ch.2 techniques of financial analysis
TRANSCRIPT
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Financial Management
Unit 2 Techniques of Financial Analysis:
Meaning, Nature, Objectives and limitations of financialanalysis. Tools of analysis and interpretation,, fund flow
statement analysis ( Working capital basis) ,Cash flow
statement analysis – (Cash basis) ,Ratio analysis
(Interpretations of ratios only) (8+2)HBPS case:
West Jet Airlines- Investment Strategy on 1st and 2nd Unit.
Lowe’s Companies Incorporation
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FINANCIAL MANAGEMENT
Introduction:
Financial Management studies aboutthe process of procuring and judicious
use of financial resources with a view
to maximizing the value of the firm
there by the value of the owners.
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Functions of Finance
In modern sense it can be broken down
into three major decisions as functions
of finance:a. The Investment Decision
b. the Financing Decision
c. the Dividend Policy Decision.
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FINANCIAL STATEMENT
A financial statement is an organized
collection of data according to logical and
consistent accounting procedures. Its purpose is to convey an understanding of
some financial aspects of a business firm.
FS are also called as Financial Reports/Financial Information
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Functions of Financial
Statements Financial Statements (FS) serve important functions:
FS provide information on how the firm has
performed in the past and what is its current financial
position. FS are a convenient device for the stakeholders (i.e.
shareholders, creditors, regulators and others) to set
performance norms and impose restrictions on the
management of the firm. FS provide useful templates for financial forecasting
and planning.
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OBJECTIVES OF FINANCIAL STATEMENT
The objective of financial statements is to provide
information about the financial position, performance and
changes in financial position of an enterprise that is useful
to a wide range of users in making economic decisions.
To meet the common needs of most users. Providing information for economic decision:
Providing information about the financial position.
Providing information about performance of an enterprise. Providing information about changes in financial position.
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Assumptions of Financial Statements/
Concept used in Financial Statement
Separate Entity Concept:
According to this concept the company (business) isconsidered as a separate legal entity from itsshareholders or stakeholders.
Double Entry:
This concept states that every transaction has
minimum two effects. The receiving and givingeffect.
Principal of Double Entry System
Every debit has corresponding credit and
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Assumptions of Financial
Statements:
Going Concern: It is assumed that accounts are drawn up on the basisthat enterprise will continue in operational existence for the foreseeablefuture. This is important assumption for valuation of assets. The value ofthe assets are taken to be based on what they cost with adjustment in theform of depreciation for fixed assets which have been declining in valueover a period of time.
Accrual basis: Profit = Revenue – Expenses.
The process of matching is an attempt to ensure that revenues recorded ina period are matched with the expenses incurred in earning them.
Revenues are recognized at the point of sale ( when they are earnedusually at the date of a transaction with a third party), and not when
collected and expenses when they are incurred rather than when actually paid.. The costs of running the business should not be treated as a flow ofcash.
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Characteristics of Financial Statements
Understandability: understand by users
Relevance: useful and relevant to decision making needs of users.
Materiality: nature of information. materialistic
Reliability: information must be reliable, free from errors and bias.
Substance: presented& accounted with substance and eco reliability.
Neutrality: free from bias
Prudence: assume losses but no overstating profits.
Completeness: complete within the bound of material and cost.
Comparability: to compare trends in financial position and performance
through time.
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Forms of Consistency:
While preparing financial statements the following form of
consistency are taken into consideration. Vertical Consistency: It is achieved when the same accounting
policies, methods and practices are adopted while preparing
interrelated financial statements of the same date.
Horizontal Consistency:It is achieved when the same entity adopts the same accounting
policies, methods and practices from year to year.
Third Dimensional Consistency:
It is the consistency in accounting policies, methods and practicesfollowed by different units in the same industry.
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Types of Financial Statements:
Income Statement: Prepared vertically or
horizontally as per statue.
Balance Sheet : The Companies Act 1956 stipulates
that the Balance Sheet of a joint stock company
should be prepared as per Part I of Schedule VI ofthe Act. Prepared vertically or horizontally as per
statutory provisions.
Statement of Retained Earnings Fund Flow statement
Cash Flow statement
Schedules
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Limitations of Financial Statements:
Net profit/loss is ascertained on historical cost basis.
Actual profit can be ascertained only after the firm achieves itsmaximum capacity.
Fails to disclose quality of product, management efficiency etc.
Balance sheet shows past positions of the company and not
present and future.
The net income disclosed is only relative and not absolute.
Use of FS are limited in decision making by management,
investors, creditors etc. FS cannot be formed as a reliable basis basis of judgement as FS
are based on accounting policies which may vary from company
to company.
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Financial Statement Analysis:
It means study of relationship among
various factors in a business as disclosed by
financial statements of a firm. It shows the
trend of the factors and will help in
evaluation of component parts. It is done to
obtain a better insight into a firm’s position
and performance.
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Objectives of Financial Statement
Analysis:
To judge the financial health of the firm.
To evaluate the profitability of the
enterprise. To gauge the debt servicing capacity of the
firm.
To understand the long term and short termsolvency of the firm.
To know the return on capital employed or
invested.
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Types of Financial Statement Analysis:
External Analysis: It is done by the outside agencies likeinvestors, financial analysts, lenders, government agencies,research scholars etc.
Internal Analysis: The management is interested in theanalysis of financial statements for measuring theeffectiveness of its own policies and decisions.
Horizontal Analysis: It is done for finding the trend ratiosand in comparative financial statements. When evaluation isdone for several years simultaneously at a time for makingconclusions, it is called horizontal analysis.
Vertical Analysis: It is the study of quantitativerelationship of one financial item to another based onfinancial statement on a particular date. For eg. Ratioanalysis, Common size statement.
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Types of Financial Statement Analysis
Long Term Analysis:
The objective of long term analysis is to determinewhether the earning capacity of the firm is sufficientto meet the targeted rate of return on investment,
and is adequate for future growth and expansion of business. It is done to evaluate long term solvency, profitability, liquidity, financial health, earningcapacity of the firm etc.
Short Term Analysis:
It is done to determine the liquidity position of thefirm and short term solvency of the firm. The
analysis is oriented on efficiency of working capital
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Methods of Analyzing Financial Statements:
Comparative Financial Statements:CFS are statements of financial position of a
business designed to provide time perspective to the
consideration of various elements of financial position embodied in such statements.
It includes :
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Comparative Financial Statement
(Income and Balance Sheet)
It reveals :
absolute data (money value or rupee value),
Increase or reduction in absolute data in terms of
money values Increase or reduction in absolute data in terms
percentages,
Comparison in terms of ratios, Percentage of totals
Inter firm comparison (means two or more firmsfinancial statements are compared for drawinginferences)
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Common Size Financial Statements
Common Size Financial Statements are percentage conversion
of Financial Statements i.e. P& L accounts and Balance Sheet to
establish each element to the total figure of the statement.
Useful to analyse the performance of the company
It includes1. Common size Income Statement: In this the sale figure is
taken as ‘100’ and all other figures of costs and expenses are
expressed as percentage of sales.
Profit = Sales – (cost + other expenses). It reveals theefficiency of the firm in generating components of cost as
proportion to sales. Inter firm comparison of common size
income statement reveals the relative efficiency of costs
incurred.
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Common Size Financial Statements
2. Common Size Balance Sheet: In this the total ofasset or liability side is taken as ‘100’ and all figures
of assets and liabilities, capital and reserves are
expressed as proportion to the total i.e. 100. It
reveals the proportion of fixed assets to current
assets, proportion of long term funds to current
liabilities; inter firm comparison, financial health
and long term solvency of the firm etc.
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TREND RATIOS
Trend Ratios: are the index numbers of the movements of
reported financial items in the financial statements which are
calculated for more than one financial year. Trend ratio help in
making horizontal analysis of comparative statements. It reflects
the behavior of items over a period of time.
Computation of trend ratio:
1. Follow accounting principles and policies consistently
throughout the period for which trend ratios are calculated.2. It is calculated only for the item having logical relationship
with one another.
3. It should be made at least for 4 consecutive years.
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TREND RATIOS
One years financial statement should be selected as
a base statement and financial items of it should beassigned with value as 100.
Following formula is used to calculate trend ratiosof subsequent years:
= Absolute figure of financial statement under study X 100
Absolute figure of same item in base financial statement
Tabulate the trend ratios for analysis of trend over a period.
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Ratio Analysis
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RATIO
Ratio: A ratio is an arithmetical relationship between two
figures.
Ratios are relative figures reflecting the relationship
between related variables.
Ratio analysis is defined as the systematic use of ratio tointerpret the financial statements so that the strengths,
weaknesses, historical performance and current financial
condition of the business can be determined.
Financial ratio analysis is a study of ratios between various
items or groups of items in financial statements.
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PURPOSE/USES OF RATIO Financial ratios are used to compare the risk and return of different
firms in order to help equity investors and creditors make intelligentinvestment and credit decisions.
Enable comparison of the performance of the company
- in different years
- with its budgets and forecasts
- with other companies in similar trades (inter firm comparison).
Provide information of the company in respect of the liquidity,
profitability, use of assets and capital structure
Eliminate the effects of the scale and size of different companies or
different years of the same company so comparison can be provided.
Appraise the performance of the company, make predictions for future
performance and assist in future planning
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Purpose/Uses of accounting ratios
To identify aspects of a business’s performance to aid decision making
Quantitative process – may need to be
supplemented by qualitative factors to geta complete picture.
Ratios can be classified into liquidity,
capital structure or leverage , profitabilityand activity. The firm uses these ratios as
per the requirement in decision making.
Areas or T pes of Ratios
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Areas or Types of Ratios
1. Liquidity – the ability of the firm to pay its way.
2. Profitability – how effective the firm is at generating profits given sales and or its capital assets.Investment/shareholders – information to enabledecisions to be made on the extent of the risk and the
earning potential of a business investment. Financial – the rate at which the company sells its stockand the efficiency with which it uses its assets.
3. Activity/Turnover /Efficiency / Asset Management
Ratios - are concerned with efficiency in assetmanagement. It is a test of relationship between sales orcost of goods sold and assets.
4. Solvency/Capital structure or Leverage ratios –
information on the long term solvency of a firm.
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Accounting ratios and interpretation
I . LIQUIDITY:
Liquidity is a measure of the amount of funds a company can quickly
use to settle its debts.
It Measure the ability of a firm to meet its short term obligations and
reflect its short term financial strength or solvency.
Following are the important liquidity ratios:
1. current ratio / working capital ratio
2. acid test ratio / quick ratio / liquid ratio
3.
stock turnover rate4. stock turnover period
5. debtors’ collection period
6. creditors’ payment period
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Liquidity – Current ratio Current ratio is the ratio of total current assets to total current
liabilities.
This ratio indicates the ability of a business to meet its short-termliabilities from its current assets.
It is also known as solvency ratio as it indicates how currentobligations are covered by current assets.
The ratio indicates the proportion of CA to meet CL.
The norm or standard ratio is 2:1.
If the ratio is too high, the company may be holding too many idleshort-term assets. (They may be used in a more profitable way.)
The excess investment in CA results in decrease in profitability dueto blocking of large funds in working capital.
If the ratio is too low, the company may not have sufficient fundsto meet its short-term liabilities.
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Liquidity – Current ratio Formula : Current ratio = Currents Assets/Current Liabilities
Current Assets means assets which have been purchased to convertthem into money or cash within a short period of time i.e. a year.
Current assets includes Cash, Bank balance, Debtors, B/R,Inventories (stock), A/c Receivables, short term investments, shortterm loans, and prepaid expenses.
Currents Liabilities means liabilities with a short term period i.e. upto one year.
Currents Liabilities includes creditors, A/c payables, Bills Payable(B/P), Bank overdraft, provision for taxation, outstanding expenses,unclaimed dividend, short term loans, o/s interest, advance paymentreceived , debt of less than a period of one year.
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Liquidity – Acid test/Quick ratio
This ratio indicates the ability of the business to meet its
short-term liabilities from its quick assets.
This ratio is a better tool to measure the ability to meet day
to day obligations.
It represents the ratio between quick current assets and thetotal current liabilities excluding bank overdraft.
The norm is 1:1.
If the ratio is too high, the company may be holding
excessive liquid assets.
If the ratio is too low, the company may have a liquidity
problem / cash flow problem.
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Liquidity – Acid test/Quick ratio
Formula : Liquid ratio = Current Assets- Stock – Prepaid
expenses/ Current Liabilities – Bank Overdraft
Liquid assets includes Cash, Bank balance, Debtors, B/R,
A/c Receivables, short term investments, short term loans.
Liquid Liabilities includes creditors, A/c payables, BillsPayable (B/P), provision for taxation, outstanding expenses,
unclaimed dividend, short term loans, o/s interest, advance
payment received , debt of less than a period of one year.
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Liquidity – Super Quick ratio
Super Quick ratio or absolute liquid ratio or cash
position ratio consider only cash in hand and at bank and marketable securities i.e. short term
investments in current assets.
The optimum value for this ratio should be 1:2. Ifratio is less than one it indicates company’s day to
day cash management is poor.
Formula :
Super Quick ratio = cash + marketable
securities/Current Liabilities
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Liquidity – stock turnover rate
It shows the number of times that a business
can sell its average stock in a period.
A high ratio means high sales, fast stock
turnover and a low stock level.
A low ratio means low sales, low stock
turnover and a high stock level. (goods may
become obsolete, high storage cost)
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Liquidity – debtors collection
period
This ratio measures the debt collection
period of a business.
A low ratio means debtors pay back their
debts in a short period of time. The
company may have sufficient liquid fund.
A high ratio indicates a poor credit control
and a high risk of bad debts.
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Liquidity – creditors payment
period
This shows the length of time taken to pay
the creditors.
A long payment period may indicate that
the company has a liquidity problem. The
relationship between the company and the
suppliers may be affected.
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A i i d i i
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Accounting ratio and interpretationII. PROFITABILITY ratios related to sales:
1. Gross profit or margin ratio= Gross profit/net sales X 100
Gross profit = Sales- Cost of goods sold
Net sales = Gross Sales- Sales return
2. Net profit ratio= Net Profit or Earning After Tax/ Net sales X 100
3. Operating Net Profit ratio
= operating net profit or PBIT or EBIT / Net sales X 100
Operating net profit= Net Profit + Non operating expenses-non operating income
OR Gross profit- Operating expenses
4.Cost of goods sold ratio= Cost of goods sold / Net sales X 100
5. Operating Ratio = Cost of goods sold+ Operating expenses or EBIT / Net salesX 100
(Non operating income and expenses are excluded from above ratio)
6. Operating Expenses ratio = Administrative exp + Selling & Distribution
expenses / Net sales X 100
7. Selling Expenses ratio = Selling expenses / Net sales X 100
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Profitability – gross profit ratio
It shows the gross profit on sales.
A low ratio means the stock is being sold at
lower prices. It may be a policy to stimulate
sales.
A high ratio may not result in high gross
profit figure unless a large volume of sales
is achieved.
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Profitability – net profit ratio
It shows the net profit as a percentage of
sales.
It gives some ideas of the company’s
pricing policy and cost control.
A low ratio may be the result of lower
selling prices or higher operating costs.
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Profitability – return on capital employed
This ratio shows the profitability of a
business and the management effectiveness
in terms of the use of capital.
A higher ratio means a higher profitability
and a better management efficiency.
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Capital employed (Sole trader)
Closing capital
Average capital
Capital balance + long term loans
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Capital employed (Partnership)
Closing balance on fluctuating capital accounts
Average of opening and closing balances on thefluctuating capital accounts
Total of fixed capital accounts plus total of currentaccounts
Average of fixed capital accounts plus total ofcurrent accounts
Any of the above plus long term loans to the partnership
C i l l d
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Capital employed
(Limited company)
- total assets
- long term suppliers of capital (ordinaryshares + preference shares + reserves +
long-term loans) - shareholders’ capital (ordinary shares +
preference shares + reserves)
- shareholders’ equity (ordinary shares +reserves)
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Return
Net profit after tax and preference share
dividends (for ordinary shareholders)
Net profit after tax + any preference share
dividends + debenture and long-term loan
interest (for all long-term suppliers of
capital)
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Profitability – assets turnover
This indicates the efficiency of the business
in using its assets to generate revenues.
A higher ratio means the company is more
efficient to use its assets to generate
revenues. This results in higher profitability.
A ti ti d i t t ti
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Accounting ratios and interpretation
III. Activity/Turnover /Efficiency / Asset Management Ratios:
These ratios are concerned with measuring the efficiency in asset management. Turnover or activity ratios are a test of relationship between sales/Cost of
goods sold and assets.
First it indicates number of times inventory is replaced during the year or
how quickly the goods are sold.
The second category of turnover indicates the efficiency of receivables
management ands how quickly trade credit is collected.
Total asset turnover reveals the efficiency in managing and utilizing the total
assets.
Depending upon type of asset activity ratio may be- Inventory or stock turnover ratio
- Receivable or debtors turnover ratio
- Total asset turnover ratio
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A ti ti d i t t ti
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Accounting ratios and interpretationFormulas:
1. Working capital turnover ratio = Cost of goods sold/Sales
average net working capital
2. Raw material turnover = Cost of raw material used
Average raw material inventory
3. Work in process turnover = Cost of goods manufactured
Average work in process inventory
4. Finished goods inventory turnover = Cost of goods sold/Sales
Average finished goods inventory
5. Debtors turnover ratio = Credit sales / (Average debtors +Avg. B/R) or
accounts receivables.
The higher the ratio, lower is the collection period.
The lower ratio indicates higher collection period.
A ti ti d i t t ti
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Accounting ratios and interpretationFormulas:
6. Average collection period (days) =Months or days in a year i.e.365 days
Debtors turnover ratio
7. Total Assets turnover = Cost of goods sold/Sales
average total assets
8. Fixed assets turnover = Cost of goods sold/Sales
average fixed assets
Note: If cost of goods sold is not available , sales figure is
used in the numerator.
A ti ti d i t t ti
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Accounting ratios and interpretation
IV. Solvency/Capital structure or Leverage
ratios:
Solvency refers to the capacity of the business to meet
its short term and long term obligations.
It shows light on Long-term solvency and stability.
There are two types of such ratios:
1. Debt equity or Debt Asset ratio
2. Coverage ratios
Long term sol enc Debt ratio
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Long-term solvency – Debt ratio Debt to total asset ratio :
Total debts= Total assets X 100%
Debt ratio shows the total amount of liabilities to total assets.
If the debt ratio is too high (more than 50%), it is difficult toobtain further financing and it also has a heavy burden of
interest expense.
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Gearing ratio
Gearing ratioPrior charge capital
= --------------------------------------- X 100%
Total capitalPrior charge capital = preference shares + long term loans
Total capital = ordinary share capital + reserves +
preference shares + long term loans
L t l i ti
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Long-term solvency – gearing ratio
It is concerned with the company’s long-term
capital structure.A high gearing ratio indicates a high portion of
funds is obtained from borrowings. It may lead
to long-term insolvency. It is difficult to obtainfurther financing and has to bear a highinterest burden.
Ordinary shareholders may not get anydividends in bad times as very little profit isleft over for them
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Gearing ratio
High geared company
Investment is more
risky
Larger dividends will beavailable in good times
Low geared company
The risk of investment
is relatively lower
It is more certain tohave dividends.
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Changing the gearing
To reduce gearing
By issuing new ordinary
shares
By redeemingdebentures
By retaining profits
To increase gearing
By issuing debentures
By buying back
ordinary shares in issue By issuing new
preference shares
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Earnings per share
Earnings per share (EPS)
Net profit after tax and preference dividends
= ------------------------------------------------------
No. of ordinary shares issued
(ranked for dividends)
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Price / earning ratio
Price / earning ratio
Market price per share
= -----------------------------------------Earnings per share
It shows the profit in rupees associated with each
ordinary share. A higher earnings per share indicates the investors
may have higher confidence in the company. It is
more profitable to invest in the shares.
Dividend cover
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Dividend cover
Dividend cover
Net profit after tax and preference dividends
= -------------------------------------------------------
Ordinary dividends paid and proposed
It shows the amount of profit that has been distributed as
dividends.
A low ratio means a large amount of profits has been retained as
reserves which can help to finance the operations of thecompany.
A high ratio means a large amount of profits has been distributed
as dividends. The dividend payment is vulnerable unless the
company becomes more profitable.
Dividend yield
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Dividend yield
Dividend yield
Dividend per share for the year
= -------------------------------------------- X 100%
Current market price of the share This ratio measures the rate of return obtained from
dividends on an investment in shares.
A high dividend yield may imply the company ismore successful and efficient. It is more profitable to
invest in these shares.
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Other ratios
The company will be able to pay interest on the loan when it
falls due. (short-term liquidity)
- current ratio and acid test ratio
It will be able to repay the loan on maturity. (long-termsolvency)
- operating profit / loan interest
- total external liabilities- shareholders’ fund / total assets
Limitations of ratio analysis
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Limitations of ratio analysis
1. Different definitions of capital employed may cause
confusion.2. Changes in price level will affect the comparability of the
ratios between two financial periods.
3. Changes in external environment will affect the comparison.
4. Differences in management and background of various
businesses may affect the comparison.
5. Different accounting definitions, methods, techniques and
policies used by various businesses may affect thecomparability.
6. It is difficult to set up a proper standard for good
performance.
7. Short term fluctuations ma not be reflected.
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Fund Flow Statement Analysis:
Working Capital Basis
Working capital
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Working capital
Introduction
Working capital typically means the firm’s holding of current or short-term assets suchas cash, receivables, inventory and
marketable securities. These items are also referred to as
circulating capital
Corporate executives devote a considerableamount of attention to the management ofworking capital.
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Definition of Working Capital
Working Capital refers to that part of the firm’s capital,
which is required for financing short-term or current
assets such a cash marketable securities, debtors and
inventories. Funds thus, invested in current assets keeprevolving fast and are constantly converted into cash and
this cash flow out again in exchange for other current
assets. Working Capital is also known asRevolving or Circulating capital or Short-
term capital.
Concept of working capital
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Concept of working capital
There are two possible interpretations of workingcapital concept:
1. Balance sheet concept
2. Operating cycle concept
Balance sheet concept:
There are two interpretations of working capitalunder the balance sheet concept.
a. Excess of current assets overcurrent liabilities
b. gross or total current assets.
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Excess of current assets over current liabilities arecalled the net working capital or net current
assets. Working capital is really what a part of long term
finance is locked in and used for supporting currentactivities.
The balance sheet definition of working capital ismeaningful only as an indication of the firm’s currentsolvency in repaying its creditors.
When firms speak of shortage of working capital theyin fact possibly imply scarcity of cash resources.
In fund flow analysis an increase in working capital,as conventionally defined, represents employment orapplication of funds.
What is Fund Flow Statement?
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What is Fund Flow Statement?
Fund Flow Statement describes the sources from
which additional funds were derived and the uses towhich these funds were applied.
1.Increase the Current Assets but do not bring any
increase in Current Liabilities, and vice-versa. 2.Decrease the Current Assets but do not bring any
decrease in Current Liabilities and vice-versa.
Why to prepare Funds Flow Statement?
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Why to prepare Funds Flow Statement?
1.Effective tool of managing working capital
2.Knowledge of change in working capital3.Knowledge of Funds from operation
4.Knowledge of inflow of Funds
5.Knowledge of Application of Funds
6.Knowledge as to the payment of C.L. and C.A.
7.Knowledge as to the purchase of F.A. and C.A.
8.Knowledge of supplementary information
9.Helps in Borrowing Operation 10.Acts as a
process of Budgeting
Funds Flow statement – Working Capital Basis
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The funds flow statement, on working capital basis, presents (1) the source of
working capital. (2) The use of working capital (3) the net change in working
capital. Various sources and uses of working capital shown in the table below
Net change in working capital = Uses of working capital – Sources of working
capital
Sources and Uses of Funds on working Capital Basis:
Sources 1. Funds from operations
2. sales of non-current assets
3. Long term financing
(i) Long term borrowings (loans/bonds etc)
(ii) Issuance of equity and preference shares.
Uses: 1. Purchase of non-current assets
2. Repayment of long term and short term debt
3. Payment of cash dividends
Funds Flow Statement – cash Basis
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Funds Flow Statement cash Basis The funds flow statement, on cash basis, shows (1) the sources of cash (2) the uses of cash (3) the net
change in cash. The sources of cash are the sources of working capital plus changes within the working
capital account which augments the cash resources of the business. The uses of cash again are thechanges which use working capital plus changes within the working capital account which deplete the
cash resources of the business. These latter changes are simply the increase in current assets other than
cash. The sources and uses of cash are shown below. Net change in cash = Sources of cash – Uses of
cash.
Sources and Uses of Funds on cash Basis:
Sources
1. Profits from operations
2. Decrease in any asset (other from cash)
3. Increase in liabilities
4. Issue of shares
Uses
1. Loss from operation
2. Increase in any asset (other from cash)3. Decrease in liability
4. Payment of cash dividends
The main difference between the working capital basis and the cash basis is that, working capital basis
treats increase in inventories and accounts receivable as equivalent to increase in cash. But in statement
on cash basis it summarizes only the cash inflows and outflows over a period of time and as the cash