Given a managerial balance sheet you have to comment on: 1. 2. 3. 4.

Liquidity (short term) / Solvency (long term) Profitability Value Addition SGR

Liquidity Its the ability of a firm to convert its current assets into cash. Liquidity is short term solvency. 1. 2. 3. 4. 5. Receivables Inventory Payables Prepaid expenses Accrued expenses

Liquidity Ratio = Net Long Term Financing/Working Capital Requirement = Long term financing Net Fixed Assets/Working Capital Requirement Net Fixed Assets = PPE depreciation Owners Equity = Retained Earnings + Common Stock Working Capital Requirement = NLTF + NSTF Short term debt Cash = NSTF If long term is increasing then liquidity position is improving. If short term is increasing them liquidity position is going bad. \om/ Liquidity is financing of assets. Profitability is utilization of assets \om/ Efficiency increases when: 1. LTF increases 2. NFA decreases 3. WCR decreases (Chepo from Page No. 16 of PDF) Long term financing increases by increase in equity, increase in long term debt and increase in retained earnings. Payables should increase, inventory should decrease and receivables should decrease. Prepaid expenses should decreases. Accrued expenses should increase. All this is a sign of improving firm. If inventory is increasing check if sales is increasing proportionately. Profitability Its the ability of generating earnings as compared to expenses and relevant costs.

ROE = PAT / Equity = ROIC * Financial leverage multiplier * Tax Effect (1 T) ROIC = Operating profit margin * Capital turnover Operating profit margin = EBIT / Sales Capital Turnover = EBIT / Invested Capital Financial leverage multiplier = Financial cost ratio * Financial Structure ratio Financial cost ratio when infusion of debt leads to increased interest payments thus lowering PAT and lowering ROE. PBT / PBIT Interest component/burden Financial structure = Invested Capital / Owners equity = when infusion of debt leads to reduction in equity thus leading to sharing of profit among smaller number of members and thus increasing ROE. When comparing balance sheets, tax is generally the same. Generally company aims to increase sales in the same proportion as they increase assets. The Operating profit margin is a good indicator of the companys efficiency. ROE increases due to FSR and ROE decreases due to FCR. EVA Economic profit created in excess of the required return by the companys investor (true economic profit of the company) EVA = (Post tax ROIC WACC) * Total Invested capital SGR It is defined as the annual %age of increase in sales that is consistent with a defined financial policy. How much a firm can grow without borrowing? SGR = Retained Earnings / Owners equity at the beginning of the year Retained Earnings = Equity retention ratio * PAT