This document provides an overview of financial statement analysis. It discusses the different types of financial statements, including the income statement, balance sheet, and statement of cash flows. It then presents a framework for analyzing the financial needs and condition of a firm using various financial ratios. The ratios are categorized as liquidity, leverage, coverage, activity, and profitability ratios. The document concludes with explanations of common-size and index analyses for comparing financial statement items over time and across firms.

2. Chapter 6
Financial Statement Analysis
Presented by: Saira Younis

3. Chapter details
• Financial Statements
• A Possible Framework for Analysis
• Balance Sheet Ratios
• Income Statement Ratios
• Income Statement/Balance Sheet Ratios
• Common-Size and Index Analysis

4. Financial statements are like a fine perfume-
to be sniffed but not swallowed.
(Abraham Brilloff)

5. Examples of External Uses of Statement Analysis
Trade Creditors
• Focus on the liquidity of the firm.
Bondholders
• Focus on the long term cash flow of the
firm.
Shareholders
• Focus on the profitability and long term
health of the firm.

6. Examples of Internal Uses of Statement Analysis
Plan
• Focus on assessing the current financial
position and evaluating potential firm
opportunities.
Control
• Focus on return on investment for various
assets and asset efficiency.
Understand
• Focus on understanding how suppliers of
funds analyze the firm.

7. Types of Financial Statements
Income Statement
• A summary of a firm’s revenues and
expenses over a specified period, ending
with net income or loss for the period.
Balance Sheet
• A summary of a firm’s financial position on
a given date that shows total assets = total
liabilities + owners’ equity.

8. Income statement (MTM)
2014 2015 2016 2017 2018
Sales 24371128 26967899 23183485 23393876 30842159
CGS (20435316) (22988317) (19971238) (20008592) (26990855)
Gross profit 3935812 3979582 3212247 3385284 3851304
Distribution cost (1159311) (1472973) (1396012) (1478067) (2063381)
Administrative expenses (443232) (477492) (472516) (480722) (549235)
Other expenses (61996) (54498) (48644) (10675) (108238)
Other income 45327 60424 341212 218041 1070524
Finance cost (1142456) (1002893) (718568) (640673) (896395)
Profit before taxation 1174144 1032150 917719 993188 1304579
Taxation (235845) (278037) (188501) (106187) (191531)
Profit after taxation 938299 754113 729218 887001 1113048
Earnings per share 14.95 11.88 11.64 12.76 16.11

9. Balance sheet (MTM)
EQUITY AND LIABILITIES
Share capital and reserves
2014 2015 2016 2017 2018
Authorized share capital 1850000 1850000 1850000 1850000 1850000
Issued, subscribed and paid up share capital 953333 948333 948333 986666 986666
Reserves 4865452 5507259 5875555 7460699 6945641
Total equity 5818785 6455592 6823888 8447365 10335874
surplus on revaluation of freehold land 606233 606233 900234 900234 900234
Non-current liabilities
Long term financing 1523918 949443 1105335 5119282 4650568
Liabilities against assets subject to finance lease 87331 93849 52468 22657 6816
Deferred liability for gratuity 426889 431923 566816 609886 724353
2038138 1475215 1724619 5751825 5381737
Current liabilities
Trade and other payables 2445831 2205160 2156675 1971985 2676834
Accrued mark-up 224442 155647 91040 126698 191768
Short term borrowings 9933466 11044430 10056494 8907948 11962878
Current portion of non-current liabilities 810797 750675 788853 686368 1469563
Provision for taxation 235845 278037 188501 106187 191531
13650381 14433949 13281563 11799186 16503387
Total liabilities 15688519 15909164 15006182 17551011 21885124
Total equity and liabilities 22113537 22970989 22730304 26898610 32220998

10. Balance sheet (MTM)
ASSETS 2014 2015 2016 2017 2018
Non-current assets
Property, plant and equipment 5772898 6582729 6713395 8377317 10028337
Long term advances 3819 713 289 8149 1814
Long term security deposits 50707 50183 45802 47387 47110
5827424 6633625 6759486 8432853 10077261
Current assets
Stores, spare parts and loose tools 1137030 1010124 956585 1312256 1579156
Stock in trade 7215963 5275563 5277633 6916511 5810871
Trade debts 5415608 6911990 6067959 5618714 9276084
Loans and advances 575559 315190 303928 354523 380772
Short term deposits and prepayments 497242 550694 576012 688858 939770
Other receivables 1000862 1106224 1562048 2672080 3536704
Cash and other bank balances 444849 1167579 1226653 902816 620380
16286113 16337364 15970818 18465757 22143737
Total assets 22113537 22970989 22730304 26898610 32220998

11. Framework for Financial Analysis
1. Analysis of the funds needs of the firm.
• Analytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
• Trend / Seasonal Component
How much funding will be required in the
future?
Is there a seasonal component?

12. Framework for Financial Analysis
2. Analysis of the financial condition and
profitability of the firm
Health of a Firm
• Financial Ratios
1. Individually
2. Over time
3. In comparison

13. Framework for Financial Analysis
• A Financial Manager must consider all three
jointly when 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.

14. Use of Financial Ratios
A Financial Ratio is an index that relates
two accounting numbers and is obtained
by dividing one number by the other.

15. External Comparisons and Sources of Industry
Ratios
• This involves comparing the ratios of
one firm with those of similar firms or
with industry averages.
• Similarity is important as one should
compare “apples to apples.

16. Liquidity Ratios
• Shows a firm’s ability to cover its
current liabilities with its current assets.
– Balance Sheet Ratios
– Liquidity Ratios
Current Ratio:
Current assets/Current Liabilities

17. Liquidity Ratios
Acid-Test(Quick)
• Shows a firm’s ability to meet current
liabilities with its most liquid assets.
• Current Assets –Inv/Current Liabilities

18. Financial Leverage Ratios
Debt-to-Equity
• Total Debt/Shareholders’ Equity
Shows the extent to which the firm is
financed by debt.

19. Financial Leverage Ratios
Debt-to-Total Assets
Total Debt/Total Assets
• Shows the percentage of the firm’s
assets that are supported by debt
financing.

20. Financial Leverage Ratios
Long-term Debt/Total Capitalization
 Total Capitalization= (LT.Debt + Equity)
Shows the relative importance of long-term
debt to the long-term financing of the firm.

21. Coverage Ratios
• Income Statement Ratios
Interest Coverage
EBIT/Interest Charges
Indicates a firm’s ability to cover interest
charges.

22. Activity Ratios
Income Statement /Balance Sheet
Receivable Turnover
Annual Net Credit Sales/Receivables
Indicates quality of receivables and how
successful the firm is in its collections.

23. Activity Ratios
Avg Collection Period
Days in the Year/Receivable Turnover=(or
Receivable Turnover in days)
Average number of days that receivables
are outstanding.

24. Activity Ratios
Payable Turnover (PT)
Annual Credit Purchases/Accounts
Payable
• Indicates the rapidity of payment to
suppliers by the firm.

25. Activity Ratios
PT in Days
• Days in the Year/Payable Turnover
Average number of days that payables are
outstanding.

26. Activity Ratios
Total Asset Turnover
• Net Sales/Total Assets
Indicates the overall effectiveness of the
firm in utilizing its assets to generate
sales.

27. Activity Ratios
Inventory Turnover
• Cost of Goods Sold/Inventory
• Indicates the effectiveness of the
inventory management practices of the
firm.

28. Profitability Ratios
Gross Profit Margin
• Gross Profit/Net Sales
• Indicates the efficiency of operations
and firm pricing policies.

29. Profitability Ratios
Return on Investment
Net Profit after Taxes/Total Assets
• Indicates the profitability on the assets
of the firm (after all expenses and
taxes).

30. Profitability Ratios
Return on Equity
• Net Profit after Taxes/Shareholders’
Equity
• Indicates the profitability to the
shareholders of the firm (after all
expenses and taxes).

31. Common-size Analysis
An Analysis of percentage financial
statements where all balance sheet Items
are divided by total assets and all income
statement items are divided by net sales
or revenues.

32. Common-size Analysis
EQUITY AND LIABILITIES
Share capital and reserves
2014 2015 2016 2017 2018
Authorized share capital 8.37% 8.05% 8.14% 6.88% 5.74%
Issued, subscribed and paid up share capital 4.31% 4.13% 4.17% 3.67% 3.06%
Reserves 22.00% 23.97% 25.85% 27.74% 21.56%
Total equity 26.31% 28.10% 30.02% 31.40% 32.08%
surplus on revaluation of freehold land 2.74% 2.64% 3.96% 3.35% 2.79%
Liabilities
Non-current liabilities
Long term financing 6.89% 4.13% 4.86% 19.03% 14.43%
Liabilities against assets subject to finance lease 0.39% 0.41% 0.23% 0.08% 0.02%
Deferred liability for gratuity 1.93% 1.88% 2.49% 2.27% 2.25%
Current liabilities
Trade and other payables 11.06% 9.60% 9.49% 7.33% 8.31%
Accrued mark-up 1.01% 0.68% 0.40% 0.47% 0.60%
Short term borrowings 44.92% 48.08% 44.24% 33.12% 37.13%
Current portion of non-current liabilities 3.67% 3.27% 3.47% 2.55% 4.56%
Provision for taxation 1.07% 1.21% 0.83% 0.39% 0.59%
Total liabilities 70.95% 69.26% 66.02% 65.25% 67.92%
Total equity and liabilities 100% 100% 100% 100% 100%

33. Common-size Analysis
ASSETS 2014 2015 2016 2017 2018
Non-current assets
Property, plant and equipment 26.11% 28.66% 29.54% 31.14% 31.12%
Long term advances 0.017% 0.003% 0.001% 0.03% 0.006%
Long term security deposits 0.23% 0.218% 0.202% 0.18% 0.146%
Current assets
Stores, spare parts and loose tools 5.14% 4.40% 4.21% 4.88% 4.90%
Stock in trade 32.63% 23.00% 23.22% 25.71% 18.03%
Trade debts 24.49% 30.09% 26.70% 20.89% 28.79%
Loans and advances 2.60% 1.37% 1.34% 1.32% 1.18%
Short term deposits and prepayments 2.25% 2.40% 2.53% 2.56% 2.92%
Other receivables 4.53% 4.82% 6.87% 9.93% 10.98%
Cash and other bank balances 2.01% 5.08% 5.40% 3.36% 1.93%
Total assets 100% 100% 100% 100% 100%

34. Common-size Analysis
2014 2015 2016 2017 2018
Sales 100% 100% 100% 100% 100%
CGS 83.85% 85.24% 86.14% 85.53% 87.51%
Gross profit 16.15% 14.76% 13.86% 14.47% 12.49%
Distribution cost 4.76% 5.46% 6.02% 6.32% 6.69%
Administrative expenses 1.82% 1.77% 2.04% 2.05% 1.78%
Other expenses 0.25% 0.20% 0.21% 0.05% 0.35%
Other income 0.19% 0.22% 1.47% 0.93% 3.47%
Finance cost 4.69% 3.72% 3.10% 2.74% 2.91%
Profit before taxation 4.82% 3.83% 3.96% 4.25% 4.23%
Taxation 0.97% 1.03% 0.81% 0.45% 0.62%
Profit after taxation 3.85% 2.80% 3.15% 3.79% 3.61%
Earnings per share 0% 0% 0% 0% 0%

35. Index Analyses
An analysis of percentage financial
statements where all balance sheet or
income statement figures for a base year
equal 100.0(percent) and subsequent
financial statement items are expressed as
percentages of their values in the base year.

36. Index Analyses
EQUITY AND LIABILITIES
Share capital and reserves
2014 2015 2016 2017 2018
Authorized share capital 100% 100% 100% 100% 100%
Issued, subscribed and paid up share capital 100% 100% 100% 104% 104%
Reserves 100% 113% 121% 153% 143%
Total equity 100% 111% 117% 145% 178%
surplus on revaluation of freehold land 100% 100% 149% 149% 149%
Liabilities
Non-current liabilities
Long term financing 100% 62% 73% 336% 305%
Liabilities against assets subject to finance lease 100% 108% 60% 26% 8%
Deferred liability for gratuity 100% 101% 133% 143% 170%
Current liabilities
Trade and other payables 100% 90% 88% 81% 109%
Accrued mark-up 100% 69% 41% 57% 85%
Short term borrowings 100% 111% 101% 90% 120%
Current portion of non-current liabilities 100% 93% 97% 85% 181%
Provision for taxation 100% 118% 80% 45% 81%
Total liabilities 100% 101% 96% 112% 140%
Total equity and liabilities 100% 104% 103% 122% 146%

37. Index Analyses
ASSETS 2014 2015 2016 2017 2018
Non-current assets
Property, plant and equipment 100% 114% 117% 145% 174%
Long term advances 100% 19% 8% 213% 48%
Long term security deposits 100% 99% 90% 94% 93%
114% 116% 145% 173%
Current assets
Stores, spare parts and loose tools 100% 89% 84% 115% 139%
Stock in trade 100% 73% 73% 96% 81%
Trade debts 100% 128% 112% 104% 171%
Loans and advances 100% 55% 53% 62% 66%
Short term deposits and prepayments 100% 111% 116% 139% 189%
Other receivables 100% 111% 156% 267% 353%
Cash and other bank balances 100% 263% 276% 203% 140%
100% 98% 113% 136%
Total assets 100% 104% 103% 122% 146%

38. Index Analyses
2014 2015 2016 2017 2018
Sales 100% 111% 95% 96% 127%
CGS 100% 113% 98% 98% 132%
Gross profit 100% 101% 82% 86% 98%
Distribution cost 100% 127% 120% 128% 178%
Administrative expenses 100% 108% 107% 109% 124%
Other expenses 100% 88% 79% 17% 175%
Other income 100% 133% 753% 481% 2362%
Finance cost 100% 88% 63% 56% 79%
Profit before taxation 100% 88% 78% 85% 111%
Taxation 100% 118% 80% 45% 81%
Profit after taxation 100% 80% 78% 95% 119%
Earnings per share 100% 80% 78% 85% 108%