2. cb - closure look at annual report(2)

8/10/2019 2. CB - Closure Look at Annual Report(2)

1/28

ese

arch

CreditR

Copyrighteducorporatebridge.com


2/28

ese

arch

Table of Contents

Annual Report Analysis

Ratio Analysis

CreditR



3/28

ese

arch

CreditR



4/28

ese

arch

Important Sections to look at Annual Report

Management Discussion

Balance Sheet

Profit & Loss a/c

CreditR

Auditors Notes

Notes to accounts/ Accounting Policies

Schedules

Foot Note



5/28

ese

arch

Balance Sheet

Tells what company owns and owes

Balance Sheet is the financial snapshot of companys health

Balance Sheet has three main categories-

- Assets

CreditR - Liabilities

- Equity



6/28

ese

arch

Equity

The difference between what company owns and what it owes

Equity= Total Assets- Total External Liabilities

Two main items-

- Paid up capital

CreditR - Reserve & Surplus (includes General Reserve, Retained Earning, etc.)

Two types of shareholdings-

- Equity share capital

- Preference share capital



7/28

ese

arch

Assets

There are two main types of assets

Current assets- Likely to be used up/ converted into cash within onebusiness cycle

Main current assets being-

-Inventory

CreditR -Debtors

-Cash

Non current Assets- mostly fixed in nature and not converted into cash inone business cycle

And includes-

-Fixed assets

-Investments

-Intangible assets



8/28

ese

arch

Current Assets

Inventories

Which includes-

-Raw material

-WIP

-Finished Goods

CreditR Debtors (receivables)

Tells speed at which company collects what it owed and tells lot about financialefficiencies

Cash

Is a cash real indicator of companys health?

Is too much of cash in books good for company?



9/28

ese

arch

Non Current Assets

Fixed Assets

- Plant & Machinery

- Furniture

- Property

CreditR

- Long term

- Short term

Intangible Assets

- Copyrights

- Patents etc

(not too much of attention needed unless company is in financial distress)



10/28

ese

arch

Liabilities

Liabilities can be divided into two parts-

-Current Liabilities

Obligation to pay in a year and includes-

- Creditors

- Loans & Advances (short term)

CreditR

-Non Current Liabilities

- Secured

- Unsecured

Is increasing debt levels always bad sign?



11/28

ese

arch

Fictitious and Intangible Assets

Fictitious assets

- Example of fictitious assets are deferred revenue expenditure whosebenefit is derived over long period of time.

- Even accumulated losses are also fictitious assets as they are writtenoff over a period of time.

- Following are the examples of fictitious assets are-preliminaryex enses discount on issue on debenture and shares underwritin

CreditR

commission, miscellaneous expenditure, profit and loss (Dr).

All fictitious assets are intangible but all intangible assets are notfictitious example goodwill, patents, trademarks, copyrights areintangible but not fictitious.



12/28

ese

arch

Analysing Profit & Loss a/c

What Profit & Loss a/c tells?

- Earning Growth

- Expenditure / cost

- Interest expense

- Depreciation cost-

CreditR

- Net profits

- Dividend / retained profits

- Exceptional items

What it does not tell?



13/28

ese

arch

Analysisng Profit & Loss a/c cont.

Three important sections of Profit & Loss a/c

- Total Revenue

- Operating Cost

CreditR

- Financing Cost

- Asset cost

- Profitability



14/28

ese

arch

Cash Flow Statement

Shows how company is able to pay for its operations and future growth

Three section of cash flow statement

- Cash flow from operating activities

CreditR

(what does negative cash flow from operating activities indicates?)

- Cash flow from investing activities

How much amount is spent on capital expenditure, equipment purchase,

new business acquisition

- Cash flow from financing activities

Cash associated with outside financing activities (Issue of long term debt,share capital, bonds and is paid back)



15/28

ese

arch

Free Cash Flow

It shows the companys ability to pay debt, dividend, share buy backand facilitates growth of business

Free cash flow = Net income

+ Depreciation/amortisation- Chan e in workin ca ital

CreditR

- Capital expenditure

- Can be returned to shareholders

- Invested into business operations



16/28

ese

arch

Net Debt

Net Debt = Long term liabilities- Cash and Cash Equivalent (includesCash, Bank Balance, Fixed Deposit, etc.)

True debt outstanding for the company

CreditR



17/28

ese

arch

Return on Equity (RoE)

Tells how well companys assets are managed

RoE = Net income after tax

Shareholders Equity

Shareholders Equity = Total Assets- Total External Liability

CreditR

Tells how profitably company can expand its business

RoE should be greater than prevailing bank interest rates

It does not tell about debt of the company



18/28

ese

arch

CreditR



19/28

ese

arch

Return on Capital Employed (RoCE)

RoCE = Operating Profit/ Capital Employed

where

Operating profit = PBIDT

Ca ital em lo ed = Total assets Current liabilities

CreditR

(Cash and assets actually used to carry out business)

RoCe gives better picture than RoE



20/28


21/28

ese

arch

Ratio Analysis

Financial Ratio (Balance Sheet)- Current Ratio- Quick Ratio- Debt Equity Ratio

CreditR

- Operating Ratio- Expense Ratio- Net Profit Ratio- Inventory Ratio

Composite Ratio (Both Balance Sheet & Profit & Loss a/c)- Fixed Assets Turnover- Debtors Turnover Ratio- Creditors Turnover Ratio



22/28

ese

arch

Financial Ratio (Balance Sheet Ratio)

Current Ratio

It is relationship between the current assets and current liabilities

Current Ratio = Current Assets/ Current Liabilities

CreditR

Net Working Capital

Surplus of long term sources over long term uses (difference of currentassets and current liabilities)

NWC= Current Assets- Current Liabilities



23/28


24/28

ese

arch


Quick Ratio/ Acid Test Ratio

It is a ratio between Quick Current Assets and Current Liabilities

Quick Current Assets: Cash/ Bank balance + receivables upto 6 months

+Quickly realizable securities ( G Secs, Quoted shares, Bank FDs)

CreditR

Quick Current Assets / Current Liabilities

(Inventory is not considered as quickly and easily realizable current assets)



25/28

ese

arch


Debt Equity Ratio

It is a relationship between borrowers fund (debt) and owners fund (Equity)

Long term debt= liabilities of long term nature

CreditR

Tangible net worth= Total of capital + reserve & surplus intangible assets



26/28

ese

arch

Operating Ratio (Profit & Loss a/c)

Operating Profit Ratio

Its defined as

(Operating Profit/ Net sales)*100

=

CreditR

,

Net Profit Ratio

It is defined as

(Net Profit/ Net sales)*100

It measures overall profitability



27/28

ese

arch

Operating Ratio (Profit & Loss a/c)

Inventory/Stock Turnover Ratio

(Av inventory/ sales)* 365 for days

(Av inventory/ sales)* 52 for weeks

(Av inventory/ sales)* 12 for months

CreditR

Av inventory or stocks = (Opening stock + Closing stock)

2

It tells number of times the inventory is rotated during the relevant

accounting period



28/28

ese

arch

Composite Ratio

Debtors Turnover Ratio

Also called as Debtors Velocity or Average Collection Period or Period ofcredit given

(Average Debtors/Sales)*365 for days

CreditR sse urnover a o

Net Sales/ tangible Assets

Creditors Turnover Ratio

Also called as Creditors Velocity or Average Payable Period, whichdetermines the creditors payment period

(Average Creditors/Sales)*365 for days

2. cb - closure look at annual report(2)

Documents