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M&M posts 4% rise in PAT at Rs 242 week. Pawan Goenka, president of the
cr automotive sector at M&M, said, “There
Mahindra & Mahindra (M&M) reported is an interest rate hike threat. A further
a 4% growth in its profit after tax (PAT) growth in the interest rate could have a
for the quarter ended December 31, 2006 negative effect.”
at Rs 242 crore. Income from operations
during the quarter improved 17% at Rs M&M’s tractor sales were up 18% at
2,576 crore. Operating profit was up 8% 26,644 units in the third quarter
at Rs 350 crore. compared to a 15% growth in the overall
tractor industry. Utility vehicle sales
However, profit after tax in the October- grew 12.6% at 33,312 units during the
December 2006 quarter included quarter as compared with a 15% increase
exceptional items of Rs 46.9 crore on in the overall industry, as the company’s
account of sale of the company’s light soft-top utility vehicle sales continued to
commercial vehicles business to group slide.
company Mahindra International and
octroi receipts. Profit after tax in the Sales of pick-up vehicles improved 44%
third quarter was up 35% if the while of light commercial vehicles was
exceptional items in the previous year up 41%. Three-wheeler sales were down
are excluded. 36% at 3163 units. Vehicle exports grew
36.5% at 1954 units despite a slump in
Operating margin stood at 12.02% exports to Malaysia following some
compared to 12.02% (excluding the changes in the duty structure there. On a
octroi refund) in the same period of the consolidated basis, M&M posted a 102%
previous fiscal. Bharat Doshi, executive growth in net profit at Rs 530 crore for
director finance and corporate affairs the quarter ended December 31, 2006.(
said the company had succeeded in TIMES NEWS NETWORK
combating input cost increases by FEBRUARY 01, 2007)
“aggressive and stringent cost As potential shareholder visit the web-
management”. site of M&M and find the following :
• Is M&M doing better than its
“Inspite of input cost increases we have competititors?
been able to contain costs. We are • Is the share price of M&M
looking at the current year with reflects the fundamentals of
optimism but how much more we can do company?
to keep costs down is the question. There • Did the company pay dividend in
is a lot of volatility in the global the recent past?
commodity market and it is difficult to • What is the return a shareholder
predict which way prices will swing,” can expect from this company?
said Mr Doshi.
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Balance sheet
Following exhibit shows the consolidated balance sheet of non-banking companies
forming a part of NIFTY. For the convenience sake the balance sheet is divided into six
major blocks
Fixed Assets
Fixed assets is an important component of the balance sheet. Generally fixed assets are
shown in the form of Gross Block and Net Block. Net Block is net of depreciation. In the
consolidated balance sheet the net block account for around 39% of the total assets. As
mentioned in the previous chapter, it signifies, that 39% of the total assets are invested
within the business. However, the percentage of fixed assets differs from company to
company.
Investments:
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Current Assets
Current assets contains all the short-term assets of the company. These assets are
normally convert back into cash quickly. The current assets consist of the following
major items:
• Inventories
• Receivables
• Cash
Balance Sheet of CBC as on 31st March 2006 Current Assets as on 31st March 2006
Sources/Liabilities Assets Inventories 66,933 22%
Of 345,696 FA 246,498 Receivables 175,429 58%
Cash and bank balance 58,529 19%
LTL 85,146 Investments 91,144
Total CA 300,890
CL 207,691 CA 300,890
Total 638,532 638,532
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Current assets are in constant movement. Raw materials are converted into finished
goods. These when sold are converted into receivables or cash. Thus returns from the
operation or in other words, the profit depends on this cycle. This cycle is also known as
the Operating Cycle. The composition of current assets also differs from company to
company.
Now let us see the liabilities of the consolidated BS Company. The following figure
shows three subdivisions of the liabilities:
• Share Capital
• Reserves
Share capital is the money collected or raised by issuing shares to the public. The shares
can be issued at par, premium, or discount. However, the share capital is always shown in
the balance sheet at the face value. Discount or premium, if any, is adjusted in the reserve
account. The details of the capital is available in Chapter-XXX.
The reserves consists of capital reserve and revenue reserves. Revenue reserve shows the
profit from the operation or the business, whereas the capital reserve shows the profits
from all other activities which do not fall under the category of main business. The
owners’ fund changes due to the following reasons:
• Issue of capital
• Profit from the operations
• Profit from any other sources
• Buy back of shares
Whereas the following transactions will have no effect on the owners’ fund:
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Owners’ fund accounts 54% of the total sources. In other words, large chunk of the
business has been financed by the owners’ fund. It is important to note that reserves
account for more that 90% of the owners’ fund. This shows that the selected companies
have used their profits for financing the business. The composition of owners’ fund also
varies with the nature of the business.
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• Total Assets
• Capital Employed
• Net worth
• Working Capital
CL 207,691 CA 300,890
Total 638,532 638,532
Total Assets
Total assets is the sum of fixed assets, investments, and current assets
• TA = FA + Investments+ CA = 638532
• Total assets are also equal to the sum of the sources = OF +LTLF+CL
Net worth
• OF = FA + Investments+ CA-CL =345,696
• OF = Total sources – LTL –CL =345,696
• OF = TA – Outsider sources (LTL and CL) = 345,696
Capital Employed
This is one of the important balance sheet terms and is very used in undertaking financial
statement analysis. Capital employed shows the long term funds used in the business.
Capital employed can be calculated as follows:
• CE = OF + LTL – Investment = 339,698
• CE = FA +CA – CL = 339,698
• CE = TA – Investments – CL = 339698
• CE = FA + Working Capital = 339,698
Working Capital
Working capital represents excess of current assets over the current liabilities. Work
capital of the combined balance sheet can be calculated as follows:
• Working Capital = CA –CL = 93,199
Income Statement
Income statement shows profit from operating and non-operating activities of a company.
The nature of expenses depend on the nature of the business. Following table shows some
of the important expense as a percentage of total income
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Board of directors analyse the financial statements to understand the impact of the
decisions and use the same for future decision making. Employees use the financial
statements to negotiate the union demands. Potential investors use the financial
statements to decide about the investment to be made. The common goal of these users is
to understand the past and use the data to predict the future.
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Analysis is Comparison
While analysing the financial statement we generally undertake the a)Interfirm
comparison or b) Intra-firm comparison
Inter-firm Comparison:
The financial statements of a company are compared with the financial statements of
another company belonging to the same industry. Inter-firm comparison is also known as
vertical comparison. The following table shows the inter firm comparison relating to
some of the financial performance of the automobile companies.
Intra-firm Comparison
In this case a particular company’s performance is compared over a period. This is also
known horizontal comparison.
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What to Compare?
Financial statement help in understanding the performance of the organisation. The
performance of an organisation can be explained on the basis of the four important
aspects of the business:
a) Liquidity: Liquidity shows the ability of the business to service the short term
obligation.
b) Solvency: Solvency shows the ability fo the business to meet the long term
obligation.
c) Efficiency: Efficiency shows the ability of the business to use the resources of the
business.
d) Profitability: Profitability shows the ability to the business to generate and
distribute profit.
Comparative Statements
Comparative statements facilitate comparison by showing financial amounts in absolute
terms and percentage change in the columnar form. Both changes are relevant.
Absolute change = Amount in Current Period – Amount in Base Period
Percentage Change = Amount in Current Period – Amount in Base Period /Amount in
Base Period
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Visit the website of Mahindra and Mahindra and check the changes in the
current year. Investigate the reasons for the change in the current liabilities by
180%.
To have a better understanding compare the above balance sheet with that of
Tata Motors or Maruti
Comparative Income Statement
Comparative income statement shows incomes and expenses for two or more periods,
with additional column for absolute change and percentage change. Let us see the
comparative income statement of Mahindra and Mahindra:
The income statement can not address whether the increase in the sales is due to price
effect or quantity effect. For such an investigation one has to undertake a detailed
company level analysis.
Refer to the comparative balance sheet and the income statement comment on
the change in profit.
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Comparative statements can also be used for undertaking Trend Analysis. Trend analysis
reveal pattern in data over a period of time. It involves determining the trend percent for a
series of financial numbers. Let us take the sales value, cost of sales, and PBDIT of
Mahindra and Mahindra and understand the trend analysis.
Mahindra & Mahindra Ltd.
Mar-03 Mar-04 Mar-05 Mar-05
Total Incomes 4585.97 6030.37 8001.1 9569.74
Expense 4440.44 5689.85 7488.43 8712.64
PAT 145.53 340.52 512.67 857.1
The trend analysis shows that the sales in the latest year is 1094% of the base year,
whereas, the profit is much higher. The above data can also be presented graphically.
Trend
600%
400%
200%
0%
1 2 3
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The trend analysis shows an overall decent growth in the profit too. However, to make
the comparison more meaningful , an inter-company comparison can be undertaken. Let
us take one of the items viz. PAT of Mahindra and compare it with that of Maruti.
Following table and graphs show the comparison the recent five years. PAT of Maruti
sharply increased.
PAT Comparison
Mar-02 Mar-03 Mar-04 Mar-05 Mar-06
Mahindra & Mahindra Ltd. 96.91 145.53 340.52 512.67 857.1
Maruti Udyog Ltd. 104.5 146.4 542.1 853.6 1189.1
Profit Comparison
1500
1000
500
0
2002 2003 2004 2005 2006
Mahindra & Mahindra Ltd.
Maruti Udyog Ltd.
Visit the website of Mahindra and Maruti and investigate reasons for
such differences in the behaviour of PAT.
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Balance Sheet (2005 year end) Rs. In crores Common Size Balance Sheet (2005 year end)
Marico HLL Marico HLL
Net worth 219 2093 Net worth 55% 28%
Long Term Liabilities 52 1471 Long Term Liabilities 13% 20%
Current Liabilities 124 3953 Current Liabilities 31% 53%
395 7516 100% 100%
Fixed Assets 99 1521 Fixed Assets 25% 20%
Investment 29 2328 Investment 7% 31%
Current Assets 266 3667 Current Assets 67% 49%
395 7516 100% 100%
Is the net worth of Marico low in comparison to HLL? To answer this question one has
to see the common size balance sheet rather than the balance sheet. CSBS shows that
Merico’s position with respect to net-worth is much better than that of HLL. So absolute
levels of net worth or any other financial item may not be useful.
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CSIS can also be used to compare the performance of a company over two time periods.
Is the profit generating capacity of ITC improving? The increase in profits in absolute
terms may convey such misleading message. CSIS shows that the Profit before tax,
which shows the profit generating ability of the business has actually reduced during the
period.
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Key Terms
• Financial statement analysis
• Owners fund
• Reserves and surplus
• Long term funds
• Capital employed
• Short term funds
• Working capital
• Inter-firm comparison
• Intra-firm comparison
• Liquidity
• Solvency
• Profitability
• Efficiency
• Ratio Analysis
• Trend Analysis
• Common size statements
• Comparative statements
Theoretical Questions
1. What is financial statement analysis?
2. What are the tools of financial statement analysis?
3. Financial statement analysis is the solution to the problem of inefficiency of a
company. Comment.
4. Financial statement analysis will help in improving the efficiency of a company.
Do you agree with the statement/
5. What is a common size balance sheet?
6. What is a comparative income statement?
7. What is the purpose of common size analysis?
8. What is trend analysis?
9. What is liquidity?
10. How liquidity differs from solvency?
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Numerical Questions
1. Following table shows the financial items of ABC ltd.
Required
• Balance Sheet
• Common Size balance sheet
Required
• Balance Sheet
• Comparative balance sheet
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4. Fixed assets = 60% of total funds. Current liabilities = 25% of the total funds.
Current assets = 30,000. Prepare the balance sheet.
5. Capital employed = 75% of total funds. Working capital = 25000; Current Assets
= 70,000. Prepare the balance sheet
Financial Items
Cash & Bank 56
Loans (Long term) 165.14
Capital WIP 186.15
Equity Share Capital (10) 249.43
Debtors 527.76
Other Current Assets, Loans and
Advances 952.88
Provisions 1108.18
Stock 2002.99
Current Liabilities 2381.95
Investments 3874.68
Net Fixed Assets 3950.76
Reserve & Surplus 7646.18
Required:
• Balance Sheet
• Common-size balance sheet
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4. Following table shows relevant financial items of SAIL as on 31st March 2005
Equity Share Capital 13%
Reserves & Surplus 26%
Secured Loans 3%
Unsecured Loans 10%
Current Liabilities 48%
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Required:
• Capital Employed
• Working Capital
• Balance Sheet
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