Financial statements analysis

Financial Statement Analysis Dr. Rana Singh www.ranasingh.org 98 11 828 987

Financial Statement Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object]

Examples of External Uses of Statement Analysis ,[object Object],[object Object],[object Object]

Examples of Internal Uses of Statement Analysis ,[object Object],[object Object],[object Object]

Primary Types of Financial Statements ,[object Object],[object Object],[object Object],[object Object]

Basket Wonders’ Balance Sheet (Asset Side) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Basket Wonders Balance Sheet (thousands) Dec. 31, 2003 a

Basket Wonders’ Balance Sheet (Liability Side) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Basket Wonders Balance Sheet (thousands) Dec. 31, 2003

Basket Wonders’ Income Statement ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2003 a

Framework for Financial Analysis ,[object Object],[object Object],[object Object],[object Object],1. Analysis of the funds needs of the firm. Trend / Seasonal Component How much funding will be required in the future? Is there a seasonal component?

Framework for Financial Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm.

Framework for Financial Analysis ,[object Object],[object Object],[object Object],[object Object],1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business risk of the firm. Business risk relates to the risk inherent in the operations of the firm.

Framework for Financial Analysis ,[object Object],Determining the financing needs of the firm. 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business risk of the firm.

Framework for Financial Analysis Negotiations with suppliers of capital. Determining the financing needs of the firm. 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business risk of the firm.

Use of Financial Ratios ,[object Object],[object Object],[object Object],[object Object]

External Comparisons and Sources of Industry Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Liquidity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Balance Sheet Ratios Liquidity Ratios *1,195 *500 = 2.39

Liquidity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Current Ratio Ratio is stronger than the industry average.

Liquidity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Balance Sheet Ratios Liquidity Ratios *1,195 - *696 *500 = 1.00

Liquidity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Acid-Test Ratio Ratio is weaker than the industry average.

Summary of the Liquidity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object]

Current Ratio -- Trend Analysis Comparison

Acid-Test Ratio -- Trend Analysis Comparison

Summary of the Liquidity Trend Analyses ,[object Object],[object Object],[object Object]

Financial Leverage Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Balance Sheet Ratios Financial Leverage Ratios *1,030 *1,139 = .90

Financial Leverage Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Debt-to-Equity Ratio BW has average debt utilization relative to the industry average.

Financial Leverage Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Balance Sheet Ratios Financial Leverage Ratios *1,030 *2,169 = .47

Financial Leverage Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Debt-to-Total-Asset Ratio BW has average debt utilization relative to the industry average.

Coverage Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement Ratios Coverage Ratios *210 *59 = 3.56

Coverage Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Interest Coverage Ratio BW has below average interest coverage relative to the industry average.

Coverage Ratio -- Trend Analysis Comparison

Summary of the Coverage Trend Analysis ,[object Object],[object Object],[object Object]

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios *2,211 *394 = 5.61 (Assume all sales are credit sales.)

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios 365 5.61 = 65 days

Activity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Average Collection Period BW has improved the average collection period to that of the industry average.

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios *1551 *94 = 16.5 (Assume annual credit purchases = *1,551.)

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios 365 16.5 = 22.1 days

Activity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Payable Turnover in Days BW has improved the PT in Days. Is this good?

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios *1,599 *696 = 2.30

Activity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Inventory Turnover Ratio BW has a very poor inventory turnover ratio.

Inventory Turnover Ratio --Trend Analysis Comparison

Activity Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Activity Ratios *2,211 *2,169 = 1.02

Activity Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Total Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?

Profitability Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Profitability Ratios *612 *2,211 = . 277

Profitability Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Gross Profit Margin BW has a weak Gross Profit Margin.

Gross Profit Margin -- Trend Analysis Comparison

Profitability Ratios ,[object Object],[object Object],[object Object],[object Object],[object Object],Income Statement / Balance Sheet Ratios Profitability Ratios *91 *2,211 = .041

Profitability Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Net Profit Margin BW has a poor Net Profit Margin.

Net Profit Margin -- Trend Analysis Comparison

Profitability Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Return on Assets BW has a poor Return on Assets.

Return on Assets – Trend Analysis Comparison

Profitability Ratio Comparisons ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Return on Equity BW has a poor Return on Equity.

Return on Equity -- Trend Analysis Comparison

Return on Investment and the Du Pont Approach ,[object Object],[object Object],ROI = Net profit margin X Total asset turnover Earning Power = Sales profitability X Asset efficiency

Return on Equity and the Du Pont Approach ,[object Object],[object Object],Return On Equity = Net profit margin X Total asset turnover X Equity Multiplier Equity Multiplier = Total Assets Shareholders’ Equity

Summary of the Profitability Trend Analyses ,[object Object],[object Object],[object Object]

Summary of Ratio Analyses ,[object Object],[object Object],[object Object],[object Object]

Common-size Analysis ,[object Object]

Basket Wonders’ Common Size Balance Sheets

Basket Wonders’ Common Size Income Statements

Index Analyses ,[object Object]

Basket Wonders’ Indexed Balance Sheets

Basket Wonders’ Indexed Income Statements

Classification of Assets: Intangible Assets ,[object Object],

Shareholder Value Maximization Profitability Risk Growth Profit Margin Sales Turnover Capital Market Conditions One Useful Framework Source : Ram Kumar Kakani, ‘ Financial Performance and Diversification Strategy of Indian Business Groups ’, Indian Institute of Management Calcutta, March 2001.

What is Tobin’s Q Ratio? ,[object Object],[object Object],[object Object],[object Object]

Financial statements analysis

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Financial statements analysis