Financial

Analysis
PARVESH AGHI
Financial Statements
Cash
Income
Balance flow
statemen
sheet statemen
t
Owner’s Sales t
Cash inflows*
equity
(Cost of sales)
(Cash
Assets = Gross profit
Outflows )
(Other
Expenses)
Net cash
Liabilities
=Net Profit movement

*Operating Cash Flow / Cash From Investing/  Cash From Financing

2
Income Statement

3 8/29/22
The Income Statement 

The income statement measures a

company's performance over a specific time
frame.

The income statement presents information

about revenues, expenses and profit that
was generated as a result of the business'
operations for that period

4
 PROFIT AND LOSS ACCOUNT Amount
Rs
A
Typical Profit and loss account
Sales 10,000

B Cost of sales ( OS + Purchases –Closing stock) 4,000

C Gross profit (A-B) 6,000

Operating expenses
(1) Selling and Marketing expenses 500
(2) Administrative expenses 1,000
D Total operating expenses 1,500
E EBIDTA (C- D) . 4,500
F Depreciation and Amortization. 1,000
G EBIT (Operating Profit). 3,500
5
 PROFIT AND LOSS ACCOUNT Amount Rs
Profit and loss account ( CONTD)
H Financial charges ( Interest, etc) 1,000

H EBT ( Earning Before Tax) 2,500

I Tax 30% 750

J PAT ( Profit After Tax) or Net Income 1,750

6
 PROFIT AND LOSS ACCOUNT FOR THE YEAR Amount
ENDING (CONT)
Profit and loss account ( CONTD)
K Preference Dividends 750

L Profit for equity shareholders (J-K) 1,000

M No of equity shareholders 200

N Earning per share (EPS) L /M 5

7
Amortization .
Amortization is similar to depreciation,
which is used for intangible assets, and to
depletion, which is used with natural
resources.

The spreading out of capital expenses for

intangible assets over a specific period of
time (usually over the asset's useful life) for
accounting and tax purposes. 

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INTANGIBLE ASSETS.

Patents Copyrights Trademarks

Intellectual Franchise Business

Property rights Licenses

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 EBIDTA .

1 Earnings Before Interest, Taxes, Depreciation and Amortization. This figure

measures a company's annual earnings before the subtraction of interest payments,
taxes, depreciation, and amortization.

2 Cash profits that the business from its operating activity

3 EBITDA is as a comparison measure when you are looking at a business’
performance compared to its industry peers.
4 What that enables you to do is to compare one business with another but without
the effects of;
Different capital and funding structures
Different tax environments
Different capex policies
5 EBIDTA Margin = EBIDTA/ Net Sales
10
TATA MOTORS Net Revenue & EBIDTA Margin.

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AIRTEL : EBIDTA (US$bn) & EBIDTA margin.

40%
34% 32%
32%

12
HLL Ltd : EBIDTA

13
 EBIT
1 Earnings Before Interest & Taxes. This figure measures a company's annual
earnings before the subtraction of interest payments & taxes.

2 EBIT is also referred to as "operating earnings”

3 EBIT, is a good gauge of how well a company is being managed. It is watched closely by all
stakeholders, because it measures both overall demand for the company’s products or
services (sales) and the company’s efficiency in delivering those products or services (costs).

4 EBIT Margin = EBIT / Net Sales

14
EBIT Margin : Tata Steel.

15
 CAPITAL STRUCTURE
The capital structure is how a firm finances its overall operations and growth
by using different sources of funds.

Debt comes in the form of bond issues or long-term loans from banks/ FI’s,
while equity is classified as Ordinary shares, preference shares or retained
earnings.

Capital Employed = Equity + Loans

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Return on Capital Employed
The return on capital employed is a better measurement
than return on equity, because ROCE shows how well a
company is using both its equity and debt to generate a return.

ROCE % = Operating Profit x 100

Capital Employed

Example
Operating Profit = Rs 2,80,000
Capital Employed = Rs 14,00,000
ROCE = Rs 2,80,000 / Rs 14,00,000 = 20%

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18
Return on Capital Employed : Tata Motors

19
Return on Capital Employed : Tata Steel

20
Return on Capital Employed : HLL Ltd

21
Return on Equity
Return on equity measures a corporation's profitability
by revealing how much profit a company generates with
the money shareholders have invested.

ROE % = Net Income x 100

Share holders' Equity

Example
Profit After Tax = Rs 80,000
Capital Employed = Rs 6,00,000
ROCE = Rs 90,000 / Rs 6,00,000 = 15 %

22
Tata Motors : Return on Equity

23
Tata Steel : Return on Equity

24
Return on Equity or Net Worth

25
TATA MOTORS : Total Assets & Asset Turnover Ratio

1.35

1.08
1.16

26
Techniques of Financial Analysis
Comparative Statements Analysis

Common-Size Statement Analysis

Trend Analysis

Ratio Analysis

Funds Flow Analysis

Cash Flow Analysis

Cost-Volume-Profit Analysis
What is Comparative Income Statement?

A Comparative Income Statement shows the operating results for

several accounting periods.

It helps the reader of such a statement to compare the results over the
different periods for better understanding and also for detailed
analysis of variation of line-wise items of Income Statement.
Comparative Income Statement format combines several Income Statements
as columns in a Single Statement, which helps the reader in analyzing trends
and measure the performance over different reporting periods.

It can also be used to compare two different companies operating metrics as

well. Such Analysis helps in comparing the performance with another
business, which can be used to analyze how companies react to market
conditions affecting the companies belonging to the same Industry.
Thus Comparative Income Statement is an essential
tool through which the result of operations of a
business (or say, the operation of the business of
different companies) over multiple accounting
periods can be analyzed to understand the various
factors contributing to the change over the period for
better interpretation and analysis.
It helps various stakeholders of the business and
also the Analyst community to analyze the impact
of business decisions over the company’s top line
and bottom line and helps in identifying various
trends over the period which otherwise would
have been difficult and time-consuming.
Comparative Income Statement shows absolute figures,
changes in absolute figures, absolute data in terms of
percentages, and also as an increase (or decrease) in terms of
percentages over the different periods. With the help of a
Comparative Income Statement format in one snapshot, the
performance of a company over different periods can be
compared, and changes in expense items and Sales can be
easily ascertained.
Example and Format of Comparative Income Statement
Example
ABC Limited has provided the following information pertaining to its two accounting periods, i.e.,
2016 and 2017.

Particulars 2016 2017

Net Sales 2,00,000 2,50,000
Cost Of Goods Sold 1,50,000 1,80,000
Selling , General and Administrative Expenses 25,000 30,000
Other income 12,000 18,000
Taxes 8,000 16,000
interest 17,000 18,000
Prepare a Comparative Income Statement and interpret the basic findings.
 Comparative income statement of ABC
Ltd for the period ended 2016 & 2017
Absolute
Particulars 2,016 2,017 change Perecentage Change
Net Sales 2,00,000 2,50,000 50,000 25.00%
Less Cost of Goods Sold 1,50,000 1,80,000 30,000 20.00%
Gross Profit 50,000 70,000 20,000 40.00%
Less Selling , General & Aminstrative Expenses 25,000 30,000 5,000 20.00%
Net Operating Profit 25,000 40,000 15,000 60.00%
Add other income 12,000 18,000 6,000 50.00%
Earing before Interest and Taxes 37,000 58,000 21,000 56.76%
Less Interest 17,000 18,000 1,000 5.88%
Earning before Taxes 20,000 40,000 20,000 100.00%
Less Taxes 8,000 16,000 8,000 100.00%
Net Profit 12,000 24,000 12,000 100.00%
Analysis
Based on the above Comparative Income Statement
of ABC Limited, it can be analyzed how an increase
in sales (25% over the previous year) has impacted
the Net profit (increased by 100% in absolute terms
over the previous year) and how various lines items
have contributed. Basic Analysis includes the
following:
Analysis

Net Sales increased by 25% over the period.

Gross Profit Ratio increased from 25% to 28% over the

period.

Net Profit Ratio increased from 6% to 9% over the period.

Analysis

Income Tax Expense doubled from 8,0000 to16,000 and Interest

expense increased by 5.88%.

Thus we can see how Comparative Income Statement helps to

ascertain the changes of various components of expenses and identify
the reason for changes that help the management in decision making
in the future.
 Class exercise
Particulars 2,016 2,017
Net Sales 5,00,000 7,50,000
Cost Of Goods Sold 3,00,000 4,50,000
Selling , General and Administrative Expenses 76,000 89,000
Other income 33,000 45,000
Taxes 16,000 32,000
interest 47,000 54,000
Steps to prepare a comparative income statement

Step1 Firstly, specify absolute figures of items

such as cost of goods sold, net sales, selling
expenses, office expenses, etc. relating to the
accounting periods considered for analysis.
These amounts are mentioned in Column I and
Column II of the comparative income statement
Steps to prepare a comparative income statement

Step 2 Find out the absolute change in the items

mentioned in the income statement. This is done by
subtracting the previous year’s item amounts from
the current year ones. This increase or decrease in
absolute amounts is mentioned in Column III of the
comparative income statement.
Step 3 Finally, calculate the percentage
change in the income statement items of the
current year relative to the previous year. This
percentage change in items is mentioned in
Column V of the comparative income
statement.
Income Statement of M/s Singhania as of
December 31, 2017, and December 31, 2018
Comparative Income Statement of M/s Singhania as of December 31, 2017, and
December 31, 2018
What is Common Size Analysis?

Common size analysis, also referred as vertical analysis, is a tool

that financial managers use to analyze financial statements.

It evaluates financial statements by expressing each line item as a

percentage of the base amount for that period.

The analysis helps to understand the impact of each item in the

financial statement and its contribution to the resulting figure.
Types of Common Size Analysis

Common size analysis can be conducted in two ways, i.e., vertical analysis and
horizontal analysis.

Vertical analysis refers to the analysis of specific line items in relation to a base
item within the same financial period.

For example, in the balance sheet, we can assess the proportion of inventory by
dividing the inventory line using total assets as the base item.
Types of Common Size Analysis

On the other hand, horizontal analysis refers to the analysis of

specific line items and comparing them to a similar line item
in the previous or subsequent financial period.

Although common size analysis is not as detailed as trend

analysis using ratios, it does provide a simple way for
financial managers to analyze financial statements.
 Let’s take the example of ABC Company whose balance
sheet for 2017 is as follows:
Amount Percentage
Liabilities and Share capital
Current Liabilities
Account payable 15,000 15%
Salary payable 10,000 10%
Accrued expenses 5,000 5%
Total Current Liabilities 30,000 30%
Long term Debt 30,000 30%
Share holders Equity 40,000 40%
Total Liabilities and share holders Capital 1,00,000 100%
 Let’s take the example of ABC Company whose balance sheet for
2017 is as follows:
Amount Percentage
Assets
Current assets
Cash 14,500 14.5%
Inventories 12,000 12%
Prepaid expenses 500 .05%
Accounts Receivable 18,000 18%
Total Current Assets 45,000 45%
Non Current Assets
Property plant & equipment 52,000 52%
Goodwill 3,000 3%
Total assets 1,00,000 100%
Analysis

From the table above, we can deduce that cash represents 14.5% of
the total assets while inventory represents 12% of the total assets.

In the liabilities section, we can deduce that accounts payable

represent 15%, salaries 10%, long-term debt 30%, and shareholder’s
equity 40% of the total liabilities and shareholder’s equity.
INCOME STATEMENT COMMON
SIZE ANALYSIS
The base item in the income statement is usually the total sales or total revenues.
Common size analysis is used to calculate net profit margin, as well as gross and
operating margins.

The ratios tell investors and finance managers how the company is doing in terms of
revenues, and they can make predictions of future revenues.

Companies can also use this tool to analyze competitors to know the proportion of
revenues that goes to advertising, research and development, and other essential
expenses.
Sales 48,077 100%
Cost of Sales 37,288 77.6%
Gross Profit or Margin 10,789 22.4%
Research & Development 1,909 4%
Sales and Marketing 6,216 12.9%
General & Administrative expenses 658 1.4%
Operating Expenses 8,783 18.3%
Depreciation 1,000 2.1%
Operating Income 1,006 2.1%
Finance costs 72 0.1%
Income before tax 934 1.9%
Income tax 291 .6%
Net Income 643 1.3%
Income statement for 3 years
COMMON SIZE INCOME
STATEMENT
Prepare a common size income statement for ABC
Company & analyse
ABC Company Income statement
Year1 Year2 Year3
Sales 4,00,000 4,25,000 5,00,000
Cost of goods sold 1,20,000 1,23,250 2,00,000
Gross profit 2,80,000 3,01,750 3,00,000
Salaries 95,000 97,000 1,50,000
Rent 25,000 25,000 25,000
Marketing 20,000 20,000 50,000
Adminsative expenes 5,000 5,000 5,000
Other expenses 7,500 10,000 8,000
Total Expenses 1,52,500 1,57,000 2,38,000
Net Income 1,27,500 1,44,750 62,000
Analysis

First, we should review the income statements as they're presented in Rupee terms.

The company's sales have grown over this time period, but net income is down sharply
in year three.

Salaries and marketing expenses have risen, which is logical, given the increased
sales. However, these expenses don't, at first glance, appear large enough to account
for the decline in net income.
Analysis
To see exactly what's happening, we'll have to dig deeper.

To do that, we'll create a "common size income statement" and perform a vertical analysis. For each account on the
income statement, we divide the given number by the company's sales for that year.

By doing this, we'll build a new income statement that shows each account as a percentage of the sales for that year. As
an example, in year one we'll divide the company's "Salaries" expense, Rs 95,000 by its sales for that year, Rs 400,000.
That result, 24%, will appear on the vertical analysis table beside Salaries for year one.

Here's how that table should look when completed.

Analysis

The vertical analysis confirms what we already observed in our initial review
of the income statement, and it also reveals the missing driver in ABC
Company's net income decline: costs of goods sold.

First, we can see that the company's marketing expenses increased not just in
Rupee terms, but also as a percentage of sales. This implies that the new
money invested in marketing was not as effective in driving sales growth as in
prior years. Salaries also grew as a percentage of sales.
Analysis

The vertical analysis also shows that in years one and two, the company's product cost
30% and 29% of sales, respectively, to produce. In year three, however, cost of goods
sold spikes to 40% of sales. That's driving a significant decrease in gross profits.

This change could be driven by higher expenses in the production process, or it could
represent lower prices. We can't know for sure without hearing from the company's
management, but with this vertical analysis we can clearly and quickly see that ABC
Company's cost of goods sold and gross profits are a big issue.
Prepare a common size income statement for XYZ
Company & analyse

XYZ Company Income statement

Year1 Year2 Year3
Sales 12,00,000 16,00,000 18,00,000
Cost of goods sold 9,70,000 13,06,000 15,00,000
Gross profit 2,30,000 2,94,000 3,00,000
Salaries 90,000 1,20,000 1,35,000
Rent 55,000 55,000 55,000
Marketing 25,000 35,000 75,000
Adminsative expenes 10,000 10,000 10,000
Other expenses 7,500 10,000 8,000
Total Expenses 1,87,500 2,30,000 2,83,000
Net Income 42,500 64,000 17,000
Importance of Common Size Analysis

One of the benefits of using common size analysis is that it allows investors to identify drastic changes in
a company’s financial statement.

This mainly applies when the financials are compared over a period of two or three years.

Any significant movements in the financials across several years can help investors decide whether to
invest in the company.

For example, large drops in the company’s profits in two or more consecutive years may indicate that the
company is going through financial distress.

Similarly, considerable increases in the value of assets may mean that the company is implementing an
expansion or acquisition strategy, making the company attractive to investors.
Common size analysis is also an excellent tool to compare companies of different
sizes but in the same industry.

Looking at their financial data can reveal their strategy and their largest expenses
that give them a competitive edge over other comparable companies.

For example, some companies may sacrifice margins to gain a large market share,
which increases revenues at the expense of profit margins.

Such a strategy allows the company to grow faster than comparable companies
because they are more preferred by investors
As an example, let’s take a look at some income
statement items for Apple and Google
Apple (APPL) US $ in Millions
2014 2015 2016 2017 2018
Revenue 1,82,795 2,33,715 2,15,639 2,29,234 2,65,595
Gross profit 70,537 93,626 84,263 88,186 1,01,893

EBIDTA 60,449 82,487 70,529 71,501 81,801

Google US $ in Millions
(GOOG)
2014 2015 2016 2017 2018
Revenue 66,001 74,989 90,272 1,10,855 1,36,819
Gross profit 40,310 46,825 55,134 65,272 77,270
EBIDTA 21,475 24,423 29,860 33,061 35,356
Analysis
it’s almost impossible to tell which is growing faster
by just looking at the numbers. So we have to do some
calculations.

We can perform horizontal analysis on the income

statement by simply taking the percentage change for
each line item year-over-year.
Horizontal Analysis
Apple (APPL) US $ in Millions  
  2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Revenue 1,82,795 2,33,715 2,15,639 2,29,234 2,65,595   27.9% -7.7% 6.3% 15.9%
Gross profit 70,537 93,626 84,263 88,186 1,01,893   32.7% -10.0% 4.7% 15.5%
EBIDTA 60,449 82,487 70,529 71,501 81,801   36.5% -14.5% 1.4% 14.4%

US $ in
Google (GOOG)                  
Millions
  2014 2015 2016 2017 2018          
Revenue 66,001 74,989 90,272 1,10,855 1,36,819   13.6% 20.4% 22.8% 23.4%
Gross profit 40,310 46,825 55,134 65,272 77,270   16.2% 17.7% 18.4% 18.4%
EBIDTA 21,475 24,423 29,860 33,061 35,356   13.7% 22.3% 10.7% 6.9%
Horizontal Analysis

By using horizontal analysis, we can now

clearly see that Google’s revenue, gross profit,
and EBITDA grew faster than Apple’s in
every year except for 2015 (and one EBIDTA
exception in 2018), with 2016 looking
particularly rough for Apple.
We can even take this one step further by
calculating the compound annual growth rate for
each line item from 2014 to 2018 (you can do
this in Excel by using the function: =rate(nper,
pmt, pv, fv)) – this tells us the average rate the
companies grew in each year.
Compound annual growth rate for
each line item from 2014 to 2018

APPLE GOOGLE

SALES CAGR 7.8% 16%

Gross Profit CAGR 7.6% 13.9%

EBIDTA CAGR 6.2% 10.5%

What are Financial Ratios?

Financial ratios are created with the use of numerical values taken
from financial statements to gain meaningful information about a company.

The numbers found on a company’s financial statements – balance

sheet, income statement, and cash flow statement – are used to
perform quantitative analysis and assess a company’s liquidity, leverage,
growth, margins, profitability, rates of return, valuation, and more.
Financial Ratios are grouped into
following categories
Liquidity ratios

Leverage ratios

Efficiency ratios

Profitability ratios

Market value ratios

Track company performance

Determining individual financial ratios per period and

tracking the change in their values over time is done to
spot trends that may be developing in a company.

For example, an increasing debt-to-asset ratio may

indicate that a company is overburdened with debt and
may eventually be facing default risk.
Make comparative judgments regarding company
performance

Comparing financial ratios with that of major competitors is

done to identify whether a company is performing better or
worse than the industry average.

For example, comparing the return on assets between

companies helps an analyst or investor to determine which
company is making the most efficient use of its assets.
Profitability ratios

Gross profit Net Profit Operating

margin Margin Profit Margin

Return on
Return on Return on
Capital
Assets Equity
Employed
Profitability ratios
Gross Profit Margin

Gross Profit Margin =

(Gross Profit / Sales) * 100
Gross Profit
= Sales –
COGS
Gross Profit Margin
Element Value Rs
Gross Profit Margin =
Sales 1000
(Gross Profit / Sales) * 100
Gross Profit 400
Gross Profit Margin = Operating Profit 200
(Rs400 / Rs 1000) * 100 Net Income 140
Total Assets 1000
Gross Profit Margin = 40% Total Equity 700
 Operating Profit Margin
Element Value Rs
Operating Profit Margin = Sales 1000
(Operating profit / Sales) * 100
Gross Profit 400
Operating Profit Margin = Operating Profit 200
(Rs200 / Rs 1000) * 100
Net Income 140
Total Assets 1000
Operating Profit Margin = 20%
Total Equity 700
Net Profit Margin
Element Value Rs
Net Profit Margin =
Sales 1000
(Gross Profit / Sales) * 100
Gross Profit 400
Net Profit Margin = Operating Profit 200
(Rs140 / Rs 1000) * 100 Net Income 140
Total Assets 1000
Net Profit Margin = 14% Total Equity 700
 Return on Assets
Element Value Rs
Return on Assets =
Sales 1000
(Net income / Assets)* 100
Gross Profit 400
Return on Assets = Operating Profit 200
(140 / 1000) * 100 Net Income 140
Total Assets 1000
Return on Assets = 14%
Total Equity 700
 Return on Equity
Element Value Rs
Return on Equity = Sales 1000
Net Income / Shareholder’s Equity
Gross Profit 400
Return on Equity = 140 / 700
Operating Profit 200
Net Income 140
Total Assets 1000
Return on Equity = 20%
Total Equity 700
 Asian Paints Ltd
Element Rs
Operating Profit Margin = Crores
(Operating Profit / Sales) * 100 Sales 20,211
Operating Profit Margin = Operating Profit 4,162
(Rs4162 / Rs 20211) * 100 Net Income 2,705
Operating Profit Margin Total Assets 16,138
= 20.60% Total Equity 11030
Asian Paints Ltd
Element Rs
Net Profit Margin = (Net Crores
Profit / Sales) * 100 Sales 20,211
Net Profit Margin = (Rs2705/ Operating Profit 4,162
Rs 20211) * 100 Net Income 2,705
Total Assets 16,138
Net Profit Margin = 13.38%
Total Equity 11030
 Asian Paints Ltd
Element Rs
Return on Assets = Crores
(Net income / Assets)* 100 Sales 20,211
Return on Assets = (Rs2705/ Operating Profit 4,162
Rs 16138) * 100 Net Income 2,705
Total Assets 16,138
Return on Assets = 16.76% Total Equity 11030
Return on Capital Employed
(ROCE)

Return on Capital Employed =

Operating Profit / Capital
Employed)* 100

Operating Profit = EBIT

Capital Employed= Shareholders
capital + Borrowed Capital
 Return on Equity (ROE)

Return on Equity =
Net Income / Share Capital+ Reserves )* 100

Net Income = Profit After Tax

ROE / ROCE
 Asian Paints Ltd ( ROCE)
Return on Capital Employed = Element Rs Crores
(EBIT / Capital Employed)* Sales 20,211
100
EBIT 3,737
ROCE=
(Rs 3737/ Rs 11,020) * 100 Net Profit 2,705
Capital Employed 11020
Return on Capital Employed
= 33.91% Total Equity 11030
EBIT = Net profit after tax + Interest = 3629+108= 3737
Capital Employed = (10791+ 11248)/2= 11020
 Asian Paints Ltd
Element Rs Crores
Return on Equity =
(Net income / Total Equity)*
Sales 20,211
100 EBIT 3,737
ROE = (Rs 2705/ Rs 9,801) * 100 Net Profit 2,705
Capital Employed 12,109
Return on Equity = 27.59% Total Equity ( average) 9,801
Average Capital Employed = (Opening (Share capital +
reserves)+Closing ( Share capital+ reserves ))/2 Total Equity = (9471+10130)/2= 9801
Leverage Ratios
The Interest Degree of
Debt to
Coverage Financial
Equity Ratio
Ratio Leverage 

Degree of
Operating
Leverage 
 Element Sept 2020

Asian Paints Ltd Share capital 96

Reserves 10934

Total 11030

Average Equity

DEBT EQUITY Borrowings 1079

RATIO = (Rs 1079/
Rs11030) = .098
 Element SEPT
2020
TATA STEEL Share capital 1145

Reserves 63921
DEBT EQUITY RATIO : The debt-
to-equity (D/E) ratio is calculated by Total 65066
dividing a company’s total liabilities
by its shareholder equity.  Average Equity

DEBT EQUITY RATIO = (Rs Borrowings 111360

111360/ 65066) = = 1.71
 TATA STEEL
INTEREST COVERAGE RATIO : The Element TTM
interest coverage ratio may be calculated by
dividing a company's earnings before
interest and taxes(EBIT) by its interest
expense during a given period..  EBIT 10246

ICR = (Rs10246/7641 ) = 1.34 INTEREST 7641

EBIT = PBT + INTEREST =2605+7641

 Determine Debt Equity Ratio & Interest Coverage Ratio of Tata
steel Ltd ,JSW steel Ltd & SAIL Ltd using trailing twelve months
numbers . Find out which company is unattractive to investors
and why ?

Equity Debt Equity Interest

Capital Borrowings Interest EBIT Ratio Coverage Ratio

Tata Steel 65066 111360 7641 10246 1.71 1.34

JSW Steel 37609 49893 3988 9850 1.33 2.47

SAIL 40639 47454 3185 9833 1.17 3.09

Debt to Equity Ratio

The debt-to-equity
(D/E) ratio is
calculated by
dividing a company’s
total liabilities by its
shareholder equity. 
The Interest Coverage Ratio

The interest coverage ratio is a debt

and profitability ratio used to
determine how easily a company can
pay interest on its outstanding debt.

The interest coverage ratio may be

calculated by dividing a
company's earnings before interest
and taxes(EBIT) by its interest
expense during a given period.
Efficiency ratios
Efficiency Ratios

The efficiency ratio is typically used to analyze how well a company uses
its assets and liabilities internally.

Efficiency Ratios are a measure of how well a company is managing its

routine affairs. Conceptually, these ratios analyze how well a company
utilizes its assets & how well it manages its liabilities.
Efficiency Ratios

Efficiency ratios are metrics that are used in analyzing a

company’s ability to effectively employ its resources, such
as capital and assets, to produce income.

The more efficiently a company is managed and operates,

the more likely it is to generate maximum profitability for
its owners and shareholders over the long term.
Inventory Turnover

Calculated as the cost of

goods sold divided by
average inventory.

A high turnover rate can be

achieved by minimizing
inventory levels, using a just-
in-time production system
Walmart Inc
TREND ANALYSIS
The chart below compares inventory turns at Costco
to Target  Restoration Hardware , and Tiffany & Company  during
their most recent fiscal years.
Notice that Tiffany & Co.'s low inventory turnover ratio of 0.7 means that its average dollar of inventory sits
in its possession for a very long time -- more than 521 days, on average. This isn't all that surprising, given
that a simple diamond engagement ring could come in millions of different combinations of stone quality,
band type and design, and price point.

Similarly, Restoration Hardware sells high-end home furnishings to particularly picky buyers. A simple
armchair on the company's website comes in as many as four styles, five wood finishes, and 45 different
leathers! That kind of selection naturally requires substantially more inventory for each dollar in sales.

Contrast these two luxury businesses with Target and Costco, which primarily sell food products and home
goods. It's only natural that their product mix of commodity goods would get turned over much faster than
specialty furniture or jewelry. (That a significant portion of space on Costco and Target shelves is dedicated to
perishable foods also necessitates faster inventory turns, as too much inventory will lead to spoilage.)
Days inventory outstanding
Inventory holding period

31.29 Days 9.13 days 33.80 27.38 days

365/11.6= 365/40 = days
31.30 9.125
To determine the DIO of each brand:
•DIO Brand 1: ($3,000 / $35,000) x 365 = 31.29 days

•DIO Brand 2: ($1,000 / $40,000) x 365 = 9.13 days

•DIO Brand 3: ($5,000 / $54,000) x 365 = 33.80 days

•DIO Brand 4: ($1,500 / $20,000) x 365 = 27.38 days

Fixed assets turnover

Calculated as sales divided by average

fixed assets.

A high turnover ratio can be achieved by

outsourcing the more asset-intensive
production to suppliers, maintaining high
equipment utilization levels, and avoiding
investments in excessively expensive
equipment.
Fixed assets turnover

Calculated as sales divided by average

fixed assets.

A high turnover ratio can be achieved by

outsourcing the more asset-intensive
production to suppliers, maintaining high
equipment utilization levels, and avoiding
investments in excessively expensive
equipment.
Industry comparison
Fixed Assets Turnover
Name of the company Industry Fixed assets
turnover ratio
Jindal Steel & Power Ltd Steel .64

Tata Motors Ltd Automobile 1.40

 
Reliance Industries Conglomerate .74
Hindustan Unilever FMCG 4.84
Infosys IT 1.3
Tata steel Steel .75
Asian Paints Paint 1.80
TREND
What the Asset Turnover Ratio Can Tell You

Typically, the asset turnover ratio is calculated on an annual basis. The higher the
asset turnover ratio, the better the company is performing, since higher ratios imply
that the company is generating more revenue per rupee of assets.

The asset turnover ratio tends to be higher for companies in certain sectors than in
others. Retail and consumer staples, for example, have relatively small asset bases but
have high sales volume—thus, they have the highest average asset turnover ratio.
Conversely, firms in sectors such as utilities and real estate have large asset bases and
low asset turnover.
Asset turnover ratio sector wise
Ranking Asset Turnover Ratio Ranking by Sector Ratio
1 Retail 2.76
2 Healthcare 1.55
3 Services 1.18
4 Basic materials 1.04
5 Transportation 1.00
6 Consumer discretionary .95
7 Capital goods .83
8 Consumer goods non cyclical .58
9 Technology .57
10 Energy .55
Accounts receivable turnover

Calculated as credit sales divided by

average accounts receivable.

A high turnover rate can be achieved by

being selective about only dealing with
high-grade customers, as well as by
limiting the amount of credit granted and
engaging in aggressive collection activities.
Accounts receivable turnover

Calculated as credit sales divided by

average accounts receivable.

A high turnover rate can be achieved by

being selective about only dealing with
high-grade customers, as well as by
limiting the amount of credit granted and
engaging in aggressive collection activities.
TREND ANALYSIS
Comparison with similar companies
 Receivable turnover ratio sector
wise
Ranking Asset Turnover Ratio Ranking by Sector Ratio Days
Receivables
1 Services 135 2.7
2 Retail 96 3.80
3 Capital Goods 21 17.4
4 Health Care 20 18.25
5 Consumer goods non cyclical 11 33.18
6 Technology 10 36.5
7 energy 9 40.55
8 utilities 8 45.62
9 Consumer discretionary 7 52.14
10 Transportation 7 52.15
365/ARTR
 Accounts payable ratio

Accounts payable
turnover : Calculated
as total purchases
from suppliers divided
by average payables.
This ratio measures how
quickly the company pays
its accounts payable
Accounts payable ratio
Accounts payable turnover : Calculated as
total purchases from suppliers divided by
average payables.

Changes to this ratio are limited by the

underlying payment terms agreed to with
suppliers.

Accounts Payable Turnover (Times) –

an activity ratio measuring how many times
per year the company pays its average debt to
suppliers (creditors). 
Accounts payable turnover ratio
Accounts payable turnover ratio :
WALMART
WALMART as on 31st Jan 2019 USD $

Cost of goods sold 3,85,301

Accounts payable 2018 47,060

Accounts payable 2019 46,092

Average Payable 46,576

Payable turn over ratio Cost of goods sold / average payables 8.3
Payable days 365/APTR 44 Days
Payable turnover ratio interpretation

High payable turnover ratio

•High payable turnover ratio indicates the company is making the payment more frequently.
•This indicates that the company has sufficient cash balance to make the payment.
•It also indicates that the company is inefficiently managing its liquidity position.
•If the turnover ratio is high, the company’s funds are utilized more frequently which otherwise could
have been re-deployed in other profitable projects
Low payable turnover ratio

Low payable turnover ratio indicates the company is paying off its accounts payable balance less
frequently.

This may be an indication that the company is running out of cash or it has insufficient cash.

Companies, at times deliberately make less frequent payment towards Account Payable balance.

Hence, the company can make better use of cash available. This, in turn, increases the company’s
liquidity position.

But this strategy may even backfire if the vendors top supplying the goods or services.

Hence, management has to be cautious while dealing low payable turnover ratio.
Trend Analysis
Comparison with similar companies
Accounts payable ratio

By comparing accounts payable turnover and accounts receivable

turnover one can understand the quality of company’s credit policy.

Excess of the accounts payable over the accounts receivable means

that the company uses creditors' funds as a source of financing its
clients and other debtors, and part of the money is being used by a
firm for financing its operations.
Liquidity Ratios

Liquidity ratios gives an idea about company’s ability to convert its asset into
cash and pay its current liabilities with that cash whenever required

Current Quick Cash

ratio ratio Ratio
 Current Ratio
The current ratio is a liquidity ratio that measures a
company's ability to pay short-term obligations or those
due within one year
Quick ratio

The quick ratio measures a

company's capacity to pay
its current liabilities
without needing to sell its
inventory or obtain
additional financing.
Liquidity Ratios
Market Value ratios( Valuation)

Market value Book value

PE Ratio
ratios are used to per share
evaluate the
share price of a Price to
Book Value
company’s stock
Book value per share
Book value per share (BVPS) takes the
ratio of a firm's common equity
divided by its number of shares
outstanding.

Book value of equity per share

effectively indicates a firm's net asset
value (total assets - total liabilities) on
a per-share basis.
 (total assets - total liabilities) / number of shares
outstanding). 
Book value per share
When a stock is
undervalued, it will
have a higher book
value per share in
relation to its current  (total assets - total liabilities) / number of shares
stock price in the outstanding). 

market.
Price to book value

The price-to-book
ratio, or P/B ratio, is a
financial ratio used to
compare a company's
current market value
to its book value. 
Price to book value
Ansal Housing Ltd
A lower P/B ratio could mean the stock
is undervalued. Current market price Rs 5.60

Book value Rs 36.5

However, it could also mean something is
fundamentally wrong with the company. Price to book value .15

As with most ratios, this varies by industry. Industry PBV .81

The P/B ratio also indicates whether you're
paying too much for what would remain if the
company went bankrupt immediately.
Price to book value
ASIAN PAINTS LTD
A price-to-book ratio that's greater than
one means that the stock price is trading at Current market price 2,631
a premium to the company's book value. 

A company with a high share price versus its Book value 115
asset value could also mean the company is
earning a high return on its assets.
Price to book value 22.9
The price-to-book ratio can help investors
identify which companies might be overvalued Industry PBV 10
or undervalued,
Price Earning Ratio

The price-earnings ratio (P/E ratio)

relates a company's share price to
its earnings per share.

A high P/E ratio could mean that a

company's stock is over-valued, or
else that investors are expecting
high growth rates in the future.
Price Earning Ratio

Companies that have no earnings or

that are losing money do not have a
P/E ratio since there is nothing to
put in the denominator.

Two kinds of P/E ratios - forward

and trailing P/E - are used in
practice.
PRICE EARNING RATIO
JINDAL STEEL LTD ASIAN PAINTS LTD

Current market price 412 Current market price 2,631

EPS 21.6 EPS 28.7

Price earning ratio 10.6 Price earning ratio 91.8

Industry PE 11.4 Industry PE 87.5

THANK YOU
Comparison of two companies
You see in the quarter ended June 2014 that Samsung Electronics brought in $47.6 billion in revenue compared to Apple’s $37.4 billion. That is 27% more revenue than Apple’s. But look at the meltdown that occurred in
the next quarter. Samsung’s revenue dropped $4.5 billion while Apple’s revenue was up $4.7 billion. Now the two are nearly equal! It looks even worse if you compare Samsung’s revenue to the same quarter last year
when they had $55 billion, a 21% drop in sales.

Manufacturing costs aren’t too much different between Samsung and Apple with both being in the low 60% of sales range. Apple skews towards more expensive materials and components, but they also charge higher
prices. So as a percent of sales it’s not too different. Also, you can clearly see how important Samsung’s Galaxy S4/S5 is to Samsung’s overall profitability. It’s been widely reported that sales of the Galaxy S5 have fallen
off a cliff, so it’s no coincidence that the gross margins fell from 39.0% to 34.7%. Since most companies get pretty worked up about margin declines measured in terms of tenths of a point, I can only imagine the
handwringing going on in Seoul right now. 

And what is going on with the selling and general costs at Apple [SG&A]? Highlighted in yellow, notice how much lower than Samsung’s they are. Samsung’s SG&A at 18 or 19% of sales is much higher than Apple’s, but is
closer to the norm for a company of this size. This is where all the costs of marketing your products, delivering them to market, and paying for the corporate, non-manufacturing salaries go. Samsung took in about the
same amount of revenue as Apple last quarter, yet they paid a heck of a lot more in expenses to do it. SG&A is the biggest reason for the profit disparity between the two companies. I’m sure Apple’s distribution costs
are much lower than Samsung’s due to the fact that they are spread among far fewer products, but this couldn’t explain over a billion dollars a month. And I’m sure Apple gets a favorable margin boost from digital sales
for which the cost of fuel is irrelevant and headcount is minimal. But even if the $4.1 billion dollars of iTunes revenue had $0 SG&A, that would only account for one full point of the eleven point differential. 

So where is the difference? Could Samsung need to spend $5 billion dollars a quarter in advertising and promotions to achieve their sales? Is Apple’s centralized flat management structure yielding massive cost savings?
I even wonder if there is some kind of classification difference between how the companies are handling various expenses. For instance, US GAAP (Generally Accepted Accounting Principles) requires costs like labor
fringe benefits to be in manufacturing costs, whereas in some countries these could be in general costs. I don’t know the answer to this question but I’d love to get my hands on Apple’s and Samsung’s product line
financials to see what the detail is.

Then there are the research and development costs. Samsung spends almost twice as much on R&D, and what do they have to show for it? A whole slew of products that cost more to manufacture, deliver, and market
than Apple?  If I were a Samsung stockholder, I’d be asking some serious questions on what their labs are working on and whether they are in alignment with the overall corporate goals. 

It’s interesting to compare Samsung Electronics and Apple because they are almost the same size in terms of sales revenue and they do compete head-to-head in the mobile arena. But this may be unfair to Samsung
much in the same way as comparing an Olympic silver medalist only to the guy who won the gold. Samsung is making a healthier profit margin than Exxon Mobil. Whenever gas prices go up, everyone is asking how
much money do those fat cats selling oil really need? But Apple seems to have found the sweet spot, the right balance of product portfolio width and depth. It’s wide enough to capture sales revenue that rivals a small
country's entire GDP but not so wide that they begin to lose efficiencies. In addition, it’s deep enough that attention to design, quality, and customer service inspire intense customer loyalty. 
By looking at this income statement, we can see that in 2017, the amount of money that the
company invested in research and development (10%) and advertising (3%).

The company also pays interest to the shareholders, which is 2% of the total revenue for the
year. The net operating income or earnings after interest and taxes represent 10% of the total
revenues, and it shows the health of the business’s core operating areas.

The net income can be compared to the previous year’s net income to see how the company’s
performance year-on-year.
The accounts receivable turnover ratio measures how many times a company can
turn receivables into cash over a given period:

Receivables turnover ratio = Net credit sales / Average accounts receivable

The days sales in inventory ratio measures the average number of days that a

company holds on to inventory before selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover ratio