PRESENTED BY:ANKUR GUPTA

Financial Statement Analysis

Financial Statement Analysis will help business owners and other interested people to analyse the data in financial statements to provide them with better information about such key factors for decision making and ultimate business survival.

Financial Statement Analysis

Purpose: To use financial organisations
Financial performance Financial position.

statements

to

evaluate

an

To have a means of comparative analysis across time in

terms of:
Intra company basis (within the company itself) Intercompany basis (between companies)

Industry Averages (against that particular industrys averages)

To apply analytical tools and techniques to financial

statements to obtain useful information to aid decision making.

Financial Statement Analysis

Financial statement analysis involves analysing the information provided in the financial statements to:
Provide information about the organisations: Past performance Present condition Future performance Assess the organisations: Earnings in terms of power, persistence, quality and growth Solvency

Effective Financial Statement Analysis

To perform an effective financial statement analysis, you need to be aware of the organisations:
business strategy objectives annual report and other documents like articles about

the organisation in newspapers and business reviews. These are called individual organisational factors.

Financial Ratio Analysis

Financial ratio analysis involves calculating and analysing

ratios that use data from one, two or more financial statements. Ratio analysis also expresses relationships between different financial statements. Financial Ratios can be classified into 5 main categories:
Profitability Ratios Liquidity or Short-Term Solvency ratios Asset Management or Activity Ratios

Financial Structure or Capitalisation Ratios

Market Test Ratios

Profitability Ratios
3 elements of the profitability analysis: Analysing on sales and trading margin
focus on gross profit

Analysing on the control of expenses focus on net profit Assessing the return on assets and return on equity

Profitability Ratios
Gross Profit % = Gross Profit * 100

Net Sales Net Profit % = Net Profit after tax * 100 Net Sales Or in some cases, firms use the net profit before tax figure. Firms have no control over tax expense as they would have over other expenses.
Net Profit % = Net Profit before tax *100

Net Sales

Return on Assets =

Net Profit Average Total Assets Net Profit Average Total Equity

* 100

Return on Equity =

*100

Liquidity or Short-Term Solvency ratios

Short-term funds management Working capital management is important as it signals the firms ability to meet short term debt obligations. For example: Current ratio

Liquidity or Short-Term Solvency ratios

Working Capital = Current assets Current Liabilities
Current Ratio =

Current Assets Current Liabilities

Quick Ratio = Current Assets Inventory Prepaid expenses

Current Liabilities Bank Overdraft

Asset Management or Activity Ratios

Efficiency of asset usage
How well assets are used to generate revenues

(income) will impact on the overall profitability of the business.

For example: Asset Turnover

This ratio represents the efficiency of asset

usage to generate sales revenue

Asset Management or Activity Ratios

Asset Turnover =

Net Sales Average Total Assets Cost of Goods Sold Average Ending Inventory

Inventory Turnover =

Average Collection Period = Average accounts Receivable

Average daily net credit sales*

* Average daily net credit sales = net credit sales / 365

Financial Structure or Capitalisation Ratios

Long term funds management Measures the riskiness of business in terms of debt gearing. For example: Debt/Equity

Financial Structure or Capitalisation Ratios

Debt/Equity ratio = Debt / Equity Debt/Total Assets ratio =

Debt *100 Total Assets

Equity ratio =

Equity *100 Total Assets

Times Interest Earned = Earnings before Interest and Tax

Interest

Market Test Ratios

Based on the share market's perception of the company.

For example: Price/Earnings ratio

The higher the ratio, the higher the perceived

quality of the earnings by the share market.

Market Test Ratios

Earnings per share =

Net Profit after tax

Number of issued ordinary shares

Dividends per share =

Dividends
Number of issued ordinary shares

Dividend payout ratio = Dividends per share *100 Earnings per share Price Earnings ratio = Market price per share Earnings per share

Illustration: Financial statement analysis

The following financial statements of Walker Ltd

were prepared in accordance with New Zealand GAAPs. Walker Ltd is a diversified enterprise with its main interests in the manufacture and retail of plastic products. The financial statements of Walker Ltd need to be analysed. An investor is considering purchasing shares in the company. Relevant ratios need to be selected and calculated and a report needs to be written for the investor. The report should evaluate the companys performance and position.

Walker Ltd Statement of Financial Position as at 31 March

2005 $000 Current Assets Bank Accounts receivable Inventory Non-current assets Fixtures & fittings (net) Land & buildings (net) Total assets Current Liabilities Accounts payable Income tax Non-current liabilities Loan Shareholders Funds Paid-up ordinary capital Retained profit Total liabilities & equity 33.5 240.8 300.0 574.3 64.6 381.2 445.8 1,020.1 63.2 376.2 439.4 1,061.4 99 104 $000 $000 41.0 210.2 370.8 622.0 108 2006 $000 Horizontal Analysis

261.6 60.2 321.8 200.0

288.8 76.0 364.8 60.0 113 30

300.0 198.3 498.3 1,020.1

334.1 302.5 636.6 1,061.4 128 104

Walker Ltd Statement of Financial Performance for year ended 31 March

2005 $000 Sales Less Cost of goods sold Gross profit Wages & salaries Rates Heat & light Insurance Interest expense Postage & telephone Depreciation Buildings Fixtures & fittings Net profit before tax Less Income tax Net profit after tax $000 2,240.8 1,745.4 495.4 $000 2006 $000 2,681.2 2,072.0 609.2 Horizontal Analysis 120 119 123

185.8 12.2 8.4 4.6 24.0 9.0 5.0 27.0

275.6 12.4 13.6 7.0 6.2 16.4 5.0 32.8

276.0 219.4 60.2 159.2

369.0 240.2 76.0 164.2

134 109 126 103

Walker Ltd Statement of Cash Flows for the year ended 31 March
2005 $000 Cash flow from operations Receipts from customers Payments to suppliers & employees Interest paid Tax paid Net cash flow from operating activities Investing activities Purchase of non-current assets Net cash used in investing activities Financing activities Dividends paid Issue of ordinary shares Repayment of loan capital Net cash outflow from financing activities Increase in cash & cash equivalents 2,281 (2,050) (24) (46.4) 160.6 (121.2) (121.2) (32.0) 20.0 -__ (12) 27.4 (40.2) 34.1 (140.0) (146.1) 7.5 (31.4) (31.4) $000 $000 2,711.8 (2,460.4) (6.2) (60.2) 185 2006 $000

Additional information:
Credit purchases for the year 2006 were $2,142,800. General prospects for the major industries in which Walker

is involved look good with a forecast glut of oil set to reduce the cost of production and world demand for plastic remaining strong. Benchmarks: There are no exact benchmarks for Walker Ltd because it is a diversified company. The following are average indicators that relate to the plastic retailing and manufacturing industries for the year 2006.

Gross profit margin Net profit margin Inventory turnover 6 times Debt/equity ratio Return on Assets Return on Equity

25% 7% 0.6 : 1 12% 20%

Relevant ratios
Profitability ratios: Gross Profit Margin Net Profit Margin Return on Assets Return on Equity Benchmarks 2005 2006

Industry 25% Industry 7% 12%

22%

22.7%

7.1%

6.1%

15.6%

15.5%

Industry 20%

32%

26%

Asset Management ratios: Inventory Turnover Asset Turnover

Benchmarks

2005

2006

Industry 6% Not given

5.8 times

5.58 times

2.2

2.53

Liquidity ratios: Current Ratio

Benchmarks
Ideal standard 2:1 Acceptable standard 1:1

2005 1.78:1

2006 1.70:1

Quick Ratio

Ideal standard 2:1 Acceptable standard 1:1

0.85:1

0.69:1

Days Payable

Standard 30 days

Credit purchases not available

49.19 days

Financial Structure ratios: Debt/Equity

Benchmarks

2005

2006

Industry 0.6:1 Standard benchmark 1:1 Standard benchmark: Between 3 and 5. Below 3 risky. Above 5 very favourable

1.05: 1

0.67:1

TIE

10.14 times

39.74 times

THANK YOU