Financial Analysis and Management

Q.1 Take the financial statements of any company, which is listed on NSE, and determine the following: 1. Efficiency Ratios 2. Liquidity Ratios 3. Profitability Ratios 4. Debt Equity Ratio 5. ROE 6. Return on capital employed

A1. Considering financial statement of TVS motors below following above ratios are calculated. Efficiency Ratios: 1. Fixed asset turnover ratio measures utilization the business is obtaining from its investment in fixed assets, its calculated as Sales revenue/ fixed assets. Fixed asset turnover ratio=7367/2015=3.65 When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was.

2. Inventory turnover ratio is A ratio showing how many times a company's inventory is sold and replaced over a period. Its calculated as (Cost of goods sold/Average Inventory)=7420/584.56=12.693 High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

3. Investment turnover ratio is defined as the percentage of a mutual fund or other investment vehicle's holdings that have been "turned over" or replaced with other holdings in a given year. For TVS motor for year 2012 it is, Investment turnover ratio = (Net sales/Net worth)=7282.43/1169.30=6.22

4. Total asset turnover ratio is the amount of sales generated for every rupees worth of assets. It is calculated by dividing sales in dollars by assets in dollars. For TVS motors for year 2012, Total asset turnover ratio= (Net sales/Total assets)= 7282.43/3140.50=2.3188 Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue the higher the number the better.

Liquidity Ratios 1. Current ratio: The Current Ratio formula is:

So current ratio for TVS Motor = 1078.30/1345.18=.801 The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.

2. Quick ratio: The quick ratio is calculated as:

So quick ratio for TVS Motor = (1078.30-584.56)/1345.18=.367

3. Debt equity ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. Debt equity ratio = Total liabilities/Shareholders equity So Debt equity ratio for TVS motor=1971.2/1169.30=1.6

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt.

Profitability Ratios 1. Operating profit margin: A ratio used to measure a company's pricing strategy and operating efficiency. Calculated as:

So Operating profit margin for TVS motor=7502/7367=1.01 Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each rupee of sales.

2. Gross profit margin: Used to asses firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Calculated as:

So Gross profit margin(%) for TVS motor= (8321-8001)/8321 X 100=3.8

3. Cash flow margin: measure of the money a company generates from its core operations per rupee of sales. The Cash Flow Margin is calculated as:

Cash Flow Margin % = Cash Flows from Operating Activities/Net Sales So Cash Flow Margin for TVS motor= (377)/7367 X 100= 5.1 4. Net profit margin: It is calculated as, Net income / Sales revenue Net profit margin(%) =227/7282.43 X 100= 3.1

Debt Equity Ratio A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Its calculated as Total long term debts/total long term funds DOE = 982.97/2000.94=.49

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

Return on equity: Return On Equity - ROE The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity ROE %= 227/725.28 X 100=31.29 It measures a efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth

Return on capital employed: A ratio that indicates the efficiency and profitability of a company's capital investments. Calculated as:

For TVS motor, its calculated as its 315/ (3345 -1631.69) X 100 =18.3 ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

Q.2 From the following balance sheet of Mohan Ltd. Prepare cash flow statement.

A2. Below is the cash flow statement for Mohan Ltd. Current year income is calculated as: Total profit & Loss account balance of 2007 - Profit & Loss account balance of 2006 year. To calculating cash flow from operating activities: Increased current assets have to deduct. Decreased current assets have to be added. Increased current liabilities have to be added. Decreased current liabilities have to deduct. Rs 40,000 20,000 40,000 10,000 20,000 10,000 20,000 60,000 Rs

Particular A Cash flow from Operating Activities Profit&Loss of 2007(200,000-160,000) Add:Depreciation on fixed assets(100,000-80,000) Add: Decrease in debtors(100,000-60,000) Add:Increase in proposed dividend(70,000-60,000) Less: Increase in stocks(150,000-130,000) Less:Increase in bills receivable(30,000-20,000) Less:Decrease in creditors(140,000-120,000) Net Cash flow from opearting activities B Cash inflow from Investing activities Less:Purchase of Fixed assets(600,000-400,000) Net Cash flow from investing activities C Cash flow from financing activities Add:Issue of equity shares(300,000-200,000) Less:Repayment of bank loan Net Cash flow from financing activities Add: Opening balance of cash & cash equivalents Net decrease in Cash & Cash equivalents(A+B+C)

200,000 130,000

100,000 20,000 50,000 90,000 60,000

Closing balance of Cash & cash equivalents

30,000