financial+statement+analysis latest

8/9/2019 Financial+Statement+Analysis Latest

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FINANCIAL STATEMENT

ANALYSIS


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Business Survival:

There are two key factors for business survival:

Profitability

Solvency

Profitability is important if the business is to generate revenue

(income) in excess of the expenses incurred in operating that

business.

The solvency of a business is important because it looks at the

ability of the business in meeting its financial obligations.


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Financial Statement Analysis

Financial Statement Analysis will help business owners and other

interested people to analyse the data in financial statements to

provide them with better information about such key factors for

decision making and ultimate business survival.


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Financial Statement Analysis (contd.)

Financial statement analysis involves analysing the information provided

in the financial statements to:

Provide information about the organisations:

Past performance

Present condition

Future performance

Assess the organisations:

Earnings in terms of power, persistence, quality and growth

Solvency


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The financial statements.

They typically include three basic financial statements:-

Balance sheet: Reports on a company's assets, liabilities, and Ownership

equity at a given point in time.

Income statement: Reports on a company's income, expenses, and

profits over a period of time

Statement of cash flows: reports on a company's cash flow activities,

particularly its operating, investing and financing activities.


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Tools ofFinancial Statement Analysis:

The commonly used tools for financial statement analysis are:

Ratio analysis

Comparative analysis

Du-pont analysis


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Financial Ratio Analysis Meaning:

A financial ratio is a relationship between two or more accounting

numbers.

Financial ratio analysis is the selection, valuation and

interpretation of financial data in easier to understand ratios, which

have been identified as critical indicators of financial performance

of the business and can be used for strategy and decision making


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Functions/Utility of Ratios Analysis

1. Aids understanding ofFinancial Statements better

2. Indicates relationships

3. Allows forComparisons

4. Shows trend over time

5. Tool for Efficiency Appraisal

6. Helps in Financial Forecasting

7. Useful in setting control standards


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Solvency-Short Term Ratios

Current Ratio =

Total Current Assets / Total Current Liabilities

Quick Ratio =

Cash + Government Securities + Receivables / Total Current Liabilities


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Solvency-Long Term Ratios

Proprietors Ratio= Proprietors Fund

Total Assets

Debt Equity Ratio= Debt

Equity

Capital Gearing Ratio= Cap bearing fixed rate of int. & div

Cap not bearing fixed rate of int.& div


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Activity Ratio

StockTurnover Ratio = COGS

Average Stock

Debtors Turnover Ratio = Credit Sales

Debtors+Bills Receivables

Creditors Turnover Ratio = Credit Purchases

Creditors+Bills Payable


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Other income statement ratios

Gross Profit % = Gross Profit * 100

Net Sales

Net Profit % = Net Profit after tax * 100

Net Sales

Or in some cases, firms use the net profit before tax figure.

Net Profit % = Net Profit before tax *100

Net Sales

Return on Assets = Net Profit * 100Average Total Assets

Return on Equity = Net Profit *100

Average Total Equity


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Asset Management Ratios

Asset Turnover = Net Sales

Average Total Assets

Inventory Turnover = Cost of Goods Sold

Average Inventory

Average Collection Period = Average accounts Receivable

Average daily net credit sales


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Profitability-Sales

Return on investments = PBIT *100

Capital Employed

Return on proprietors funds=

PAT *

100

Proprietor funds

Dividend Payout Ratio = Dividend per share

Earning per share


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Market Test Ratios

Earnings per share = Net Profit after tax

Number of issued ordinary shares

Dividends per share = Dividends

Number of issued ordinary shares

Price Earnings ratio = Market price per share

Earnings per share


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The DuPont System

Profit Margin Total Asset Turnover

ROA Equity Multiplier

ROE

EquityAvg

AssetsAvg

AssetsAvg

Sales

Sales

profitNetultiplierEquityTurnoverAssetTotalarginProfitROE

vv!

vv!


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COMPARATIVE STATEMENTS

Statements of financial position at different period of time

Elements of the statements are shown in comparative form

Gives idea of financial position in two or more period

Practically two financial statements viz., Balance sheet and income

statement are prepared in comparative form and analysis is done


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COMPARATIVE RATIO ANALYSIS

COMPARATIVE BALANCE SHEET

STATEMENTS


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Limitations ofFinancial Statement Analysis

Ratios may have intrinsic problems:

They are calculated from accounting data, and if there are mistakes in this.

The comparisons may be made against the wrong benchmarks.

Ratios (like Balance sheet) are calculated at a point in time and significant

changes may occur within short period.

Relying only on ratios when analyzing an entitys performance is not

advisable.

Strong financial statement analysis does not necessarily mean that the

organisation has a strong financial future.

Financial statement analysis might look good but there may be other factors

that can cause an organisation to collapse.


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