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Financial Statement Analysis:Ratio Analysis

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Financial StatementsFinancial statements provide informationabout the financial activities and position of afirm.

Important financial statements are:Balance sheetProfit & Loss statementFunds flow statement

Cash flow statement

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B alance SheetBalance sheet indicates the financialcondition of a firm at a specific point of time. Itcontains information about the firms: assets,liabilities and equity.

Assets are always equal to equity andliabilities:

Assets = Equity + Liabilities

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A ssets Assets are economic resources or propertiesowned by the firm.There are two types of assets:

Fixed assetsCurrent assets

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Curr ent A ssetsCurrent assets (liquid assets) are those whichcan be converted into cash within a year inthe normal course of business. Currentassets include:

Cash and bank balance Accounts receivable (debtors)Inventory (stocks)

Advances to suppliersPrepaid expenses

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Fixed A ssets

Fixed assets are long-term assets.Tangible fixed assets are physical assets likeplant.

Intangible fixed assets are the firms rights andclaims, such as patents, copyrights, goodwill etc.Gross block represent all tangible assets atacquisition costs.Net block is gross block net of depreciation.

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L iabilities

Liability is a firms obligation to pay cash or provide goods or services in the future. Twotypes of liabilities are:

Current liabilitiesLong-term liabilities

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Curr ent L iabilitiesCurrent liabilities are payable within a year inthe normal course of business. They include:

Accounts payable (creditors)

Outstanding expenses Advances from customersProvision for taxProvision for dividend

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Lo ng-te r m L iabilitiesLong-term liabilities are payable after a year.They include:

Borrowings from financial institutions and banksetc.Debentures/bonds:

Non-convertibleFully convertible

Partly convertible

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Sha r eho lde r s Fu nds o r Equ ity

S hare capital is owners contribution dividedinto shares. A share is a certificateacknowledging the amount of capitalcontributed by the shareholder.Reserves and surplus or retained earningsare undistributed profits.

S hareholders funds or equity is the sum of share capital plus reserves & surplus. It isalso called net worth.

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B alance Sheet Relati o nship

Total assets (TA) equal net fixed assets(NFA) plus current assets (CA):

TA = NFA + CA

Net current assets (NCA) is the differencebetween current assets (CA) and currentliabilities (CL):

NCA = CA CL

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B alance Sheet Relati o nship

Net assets (NA) equal net fixed assets (NFA)plus net current assets (NCA):

NA = NFA + NCA

Capital employed (CE) is the sum of networth or equity (E) and borrowing/debt (D)and it is equivalent of net assets:

CE = Net Worth + Borrowing = E + D

Capital Employed = Net Assets

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P r of it & Lo ss Statement

Profit & Loss statement provides informationabout a firms:

revenues,expenses, andprofit or loss.

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N atur e of Reven u esRevenue is the amount received or receivablewithin the accounting period from the sale of the firms goods or services.Operating revenue is the one that arises frommain operations of the firm, and the revenuearising from other activities is called non-operating revenue.

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N atur e of ExpensesExpense is the amount paid or payable withinthe accounting period for generating revenue.

Examples : raw material consumed, salary andwages, power and fuel, repairs and maintenance,rent, selling and marketing expenses, administrativeexpenses.

Expenses are expired costs and capitalexpenditures represent un-expired costs andappear as assets in balance sheet.

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D ep r eciati o nDepreciation is a charge for the use of fixedassets; it is an expense. It is a non-cashexpense since cash was paid at the time fixedassets were acquired. Expenditures incurredon acquiring assets are called capitalexpenditures. Depreciation is allocation of these expenditures over the life of assets thathave helped in generating revenue.

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M eth o ds of D ep r eciati o n

Depreciation may be provided onstraight line basis or

written down value basis (DWV). DWV basisis allowed for taxation in India.

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C o ncepts of P r of itGross profit = sales cost of goods sold (CG S )

CG S = raw material consumed + manufacturing expenses of goods that have been sold

PBDIT = Profit before dep., interest and tax= sales expenses, except dep., interest andtaxPBIT= Profit before interest and tax= PBDIT DEPPBT= Profit before tax = PBIT InterestPAT = Profit after tax = PBT Tax

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Fu ncti o ns of Inc o me Statement

S ummary of revenues and expensesMeasurement of profitability

Fu ncti o ns of B alance SheetMeasurement of liquidity

Measurement of solvency

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Relati o nships: B/ S and P &L A/C

Net profit = Equity (end) Equity (begin)Equity (end) = Equity (begin) + Net profit +Equity issued DividendNet profit = [Equity (end) Equity (begin)] [Equity issued Dividend]Change in equity = Equity (end) Equity(begin) = Net profit + Equity issued Dividend

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Eco no mic Vs. A cco u nting P r of it

Accounting profit is a result of the arbitraryallocation of expenditures between expenses(revenue expenditure) and assets (capitalexpenditure).

Economic profit is the net increase in the wealthof the firm, and it is measured in cash flow.

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Financial A nalysis

Financial analysis is the process of identifyingthe financial strengths and weaknesses of thefirm by property establishing relationshipsbetween the item of the balance sheet and theprofit and loss account.

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U se r s of Financial A nalysis

Trade creditorsLendersInvestorsManagement

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N atur e of Rati o A nalysis A financial ratio is a relationship between twoaccounting numbers. Ratios help to make aqualitative judgment about the firms financial

performance.

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Standa r d of C o mpa r iso nTime series analysisInter-firm analysisIndustry analysisProforma financial statement analysis

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T ypes of Financial Rati o sLiquidity ratiosS olvency ratiosTurnover ratiosProfitability ratiosEquity-related ratios

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L iqu idity Rati o sLiquidity ratios measure a firms ability tomeet its current obligations.

Curr ent assetsCurr

entr ati

o= Curr ent liabilities

Curr ent assets Invent o r iesQu ick r atio =

Curr ent liabilitiesC ash + M ar ketable sec ur ities

C ash r atio =Curr ent liabilities

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So lvency Rati o sS olvency ratios measure the dependence of a firm on borrowed funds.

D ebtD ebt-eq u ity r atio Eq u ity ( N et W o r th)

D ebt r atio

D ebt Eq u ity empl o yed

Ea r nings be fo r e inte r est and taxc

ove

r age Inte r est

Debt Debt

Capital

Interest

!

! !

!

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T ur no ve r Rati o sTurnover or activity ratios measure the firmsefficiency in utilizing its assets.

C o st of goo ds s o ld o r net salesInvent o r y tur no be r A ver age ( o r clo sing) invent o r y

N u mbe r of days in the yea r (say, 360) of invent o r y ho lding

Invent o r y tur no ver

Cr edit sales o r net saD

ebto r

s tur

no

ver

Days

!

!

! lesA ver age ( o r clo sing) debt o r s N u mbe r of days in the yea r (say, 360)

pe r io dD ebt o r s tur no ver

Collection !

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T ur no ve r Rati o s N et sales

Curr ent assets t ur no ver Curr ent assets

N et salescurr ent assets t ur no ver

N et c urr ent assets N et sales

assets t ur no ver N et f ixed assets

N et salesassets t ur no ver

N et assets o r capital

N et

Fixed

N et

!

!

!

!empl o yed

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P r of itability Rati o sProfitability ratios measure a firms overallefficiency and effectiveness in generatingprofit.

be fo r e inte r est and tax ( P B IT )M ar gin N et sales

af ter tax ( P A T )ma r gin

N et salesP B IT

r etur n o n investment N et assetsP r of it a f ter tax

o n eq u ityEq u ity (net w o r th)

P rofit

P rofit N et

Before tax

Return

!

!

!

!

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Equ ity- r elated Rati o sEquity-related ratios measure theshareholders return and value.

P r of it a f ter taxEP S

N u mbe r of o r dina r y sha r es

DP S N u mbe r of o r dina r y sha r es

DP S r atio

EP S P r af ter taxDP S

yieldM ar ket val u e pe r sha r e

Dividends

Dividends P ayout

ofit

Dividend

!

!

! !

!

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D u P o nt A nalysisD u P o nt A nalysis

integ r ates the imp o r tant r atio s to analyse a f ir m 's p r of itability.P B IT Sales P B IT

RO N A

= N et A ssets N et A ssets SalesP A T Sales P B IT P A T N et A ssets

ROE N et W o r th N et A ssets Sales P B IT N et W o r th

! v

! ! v v v-ROE A ssets t ur no ver M ar gin eve r age L

!

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ISPAT INDUSTRIES LIMITEDBALANCE SHEETAS AT 31ST MARCH, 2001 Rs crore

2001 2000SOURCES OF FUNDS

. Shareholders' FundsShare Capital .

.5 5

Advances against Share Capital 2

.3

.

Reserves & Surplus

.

. 1969.14 1872.09

2. Loan FundsSecured Loans

.2 2. Unsecured Loans . .2

5619.35 4670.89

TOTAL 7588.49 654 2 .98 APPLICATION OF FUNDS

. Fixed AssetsGross Block

.

.2 !

Less: Depreciation

.

" !

.

Net Block 2 . #

2.

Capital Work -in-Progress 2 " . 2

. Pre-operative exp. etc. # .

22 . ! # 6575.4 6114.65

2. Investments 130.87 135.793 . Current As sets , Loans & Advances

Inventories 2 $ % . 37 2 $ & .'

(

Sundry Debtors 389 . ) 9 2 $ 0 .'

Cash & Bank Balances $ 3 . 9 77 . 7Loans, Advances & Deposits 1 0 1 8 . 31 907 . ) 1

1719.27 1495.19Less: Current Liabilities & Provisions

Liabilities 1150 . 7 1185 . 39Provisions 18 . 86 18 . 61

1169.56 1204

Net Current Assets 549.71 291.192

. Mis cellaneous Expenditure 134 . 37 1 . 35(To the extent not written off or adjusted)

5 . Profit and Loss Account Debit balance 198 . 14 _ TOTAL 7588.49 6542.98

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ISPAT INDUSTRIES LIMITED

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 31ST MARCH

2001 2000

INCOME

J 36

2264.07 1437.13

EXPENDITURE 3 333 333

33

6 3

3 63 6 3

6 333 3

2576.5 1433.21

/ + 312.43 3.92 Less: Provision for Taxation 0.03 0.32Add: Provision for Taxation written back 0.07Profit / Loss) after taxation 312.46 3.67 Less: Balance brought forward from Previous Year 100.52 106.59Transfer from Debenture Redemption Reserve 8.09Transfer from Taxation Reserve 0.73Transfer from General Reserve 13.07 _ Profit / Loss) available for appropriation -198.14 118.35

APPROPRIATIONS:

Transfer to Debenture Redemption Reserve _ 17.83Balance carried to Balance Sheet -198.14 100.52TOTAL -198.14 118.35

(Rs. crores)

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ISPAT INDUSTRIES LIMITED

RATIO ANALYSIS Liquidity ratios

Current ratio 1.47 1.24Quick ratio 0.05 0.06

Activity ratiosSales/TA 0.30 0.22Sales/FA 0.81 1.25

Sales/Debtors 5.75 5.69Sales/Inventory 8.70 5.49Leverage ratiosDebt/Equity 2.85 2.50Debt/TA 0.74 0.71

PBIT/Interst 1.90 1.04Profitability ratiosPBIT/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%

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INFOSYSProfit and Loss Account for the year ended March 31

9 9 9339 3

93 9 39 919,599,373,722.00 9,214,648,068.00

9

9 9933 33

11,510,136,229.00 5,425,834,860.008,089,237,493.00 3,788,813,208.00

9 3 3 3 99 9 3 3 9

3 396,233,192,341.00 2,859,485,819.00

9q

3 3 936,288,136,341.00 2,935,156,665.00

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INFOSYSFinancial Ratios

2001 2000

Activity Ratios44

Current Ratios4 4

0 0 00 0

Profitability RatiosMargin

4 % 4 %% 4 %

0 % 0 %Return on Investment

% 4 4 %0 0 % 0 %

4 4 % 4 %

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U tility of Rati o A nalysis

Assessment of the firms financial conditionsand capabilities.Diagnosis of the firms problems, weaknessesand strengths.Credit analysisS ecurity analysisComparative analysisTime series analysis

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C au tio ns in U sing Rati o A nalysisS tandards of comparisonsCompany differencesPrice levelDifferent definitionChanging situationsPast data