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Financial Statements Analysis

The analysis of financial data employs various techniques to emphasize the compa
rative and relative importance of the data presented and to evaluate the positio
n of the firm.
A very important techniqueused to analysis the financial positions of companies
called ratio analysis. The information derived from these types of analyses shou
ld be blended to determine the overall financial position. No one type of analys
is supports overall findings or serves all types of users.
1. Financial Statement Analysis Project
In this project, you have to:
1. Select two listed companies existing in the same industry (e.g. Unilever
and
Proctor and Gamble in the food and personal care products, etc)
2. Get their financial statements for the most recent three years and perfo
rm the afore-mentioned analysis
2. Theme of the Project
Financial Analysis techniques such as ratio analysis can provide valuable insigh
t into a company’s operations, riskcharacteristics, and valuation beyond what is r
eadily apparent by examining rawdata. When data is presented analytically, diffe
rences across time periods,interrelationships of financial statement accounts an
d comparisons amongcompanies, are more easily understood.
An effective analysis encompasses both computations and interpretations. A well-
reasoned analysis differs from a mere complication of various pieces of informat
ion, computations, tables, and graphs by integrating the data collected into a c
ohesive whole. Analysis of the past performance, for example, should address not
only what happened but also why it happened and whether it advanced company’s str
ategy.
Some of the key questions to address include:
• What aspects of performance are critical for this company to successfully compet
e in the industry?
• How well did the company‘s performance meet these critical aspects? (This is estab
lished through computations and comparison with appropriate benchmarks, such as
the company’s own historical performance or competitors’ performance.)
3. Financial Analysis Techniques.
The following techniques can help you in achieving the overall objective offinan
cial statement analysis of the companies.
Ratio Analysis
Ratio analysis is the calculation and comparison of ratios which are derived fro
m the information in a company s financial statements. Financial ratios are usua
lly expressed as a percent or as times per period.
a) Liquidity Ratio/Short Term Solvency Ratios
Liquidity ratios measure a firm’s ability to meet its current obligations.
These include:
1. Current Ratio
2. Acid Test Ratio/Quick Ratio
b) Activity Ratios/Turnover Ratios/Efficiency Ratios
It is also called turnover ratio or efficiency ratio. It measures the efficiency
of current assets and current liabilities in the business concern during a part
icular period. This ratio helps to understand the performance of the business co
ncern.
These include:
1. Stock Turnover Period
2. Debtor’s Collection Period
3. Creditor’s Payment Period
4. Total Assets Turnover
5. Operating Cycle
c) Market Ratios
Market ratios are commonly used by the investors to assess the performance of a
business as an investment and also the cost of issuing stock.
These include:
1. Dividend per share (DPS)
2. Earnings per Share (EPS)
3. Price/Earnings Ratio (P/E)
4. Percentage of Earnings Retained
5. Dividend Payout
6. Dividend Yield
7. Book Value per Share
d) Profitability Ratios
Profitability ratios measure the earning ability of a firm.
These include:
1. Gross Profit Ratio
2. Net Profit Ratio
3. Operating Profit Ratio
4. Return of Equity
5. Return of Assets
4. Comparisons
Absolute figures or ratios appear meaningless unless compared to other figures o
r ratios.
Several types of comparisons offer insight, e.g.
a) Trend Analysis
Trend analysis studies the financial history of a firm for comparison. It is the
comparative analysis of a company s financial ratios over time. This helps to d
etect problems or observe good management. Ratios are plotted on graph to see wh
ether the ratios are falling, rising, or remaining relatively constant.
b) Industry Averages and Comparisons with Competitors
The analysis of an entity’s financial statements is more meaningful if the results
are compared with industry averages and with results of competitors. You are re
quired to select 3-4 companies from the same industry and then calculate their 8
-10 ratios. You have to compare their ratios results with your companies’ ratios
results. This enables financial analyst to check that where the selected compani
es fall in that particular industry.
5. Instructions:
Please follow these instructions strictly:
You must provide scanned copies of all the financial statements used for financi
al analysis. (If you have downloaded the financial statements from internet then
its source or web link should be provided. Scanned copies are not required in s
uch case).
NOTE 1: Your work will not be considered or accepted in case you do not provide
scanned copies or source of original financial statements.
• You must perform complete financial statements analysis of the selected companie
s for the most recent three years.
• You must apply all afore-mentioned techniques when doing analysis of financial s
tatements.
• You must provide all the supporting calculations, working and interpretation of
results obtained from each ratio. You are required to calculate/analyze minimum
forty (20) ratios.
NOTE 2:Failure to provide the financial statements, supporting calculations and
working of analyses in your project will affect the worth of your work and may r
esult in failure/rejection of the project.
• You must not perform the financial analyses of companies having losses.
• While selecting companies for analyses, keep in mind that they are from same ind
ustry for example; you cannot select one company from textile spinning and one f
rom textile weaving. Both companies should be either from textile spinning or we
aving sector.
• You can get annual reports of companies from companies’ offices, stock exchanges o
r from companies’ websites.

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