definition and explanation of financial statement analysis repaired)

7/31/2019 Definition and Explanation of Financial Statement Analysis Repaired)

1/35

I n t h e N a m e o f A l l a h t h e M o s t G r a c i o u s ,t h e M o s t B e n e f i c e n t a n d t h e M o s t M e r c i f u l

I n t h e N a m e o f A l l a h t h e M o s t G r a c i o u s ,t h e M o s t B e n e f i c e n t a n d t h e

M o s t M e r c i f u l R e a d ( O P r o p h e t , ) i n t h en a m e o f y o u r s R u b , W h o c r e a t e d . C r e a t e d m a n

f r o m a c l o t o f c o n g e a l e d b l o o d . R e a d ; a n dy o u r L o r d i s M o s t G e n e r o u s ,

W h o t a u g h t k n o w l e d g e b y t h e p e n ; t a u g h t

m a n w h a t h e d i d n o t k n o w .( A l - A l a q , S u r a h # 9 6 , A y a t s 1 - 4 , P a r a #3 0 )


2/35

dedication

I w o u l d l i k e t o d e d i c a t e m y w o r k , A s a l i t t l e

t o k e n o f g r a t i t u d e f o r m y L o v i n g P a r e n t s .Thew i s d o m a n d l o v e o f m y p a r e n t s e n a b l e s m e t o

s t r i v e t o w a r d s a l e g a c y o f h o n o r . W i t h o u t

t h e i r k n o w l e d g e , w i s d o m a n d g u i d a n c e , I w o u l d

n o t h a v e t h e g o a l s , I h a v e t o s t r i v e a n d b e t h e

b e s t t o r e a c h m y d r e a m s !


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ACKNOWLEDGEMENT

I f i n d n o w o r d s a t m y c o m m a n d t o e x p r e s s m y

d e e p e s t s e n s e o f g r a t i t u d e t o t h e

A l m i g h t y ALLAH , t h e m o s t G r a c i o u s , t h e

m o s t M e r c i f u l a n d t h e m o s t B e n e f i c e n t , w h o

g i v e s m e t h e t a l e n t t o c o m p l e t e t h i s

t a s k s u c c e s s f ul l y , H e i s t he o n e w ho g a v e m e

c o ur a ge to d o t h is . I a m m u c h o b l i g e d t o m y

l o v i n g P a r e n t s w h o s e p r a y e r s h a v e e n a b l e d

m e t o r e a c h t h i s s t a g e . A t t h i s o c c a s i o n Ic a n t f o r g e t m y p a r e n t s f o r t h e i r g u i d a n c e

a t t h e c r u c i a l m o m e n t s o f m y l i f e . N e x t I o w e

m y b o t t o m l e s s t h a n k s t o o u r e s t e e m e d

r e s o u r c e p e r s o n M r . y a s i r s h e h z a d w h o

d i r e c t e d m e w e l l a n d w a s a l w a y s a v a i l a b l e

t o c l e a r m y d o u b t s a n d m i s u n d e r s t a n d i n g s

t h r o u g h o u t t h i s p r o j e c t . I t i s a l s o a m a t t e ro f i m m e n s e p l e a s u r e f o r m e t o e x p r e s s m y

g r a t i t u d e t o the F a c u l t y o f

D e p a r t m e n t o f c o m m er c e a n d

p r o f e s s i o n a l p r o j e c t s e v a l u a t i o n C o m m i t t e e o f

t h e b . z . u f o r g i v i n g u s t h e i r p r e c i o u s t i m e

a n d t r i e d t h e i r b e s t a s h e l p f u l a s

p o s s i b l e . I w i s h t o t h a n k s a l lm y F r i e n d s and C l a s s m a t e s w h o r e a l l y h e l p e d

m e b y g i v i n g s u g g e s t i o n s

a n d c r i t i c a l r e v i e w o f t h e m a n u s c r i p t


4/35

D I S C L A I M R

T h e p u r p o s e o f t h e p r o j e c t i s t o i n t r o d u c et h e s u b j e c t m a t t e r s a n d p r o v i d e a g e n e r a l

i d e a a n d f i n a n c i a l i n f o r m a t i o n a b o u t t h e

I n d u s M o t o r s C o m p a n y L i m i t e d . A l l t h e

m a t e r i a l i n c l u d e d i n t h i s d o c u m e n t i s b a s e d

o n d a t a / i n f o r m a t i o n g a t h e r e d f r o m v a r i o u s

s o u r c e s a n d i s b a s e d on c e r t a i n a s s u m p t i o n s .

A l t h o u g h , d u e c a r e , d i l i g e n c e a n d r e a s o n a b l e

e f f o r t s h a s b e e n t a k e n t o c o m p i l e t h i s

p r o j e c t , t h e c o n t a i n e d i n f o r m a t i o n m a y v a r y

d u e t o a n y c h a n g e i n a n y o f c o n c e r n e d

f a c t o r s a n d REFRENCES
http://www.scribd.com/doc/50729557/79/REFRENCEShttp://www.scribd.com/doc/50729557/79/REFRENCEShttp://www.scribd.com/doc/50729557/79/REFRENCES


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E x e c u t i v e S u m m a r y

Indus Motor Company is one of the Automobile Companies which

formedwith the help of house of Habib, Toyota Motor Corporation,

Toyota TsushoCorporation. It manufactures and imports cars and enjoys

a healthy sharein the market. It is competing with the Honda, Nissan,

Suzuki andMitsubishi. To sustain its lead IMC must maintain strategic

competitiveadvantage which is its production strength, ability to producequality carswith respect to low cost and research and development in

hybrid and biofuel cars. But recently company is in stabilization mode

trying to improve itsfunctional area, consolidation of resources and

maintaining SCA. In myOpinion it is the best move made by IMC to

survive the financial holocaust


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O p e r a t i n g H i g h l i g h t s : F o r t h e Y e a r e n d e d J u n e 3 0 , 2 0 0 9

Vehicle Sales: down30.6% to 35,276 units

Vehicle Production: down28.9% to 34,298 units

Net Revenues: down8.6% to Rs. 37.9 billion

Profit after tax: down39.5% to Rs.1.4 billion

Earning per share: down39.5% to Rs. 17.6

Manpower: down6.7% to 1,893 employees

Total assets: up50.5% to Rs. 20.69 billion

Share holders' equity: up9.1% to Rs. 10.3


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2

S h o r t T e r m D e b t P ay in g A bi l i ty

2005 2006 2007 2008 2009a)Net Working Capital

3.51 4.65 6.15 5.89 6.83

Current Ratio 1.46 1.49 1.83 2.56 1.69

Acid Test Ratio 1.05 1.07 1.44 1.86 1.28

Cash Ratio 0.88 0.79 1.15 1.16 0.98

Cash Flow fromOperations Ratio 0.12 0.28 0.38 (0.21) 0.66

L o n g T e r m D e b t P ay in g A bi l i ty

Times Interest Earned 25.48 33.08 187.44 1284.23 78.09

Fixed Charged Coverage 22.60 32.10 187.40 1284.23 78.09

Debt Ratio 63.30 60.45 48.65 31.36 50.22

Debt Equity Ratio 00 00 00 00 00

Debt to Tangible Net 172.86 152.99 94.78 45.71 100.93Worth.

Shor t t e rm Liqu id i ty

Days Sales inAccounts 13.09 24.89 15.86 18.90 26.02

Receiveables.


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Accounts Receivable 27.89 14.66 23.01 19.32 14.03

Turnover.

Days Sales in Inventory.11.80 15.55 5.57 10.92 14.20

Inventory turnover 42.20 29.20 37.38 45.49 28.36

Profitability ratios

Net Profit Margin 5.38 7.52 7.03 5.53 3.66

Total Assets Turnover 2.26 2.23 2.49 3.01 1.83

Return on Assets 12.17 16.74 17.53 16.66 6.70

Operating Income Margin 7.73 9.93 9.38 7.40 3.97

Operating AssetsTurnover 30.63 25.02 20.53 11.53 9.71

Return on OperatingAssets 164.77 188.06 144.29 63.73 35.51

Sales to Fixed Assets 27.63 20.53 18.66 10.27 9.62

Return on Equity 33.17 42.32 34.13 24.28 13.45

Gross Profit Margin 9.80 11.77 11.37 9.29 6.14


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Analysis for investor

Earning Per Share 18.89 33.70 34.93 29.15 17.62

Price Earning Ratio 4.76 5.67 8.75 6.86 6.11

Dividend Payout Ratio 52.94 35.61 37.22 36.02 56.75

Dividend Yield Ratio 11.11 6.28 4.26 5.25 9.28

CONDENSED INCOME STATEMENT:

Indus Motor Company Limited

Condensed Income Statement

For The Year Ended June 30,

Net Sales

Gross Profit

Operating Profit

Profit before Taxation

Net Profit


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In comparison with FY 2005, sales of FY 2006 have been increased by 7.63

billions.Similarly in FY 2007 and FY 2008 there is an increasing trend by 3.82

billions and 2.36billions while there is decrease in sales of 3.55 billions in FY 2009

with respect to thepreceding years.In the term of percentage sales have increased by

27.66% in FY 2006 as compared to FY2005. In FY 2007, as compared to FY 2006,

sales increased by 10.85% whereas the increasewas 6.05% in FY 2008, as

compared to FY 2007, while there is a decrease of 8.59% in salesin FY 2009 as

compared to the FY 2008. The sales have increased 41.52%, 50.08% and37.19% in

FY 2007, FY 2008 and FY 2009 as compare to FY 2005.

N ET S A LES :

Net Sales

%ageComparativeChain

b a s e

Comparative chain Base

2005 base

Vertical common size

. In comparison with FY 2005, sales of FY 2006 have been increased by 7.63

billions.Similarly in FY 2007 and FY 2008 there is an increasing trend by 3.82

billions and 2.36billions while there is decrease in sales of 3.55 billions in FY 2009

with respect to thepreceding years.In the term of percentage sales have increased by

27.66% in FY 2006 as compared to FY2005. In FY 2007, as compared to FY 2006,sales increased by 10.85% whereas the increasewas 6.05% in FY 2008, as

compared to FY 2007, while there is a decrease of 8.59% in salesin FY 2009 as

compared to the FY 2008. The sales have increased 41.52%, 50.08% and37.19% in

FY 2007, FY 2008 and FY 2009 as compare to Fy2005


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COST OF GOODS SOLD:

C.G.S

ComparativeChain Base

Percentage Comparative

Chain base.

Percentage Comparative

2005 Base

Vertical Common

In FY 2006, FY 2007 and FY 2008 increase in C.G.S has been recorded with 6.19

billions,3.53 billions and 2.95 billions with respect to the preceding year. In FY

2009 C.G.S has beendecreased by 2.03 billions as compared to FY 2008 due to the

low production.An increasing trend was recorded by 24.88%, 11.36% and 8.53%

in FY 2006, FY 2007 andFY 2008 respectively as compare to the preceding years.

While C.G.S decreased by 5.42% inFY 2009 with respect to FY 2008. As

compared to FY 2005 C.G.S increased by 39.07%,50.94% and 42.76% in FY

2007, FY 2008 and FY 2009 respectively.There is a deceasing trend in C.G.S as a

part of sales. C.G.S has decreased by 9.80% in FY 2005, FY 2006, FY 2007, FY

2008 and FY 2009respectively.%,11.77%, 11.37%, 9.29% and 6.1

G R O S S P R O F I T : Gross Profit


Percentage ComparativeChain Base

%Percentage Comparative2005 Base

Vertical Common Size


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G.P of FY 2006 and FY 2007 increased by 1.44 billions and 292 millions as

compared to theFY 2005 and FY 2006 respectively. In FY 2008 and FY 2009 there

was a decrease of 592millions and 1.52 billions in G.P as compared to FY 2007

and FY 2008 respectively.G.P has been increased by 53.27% and 7.06% in FY

2006 and FY 2007 as compared to theFY 2005 and FY 2006 respectively. While

GP of FY 2008 and FY 2009 decreased by13.33% and 39.61% with respect to

preceding years respectively. As compared to FY 2005G.P has been increased by

64.09% and 42.21%, in FY 2007 and FY 2008 respectively whilein FY 2009 the

decrease of 14.12% as compared to FY 2005 was recorded.As compared to sales,

G.P has been decreased by 90.02%, 88.23%, 88.63%, 90.71% and93.86% in FY

2005, FY 2006, FY 2007, FY 2008 and FY 2009 respectivel

O P ERA TI N G EX P EN S ES :

Operating Expenses


Percentage ComparativeChain

Base

%Percentage Comparative

2005 Base


Operating expenses have been increased by 75.1 millions, 127 millions,

9.3 millions and 37.5millions in FY 2006, FY 2007, FY 2008 and FY 2009

respectively in comparison with thepreceding years.In terms of percentage, operatingexpenses have been increased by 13.19%, 19.76%, 1.21%and 4.79% in FY 2006,

FY 2007, FY 2008 and FY 2009 respectively in comparison with thepreceding

years. As compared to FY 2005 increase of 35.55%, 37.19%, 43.76% was

recordedin FY 2007, FY 2008 and FY 2009 respectively.As compare to sales, there

is a significant decrease in operating expenses by 97.93%,98.16%, 98.02%,98.11%

and 97.83% in FY 2005, FY 2006, FY2007, FY 2008 and FY 2009respectively.


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O P E R A T I N G P R O F I T :

Operating Profit


Percentage ComparativeChain Base

%Percentage

Comparative2005 Base


Operating profit is increasing from FY 2006 to FY 2007 by 1.36 billions and 165

millions incomparison with the FY 2005 and FY 2006 respectively. While it

decreased in FY 2008 andFY 2009 by 601 millions and 1.56 billions respectively

with respect to the previous years

CONDENSED BALANCE SHEET: Indus Motor Company Limited

Conden sed Balanc e Sheet As on June

Current Assets

Less: Current LiabilitiesNet Working Capital

Net Fixed Assets

Capital Work-in-progress


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Intangible Assets

Other Non Current Assets

Net Assets Position

Non-Current Liabilities

Long Term Debt - - - - -

Equity

Net Liability and Equity Position,

The condensed balance sheet of FY 2005, FY 2006, FY 2007, FY 2008

and FY 2009 isgiving a clear look at the companys resources and claims of

outsiders.Net assets of the company are showing an increasing trend from

FY 2005 to FY 2009.The long term debt position of the company is

obvious and seems that company has a realstrong background. There

was no claim of outsiders on the companys resources.The detail of

trends of balance sheet is discussed below item wise and the annexed

notes arealso at the end of the report which forms an integral part of the

above sheet.


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S H O R T T E R M D E B T P A Y I N G A B I L I T Y :

NET WORKING CAPITAL:

Net working capital is a financial metric which represents operatingliqui

dity available to a business. Along with fixed assets such as plant and

equipment,working capital is considered a part of operating

followingformula:

Formula:Current Assets - Current Liabilities

2005 2006 2007 2008 20093513878 4651103 6149403 588153 6830469


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Interpretation:Working capital of the company has always been maintained very high

up toFY 2007. The company then reduced it in FY 2008 to avoid

excessive workingcapital but in FY 2009 it again increased which

showscompany has sufficientcapital to pay its liabilitiesC U R R E N T R A T I O :

The current ratio is a financial ratio that measures whether or not a firm has

enoughresources to pay its debts over the next 12 months. It comparesa firm's currentassets to its current liabilities. It is expressed as follows

Formula:

Current Assets

Current Liabilities

2005 2006 2007 2008 20091.46 : 1 1.49 : 1 1.83 : 1 2.56 : 1 1.69 :1

Interpretation:

Current Ratio of the company has a increasing trend up to FY 2008. It was

minimumin FY 2005. As the graph shows that current ratio remains positive in last

five yearsso the company has the ability to pay its current liabilities with its currentassets.Current ratio was maximum in FY 2008 than once again it decreased in FY

2009 dueto increase in liabilities


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A C I D T E S T R A T I O :

A stringent test that indicates whether a firm has enough short-term assets to coveritsimmediate liabilities without selling inventory. The acid-test ratio is far

morestrenuous than the working capital ratio, primarily because the working

capital ratioallows for the inclusion of inventory assets.Current AssetsInventoryCurrent

Liabilities

2005 2006 2007 2008 20091.05 : 1 1.07 : 1 1.44 : 1 1.86 : 1 1.28 : 1


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Interpretation:

Quick ratio of the company has an increasing trend up to FY 2008 showing

theadequacy in paying off the current liabilities. Then it decreased slightly in FY2009.But as a whole the graph shows that company has a tendency that the most liquidassets

of the company are ina position to payoff the current liabilities.

C A S H R A T I O

: The cash ratio is a formula for measuring the liquidity of the company by

calculatingthe ratio between all cash and cash equivalent assets and all the current

liabilities. Theformula for calculating the cash ratio is as under:

Marketable Securities + CashCurrent

Liabilities

2005 2006 2007 2008 20090.88 : 1 0.79 : 1 1.15 : 1 1.16 : 1 0.98 :


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Financial statement analysis is defined as the process of identifying financial strengths

and weaknesses of the firm by properly establishing relationship between the items of thebalance sheet and the profit and loss account.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis:

Comparison of two or more year's financial data is known as horizontal analysis, or trend

analysis. Horizontal analysis is facilitated by showing changes between years in both dollarand percentage form.

Vertical analysis is the procedure of preparing and presenting common size

statements.Common size statement is one that shows the items appearing on it in

percentage form as well as in dollar form.Accounting Ratios Definition,

The ratios analysis is the most powerful tool of financial statement analysis.Ratios simplymeans one number expressed in terms of another. A ratio is a statistical yardstick by means

of which relationship between two or various figures can be compared or measured. Ratioscan be found out by dividing one number by another number. Ratios show how one numberis related to another.
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Advantages of Financial Statement Analysis:

There are various advantages of financial statements analysis. The major benefit is thatthe investors get enough idea to decide about the investments of their funds in the specific

company. Secondly, regulatory authorities like International Accounting Standards Board

can ensure whether the company is following accounting standards or not. Thirdly, financialstatements analysis can help the government agencies to analyze the taxation due to the

company. Moreover, company can analyze its own performance over the period of timethrough financial statements analysis.

Liquidity Ratios:

Liquidity ratios measure the short term solvency of financial position of a firm. These ratios

are calculated to comment upon the short term paying capacity of a concern or the firm'sability to meet its current obligations. Following are the most important liquidity ratios.

Current ratio Liquid / Acid test / Quick ratio

Definition of 'Current Ratio'

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:

Definition of 'Liquidity'1. The degree to which an asset or security can be bought or sold in the market without affectingthe asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be

easily bought or sold are known as liquid assets.

Formula:

Current assetinventory prepaid expenses

_______________________________________

Current liabilities

Activity Ratios:

Activity ratios are calculated to measure the efficiency with which the resources of a firm

have been employed. These ratios are also called turnover ratios because they indicate the
http://www.accounting4management.com/current_ratio.htmhttp://www.accounting4management.com/current_ratio.htmhttp://www.accounting4management.com/liquid_ratio.htmhttp://www.accounting4management.com/liquid_ratio.htmhttp://www.accounting4management.com/liquid_ratio.htmhttp://www.accounting4management.com/current_ratio.htm


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speed with which assets are being turned over into sales. Following are the most importantactivity ratios:

Inventory / Stock turnover ratio Debtors / Receivables turnover ratio Average collection period Creditors / Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio

Definition:

Stock turn over ratio and inventory turn over ratio are the same. This ratio is a

relationship between the cost of goods sold during a particular period of time and the cost ofaverage inventory during a particular period. It is expressed in number of times. Stock turn

over ratio/Inventory turn over ratio indicates the number of time the stock has been turnedover during the period and evaluates the efficiency with which a firm is able to manage its

The formula for inventory turnover:

The formula for average inventory:

Definition:

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity ofdebt collection of a firm. In simple words it indicates the number of times average debtors(receivable) are turned over during a year.

Formula of Debtors Turnover Ratio:

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

Average Collection Period Ratio:

Definition:

TheDebtors/Receivable Turnover ratiowhen calculated in terms of days is knownasAverage Collection Period or Debtors Collection Period Ratio.
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The average collection period ratio represents the average number of days for which a firmhas to wait before its debtors are converted into cash.

Formula of Average Collection Period:

Following formula is used to calculate average collection period:

(Trade Debtors No. of Working Days) / Net Credit Sales

Definition:

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of

debt collection of a firm. In simple words it indicates the number of times average debtors(receivable) are turned over during a year.

Formula of Debtors Turnover Ratio:

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

Working capital:

Working capital is money available to a company for day-to-day operations.

The formula for working capital is:

Current Assets- Current Liabilities

Working Capital Turnover Ratio:

Definition:

Working capital turnover ratio indicates the velocity of the utilization of net workingcapital.

This ratio represents the number of times the working capital is turned over in the course ofyear and is calculated as follows:

Formula of Working Capital Turnover Ratio:

Following formula is used to calculate working capital turnover ratio

Working Capital Turnover Ratio = Cost of Sales / Net Working Capital
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/current-assets-108http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/current-assets-108http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/current-assets-108


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Fixed Assets Turnover Ratio:

Definition:

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measuresthe efficiency and profit earning capacity of the concern.

Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means

under-utilization of fixed assets. The ratio is calculated by using following formula:

Formula of Fixed Assets Turnover Ratio:

Fixed assets turnover ratio turnover ratio is calculated by the following formula:

Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

Operating cycle:

Accounts receivable turnover +inventory turnover

Sales to working capital:

the sales to working capital ratio is included in thefinancial statement ratio analysis

spreadsheets highlighted in the left column,

formula:

Sales to Working Capital = sales / working capitalLong term paying ability:

A firms top executives review the corporate balance sheet to ensure that asset

levels are adequate to repay debts in the short term and long term. Financial ratios help senior

management gauge a firm's economic robustness.

Ratios:

1. Debt ratio

2. Debt to equity ratio

3. Times interest earned4. Fixed charge coverage

5. Debt to tangible net worth

Debt ratio:


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Thedebt ratiocompares a company's totaldebtto its totalassets, which

is used to gain a general idea as to the amount of leverage being used by a company. A low

percentage means that the company is less dependent on leverage, i.e., money borrowed from

and/or owed to others. The lower the percentage, the less leverage a company is using and the

stronger its equity position. In general, the higher the ratio, the more risk that company is

considered to have taken on.

Formula:

Debt to equity ratio:

The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditorsand the capital contributed by shareholders. It also shows the extent to which shareholders' equity can

fulfill a company's obligations to creditors in the event of aliquidation.

Formula:

Debt-to-Equity Ratio = Total Debt / Total Equity

Times interest earned ratio:

Times interest earned (TIE) or interest coverage ratio is a measureof a company's ability to honor its debt payments. It may be calculated as eitherEBITor

EBITDAdivided by the totalinterestpayable.

Definition of 'Fixed-Charge Coverage Ratio'

A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and

leases. It is calculated as the following:

debt to tangible networth:This ratio calculates the relationship between a company's debt and its tangible net worth. By definition,

it is a more conservative measure than the traditional "Debt / Worth" calculation. As with "Debt /

Worth", the lower the ratio the higher the degree of relative capitalization and the lower the degree of

leverage.
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Formula:

Total Liabilities / (Net Worth - Net Intangible Assets)

Analysis of profitability:

Definition of 'Profitability Ratios'

A class of financial metrics that are used to assess a business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of time. Formost of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a

previous period is indicative

Net Profit Ratio (NP Ratio):

Definition of net profit ratio:

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed aspercentage.

Components of net profit ratio:

The two basic components of the net profit ratio are the net profit and sales. The netprofits are obtained after deducting income-tax and, generally, non-operating expenses and

incomes are excluded from the net profits for calculating this ratio. Thus, incomes such asinterest on investments outside the business, profit on sales of fixed assets and losses onsales of fixed assets, etc are excluded.

Formula:

Net Profit Ratio = (Net profit / Net sales) 100

Definition of 'Asset Turnover'

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing salesin dollars by assets in dollars.

Formula:


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Definition of 'Return On Assets - ROA'

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to

how efficient management is at using its assets to generate earnings. Calculated by dividing a

company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes thisis referred to as "return on investment".

The formula for return on assets is:

Return on Equity (ROE)Net Income

Return on Equity (ROE) = -------------------------------------------- Average Stockholders' Equity

Average Stockholders' Equity= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Return on Common Equity (ROCE)Net Income

Return on Common Equity = --------------------------------------------

Average Common Stockholders' EquityAverage Common Stockholders' Equity

= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2

Earnings Per Share (EPS)Net Income

Earnings Per Share = --------------------------------------------- Number of Common Shares Outstanding

Operating income margin:

Net Operating margin is a measurement of what proportion of a company's

revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A

healthy operating margin is required for a company to be able to pay for its fixed costs, such as

interest on debt. fit margin .A ratio used to measure a company's pricing strategy and operating

efficiency.


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Calculated as:

R eturn on Operating Assets

Description: The return on operating assets measure only includes in the denominator thoseassetsactively used to createrevenue. This focuses management attention on the amount of

assets actually required to run the business, so that it has a theoretical targeted asset level to

achieve. A typical result of this measurement is an ongoing campaign to eliminate unnecessaryassets.

Formula:

Net Income

Assets used to create revenue

Operating Asset Turnover

Operating asset turnover is the ratio of net sales divided by operating assets.

The formula of the ratio is given by:

Operating Asset Turnover= net sales/operating assets.

Return on Assets (Du Pont)

Return on assets (ROA) is a percentage of the after-tax income as compared to the total assets ofthe company. Management at Du Pont came up with Return on Assets (Du Pont), an approach

that determines the impact of asset turnover and profit margin on profits. This interactive tutorialexplains the concept by walking you through the calculations, including where to find thenumbers on the financial statements.

Formula:

Operating income margin . operating asset turnover
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Definition of 'Return On Investment - ROI'

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of

a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by

the cost of the investment; the result is expressed as a percentage or a ratio

Formula:

Definition of 'Gross Profit Margin'

A financial metric used to assess a firm's financial health by revealing the proportion of money left over

from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for

paying additional expenses and future savings.

Also known as "gross margin".

Calculated as:

analysis for investor:

Definition of 'Degree Of Financial Leverage - DFL'

A leverage ratio summarizing the affect a particular amount of financial leverage has on a company's

earnings per share (EPS). Financial leverage involves using fixed costs to finance the firm, and will

include higher expenses before interest and taxes (EBIT). The higher the degree of financial leverage, the

more volatile EPS will be, all other things remaining the same. The formula is as follows:


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Definition of 'Earnings Per Share - EPS'

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serves as an indicator of a company's profitability.

Calculated as:

Definition of 'Price-Earnings Ratio - P/E Ratio'

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

Market Value per Share

Earnings per Share (EPS)

Dividend Payout Ratio:

Dividend payout ratio is calculated to find the extent to which earnings per share have

been used for paying dividend and to know what portion of earnings has been retained inthe business. It is an important ratio because ploughing back of profits enables a companyto grow and pay more dividends in future.

Formula of Dividend Payout Ratio:

Following formula is used for the calculation of dividend payout ratio

Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

A complementary of this ratio is retained earnings ratio. Retained earning ratio iscalculated by using the following formula:

Retained Earning Ratio = Retained Earning Per Equity Share / Earning Per Equity Share


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Definition of 'Retention Ratio'

The percent of earnings credited to retained earnings. In other words, the proportion of net income that

is not paid out as dividends.

Calculated as:

Definition of 'Dividend Yield'

A financial ratio that shows how much a company pays out in dividends each year relative to its share

price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.Dividend yield is calculated as follows:

Definition of 'Book Value Per Common Share'

A measure used by owners of common shares in a firm to determine the level of safety associated with

each individual share after all debts are paid accordingly.

Formula:

analysis for the cash flow statement:

cash Flow to Current Portion of Long-Term Debt

Cash Flow to CPLTD = Net Income + Depreciation + Amortization

Current Portion of Long-Term Debt

The Cash Flow to Current Portion of Long-Term Debt ratio measures thecoverage of next years principal payments by last years cash available to

service them (using accrual accounting.)


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Cash Flow To Debt Ratio:Thiscoverage ratiocompares a company's operating

cash flowto its total debt, which, for purposes of this ratio, is defined as the sum of short-term

borrowings, the current portion of long-term debt and long-term debt. This ratio provides an indication

of a company's ability to cover total debt with its yearly cash flow from operations. The higher the

percentage ratio, the better the company's ability to carry its total debt.

Formula:

Definition of 'Free Cash Flow Per Share'A measure of a company's financial flexibility that is determined by dividing free cash flow by the total

number of shares outstanding. This measure serves as a proxy for measuring changes in earnings per

share.

Calculated as:

Operating cash flow/cash dividends:
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he larger the operating cash flow coverage for these items, the greater the company's ability to meet its

obligations, along with giving the company more cash flow to expand its business, withstand hard times,

and not be burdened by debt servicing and the restrictions typically included in credit agreement

formula:

definition and explanation of financial statement analysis repaired)

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