Hema Krishnamurthy

Essentials
Viewpoint or Perspective - Creditor, Investor,

Management
Objective of Analysis Standards or Yardstick for comparison

Information Sources
Annual reports – Directors’ Report, Auditors’ report,

Management Discussion and Analysis, Balance Sheet, Profit and Loss Account, Schedules, Notes to Accounts

Some of the following provide comparative

statistical ratios:

Dun and Bradstreet Information Services – (

www.dnb.com) Standard and Poor ‘s Rating handbook and industry surveys ( www.standard poor.com)

Information Sources (cont)
Gale Research Inc.- Manufacturing USA

Industry analysis ICRA CRISIL www. valueline.com www.investor.reuters.com

Tools and Techniques
Common size financial statements Ratio analysis Trend analysis Fund flow and cash flow analysis

Ratios
Liquidity Ratios - Short term solvency

- Current Ratio - Current assets/ Current Liabilities - Acid Test Ratio (Quick Ratio) – (Current assets-Inventories)/Current Liabilities - Average Collection Period – Average Receivables/ Average per day sales - Inventory Holding Period – Average Inventory/Av. COS per day

Ratios(Cont)
Turnover or Activity Ratios : Asset

management efficiency
- Sundry Debtors (Accounts receivable) T.ONet Sales/ Net Sundry debtors Inventory T.OCost of Goods Sold/Inventory Sundry Creditors(Accounts Payable )T.O – Cost of Goods Sold/ Sundry creditors Fixed Assets T.O - Net Sales/ Net Fixed assets Total Assets T.O – Net Sales /Total assets

Ratios(Cont)
Leverage Ratios : Debt Financing and Coverage

- Debt Ratio – Total Liabilities/ Total assets - Debt-Equity – Total liabilities/Shareholders’ funds - Long term Debt-Equity – Long term Debt/ Shareholders’ funds - Interest Cover – EBIT/Interest - DSCR – (PAT +interest+Depn) /(Interest + installment due)

Ratios(Cont)
Profitability Ratios: Overall efficiency and

Performance

- Gross Profit Margin – Gross Profit/Net Sales - Net Profit Margin – PAT/Net Sales - Operating profit margin – EBIT/Sales - Operating Cash Profit Margin – EBITDA/Sales - Return on Assets(ROA) – PAT/Total assets - Return on Investment(ROI)(pre-tax)-

EBITDA/Total assets - Return on Equity- PAT/Shareholders funds

Ratios (Cont)
Valuation , Market Ratios:

- Earnings per Share (EPS)– PAT/No. of Equity shares - Price earnings (P/E) – Market price/EPS - Yield – (Dividend + price change)/Price paid per share - Dividend pay out – Dividend paid/PAT

Relating the ratios – The Du Pont System
ROE = Net Profit Margin x Total assets TO x Financial leverage ROE = Net Profit/Sales x Sales/Total assets x Total assets/Shareholders’ funds

Steps for FS Analysis
1. Establish objectives of analysis 2. Study the industry in which the Company

operates and relate industry climate to current and projected economic developments 3. Develop knowledge of the Company and the management 4. Evaluate the financial statements

Tools – Common size statements, key ratios, trend analysis, comparison with industry competitors Major areas – Liquidity, operating efficiency,

Steps for FS Analysis(Cont)

Profitability, long term solvency, capital structure, market ratios, segmental analysis(when relevant), and quality of financial reporting

 Summarize findings based on analysis and

reach conclusions about firm relevant to the established objectives

Some typical questions on financial statements
What parameters should I focus on, to improve the financial

performance We know we are making profits but the finance dept. is constantly complaining that there is no cash I have growth targets to achieve but my finance dept. talks about cost reduction; How can I do both? How are accounts “cooked”? Months in which my unit builds up stocks we seem to be making profits and when we sell my accountants report losses!

Some typical questions on financial statements (Cont)
How come our prices are so way off from the

competitors’ My business gets a step-motherly treatment from my management My business seems to be subsidizing other SBUs..

Measuring Strategic financial Themes
STRATEGIC THEMES REVENUE GROWTH COST & MIX REDUCTION /PRODUCTIVITY IMPROVEMENT GROWTH PHASE • SALES GROWTH REVENUE/ RATE BY SEGMENT EMPLOYEE •REVENUE % FROM NEW PRODUCTS, SERVICES, CUSTOMERS ASSET UTILISATION

INVESTMENT (% OF SALES); ASSET T.O. RATIOS R&D (% OF SALES)

Measuring Strategic financial Themes
STRATEGIC THEMES REVENUE GROWTH & MIX COST REDUCTION /PRODUCTIVITY IMPROVEMENT SUSTANANCE PHASE •SHARE OF TARGETED CUSTOMERS AND ACCOUNTS •CROSS SELLING ASSET UTILISATION

•% REVENUE FROM NEW PRODUCTS/APPLICATION •INDIRECT S EXPENSES (% OF SALES) •CUSTOMER AND PRODUCT LINE PROFITABILITY

•COST •WORKING COMPARISON WITH CAPITAL RATIOS COMPETITORS •ROCE BY KEY •COST REDUCTION ASSETS RATES CATEGORY •ASSET UTILISATION RATES

Measuring Strategic financial Themes
STRATEGIC THEMES REVENUE GROWTH & MIX COST REDUCTION /PRODUCTIVITY IMPROVEMENT ASSET UTILISATION

HARVEST PHASE CUSTOMER AND UNIT COSTS (PER PAY BACK PRODUCT LINE UNIT OF OUTPUT, PROFITABILITY PER THROUGHPUT TRANSACTION) PERCENTAGE OF UNPROFITABLE CUSTOMERS