FINANCIAL STATEMENTS

ANALYSIS

Dr. Vunyale Narender

 FINANCIAL STATEMENTS
ANALYSIS
1. HORIZONTAL AND VERTICAL
ANALYSIS
2. COMMON SIZE ANALYSIS
3. COMPARATIVE ANALYSIS
4. RATIO ANALYSIS
5. TREND ANALYSIS
6. ECONOMIC VALUE ADDED
7. MARKET VALUE ADDED
 RATIO ANALYSIS

RATIO S
F INA N C IA L
R AT IO S

L IQ U ID ITY C A PITA L STR U C TU R E TU R N OV ER R AT IO S

R AT IO S R AT IO S &
P R O F ITA B IL IT Y R AT IO S
 LIQUIDITY RATIOS

1) CURRENT RATIO

2) QUICK RATIO

3) ABSOLUTE QUICK RATIO

 
4) BASIC DEFENSIVE INTERVAL RATIO
 LIQUIDITY RATIOS

Current Assets/ Current

Current Ratio =
Liabilities
Current Assets =
Cash, Bank, Stock, Bills Receivable,
Sundry Debtors, Prepaid Expenses,
Outstanding Incomes, etc.
Current Liabilities = S. Crs., Bills Payable,
Bank Overdraft, Outstanding Expenses,
Provision for Tax, Proposed Dividend, etc.
Quick Ratio =
Quick Assets/ Quick Liabilities

Quick Assets =
Current Assets –(Stock + Prepaid Expenses)

Quick Liabilities =
Current Liabilities – Bank Over draft
Absolute Quick Ratio=
Absolute Quick Assets/Current Liab.

Absolute Quick Assets = Cash +

Bank + Marketable Securities or
Short Term Investments.
Current Liabilities = S. Crs., B/P, O/s.
Expenses, Prov. For Tax, Proposed
Dividend, Incomes received in advance,
etc.
 BASIC DEFENSIVE
INTERVAL RATIO

= Quick Assets/ Projected daily cash

requirements
Quick Assets = Current Assets – (Stock
+ Prepaid Expenses
Projected daily cash requirements will
have to be given in the problem Or
otherwise we cannot compute
 CAPITAL STRUCTURE
RATIOS
1. DEBT-EQUITY RATIO
2. PROPRIETARY RATIO
3. CAPITAL GEARING RATIO
4. FIXED ASSETS RATIO
5. INTEREST COVERAGE RATIO
6.DIVIDEND COVERAGE RATIO &
7. DEBT-SERVICE COVERAGE RATIO
DEBT-EQUITY LONG TERM DEBT
RATIO
= /SHAREHOLDERS EQUITY

LONG-TERM DEBT= DEBENTURES +

LOANS+MORTGAGE DEBT, Etc.
SHAREHOLDERS EQUITY=

Equity + Reserves + P & L Cr. +

Undistributed profits –
Fictitious Assets (Preliminary
expenses, etc.)
PROPRIETARY NETWORTH/
RATIO= TOTAL ASSETS

NET WORTH= EQUITY+ PREF.

EQUITY+ RESERVES + P & L A/C.
– FICTITIOUS ASSETS

TOTAL ASSETS =
FIXED ASSETS AND CURRENT
ASSETS
CAPITAL FIXED FIXED
GEARING = DIVIDEND+INTEREST
RATIO FUNDS FUNDS
EQUITY
SHAREHOLDERS FUNDS
FIXED DIVIDEND FUNDS=
PREFERENCE EQUITY
FIXED INTEREST FUNDS=
DEBENTURES OR ANY OTHER
FIXED INTEREST LOAN
FIXED FIXED ASSETS
___________________
ASSETS = CAPITAL EMPLOYED
RATIO

CAPITAL EMPLOYED =
SHAREHOLDERS EQUITY +
LONG TERM DEBT
INTEREST PROFIT BEFORE
COVERAGE =INTEREST & TAX
RATIO FIXED INTEREST

PBIT = PROFIT AFTER TAX+ TAX+

INTEREST

INTEREST =
INTEREST ON DEBENTURE OR
ANY OTHER LONG TERM LOAN
DIVIDEND PROFIT AFTER TAX
COVERAGE =
PREFERENCE DIVIDEND
RATIO

PROFIT AFTER TAX =

PROFIT BEFORE INTEREST & TAX –
INTEREST – TAX
FIVIDEND PAID OR TO BE PAID
ON PREFERENCE EQUITY
 PBIT INTEREST +
DEBT-SERVICE = PERIODICAL LOAN
COVERAGE RATIO INSTALMENT /
1 – RATE OF TAX

PBIT = PROFIT BEFORE

INTERESTT AND TAX
PERIODICAL LOAN INSTALMENT
MAY BE FOR THE PURCHASE OF
AN ASSET
RATE OF TAX WILL BE GIVEN IN
THE PROBLEM
TURN0VER RATIOS

INVENTORY TURNOVER RATIO

DEBTOR TURNOVER RATIO
CREDITOR TURNOVER RATIO
INVENTORY VELOCITY
DEBTOR VELOCITY
CREDITOR VELOCITY
FIXED ASSETS TURNOVER RATIO
TOTAL ASSETS TURNOVER RATIO
INVENTORY COST OF GOODS
TURNOVER = SOLD
RATIO AVERAGE STOCK

AVERAGE STOCK= O/STOCK+C/STOCK

2
COST OF O/STOCK + PURCH-
GOODS SOLD ASES + WAGES +
= DIRECT EXPENSES
– CLOSING STOCK
No. OF DAYS IN A YEAR/
STOCK VELOCITY = S.T.R.
 DEBTOR
NET CREDIT SALES
TURNOVER =
RATIO AVERAGE DEBTORS

CREDIT SALES=TOTAL SALES–CASH SALES

AVERAGE Drs. = O/Drs+C/Drs./2

DEBTOR = No. of days in a year

VELOCITY Debtor Turnover Ratio
CREDITOR NET CR. PURCHASES
TURNOVER =
AVERAGE CREDITORS
RATIO

CR. PURCHASES= TOTAL PURCHASES

– CASH PURCHASES

CREDITOR = No OF DAYS IN A YEAR

VELOCITY CREDITOR TURNOVER RATIO
FIXED ASSETS SALES
TURN-OVER = FIXED ASSETS
RATIO

SALES = TOTAL SALES

FIXED ASSETS= ALL FIXED ASSETS

AND MAY INCLUDE GOODWILL IF
IT IS CONSIDERED AS FIXED ASSET
THOUGH IT IS AN INTANGIBLE
ASSET
TOTAL ASSETS TURNOVER
RATIO

= SALES / TOTAL ASSETS

TOTAL ASSETS = FIXED ASSETS +

CURENT ASSETS
Note: Fictitious assets like preliminary
expenses should be excluded while
computing total assets.
 PROFITABILITY RATIOS

GENERAL PROFITABILITY RATIOS:

1. GROSS PROFIT RATIO

2. NET PROFIT RATIO
3. OPERATING PROFIT RATIO
4. OPERATING COST RATIO
 GROSS GROSS PROFIT
x 100
PROFIT = SALES
RATIO

GROSS PROFIT = SALES – COST OF GOODS SOLD

COST OF GOODS SOLE = OPENING

STOCK + PURCHASES + WAGES +
DIRECT EXPENSES – CLOSING STOCK

SALES = CASH SALES + CREDIT SALES

 NET NET PROFIT
PROFIT = X 100
SALES
RATIO

NET PROFIT = SALES – COST OF

GOODS SOLD – OPERATING
EXPENSES – SELLING EXPENSES
– ADMINISTRATIVE EXPENSES –
GENERAL EXPENSES
 OPERATING PROFIT
OPERATING X 100
PROFIT RATIO = SALES
X

Operating Profit = Sales – Cost of

goods sold – operating expenses
(including depreciation) & admn. ,
general, selling & distribution expenses
 OPERATING COST
OPERATING = X100
COST RATIO SALES

Operating Cost =
Cost of Goods sold + Operating
Expenses + Administration, General
Selling & Distbution Expenses
 PROFIT BEFORE
RETURN ON CAPITAL INTEREST & TAX
EMPLOYED = CAPITAL EMPLOYED

CAPITAL EMPLOYED = Long Term Debt +

Shareholders Equity

Where Shareholders equity = Ordinary Equity

+ Reserves & Surplus + Retained
earnings/Profit & Loss Account (Cr.) Balance
+ Preference Equity.

Return On Capital Employed is

otherwise known as
Return on Investment
 PROFIT AFTER TAX
RETURN ON
=
NET WORTH NET WORTH

Return On Net Worth is also known as

Return on Shareholders Equity

Shareholders Equity =
Equity shareholders funds
+ Preference Equity
 PROFIT AFTER TAX – Pref. Dividend
RETURN ON
=
EQUITY Equity shareholders funds

Equity Shareholders Funds =

Ordinary Shareholders Equity
+Reserves & Surplus +
Retained Earnings +
Profit & Loss A/c. Cr. balance
RETURN ON PROFIT AFTER TAX
TOTAL = TOTAL ASSETS
ASSETS
 EARNINGS PER SHARE

PROFIT AFTER TAX – PREF.

DIVIDEND
No. OF SHARES

No. of Shares = Equity capital/ called up

capital
DIVIDENDS PER SHARE

DIVIDENDS DECLARED AND PAID

NUMBER OF SHARES
 DIVIDEND PAYOUT
RATIO

DIVIDEND PER SHARE

EARNINGS PER SHARE
PRICE EARNINGS RATIO

MARKET VALUE PER SHARE

EARNINGS PER SHARE

MARKET VALUE PER SHARE =

EARNINGS PER SHARE x PRICE
EARNINGS MULTIPLE i.e. ratio.
BOOK VALUE OF SHARE

NET WORTH
NUMBER OF SHARES