Financial Statement Analysis

Assets Liabilities Owner’s Equity

Fixed Assets : long lived asset Long term Liabilities Share Holder’s equity
• Property • Secured long term debt Shareholders Equity
• Plant • Mortgage loan
• Machinery
Current Assets : Assets expected to Current Liabilities: is expected to Retained Earnings
be realized in cash or consumed extinguished or satisfied during the
during the normal operating cycle normal operating cycle or within
one year
• Cash • Accounts payable Total Earnings – Total Dividend paid
• Marketable Securities • Taxes payable
• Accounts Receivables • Short term loans
• Inventory • Accrued expenses
• Prepaid Expenses • Deferred Revenues( payment
received in advance but not
rendered the service)
• Current Portion of long term
debt
Other Assets Net worth = Owner’s equity
Investments
Intangible assets
Four techniques used : Financial
statement analysis
• Horizontal Analysis
• Vertical Analysis
• Trend Analysis
• Ratio Analysis
Horizontal Analysis
• Presents Comparative information for two years

• It calculates amount of changes from previous year to the current

year.
Trend Analysis
• Studying the changes in financial statement for many years.

• It is extension of horizontal analysis.

Vertical Analysis
• It is also called as common size statements

• It is convention to consider sales as 100% and then calculating

expenses as a percentage of sales in statement of profit and loss
account
• For the balance sheet, total assets as 100% and then calculating the
percentage of the assets based on the total assets
• Similarly it is followed for the liabilities
Ratio Analysis
• Establishes the financial relationship between components of
financial statements

• Financial Ratios are used to evaluate profitability, liquidity, solvency

and capital market strength.
Ratio Analysis
• Profitability Analysis
• Liquidity analysis
• Solvency analysis
• Capital market standing
Profitability Analysis
• Profit margin =

• Asset Turnover =

Asset Turnover is the measure of a firm efficiency in utilizing the asset

Lower Asset turnover implies idle assets.
Profitability Ratio’s

• Return on Assets =

• Return on Equity =
DuPont Chart
Overall Performance Measures
• Return on Investment

• Return on Invested capital =

• Return on Owner’s equity =

Liquidity Analysis
• Current Ratio
• Quick Ratio
• Receivables Turnover
• Inventory Turnover
• Payable turnover
Balance Sheet Model of the Firm
Current
Liabilities
Current Assets
Net
Working Long-Term
Capital Debt

How much short-

Fixed Assets
term cash flow
1. Tangible does a company
1. Sharehold
need to pay its
2. Intangible ers’ Equity
bills?

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• Current Assets are cash and other assets that are expected to be
converted to cash within the year.
• Cash
• Marketable securities
• Accounts receivable
• Inventory
• Current Liabilities are obligations that are expected to require
cash payment within the year.
• Accounts payable
• Accrued wages
• Taxes
Liquidity Analysis
• Current Ratio = : 2/1

• It says the firms ability to pay off the current liabilities

Current Ratio 2016 2015

Current Assets/Current = 1.73 = 1.74
liabilities
Liquidity Analysis
• Quick Ratio =

• Desired Ratio is 1:1

Quick Ratio 2016 2015

Current Assets- = 1.35 = 1.36
inventories/Current
liabilities
Raw material
Cash
purchased Finished goods sold
received
Order Stock
Placed Arrives

Inventory period Accounts receivable period

Accounts payable period

Time

Firm receives invoice Cash paid for materials

Operating cycle

Cash cycle
Receivable turnover ratio
• Recievables turnover
• Measures the efficiency of firm’s credit policy
• Shows number of times the receivables are turned into cash
• Higher RTO indicates the receivables are converted rapidly into cash

• Receivables Turnover =

• Average collection period =

Average collection period 2016 2015

94.80 88.98
Inventory Turnover
• Inventory Turnover
• Number of times inventory is turned to sales
• High inventory turnover is a sign of efficient Inventory management

• Inventories Turnover =

• Average collection period =

Average Inventory 2016 2015

Collection period
CGS/Average inventory 30 40
Payable ratio –
• Payable Turnover =
Solvency Analysis
• Liquidity Vs Solvency
• Liquidity refers to company’s ability to meet its current obligations
• Solvency pertains to company’s ability to meet its interest cost and
repayment schedule associated with it’s long term obligations.
• Ratio’s under solvency analysis
• Debt to Equity Ratio
• Liabilities to Equity Ratio
• Interest cover
• Debt to Equity Ratio =

• Higher ratio indicates high levered the firm is. It is risky for creditors
• Lower ratio indicates the firm is conservative and low leverage

Liabilities to Equity Ratio =

A fall in the liabilities to equity ratio indicates the decreasing dependence on liabilities

Interest cover =

Higher ratio indicates sufficient income to cover the interest expenses

Capital market Ratio
• P/ E ratio =

• P/E says how much the investor is willing to pay for per rupee of
earnings
• Higher PE ratio shows the confidence of the investor and are
overpriced

• Price/book value ratio

Capital market Ratio
• Dividend yield =

• Dividend payout =
Order of payment
• Profit Before tax : :::::_____________
Less Interest payments ____________
Profit after interest before tax __________
Less : TAX ____________
Profit after tax _________________________
Less : Preference Dividend____________
Earnings available to Equity share holders ___________
 Basic EPS
• Basic EPS : =