COMPANY ANALYSIS

SOURCES OF COMPANY INFORMATION

INTERNAL SOURCES OF INFORMATION
 P&L Account
 Balance Sheet
 Cash Flow
 Sales Number
 Any other Public Information

EXTERNAL SOURCES OF INFORMATION

 Dealer Check
 Buyer and Supplier Survey
 Industry Body
 Industry Journal
TYPES OF COMPANY INFORMATION

• Assets & Liabilities

• Cash
QUANTITATI • Sales
VE DATA • Profit
• Ratios

• Management Quality
• Company Strategy
QUALITATIV • Growth Drivers, Asset Quality
E DATA • R&D, USP
• Client Profile
Significance of Fin. St. Analysis
Finance Manager

Top Management

Trade Payables

Lenders

Investors

Labour Unions

Others
 Obj. of Financial Statement Analysis
Reveals important facts concerning managerial performance and weaknesses and strengths of the firm.

To make a forecast about the future prospects of the firm enabling the analysts to take decisions
regarding the operations, efficiency and further investment.

To assess the current profitability and operational efficiency of the firm as a whole as well as its
different departments so as to judge the financial health of the firm.

To identify the reasons for change in the profitability/financial position.

To judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term
liquidity position of the firm.

Economist can judge the extent of concentration of economic power and pitfalls in the financial
policies pursued.

The analysis also provides the basis for many governmental actions relating to licensing, controls,
fixing of prices, ceiling on profits, dividend freeze, tax subsidy and other concessions to the corporate
sector.
TOOLS FOR COMPANY ANALYSIS
(Analysis of Financial Statements

Comparativ Common
Trend
e Size
Analysis
Statements Statements

Ratio Cash Flow

Analysis Analysis
 Comparative Statements
(Part of Growth Analysis)
Comparative statements refer to the statement of profit and loss and the balance
sheet prepared by providing columns for the figures for both the current year as
well as for the previous year and for the changes during the year, both in absolute
and relative terms.

The financial data will be comparative only when same accounting principles
are used in preparing these statements.

It helps to find out not only the balances of accounts as on different dates and
summaries of different operational activities of different periods, but also the
extent of their increase or decrease between these dates.

The figures in the comparative statements can be used for identifying the
direction of changes and also the trends in different indicators of performance of
an organisation.

 This analysis is also known as ‘horizontal analysis’.

Comparative Statement Analysis
Common Size Statements
(Part of Growth Analysis)
 Common Size Statement, also known as Vertical Analysis, is a financial tool
for studying the key changes and trends in the financial position and
operational result of a company.

 Here, each item in the statement is stated as a percentage of the aggregate, of

which that item is a part. For example, a common size balance sheet shows the
percentage of each asset to the total assets, and that of each liability to the total
liabilities.

 Common size analysis is of immense use for comparing enterprises which

differ substantially in size as it provides an insight into the structure of
financial statements.

 Inter-firm comparison or comparison of the company’s position with the

related industry as a whole is possible with the help of common size statement
analysis. Thus, common size statements are useful, both, in intra-firm
comparisons over different years and also in making inter-firm comparisons for
the same year or for several years.
Common Size Statement Analysis
 Trend Analysis
(Part of Growth Analysis)
 The financial statements may be analysed by computing trends of series of
information. Trend analysis determines the direction upwards or downwards
and involves the computation of the percentage relationship that each item
bears to the same item in the base year.

 In case of comparative statement, an item is compared with itself in the

previous year to know whether it has increased or decreased or remained
constant. Common size analysis is to ascertain whether the proportion of an
item (say cost of revenue from operations) is increasing or decreasing in the
common base (say revenue from operations). But in case of trend analysis, we
learn about the behaviour of the same item over a given period, say, during the
last 5 years.

 Generally trend analysis is done for a reasonably long period and may point to
basic changes in the nature of business. Many companies present their financial
data for a period of 5 or 10 years in various forms in their annual reports. From
this observation, a problem is detected or the sign of good or poor management
is detected.
Trend Analysis Example
Ratio Analysis
RATIO ANALYSIS
 Ratio Analysis is one of the most important tools of company analysis.

 A Financial analyst studies the results of business operations as reflected in the

relationships among the items of balance sheet and operating statement. He asks
the following questions and tries to get the answer from the financial statements
on –

 Extent and character of the liabilities of the business.

 Net Worth of the business.
 Ability of the business to meet its obligations as and when they arise.
 Ability of the business to earn a “fair” return on its investments.
 Ability of the business to withstand possible setbacks from external and
internal forces.
 Resourcefulness and the ability of the business to raise new funds as and
when required.
Activity Liquidity Profitabilit
Ratios Ratios y Ratios

Solvency Valuation Leverage

Ratios Ratios Ratios

Segment Performanc
Ratios e Ratios
Activity ratios measure how efficiently a company performs day-to-day
tasks, such as the collection of receivables and management of inventory.
Liquidity ratios measure the company’s ability to meet its short-term
obligations and how quickly assets are converted into cash.
 Solvency/Leverage measure a company’s ability to meet long-term
obligations. Subsets of these ratios are also known as “leverage” and “long-term
debt” ratios.
 Profitability ratios measure the company’s ability to generate profits from its
resources (assets).
 Profitability ratios measure the company’s ability to generate profits from its
resources (assets).
 Valuation Ratios measure the quantity of an asset or flow (i.e., earnings)
associated with ownership of a specified claim (i.e., a share or ownership of the
enterprise). 
 Valuation Ratios measure the quantity of an asset or flow (i.e., earnings)
associated with ownership of a specified claim (i.e., a share or ownership of the
enterprise). 
Credit Ratios are important tools for analysts when doing credit analysis.
Performance Ratios are based on cash flows and gives a good sense of actual
cash generated and its utilisation.
Segment Ratios are important for segment reporting and analysing the segment
performance.
Du-Pont Analysis
 We can gain further insight into a firm’s ROE using a tool
called the DuPont Identity (named for the company that
popularized its use), which expresses the ROE in terms of the
firm’s profitability, asset efficiency, and leverage
Sector Specific Important
Ratios
Manufacturing Industry
Performance Ratios: Capacity utilization ratio, Leverage ratio, liquidity
ratio, cost of personnel, turnover days of inventory, collection period, and
payment period, fixed asset turnover ratio.

Profitability ratios: Return on equity, return on total assets, net profit

margin, and operating profit margin.

Market / valuation ratios: Book value per share, earnings per share,
diluted earnings per share, payout ratio, price earning multiplier, yield ratio.
Banking Industry
 Profitability Ratios
Net Interest Margin = (Interest Income – Interest Expense) / Total
Assets
Interest Expenses/Total Income, Non-Interest Expenses/Total Income,
Non-Interest Income/ Non-Interest Expenses, Interest Income/ Total
Assets, Interest Expenses/ Total Assets.

 Performance Ratios
Interest Expenses/Total Profit Margin, Net Profit/ Total Income
Asset Utilization = Total Income/Total Assets, Other Income/Total
Assets
Equity Multiplier = Total Assets/ Equity, Return on Assets = Net
Profit/ Total Assets, Return on Equity = Net Profit/ Equity.
Banking Industry
 Sustenance Ratios / Ratios for Financial Strength
• Efficiency Capital to Risk Weighted Assets (CRAR) = Total Capital/
(RWAs), Core CRAR = Tier I Capital / RWAs, Adjusted CRAR =
(Total Capital – Net NPAs)/(RWAs – Net NPAs).
• Liquidity Coverage Ratio = High-Quality Liquid Asset Amount / Total
Net Cash Flow Amount 
• Provision for Credit Losses Ratio = Provision for Credit Losses / Net
Loans and Acceptances

 Ratios for Efficiency

• Efficiency Ratio = Non-Interest Expense / Revenue
• Operating Leverage = Growth Rate of Revenue – Growth Rate of
Non-Interest Expense
Banking Industry

 Asset Quality
• Gross NPAs/ Gross Advances, Gross NPAs/Total Assets, Net NPAs/ Net
Advances, Net NPAs/ Total Assets,
• Provisions for loan losses/Gross Advances, Incremental RWAs/ Incremental
Total Assets, Provisions for loans and investments/Total Assets.

 Staff Productivity
• Net Total Income/ Number of Employees, Profit per Employee = Net
Profit/Number of Employees,
• Business per Employee = (Advances + Deposits)/Number of Employees,
Break-even Volume of Incremental Cost per Employee = Cost per Employee/
NIM.
Trading Companies
 Financial ratios: Current ratio, quick ratio, debt-equity ratio, interest
coverage, Working capital turnover ratio.

 Profit ratios: Net profit margin, return on investment.

 Value ratios: P/E multiplier, dividend payout ratio, Book value per share.
Service Companies
 Profitability Ratios: Operating profit ratio, Net profit Ratio, Return on
investments.

 Liquidity Ratios: Current ratio, quick ratio.

 Leverage Ratio: Debt/equity ratio.

 Value Ratios: Book value per share, earnings per share, payout ratio, price
earnings multiplier, yield ratio.
Insurance Companies
Profitability Ratios: Adjusted net profit margin, cash profit margin, gross
profit margin, operating profit margin, profit before tax margin, return on
capital employed, return on net worth.

Spread Ratios: Premium ceded /total funds, Premium income/total funds,

net premium income/total funds, net profit/total funds, other income/total
funds, operating expense/total funds, profit before provisions/total funds.

Management Efficiency Ratios: Fixed assets turnover ratio, loans

turnover ratio, asset turnover ratio, total income/capital employed.

Profit and Loss Account Ratios: Premium ceded /Premium earned, other
expense/total income, other income/ total income.
Insurance Companies
Efficiency Ratio:
Pure loss ratio [expenses (excluding losses, loss adjusting expenses
and policyholder dividends) / earned premiums] ,
Expenses ratio or Loss adjustment ratio, [expected incurred
expenses / expected written premiums ],
Dividend ratio [policyholder dividends / earned premiums ],
Combined ratio [Pure loss ratio+ Expenses ratio + dividend ratio]

Growth Ratios: Cash ratio, credit ratio, investment ratio

Liquidity and Solvency Ratios: Debt equity ratio and long term debt
equity ratio.

Balance Sheet Ratios: Advances/loan funds.

Hospitality Industry
 Profitability (Performance)
Net Profit Margin, Return on Assets, Return on Equity

 Liquidity (Financial Flexibility)

Current Ratio, Quick Ratio

 Capital Structure (Leverage)

Debt to total assets, Debt to equity Times interest earned

 Asset Management (Activity, Operating Efficiency)

Average collection period, Inventory turnover, Total asset turnover

 Market Value
Price-to-book ratio, Market to book value
Cash Flow Analysis
CASH FLOW ANALYSIS
Cash Flow Statement
 A Cash Flow Statement (also called the Statement of Cash Flows) shows how
much cash is generated and used during a given time period. The statement of
cash flows acts as a bridge between the income statement and balance sheet by
showing how money moved in and out of the business.

 The total cash provided from or used by each of the three activities is summed
to arrive at the total change in cash for the period, which is then added to the
opening cash balance to arrive at the cash flow statement’s bottom line,
the closing cash balance.

 The reason for the difference between cash and profit is because the income
statement is prepared under the accrual basis of accounting, where it matches
revenues and expenses for the accounting period, even though revenues may
actually not have yet been collected and expenses may not have yet been paid.
In contrast, the cash flow statement only recognizes cash that has actually been
received or disbursed.
Cash Flow Statement
Bharti Airtel Example
Bharti Airtel Example
Bharti Airtel Example
A good read on phase wise implementation
IndAS
https://www.business-standard.com/article/opinion/ind
as-governance-and-audit-committee-115030800747_1.
html
Accounting Policies
 Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.

 Following are Examples of accounting policies:

 Valuation of inventory using FIFO, Average Cost or other suitable basis as
per IAS 2
 Classification, presentation and measurement of financial assets and
liabilities under categories specified under IAS 32 and IAS 39 such as held to
maturity, available for sale or fair value through profit and loss
 Timing of recognition of assets, liabilities, expenses and income
 Basis of measurement of non-current assets such as historical cost and
revaluation basis
 Accruals basis of preparation of financial statements
 Changes in Accounting Policies
 Accounting Policies play a major role in changing earnings and manipulating them as well.

 Changes in Accounting Policies is not an easy thing to opt for. An entity can go for making
changes in accounting policies if and only if:
  there is a requirement of change in the whole organization and its standards.
 it shows the correct statements that contain more reliable and relevant information. They are all
related to every transaction ever made in the company so far.

 The disclosures relating to the coming up changes in accounting policies are as follows:
 the reason behind the change and the interpretation that is responsible for causing it.
 the type of nature and the changes occurring in the policies.
 a detailed description of provisions that will have necessary options for changes in the coming
time.

 The disclosures relating to the coming up voluntary changes in accounting policies are as
follows:
 change of nature in the policies.
 the reasons behind the relevant information that is easily accessible to gain more reliable details.
 adjustments that were made every time.
Impact of change in accounting policy
• Many a times written back to show higher profits. This is made
Depreciation part of other income which should be eventually deducted for
valuation purpose.
• Interest on buying assets could be capitalized till it is put to use.
Valuation of Fixed Assets Capitalizing interest expenses improves profit, increases assets
and increases deprecation gain.

Translation of Foreign • Any forex losses needs to be settled in that particular financial
Currency items year, but in case of fixed asset it can be capitalized.

• By changing inventory method and expenses attached to

Valuation of Inventories inventory.

Amortization of preliminary • No clarity as to by when they need to be written off.

expenses
• The finance charge (interest) and operation part (capital charge)
Lease Accounting both are put into P&L.

Treatment of Gratuity • It is treated on cash basis instead of accrual basis.

• Pure Research goes to P&L; Developmental research goes to

Treatment of R&D expenses balance sheet. However, there is lot of tweaking around it.
Management evaluation
History of the company and line of business
Product portfolio's strength
Market share
Intrinsic values for assets like patents and trademarks
Foreign collaboration, its need and availability for future
Quality of competition in the market, present, and future
Future business plans and projects
Market tags like index heavy weights and so on.
Enjoy Analysing!!!