project - financial statement analysis
TRANSCRIPT
FINANCIAL STATEMENT ANALYSIS
FINAL PROJECT
TOPIC: FINANCIALRATIO ANALYSIS
OF MR. DENIM (PVT.) LTD.
SUBMITTED TO: MR. UMAR SAFDAR KAYANI
SUBMITTED BY: WAQAS SHABBIR
SP08-MBA-098 ZOHAIB AFTAB
SP08-MBA-100
SUBMISSION DATE: MAY29, 2009
SECTION “B”
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RATIO ANALYSIS
Financial ratios are useful indicators of a firm's performance and
financial situation. Most ratios can be calculated from information
provided by the financial statements. Financial ratios can be used to
analyze trends and to compare the firm's financials to those of other
firms. In some cases, ratio analysis can predict future bankruptcy.
Financial ratios can be classified according to the information
they provide. The following types of ratios frequently are used:
LIQUIDITY RATIOS
Current Ratio Current Assets/Current Liabilities
Quick Ratio Quick Assets/Current Liabilities
Absolute Quick Ratio Cash/Current Liabilities
Net Working Capital Ratio Current Assets-Current Liabilities
Defensive Interval Cash/One Year Projected Expenditure
ACTIVITY RATIOS
Inventory Turn Over Cost of Good Sold/Inventory
Inventory Turn Over In Days 360*Inventory/Cost of Good Sold
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Debtor Turnover Sales/Trade Debtor
Collection Period 360*Receivable/Sale
Working Capital Turnover Sales/Working Capital
Fixed Asset Turnover Sales/Fixed Assets
Total Asset Turnover Sales/Total Assets
Payment Period 360*Creditor/Purchase
Operating CycleInventory Turn Over in Days + Receivable Turn Over in Days
SOLVENCY RATIOS
Times Interest Earned EBIT/Interest
Debt Ratio Total Debts/Total Assets
Equity Ratio Equity/Total Assets
Debt to Equity Long term debts/Equity
Debt To tangible net worth Total Debts/(Equity-Intangible Assets)
PROFITABILITY RATIOS
Net Profit Ratio Net Profit/Sale
Operating Profit Ratio Operating Profit/Sales
Gross Profit Ratio Gross Profit/Sale
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Operating Ratio Operating Expense/Sale
Return on Total Assets Net Profit/Total Assets
Return on Equity Net Profit/Equity
Return on Fixed Assets Net Profit/Fixed Assets
Return on InvestmentNet Profit/Total Assets-Investments-Deferred Cost
MARKET ANALYSIS
Degree of Financial Leverage EBIT/EBT
Price Earning Ratio Market Price per share/Earning Per share
Earning Per Share Net Profit/Number of Share issued
Book Value Per Share Total Equity/Number of Share issued
Dividend Yield Ratio Dividend Per Share/Market Value Per Share
Dividend Payout Ratio Dividend Per Share/Earning Per Share
Diluted Earning Per Share
Stock Dividend Per Share/Diluted Earning Per Share
Percentage of Retained Earnings (Total Income-Dividend)/Total Income
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LIQUIDITY RATIOS
Liquidity ratios provide information about a firm's ability to meet its
short-term financial obligations. They are of particular interest to those
extending short-term credit to the firm. Two frequently used liquidity
ratios are the current ratio (or working capital ratio) and the quick
ratio.
Items Required in Liquidity Ratio:
Current Assets
Current Liabilities
Inventory
Cash
Marketable Securities
CURRENT RATIO
Current Ratio = Current Assets
Current LiabilitiesQUICK RATIO
Quick Ratio = Current Assets - Inventory
Current Liabilities
CASH RATIO/ ABSOLUTE LIQUID RATIO
Cash Ratio = Cash + Marketable Securities
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Current Liabilities
WORKING CAPITAL RATIO
Net Working capital Ratio=Working Capital/Total Assets
LIQUDITY ANALYSIS
RATIOS YEARS RESULT
S
REASON OF
CHANGE
2007 2006
CURRENT RATIO 1.12 1.03 Favorable Increase in Book
Debts, A/R and
Cash.
QUICK RATIO 0.86 0.68 Favorable Increase in Book
Debts, A/R and
Cash.
ABSOLUTE RATIO 0.05 0.012 Favorable Increase in Cash
WORKING
CAPITAL
76,852,450 12,523,260 Favorable Increase in
current assets
NEW WORKING
CAPITAL RATIO
0.067 0.01367 Favorable Increase in
working capital
by 513.67 %.
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INTERPRETATION OF LIQUIDITY RATIOS
After the Liquidity Ratio Analysis of MR. Denim I considered the
liquidity of Denim is improved as compare to its previous year and it
gives favorable results. Short-term creditors prefer a high current ratio
since it reduces their risk because less the current liabilities and higher
the current ratio which means less the accounts payables and short
term liabilities hence short term creditors will be paid soon.
Liquidity analysis of MR. Denim shows positive results. The contribution
of highly liquid assets is very much encouraging because increase in
cash is 422.5%. Increase in cash will also helpful for the company to
maintain the business operations effectively by paying the supplier in
time and get benefits of discounts. It will also enhance the credibility of
the company, which further helpful for the suppliers and customer’s
attraction Inventories are decreased by 2.05%. Decrease in inventory
means there are less produced goods for satisfying the customers,
which ultimately cause of decrease in sales of company. Account
Receivables and Book Debts are increased by 48% and 78 %, which
means the net sales of the company this year is increased because of
that cash in hand, is increased 422.5 % compared to last year.
One drawback of the current ratio is that it includes inventory is
difficult to liquidate quickly and that have uncertain liquidation values.
The quick ratio is an alternative measure of liquidity that does not
include inventory in the current assets.
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Finally, the cash/Absolute Liquid ratio is the most conservative liquidity
ratio and the cash ratio of MR. Denim is improved very much as
compared to base year. The reason is sufficient increase in cash in
hand. This healthy increase in ratio result will assure that MR. Denim
can be paid its suppliers any time if needed urgently.
Working Capital of MR. Denim is also increased by 513.67 % as
compare to base year, which is also a good sign, and show that
company has enough capital to maintain its business operations. This
will also produce the credibility among suppliers and customers of the
company. Overall Company has a good strong current asset ratio and
also maintained quick ratio along with the healthy working capital so
liquidity of MR. Denim (PVT) Limited is in better position.
ACTIVITY RATIOS
Activity ratios indicate of how efficiently the firm utilizes its assets.
They sometimes are referred to as efficiency ratios, asset utilization
ratios, or asset management ratios.
Items Required in Activity Ratios:
Annual Sales
Purchases
Accounts Receivable
Accounts Payable
Net Fixed Assets
Total Assets
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ACCOUNT RECEIVABLES TURNOVER
Receivables Turnover =
Annual Credit Sales
Accounts Receivable
AVERAGE COLLECTION PERIOD
Average Collection Period = 360
Accounts Receivable Turnover
ACCOUNT PAYABLE TURNOVER
Account Payables Turnover = Purchases
Accounts Payables
AVERAGE PAYMENT PERIOD
Average Payment Period = 360
Accounts Payable Turnover
FIXED ASSET TURNOVER
Fixed Asset Turnover = Sale
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Net Fixed Asset
TOTAL ASSET TURNOVER
Total Asset Turnover = Sale
Total Assets
ACTIVITY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
INVENTORY
TURNOVER
6.20
Times
4.68
Times
Favorable Decrease in
Inventory more as
compare to CGS
INVENTORY
TURNOVER IN DAYS
58
Days
77
Days
Favorable Decrease in
Inventory more as
compare to CGS
DOBTORS
TURNOVER
4.32 6.03 Unfavorable Increase in sales by
27.10%
COLLECTION
PERIOD
84
Days
58
Days
Unfavorabl
e
Increase in sales by
27.10%
CREDITORS
TURNOVER
32 20.03 Favorable Creditors decreased
by 20.82.
PAYMENT PERIOD 11
Days
18
Days
Favorable Creditors decreased
by 20.82.
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FIXED ASSETS
TURNOVER
2.58 2.18 Favorable Increase in Fixed
Assets by 4.02%
TOTAL ASSETS
TURNOVER
0.90 0.88 Favorable Increase in Total
Assets by 24.41%.
WORKING CAPITAL
TURNOVER RATIO
13.43
Times
65
Times
Unfavorable Working capital
increased by
513.67%
OPERATING CYCLE 142
Days
135
Days
Unfavorable High average
collection period.
INTERPRETATION OF ACTIVITY RATIOS
Activity ratios are also known as efficiency or turnover ratios, measure
how effectively and efficiently the firm is utilizing its assets. Activity
ratios are also known as management ratios. Some of the aspects of
activity analysis are closely related to liquidity analysis. In this
session we will primarily focus on how effectively the firm is managing
two specific groups receivables and inventories and its total assets in
general.
Management of MR. Denim Limited is very efficient to operate its fixed
assets and overall efficiency of management has gone better as
compared with base year. Total assets, current assets, fixed assets;
working capital and cash all are increased with decent percentage,
which gives the proof of efficient management. Overall management
has been very successful in deploying its resources for the best of
company, which will definitely contribute to higher profits for company.
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Also management is very much efficient to pay its payables because
average collection period is higher than average payment periods
which mean management can use idle funds. Higher collection period
shows too liberal and inefficient credit collection performance and a
lower payment period shows in time payments to various stakeholders
and built repute about the company among its stakeholders. Less
inventory period will also helpful for the company to increase its sales
volume.
SOLVENCY RATIOS
The solvency ratios measure business risk, which shows the ability if
the business to pay its long term debts. Investors are very interested in
these ratios because they indicate the amount of debt your company
can handle. They also indicate the amount of investment you have in
your company
Items Required in Solvency Ratio:
EBIT
Interest Expense
Total Debts
Total Assets
Net Profit
Equity
TIMES INTEREST EARNED
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Times Interest Earned = EBIT
Interest Expense
DEBT RATIO
Debt Ratio = Total Debts
Total AssetsEQUITY RATIO
Equity Ratio = Equity
Total Assets
DEBT TO EQUITY RATIO
Debt to Equity Ratio = Total Debt
Equity
SOLVENCY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
TIME INTEREST
EARNED
1.61 1.01 Favorable Increase in profit
margin
DEBT RATIO 0.626 0.636 Favorable Increase in total
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assets by 24.41 %
PROPERITY/EQUITY
RATIO
37.35% 36.1% Favorable Increase in equity
by 28.7% & Total
Assets by 24.41%
DEBT TO EQUITY
RATIO
1.678 1.76 Favorable Increase in Equity
by 28.7%
INTERPRETATION ON SOLVENCY RATIOS
Solvency Analysis of MR. Denim (PVT) Limited is favorable because all
the ratios provided the favorable result which is a good strong and
positive indication towards firm’s ability to fulfill its long-term debts.
Time interest earned ratio shows that although financial cost is
increased but Earning before interest and tax increased by 28.58%
which means management has utilized the debt funds efficiently which
produced high profits and hence percentage of earnings through debts
are more than percentage of financial cost (interest payable) which is
14.8%.
Debt ratio is also decreased which is favorable for the company
because it means less contribution of external debts in business and
ultimately less interest will be paid and hence more profits will be
achieved. Result also shows that total equity of the company has
increased with 28.7% and total debts reduced by 4.3% which is also a
good sign for the company and it means that most of the working of
the company is done by equity rather than to use of external debts
which also reduced the fixed cost and financial burden on company. It
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also indicates that more percentage of the assets is being financed by
owner’s equity. Company’s current liabilities also increased by 32.7 %
but long term liabilities (loans) has decreased by 28.7% which is a
major contribution and because of this financial cost of business is
decreased. Company should try to reduce its current liabilities.
Although current year debt ratio result is favorable but this is because
of increase in current liabilities. Company’s Long Term debts paying
worth/ability is also improved.
PROFITABILITY RATIOS
Profitability ratios offer several different measures of the success of the
firm at generating profits.
Items Required In Profitability Ratios:
Sales
Cost of Goods Sold
Net Profit
Total Assets
Shareholder’s Equity
GROSS PROFIT MARGIN
Gross Profit Margin = Sales - Cost of Goods Sold
Sales
OPERATING PROFIT MARGIN
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Operating Profit Margin = Operating Profit
Sales
NET PROFIT MARGIN
Net Profit Margin = Net Profit After Tax
Sales
OPERATING RATIO
Operating Ratio = Operating Expenses
Sales
RETURN ON ASSETS
Return on Assets = Net Income
Total Assets
RETURN ON EQUITY
Return on Equity = Net Income
Shareholder Equity
RETURN ON INVESTMENT
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Return on Investment = Net Income
Investment
RETURN ON FIXED ASSET
Return on Fixed Asset = Net Income
Fixed Assets
PRIFITABILITY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
NET PROFIT RATIO 9.18% 9.4% Unfavorabl
e
N.P increased
with less % as
compare to sales
GROSSPROFIT RATIO 22.12% 22.8% Unfavorabl
e
G.P increased
with less % as
compare to sales
OPERATING PROFIT
RATIO
9.23% 9.77% Unfavorabl
e
O.P increased
with less % as
compare to sales
OPERATING RATIO 12.88% 13.02% Favorable Increase in sales
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by 27.10%.
RETURN ON
TOTALASSETS
8.32% 8.33% Unfavorabl
e
N.P increased
with less % as
compare to Total
Assets
RETURN ON EQUITY 22.3% 23% Unfavorabl
e
N.P increased
with less % as
compare to
Equity
RETURN ON FIXED
ASSETS
23.76% 19.88 Favorable Increase in fixed
assets by 4.02%
INTERPRETATION ON PROFITABILITY RATIOS
After calculating all the ratios of Profitability of MR. Denim I considered
that profitability of the company is in unfavorable condition.
Profitability is a tool to check the final outcome of the firm. As ratios
include in Profitability are calculated by use of Sales and profits also it
includes ROA, ROI and ROE ratios that’s why potential customers,
investors, creditors, Govt., owner and even all of the stakeholders of
the company have shown their deep interest in Profitability analysis.
The company’s profitability analysis shows the Unfavorable result. The
main reason of favorable condition is Increase in GP, NP, and OP with
less percentage as compare to sales in the comparative years.
Company also earns profit but comparing to its base year this profit is
decreased. This decrease in ratios is also because of increase in admin
and selling expenses. Inefficient utilization of resources is also one
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reason of unfavorable results. Return on equity and total asset is also
decreased which may damage the credibility of the company.
“The analysis of the changes in a given item of information
over a period of time or a comparative analysis of a
company's financial ratios over time”
Trend analysis is basically used to determine the trend of the firm. It
provides trend of items involved in Income statement and Balance
Sheet. E.g. how much percentage of sales is increased this year
comparing to base year. Considering these trends in mind
management takes the future decisions. Trend analysis is not only
useful for management but also for potential investors of the company
who can evaluate the performance of the company by comparing with
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Trend Analysis
previous years performance. Basically there are two types of Trend
analysis, which are:
1. Horizontal Analysis
2.Vertical Analysis (Common size Financial Statement)
Horizontal analysis is basically compares horizontally the items of
income statement and balance sheet with previous years keeping one
base year as 100%. At least four years data is required for conducting
Horizontal Trend Analysis. When an analyst compares financial
information more than three years for a single company, the process is
referred to as HORIZONTAL ANALYSIS.
In Horizontal Trend Analysis the analyst computes percentage
changes from year to year for all financial statement items, such as
cash and inventory. Trend analysis involves calculating each year's
financial statement balances as percentages of the first year, also
known as the Base year. When expressed as percentages, the base
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Horizontal Analysis
year figures are always 100 percent, and percentage changes from the
base year can be determined.
As we know that minimum four years data is required to conduct the
Horizontal Trend Analysis of a company, so here this analysis could not
be performed due to unavailability of financial data.
Vertical Analysis is basically vertically analyze or compare the items
include in Income Statement and Balance Sheet. Mainly one of the
item is consider as base and keep that item equal to 100 all the
remaining items are divided by that base and evaluating the answers.
In VERTICAL ANALYSIS analyst uses base of income statement is
net sales revenue, while in balance sheet it is total assets. This
approach to financial statement analysis, also known as component
percentages, produces common-size financial statements.
Common-size balance sheets and income statements can be more
easily compared, whether across the years for a single company or
across different companies. Vertical Analysis requires minimum two
years data.
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Vertical Analysis
Vertical Analysis of MR. Denim’s INCOME STATEMENT
FACTOR 2006 2007 SPEED DIRECTION RESULT
Sales 100 100
C.G.S 77.2 77.88 (0.68) UpwardUnfavorable
Gross Profit 22.8 22.12 (0.67) DownwardUnfavorable
Selling Expense 3.98 4.04 0.066 UpwardUnfavorable
Admin Expense 3.18 2.77 (0.40) DownwardFavorable
Operating Profit 9.78 9.23 (0.54) Downward Unfavorable
Other Operating Income
0.41 0.86 0.45 Upward Favorable
Profit Before Interest & Tax
15.63 15.3 (0.33) Downward Unfavorable
Financial Cost 5.85 6.07 0.22 Upward Unfavorable
Profit Before Tax 10.2 10.1 (0.1) Downward Unfavorable
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Tax 0.8 0.91 0.11 Upward Unfavorable
Net Income 9.4 9.12 (0.21) DownwardUnfavorabl
e
Vertical Analysis of MR. Denim’s BALANCE SHEET
ITEMS 2006 2007 SPEED DIRECTION RESULT
CURRENT ASSETS
Cash0.65 2.73 2.08 Upward Favorable
Prepayments, Advances and Deposits
20.8 24.81 4.01 Upward Favorable
Book Debts 14.71 21 6.28 Upward Favorable
Stock in Trade 14.61 11.50 (14.05) Downward Unfavorable
Stores and Spares
3.63 3.3 (0.33) Downward Unfavorable
Total Current Assets
54.41 63.33 8.92 Upward Favorable
FIXED ASSETS
Property, Plant and Equipment
41.11 32.81 (0.83) DownwardUnfavorable
Fixed Assets SubjectTo Finance Lease
0.76 2.21 1.45 UpwardFavorable
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Capital Work in Progress
2.45 1.46 (0.98) Downward Unfavorable
Total Fixed Assets
44.33 36.49 (7.84) DownwardUnfavorabl
eLong Term Deposits
1.24 0.17 (1.07) Downward Unfavorable
TOTAL ASSETS 100 100 - - -
EQUITY
Share Capital 1.91 1.54 (0.37) Downward Unfavorable
Un-appropriated Profit
34.18 35.8 1.62 Upward Favorable
Total Equity 36.1 37.34 1.24 Upward Favorable
NON CURRENT LIABILITIES
Long term Loans 10.58 6.08 (4.52) Downward Favorable
CURRENT LIABILITIESShort term Borrowings
46.61 55.05 8.44 Upward Unfavorable
Long term financing
4.01 0 (4.01) Downward Favorable
Trade & Other payables
2.41 1.53 (0.87) Downward Favorable
Current Liabilities
53.04 56.6 3.55 UpwardUnfavorabl
e
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