8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 1/21
Chapter - 25
Financial Statement
Analysis
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 2/21
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
http://slidepdf.com/reader/full/ch025 3/21
BY Akash Saxena
Users of Financial Analysis
Trade creditors
Lenders
Investors Management
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 4/21
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
http://slidepdf.com/reader/full/ch025 5/21
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
http://slidepdf.com/reader/full/ch025 6/21
BY Akash Saxena
Types of Financial Ratios
Liquidity ratios
Solvency ratios
Turnover ratios
Profitability ratios
Equity-related ratios
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 7/21
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
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 8/21
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
!
! !
!
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 9/21
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 !
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 10/21
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
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 11/21
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
!
!
!
!
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 12/21
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
!
!
! !
!
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 13/21
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
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 14/21
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
!
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 15/21
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%
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 16/21
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 17/21
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 18/21
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 % %
8/7/2019 Ch_025
http://slidepdf.com/reader/full/ch025 19/21
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
http://slidepdf.com/reader/full/ch025 20/21
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
http://slidepdf.com/reader/full/ch025 21/21
BY Akash Saxena
Cautions in Using Ratio Analysis
Standards of comparisons
ompany differences
Price level
ifferent definition
hanging situations
Past data