ASSIGNMENT

ON
FINANCIAL STATEMENT ANALYSIS

Submitted By,
Name: Shafi Al Mehedi
Student ID: 1710236139
Session: 2016/2017
Course No: Fin-302
Course Name: Financial Statement Analysis

Submitted To,
Associate Professor,
Dr. Md Atiqur Rahman Khan
Department Of Finance
University Of Rajshahi
Question: How The Financial statement analysis can contributes towards the
identification of the business performance?

Answer:
Financial statement analysis means assessing a company by examining the financial
statements of a company. A financial performance report is a summary of financial
performance of a company that reports the financial health of a company helping various
investors and stakeholders take their investment decision.

Business performance of a company is measured through various techniques by

quantifying the financial health of that company for a specific time period. There are a lot
of tools available to analyze business performance and generate informative reports about
a business firm.

To measure business performance of a firm, we need to track relevant business metrics,

also known as key performance indicators (KPI). There are some indicators through
which we can learn about the performance of a business firm. Now we are discussing
about those indicators.

Getting latest financial statements. Assessing the company's balance sheet. The
percentage of total assets is financed by debt as opposed to stockholder equity and
retained earnings. The higher the ratio of debt/equity, the greater the risk. Looking at the
organization's monetary record. Testing the organization's capacity to bring money up in
excess of its present obligations by subtracting current liabilities from current assets for
infer working capital. A healthy working capital ratio means the company is generating
cash from business activities to fund current operations. Performing a profitability
analysis by calculating profit margin, measure the return on assets (ROA) and the return
on equity (ROE). Comparing the results of the company's evaluation with data from
similar companies. Calculating the ratios. There are quite a few ratios that determine in
financial terms how a company is performing. The most commonly used ratio is earnings
per share and diluted earnings per share. Two other important statistics are sales per
revenue and fixed asset turnover. The ratio signifies how well the company is converting
fixed assets into net revenue. Calculating the leverage and the profitability of the
company. The total debt to equity and debt to assets will signify the overall assets of the
company, what the liabilities are, and the company’s ability to pay off the debt. Higher
return means better performance of the firm. Judging the overall perspective of the
company and growth potential. As the long-term plans and future of the company decide
how the company will do. Profits and revenue will also depend on the growth of the
company. Ratio analysis is a very important tool to quantitatively understand a business's
performance which requires information from the company's financial statements.

Liquidity Ratios
It indicates the ability of a company to turn its assets into cash. They include current
ratios, quick ratios and leverage ratios.
Current Ratio = Total Current Assets/Total Current Liabilities
Quick Ratio = (Cash + Government Securities + Receivables)/Total Current Liabilities
Leverage Ratio = Total Liabilities/Net Worth

Income Statement Ratios

Income statement ratios measure profitability.
Gross Profit = Net Sales – Cost of Goods Sold
Gross Margin Ratio = Gross Profit/Net Sales
Net Profit Margin Ratio = Net Profit Before Tax/Net Sales

Management Ratios
These ratios are derived from information in both the balance sheet and the income
statement. The inventory turnover ratio reveals how well inventory is being managed.
Inventory Turnover Ratio = Net Sales/Average Inventory at Cost

The accounts/receivable turnover ratio indicates how well receivables are being collected.
A/R Turnover Ratio = Accounts Receivable/(Annual Net Credit Sales/365)

The return on assets (ROA) ratio measures how efficiently assets are being used.
ROA = Net Profit Before Tax/Total Assets

The return on investment (ROI) ratio reflects the return received on funds invested in the
business. ROI = Net Profit Before Tax/Net Worth

Cash Flow Ratios

These ratios tend to be favored more by analysts than auditors. They are used to evaluate
risk and can provide a more accurate determination of a company to satisfy its current
and future obligations.
Operating cash flow (OFC) is the company's ability to generate resources to meet current
liabilities. OCF = Cash Flow From Operations/Current Liabilities

Companies use financial-performance tools to determine whether operating strategies are

working. Corporate leadership relies on them to project financial success and cushion the
effect of flaws in previously issued operating forecasts. By comparing prior data with
current information, management can detect errors and adjust present-period performance
data based on economic conditions and the competitive landscape. Financial tools include
accounting reports and performance metrics.
Pro Forma Statements
Investors who doubt a firm's ability to access capital markets often review the company's
pro forma statements.

Budgets
Company can analyze the financial performance of each business unit and single out
processes generating mediocre numbers.
Balance Sheets
By analyzing a balance sheet, investors can calculate a company's assets and compare
them to its liabilities.

Efficiency Metrics
Business-unit chiefs rely on efficiency metrics to determine whether their strategies are
bearing fruit, comparing operating blueprints to rivals.

Income statements
Income statement components include revenues and expenses.

Profitability Metrics
These metrics show net profits and the consistency with which businesses generate these
earnings.

Statements of Cash Flows

A statement of cash flows is an effective tool to gauge a company's liquidity movements
over a specific period, such as a quarter or fiscal quarter.

Liquidity Indicators
Company principals use liquidity ratios to anticipate the funding needs of business units
and operating segments.

Safety Ratios
Safety indicators are key barometers in debt management. Companies use them to
understand how operating activities may fare under worst- and best-case scenarios.

These are the indicators of measurement of business performance of a firm. And we are
able to know about these components through financial statement analysis. Without
analyzing the financial statement these data can’t be collected and calculated, so the
performance of business also can’t be measured. So by analyzing the financial statement
we can identify and evaluate the business performance.
Math solve:
201 201 Solution A:
4 5
sales 122 128 ROCE=comprehensive
57 67 income/average common equity

operating 858 772 ROCE(2014) 22.89%

income(after
tax)
net financial 56 98
expense (after
tax)
comprehensive 802 674 ROCE(2015) 31.36%
income

average net 490 494 RNOA=operating income/average

operating assets 3 9 net operating assets
average 350 214
common equity 3 9
RNOA(2014) 17.50%

RNOA(2015) 15.6%

NBC=net financial expense/net

financial obligation

NFO=average net operating assets-

average common stock equity

NFO(2014) 1400
NFO(2015) 2800

NBC(2014) 4.0%
NBC(2015) 3.5%

Solution: B

profit margin=operating
income/sales
PM(2014) 7.0%
PM(2015) 6.0%

Δ core PM1 -1.0%

ATO=sales/average net operating

assets

ATO(2014) 2.4998980
22
ATO(2015) 2.5999191
76

Δ ATO1 0.1000211
54

financial leverage=net financial

obligations/average common equity

FLEV(2014) 0.3996574
36
FLEV(2015) 1.3029315
96

Δ FLEV 0.9032741
6

change in ROCE= Δ RNOA+( Δ

SPEAD*FLEV0)+(SPEAD1* Δ
FLEV1)

Δ RNOA=( Δ core
PM1*ATO0)*(ATO1*core PM1)

Δ core PM1 -1.0%

Δ RNOA -1.9%

SPEAD=RNOA-NBC

SPEAD(2014) 13.50%
SPEAD(2015) 12.10%
Δ SPEAD -1.4%
Δ ROCE 8.45%