Financial Statements

Analysis of Financial Statements
October 6, 2005
Financial Statements
• Profit & Loss Account
• Balance Sheet
• Cash Flow Statement

Financial Statements Analysis -
• By Whom
Investors
Lenders
Analysts
Credit Rating Agencies
Financial Analysis - Why
• Investor
Whether his investment is safe ?
Whether his growth projections will
fructify ?
Whether he should further invest ?
Whether he should continue to hold ?
Whether he should exit ?
• Lenders
Whether he should lend ? On what terms ?
Whether his lent money is safe ?
Any risk on payment of interest and
repayment of principal to him?
Whether materials can be supplied on
credit ?
• Analysts
To inform equity investors about the
financial health and future prospects
of the Company
• Credit Rating Agencies

To inform debt investors about the
degree of safety with respect to timely
payment of interest and principal
Financial Analysis - How
• Tools of Analysis
Profit and Loss A/c & Related Ratios

Balance Sheet & Related Ratios
Cash Flow Statement
Profit & Loss Account
• It is an income and expense statement for a

defined period.
PROFIT AND LOSS ACCOUNT
Rs. in Crores
Current Previous
Year Year
Net Sales 701 623

Less : Cost of Goods Sold (552) (475)
(Raw Materials & Mfg Exp)
Gross Profit 149 148
Less : Operating Expenses (56) (49)
(Depn, Admin, Selling)
Operating Profit 93 99
Net Non-operating Income/(Expense) (4) 6
Profit Before Intererest & Tax (PBIT) 89 105
Interest (21) (22)
Profit Before Tax (PBT) 68 83
Tax (34) (41)
Profit after Tax (PAT) 34 42
Dividends (28) (28)
Retained Earnings 6 14
Profit & Loss Account - Ratios
• Gross Margin Ratio - measures efficiency of

production and pricing
• Operating Margin - measures quality of a
firms operations
• Net Profit/Sales - indicates the earnings left for
shareholders
• Dividend %age and Dividend Payout Ratio
Profitability Ratios
Current Previous
1) Gross Profit/Net Sales 21% 24%

2) Op Profit/Net Sales 13% 16%
3) Net Profit/Net Sales 5% 7%
4) Dividend % 18% 18%
5) Dividend Payout ratio 82% 67%
Balance Sheet
• It is a statement of what a Company Owns (assets) and what

the Company Owes (liabilities).
Key Items in a Balance Sheet
Net Worth
Debt
Capital Employed
Working Capital
BALANCE SHEET
Rs. in Crores
Current Previous
year year
I. Sources of Funds
a) Shareholders Funds
(i) Share Capital 150 150
(ii) Reserves & Surplus 112 106
Shareholders Funds 262 256
b) Loan Funds
(i) Secured 143 131
(ii) Unsecured 69 25
Loan Funds 212 156
Sources of Funds 474 412
II. Application of Funds
I) Fixed Assets 330 322

ii) Investments 15 15
iii) Current Assets, Loans & Adv.
a) Inventories 105 72
b) Sundry Debtors 114 68
c) Cash & Bank Balance 10 6
d) Loans & Advances 5 10
234 156
Less : Current Liabilites (105) (81)

Net Current Assets 129 75
Application of Funds 474 412

Balance Sheet - Ratios
• Liquidity Ratios
• Leverage Ratios
• Turnover Ratios
• Valuation Ratios
Liquidity Ratios - measures a firms ability to

meet its short term
obligations
Current Ratio - ability of a firm to meet its

current liabilities
Quick Ratio - measures immediate
liquidity
Liquidity Ratios Current Previous

Year Year
Current Ratio 2.2 : 1 1.9 : 1
(Current Assets/Current Liab)
Quick Ratio 1.2 : 1 1.03 : 1

(Quick Assets / Current Liab)
Quick Assets = Current Assets Less Inventory
Leverage Ratios - refers to the use of debt
finance
Debt Equity Ratio - proportion of debt and

equity
Debt Service Coverage Ratio - used by
lending institutions
Interest Coverage Ratio
Leverage Ratios Current Previous

Year Year
Debt Equity Ratio 0.8 : 1 0.6 : 1
(Total Debt/Total Equity)
DSCR 0.8 : 1 1.16 : 1
((PAT+Depn+Int)/Int+Repayment of Loan)
Interest Coverage 4 times 5 times
(PBIT/Interest)
Turnover Ratios - measures how efficiently the

assets are employed by a firm
Inventory Turnover
Debtors Turnover
Average Collection Period
Turnover Ratios Current Previous

Year Year
Inventory Turnover (times) 6.24 6.60
(Cost of goods sold/Avg Inventory)
Debtors Turnover (times) 7.70 9.16
(Net Sales/Avg Debtors)
Average Collection period 47 days 40 days
(Avg Debtors/Avg daily sales)
Valuation Ratios - indicates worth of an equity

share
Book Value per share
Earnings Per Share
Price-earnings ratio
Dividend Yield ratio
Market Value to Book Value
Valuation Ratios Current Previous
Year Year
Book Value per share (Rs.) 17.47 17.06
(Net Worth / No. of shares)
Earnings Per Share (Rs.) 2.27 2.80
(PAT/No.of shares)
Price Earnings Ratio 9.25 10.7
(Market Price per share/EPS)
Market Price 21 30
Valuation Ratios Current
Previous
Year Year
Dividend Yield 8.6% 6%
(Div/Market Price)
Market Value to Book Value 1.20 1.75
Other Crucial Ratios
Current Previous
Year Year
Return on Capital Employed 20% 25%
(PBIT/ Avg Capital Employed)
Return on Equity 13% 16%

(PAT/Avg Equity)
Cash Flow Statement Analysis
• To understand how a firm has obtained cash

and how it has spent during a given period
Cash Flow Statement Analysis
Cash Flows are classifed into :
• Cash Flow from Operating Activities
(Business operations)
• Cash Flow from Investing Activities
(Purchase/Sale of Fixed Assets, Investments)
• Cash Flow from Financing Activities
(Borrowings, Securities Issues, etc.)
Limitations of Ratios
• Based on Pure Numbers

• Development of Benchmarks
• Window Dressing of Accounts
• Variations in Accounting Policies
Guidelines for analysis
• Use ratios to get clues to ask right questions
• Be Selective in the choice of ratios
• Employ proper benchmarks
• Restate Figures which are not consistent
• Combine the financial analysis with other
reports like Notes to Accounts, Auditors Report,
Directors Report, etc.

Financial Statements

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Analysis of Financial Statements

• Profit & Loss Account

• Cash Flow Statement

• Credit Rating Agencies

Profit and Loss A/c & Related Ratios

• It is an income and expense statement for a

Net Sales 701 623

• Gross Margin Ratio - measures efficiency of

1) Gross Profit/Net Sales 21% 24%

• It is a statement of what a Company Owns (assets) and what

Sources of Funds 474 412

II. Application of Funds

I) Fixed Assets 330 322

Less : Current Liabilites (105) (81)

Application of Funds 474 412

Liquidity Ratios - measures a firms ability to

Current Ratio - ability of a firm to meet its

Liquidity Ratios Current Previous

Quick Ratio 1.2 : 1 1.03 : 1

Debt Equity Ratio - proportion of debt and

Leverage Ratios Current Previous

Turnover Ratios - measures how efficiently the

Turnover Ratios Current Previous

Valuation Ratios - indicates worth of an equity

Return on Equity 13% 16%

• To understand how a firm has obtained cash

• Based on Pure Numbers

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