Class Understanding FS

8/12/2019 Class Understanding FS

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Module III

Understanding of FinancialStatements

WHAT IS AN ACCOUNTING?


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Accounting is a Language of Business

Accounting is an information processingsystem and the products of this process

are Financial Statements


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Sources of Information

Private Information Public Information

Annual Reports Quarterly Results Prospectus Others


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Quarterly Results

SEBI WHAT ? SEBI asks companies to mandatorily publish

and file quarterly results


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Prospectus

What is a Prospectus?

What is red herring prospectus?

What does it contain?

Examples, if any


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http://www.sebi.gov.in/sebiweb/home/list/3/15/11/0/Red-Herring-Documents-filed-with-ROC

SEBI

Sources of red herring prospectusand final prospectus


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Question

What does an Annual Report

Consists of


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Financial Statements

Balance Sheet Profit and Loss Account

Cash Flow Statement


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Balance Sheet consists of Chairmans message

Key Financials Executive team profile Highlights & Objectives Driving sustained growth MDA or MAD Directors reports Report on Corporate Governance Auditors report Financial Statements Schedules Notes to Accounts

Consolidated Financial Statements


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Analysis of Financial Statement


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Analysis

Depends upon the need of the users andinformation available

Users Availability of information


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Analysis

Quantitative Analysis

Qualitative Analysis

Annual Reports/Quarterly results/Otherinformation


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Types of Quantitative Analysis

Cash Flow Statement Analysis Comparative Statement Analysis

Common size Statement Analysis Trend Analysis Ratio Analysis Dupont Analysis


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Cash Flow Statement Analysis

Cash from Operations activities (A)

Cash from Investments activities (B)

Cash from Financing activities (C)


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Relation and Comparison of Data

Accounting data in absolute terms do not provide muchmeaning the analysis involves comparison and relation

Ratio Whenever one item is expressed (as a fraction or adecimal fraction or an integer) in terms of another item

Example A firm earns a net profit of Rs. 20,000 on a sale ofRs. 500,000. We could express this relationship as ____?

4 percent or 4% profit margin Comparisons could be made

With Companys past performance With Competing Firms With an Absolute Standard With Industry/Economy trend With Budgets (Planning and Control)


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But In most cases, there are no standards against which a

particular ratio value could be tested We make relative conclusions bycomparing the ratios with

industry averages Thus, at best the conclusions could be better than or worse

than or average Possible pitfalls in these comparisons could be the different

accounting conventions Inventory valuation (LIFO vs. FIFO) Different methods of depreciation Typical items (eg. Retirement benefits)


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Ratio Analysis

1. Liquidity Ratios2. Profitability Ratios

3. Leverage Ratios4. Coverage Ratios5. Efficiency Ratios

6. Investors Ratios 7. Dupont Analysis


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Profitability Ratios

Marginon sales

Gross Profit Margin

Operating Profit Margin

Earnings Before Interest & Tax

Profit before tax

Net Profit Margin (i.e., Profit after tax)

Return onInvestment

Operating Profit to Operating Assets

Net Income to Total AssetsReturn on Equity

Efficiency

Total Asset Turnover

Operating Asset Turnover

Working Capital Turnover

Shareholder Equity Turnover

Returnper share

Earnings per share

Earnings to price

Dividends per share


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Solvency Ratios

Short-term

Net Working Capital

Current Ratio

Quick Ratio

Accounts Receivable Turnover

Collection Period

Inventory Turnover

Conversion Period

Long-term

Total Debt to Total Capital

Long Term Debt to Total Capital

Long Term Debt to Fixed Assets

Interest Cover

Times Fixed Charges Covered

Gearing

Equity Multiplier


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Liquidity Ratios

Current Ratio

Quick Ratio

Net Working Capital


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Profitability Ratios

Gross margin or Operating Profit Ratio

Net Profit Ratio

ROCE

ROE


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Leverage Ratios

Debt Equity Ratios

Debt to Capital Employed


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Efficiency Ratios/Turnover Ratios

Receivables or Debtors Turnover

Inventory or Stock Turnover

Assets Turnover


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Investors Ratios

EPS

PE ratio

DPS


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Implied growth rate equation

Also called sustainable growth rate

= Return on Shareholders equity X Profitretention rate


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Du Pont Analysis

A combination of margin on sales ratio, efficiency ratio, andlong-term solvency ratio is popularly known as the DuPontanalysis

Return on Equity (ROE) =Net Profit Margin (defined as Net Profit/Sales) x AssetUtilization Ratio (defined as Sales/Total Asset) x EquityMultiplier Ratio (Total Assets/Owners Equity)

The DuPont analysis approach helps in identifying andpinpointing the reasons behind high or low profitability of afirm vis--vis its competitors


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Dupont Analysis

ROE = NPM X Asset Turnover X Leverage


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Qualitative Analysis

Look at handout on questions to be asked


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Basics of Accounting

Understanding

Analyzing


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Questions

Thank you

Class Understanding FS

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