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CORPORATE FINANCE

ASSIGNMENT ON

ANALYSIS OF FINANCIAL STATEMENTS

SUBMITTED TO: SIR ATIF IQBAL SUBMITTED BY: FAHAD AHMED KHAN HASSAN ALI KHAN

UNIVERSITY OF KARACHI

ANALYSIS OF FINANCIAL STATEMENTS

Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. OR Financial Statement Analysis is the process of understanding the risk and profitability of the firm through analysis of reported financial information, by using different accounting tools and techniques. Financial Statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in Financial Statements is not an end in itself as no meaningful conclusion can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

TOOLS OF FINANCIAL STATEMENT ANALYSIS:

Following are the most important tools of financial statement analysis. 1) Horizontal and vertical analysis. 2) Ratio analysis.

1) Horizontal and Vertical Analysis:

Horizontal Analysis or Tre nd Analysis: Comparison of two or more year's financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both Rupees and %age form. Trend Pe rcentage: Horizontal analysis of financial statements can also be carried out by computing trend percentages. Trend percentage states several years' financial data in terms of a base year.The base year equals 100%, with all other years stated in some percentage of this base. Vertical Analysis: Vertical Analysis is the procedure of preparing and presenting common size statements. Common size statement is one that shows the items appearing on it in percentage form as well as in Rupees form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by use of common size statements.

2) Ratios Analysis:
The ratio analysis is the most important tool of financial statement analysis. Ratios simply means one number expressed in term of another. A ratio is statistical yardstick by means of which relationships between two or various figures can be compared or measured. Ratios show how one number is related to another. Advantages of Ratios Analysis: 1) Simplifies financial statements. 2) Facilitates inter- firm comparison. 3) Helps in planning. 4) Makes inter- firm comparison possible. 5) Help in investment decisions. There are various ratios which can analyze any particular financial statement of any firm, some important ratios are given below. CURRENT RATIO:

Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity a nd is most widely used to make the analysis for short term financial position or liquidity of a firm.It is calculated by dividing the total of the current assets by total of the current liabilities. Curre nt Assets Curre nt Liabilites QUICK RATIO:

Liquid ratio is also termed as "Liquidity Ratio", "Acid Test Ratio" or "Quick Ratio".It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. Curre nt Assets-Inventories Curre nt Liabilities FIXED ASSET TURNOVER RATIO:

This ratio measures the efficiency and profit earning capacity of the concern.Higher the ratio, greater is the intensive utilization of fixed assets.Lower ratio means under- utilization of fixed assets. The ratio is calculated by using following formula: Net Income/ Profit after tax Net Fixed Asset TOTAL ASSET TURNOVER RATIO:

The final asset management ratio, the total assets turnover ratio, measures the turnover of all the firms assets. It measures the ability of a company to use its assets efficiently.This ratio considers all assets, current and fixed.

Net Income/ Profit Afte r Tax Total Assets DEBT RATE/RATIO :

A ratio that indicates what proportion of debt a company has has relative to assets. The measures gives an idea to the leverage of the company along with the potential risk the company faces in terms of its debt load.A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk. Debt Ratio = Total Liabilities x 100 Total Assets TIMES INTEREST EARNED RATIO:

Times interest earned (also called interest coverage ratio) is the ratio of earnings before interest and tax (EBIT) of a business to its interest expense during a given period. It is a solvency ratio measuring the ability of a business to pay off its debts. EBIT* Inte rest charges *EBIT= Earning before interest and tax BASIC EARNING POWER (BEP) :

This ratio shows the raw earning power of the firms assets before the influence of tax and debts, and it is useful when comparing firms with different debts and tax situation. The higher the BEP ratio, the more effective a company is at generating income from its assets.Using EBIT instead of operating income means that the ratio considers all income earned by the company, not just income from operating activity. This gives a more complete picture of how the company makes money.BEP is useful for comparing firms with different tax situations and different degrees of financial leverage. EBIT x 100 Total Asset RETURN ON COMMON EQUITY :

It is the ratio of net profit to share holder's investment. It is the relationship between net profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the profitability from the share holders' point of view. The ratio is generally calculated in percentage. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Net income/Profit after tax x 100 Common equity

EARNING PER SHARE:

Earnings per share ratio (EPS Ratio) is a small variation of return on equity capital ratio and is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. Net Income/Profit Afte r Tax No. Of shares PRICE/EARNING RATIO:

Price earnings ratio (P/E ratio) is the ratio between market price per equity share and earning per share. The ratio is calculated to make an estimate of appreciation in the va lue of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. Market Price per share Earning per share BOOK VALUE PER SHARE:

A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly.Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid. In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate. Book Value per share = common equity Shares outstanding

MARKET BOOK RATIO:

The ratio of a stocks market price to its book value gives another indication of how investors regard the company. Companies that are well regarded by investors which means low risk and high growth have high M/B ratios.A ratio used to find the value of a company by comparing the book value of a firm to its market value.Book value is calculated by looking at the firm's historical cost, or accounting value.Market value is determined in the stock market through its market capitalization. Market value per share Book value per share

1.10

1.09

1.09

1.09
1.09 1.08 1.08

QUICK RATIO: Current Assets-Inventories Curre nt Liabilities

1.11 1.10

1.10
1.10 1.09 1.09 1.09 1.08 1.08 1.09 1.09

1.08
1.07 2011 2010 2009 2008 2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

1.4 1.2 1 1.16 1.05 0.79

0.8 0.6
0.4 0.2 0 2011 2010

0.73

0.73

2009

2008

2007

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.012 0.01
0.01 0.008 0.006 0.004

0.01

0.01

0.01

0.01

0.002
0

2011

2010

2009

2008

2007

DEBT RATE/RATIO : Debt Ratio = Total Liabilities x 100 Total Assets

91.50%

91.05%
91.00%

90.86%
90.38% 90.23% 89.59%

90.50% 90.00%
89.50% 89.00%

88.50%
2011 2010 2009 2008 2007

1.2
1 0.8 0.6 0.4

1.14

1.07

1 0.91 0.83

0.2
0

2011

2010

2009

2008

2007

BASIC EARNING POWER (BEP) : EBIT x 100 Total Asset

3.50%

3.01%
3.00% 2.50% 2.00%

2.92% 2.47%

2.93%

2.18%

1.50%
1.00%

0.50%
0.00% 2011 2010 2009 2008 2007

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

22.30% 19.61%

17.83%

17.19%

18.31%

2011

2010

2009

2008

2007

25

20.26 20 15
10 5 17

14.71

14.31

14.61

PRICE/EARNING RATIO: Market Price per share Earning per share

18 16
14 12 10 8.39

16.29

8 6
4 2 0 2011 5.28

7.02
5.03

2010

2009

2008

2007

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

9.2
9

9.08

8.8
8.6 8.4 8.2 8

8.66
8.32 7.98

8.24

7.8
7.6

7.4 2011 2010 2009 2008 2007

MARKET BOOK RATIO: Market value per share Book value per share

35 30 25 29.82

20
15 11.8 13.8 14.98

10
5

8.67

0
2011 2010 2009 2008 2007

1.11

1.11

1.11

1.11

1.1

1.098 1.096 1.094

2011 2010 2009 2008 2007

QUICK RATIO:

Current Assets-Inventories Current Liabilities

1.112

1.11

1.11

1.11

1.11

1.11
1.108

1.106
1.104 1.102 1.1

1.1
1.098 1.096 1.094 2011 2010 2009 2008 2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

1.2

1.02 1
0.8 0.6 0.4 0.2

0.88

0.81

0.86

0.89

0
2011 2010 2009 2008 2007

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 2011 2010 2009 2008 2007

86.20% 86.02% 86.00%

85.80% 85.60% 2011 2010 2009 2008

86.06%

2007

3.5 3 2.5 2

1.5
1 0.5

BASIC EARNING POWER (BEP) : EBIT x 100 Total Asset

5.60%

5.46%

5.40%
5.20% 5.00% 4.93%

4.82%
4.62% 4.55%

4.80%
4.60% 4.40%

4.20%
4.00%

2011

2010

2009

2008

2007

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

40.00% 35.00% 34.73% 29.43%

30.00%
25.00% 20.00%

24.61%

24.39%

25.37%

15.00%
10.00% 5.00%

0.00%
2011 2010 2009 2008 2007

EARNING PER SHARE: Net Income/Profit Afte r Tax No. Of shares

27 26.17 26
25 24 23 22 23.22 24.47

22.2

22.42

PRICE/EARNING RATIO: Market Price per share Earning per share

18
16

15.32

14
12 10

10.3

9.8

8
6 4 2 0

5.8

5.16

2011

2010

2009

2008

2007

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

10
9 8 7

9.44

9.1 8.03 7.56 7.53

6
5 4

3
2 1 0 2011 2010 2009 2008 2007

MARKET BOOK RATIO: Market value per share Book value per share

60 50

53.11

40
30 20 14.26 25.11

27.36
16.64

10
0 2011 2010 2009 2008 2007

CURRENT RATIO: Current Assets Curre nt Liabilites

1.065 1.06 1.055 1.05 1.045 1.04 1.035 1.03 1.025 1.02 1.015

1.06

1.06

1.06

1.04 1.03

2011

2010

2009

2008

2007

QUICK RATIO: Current Assets-Inventories Curre nt Liabilities

1.065 1.06 1.055 1.05 1.045 1.04 1.035 1.03 1.025 1.02 1.015

1.06

1.06

1.06

1.04

1.03

2011

2010

2009

2008

2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

0.6
0.5 0.4 0.3 0.2

0.56

0.57 0.53

0.54

0.36

0.1
0 2011 2010 2009 2008 2007

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.012 0.01
0.01 0.008

0.01

0.01

0.01

0.01

0.006
0.004 0.002

DEBT RATE/RATIO : Debt Ratio = Total Liabilities x 100 Total Assets

94.50%
94.00% 93.50% 93.00% 92.50% 92.00% 92.84% 93.93% 93.78%

92.00%
91.50% 91.00% 90.50% 90.00%

91.60%

2011

2010

2009

2008

2007

1.07

1.04

1.08

0.92
0.68

0.4
0.2 0

2011

2010

2009

2008

2007

3.50% 3.00% 2.93%

2.74%

2.52%
1.86%

2.50%
2.00% 1.62%

1.50%
1.00%

0.50%
0.00% 2011 2010 2009 2008 2007

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

30.00%
25.00% 20.00%

26.95%

26.39%

27.54%

22.15% 19.73%

15.00%
10.00% 5.00%

0.00%
2011 2010 2009 2008 2007

EARNING PER SHARE: Net Income/Profit Afte r Tax No. Of shares

14
12 10 8 6 4 2 0 7.57 11.79 10.52 10.02

6.33

2011

2010

2009

2008

2007

PRICE/EARNING RATIO: Market Price per share Earning per share

18
16

16.91

14
12 10 8 6 4.55 6.44 5.91

4.74

4
2

0
2011 2010 2009 2008 2007

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

5
4.5 4 4.37

3.98
3.64

3.5
3 2.5

3.21

3.42

2
1.5 1

0.5
0

2011

2010

2009

2008

2007

MARKET BOOK RATIO: Market value per share Book value per share

40 35
30 25 20 15 10 5

37.43

17.04 12.27

16.26

9.35

CURRENT RATIO: Current Assets Curre nt Liabilites

1.105 1.1 1.095 1.09 1.085 1.08 1.075 1.07 1.065 1.06 1.055

1.07

1.07

2011

2010

2009

2008

2007

QUICK RATIO: Current Assets-Inventories Curre nt Liabilities

1.105 1.1 1.095 1.09 1.085 1.08 1.075 1.07 1.065 1.06 1.055

1.1
1.09 1.09

1.07

1.07

2011

2010

2009

2008

2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

0.6
0.5

0.57
0.45 0.4 0.48 0.42

0.4
0.3

0.2
0.1

0
2011 2010 2009 2008 2007

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.012

0.01
0.01 0.008

0.01

0.01

0.01

0.01

0.006
0.004 0.002 0

2011

2010

2009

2008

2007

92.50% 92.00% 91.50%

92.04%

91.23%

91.00%
90.50% 90.00% 89.50% 89.36%

89.67%

89.49%

89.00%
88.50% 88.00% 2011 2010 2009 2008 2007

TIMES INTEREST EARNED RATIO: EBIT* Interest charges

0.82

0.81 0.79

0.81 0.8

0.8
0.78 0.76 0.74

0.74
0.72

0.7
2011 2010 2009 2008 2007

BASIC EARNING POWER (BEP) : EBIT x 100 Total Asset

3.00% 2.95% 2.90% 2.85% 2.80% 2.75% 2.70% 2.65% 2.60% 2.55% 2.50%

2.95% 2.86% 2.74%

2.73% 2.65%

2011

2010

2009

2008

2007

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

30.00%

25.00%
20.00% 15.00% 19.23%

23.98%
17.92%

16.67%

16.30%

10.00%
5.00% 0.00% 2011 2010 2009 2008 2007

EARNING PER SHARE: Net Income/Profit Afte r Tax No. Of shares

14 12 10

11.98 9

11.41 8.53
8.35

8 6 4 2 0
2011 2010 2009 2008 2007

PRICE/EARNING RATIO: Market Price per share Earning per share

25

20.85
20 15 10 5 0 2011 2010 2009 2008 2007 4.47

7.3

6.92 4.2

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

7
6 5 4

6.23 5.4

5.23
4.66 4.76

3
2 1

0
2011 2010 2009 2008 2007

MARKET BOOK RATIO: Market value per share Book value per share

60 50 50

40
30

20
10 0 2011 2010 2009 2008 2007 8.59 12.17 11.28

7.5

7)

1 0.95
0.95

0.91
0.9 0.85 0.8

0.92 0.88 0.82

0.75
2011 2010 2009 2008 2007

QUICK RATIO: Current Assets-Inventories Curre nt Liabilities

10 9 8 7 6 5 4 3 2 1 0

8.59 7.58 5.36

4.16

4.78

2011

2010

2009

2008

2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2011 2010 2009 2008

0.07

0.05 0.04 0.03 0.02

2007

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 2011 2010 2009 2008 0.005 0.003

0.014

0.008

0.007

2007

92.50%
92.00%

92.18% 91.51%

91.50% 91.00%

2.50% 2.04% 2.00% 1.54% 1.89% 1.40% 1.16%

1.50%
1.00% 0.50%

0.00%
2011 2010 2009 2008 2007

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

30.00%

27.13%

25.00%
20.00% 15.00% 10.00% 5.00%

16.84% 11.28% 4.63% 9.80%

0.00%
2011 2010 2009 2008 2007

EARNING PER SHARE: Net Income/Profit Afte r Tax No. Of shares

2.55
2.5

2
1.5 1 1.34 0.78 1.54 1.26

0.5
0

2011

2010

2009

2008

2007

PRICE/EARNING RATIO: Market Price per share Earning per share

25
21.67

20
15 10 5 0 2011 2010 2009

17.05
15.12 12.97

10.22

2008

2007

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

1.8 1.6 1.4

1.68
1.51 1.37 1.29

1.2
1 0.8

0.6
0.4 0.2 0

0.49

2011

2010

2009

2008

2007

MARKET BOOK RATIO: Market value per share Book value per share

40

35.47

35
30 25.23 16.65 10.06 11.49

25
20 15 10 5 0 2011 2010 2009 2008 2007

0.98 0.97
0.96 0.95

0.97

0.96

0.94
0.93 0.92 0.91

0.93

0.93

0.92

0.9
0.89

2011

2010

2009

2008

2007

QUICK RATIO: Current Assets-Inventories Curre nt Liabilities

0.98
0.97 0.96 0.95

0.97

0.96

0.94
0.93 0.92 0.91

0.93

0.93

0.92

0.9
0.89

2011

2010

2009

2008

2007

FIXED ASSET TURNOVER RATIO: Net Income/ Profit after tax Net Fixed Asset

0.06

0.044
0.04 0.02 0 2011 -0.02 2010 2009 2008 -0.009 2007 -0.009

0.006

-0.04 -0.06 -0.08

-0.065

TOTAL ASSET TURNOVER RATIO: Net Income/ Profit Afte r Tax Total Assets

0.01 0.005

0.007

0.001 0
2011 2010 2009 2008 -0.003 2007 -0.003

-0.005 -0.01
-0.015 -0.02

-0.014

DEBT RATE/RATIO : Debt Ratio = Total Liabilities x 100 Total Assets

100.00%

90.97%

90.00%
80.00% 70.00% 60.00%

89.42%

86.17%
72.80% 73.39%

50.00% 40.00%
30.00% 20.00% 10.00%

0.00%
2011 2010 2009 2008 2007

BASIC EARNING POWER (BEP) : EBIT x 100 Total Asset

1.50%
1.03% 1.00%

0.50% 0.10%
0.00% 2011 2010 2009 2008 2007 -0.70% -1.20%

-0.50%
-1.00%

-1.50%
-2.00%

-1.64%

RETURN ON COMMON EQUITY : Net income/Profit after tax x 100 Common equity

10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00%

-8.00% -10.00% -12.00%

7.96%

-10.18%

EARNING PER SHARE: Net Income/Profit Afte r Tax No. Of shares

1
0.8 0.6 0.4 0.2 0

0.78

-0.2 -0.4
-0.6 -0.8 -1

-0.9

60 40 20 0 -20 -40 -60 -80 -100 -120 -140 -160

40.33
3.97 2011 2010 2009 -8.05 2008 2007

-72.5

-135

BOOK VALUE PER SHARE: Book Value per share = common equity Shares outstanding

1
0.98 0.96 0.94 0.92 0.9 0.9 0.97

0.99 0.98

0.9 0.88
0.86 0.84 2011 2010 2009 2008 2007

MARKET BOOK RATIO: Market value per share Book value per share

18 16 14 12

16.36

10 8 6 4
2 0 2011 2010 3.2 4.03

8.06

7.4

2009

2008

2007