Financial statement

analysis (or financial

analysis) is the
process of reviewing
and analyzing a
company's financial
statements, these

NEED OF FINANCIAL
STATEMENT ANALYSIS:
1)Managers
2)Shareholders
3)Prospective investors
4)Financial Institutions
5)Suppliers
6)Customers
7)Employees
8)Competitors
9)General public
10)Government

OBJECTIVES OF
FINANCIAL STATEMENT
ANALYSIS:
1. Assessment Of Past
Performance

2. Assessment of current position

3. Prediction of profitability and

growth prospects

4. Prediction of bankruptcy and

failure
5. Assessment of the operational

TYPES OF FINANCIAL
STATEMENT ANALYSIS
A distinction may be drawn between various
types of financial analysis either on the basis
of material used for the same or according
to the modus operandi or according to the
objective of the analysis.
According

to Nature of the Analyst

According to Modus Operandi of Analysis
According to the Objective of the Analysis

EXTERNA
L

ACCORDING
TO THE
NATURE OF
THE
ANALYST INTERNAL

ACCORDING
TO THE
HORIZONTA
MODUS
VERTICAL
L
OPERANDI
OF
ANALYSIS

LONGTERM
ANALYSI
S

ACCORDIN
G TO THE
SHORTOBJECTIVES TERM
OF THE
ANALYSI
S
ANALYSIS

Comm
on Size

Trend
Analy
sis

Financi
al
Analys
is
Ratio
Analy
sis

Compa
rative

Common size statement It is a

statement in vertical form in which
every item of the financial statement is
reduced to a common base.
Advantages
Helps in decision
making
Helps in identification
of changing proportion
of assets, liabilities,
net sale, cost, profit
etc.
Helps in corporate
evaluation and
ranking.

Disadvantages
No Established
Standard Proportion
Consistency Required

Comparative Financial Statements is a statement of

Financial Position where a comparative study is undertaken
of different accounting items, to measure the performance
of a Business Activity.

Advantages

Indicate the Direction

of Financial Position.
Reveal Nature &
Trend.
Identifying Trouble
Spots.

Disadvantages

Misleading picture, if
consistency in
accounting principle not
followed.
Useless comparison due
to change in price level.
Inter firm comparison
useless until same
accounting principles
followed by all.

An array of proportions are available for

discerning the relationship between the size of
variousaccountsin the financial statements.

Advantages

It simplifies the
financial statements.
It helps in comparing
companies of different
size with each other.
It highlights important
information in simple
form quickly.

Disadvantages

Different accounting
principles, estimates
and assumptions.
It explains relationship
between past,
whereas users are
more concerned about
present and future.

Trends create trend lines for key items in

the financial statements over multiple
time periods, to see how the company is
performing.
Advantages

Trend % indicates the

increase or decrease
with the magnitude of
change in % which is
more effective than
absolute data.
Facilitate efficient
comparative study of
financial performance.

Disadvantages

Inaccurate if inconsistent
accounting principles are
followed.
Constant change in price
level render accounting
statement useless for
comparison.
Misleading, if not studied
with absolute figures.

COMMON SIZE STATEMENTS

mon size statementsusually are prepared for

income statementand balance sheet,
expressing information as follows:
Income statementitems - expressed as
a percentage of total revenue
Balance sheet items - expressed as a
percentage of total assets.

Common Size Ratio=Item of Interest

Reference Item

Common size ratio = Item of interest

for inventory

Reference Item

LIMITATIONS

As with financial statements in general, the

interpretation of common size statements
is subject to many of the limitations in the accounting
data used to construct them
.For example:
Different accounting policies may be used by different
firms or within the same firm
at different points in time. Adjustments should be
made for such differences.
Different firms may use different accounting
calendars,
so the accounting periods may not be directly
comparable.

COMPARATIV
E
BALANCE
SHEET

COMPARATI
VE
STATEMENT
COMPARATIVE
INCOME
STATEMENT

A specimen of comparative balance sheet is given below:

X&Co.
Comparative Balance Sheet
(as on 31st March,2012 and 2013)

Increase or

Particulars
Increase or

31.3.2012
Decrease in

in
Amounts
Percentage(%)

Current Assets:

31.3.2013
Decrease

Particulars

31.3.2012

31.3.2013

Increase or
Decrease in

Increase or
Decrease

in
Amounts
Percentage(%)

Fixed Assets
Land & Building 2,70,000 1,70,000 (-)1,00,000
Plant & Machine 3,10,000 7,86,000
(+)4,76,000
Furniture
9,000
18,000
(+) 9,000
Other Fixed Assets 20,000
30,000
(+) 10,000
Total Fixed Asset 6,09,000 10,04,000 (+)3,95,000

(-) 37
(+)150
(+)100
(+) 50
(+)65

Particulars

Percentage(%)

31.3.2012

31.3.2013

Increase or
Decrease in
Amounts

Increase or
Decrease in

Capital:
Equity Share
Capital
4,00,000
Reserves &
Surplus
3,12,000
Total liability
and cap

.
11,74,000

6,00,000

(+)2,00,000

(+)50

3,54,000

(+) 42,000

(+)13

.
14,06,000

.
(+)2,32,000

Trend Percentages

Method of Time Series Data

Analysis involving comparison of
the same item over a significantly
long period
Detects general pattern of
relationship between associated
factors
Projects the future direction of this
pattern.

Key Equation
Percent change = Absolute fig of successive year Base
year amount x 100.

Trend Percentage
FromExample
the following particulars presented by H. Ltd
compute trend % taking 2002 as the base year.
(fig in 00000)
YEAR

SALES

INVENTORY

GROSS PROFIT

2002

1000

500

250

2003

1500

700

375

2004

2200

900

600

2005

2500

1000

700

2006

4000

1250

1000

SOLUTION :
In the books of HLtd
Statement showing Trend Percentage
Base year (2002)
YEAR

(fig in 00000)

SALES

INVENTORY

GROSS PROFIT

ABSOLU TREND
TE
%
FIGURES

ABSOLUTE
FIGURES

TREND %

ABSOLUTE
FIGURES

TREND %

2002

1000

100

500

100

250

100

2003

1500

150

700

140

375

150

2004

2200

220

900

180

600

240

2005

2500

250

1000

200

700

280

2006

4000

400

1250

250

1000

400

TR= Absolute fig of successive year/ Absolute fig of base

year x 100
Eg: Sales: 1000 /100 x 100 = 100
The same is done for Inventory and Gross profit
Computation

GRAPHICAL REPRESENTATION
1200

1000
GR.PROFIT TREND %
800
INVENTORY TREND %
FIGURES

600
SALES TREND %
400

200

2002

2003

2004

2005

2006

RATIO ANALYSIS

Ratio analysis is a useful technique to

measure, compare, and evaluate the
financial condition and performance of a
customer. Ratio analysis enables a credit
manager to spot trends in a customer's
financial performance, and to compare its
performance and financial condition with
the average performance of similar
businesses in the same industry.

LIQUIDITY RATIO

Liquidity

ratios are the ratios that

measure the ability of a company to
meet its short term debt obligations.
These ratios measure the ability of a
company to pay off its short-term
liabilities when they fall
due.Examples are:-

CURRENT
RATIO

QUICK
RATIO

CASH RATIO

WORKING
CAPITAL
RATIO

MEANING OF THE
DIFFERENT RATIOS
CURRENT RATIO

QUICK RATIO

It
The

current ratio
indicates a
company's ability
to meet short-term
debt obligations.
The current ratio =
Current Assets /
Current Liabilities

measures
current (short term)
liquidity and
position of the
company.
Quick ratio =
(Current Assets
Inventory) / Current
liabilities

CASH RATIO

WORKING CAPITAL RATIO

Working
Cash

ratio is a
refinement of quick
ratio and indicates the
extent to which readily
available funds can
pay off current
liabilities.
Cash ratio = Cash and
cash equivalents /
Current Liabilities

capitalis
the amount by
which the value of a
company's current
assets exceeds its
current liabilities.
Net working
capital(NWC) =
current assets
minuscurrent
liabilities.

CAPITAL
STRUCTURE
RATIO

Example:
The following information have been taken from the balance
sheet of PQR limited:

Common
stockholders
equity
Preferred stock
9%
Bonds payable
6%

2011

2012

3,500,000

2,800,000

1,400,000

1,800,000

1,600,000

1,400,000

We can compute the capital gearing ratio for the years 2011 and
2012 from the above information as follows:
For the year 2011:
Capital gearing ratio = 3,500,000 / 3,000,000
= 7:6 (Low geared)
For the year 2012:
Capital gearing ratio = 2,800,000 / 3,200,000
= 7:8 (Highly geared)
The company has a low geared capital structure in 2011 and
highly geared capital structure in 2012.

TURNOVER
RATIOS

CAPITAL TURNOVER RATIO

FIXED ASSETS TURNOVER RATIO
STOCK TURNOVER RATIO
RAW MATERIALS TURNOVER RATIO
DEBTOR TURNOVER RATIO
CREDITOR TURNOVER RATIO


ABC Company has $12,000,000 of
net sales over the past twelve
months, and average capital
during that period of $2,000,000.
The calculation of its capital
turnover ratio is:
$12,000,000 Net sales
$2,000,000 Average capital
= 6.0 capital turnover ratio


ABC Company has gross fixed assets of
$5,000,000 and accumulated depreciation
of $2,000,000. Sales over the last 12
months totalled $9,000,000. The calculation
of ABC's fixed asset turnover ratio is:
$9,000,000 Net sales
$5,000,000 Gross fixed assets - $2,000,000
Accumulated depreciation
= 3.0 Fixed Assets Turnover per year


The Hegemony Toy Company is reviewing its
inventory levels. The related information is
$8,150,000 of cost of goods sold in the past
year, and ending inventory of $1,630,000.
Total inventory turnover is calculated as:
$8,150,000 Cost of Goods Sold
$1,630,000 Inventory
= 5 Turns per year
The 5 turns figure is then divided by 365 to
arrive at 73 days of inventory on hand.


A table manufacturing company sold 100
tables the COGS of 100 tables being
$15,000. The stock of raw materials was
$200 at the beginning and $120 at the end
of the year.
Average stock of raw materials
= $200 + $120 = $160
2
Raw materials stock turnover ratio
= $15,000 = 93.75
$160


The beginning accounts receivable balance of
ABC company was $316,000, and the ending
balance was $384,000. Net credit sales for the
year were $3,500,000. The controller calculates
the accounts receivable turnover as:
$3,500,000
($316,000 + $384,000) / 2
= $3,500,000
$350,000
= 10.0 Accounts receivable turnover


The beginning accounts payable
balance of ABC company was $800,000,
and the ending balance was $884,000.
Purchases for the year were
$7,500,000. The controller calculates
the accounts payable turnover as:
$7,500,000
($800,000 + $884,000) / 2
= $7,500,000 Purchases
$842,000 Average accounts payable
= 8.9 Accounts payable turnover

Profitability
Ratio Based On
Sales

SL

Ratio

Formula

1.

Gross Profit Ratio.

2.

Operating Profit Ratio.

Operating Profit
Sales

Indicators of
operating
performance of
business.

3.

Net Profit Ratio.

Net Profit
Sales

Indicator of Overall
profitability.

4.

Contribution Sales Ratio

(or) Profit Volume Ratio.

Contribution
Sales

Indicator of
profitability in
Marginal Costing.

Gross Profit
Sales

Significance

Indicator of basic
profitable.

Illustration: From the following annual financial statement of Sri. Ltd.

Calculate the following ratios:
Gross Profit Ratio.
Operating Profit Ratio.
Net Profit Ratio.
Profit and Loss Statement
Particulars
Sales
Less: Cost of Good Sold
Gross Profit
Less: Administrative Expenses
Less: Selling and Distributive Expenses
Less: Interests
Less: Depreciation
Profit before Tax
Less: Tax Provision
Net Profit
Less: Proposed Dividend
Retained Earnings

(Rs) in Lakhs (Rs) in Lakhs

7850
5232
2618
240
545
280
540

1605
1013
500
513
400
113

Solution:
Gross Profit Ratio :
GP Sales100
= 26187850100
= 3335%

Operating Profit Ratio : EBITSales100

=1013+2807850100
=12937850100
=1647%

Net Profit : Net ProfitSales100

=5137850100
=654%

Overall Returns / Profitability Ratios Owners

View Point
Sl.

1.

Ratio

Formula

Significance/Indicator

Return on Equity
Equity Earnings Indicatives profitability of
(ROE) (or) Return on
Shareholders
Equity Funds / Owners
Net Worth (RONW).
Funds
Funds invested in the
business.

2.

Return on
Assets(ROA)

Net Profit Taxes

Average Total
Assets.

Indicates Net Income per

rupee of Average Fixed
Assets.

3.

Earning per Share

(EPS)

(PAT-Preference
Dividend)
Number of
Equity Shares.

Return or Income per

share, Whether or not
distributed as dividends.

GROUP MEMBERS:
13

SHREYA RAJGARHIA

14

SAAZ MITTAL

15

GAURI CHOPRA

16

SIDDHI NEWATIA

17

AANCHAL MUNDHRA

19

PARIDHI KESHAN

20

SMITA SINGH

22

KIRTI LATH

24

SHREYA JHUNJHUNWALA

25

KHUSHBHOO BHERA