You are on page 1of 64

# 1

Presented to
Sir
2
Group members ROLL NO
 SHABNUM NAZ
36
 MOIN MUGHAL 15
 AMIR TEHSEEN
01
 HAFIZ MUHAMMAD MOIN
12
32
 ZEESHAN BHUTTA
16
3
MOIN MUGHAL
ROLL NO - 15
4
Financial
Statements and
ratio Analysis
5
Ratio analysis
 Ratio analysis is the broad method by which
financial data is converted into simple mathematic
ratios for comparison.
 Ratio analysis is a tool brought into play by
individuals to carry out an evaluative analysis of
information in the financial statements of a
company. These ratios are calculated from current
year figures and then compared to past years,
other companies, the industry, and also the
company to assess the performance of the
company.

6
Ratio Analysis
 Ratio Analysis is a form of Financial Statement
Analysis that is used to obtain a quick indication of
a firm's financial performance in several key areas.
 Financial ratio analysis involves calculating certain
standardized relationship between figures
appearing in the financial statements and then
using those relationships called ratios to analyze
the business' financial position and financial
performance.

7
Types of Ratio Comparison:

 Cross-sectional Analysis:

 Time Series Analysis:

 Combine Analysis:

8
Cross-sectional Analysis:

 The analysis of a financial ratio of a company with
the same ratio of different companies in the same
industry. For example, one may conduct a cross-
sectional ratio analysis of the debt ratios of multiple
companies in the telecommunications industry.
Quite simply, one does this by taking the debt
ratios of each company and comparing them to
one another. An analyst does this in order to find
the company with healthiest financial status. This is
helpful in making informed investment decisions.

9
Time Series Analysis:

 Time-series analysis is the evaluation of the firm’s
financial performance over time using financial
ratio analysis
 Comparison of current to past performance, using
ratios, enables analysts to assess the firm’s
progress.
 Developing trends can be seen by using multiyear
comparisons.
 The most informative approach to ratio analysis
combines cross-sectional and time-series
analyses.
10
Combine Analysis:

 Combine both ratios i.e: The cross
sectional ratio analysis and time series
ratio analysis.

11
SHABNAM NAZ
ROLL NO - 36
12
Benefits of Ratio Analysis

 The ratio analysis forms an essential part of the
financial analysis which is a vital part of business
planning. The key benefits of ratio analysis include:
 Determines profitability
 Ratio analysis assists managers to work out the
production of the company by figuring the
profitability ratios. Also, the management can
evaluate their revenues to check if their
productivity. Thus, probability ratios are helpful to
the company in appraising its performance based
on current earning.
13
Helpful in evaluating solvency

 By computing the solvency ratio, the
companies are able to keep an eye on the
correlation between the assets and the
liabilities. If, in any case, the liabilities
exceed the assets, the company is able to
know its financial position. This is helpful in
case they wish to set up a plan for loan
repayment
14
Better financial analysis

 Ratio analysis is also helpful to
recluses, in addition to shareholders,
debenture holders, and creditors.
Besides, bankers are also able to
know the profitability of the company
to find out whether they are able to
pay the dividend and interests under a
specific period
15
Performance analysis

 Ratio analysis is also helpful in
analyzing the performance of a
company. Through financial analysis,
companies can review their
performance in the past years. This is
also helpful in identifying their
weaknesses and improving on them.

16
Forecasting

 At present, many companies use ratio
analysis to reveal the trends in
production. This provides them an
opportunity for estimation of future
trends and thus the foundation for
budget planning so as to determine
the course of action for the growth and
development of the business.

17
AMIR TEHSEEN
ROLL NO - 01
18
Types of ratio
Liquidity
ratio
Activity
ratio
Debt ratio
Profitability
ratio
Market
ratio
19
Liquidity Ratios

 Liquidity is the ability of a business to
pay its current liabilities using its
current assets. Information about
liquidity of a company is relevant to its
creditors, employees, banks, etc.
current ratio, quick ratio, cash ratio
and cash conversion cycle are key
measures of liquidity

20
Debt Ratio

 A measure of a company's total debt
to its total assets. A ratio less than one
means that a company has more
assets than debt, while a ratio of more
than one means the opposite. A debt
ratio is a measure of how risky it
would be for a bank to extend a loan
to a company, with a higher ratio
indicating great risk.

21
Profitability Ratios

 Profitability is the ability of a business to
earn profit for its owners. While liquidity
ratios and solvency ratios are relationships
that explain the financial position of a
business profitability ratios are relationships
that explain the financial performance of a
business. Key profitability ratios include net
profit margin, gross profit margin, operating
profit margin, return on assets, return on
capital, return on equity, etc.

22
Activity ratios
Activity ratios explain the level of
efficiency of a business. Key activity
ratios include inventory turnover, days
sales in inventory, accounts receivable
turnover, days sales in receivables, etc.
 Performance ratios include cash flows
to revenue ratio, cash flows per share
ratio, cash return on assets, etc. and
they aim at determining the quality of
earnings.

23
Market Ratios

 When a stock analyst wants to
understand how other investors value
a company, they look at market ratios.
These measures all have one factor in
common; they're evaluating the
current market price of a share of
common stock versus an indicator of
the company's ability to generate
profits or assets held by the company.

24
HAFIZ MOIN-UL-AZIZ
ROLL NO - 12
25
Income Statement
2010 2011E
Sales \$5,834,400 \$7,035,600
COGS 4,980,000 5,800,000
Other expenses 720,000 612,960
Deprec. 116,960 120,000
Tot. op. costs 5,816,960 6,532,960
EBIT 17,440 502,640
Int. expense 176,000 80,000
EBT (158,560) 422,640
Taxes (40%) (63,424) 169,056
Net income (\$ 95,136) \$ 253,584
26
Balance Sheets: Assets
2010 2011E
Cash \$ 7,282 \$ 14,000
S-T invest. 20,000 71,632
AR 632,160 878,000
Inventories 1,287,360 1,716,480
Total CA 1,946,802 2,680,112
Net FA 939,790 836,840
Total assets \$2,886,592 \$3,516,952
27
Balance Sheets: Liabilities &
Equity
2010 2011E
Accts. payable \$ 324,000 \$ 359,800
Notes payable 720,000 300,000
Accruals 284,960 380,000
Total CL 1,328,960 1,039,800
Long-term debt 1,000,000 500,000
Common stock 460,000 1,680,936
Ret. earnings 97,632 296,216
Total equity 557,632 1,977,152
Total L&E \$2,886,592 \$3,516,952
28
Other Data
2010 2011E
Stock price \$6.00 \$12.17
# of shares 100,000 250,000
Earning per share -\$0.95 \$1.01
Dividend per
share \$0.11 \$0.22
Book val. per sh. \$5.58 \$7.91
Lease payments \$40,000 \$40,000
Tax rate 0.4 0.4
29
Liquidity Ratios
30
Liquidity Ratios
 Can the company meet its short-term
obligations using the resources it
currently has on hand?
 Current ratio =

31
Current assets
Current liabilities

Forecasted Current and Quick
Ratios for 2011.
32
CR = = = 2.58.
QR =
= = 0.93.
CA
CL
\$2,680
\$1,040
\$2,680 - \$1,716
\$1,040
CA - Inv.
CL
Comments on CR and QR
2011E 2010 2009 Ind.
CR 2.58 1.46 2.3 2.7
QR 0.93 0.5 0.8 1.0
 Expected to improve but still below the
industry average.
 Liquidity position is weak.
33
Activity ratio
34
Asset Management Ratios
 How efficiently does the firm use its
assets?
 How much does the firm have tied up
in assets for each of sales?
35
Inventory Turnover Ratio vs.
Industry Average
36
Inv. turnover =

= = 4.10.
Sales
Inventories
\$7,036
\$1,716
2011E 2010 2009 Ind.
Inv. T. 4.1 4.5 4.8 6.1
Turnover
 Inventory turnover is below industry
average.
 Firm might have old inventory, or its
control might be poor.
 No improvement is currently
forecasted.
37
ACP: average number of days
from sale until cash received.
38
ACP =

= =

= 45.5 days.
Receivables
Average sales per day
\$878
\$7,036/365
Receivables
Sales/365
Appraisal of ACP
 Firm collects too slowly, and situation
is getting worse.
 Poor credit policy.

39
2011 2010 2009 Ind.
ACP 45.5 39.5 37.4 32.0
Fixed Assets and Total Assets
Turnover Ratios
40
Total assets
turnover
=

= = 2.00.
Sales
Total assets
\$7,036
\$3,517
Fixed assets
turnover
Sales
Net fixed assets
=

= = 8.41.
\$7,036
\$837
(More…)

Fixed Assets and Total Assets
Turnover Ratios
 FA turnover is expected to exceed industry average.
Good.
 TA turnover not up to industry average. Caused by
excessive current assets (A/R and inventory).
2011E 2010 2009 Ind.
FA TO 8.4 6.2 10.0 7.0
TA TO 2.0 2.0 2.3 2.5
41
M.ARSALAN
ROLL NO - 32
42
Debt Ratios
43
Debt Management Ratios
 Does the company have too much
debt?
 Can the company’s earnings meet its
debt servicing requirements?
44
Calculate the debt, TIE, and
EBITDA coverage ratios.
45
Total liabilities
Total assets
Debt ratio =

= = 43.8%.
\$1,040 + \$500
\$3,517
EBIT
Int. expense
Time int ER =

= = 6.3.
\$502.6
\$80 (More…)
EBITDA Coverage
46

= = 5.5.
EBIT + Depr. & Amort. + Lease payments
Interest Lease
expense pmt.
+ + Loan pmt.
\$502.6 + \$120 + \$40
\$80 + \$40 + \$0
Debt Management Ratios vs.
Industry Averages
47
2011E 2010 2009 Ind.
D/A 43.8% 80.7% 54.8% 50.0%
TIE 6.3 0.1 3.3 6.2

Profitability Ratios
48
Profitability Ratios
 What is the company’s rate of return
on:
◦ Sales?
◦ Assets?
49
Profit Margins
50
PM = = = 3.6%.
NI
Sales
\$253.6
\$7,036
OM = = = 7.1%.
EBIT
Sales
\$503
\$7,036
Net profit margin (PM):
Operating profit margin (OM):
(More…)
Profit Margins (Continued)
51
Sales − COGS
Sales
GPM = =
GPM = = 17.6%.
\$1,236
\$7,036
Gross profit margin (GPM):
\$7,036 − \$5,800
\$7,036
Profit Margins vs. Industry
Averages
52
Very bad in 2010, but projected to
meet or exceed industry average in
2011.
2011E 2010 2009 Ind.
PM 3.6% -1.6% 2.6% 3.6%
OPM 7.1 0.3 6.1 7.1
GPM 17.6 14.6 16.6 15.5
Return on Assets (ROA)
and Return on Equity (ROE)
53
ROA =

= = 7.2%.
NI
Total assets
\$253.6
\$3,517
(More…)
Return on Assets (ROA)
and Return on Equity (ROE)
54
ROE =

= = 12.8%.
NI
Total Equity
\$253.6
\$1,977
(More…)
ROA and ROE vs. Industry
Averages
55
2011E 2010 2009 Ind.
ROA 7.2% -3.3% 6.0% 9.0%
ROE 12.8% -17.1% 13.3% 18.0%
Both below average but improving.
ZEESHAN
ROLL NO - 16
56
Market Value
Ratios
57
Market Based Ratios
(Continued)
58
Com. equity
Shares out.
BVPS =

= = \$7.91.
\$1,977
250
Mkt. price per share
Book value per share
M/B =

= = 1.54.
\$12.17
\$7.91
Explain the Du Pont System
 The Du Pont system focuses on:
◦ Expense control (PM)
◦ Asset utilization (TATO)
◦ Debt utilization (EM)
 It shows how these factors combine to
determine the ROE.
59
The Du Pont System
60
( )( )( ) = ROE

Profit
margin
TA
turnover
Equity
multiplier
NI
Sales
Sales
TA
TA
CE
x x
= ROE
The Du Pont System
61
2010: -1.6% x 2.0 x 5.2 = -16.6%
2011: 3.6% x 2.0 x 1.8 = 13.0%
Ind.: 3.6% x 2.5 x 2.0 = 18.0%
NI
Sales
Sales
TA
TA
CE
x x
= ROE
Potential Problems and
Limitations of Ratio Analysis
 Comparison with industry averages is
difficult if the firm operates many
different divisions.
 Seasonal factors can distort ratios.
 Window dressing techniques can
make statements and ratios look
better.
 Different accounting and operating
practices can distort comparisons.
62
Qualitative Factors
 There is greater risk if:
◦ revenues tied to a single
customer
◦ revenues tied to a single product
◦ reliance on a single supplier?
◦ High percentage of business is
generated overseas?

63

64