1.

FINANCIAL STATEMENT ANALYSIS FINANCIAL RATIOS

1. Liquidity ratios a. b. 2.
Current assets ] Current liabilitie s Current assets - Inventories Quick ratio = Current liabilitie s

Current ratio =

Turnover ratios: (a) Average receivables turnover ratio: = Net credit sales Average accounts receivable s Cost of goods sold (b) Inventory Turnover Ratio: = Average inventory 3. Profitability ratios: (a) Profit in relation to sales: Sales Cost of g o os do s l d i. Gross Profit Margin: = , N eSt a l e s where net sales = Sales Excise duty. Profit After Tax ii. Net Profit margin = Net Sales (b) Profit in relation to assets: Sales i. Asset Turnover Ratio: = Average assets Earnings Before Interest and Taxes ii. Earning Power: = Average total assets Net Income iii. Return on Equity (ROE): = Average equity 4. Ownership Ratios: a. Earnings ratios: Profit After Tax i. Earnings per Share (EPS): = Number of Outstanding Shares Market Price of the share Price-Earnings Ratio (P/E ratio): = Earnings Per Share b. Capital Structure Ratios: Debt i. Debt-Equity Ratio: = Equity Debt ii. Debt-Assets Ratio: = Assets

c. Coverage Ratios: i. Interest Coverage ratio:

EBIT Interest Expense

ii. Fixed Charges Coverage Ratio:

EarningsBefore Depreciati Debt interest,Lease rentalsand Taxes on, Loan Repayment Installmen t Debt Interest Lease rentals (1 tax rate) (1 tax rate) P reference Dividends

iii. Debt-Service Coverage Ratio: =

PAT Depreciati on other non - cash charges Interest on term loan Interest on term loan Repayment of the term loan

d. Dividend Ratios:
Dividend Per Share Earnings Per Share Dividend Per Share ii. Dividend Yield: Market Price of the Share

i. Dividend Pay-out Ratio:

II. TIME VALUE OF MONEY 1. Effective Interest Rate = r = (1+ 2. FVn = A (1+k)n
k m ) 1 m Future Value of a Single Flow

3. FVn = A1 (1+k)n + A2 (1+k)n-1 +A3(1+k)n-2 Future Value of a Multiple Flow 4. Future Value Investment Factor for Annuity FVAn= A (1+k)n + A (1+k)n-1 +....+A = A where FVIFA = [(1+k)n- 1]/k 5. Present Value of a Single Flow 1 1 PV= A x Where PVIF = n (1 k ) (1 k ) n 6. Present Value of Multiple Cash Flows PV = A1/(1+k) + A2/(1+k)2 +........+An/(1+k)n 7. Present Value of an Annuity PV = A x
(1 k) n 1 k(1 k) n
n ; where PVIFA= (1 k) 1 k(1 k) n

(1 k) n 1 k

III. CAPITAL EXPENDITURE / BUDGETING DECISION 1. PAYBACK PERIOD = Initial Investment When Cash Flows are even Annual Cash Outlay b. In case the cash flows are uneven then it is computed as Base year + Required Cash Flow After Tax Next Year Cash Flow After Tax Required Cash Flow After Tax (CFAT) = initial investment cumulative cash flow of the base year Next year CFAT = the CFAT after the base year
AverageProfit after tax Averagevalue of investment

2. Accounting Rate of Return (ARR) =

3. Net Present Value ( NPV) = PV of cash inflows PV of cash outflows

4. Benefit Cost Ratio ( BCR )

PI

Present va of cash inflows lue Initial investment

5. Annual Capital Charge =

Present va of costs associatedwith the proj ect lue PVIFA(k%, n y ears)

IV . COST OF CAPITAL

I(1 t)
1. Cost of Debentures = k d

F P n F P 2

2. Cost of Term Loans: = I (1-t)

D
3. Cost of Preference Capital:

kp

F P n F P 2

5. Cost of Equity Capital: D1 g a. k e P0 b. kj= Rf + j (km- Rf) c. Cost of Equity =

E1 P
D1 P0 (1 f) g

6. Cost of External (New) Equity: k e 7. Weighted Average Cost of Capital =

WAC We k e Wr k r Wp k p Wd k d

Wi k i

V. DIVIDEND DECISIONS 1. Traditional Approach P = m(D+E/3)

(DIV / k ) (r / k ) (EPS DIV) k

2. Walters Model

3. Gordons Model P = EPS ( 1- b) / K br 4. MM Approach Po = (D1+P1) (1+ke)