Financial Statements Analysis

Amardeep Singh
amardeep_singh@hotmail.com
(+91) 9711071834

International Management Institute, Delhi

Expectation from any Accounting Information
▪ Any accounting information, prior to being used, needs to be accurate so that it can gain reliability from the end user
▪ The information should be impacted by whims and fancies of the accountant per se
▪ Adherence to Accounting Standards cannot be undermined
▪ Only perfect accounting information can be analyzed

Reliable
Consistent

“Perfect”
Verifiable & Accounting
Information
Comparable
Objective
What do Financial Statements include?
▪ Financial statements (FS) refer to a set of accounts prepared to summarize:
• Results of an entity during an accounting period through Profit & Loss a/c;
• Position of an entity as at the end of accounting period through Balance Sheet; and
• Reconciliation of net profit and Cash inflow/outflow during the accounting period through Cash Flow Statement

▪ In essence, the financial statements comprise of details about:

• Revenue (operating and others)
• Expenses (operating and others)
• Assets (core and non-core)
• Liabilities (interest bearing and others)
• Equity (capital infusion and accumulated profits)

▪ All the above financial statements are typically read in conjunction with supplementary schedules which provide
additional details for meaningful analysis and understanding
Supplementary Schedules
▪ These schedules detail out different consolidated figures given in FS
• These substantially include information which is more or less voluntarily disclosed by the company
• These may also include the accounting methods and assumptions used by management for preparation of FS

▪ Supplementary schedules contain additional information like:

• Operating income or sales by region or business segment
• Reserves for an oil and gas company
• Information about hedging activities and financial instruments

The idea of these schedules is to ensure that the end user gets complete understanding of financials of an entity
and can use it for effective decision making
Integration of Financial Statements
Capital Infusion Balance Sheet P&L Statement

▪ Raise Debt ▪ Buy fixed assets ▪ Generate sales

▪ Raise Equity ▪ Build goods inventory ▪ Pay costs and taxes

This cycle would Profit Retention Return to Financiers

continue since all ▪ Pay interest on debt
businesses have ▪ Reinvest net profit after
▪ Repay debt principal
regular need of dividend distribution
▪ Declare dividend
finance

All financial statements (PL, BS and CFS) are integrated. An impact in a line item in PL, directly or
indirectly, impacts both BS and CFS
Financial Ratios | Base for Financial Analysis
What are Ratios?
▪ Ratios are typically used to understand the significant relationship between figures shown in FS
▪ Ratio can be expressed in the form of a percentage, proportion or a multiple
▪ For instance, Current Assets for a company is $100,000 and Current liabilities are $50,000
• Current Ratio= Current Assets/ Current Liabilities= $100,000/$50,000= 2
• Here, Current ratio can be expressed as 2.0x or 200%, or can be expressed as 2:1

Rationale for Ratio Analysis

▪ Simplifies financials and tells the whole story about financial condition of the business
▪ Facilitates Inter-firm comparison and allows financial health to be judged on relative basis
▪ Helps to compare performance of different divisions of a firm
▪ Helps in planning and forecasting
Ratios Classification | Based of Fin. Statements
Ratios based on Fin.
Statements

P&L a/c Ratios Balance Sheet Ratios Mixed Ratios

• Gross Margin • Return on Equity

• Debt to Equity ratio
• Net Margin • Inventory Turnover
• Current Ratio, etc.
• Sales CAGR, etc. • Return on Assets, etc.
Ratios Classification | Based of Function

Indicator of how well the company generates profits from its sales. e.g. net, gross, and
Profitability Ratios operating profit margins, return on assets, return on equity, etc.

Indicator of the ability of company to pay cash expenses / liabilities in the short term as
Liquidity Ratios they fall due. e.g. Current ratio, Cash ratio, etc.

Indicator of the firm's financial leverage and ability to meet its longer-term obligations.
Solvency Ratios e.g. debt-to-equity, debt-to-capital, interest coverage, etc.

Indicator of how well a company utilizes various assets. e.g. inventory turnover,
Activity Ratios
receivables turnover, payables turnover, etc.
Questions?

International Management Institute, Delhi