FINANCIAL STATEMENT ANALYSIS

 Process of the critical examination of the

financial information contained in the
financial statements in order to
understand and make decisions
regarding the operations of the firm.

 It is basically a study of the relationship

among various financial facts and
figures as given in a set of financial
statements.
FINANCIAL STATEMENT ANALYSIS

OBJECTIVES
 Liquidity
 Solvency
 Profitability
 Efficiency
 Health & Performance
 TECHNIQUES OF FSA
 Comparative Statement Analysis
 Common Size statement Analysis
 Trend Analysis
 Ratio Analysis
 Comparative Statement Analysis
 In Comparative Financial Statements, two or
more Balance Sheet and/or the Income
Statement of a firm are presented
simultaneously in columnar form.

 The financial data for two or more years are

placed and presented in adjacent columns
and thereby the financial data is provided a
times perspective in order to facilitate
periodic comparison.
 Comparative Financial
Statement
Particulars Inter Firm Comparisons
Firm 1 Firm 2 Absolute Percentage
Difference Difference %
(Rs.)
1 2 2-1 =3 3/1 x 100

Particulars Inter Period Comparisons

Year 1 Year 2 Absolute Percentage
Difference Difference %
(Rs.)
1 2 2-1 =3 3/1 x 100
 Q) The following Balance Sheet of a concern for the years 2007 and 2008.
Prepare a comparative balance sheet and study the financial position.

Balance Sheet
As on 31st March
Capital and 2007 2008 Assets 2007 2008
Liabilities Rs. Rs. Rs. Rs.

Equity Share 6,00,000 8,00,000 Land and Buildings 3,70,000 2,70,000

capital Plant and Machinery 4,00,000 6,00,000
Reserves and 3,30,000 2,22,000 Furniture and Fixtures 20,000 25,000
surplus Other fixed assets 25,000 30,000
Debentures 2,00,000 3,00,000 Cash in hand and at 20,000 80,000
Long term loans 1,50,000 2,00,000 bank
and Bills receivables 1,50,000 90,000
Mortgage Sundry debtors 2,00,000 2,50,000
Bills payable 50,000 45,000 Stock 2,50,000 3,50,000
Sundry creditors 1,00,000 1,20,000 Prepaid expenses - 2,000
Other current 5,000 10,000
liabilities

Total 14,35,000 16,97,000 Total 14,35,000 16,97,000

 Q) The following Income Statement of a concern for the
years 2007 and 2008. Prepare a comparative Income
Statement and study the profitability position.
Particulars 2007 2008
Rs. Rs.
Net sales 7,85,000 9,00,000
Cost of goods sold 4,50,000 5,00,000
Operating expenses:

General and Administrative expenses 70,000 72,000

Selling expenses 80,000 90,000
Non-operating expenses:

Interest paid 25,000 30,000

Income tax 70,000 80,000
 Common Size Statement
 The Common Size Statement represents the
relationship of different items of a financial
statement with some Common item by
expressing each item as a percentage of the
Common item.

 In Common Size Balance Sheet, each item of

the Balance Sheet is stated as a percentage of
the total of the Balance Sheet.

 In Common Size Income Statement, each

item is stated as percentage of the Net Sales.
 Q) The following Balance Sheet of a concern for the years 2007 and 2008.
Prepare a Common size balance sheet and study the financial position.

Balance Sheet
As on 31st March
Capital and 2007 2008 Assets 2007 2008
Liabilities Rs. Rs. Rs. Rs.

Equity Share 6,00,000 8,00,000 Land and Buildings 3,70,000 2,70,000

capital Plant and Machinery 4,00,000 6,00,000
Reserves and 3,30,000 2,22,000 Furniture and Fixtures 20,000 25,000
surplus Other fixed assets 25,000 30,000
Debentures 2,00,000 3,00,000 Cash in hand and at 20,000 80,000
Long term loans 1,50,000 2,00,000 bank
and Bills receivables 1,50,000 90,000
Mortgage Sundry debtors 2,00,000 2,50,000
Bills payable 50,000 45,000 Stock 2,50,000 3,50,000
Sundry creditors 1,00,000 1,20,000 Prepaid expenses - 2,000
Other current 5,000 10,000
liabilities

Total 14,35,000 16,97,000 Total 14,35,000 16,97,000

 Q) The following Income Statement of a concern for the years 2007
and 2008. Prepare a common size Income Statement and study the
profitability position.

Particulars 2007 2008

Rs. Rs.
Net sales 7,85,000 9,00,000
Cost of goods sold 4,50,000 5,00,000
Operating expenses:

General and Administrative expenses 70,000 72,000

Selling expenses 80,000 90,000
Non-operating expenses:

Interest paid 25,000 30,000

Income tax 70,000 80,000
 Trend Analysis

• Trend analysis treats the first year

as the base year and compares the
figures of all the other years
against it.
The position as on 31st December 2010, 2011 and 2012 of
AB Co. Is given below. You need to work out the trend
percentage and give the interpretation on the same.

Summarized Income Statement

Particulars 2010 2011 2012
sales 3000000 3600000 4000000
Less: cost of goods sold 2000000 2400000 2800000
Gross profit 1000000 1200000 1200000
expenses 700000 800000 800000
Net profit 300000 400000 400000
 Trend Analysis of Income Statement
Particulars 2010 2011 2012 2010 (%) 2011(%) 2012(%)

sales 3000000 3600000 4000000 100 120.00 133.33

Less: cost of goods
sold 2000000 2400000 2800000 100 120.00 140.00

Gross profit 1000000 1200000 1200000 100 120.00 120.00

expenses 700000 800000 800000 100 114.29 114.29

Net profit 300000 400000 400000 100 133.33 133.33

140

120

100

80 sales
Gross profit
60
Net profit
40

20

0
2010 (%) 2011(%) 2012(%)
The position as on 31st December 2010, 2011 and 2012 of AB Co. Is
given below. You need to work out the trend percentage and give the
interpretation on the same.

Summarized Balance Sheet

Liabilities and
Equity 2010 2011 2012Assets 2010 2011 2012

Capital 300000 340000 400000Fixed assets 280000 360000 400000

General reserves 100000 100000 100000Current assets

Secured loans 50000 60000 60000Stock 135000 150000 160000

unsecured loans 140000 180000 160000debtors 140000 160000 200000

loans and
sundry creditors 45000 90000 90000 advances 60000 80000 100000
cash and bank
balances 20000 20000 20000

635000 770000 880000 635000 770000 880000

Ratio Analysis
 Nature of Ratio Analysis
A financial ratio is a relationship
between two accounting numbers.

 Ratioshelp to make a qualitative

judgment about the firm’s financial
performance.
 Types of Financial Ratios
 Profitabilityratios
 Liquidity ratios
 Turnover ratios
 Leverage ratios
 Equity-related ratios
 Profitability Ratios
 Profitability ratios measure a firm’s overall
efficiency and effectiveness in generating profit.
 Gross profit ratio = gross profit/ net sales x 100
 Operating ratio = COGS + Operating Expenses
/net sales x 100
 Operating profit ratio = operating net profit/ net
sales x 100
 Expenses ratio = Expenses/net sales x 100
 Net profit Margin ratio= net profit after tax/ net
sales x 100
 Profitability Ratios
 Return on capital employed = EBIT/ average capital
employed
 Capital employed = Long term liabilities+ Share capital
and reserves and surplus
 Return on Proprietor’s Fund= PAT/ average Proprietor’s
Fund x100
 Proprietors’ Fund = Equity share capital + Preference
share capital + Reserves and surplus.
 Return on Equity = PAT/Equity share capital+ reserves
and surplus
 Liquidity Ratios
 Liquidity ratios measure a firm’s ability to
meet its current obligations.
 Current ratio = Current assets/ current Liabilities
 Quick ratio = Quick assets/quick liabilities
 Quick assets = C.A – Inventories and Prepaid
Expenses
 Quick Liabilities = C.L – Bank overdraft and
Income received in advance.
 Absolute liquid ratio= (cash +bank + marketable
securities)/Quick liabilities
 Turnover Ratios
 Turnover or activity ratios measure the firm’s
efficiency in utilizing its assets.
 Inventory Turn over ratio (times) = cost of goods
sold/average inventory
 Inventory holding period(days) = 365/ Inventory
Turn over ratio
 Debtors Velocity or turnover = net credit sales/
average debtors
 Average collection period = 360 or 365/ debtors
velocity ratio
 Turnover Ratios
Creditors Turnover = Credit purchases
Average (Closing) Creditors
Average Payment Period = Number of days in a
year (say,360)/ Creditor turnover
Working capital turnover ratio = sales/working capital
Current asset turnover = sales / current assets
Fixed asset turnover = sales/ net fixed assets
Net asset turnover = sales/ net assets
 Leverage Ratios
 leverage ratios measure the dependence of a firm on
borrowed funds.
 Debt to equity ratio= Total borrowed fund/ proprietors’
fund
 Total Borrowed fund = Long term Liabilities
 Proprietors’ Fund = Equity share capital + Preference
share capital + Reserves and surplus.
 Proprietary ratio = Proprietors’ Fund / total assets or
total liabilities
 Capital gearing ratio or leverage ratio= equity share
capital + reserves and surplus/ fixed interest and
dividend funds
 Interest coverage ratio = EBIT/Interest
 Equity-related Ratios
 Equity-relatedratios 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 and Solvency
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