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ANALYSIS
By :
PGDM-FS (2015-2017)
Group - 06
Amrit Kaur (09)
Chandra Gupt Sharma (16)
Kirti Sharma (25)
Prateek Singh (34)
Rashmi Tyagi (40)
Saurabh Mutreja (42)
What is Financial
Statement?
Afinancial statement(orfinancial report) is a formal record
of the financial activities of a business, person, or other entity.
Financial Statements reflect the financial effects of business
transactions and events on the entity.
Types of Financial
Statements
Statement of Financial Position, also known as the Balance
Sheet.
Income Statement, also known as theProfit and Loss
Statement.
Cash Flow Statement, presents the movement in cash and
bank balances over a period.
Statement of Changes in Equity, also known as
theStatement of Retained Earnings.
Auditors
Purpose of Analysis
Financial
Financial statement
statement analysis helps
users
users make
make better
better decisions.
decisions.
Managers
Officers
Internal Auditors
Shareholders
Lenders
Customers
Purpose of Analysis
F in a n c ia l m e a s u re s a re o fte n u s e d
to ra n k c o rp o ra te p e rfo rm a n c e .
E x a m p le m e a s u r e s in c lu d e :
G ro w th
in s a le s
R e tu r n to
s to c k h o ld e rs
P r o fit
m a r g in s
D e te r m in e d b y
a n a ly z in g th e
fin a n c ia l
s ta te m e n ts .
R e tu rn o n
e q u ity
Sources of Information
Published Annual Reports
Financial statements
Notes to financial statements
Letters to stockholders
Auditors report (Independent accountants)
Managements discussion and analysis
Reports filed with the government
e.g., Form 10-K, Form 10-Q and Form 8-K
Types of
Financial Statement
Analysis
Vertical
AnalysisVertical
Analysis
involves
the
comparison of two entries of the same firm and in the same
year. Therefore, it is referred as static analysis. Eg: Ratio
Analysis and Cash Flow Statements.
Vertical Analysis of
Financial Statement
Vertical analysis is the proportional analysis of a
financial statement, where each line item on a financial
statement is listed as a percentage of another item.
Vertical analysis helps in comparing the performance
and financial position of two businesses of different size.
A vertically analyzed financial statement may be visually
presented in a pie chart.
Income Statement
Income statement shows the various expense line
items as a percentage of sales.
Balance Sheet
A balance sheet typically states each line as a
percentage of total assets.
Advantages of Vertical
Analysis
It determines a company's health and stability.
The balance sheets of businesses of all sizes can
easily be compared.
It also makes it easy to see relative annual changes
within one business.
Different Techniques of
Financial Statement
Analysis
Trend Analysis
Ratio Analysis
Comparative Financial
Statements
Forms of Comparative
Financial Statements
Most commonly used forms are :
Limitations of Comparative
Financial Analysis
Inflation
Common size comparisons
Trend comparisons
Horizontal comparisons
Different accounting practices
The financial statements are lengthy and run into many pages & contain figures
which are complex for the comparison.
Accountants have devised COMMON SIZE METHOD to compare items in the financial
statement which are shown in odd amounts for e.g.; 25,456.81
TYPES OF COMMON SIZE STATEMENTS
Common
Size
Balance
Sheet
Common
Size Income
Statement
To compare the items in the P&L Account Sale Revenue is taken as the base and treated as 100.
All the other entries in P&L account are then expressed as a % of sales.
To illustrate it with an example; Assuming Sales Revenue to be 1,30,000 and Cost of goods sold is
assumed to be 97,500. This makes Cost as 75% of sales
The relationship now is evident which was not readilyy evident just by looking at the figures.
BALANCE SHEET
To compare the items the balance sheet, the amount of total assets/ total liabilities is treated as equal
to 100.
Then the individual items are expressed as a % of thee total assets and total liabilities.
NOTE: The COMMON SIZE ANALYSIS is used for both the Horizontal and Vertical Analysis.
ADVANTAGES
It helps an investor to identify large or drastic changes in a firms financials. Rapid increases or decreases
can be readily observable.
Common Statement Analysis helps in doing the corporate evaluation and Ranking in the Inter Firm
comparison.
DISADVANTAGES
In the COMMON SIZE METHOD we establish the relationship between the all the items in the P&L account
with the single item of sales.
The Common Size balance sheet takes only total assets or total liabilities as the base for other items in the
balance sheet.
It ignores relationship among the different items themselves in the balance sheet.
It also doesnt establish the relationship between the items of P&L account and Balance Sheet, thus we cannot
establish the relationship between the Sales and capital employed.
It compares the figure of the first year with the second year, or the second year with the third year, so it doesnt
give an idea over the period of years regarding the performance.
Different firms may adopt different accounting practices. In that case, the common ratios may not be directly
comparable.
Examples
Trend Analysis
The trend analysis treats the first year as the base year and compares the figures of all
years against it.
The trend analysis for instance sales , will reveal if the sales compared to the base year
has increased or decreased in the subsequent years.
ADVANTAGES
Revenue and cost information from a company's income statements can be arranged on a trend line for
multiple reporting periods and examined for trends and inconsistencies.
The trends show the direction (Up/down) for the change.
It is based on the percentages, thus provide more accurate interpretation regarding sudden spike or fall.
Predict and estimate the future results on the basis of historical trends.
DISADVANTAGES
The trends may change with the selection of the different base years.
The
total no of years covered should not be very large (such as 20 years) or too small.
Figures
The
in large number show wide variations due to factors like Inflation etc.
trend will give a distorted impression if during the years taken into account, the
accountings policies will change.
Examples
Ratio Analysis
Liquidity Ratios
Leverage Ratios
Coverage Ratios
Activity Ratios
Profitability Ratios
Liquidity Ratios
A financial metrics to determine a company's ability to pay off
its short-terms debts/ current requirement obligations. It is
required for understanding in preparing Cash Budgets and
cash flow statements of a company.
Important Ratios:
Current Ratio
Quick Ratio
Leverage Ratios
Leverage ratio indicates the debt paying ability of a company.
It calculates the proportion of debt in the total financing of a
company.
Important Ratio
Debt Equity Ratio
Total Debt Ratio
Coverage Ratios
Coverage ratios test the debt servicing capacity of a company.
This ratio indicates the ability of a firm to meet its interest
obligations.
Important Ratios:
Interest Coverage Ratio
Activity Ratios
Activity Ratios measure a firm's ability to convert different
accounts within its balance sheets into cash or sales. These are
used to measure the relative efficiency of a firm based on its use
of its assets, leverage or other such balance sheet items.
Important Ratios
Inventory Turnover Ratio
Debtors Turnover Ratio
Collection Period Ratio
Inventory Ratios
Profitability Ratios
Profitability Ratios indicate the operating efficiency of a company by
measuring the revenues of the company.
Important Ratios
Net Profit Margin Ratio
Operating Profitability Ratio
Cost of Goods Sold Ratio
Return on Investments (Total Assets) Ratio
Return on Equity Ratio
Earnings per Share Ratio
Dividend per Share Ratio
Dividend Payout Ratio
Price Earning Ratio
Net Profit Margin Ratio : It measures how much out of every unit
sales a company actually keeps in earnings.
Net Profit Margin Ratio = Profit after tax/Sales
Earnings per Share Ratio : This ratio provides an insight into the
earnings of shareholders in a company.
Earnings per Share Ratio = Profit after tax/No. of equity shares
Dividend per Share Ratio : Dividends are calculated to find out what
proportion of the earnings are given to the shareholders. This is
calculated by earnings paid to shareholders divided by the no of shares
in the company.
Thank You