Financial

Statement
Analysis
Financial Analysis

Financial analysis is the process of identifying

the financial strengths and weaknesses of the
firm by property establishing relationships
between the item of the balance sheet and the
profit and loss account.
Users of Financial Analysis

Trade creditors
Lenders
Investors
Management
Nature of Ratio Analysis

A financial ratio is a relationship between

two accounting numbers. Ratios help to
make a qualitative judgment about the
firms financial performance.
Standard of Comparison

Time series analysis

Inter-firm analysis
Industry analysis
Proforma financial statement analysis
Types of Financial Ratios

Liquidity ratios
Solvency ratios
Turnover ratios
Profitability ratios
Equity-related ratios
Liquidity Ratios

Liquidity ratios measure a firms ability to

meet its current obligations.
Current assets
Current ratio =
Current liabilities
Current assets Inventories
Quick ratio =
Current liabilities
Cash + Marketable securities
Cash ratio =
Current liabilities
Solvency Ratios

Solvency ratios measure the dependence

of a firm on borrowed funds.
Debt
Debt-equity ratio
Equity (Net Worth)
Debt Debt
Debt ratio
Debt Equity Capital employed
Earnings before interest and tax
Interest coverage
Interest
Turnover Ratios

Turnover or activity ratios measure the firms

efficiency in utilizing its assets.
Cost of goods sold or net sales
Inventory turnober
Average (or closing) inventory
Number of days in the year (say, 360)
Days of inventory holding
Inventory turnover
Credit sales or net sales
Debtors turnover
Average (or closing) debtors
Number of days in the year (say, 360)
Collection period
Debtors turnover
Turnover Ratios

Net sales
Current assets turnover
Current assets
Net sales
Net current assets turnover
Net current assets
Net sales
Fixed assets turnover
Net fixed assets
Net sales
Net assets turnover
Net assets or capital employed
Profitability Ratios

Profitability ratios measure a firms overall

efficiency and effectiveness in generating
profit.
Profit before interest and tax (PBIT)
Margin
Net sales
Profit after tax (PAT)
Net margin
Net sales
PBIT
Before tax return on investment
Net assets
Profit after tax
Return on equity
Equity (net worth)
Equity-related Ratios

Equity-related ratios measure the

shareholders return and value.
Profit after tax
EPS
Number of ordinary shares
Dividends
DPS
Number of ordinary shares
DPS Dividends
Payout ratio
EPS Pr ofit after tax
DPS
Dividend yield
Market value per share
Equity-related Ratios

EPS
Earnings yield
Market value per share
Market value per share
P / E ratio =
EPS
Net worth
Book value per share
Number of ordinary shares
Market value per share
M B value
Book value per share
Market value of assets
Tobin ' s q
Economic value of assets
DuPont Analysis

DuPont Analysis
integrates the important ratios to analyse a firm's profitability.
PBIT Sales PBIT
RONA=
Net Assets Net Assets Sales
PAT Sales PBIT PAT Net Assets
ROE
Net Worth Net Assets Sales PBIT Net Worth
ROE Assets turnover Margin Leverage
Utility of Ratio Analysis

Assessment of the firms financial conditions

and capabilities.
Diagnosis of the firms problems, weaknesses
and strengths.
Credit analysis
Security analysis
Comparative analysis
Time series analysis
Cautions in Using Ratio Analysis

Standards of comparisons
Company differences
Price level
Different definition
Changing situations
Past data
 ISPAT INDUSTRIES LIMITED
RATIO ANALYSIS
Liquidity ratios
Current ratio 1.47 1.24
Quick ratio 0.05 0.06
Activity ratios
Sales/TA 0.30 0.22
Sales/FA 0.81 1.25
Sales/Debtors 5.75 5.69
Sales/Inventory 8.70 5.49
Leverage ratios
Debt/Equity 2.85 2.50
Debt/TA 0.74 0.71
PBIT/Interst 1.90 1.04
Profitability ratios
PBIT/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%
INFOSYS
Balance Sheeet as at March 31
in Rs.
2,001 2,000
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital 330,792,085 330,755,000
Reserves and surplus 13,565,599,903 8,002,273,248
Capital Employed 13,896,391,988 8,333,028,248
APPLICATION OF FUNDS
FIXED ASSETS
Original cost 6,311,444,025 2,840,305,143
Less: Depreciation 2,441,315,982 1,336,520,594
Net book value 3,870,128,043 1,503,784,549
Add: Capital work-in-progress 1,706,504,250 569,603,505
5,576,632,293 2,073,388,054
INVESTMENTS 341,154,821 138,348,469
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors 3,023,702,417 1,361,781,253
Cash and bank balances 3,850,610,285 4,317,935,730
Loans and advances 4,302,793,623 2,101,277,161
11,177,106,325 7,780,994,144
Less: Current liabilities 1,349,181,176 671,506,459
Provisions 1,849,320,275 988,195,960
NET CURRENT ASSETS 7,978,604,874 6,121,291,725
Net Assets 13,896,391,988 8,333,028,248
Thank you