Financial Statement Analysis Assignment

Name: Prachi Das Section: A Enrolment Number: 20BSP1623

Ques 1. Explain how Financial statement analysis can be of use to a finance student in his
professional career.

Ans 1. Financial statements are the window into the corporate world. We use financial statements to
measure the profitability of companies, to figure out why companies are profitable, and why their
profits are sustainable. Equally we use financial statements to measure the financial strength of
different companies. From this, we tend to evaluate, how much equity capital there is in there, and
how much borrowing the company is doing.

We need companies to provide:

a) Balance Sheet that is complete in their assets and liabilities, and is weighing the current values
more precisely and thereby measures the opportunity cost of these assets and liabilities; and

b) Income Statement that measures income and the associated expenses for a particular period of
time comprehensively.

 Financial statements help to facilitate balance between the management and owner as to
how they interpret and make use of such statements, which we get from company’s annual
reports.
 It is useful so as to decide the Fiscal policy of the concerned company in play. It means, how
the company should work, what accounting treatment it must use, understand and evaluate
impact of different policies on the business environment, how the dividend be declared, etc.
 Analysis of financial statement is also important to evaluate and understand legality of
dividend and advise of dividend action, to understand it’s performance in the market.
 Government supervision for investment and granting of credit, also depends upon the
financial position of the concerned company, which is evaluated from financial statements
through EPS, P/E Ratio, DSO(Debt Service coverage) etc.
 Financial statement is important to get better understanding about its credibility, legality,
and thus, be able to get listed on stock exchange, because users of financial statements are
nowadays more inclined to get knowledge about the fundamental analysis of companies
listed or getting listed on stock exchange for trading and investment purposes.

Along with this, for a finance student, analysis of financial statement is important because, at young
age, they are inclined towards performing following functions:-

a) Fundamental Analysis(analysis of a business's financial statements; health; and competitors and

markets)

b) Debt Management(debt to equity, interest coverage ratio, debt service charge)

c) Trend Analysis(current weakness and overall health of the company)

d) Track and Comply(get accurate and regular information and publish financial statements quarterly
or annually)
Also, to get better position through placements that we seek of as a finance manager, finance
analyst, etc. requires conceptual clarity and practical knowledge and experience about the same at
each stage of growth.

A suitable example, I would like to share, from my SIP experience, wherein we were assigned task of
analysing financial statement of company of our choice.

I did it on GAIL India Ltd., wherein I studied and evaluated its performance on the basis of following
parameters:-

i) BOD(Board of Directors)- panel of people who are elected to represent shareholders and is
responsible for protecting shareholders' interests, establishing policies for management, oversight of
the corporation.

ii) PAT(Profit after tax)- financial performance ratio calculated by dividing net income by net sales. A
company's after-tax profit margin is significant because it shows how well a company controls its
costs. 

iii) Interim Dividend- dividend payment made before a company's annual general meeting (AGM)
and the release of final financial statements.

iv) Financial Ratios(P/E, ICR, D/E, EPS, ROCE, ROE)- quantitative method of gaining insight into a
company's liquidity, operational efficiency, and profitability by studying its financial statements such
as the balance sheet and income statement.

v) Shareholding Pattern-official disclosure requirement of companies, whereby the namesake

document details about its ownership pattern, comprising of both promoters and non-promoters.

vi) USP(Unique Selling Proposition) like its completely debt-free, providing good dividend yield of
4.3%, etc.

vii) Future growth and Prospects- like it plans to double revenues in 5 years, plans to set up charging
stations for EVs

Thus, I was able to interpret that, the financial position of Gail India Ltd. is quite stable, as it offers
long term prospectus and growth opportunities, it has 0 promoter pledge, annual net profit
improving since past 2 years, and its stock with low P/E <=10.

Hence, to evaluate the performance of a business entity, it is very important, to do such analysis, so
as to have and be able to make better financial decisions in corporate environment.