Presented byGroup 11 Umashankar Joshi (131) Ruchi Gupta(132) Ravish Kapoor(133) Archana Madhu KumarA(134)
Flow of presentation
Objectives of financial statement analysis
Various tools used Horizontal analysis
Trend analysis
Vertical analysis Ratio analysis Cash conversion cycle Conclusion
Financial Statement Analysis
Identify financial strengths and weaknesses of the firm
by properly establishing relationship between the items of the balance sheet and the profit and loss account.
Consists of Comparison for the same company over a period of
time. Comparisons of different companies either in the same industry or in different industries.
Used for
Enabling investors and creditors to
Evaluate past performance and financial position To predict future performance
Tools for financial statement analysis
Horizontal analysis
Trend analysis Vertical analysis/Common size statements Ratio analysis Profitability ratios Du Pont approach Liquidity ratios Solvency ratios Capital market ratios Cash conversion cycle
Horizontal analysis
Financial statements present comparative information
for the current year and the previous year Calculate amount changes and percentage changes from the previous year to current year
Formula Used
Trend analysis
Involves calculation of percentage changes in financial
statement items for a number of successive years Trend percentages
Select a base year Set item amounts of that year = 100% Corresponding amount of each following year = % of
base amount
Vertical Analysis
Proportional expression of each item on a financial to
the statement total Results presented in the form of common size statements
Common-size Financial Statements
Standardizing Financial statements by introducing a common denominator In a common-size balance sheet each component of the balance sheet is expressed as a percentage of total assets In a common-size income statement each item is expressed as a percentage of sales
Allow comparison of companies of different size (in terms of total assets and sales) Allow (internal) structural analysis of the financial statements of a company
Relative magnitude of asset, liability, equity and income statement components
Combination of horizontal and vertical analysis
Ratio Analysis
Establishing a relevant financial relationship between
components of financial statements
Financial ratios used to evaluate-
Profitability Liquidity Solvency Capital market strength
Use of Financial ratios
A financial ratio expresses the mathematical relationship between two or more financial statement items that are logically linked Comparison over time and in space
Like must always be compared with like
Combined use of financial ratios is more informative Financial ratios as indicators of management performance and financial strength
Liquidity
Ability of a business to meet its short term obligations
when they fall due Quality of being readily converted into cash Payment to suppliers and lenders on time Timely distribution of wages and salaries
Current Ratio
Quick Ratio Debtor Turnover Ratio Inventory Turnover ratio
Current Ratio
Ratio of current assets to current liabilities
Ability of a firm to pay debts in short term
Current Ratio
Current assets Current liabilities
2010-11
8035.22 = 0.639 12569.38
2011-12
9268.28 = 0.692 13258.48
Quick Ratio
Ratio of more liquid current assets to liabilities
Also known as acid test ratio As a thumb rule should be at least 1:1
Quick Ratio
Quick Assets Current liabilities
2010-11
5289.90 = 0.42 12569.38
2011-12
6018.28 = 0.452 13258.48
Debtor Turnover Ratio
Measures efficiency of firms collection policy Shows number of times each year the debtors turn into
cash High ratio indicates that debtors are being converted into cash quickly
Debtor Turnover Sales Average Debtors 2010-11 1,10,564 = 12.33 8962.33 2011-12 1,18,587 = 12.02 9865.48
Average Debt collection period
Computed by dividing the number of days in a year by
debtor turnover ratio Gives average outstanding days for debtors
Avg. Debt collection period 360 debtor turnover
2010-11
2011-12
360 = 29.19 12.33
360 = 29.95 12.02
Inventory Turnover Ratio
Number of times a companys inventory is turned into
sales Lesser the inventory more is the cash available with the firm
Inventory Turnover Cost of goods sold Average inventories
2010-11 98526.54 = 7.82 12586.48
2011-12 102569.79 = 8.85 11586.25
Capital Market Ratios
Relate market price of a
companys earnings to its earnings and dividends
Price Earnings Ratio
This ratio is used extensively by institutional investors
for making investments A high ratio indicates stock markets confidence in companys growth
P-E Ratio Average Stock Price Earnings per share
2010-11 398.58 = 38.8 10.25
2011-12 439.47 = 39.63 11.08
Dividend Yield
Ratio of dividend per share to current market price per
share Represents cash return to shareholders
Dividend Yield
2010-11
2011-12
Dividend Per share Average stock price
8 = 2.02% 398.58
11 = 2.52% 439.47
Gross profit Ratio Net profit Ratio/ Profit Margin
Operating Ratio Assets turnover Return on assets Return on equity
Gross profit Ratio
Relationship between gross profit and net sales
Higher the ratio , low cost of goods sold
Gross Profit Ratio Gross Profit Net sales
2010-2011 4,00,000 12,00,000 =33.33%
2011-2012 6,00,000 16,00,000 = 37.5%
Net profit Ratio/ Profit Margin
Indicates the overall efficiency of the business.
Higher the net profit ratio, better the business.
Net Profit Ratio
2010-2011
2011-2012
Net Profit after tax Net sales
2,59,000 12,00,000
=21.5%
3,60,000 16,00,000
=22.5%
Operating Ratio
To judge the operating efficiency of the business A decline in the operating ratio is better because it would lead a higher margin , which means more profit
Operating Profit Ratio Cost of goods sold + operating Expenses Net Sales 2010-2011 9,40,000 12,00,000 =78.33% 2011-2012 11,80,000 16,00,000 =73.75%
Asset Turnover
Efficiency with which assets are utilized
How many times assets were turned over in a period Higher the ratio, more efficiently the company
manages its assets
Asset turnover Net sales
Average total assets
2010-2011 12,00,000 5,50,000 =2.18 times
2011-2012 16,00,000 = 2.31 times 6,90,000
Return on assets
Measure of profitability from a given level of
investment Excellent measure of overall performance of a company
Return on assets Profit after tax Average total assets
2010-2011 2,59,000 5,50,000 =47.1%
2011-2012 3,60,000 6,90,000 =52.17%
Return on Equity
Measure of profitability from the standpoint of
shareholders Measure the efficiency with which shareholders funds were employed
Return on Equity 2010-2011 2011-2012
Profit after tax Average shareholders equity
2,59,000 =52.85% 4,90,000
3,60,000 6,20,000
=58%
The DuPont System
Method to breakdown ROE into: ROA and Equity Multiplier ROA is further broken down as: Profit Margin and Asset Turnover Helps to identify sources of strength and weakness in
current performance Helps to focus attention on value drivers
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ROE
ROA
EQUITY MULTIPLIER
PROFIT MARGIN
ASSET TURNOVER
ROE ROA Equity Multiplier Net Income Total Assets Total Assets Common Equity
ROE
ROA
EQUITY MULTIPLIER
PROFIT MARGIN
ASSET TURNOVER
ROA Profit Margin Total Asset Turnover Net Income Sales Sales Total Assets
The DuPont Approach
Shows how Return on assets is influenced by profit
margin and assets turnover To achieve a certain rate of return on assets, companies can choose between various combinations of profit margin rates and assets turnover
Companies operating
in mass market
Companies selling premium products
low profit margin and high assets turnover
high profit margin and low assets turnover
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Leverage / Trading on equity
The practice of acquiring assets using debt financing
to earn higher rate of return on equity
High leverage
More risky to the creditors
Low leverage
Too conservative
Solvency Ratios
Debt to equity
Interest coverage
Debt to Equity
Measure the relationship of the capital provided by
creditors to the amount provided by the shareholders Lower the debt equity ratio higher the degree of protection enjoyed by the lenders Higher ratio indicates an aggressive use of leverage, more risky for the creditors
Debt to Equity Total liabilities Shareholders equity 5,50,000 4,90,000 = 1.13 6,90,000 6,20,000 =1.12% 2010-2011 2011-2012
Interest coverage
Measure of protection available to creditors for
payment of interest charges by the company Higher ratio implies adequate safety for profit for payment of interest even if there were to be a drop in the companys earnings
Interest coverage 2010-2011 2011-2012
Profit before interest and tax
Interest expense
3,00,000 40,000
=7.5 times 4,05,000 45,000
= 9 times
Cash Conversion Cycle
This is a tool used to measure how well a company is making use of its working capital
Its is the speed with which a business converts its
inventories and debtors into cash in the normal course of business The shorter the firms cash conversion cycle the more efficient it is in managing its current assets.
Cash Conversion Cycle = days receivables + days inventories- days payables Eg: Receivables conversion period (days receivables)= 31 Inventory conversion period (days inventory) =49 Payment Deferral Period (days payables) =56 Operating cycle = days receivables+ days inventories = 31 + 49 =80 Cash Conversion Cycle = operating cycle- days payables = 80-56 =24
Conclusion
The amounts reported in the financial statements are a
representation of what is really happening with the business. The task of the analyst is to understand the business factors that give rise to the reported figures.
Thank You
