Ch_025

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Chapter - 25

Financial Statement

Analysis

8/7/2019 Ch_025


BY Akash Saxena

Financial Analysis

Financial analysis is the process of identifying

the financial strengths and weaknesses of the

firm by property establishing relationships

between the item of the balance sheet and theprofit and loss account.

8/7/2019 Ch_025


BY Akash Saxena

Users of Financial Analysis

Trade creditors

Lenders

Investors Management

8/7/2019 Ch_025


BY Akash Saxena

Nature of Ratio Analysis

A financial ratio is a relationship between two

accounting numbers. Ratios help to make a

qualitative judgement about the firm¶s

financial performance.

8/7/2019 Ch_025


BY Akash Saxena

Standar d of Compar ison

Time series analysis

Inter-firm analysis

Industry analysis Proforma financial statement analysis

8/7/2019 Ch_025


BY Akash Saxena

Types of Financial Ratios

Liquidity ratios

Solvency ratios

Turnover ratios

Profitability ratios

Equity-related ratios

8/7/2019 Ch_025


BY Akash Saxena

Liquidity Ratios

Liquidity ratios measure a firm¶s ability to

meet its current obligations.

Current assets

Current ratio = Current liabilities

Current assets ± Inventor iesQuick ratio =

Current liabilities

Cash + Mar k etable secur itiesCash ratio =

Current liabilities

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BY Akash Saxena

Solvency Ratios

Solvency ratios measure the dependence of

a firm on borrowed funds.

DebtDebt-equity ratio Equity ( Net Worth)

Debtratio

Debt Equity employed

Ear nings before interest and tax

coverage Interest

Debt Debt

Capital

Interest

!

! !

!

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BY Akash Saxena

Tur nover Ratios

Turnover or activity ratios measure the firm¶s

efficiency in utilising its assets.

Cost of goods sold or net salesInventory tur nober Average (or closing) inventory

Number of days in the year (say, 360)of inventory holding

Inventory tur nover

Credit sales or net sa

Debtors tur nover

Days

!

!

!

les

Average (or closing) debtors

Number of days in the year (say, 360)per iod

Debtors tur nover Collection !

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BY Akash Saxena

Tur nover Ratios

Net salesCurrent assets tur nover

Current assets

Net sales current assets tur nover

Net current assets Net sales

assets tur nover Net f ixed assets

Net salesassets tur nover

Net assets or capital

N et

Fixed

N et

!

!

!

!employed

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BY Akash Saxena

Prof itability Ratios

Profitability ratios measure a firm¶s overall

efficiency and effectiveness in generating

profit.

before interest and tax (PBIT)Mar gin Net sales

after tax (PAT)mar gin

Net sales

PBIT

retur n on investment Net assets

Prof it after taxon equity

Equity (net worth)

P rofit

P rofit N et

Before tax

Return

!

!

!

!

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BY Akash Saxena

Equity-related Ratios

Equity-related ratios measure the

shareholders¶ return and value.

Prof it after taxEPS

Number of or dinary shares

DPS Number of or dinary shares

DPSratio

EPS Pr after taxDPS

yieldMar k et value per share

Dividends

Dividends P ayout

ofit

Dividend

!

!

! !

!

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BY Akash Saxena

Equity-related Ratios

EPSEar nings yield

value per share

value per shareP

/ E ratio = EPS

Net worth value per share

Number of or dinary shares

value per shareM Bvalue

Book value per shareMar

'

M arket

M arket

Book

M arket

Tobin s q

!

!

!

!k et value of assets

Economic value of assets

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BY Akash Saxena

DuPont Analysis

DuPont Analysis

integrates the important ratios to analyse a f irm's prof itability.

PBIT Sales PBIT

RO NA= Net Assets Net Assets Sales

PAT Sales PBIT PAT Net AssetsROE

Net Worth Net Assets Sales PBIT Net Worth

! v

«! ! v v v¬

-

ROE Assets tur nover × Mar gin × everage L

»¼½

!

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BY Akash Saxena

ISPAT INDUSTRIES LIMITED

RATIO ANALYSIS

Liquidity ratios

Current ratio 1.47 1.24

Quick ratio 0.05 0.06

Activity ratios

Sales/ A 0.30 0.22Sales/FA 0.81 1.25

Sales/Debtors 5.75 5.69

Sales/Inventory 8.70 5.49

Leverage ratios

Debt/Equity 2.85 2.50

Debt/ A 0.74 0.71PBI /Interst 1.90 1.04

Profitability ratios

PBI /Sales 29.41% 7.30%

Net profit/Sales 13.96% 0.26%

PBI / A 8.68% 1.59%

Net profit/NW 15.87% 0.21%

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8/7/2019 Ch_025


BY Akash Saxena

INFOSYS

Financial Ratios2001 2000

Activity Ratios

n e /A s s e s

n e / e s

Current Ratios

A /

A /A s s e s

A /A s s e s

Profitability Ratios

Margin

B / n e % %

B / n e % %

A / n e % %

Return on Investment

B /A s s e s % %

B /A s s e s % %

A / W % %

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BY Akash Saxena

SBU PROFIT & LOSS ACCOUNT, YTD 2002

USD in '000

% of

YTD Rev.

Total Revenue 14850 100.0%

Onsite revenue 12600 84.8%

Offshore revenue 2250 15.2%

Service Credit

- Onsite Revenue % 85%

CONTROLLABLE COSTS

CGS A

Salaries & Related Costs:

Onsite Salaries 6375 42.9%

Offshore Salaries

GRP Allocated 0 0.0%

Offshore Salaries 840 5.7%

Other Salary Overheads 34 0.2%

Subcontractor Costs

Salaries-Onsite 0 0.0%

Salaries-Offshore 0 0.0%

Foreign Travel 250 1.7%

Incentives

Project Incentives 0 0.0%

SBU Special Incentives 0 0.0%

Data Communication Charges 0 0.0%

Legal Immigration Fees 333 2.2%

Other Professional Fees 0 0.0%

Total CGS A Cost 7832 52.7%

CGS B

Data Communication Charges 90 0.6%

Medical Insurance 300 2.0%

Depreciation: CGS 223 1.5%

Others CGS 0 0.0%

Total CGS B Cost 613 4.1%

TOTAL CGS A + CGS B Costs 8445 56.9%

Gross Margin 6405 43.1%

8/7/2019 Ch_025


BY Akash Saxena

Utility of Ratio Analysis

Assessment of the firm¶s financial conditionsand capabilities.

iagnosis of the firm¶s problems weaknesses

and strengths. redit analysis

Security analysis

omparative analysis

Time series analysis

8/7/2019 Ch_025


BY Akash Saxena

Cautions in Using Ratio Analysis

Standards of comparisons

ompany differences

Price level

ifferent definition

hanging situations

Past data

Ch_025

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