Chapter - 25

Financial Statement
Analysis
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 the
profit and loss account.

BY Akash Saxena
Users of Financial Analysis
 Trade creditors
 Lenders
 Investors
 Management

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.

BY Akash Saxena
Standard of Comparison
 Time series analysis
 Inter-firm analysis
 Industry analysis
 Proforma financial statement analysis

BY Akash Saxena
Types of Financial Ratios
 Liquidity ratios
 Solvency ratios
 Turnover ratios
 Profitability ratios
 Equity-related ratios

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 – Inventories
Quick ratio =
Current liabilities
Cash + Marketable securities
Cash ratio =
Current liabilities

BY Akash Saxena
Solvency Ratios
 Solvency ratios measure the dependence of
a firm on borrowed funds.
Debt
Debt-equity ratio 
Equity (Net Worth)
Debt Debt
Debt ratio  
Debt  Equity Capital employed
Earnings before interest and tax
Interest coverage 
Interest

BY Akash Saxena
Turnover Ratios
 Turnover or activity ratios measure the firm’s
efficiency in utilising its assets.
Cost of goods sold or net sales
Inventory turnober 
Average (or closing) inventory
Number of days in the year (say, 360)
Days of inventory holding 
Inventory turnover
Credit sales or net sales
Debtors turnover 
Average (or closing) debtors
Number of days in the year (say, 360)
Collection period 
Debtors turnover

BY Akash Saxena
Turnover Ratios
Net sales
Current assets turnover 
Current assets
Net sales
Net current assets turnover 
Net current assets
Net sales
Fixed assets turnover 
Net fixed assets
Net sales
Net assets turnover 
Net assets or capital employed

BY Akash Saxena
Profitability Ratios
 Profitability ratios measure a firm’s overall
efficiency and effectiveness in generating
profit.
Profit before interest and tax (PBIT)
Margin 
Net sales
Profit after tax (PAT)
Net margin 
Net sales
PBIT
Before tax return on investment 
Net assets
Profit after tax
Return on equity 
Equity (net worth)

BY Akash Saxena
Equity-related Ratios
 Equity-related ratios measure the
shareholders’ return and value.
Profit after tax
EPS 
Number of ordinary shares
Dividends
DPS 
Number of ordinary shares
DPS Dividends
Payout ratio  
EPS Pr ofit after tax
DPS
Dividend yield 
Market value per share

BY Akash Saxena
Equity-related Ratios
EPS
Earnings yield 
Market value per share
Market value per share
P / E ratio =
EPS
Net worth
Book value per share 
Number of ordinary shares
Market value per share
M B value 
Book value per share
Market value of assets
Tobin ' s q 
Economic value of assets

BY Akash Saxena
DuPont Analysis
DuPont Analysis
integrates the important ratios to analyse a firm's profitability.
PBIT Sales PBIT
RONA=  
Net Assets Net Assets Sales
PAT Sales PBIT  PAT Net Assets 
ROE     
Net Worth Net Assets Sales  PBIT Net Worth 
ROE  Assets turnover × Margin × Leverage

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/TA 0.30 0.22
Sales/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/TA 0.74 0.71
PBIT/Interst 1.90 1.04
Profitability ratios
PBIT/Sales 29.41% 7.30%
Net profit/Sales 13.96% 0.26%
PBIT/TA 8.68% 1.59%
Net profit/NW 15.87% 0.21%
BY Akash Saxena
INFOSYS
Balance Sheeet as at March 31
in Rs.
2,001 2,000
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital 330,792,085 330,755,000
Reserves and surplus 13,565,599,903 8,002,273,248
Capital Employed 13,896,391,988 8,333,028,248
APPLICATION OF FUNDS
FIXED ASSETS
Original cost 6,311,444,025 2,840,305,143
Less: Depreciation 2,441,315,982 1,336,520,594
Net book value 3,870,128,043 1,503,784,549
Add: Capital work-in-progress 1,706,504,250 569,603,505
5,576,632,293 2,073,388,054
INVESTMENTS 341,154,821 138,348,469
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors 3,023,702,417 1,361,781,253
Cash and bank balances 3,850,610,285 4,317,935,730
Loans and advances 4,302,793,623 2,101,277,161
11,177,106,325 7,780,994,144
Less: Current liabilities 1,349,181,176 671,506,459
Provisions 1,849,320,275 988,195,960
NET CURRENT ASSETS 7,978,604,874 6,121,291,725
Net Assets 13,896,391,988 8,333,028,248

BY Akash Saxena
INFOSYS
Profit and Loss Account for the year ended March 31
in Rs.
2001 2000
INCOME
Software development services and products
Overseas 18,740,266,421.00 8,696,980,931.00
Domestic 265,392,386.00 126,256,042.00
Other income 593,714,915.00 391,411,095.00
19,599,373,722.00 9,214,648,068.00
EXPENDITURE
Software development expenses 9,581,766,650.00 4,662,684,578.00
Administrative and other expenses 1,775,470,971.00 694,850,282.00
Provision for investments 152,898,608.00
Provision for contingencies 33,300,000.00
Provision for e-inventing the company 35,000,000.00
11,510,136,229.00 5,425,834,860.00
Operating profit (PBIDT) 8,089,237,493.00 3,788,813,208.00
Interest
Depreciation 1,128,945,152.00 532,327,389.00
Profit before tax and extraordinary item 6,960,292,341.00 3,256,485,819.00
Provision for tax
earlier years 14,000,000.00 2,400,000.00
current year 713,100,000.00 394,600,000.00
Profit after tax before extraordinary item 6,233,192,341.00 2,859,485,819.00
Extraordinary item -- transfer of intellectual property right (net of tax) 54,944,000.00
-- provision no longer required 75,670,846.00
Net profit after tax and extraordinary item 6,288,136,341.00 2,935,156,665.00
AMOUNT AVAILABLE FOR APPROPRIATION 6,288,136,341.00 2,935,156,665.00
BY Akash Saxena
INFOSYS
Financial Ratios
2001 2000
Activity Ratios
Income/Assets 1.41 1.11
Income/Debtors 6.48 6.77

Current Ratios
CA/CL 3.49 4.69
CA/Assets 0.80 0.93
NCA/Assets 0.57 0.73

Profitability Ratios
Margin
PBDIT/Income 41.27% 41.12%
PBIT/Income 35.51% 35.34%
PAT/Income 31.80% 31.03%
Return on Investment
PBDIT/Assets 58.21% 45.47%
PBIT/Assets 50.09% 39.08%
PAT/NW 44.85% 34.32%

BY Akash Saxena
 SBU PROFIT & LOSS ACCOUNT, YTD 2002
USD in '000
% of
YTD Re v.

Tota l Re ve nue 14850 100.0%

Onsite reve nue 12600 84.8%
Offshore re ve nue 2250 15.2%
Se rvice Cre dit
- Onsite Reve nue % 85%
CONTROLLABLE COSTS
CGS A
Sa la rie s & Re la te d Costs:
Onsite Sa la rie s 6375 42.9%
Offshore Sa la rie s
GRP Alloca te d 0 0.0%
Offshore Sa la rie s 840 5.7%
Othe r Sa la ry Ove rhe a ds 34 0.2%
Subcontra ctor Costs
Sa la ries-Onsite 0 0.0%
Sa la ries-Offshore 0 0.0%
Fore ign Tra ve l 250 1.7%
Ince ntive s
Proje ct Ince ntive s 0 0.0%
SBU Spe cia l Incentive s 0 0.0%
Da ta Communica tion Cha rge s 0 0.0%
Le ga l Immigra tion Fe e s 333 2.2%
Othe r Profe ssiona l Fe e s 0 0.0%
Tota l CGS A Cost 7832 52.7%
CGS B
Da ta Communica tion Cha rge s 90 0.6%
Medica l Insura nce 300 2.0%
De pre cia tion: CGS 223 1.5%
Othe rs CGS 0 0.0%
Tota l CGS B Cost 613 4.1%
TOTAL CGS A + CGS B Costs 8445 56.9%
Gross Ma rgin 6405 43.1%
BY Akash Saxena
Utility of Ratio Analysis
 Assessment of the firm’s financial conditions
and capabilities.
 Diagnosis of the firm’s problems, weaknesses
and strengths.
 Credit analysis
 Security analysis
 Comparative analysis
 Time series analysis

BY Akash Saxena
Cautions in Using Ratio Analysis
 Standards of comparisons
 Company differences
 Price level
 Different definition
 Changing situations
 Past data

BY Akash Saxena