 31, 2006, and the income statement for the
year 2006 are as follows:
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 Sadiksha Company
Balance Sheet at December 31
2006 2005
Assets:
Cash Rs.25,000 Rs.42,000
Accounts receivable 93,000 75,000
Inventory 63,000 75,000
Prepaid insurance 6,000 15,500
Investments (long-term) 1000 25,500
Property, plant and equipment (net) 180,000 120,000
Total assets Rs.368,000 Rs.353,000

Liabilities and Stockholders’ Equity:

Liabilities:
Accounts payable Rs.38,000 Rs.37,400
Accrued salaries payable 6,000 3,500
Notes payable, short-term 38,500 19,100
Mortgage payable (long-term) 80,000 105,000
Total liabilities 162,500 Rs.165,000
Stockholders’ equity:
Common stock Rs.120,000 Rs.100,000
Contributed capital in excess of par 26,000 20,000
Retained earnings 59,500 68,000
Total stockholders’ equity 205,500 Rs.188,000
Total liabilities and stockholders’ equity 368,000 Rs.353,000

Sadiksha Company
Income Statement
For the Year Ended December 31
2006 2005
Sales Rs.275,000 Rs.255,000
Cost of goods sold 208,000 183,000
Gross margin Rs.67,000 Rs.72,000
Expenses:
Salaries expense Rs.10,000 Rs.12,000
Rent expense 5,000 4,000
Depreciation expense 20,000 18,000
Other operating expenses 5,000 6,000
Interest expense 7,000 5,500
Total expenses Rs.47,000 Rs.45,500
Income before taxes Rs.20,000 Rs.26,500
Income tax expense 6,000 7,950
Net income Rs.14,000 Rs.18,550
All sales of both years were almost on account. During 2005 and 2006 Sadiksha Company averaged 10,000 and 12,000
shares of stock outstanding, respectively. Market price per share is Rs. 50 at the end of 2006.
Industry averages for the selected ratios are:
Net profit margin 10.5%
Assets turnover 2.25 times
Return on assets 20%
Return on equity 25%
Earnings per share Rs. 55
Current ratio 2.2:1
Quick ratio 1.3:1
Total debt to equity 1.6:1
Interest coverage 5.5 times
Price-earning ratio 30 times

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 Required:
1. Prepare a horizontal analysis of the above financial statements for the Sadiksha Company.
2. Calculate as many ratios as possible on investors’ prospective for the year 2006.
3. Evaluate the performance of the company as a perspective investor for the purpose of purchasing stocks of Sadiksha
Company.
08. Aayushma Company Ltd. is a medium-size company that has been in business for 20 years. The industry in which
Aayushma exist has become very competitive in the last few years, and Aayushma has decided that it must grow if it is
going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested its most recent
financial statements as part of the loan package.
The industry in which Aayushma operates consists of approximately 20 companies relatively equal in size. The trade
association to which all of the competitors belong publishes an annual survey of the industry, including industry
averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for
this purpose.
Aayushma’s controller is aware that the bank has access to this survey and is very concerned about how the
company fared this past year compared with the rest of the industry. The rations included in the publication,
and the averages for the past year, are as follows:
Ratio Industry Average
Current ratio 1.20
Acid-test (quick) ratio 0.50
Inventory turnover 35 times
Debt-to-equity ratio 0.50
Times interest earned 22 times
Return on sales 3%
Asset turnover 3.5 times
Return on common stockholders' equity 20%
The financial statements to be submitted to the bank in connection with the loan follow:
Aayushma Company Ltd.
Statement of Income and Retained Earnings
For the year ended December 31, 2006
(Thousands omitted)
Sales revenue Rs. 420,500
Cost of goods sold 300,000
Gross margin 120,500
Selling, general, and administrative expense (85,000)
Income before interest and taxes 35,500
Interest expense (8,600)
  Income before taxes 26,900
Income tax expense (12,000)
Net income 26,900
Retained earnings, January1, 2006 12,400
  27,300
Dividends paid on common stock (11,200)
Retained earnings, December 31, 2006 16,100
Aayushma Company Ltd.
Comparative Balance Sheet
As on 31st December
(Thousands Omitted)
Assets 2006 2005
Current assets:    
Cash 1,790 2,600
Marketable securities 1,200 1,700
Accounts receivable, net of allowances 400 600

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 Inventories 8,700 7,400
Prepaid items 350 400
Total current assets 12,440 12,700
Long-term investments 560 400
Property, plant and equipment:
Land 12,000 12,000
Buildings and equipment, net 87,000 82,900
Total property, plant and equipment 99,00 94,900
Total assets 112,000 108,000
Liabilities and stockholders' equity  
Current Liabilities
Short-term notes 800 600
Accounts payable 6,040 6,775
Salaries and wages payable 1,500 1,200
Income taxes payable 1,560 1,025
Total current liabilities 9,900 9,600
Long-term bonds payable 36,000 36,000
Stockholders' equity:
Common stock 50,000 50,000
Retained earnings 16,100 12,400
Total stockholders' equity 66,100 62,400
Total liabilities and stockholders' equity 112,000 108,000
Required:
1. Prepare a columnar report for the controller of Aayushma Company, comparing the industry averages for the ratios
published by the trade association with the comparable ratios for Aayushma. For Aayushma compute the ratios as of
December 31, 2006.
2. Briefly evaluate Aayushma’s ratios relative to the industry.
3. Do you think that the bank will approve the loan? Explain your answer.

09. Consider the condensed financial statement data for Garfield Fish, Inc., provided below (all amounts are in thousands):
Garfield Fish, Inc.
Balance Sheets
At December 31
ASSETS 2002 2001 2000
Cash Rs. 21 Rs. 24 Rs. 20
Marketable securities 149 100 61
Receivable(net) 232 190 204
Inventory 229 244 260
Total current assets Rs. 631 Rs. 558 Rs. 545
Plant and equipment(net) 1,400 1360 1390
Land 310 310 310
Total assets Rs. 2,341 Rs. 2,228 Rs. 2,245
LIABILITY AND SHAREHOLDER’ EQUITY 2002 2001 2000
Accounts payable Rs. 187 Rs. 193 Rs. 204
Taxes payable 49 77 82
Other current 63 39 68
Total current liabilities Rs. 299 Rs. 309 Rs. 354
Long-term debt 1,020 985 985
Common stock 680 680 680
Retained earnings 342 254 226
Total liabilities and stockholders’ equity Rs. 2,341 Rs. 2,228 Rs. 2,245

Garfield Fish, Inc.

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 Earnings Statements
For the Years Ending December 31
2002 2001
Revenues Rs. 4,508 Rs. 3,752
Cost of goods sold 3,606 3,077
Gross margin Rs. 902 Rs. 675
Other gains and (losses) (14) 15
Interest expense (105) (102)
Earnings before taxes Rs. 783 Rs. 588
Income tax expense (303) (274)
Earnings Rs. 480 Rs. 314

Par value for Garfield common stock is Rs. 1.00 per share. Market value of the stock was Rs. 2.75, Rs. 2.50, and Rs. 2.25 per share
at the end of 19X2, 19X1, and 19X0, respectively.
Required:
1. Compute the following ratios of Garfield Fish, Inc. for the year 2001 and 2002 (Round all ratios to two decimal places)
(a) Earning per share
(b) Return on Assets Accounting performance measuring ratios
(c) Profit Margin

(d) Price earning ratio Market performance measuring ratio

(e) Current ratio

(f) Debt to equity ratio Solvency (Liquidly) measuring ratio
(g) Times interest earned ratio

(h) Receivable turnover ratio

(i) Inventory turnover ratio Asset managing performance measuring ratio
(j) Assets turnover ratio
2. Analyse the above ratio in terms of perspective investors.
3. Analyse the above ratio in term of lenders.
4. What are the other ways to analyse the financial statement?

10. The following data are summarized from a recent annual report of Westinghouse Electric Corporation, a diversified
technology-based corporation providing products and services for industrial, construction, and electric utility
applications, and equipment for power generation.
Westinghouse Electric Corporation
Condensed Balance Sheet Data
At December 31
(in millions)
ASSETS 2002 2001
Cash and marketable securities Rs. 598 Rs. 702
Receivables 1,905 2,032
Inventories 1,391 1,262
Prepaid and other current assets 741 625
Total current assets Rs. 4,635 Rs. 4,621
Investments 894 762
Plant and equipment 2,189 3,300
Intangibles and other noncurrent assets 764 1,028
Total assets Rs. 8,482 Rs. 9,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable Rs. 646 Rs. 625
Unearned revenues 1,129 1,097
Short-term debt 597 2,039
Other current liabilities 1,824 1,492
Total current liabilities Rs. 4,196 Rs. 5,253
Long-term liabilities 1,252 1,190

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 Minority interest 24 33
Stockholders’ equity 3,010 3,235
Total liabilities and stockholders’ equity Rs. 8,482 Rs. 9,711

Westinghouse Electric Corporation

Condensed Income Statement Data
For the Year Ended December 31
(in millions)
2002 2001
Sales Rs. 10,731 Rs. 10,700
Cost of sales 7,771 7,738
Depreciation and amortization 371 449
Interest expense 146 185
Other expenses(net) 1,643 1,534
Pre-tax income Rs. 800 Rs. 794
Income tax expense 129 189
Net income Rs. 671 Rs. 605
In addition to the condensed data above, Westinghouse reported its weighted average number of shares of common stock
outstanding for 2002 and 2001 were 157 million shares and 179 million shares, respectively. The market price of Westinghouse
common was Rs. 55.75 and Rs. 44.50 per share at the end of 2002 and 2001, respectively.
Requires:
1. Compute earnings per share for 2002 and 2001.
2. Compute the price-earnings ratio for 2002 and 2001.
3. Compute the quick ratio for 2002 and 2001.
4. Compute the debt-to-equity ratio for 2002 and 2001.
5. Compute the inventory turnover ratio for 2002 only.

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