Understanding and Analysing Financial Statements: BY Dr. Archana Singh
Understanding and Analysing Financial Statements: BY Dr. Archana Singh
Understanding and Analysing Financial Statements: BY Dr. Archana Singh
FINANCIAL STATEMENTS
1
BY
DR. ARCHANA SINGH
2
What are Financial Statements?
The “HOW” of Financial Decision
Making
3
⚫ Comparison is essential
⚪ The comparison can be of the ratio of the same
company over several successive years
⚪ Comparison with similar figures of other firms and
units in the same industry
⚪ Comparison with similar figures of other firms and
units in different industries
Fundamental Question
16
⚫ Ratio Analysis
⚪ Trend Analysis
⚪ Inter firm Comparison
⚪ Comparative statements
⚪ Common size statements
⚪ Fund flow analysis
⚪ Cash Flow analysis
⚪ Benchmarking
Performance Key Issues
Area
20
RATIO ANALYSIS
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⚫ LEVERAGE RATIOS/stability
• debt-equity ratio
• debt ratio
⚫ PROFITABILITY RATIOS
▪ P/E ratio
▪ Market value to book value ratio
▪ Gross profit ratio
▪ Operating profit ratio
▪ Net profit ratio
▪ ROTA
▪ ROE/-ROCE
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⚫ ACTIVITY RATIOS
• Total assets turnover ratio
• Fixed assets turnover ratio
• Current assets turnover ratio
• Interest coverage ratio
• Accounts receivable ratio
• Average collection period
Liquidity ratios 26
▪ CR= CA/CL
▪ QR= CA-Inventory/CL
Coverage ratios
▪ EAIBT/Annual interest payment= Interest coverage
▪ EAT + Depreciation/Annual amount of loan
installment= loan repayment coverage ratio
▪ EAT + Depreciation/Annual interest(1-tax
rate)=Coverage for principal & interest loan
repayment
▪ EAT-Preference Dividend/Annual dividend
payment=Dividend Coverage
⚫ Profitability ratios
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⚪ PBIT*100/Total capital employed=ROCE
⚪ EAIT/Sales=Net Profit ratio
⚪ EBIT/Sales=Gross Profit ratio
⚫ Turnover ratios
▪ Net sales/Total capital employed=Capital
turnover ratio
▪ Net sales/Net FA= FA turnover ratio
▪ COGS/Average inventory=Inventory
Turnover ratio
▪ Net sales/Gross CA=CA turnover ratio
▪ Annual credit sales/amt. of debtors at the
end of the month=Debtors turnover ratio
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⚫ Capital structure ratios
⚪ Total of LT liabilities/Total shareholders funds =
Debt to Equity ratio
⚪ Net worth to total assets shows stability of the
firm
⚪ Net worth to Fixed Assets shows extent to which
FA have been financed out of owner’s funds.
Symptoms, Causes
29
& Solutions
revealed
Symptoms
by Financial
Problem
Ratios
Solution
A. Abnormal 1.Inadequate 1.Raise
Liquidity Cash
additional
Ratio funds
2. Excessive 2. Restrict
Receivables terms of
trade: more aggressive
collection
policy
Symptoms Problem Solution
30
3.Excessive 3.Improve
inventory inventory
mgmt.
4. Excessive 4.Obtain
CL LT financing
Symptoms Problem Solution
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2. Abnormal 1. High 1. Institute
Profitability Production cost cutting
Ratio costs measures
2. Idle 2. Sell excess
assets assets 3.
Inadequate 3. Increase
sales size of
sales force &
advertising
4. Inadequate 4. Raise SP
selling price
Symptoms Problem Solution
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5. High 5.Reduce
administrative them
expenses
6. Excessive 6. Seek
interest lower cost
payments debt or shift
to
equity
financing
DU PONT33 Analysis
⚫ ROCE= Net profit margin * capital turnover
Ratio
⚫ N.P.(EAIT) Sales
---------------- * --------------------------
Sales Capital employed
Sources & Uses of Funds
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THANK YOU