Financial Statement Analysis

Financial Statements Analysis
The Most Important analysis . .Must know for HR, Mrkt, Op and of course, Finance Decision makers.
prateeksparihar@gmail.com 1
But before that..Some ..
RECAP
prateeksparihar@gmail.com
Financial Statements
Financial statements provide information about the financial activities and position of a firm. Important financial statements are:
Balance sheet Profit & Loss statement Cash flow statement
Balance Sheet
Balance sheet indicates the financial condition of a firm at a specific point of time. It contains information about the firms: assets, liabilities and equity. Assets are always equal to equity and liabilities: Assets = Equity + Liabilities
Assets
Assets are economic resources or properties owned by the firm. There are two types of assets:
Fixed assets Current assets
Current Assets
Current assets (liquid assets) are those which can be converted into cash within a year in the normal course of business. Current assets include:

6
Cash Tradable (marketable) securities Debtors (account receivables) Stock of raw material Work-in-process Finished goods
Fixed Assets
Fixed assets are long-term assets. Tangible fixed assets are physical assets like land, machinery, building, equipment. Intangible fixed assets are the firms rights and claims, such as patents, copyrights, goodwill etc. Gross block represent all tangible assets at acquisition costs. Net block is gross block net of depreciation.
7 prateeksparihar@gmail.com
Liabilities
Liability is a firms obligation to pay cash or provide goods or services in the future.
Two types of liabilities are:

Current liabilities Long-term liabilities
Current Liabilities
Current liabilities are payable within a year in the normal course of business. They include:
Accounts payable (creditors) Outstanding expenses Advances from customers Provision for tax Provision for dividend
Long-term Liabilities
Long-term liabilities are the obligations or debts payable in a period of time greater than the accounting period. They include - Debentures, bonds, and secured long-term loans from financial institutions.
10
Shareholders Funds or Equity

Share capital is owners contribution divided into shares. A share is a certificate acknowledging the amount of capital contributed by the shareholder. Shareholders equity has two parts: (i) paid-up share capital, and (ii) reserves and surplus (retained earnings) representing undistributed profits. Paid-up share capital and reserve and surplus together are called net worth.
Nature of Revenues
Revenue is the amount received or receivable within the accounting period from the sale of the firms goods or services. Operating revenue is the one that arises from main operations of the firm, and the revenue arising from other activities is called nonoperating revenue.
12
Nature of Expenses
Expense is the amount paid or payable within the accounting period for generating revenue.
Examples: raw material consumed, salary and wages, power and fuel, repairs and maintenance, rent, selling and marketing expenses, administrative expenses.
Expenses are expired costs and capital expenditures represent un-expired costs and appear as assets in balance sheet.
Concepts of Profit
Gross profit = sales cost of goods sold (CGS) CGS = raw material consumed + manufacturing expenses of goods that have been sold PBDIT = Profit before dep., interest and tax = sales expenses, except dep., interest and tax Operating profit (OP), OP = GP OEXP DEP PBIT= Profit before interest and tax= PBDIT DEP PBT= Profit before tax = PBIT Interest PAT = Profit after tax = PBT Tax Net operating profit after tax (NOPAT)=PBIT (1 Tax rate)
14
CASH FLOW STATEMENT

A statement of changes in financial position on cash basis, commonly known as the cash flow statement, summarizes the causes of changes in cash position between dates of the two balance sheets.
It indicates the sources and uses of cash.
This statement analyzes changes in noncurrent accounts as well as current accounts (other than cash) to determine the flow of cash.
15
Sources of Cash
The profitable operations of the firm, Decrease in assets (except cash), Increase in liabilities (including debentures or bonds), and Sale proceeds from an ordinary or preference share issue.
16
Uses of Cash
The loss from operations Increase in assets (except cash) Decrease in liabilities Redemption of redeemable preference shares Cash dividends
17
FINANCIAL STATEMENTS ANALYSIS

Ratio Analysis
Common Size Statements

Importance and Limitations of Ratio Analysis Mini Case
Ratio Analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.
6 - 19
Basis of Comparison
1) Trend Analysis involves comparison of a firm over a period of time, that is, present ratios are compared with past ratios for the same firm. It indicates the direction of change in the performance improvement, deterioration or constancy over the years. 2) Interfirm Comparison involves comparing the ratios of a firm with those of others in the same lines of business or for the industry as a whole. It reflects the firms performance in relation to its competitors.
3) Comparison with standards or industry average.

prateeksparihar@gmail.com 6 - 20
Types of Ratios
Liquidity Ratios Capital Structure Ratios
Profitability Ratios
Efficiency ratios Integrated Analysis Ratios Growth Ratios
Net Working Capital

Net working capital is a measure of liquidity calculated by subtracting current liabilities from current assets.
Table 1: Net Working Capital Particulars Company A Company B
Total current assets Total current liabilities NWC

Table 2: Change in Net Working Capital
Rs 1,80,000 1,20,000 60,000
Rs 30,000 10,000 20,000
Particulars
Current assets Current liabilities NWC
Company A
Rs 1,00,000 25,000 75,000
Company B
Rs 2,00,000 1,00,000 1,00,000
22
Liquidity Ratios
Liquidity ratios measure the ability of a firm to
meet its short-term obligations.
6 - 23
Current Ratio
Current Ratio is a measure of liquidity calculated dividing the current assets by the current liabilities
Current Ratio =
Current Assets Current Liabilities

Firm B Rs 30,000 Rs 10,000 3:1
6 - 24
Particulars Current Assets Current Liabilities Current Ratio
Firm A Rs 1,80,000 Rs 1,20,000 = 3:2 (1.5:1)

Acid-Test Ratio
The quick or acid test ratio takes into consideration the differences in the liquidity of the components of current assets.
Acid-test Ratio =
Quick Assets
Current Liabilities
Quick Assets = Current assets Stock Pre-paid expenses

Example 1: Acid-Test Ratio

Cash Debtors Inventory Total current assets Total current liabilities Rs 2,000 2,000 12,000 16,000 8,000
(1) Current Ratio (2) Acid-test Ratio

2:1 0.5 : 1
26
Supplementary Ratios for Liquidity

Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio
6 - 27
Inventory Turnover Ratio

The ratio indicates how fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast and stays on the shelf or in the warehouse for a long time.
Cost of goods sold

Inventory turnover ratio = Average inventory
The cost of goods sold means sales minus gross profit. The average inventory refers to the simple average of the opening and closing inventory.
Example 2: Inventory Turnover Ratio

A firm has sold goods worth Rs 3,00,000 with a gross profit margin of 20 per cent. The stock at the beginning and the end of the year was Rs 35,000 and Rs 45,000 respectively. What is the inventory turnover ratio?
Inventory turnover ratio
(Rs 3,00,000 Rs 60,000) (Rs 35,000 + Rs 45,000) 2
6 (times per year)
12 months Inventory = = 2 months holding period Inventory turnover ratio, (6)
29
Debtors Turnover Ratio

The ratio measures how rapidly receivables are collected. A high ratio is indicative of shorter time-lag between credit sales and cash collection. A low ratio shows that debts are not being collected rapidly.
Debtors turnover ratio
Net credit sales

Average debtors
Net credit sales consist of gross credit sales minus returns, if any, from customers. Average debtors is the simple average of debtors bills receivable) at the beginning and at the end of year.
(including
30
Example 3: Debtors Turnover Ratio

A firm has made credit sales of Rs 2,40,000 during the year. The outstanding amount of debtors at the beginning and at the end of the year respectively was Rs 27,500 and Rs 32,500. Determine the debtors turnover ratio. Debtors turnover ratio Rs 2,40,000 8 (times per year) 1.5 Months
31
(Rs 27,500 + Rs 32,500) 2

= 12 Months Debtors turnover ratio, (8)
Debtors collection period
Creditors Turnover Ratio

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on suppliers credit.
Creditors turnover ratio
Net credit purchases Average creditors
Net credit purchases = Gross credit purchases - Returns to suppliers. Average creditors = Average of creditors (including bills payable) outstanding at the beginning and at the end of the year.
Example 4: Creditors Turnover Ratio

The firm in previous Examples has made credit purchases of Rs
1,80,000. The amount payable to the creditors at the beginning

and at the end of the year is Rs 42,500 and Rs 47,500 respectively. Find out the creditors turnover ratio.
Creditors turnover ratio Creditors payment period
(Rs 1,80,000) (Rs 42,500 Rs 47,500) 2
4 (times per year)
12 months
Creditors turnover ratio, (4)
= 3 months
6 - 33
The summing up of the three turnover ratios (known as a cash cycle) has a bearing on the liquidity of a firm. The cash cycle captures the interrelationship of sales, collections from debtors and payment to creditors.
The combined effect of the three turnover ratios is summarised below:

Inventory holding period Add: Debtors collection period Less: Creditors payment period 2 months + 1.5 months 3 months 0.5 months
As a rule, the shorter is the cash cycle, the better are the liquidity ratios as measured above and vice versa.
Leverage Capital Structure Ratio

There are two aspects of the long-term solvency of a firm: (i) Ability to repay the principal when due, and
(ii) Regular payment of the interest . Capital structure or leverage ratios throw light on the long-term solvency of a firm. Accordingly, there are two different types of leverage ratios.
First type: These ratios are computed from the balance sheet Second type: These ratios are computed from the Income Statement
(a) Debt-equity ratio

(b) Debt-assets ratio (c) Equity-assets ratio
(a) Interest coverage ratio

(b) Dividend coverage ratio
6 - 35
I. Debt-equity ratio
Debt-equity ratio measures the ratio of long-term or total debt to shareholders equity.
Debt-equity ratio measures the ratio of long-term or+ Other Current debt Total Debt Liabilities = Total external Debt-equity ratio = total de3bt to shareholders equity Shareholders equity Obligations
Long-term Debt + Short term
If the D/E ratio is high, the owners are putting up relatively less money of their own. It is danger signal for the lenders and creditors. If the project should fail financially, the creditors would lose heavily. A low D/E ratio has just the opposite implications. To the creditors, a relatively high stake of the owners implies sufficient safety margin and substantial protection against shrinkage in assets.
For the company also, the servicing of debt is less burdensome and consequently its credit standing is not adversely affected, its operational flexibility is not jeopardised and it will be able to raise additional funds. The disadvantage of low debt-equity ratio is that the shareholders of the firm are deprived of the benefits of trading on equity or leverage.
37
Trading on Equity
Trading on equity (leverage) is the use of borrowed funds in expectation of higher return to equity-holders. Trading on Equity Particular (a) Total assets Financing pattern: Equity capital 15% Debt (b)Operating profit (EBIT) Less: Interest Earnings before taxes Less: Taxes (0.35) Earnings after taxes Return on equity (per cent) A 1,000 1,000 300 300 105 195 19.5
(Amount in Rs thousand) B 1,000 800 200 300 30 270 94.5 175.5 21.9 C 1,000 600 400 300 60 240 84 156 26 D 1,000 200 800 300 120 180 63 117 58.5
38
Coverage Ratio
Interest Coverage Ratio Interest Coverage Ratio measures the firms ability to make contractual interest payments. Interest coverage ratio = EBIT (Earning before interest and taxes) Interest
39
Debt Service Coverage Ratio

Debt-service coverage ratio (DSCR) is considered a more comprehensive and apt measure to compute debt service capacity of a business firm.
DSCR
t=1
EATt
Interestt
n
Depreciationt
OAt
t=1
InInstalmentt
DEBT SERVICE CAPACITY

Debt service capacity is the ability of a firm to make the contractual payments required on a scheduled basis over the life of the debt.
Example 6: Debt-Service Coverage Ratio

Agro Industries Ltd has submitted the following projections. You are required to work out yearly debt service coverage ratio (DSCR) and the average DSCR.
(Figures in Rs lakh) Year 1 2 3 4 5 6 7 8 Net profit for the year 21.67 34.77 36.01 19.20 18.61 18.40 18.33 16.41 Interest on term loan during the year 19.14 17.64 15.12 12.60 10.08 7.56 5.04 Nil Repayment of term loan in the year 10.70 18.00 18.00 18.00 18.00 18.00 18.00 18.00
The net profit has been arrived after charging depreciation of Rs 17.68 lakh every year.
Solution
Table 3: Determination of Debt Service Coverage Ratio
(Amount in lakh of rupees)

Ye ar Net profit Depreciation Interest Cash available (col. 2+3+4) 5 58.49 70.09 68.81 49.48 46.37 43.64 41.05 34.09 Principal Installment Debt obligation (col. 4 + col. 6) 7 29.84 35.64 33.12 30.60 28.08 25.56 23.04 18.00 DSCR [col. 5 col. 7 (No. of times)] 8 1.96 1.97 2.08 1.62 1.65 1.71 1.78 1.89 1.83 prateeksparihar@gmail.com 6 - 42
1 1 2 3 4 5 6 7 8
2 21.67 34.77 36.01 19.20 18.61 18.40 18.33 16.41
3 17.68 17.68 17.68 17.68 17.68 17.68 17.68 17.68
4 19.14 17.64 15.12 12.60 10.08 7.56 5.04 Nil
6 10.70 18.00 18.00 18.00 18.00 18.00 18.00 18.00
Average DSCR (DSCR 8)
Profitability Ratio
Profitability ratios can be computed either from sales or investment. Profitability Ratios Profitability Ratios
Related to Sales
(i) Profit Margin (ii) Expenses Ratio
Related to Investments
(i) Return on Investments (ii) Return on Shareholders Equity
43
Profit Margin
Gross Profit Margin
Gross profit margin measures the percentage of each sales rupee remaining after the firm has paid for its goods.
Gross profit margin =
Gross Profit Sales
X 100
44
Net Profit Margin

Net profit margin measures the percentage of each sales rupee remaining after all costs and expense including interest and taxes have been deducted. Net profit margin can be computed in three ways Earning before interest and taxes Net sales
i. Operating Profit Ratio =
ii. Net Profit Ratio =
Earning after interest and taxes Net sales

Example 7: From the following information of a firm, determine (i) Gross profit margin and (ii) Net profit margin. 1. Sales Rs 2,00,000 2. Cost of goods sold 1,00,000 3. Other operating expenses 50,000
(1) Gross profit margin =
Rs 1,00,000
Rs 2,00,000
Rs 50,000
= 50 per cent
(2) Net profit margin =
Rs 2,00,000
= 25 per cent
6 - 46
Return on Investment
Return on Investments measures the overall effectiveness of management in generating profits with its available assets.
i. Return on Assets (ROA) ROA = EAT + (Interest Tax advantage on interest) Average total assets
ii. Return on Capital Employed (ROCE)

ROCE = EAT + (Interest Tax advantage on interest) Average total capital employed
Return on Shareholders Equity

Return on shareholders equity measures the return on the owners (both preference and equity shareholders) investment in the firm. Return on total shareholders equity = Net profit after taxes Average total shareholders equity X 100
48
Efficiency Ratio
Activity ratios measure the speed with which various accounts/assets are converted into sales or cash.
Inventory turnover measures the efficiency of various types of inventories.
Cost of goods sold of inventory i. Inventory Turnover measures the activity/liquidity Inventory Turnover Ratio = Average of a firm; the speed with which inventory isinventory sold
Cost of raw materials used i. Inventory Turnover measures the activity/liquidity of inventory Raw materials turnover = of a firm; the speed with whichAverage inventory is material sold raw inventory
49
Debtors Turnover Ratio

Liquidity of a firms receivables can be examined in two ways.
Credit sales i. Inventory Turnover measures the activity/liquidity of inventory of a i. Debtors turnover = firm; the speed with which Average inventory debtorsis + sold Average bills receivable (B/R)
2. Average collection period =
Months (days) in a year Debtors turnover
i. Inventory Turnover measures the activity/liquidity of inventory of a firm; the speed with which inventory is sold
Ageing Schedule slow paying debtors.
enables
analysis
to
identify
50
Assets Turnover Ratio

Assets turnover indicates the uses all its assets to generate sales. efficiency with which firm
Cost of goods sold of inventory of a i. Inventory Turnover measures the activity/liquidity i. Total assets turnover = firm; the speed with which inventory Average is sold total assets ii. Fixed assets turnover = Cost of goods sold Average fixed assets
Cost of goods sold of inventory of a i. Inventory Turnover measures the activity/liquidity v. Working capital turnover = Net working capital firm; the speed with which inventory is sold
1)
1)
Return on shareholders equity =

EAT/Average total shareholders equity. Earnings per share (EPS) = Net profit available to equity shareholders (EAT)/Number of equity shares outstanding (N).
1)
Dividends per share (DPS) =

Dividend paid to ordinary shareholders/Number of ordinary shares outstanding (N).
1) 1) 1)
Dividend Yield =
DPS/Market price per share.

Price-earnings (P/E) ratio = Market price of a share/EPS. Book value per share = Ordinary shareholders equity/Number of equity shares outstanding.
52
Common Size Statements

Preparation of common-size financial statements is an extension of ratio analysis. These statements convert absolute sums into more easily understood percentages of some base amount. It is sales in the case of income statement and totals of assets and liabilities in the case of the balance sheet.
Limitations
Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.
53
Common-size Income Statements

A common-size income For the Year Ended Dec. 31, 1997 ($1997% 000's) 1997% statement restates all Sales 100.00% Cost of Goods Sold 83.33% expenses as a Gross Profit 16.67% percentage of sales Selling and G&A Expenses 8.47% Fixed Expenses 2.56% This allows the analyst Depreciation Expense 0.51% EBIT 5.12% to quickly and easily Interest Expense 1.95% Earnings Before Taxes 3.17% see which expenses Taxes @ 40% 1.27% Net Income 1.90% have increased or decreased relative to sales
1997 1997 3900.00 3250.00 650.00 330.30 100.00 20.00 199.70 76.00 123.70 49.48 74.22 1996% 1996% 100.00% 81.83% 18.17% 6.86% 2.86% 0.54% 7.92% 1.79% 6.13% 2.45% 3.68% 1996 1996 3500.00 2864.00 636.00 240.00 100.00 18.90 277.10 62.50 214.60 85.84 128.76
54
Common-size Balance Sheets

A common-size balance sheet restates all assets and liabilities as a percentage of total assets This allows the analyst to quickly and easily see which accounts have increased or decreased relative to total assets
Elvis Products International Common-size Balance Sheet As of Dec. 31, 1997 ($ 000's)
Assets Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets 1997% 1997 1996% 1996 3.03% 50.00 3.92% 57.60 24.35% 402.00 23.91% 351.20 50.76% 838.00 48.69% 715.20 78.14% 1290.00 76.53% 1124.00 31.92% 527.00 33.43% 491.00 10.07% 166.20 9.95% 146.20 21.86% 360.80 23.47% 344.80 100.00% 1650.80 100.00% 1468.80 9.91% 145.60 13.62% 200.00 9.26% 136.00 32.79% 481.60 22.02% 323.43 54.81% 805.03 31.32% 460.00 13.87% 203.77 45.19% 663.77 100.00% 1468.80
Liabilities and Owner's Equity Accounts Payable 10.61% 175.20 Short-term Notes Payable 13.63% 225.00 Other Current Liabilities 8.48% 140.00 Total Current Liabilities 32.72% 540.20 Long-term Debt 25.72% 424.61 Total Liabilities 58.45% 964.81 Common Stock 27.87% 460.00 Retained Earnings 13.69% 225.99 Total Shareholder's Equity 41.55% 685.99 Total Liabilities and Owner's Equity 100.00% 1650.80
55
CASE STUDY
56
From the following selected financials of Reliance Industries Ltd (RIL) for the period 2001-2006, appraise its financial health from the point of view of liquidity, solvency, and profitability. Selected financial data and ratios Particulars (I) Related to Liquidity Analysis Current assets Marketable investments Inventory Debtors Advances Cash and bank balance Current liabilities Short-term bank borrowings Sundry creditors Interest accrued Creditors for capital goods Other current liabilities & provisions Other data and ratios Net working capital Credit sales Cost of goods sold Cost of raw material used Credit purchases Average debtors Average creditors Current ratio Acid test ratio Debtors turnover Creditors turnover Debtors cycle (days) Creditors cycle (days) 2001 9,844.48 3387.25 2299.85 1,134.17 2,922.58 100.63 5,312.06 337.76 3,754.50 223.00 104.72 892.08 2002 13,025.31 536.80 4976.07 2,722.46 3,310.27 1,760.71 9,830.10 2,148.27 5,847.20 389.23 175.16 1270.24 2003 17,925.25 536.19 7510.14 2,975.49 6,756.22 147.21 18,160.39 7,193.77 8288.10 380.15 717.48 1580.89 2004 23,245.88 536.11 7,231.22 3,189.93 12,064.38 224.24 16,966.15 9,145.14 366.78 676.45 2,670.75 4,107.03 (Amount in Rs crore) 2005 28,988.62 536.11 7,412.88 3,927.81 13,503.03 3,608.79 21,934.45 12,684.39 366.95 525.37 3471.80 4,885.94 2006 24,591.03 16.58 10,119.82 4,163.62 8,144.85 2,146.16 21,441.88 11,438.69 310.42 728.18 3,890.98 2,073.61
4,532.42 22,886.51 21,290.91 18,155.98 21,608.85 988.31 3,170.68 1.85 0.87 23 7 16 54
3,195.21 45,073.88 45,957.85 41,023.35 45,083.06 1,928.31 4,800.85 1.33 0.51 23 9 16 39
-235.14 49,743.54 54,642.60 50,378.65 56,884.49 2,848.97 7,067.65 0.99 0.20 17 8 21 45
6,279.73 56,247.03 41,657.92 34,721.39 60,246.91 3,094.02 9,413.58 1.75 .26 17.63 6.40 21 57
7,054.17 73,164.10 53,345.03 45,931.87 70,014.80 3,558.87 11,515.6 1.66 .55 18.62 6.08 20 60
3,149.15 89,124.16 65,535.84 58,342.31 68,516.87 4,045.71 12,688.31 1.49 .38 21.40 5.40 17 67
57
CONTD. Particulars (II) Related to Solvency Analysis Free reserves Paid up capital Preference capital Bonus equity capital Total equity Long-term borrowings Current liabilities Total debt EBIT Interest Total debt-equity ratio Long-term debt-equity ratio Interest coverage ratio (III) Related to Profitability Analysis Sales (manufacturing) Cost of goods sold EBDIT (including other earnings) EBIT EBT EAT Interest Average total capital employed Average total assets Average equity funds Gross profit % Operating profit ratio % Net profit ratio % Cost of goods sold ratio % Rate of return on capital employed (ROCE)1 ROR (Total assets)2 ROR (Equity funds)
2001 9,307.89 1,053.49 0.00 481.77 10,843.15 9,798.03 5,312.06 15,110.09 4,032.37 1,215.56 1.39 0.90 3.32 22886.51 21290.91 5,597.48 4,032.37 2,786.00 2,646.50 1,215.55 19235.95 29622.14 10715.17 24.46 17.62 11.56 93.03 20.07 13.03 24.70
2002 21,834.29 1,395.85 0.00 481.77 23,711.91 16,780.21 9,830.10 26,610.31 6,307.71 1,827.85 1.12 0.71 3.45 45073.88 45957.85 9,123.85 6,307.71 4,434.17 3,242.17 1,827.84 27,053.32 43,325.86 17,277.53 20.24 13.99 7.19 101.96 18.74 11.7 18.77
2003 23,656.31 1,395.92 0.00 481.77 25,534.00 12,564.54 18,160.39 30,724.93 6,551.17 1,555.40 1.20 0.49 4.21 49,743.54 54,642.60 9,388.26 6,551.17 4,982.75 4,106.85 1,555.4 34,388.04 60,415.77 24,622.96 18.87 13.17 8.26 109.85 16.47 9.37 16.68
2004 33,056.50 1,395.95 0.00 481.77 34,934.22 11,149.38 12,955.22 24,104.60 7,735.86 1,434.72 0.69 .31 5.39 56,247.03 41,657.92 10,982.88 7,735.86 6,301.14 5,160.14 1,434.72 50,030.24 52,764.91 1,396.38 18.41 13.75 9.95 80.34 13.18 12.4 16.26
2005 39,010.23 1,393.09 0.00 481.77 40,885.09 6,172.98 17,131.52 23,304.50 10,537.34 1,468.66 0.57 .15 7.17 73.164.10 53,345.03 14,260.84 10,537.34 9,068.68 7,571.68 1,468.66 54,560.80 57,292.51 1,394.94 19.40 14.40 11.48 80.92 16.56 15.77 20.09
2006 48,411.09 1,393.17 0.00 481.77 50,286.03 8,185.60 16,454.48 24,640.08 11,581.10 877.04 0.49 .16 13.20 89,124.46 65,535.84 14,982.01 11,581.10 10,704.06 9,069.34 877.04 61,738.85 65,428.89 1,393.51 17.43 12.99 11.21 81.03 16.11 15.20 20.08
1. ROCE = (EAT + Interest)/ Average capital employed
2. ROR (Total assets) = (EAT + Interest)/ Average assets
58
Solution: The appraisal of financial health of RIL is presented below. Liquidity Analysis: The liquidity position of RIL does not appear to be commendable during all the years under reference. In fact, its current ratio was less than one implying negative working capital (in 2003) and acid-test ratio was at an alarming low level of 0.2. Though the current ratio range of 1.33 1.85 (during 2001-2 and 2004-6) is an indicative of satisfactory liquidity position, the acid-test ratios appear to be on the lower side, the range being 0.20 0.55 (during 2002-6). The major reason for the sharp difference in these two liquidity ratios may be ascribed to a significant proportion of inventory (in current assets). The other notable observation is that the RIL seems to be banking on bank borrowings to finance its working capital requirements evidenced by a substantial increase in such borrowings over the years. From 337.76 crore (in 2001), they steadily increased to 7,193.77 crore (by 2003) and to Rs 11,438.69 crore by 2006: (registering more than 30 times increase in 2006 compared to 2001). In fact, short-term borrowings constitute more than one-half of its total current liabilities during the 6 year period. The reliance on short-term bank borrowings, to such a marked extent, is contrary to sound tenets of finance. Likewise, it appears that its net working capital is inadequate in relation to its credit sales which stood at Rs. 89,124 crore in 2006 compared to Rs. 73,164 crore in 2005. Contrary to increase in net working capital, however, there has been a more than 50 per cent decrease in net working capital of the RIL; (the relevant figures being Rs 7,054.17 crore and Rs 3,149.15 crore in years 2005 and 2006 respectively).
The RIL has the advantage of much higher creditors payment period compared to debtors collection period. The debtors collection period (varying from 16 days in 2001 and 2002 to 21 days in 2004) seems to be at a very satisfactory level. In marked contrast, the creditors payment period is threetimes (varying in the range of 39-67 days) during the same period. This favourable gap, provides some leverage to RIL to operate at relatively low acid-test ratio. To conclude, the liquidity position of the RIL does not appear to be satisfactory. It is suggested that RIL should substitute a fair share of shortterm bank borrowings by long-term loans (which have shown sharp decrease trend over the years). Such a step would help to improve its liquidity ratios.
Solvency Analysis:
The solvency position of the RIL is sound for two reasons: First, it has a satisfactory level of interest coverage ratio during all the 6 years, being in the range of 3.32 and 13.2. The RIL is not likely to commit default in payment of interest to its lenders as even though its operating profits (EBIT) decline by more than nine-tenth (2006), it l would stil have enough margin to meet its interest obligations. Secondly, its total debt-equity ratio over the years has shown a substantial decrease from 1.39 in 2001 to 0.49 by 2006. Likewise, the long-term debt to equity ratio during over the years has improved substantially.
Profitability Analysis: The profit margins (gross, operating and net) of the RIL over the years have reduced, albeit recent improvements. For instance gross profit margin has decreased from 24.46 per cent (in 2001) to 17.43 per cent (in 2006). Likewise operating profit margins have declined from 17.62 per cent to 12.99 per cent and net profit margins from 11.56 per cent to 11.21 per cent during these years. The lower operating profit margins have an unfavourable effect on the ROR on capital employed. It fell from 20.07 per cent in 2001 to 16.11 per cent by 2006. However, it is gratifying to note that there has been an increase in other rates of return. For instance, the ROR on total assets has improved from 13.03 per cent in 2001 to 15.20 per cent in 2006. Likewise a notable increase in observed in ROR on equity funds. From 16.68 in 2003, it has increased to more than 20 per cent in 2005 as well as in 2006. There seems to be a potential for further improvement in its various RORs by increasing its gross profit and operating profit margins.
61

Financial Statement Analysis

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Financial Statement Analysis

Загружено:

Авторское право:

Доступные форматы

Financial Statements Analysis

But before that..Some ..

Two types of liabilities are:

Shareholders Funds or Equity

CASH FLOW STATEMENT

It indicates the sources and uses of cash.

FINANCIAL STATEMENTS ANALYSIS

Common Size Statements

3) Comparison with standards or industry average.

Net Working Capital

Total current assets Total current liabilities NWC

Rs 1,80,000 1,20,000 60,000

Rs 30,000 10,000 20,000

Liquidity ratios measure the ability of a firm to

meet its short-term obligations.

Current Assets Current Liabilities

Particulars Current Assets Current Liabilities Current Ratio

Firm A Rs 1,80,000 Rs 1,20,000 = 3:2 (1.5:1)

Quick Assets = Current assets Stock Pre-paid expenses

Example 1: Acid-Test Ratio

(1) Current Ratio (2) Acid-test Ratio

Supplementary Ratios for Liquidity

Inventory Turnover Ratio

Cost of goods sold

Example 2: Inventory Turnover Ratio

Inventory turnover ratio

(Rs 3,00,000 Rs 60,000) (Rs 35,000 + Rs 45,000) 2

6 (times per year)

12 months Inventory = = 2 months holding period Inventory turnover ratio, (6)

Debtors Turnover Ratio

Debtors turnover ratio

Net credit sales

Example 3: Debtors Turnover Ratio

(Rs 27,500 + Rs 32,500) 2

Debtors collection period

Creditors Turnover Ratio

Creditors turnover ratio

Net credit purchases Average creditors

Example 4: Creditors Turnover Ratio

1,80,000. The amount payable to the creditors at the beginning

Creditors turnover ratio Creditors payment period

(Rs 1,80,000) (Rs 42,500 Rs 47,500) 2

4 (times per year)

The combined effect of the three turnover ratios is summarised below:

Leverage Capital Structure Ratio

(a) Debt-equity ratio

(a) Interest coverage ratio

Long-term Debt + Short term

Debt Service Coverage Ratio

DEBT SERVICE CAPACITY

Example 6: Debt-Service Coverage Ratio

(Amount in lakh of rupees)

2 21.67 34.77 36.01 19.20 18.61 18.40 18.33 16.41

3 17.68 17.68 17.68 17.68 17.68 17.68 17.68 17.68

4 19.14 17.64 15.12 12.60 10.08 7.56 5.04 Nil

6 10.70 18.00 18.00 18.00 18.00 18.00 18.00 18.00

Average DSCR (DSCR 8)

Gross profit margin =

Gross Profit Sales

Net Profit Margin

i. Operating Profit Ratio =

ii. Net Profit Ratio =

Earning after interest and taxes Net sales

(2) Net profit margin =