FINANCIAL

ANALYSIS

What is Financial
Analysis
The process of evaluating businesses,
projects, budgets and other financerelated
entities
to
determinetheir
suitability
for
investment.
Typically,
financial analysis is used to analyze
whether an entity is stable, solvent, liquid,
or profitable enough to be invested in.

Effective Financial Statement

Analysis
Understand the nature of the industry in which
the organisation works. This is an industry factor.
Understand that the overall state of the economy
may also have an impact on the performance of
the organisation.
Financial statement analysis is more than just
crunching numbers; it involves obtaining a
broader picture of the organisation in order to
evaluate appropriately how that organisation is
performing

Statement Required for financial

Analysis

Balance Sheet
Trading and Profit & Loss Account
Cash Flow Statement
Fund Flow Statement

Relevance Of FA @ PNB
Pre Sanction Appraisal

Project Financing
Term Loan Finance
Working Capital Finance
Credit Risk Rating

Post Sanction Analysis

Credit limit Enhancement
Credit Monitoring Arrangement
Renewal of Credit Limit

The Use Of Financial

Ratios
Financial Ratio are used as a relative
measure that facilitates the evaluation of
efficiency or condition of a particular
aspect of a firm's operations and status
Ratio Analysis involves methods of
calculating and interpreting
financial
ratios in order to assess a firm's
performance and status

Financial Analysis of Sony

Advertising Services Pvt Ltd A
Brief Profile
Business Activity Advertising
Year of Establishment 1999
Nature

Existing

Proposed

Fund Based
Cash Credit (BD)

INR 90 Lacs

INR 90 Lacs

Non Fund Based

ILG

INR 22.50 Lacs

INR 22.50 Lacs

Total Commitment

INR 112.50 Lacs

INR 112.50 Lacs

Liquidity Analysis
Current Ratio
=
Current Assets/Current Liabilities
Sony Advertising

31.3.08

31.03.09

31.03.10

Current Ratio

1.40

1.33

1.12

Interpretation it indicates the firms ability to pay

liabilities out of its current assets. it shows
commitment to meet its short term liabilities.
indicates the extent of Margin of Safety or
available to the current creditors.

its current
the firms
This ratio
Cushion

Profitability Analysis
Operating Profit Ratio
=
OPBDIT/Net Sales
Sony Advertising

31.3.08

31.03.09

31.03.10

Operating profit Ratio

1.42%

2.09%

1.56%

Interpretation This ratio reflects the efficiency by which a firm

manufactures its products. It is calculated by deducting cost of
goods sold from net sales. Higher the gross profit better is the
result. Gross profit should be adequate to cover the operating
expenses and to provide for fixed charges, dividends and
accumulation of reserves. A low gross profit ratio normally
indicates high cost of goods.

Profitability Analysis
Return on Capital Employed (ROCE) =
PBIT/ Avg. Capital Employed
Sony Advertising

31.3.08

31.03.09

31.03.10

ROCE

2.92%

4.80%

3.10%

Interpretation This ratio assesses the return on earned by

both equity and debt. It indicates how well the firm utilizes its
assets base. This ratio measures the ability of the firm to
reward providers of long term fund. It measures the overall
efficiency of the firm. It again reveals how well the resources of
the firm are being used; Higher the ratio better is the results.

Profitability Analysis
Cash Profit Ratio = PBDT/Net Sales
Sony Advertising

31.03.08

31.03.09

31.03.10

Cash Profit Ratio

0.92%

0.35%

0.58%

Interpretation It indicates the cash profit generated from

total sales of the firm after deducting all cash expenses. Higher
the value of this ratio more is the security for the lenders or
creditors of the firm as more cash is available for service of
debt obligations.

Solvency Analysis
Debt-Equity Ratio = Debt/Equity
Sony Advertising

31.03.2008

31.03.2009

31.03.10

Debt Equity Ratio

0.58

0.32

0.27

Interpretation This ratio determines the soundness of

long term financial policies of the company and also
measures the relative investment proportions of outsiders
fund and shareholders fund in the company. A low ratio is
favourable from the creditors point of view because it
provides safety to creditors. A high debt equity ratio
connotes high degree of leverage which implies substantial
interest charges and substantial exposure to interest rate
movement.

Solvency Analysis
TOL/TNW =
Total Outside Liability/Tangible Net Worth
Sony Advertising

31.03.08

31.03.09

31.03.10

TOL/TNW Ratio

4.43

4.31

9.89

Interpretation This ratio indicates the level of security to

lenders and creditors of the firm as it shows that how much
owners equity is available against total outside borrowings.
Lower value of this ratio is healthy sign because it shows that
firm is more financed by owners equity and less funds are
generated from outside sources to finance the activities of the
firm.

Debt Coverage Analysis

Interest Coverage Ratio = EBITDA/Total
Interest
Sony Advertising

31.03.08

31.03.09

31.03.10

Interest Coverage Ratio

2.50

1.82

3.15

Interpretation This ratio reveals the debt servicing

capacity of the firm. It measures the adequacy of profits to
cover the interest, i.e. whether the business earns sufficient
profits so as to pay the interest charges periodically. Higher
the ratio, better for lenders and more secure their
periodical interest income.

Debt Coverage Analysis

Debt Service Coverage Ratio (DSCR)
=
EBDIA / Interest + TL Installments
Interpretation It indicates the ability of the firm to
repay the interest and installments on time. Higher the
ratio, better it is. A high debt service coverage ratio implies
better security to the lenders. DSCR is used to decide
about the quantum of debt to be issued.

Debt Coverage Analysis

Current Assets to Short Term Borrowings
= Total Current Assets/Short term bank loan
Sony Advertising

31.03.08

31.03.09

31.03.10

Total CA/ ST bank loan

18.61

9.23

8.85

Interpretation This ratio indicates that out of total current assets how
much is financed by short term bank borrowings. Higher value of this
ratio provides more security to repayment of interest and installment
of loan amount as short term liabilities can be paid by encashing
current asset.

Efficiency Analysis
Current Assets Turnover Ratio =
Net Sales/Current Assets
Sony Advertising

31.03.08

31.03.09

31.03.10

Current Assets Turnover

Ratio

2.91

2.80

1.55

Interpretation Current Assets Turnover Ratio measures the

level of current assets needed to support the current level of
sales. Since current assets are more flexible than fixed assets, it
should be maintained at relatively stable level. This ratio also
tells us that how efficiently the current assets of the firm are
utilized. Higher value of this ratio defines the efficient use of
current assets and lower value tells the inefficient use and
advices the management of the company to take appropriate
action.

Efficiency Analysis
Inventory Turnover Ratio
=
Cost of goods sold/ Average Inventory
Interpretation A high inventory turnover ratio indicates
efficient management of inventory because more
frequently the stocks are sold, the lesser amount of money
is require to finance the inventory. A low inventory turnover
ratio implies overinvestment in inventories and other
inefficiencies in inventory management.

Efficiency Analysis
Collection Period = Avg. Debtors/Avg. Daily
Sales
Sony Advertising

31.03.08

31.03.09

31.03.10

Collection Period
(months)

3.51

3.77

4.86

Interpretation It represents the average number of

days for which a firm has to wait before its receivables are
converted into cash. It also measures the quality of debtors.
Generally the shorter the average collection period the
better is the quality of debtors as a short collection period
implies quick payment by debtors. Longer the average
collection period larger are the chances of bad debts.

Efficiency Analysis
Creditors Holding Ratio =
Avg. Creditors/ Avg. Daily Cost of Sales
Sony Advertising

31.03.08

31.03.09

31.03.10

Creditors Holding period

(months)

2.45

2.50

3.83

Interpretation Creditors turnover ratio represents the

average number of days taken by the firm to pay its
creditors. Generally lower the ratio, the better is the
liquidity position of the firm and higher the ratio, less liquid
is the position of the firm. But again a higher payment
period also implies greater credit period enjoyed by the firm
which results in lower cost of funds and low working capital
requirement.

Operations Analysis
Raw Material to Cost of Production
=
Raw Material Expenses/ Cost of
Production
Interpretation This ratio indicates the proportion of raw
material out of total cost of production. Lower the value, better
the situation for the firm. This ratio can be used for comparative
analysis, through which the firm can assess about the optimum
quantity of raw material required for producing particular
quantity of finished goods. This ratio is useful for calculation of
working capital requirement of the organization.

Operations Analysis
Wages to Cost of Production
=
Wages/ Cost of Production
Interpretation This ratio indicates the proportion of
wages out of total cost of production. Lower value of this
ratio indicates the better efficiency of workers in producing
the final goods or services. Further this ratio also provides
about the appropriate number of workers required to
produce goods or services.

Operations Analysis
Cost of Goods Sold to Net Sales
=
Cost of Goods Sold/ Net Sales
Interpretation This ratio indicates the cost of goods
sold with respect to sales of the firm. Higher the percentage
lesser is the profitability. Where lower percentage defines
the efficient management of resources of the firm. Higher
cost of goods sold also affects the firms ability to repay its
interest and installment amount of debt.

Limitations of Financial
Analysis
Financial
Analysis
is
retrospective,
not
prospective
examination
It is based on accounting data not on economic data
Financial Analysis does not capture significant off balance
sheet items
Ratios can be manipulated through acceptable alteration in
accounting policies
Quality of Data
Financial Statements reflect historical cost not necessarily
current economic cost
Do not incorporate opportunity cost or risk
Ignore cost of capital investments required to generate
earnings
Difficult to compare with other opportunities when used in
isolation
May be affected by financing decisions

Cash Flow Statements

Cash flow is the movement of cash into or out of a business, project, or
financial product. It is usually measured during a specified, finite period of
time. Measurement of cash flow can be used for calculating other
parameters that give information on a company's value and situation.
-Calculation of DSCR;
-IRR/ NPV Calculation;
-Segmentation of Cost & Income.

Preparation of the Statement of Cash Flows

As a first step in learning to prepare the statement of cash flows, you need to
understand that
Cash is generated by reductions in assets or increases in liabilities.
Collection of accounts receivable increase cash and reduce receivables, an
asset, and
Increases in a bank loan increases cash and liabilities
Cash is used to increase assets or to pay liabilities
Cash is reduced to purchase fixed assets
Cash is also reduced for Debt repayment

The statement of cash flows is divided into three sections:

Net cash from Operations - cash inflows and outflows

relating to the firms normal business activities (i.e., cash
operating profit and new cash flows from current assets and
current liabilities)
Net cash from Investing activities - purchases and sales of
long-term assets and marketable securities
Net cash from Financing activities - changes in long-term
debt and equity, and the payment of dividends
Notice that the statement of cash flows combines both the income statement
and the balance sheet. The sum of the three sections, therefore, yields the net
change in cash for the period.
There is always a built in check on the accuracy of the statement. Net cash flow
plus the beginning balance in cash (last years ending balance) will always
equal the ending balance in cash this year.

The first section of the statement, net cash from operations, begins with net income
and adjusts reported profit for depreciation and gains and losses on sales of assets.

Next, cash generated from changes in current assets and current liabilities is added. The
sum of all of these items is the net cash flows from operating activities, as follows:

Net Income
+ Depreciation
- Gains (+Losses) on asset sales
Changes in Current Assets and Liabilities

= Net Cash Flows from Operating Activities

The next section is the net cash flow from investing activities.

In this section, we are concerned with changes in the long-term portion of

the asset section of the balance sheet: property, plant and equipment, and
other long-term investments.

As with previous changes in balance sheet accounts, increases in

these assets are recorded as cash outflows and decreases are
recorded as cash inflows.

The last section deals with net cash flows from financing activities.

These include changes in long-term debt, sales and repurchases of

stock, and dividends.

Increases in liabilities and equity are recorded as cash inflows and

decreases as cash outflows. Dividends are also reflected as a cash
outflow.

So, we have included the income statement through net income and
the associated adjustments for non-cash expenses or gains and
losses.
And we have included all of the balance sheet accounts:

Used for net cash flow from operations

Current assets

Current Liabilities

Long-term Assets

Long-Term Liabilities
Stockholders Equity

Used for net cash flow from financing activities

Used for net cash flow from investing activities

1998

1999

Change

Assets

Sales
Expenses:
Cost of Goods sold
Salaries expense
Depreciation Expense
Loss on sale of fixed assets
Net income

Cash

25,500

4,400

21,100

Accounts Receivable

59,000

35,000

24,000

Inventories

30,000

50,000

20,000

Fixed Assets

165,000

180,000

15,000

Accumulated Depreciation

(61,900)

(80,400)

18,500

Note:

Fixed Assets (net)

103,100

99,600

3,500

Total Assets

217,600

189,000

28,600

Fixed assets originally costing Rs35,000

with Accumulated Depreciation of
Rs.5,000 were sold for Rs.25,000

185,500
87,500
56,000
23,500
5,000
13,500

Dividends declared and paid during the

year were Rs.10,000

Liabilities
Accounts Payable

62,600

40,500

22,100

Bonds Payable (long-term)

50,000

40,000

10,000

Common Stock

100,000

100,000

Retained Earnings

5,000

8,500

3,500

Total Liabilities and Equity

217,600

189,000

28,600

Equity

Try to compute the statement

of cash flows yourself before
looking at the solution

Net income
Depreciation
Loss on sale
Accounts Receivable
Inventory
Accounts Payable
Net cash from operations

13500
23500
5000
24000

We start with net income

Cash from Operating Activities

(20000)
(22100)
23900

Sale of fixed assets

Purchase of fixed assets
Net cash flow investing

25000
(50000)
(25,000)

Adjustments related to investing

activities

Bonds
Dividends
Net cash flow financing

(10000)
(10000)
(20000)

Adjustments related to Financing

Activites

Net change in cash

Beginning cash
Ending cash

(21100)
25500
4400

Case @ MCB, Delhi

Rescheduling of TDI Infra. LTD , Amendment in terms and conditions of

sanction for TL Rs 40 Cr

Existing Stipulation

Proposed Amendment

Repayment Schedule

24 Equal Monthly
Installments wef Oct,
2009 and ending in
Sept 2011

60 Balooing monthly
installments wef April
2011 and ending in
March 2016

ROI

BPLR+1.25%+.50 Term To increase ROI to

Premium (12.75%)
BPLR+2%+.50% TP
(13.50%)

Based on the assumptions and the anticipated sales of the project, the
company has projected cash flow during the project period.
The relevance lies in calculating DSCR over period of repayment
Note:- In case of any shortfall, the co. will be in a position to bring the funds
from the own sources.

Limitations of Financial
Analysis
Financial Analysis is retrospective, not prospective
examination
It is based on accounting data not on economic data
Financial Analysis does not capture significant off
balance sheet items

Ratios can be manipulated through acceptable

alteration in accounting policies
Quality of Data
Financial Statements reflect historical cost not
necessarily current economic cost
Do not incorporate opportunity cost or risk
Ignore cost of capital investments required to generate
earnings
Difficult to compare with other opportunities when used
in isolation

Thank You

Presented By
Ajay Kumar Yadav
Gaurav Gahlot
Saurav Bamania
Varun Singhal
Vishal Prasad