Why Financial Statement Analysis

Financial statement analysis is the process of reviewing and analyzing a company's financial statements
to make better investment decisions. These statements include the profit/loss statement, balance sheet,
statement of cash flows, and a statement of retained earnings. Financial Statement Analysis of an

organization, to gain information about the current and future financial health of a company. The
process of assessing the businesses, projects, budgets and other finance related entities to
determine their suitability for investment. Most of the financial analyzers are study about
companys financial statements and analyze commodity prices, sales, costs, expenses, and tax
rates to determine a company's value by estimating its future earnings. Financial Statement
Analysis also helpful for deciding how much investor spends money in the company.

Beneficiaries of Financial Statement Analysis

Financial statements are widely used by company executives and investors in assessing the overall
status and financial condition of the company. An investor who is interested to invest his money in a
Colgate-Palmolive company or any other will be keen to know about the economic performance and
financial conditions of the company to ensure profitability and better return on investment. Financial
Statement analysis is a depth reviewing and analyzing for investors, that what Colgate-Palmolive
Companys financial position and strength and how much they invest in the company.

For the comparison and analysis of financial statement of Colgate Palmolive and Shield
Corporation we used one of the most commonly used tool i.e. Ratio analysis. Ratio analysis is a
tool used for quantitative analysis of companys financial information. Ratios are calculated from
current year information and are then compared with previous years ratios. Ratios may also be
used to compare between these two companies. It is mainly used to assess the financial health of
company and help for investors, which company is good for investment. These ratios are mainly
divided into four main types:
1. Liquidity Ratio
2. Profitability Ratio
3. Turnover Ratio
4. Solvency or leverage Ratio

Liquidity Ratio
Liquidity ratio measures the ability of a firm to meet its short term obligations, in other words it
shows the ability of a company to pay its short term obligations when they fall due. It reflects the
short term solvency of company. Company or a firm should ensure required liquidity and take
measures to avoid suffering from lack of liquidity. If a company fails to meet its short term
obligations it will result in bad credit image and loss of creditors confidence. Very high liquidity
is also not pleasing as it shows that funds are idle and are not used efficiently.
The different ratios that explain about the liquidity of the firm are
i. Current Ratio
ii. Acid Test Ratio / quick ratio
iii. Absolute liquid ration / cash ratio

Current Ratio
Current ratio compares current assets with current liability and measures the ability of a company
to meet its short term obligations. Higher the ratio more capable company is to pay off its
obligation. A ratio less than one suggest that company does not have enough of current assets to
pay off its short term obligations if they came due at this point. This shows that company has not
good financial health On the other hand if the current assets are more than current liabilities and
ratio is higher than one then company is considered to have good financial health.. This ratio also
gives sense of efficiency of operating cycle of how efficiently it converts its product into cash.
Formula:

CURRENT ASSETS / CURRENT LIABILITIES

ATLAS BATTERY

EXIDE PAKISTAN

YEARS

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

440,235 / 356,363

1.23 : 1

753,537 / 479,882

1.60 : 1

2008

684,862 / 564,815

1.21 : 1

1,255,585 / 895,686

1.40 : 1

2009

662,423 / 509,197

1.30 : 1

1,346,232 / 1,011,724

1.33 : 1

2010

756,814 / 544,754

1.40 : 1

2,107,704 / 1,710,480

1.23 : 1

2011

1,172,913 / 813,725

1.44 : 1

2,959,417 / 2,366,350

1.25 : 1

2012

1,496,313 / 938,546

2.0 : 1

2,892,389 / 1,993,234

1.45 : 1

2013

2,468,341 / 1,462,754

2.0 : 1

2,743,749 / 1,421,511

2.0 : 1

2014

3,894,029 / 2,557,886

1.52 : 1

4,792,792 / 3,302,413

1.45 : 1

Graphical Representation
2.5

1.5

Atlas Battery
Exide Pakistan

0.5

0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
Both Companies has irregular increasing and decreasing trends but the increasing trends are
more significant which shows the progress in liquidity condition of both companies. When we
separately analyze the ratios of both Atlas Battery and Exide Pakistan it is always greater than 1.
This shows that both companies has more assets against liabilities and is capable to pay off its
short term obligations. But when we compare, the Atlas Battery depicts sound financial standing,
it continuously growing against Exide Pakistan. In 2007 to 2009 Exide Pakistan was good
liquidity conditions but they do not maintain and growing their assets against liabilities. On the
other side Atlas Battery improve their assets against liabilities.

Quick Ratio
Quick ratio is more conformist than current ratio, a better known liquidity ratio. It is known as
Acid Test Ratio. Quick ratio measures a companys ability to meet its short term obligations by
using its quick assets which include cash, marketable securities and A/R. In other word quick
assets include all current assets except inventory. The reason why inventory is excluded from
current assets is the fact that is difficult in some situations to turn inventory into cash
immediately. Higher the ratio more financially secure a company is in short term.
Lower or decreasing quick ratios suggest that company is over leveraged, struggling to maintain
or grow sales, paying bills too quickly or collecting receivables too slowly. On the other hand
Higher or increasing quick ratio depicts that company is quickly converting receivables into
cash, and easily able to cover its financial obligations. Companies with high quick ratios are
expected to have high inventory turnover ratios.
Formula:

Current Assets Inventory / Current Liablilities

ATLAS BATTERY

EXIDE PAKISTAN

YEARS

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

440,235 - 306,171 / 356,363

0.40 : 1

753,537 - 556,077 / 479,882

0.41 : 1

2008

684,862 - 410,672 / 564,815

0.50 : 1

1,255,585 920,042/ 895,686

0.40 : 1

2009

662,423 - 434,594 / 509,197

0.45 : 1

1,346,232 859857/ 1,011,724

0.48 : 1

2010

756,814 - 531,597 / 544,754

0.41 : 1

2,107,704 - 1,457,671/ 1,710480

0.40 : 1

2011

1,172,913 - 717,004 / 813,725

0.60 : 1

2,959,417 - 1,856,140 / 2,366,350

0.5 : 1

2012

1,496,313 - 811,490 / 938,546

1.0 : 1

2,892,389 - 1,497,121 / 1,993,234

1.0 : 1

2013

2,468,341 - 1,477,258 / 1,462,754

1.0 : 1

2,743,749 - 1,605,155 / 1,421,511

1.0 : 1

2014

3,894,029 - 2,551,256 / 2,557,886 0.52 : 1

4,792,792 - 2,355,195 / 3,302,413

1.0 : 1

Graphical Representation

1.2

0.8
Atlas Battery

0.6

Exide Pakistan
0.4

0.2

0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
Analysis of Atlas Battery and Exide Pakistan quick ratio for eight years shows an irregular trend.
In 2007 to 11 both companies has less than 1 its ratio. Companies assets have not meet with
liabilities, they do not paid liabilities and it depicts unfavorable financial situation of both
companies during four years. In 2012 and 13 Atlas Battery ratio has 1 they just grow and able to
paid our liabilities and its financially favorable for the company. But in 2014 Quick Liquidity
ratio is again going down and company again do not able to pay the liabilities. On the other side
Exide Pakistan, from 2012 to 2014 quick ratio is 1 which shows that the company has most
liquid assets of a business are equal to its total debts and its favorable to the company. In this
quick ratio Exide Pakistan are very strong because their assets just equal to their liabilities.

Absolute Liquid Ratio

Absolute liquid ratio also known as Super quick ratio or Cash ratio, it further specifies the
liquidity of firm. It eliminates account receivables (Sundry Debtors and Bill receivables) also due
to the doubt in considering their time and amount of realization. For this reason Absolute liquid
ratio only relates cash, bank and marketable securities to current liabilities. As absolute liquidity
ratio follows very strict standards of liquidity therefore acceptability of this ratio is 50%. It

means that this ratio worth one half of the value of current liabilities is satisfactory liquid
position of company.
Formula: Current Assets Inventory Account Receivable / Current Liabilities
ATLAS BATTERY

EXIDE PAKISTAN

Years

Formula/Calculation

Ratio

Formula/Calculation

Ratio

2007

440,235 - 306,171 - 3,130 / 356,363

0.40 : 1

0.40

2008

684,862 - 410,672 - 76,431 / 564,815

0.35 : 1

2009

662,423 - 434,594 - 21,229 / 509,197

0.40 : 1

2010

756,814 - 531,597 - 32,347 / 544,754

0.35 : 1

2011

1,172,913 - 717,004 - 212,027 / 813,725

0.30 : 1

2012

1,496,313 - 811,490 - 448,452 / 938,546

0.25 : 1

753,537 - 556,077 -16,671 /

479,882
1,255,585 920,042 54,391 /
895,686
1,346,232 859857 19,234 /
1,011,724
2,107,704 1,457,671 19,563 /
1,710480
2,959,417 - 1,856,140 - 36,358 /
2,366,350
2,892,389 - 1,497,121 - 32,522 /
1,993,234

0.20 : 1

2,743,749 - 1,605,155 - 73,245 /

1,421,511

0.75

0.24 : 1

4,792,792 - 2,355,195 - 48,969 /

3,302,413

0.72

2013
2014

2,468,341 - 1,477,258 - 722,111 /

1,462,754
3,894,029 - 2,551,256 - 842,739/
2,557,886

Graphical Representation

0.31
0.5
0.40
0.45
0.7

0.8
0.7
0.6
0.5
Atlas Battery

0.4

Exide Pakistan
0.3
0.2
0.1
0
2007

2008

2009

2010

2011

2012

2013

2014

Analysis
Due to strict standards of liquidity followed by this ratio normal norm for acceptability of this
ratio is 0.5:1. When we compare both companies, Atlas Battery has low cash ratio throughout the
eight years. In 2007 and 2009 company have highest 0.4 cash ratio and the remaining years
company has continuous decreasing its cash ratio. Exide Pakistan performance on cash ratio is
satisfactory, in 2007, 2008 and 2010 company have lowest cash ratio and remaining years
company has increasing their cash ratio. Exide Pakistan has better performance in against Atlas
Battery.