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Duration: 60

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Slides:
14
MANAGEMENT,
THAPAR

LMT SCHOOL OF
UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis


Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 21: Financial Statement Analysis

Horizontal Analysis
The tool facilitates a quick review of the current years
performance and financial position of a company over
the previous year.
Work out the increase/decrease in each line item of B/S
and P/L. Analysis includes finding out if growth in PAT is
proportionate to growth in sales, growth in total assets
is proportionate to growth in sales and likewise.
%change = ((current years figure previous years
figure)/previous years figure)*100

8/17/15

Financial Statement Analysis

8/17/15

Financial Statement Analysis

Net sales
up by
24.4%
Material,
interest
and
finance
charges
and extraordinary
expenses
grew more
than net
sales
Depreciati
on down
by 0.38%
PAT up by
10.13%
much
lower than
sales 3

Financial Statement Analysis


8/17/15

Total assets/liabilities
up by 14.36%
Net worth up by 16%
Net fixed assets up by
12.17% whereas net
sales up by 24.4%.
Efficient utilization of
fixed assets
Investments grew by
10.08% but nonoperating income only
6.22%
Inventory up by only
13.47% whereas net
sales up by 24.4%.
Efficient Inventory
Management
4

Common Size Statements (Vertical


Analysis)
The tool is useful for comparing the performance
and financial position of two companies (or two
accounting periods of same firm), either in the
same industry or in different industries. Since no
two balance sheets will have the same figures,
they cannot be compared and analysed based on
absolute figures.
For B/S each item is restated taking both the total
assets and total liabilities as 100. For P/L each
item is restated taking the Net Sales as 100.
8/17/15

Financial Statement Analysis

PBDIT is
14.27% of net
sales in 2007
vis--vis
15.88% in
2006, PAT also
down to
13.33% of net
sales in 2007
vis--vis
15.06% in 2006
Material costs
are higher in
2007 at
74.26%
8/17/15

Financial Statement Analysis

Sundry debtors
are higher in
2007 at 7.32%
of total sources
of funds vis-vis 4.77% of
total sources of
funds in 2006
Higher current
assets and
current
liabilities, but
lower net
current assets
8/17/15

Financial Statement Analysis

Trend Analysis
An extension of horizontal analysis, it
compares the performance and financial
position for more than two years.
Take the value of the base year as 100 or 1
and restate all successive years figures
accordingly. Two years comparison provide
indication of growth, several years
comparison leads to conclusive judgement.
8/17/15

Financial Statement Analysis

Consistent
rise in sales
except in the
last year
PBT growth
always much
lower than
sales growth
PAT growth
always much
lower than
sales growth
Consistent
rise in
dividend
payout
8/17/15

Financial Statement Analysis

Ratio Analysis
Return on Investment Ratios
Name of
Ratio

Formula

State
results
as

Importance

Return on
Net Worth

(PAT Preference
Dividend)*100/Avg.
Net Worth

Good overall financial


position of the company

Rs.

Good for equity valuation

Earnings per (PAT-Preference


Share
Dividend)/Avg. no.
of equity shares
outstanding

Cash
(PAT-Preference
Rs.
In case of long gestation
Earnings per Dividend+ Nonprojects and start-up
Share
cash charges)/Avg.
cases
no. of equity shares
8/17/15
10
outstandingFinancial Statement Analysis

Solvency ratios
Name of
Ratio

Formula

State
results
as

Importance

Net Asset
Value

Net Worth/no. of
equity shares
outstanding

Rs.

Efficiency in building up a
back-up of reserves and
surplus

Debt Equity

Long term debt/


Total Net worth
(Net worth +
Preference Capital)

times

Tells us whether the


company is relying more
on debt share capital for
financing

Interest
Cover

(PAT + Interest on
long term debt +
non-cash
charges)/interest
on long term debt

times

Assesses whether a
company is comfortably
placed to service its
interest obligations out of
revenues it is generating

Debt
Service
Coverage
8/17/15
Ratio

(PAT + Interest on
times
long term debt +
non-cash charges)/
(interest onFinancial
long Statement Analysis

Assesses whether a
company is comfortably
placed to service its due
outstanding long-term 11

Liquidity Ratios
Name of
Ratio

Formula

State
result
s as

Importance

Current
Ratio

(current assets + loans and


advances + short-term
investments)/(current liabilities
+ provisions + short-term debt)

times

Assesses a firms capacity to


discharge its day-to-day
activities. Generally it should
be more than 1.33

Quick
Ratio
(Acid-test
ratio)

(current assets + loans and


advances + short-term
investments - Inventories)/
(current liabilities + provisions +
short-term debt net of working
capital limits)

times

Refinement of current ratio;


generally it should be more
than 1.1

Collection
period

Account Receivables*365/Credit
Sales

days

Credit period extended by a


company to its customers

days

Credit policy extended to a


company by its suppliers

(Use total sales if credit sales are not


known)

Suppliers
credit

Account Payables*365/Credit
Purchases
(Use total Purchases if credit
purchases are not known)

8/17/15
Inventory

Financial Statementdays
Analysis
Inventory *365/COGS

12
Assesses how fast a company

Turnover Ratios
Name of
Ratio

Formula

State
result
s as

Importance

Fixed
Asset
Turnover
Ratio

Net Sales/Net block of fixed


assets
(Capital WIP is not included in
fixed assets)

times

Assesses the utilization


efficiency of the fixed assets of
a firm

Net Worth Net Sales/ Net Worth (Equity


Turnover
Capital + Reserves and Surplus
Ratio
Miscellaneous expenditure not
written off)

times

Assesses the utilization


efficiency of the equity
shareholders funds of a firm

Inventory
Turnover
Ratio

COGS/ Inventory

times

Indicates the speed at which


the merchandise moves
through a business

Name of
Ratio

Formula

State
result
s as

Importance

Gross
Profit
Margin

Gross Margin*100/Net sales

Assesses gross margin as a %


of net sales

Net8/17/15
Profit
Margin

Net Income*100/NetFinancial
sales Statement %
Analysis

Profitability Ratios

Assesses net income as a13% of


net sales

DU PONT ANALYSIS
RONW

= Net Profit Margin

(PAT Preference = (PAT Preference


Dividend)*100/Av
Dividend)*100/Net
g. Net Worth
sales

* Net Worth
Turnover
* Net Sales/ Net
Worth (Equity
Capital + Reserves
and Surplus
Miscellaneous
expenditure not
written off)

Du Pont Analysis helps in detecting whether the increase or


decrease in RONW is due to increase/decrease in Net Profit
margin or Net Worth Turnover or both.

8/17/15

Financial Statement Analysis

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