Indian Institute of Management Rohtak

Course Title : Financial Statement Analysis

Credits : 1
Type : PGP Finance Elective
Session Duration : 75 minutes
Term : IV
Year : 2020
Faculty : Dr. Narender L. Ahuja
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Course Outline

Introduction:

Financial statements, including Profit and Loss account and the Balance
Sheet, provide useful authentic information about the performance of a
business and its financial position. These financial statements are eagerly
awaited by internal and external stakeholders - including managers, equity
investors, creditors and lenders - who need to carefully analyse the
financial data provided in these statements to make economic and financial
decisions. Proficiency in analysing the financial statements is a
prerequisite for success in business and forms the core skill set required for
financial sector careers:

Course Objectives:

This course is designed to prepare students to:

 Analyse financial statements for the purpose of security valuation,
lending and credit decisions as well as for internal financial
management
 Prepare pro-forma financial statements to reflect changing business
scenarios
 Analyse business strategies to understand their impact on the firm’s
profitability

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  Write a brief report or management summary on the basis of
financial analysis performed.

Reading Material:

Prescribed Book:
Stephen H Penman, Financial Statement Analysis and Security Valuation,
McGraw-Hill

Additional Readings:

 Ahuja, NL and Dawar V, Financial Accounting and Analysis,

Taxmann Publications, 2015
 Ahuja NL, Dawar V and Arrawatia R, Corporate Finance, PHI, 2016
 Foster G, Financial Statement Analysis, Second Edition, Pearson.
 Palepu K, Healy P and Bernard V., Business Analysis & Valuation
Using Financial Statements, Third Edition. Cincinnati, Ohio: South-
Western College Publishing, 2004.
 Financial Analysts’ Journal
 Journal of Applied Corporate Finance.
 Journal of Financial Statement Analysis
[Some more readings may be prescribed during the course.]

Pedagogy
The pedagogy involves analysis of the assigned cases supported by a
discussion of the related concepts, student presentations and class
exercises.

Evaluation Scheme
End-Term Exam : 60%
Quiz : 10%
Group Project : 20%
Attendance/Class Participation : 10%

Special Instructions
Please read the prescribed material and prepare for cases well in advance
for discussion in the class. You may carry your laptop (with Excel) only
for class work. Mobile phones must remain switched off and their use in
class is strictly prohibited.

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 SESSION PLAN

Session Topics, Readings and Cases

No.
1-2 Introduction to the Financial Statements:
The Form and Contents of financial statements: The Balance
Sheet, The Income Statement, The Cash Flow Statement,
Statement of Shareholders’ Equity, Notes to the Accounts.
Users of financial statements.
Read: Chapter 2 of SP
Case: Reviewing the Financial Statements of Infosys Limited
3-4 Analysis of the Balance Sheet and Income Statement:
Comparative Analysis of Balance Sheet and Income
Statement, Common Size analysis, Trend Analysis, Ratios
Analysis. Reformulation of Balance Sheet and Income
Statement. Graphical presentation.
Read: Chapter 9 of SP
Case: Britannia Industries
5 Analysis of the Cash Flow Statement:
Reclassifying cash transactions, calculation of cash flow
from operations, financing and investing activities.
Read: Chapter 10 of SP
Case: Tirupati Engineering by Dr. NL Ahuja
6 The Analysis of Profitability:
Financing and operating activities and the effect of leverage;
Return on Assets, drivers of operating profitability.
Read: Chapter 11 of SP
Case: Maruti Suzuki versus Tata Motors
7 Analysis of Growth and Sustainable Earnings:
Analysis of changes in growth and profitability and
sustainable earnings.
Read: Chapter 12, SP
Case: Analysis of Changes in Profitability and Growth: Cisco
Systems, Inc. [M12.2]
8 Analysis of the statement of Shareholders’ Equity:
Reformulating the statement of owners’ equity, Pay-out and
retention ratios, shareholder profitability, growth ratios.
Read: Chapter 8, SP
Case: Analysis of the Equity Statement, Hidden Losses, and
Off-Balance-Sheet Liabilities: Microsoft Corporation [M8.2]
9-10 Financial Statements Analysis for Equity Valuation:
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 Use of accounting information to value a company’s equity
shares. Relative and DCF valuation. Calculation of FCFF and
FCFE.
Read: Chapter 3, SP
Case: Asian Paints Equity Valuation by Dr. NL Ahuja
11-12 Pro-Forma Financial Statements:
Forecasting financial statements on the basis of estimated
changes in sales, costs, working capital etc. Creating
Integrated Financial Statements.
Read: Chapter 15, SP
Case: Kohinoor Handicrafts by Dr. NL Ahuja
13-14 Analyzing the Financial Statements of Banks:
Distinctive features of the financial statements of banks,
drivers of profitability in banks and analysis of performance.
Read: Handout/article
Case: State bank of India: Reinventing Business by Dr. NL
Ahuja
15-16 Financial Statement Analysis for Credit Risk:
Evaluating financial position and performance for credit
decisions. Ratios analysis and credit scoring, credit scoring
models, Z-score to predict bankruptcy.
Read: Chapter 19, SP
Case: DBC Limited by Dr. NL Ahuja
17-18 Analyzing financial statements for M&A decisions:
Forecasting pre-and-post merger cash flows, revaluation of
assets and calculation of goodwill, accretive versus dilutive
EPS scenarios.
Read: Chapter 15, SP
Case: Harmony Limited by Dr. NL Ahuja
19-20 Project presentations/Miscellaneous

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