Chapter - 25

Financial Statement
Analysis

Financial Analysis
Financial analysis is the process of identifying
the financial strengths and weaknesses of the
firm by property establishing relationships
between the item of the balance sheet and the
profit and loss account.

Financial Management, Ninth

Users of Financial Analysis

Trade creditors
Lenders
Investors
Management

Financial Management, Ninth

Nature of Ratio Analysis

A financial ratio is a relationship between two
accounting numbers. Ratios help to make a
qualitative judgement about the firms
financial performance.

Financial Management, Ninth

Standard of Comparison
Time series analysis
Inter-firm analysis
Industry analysis
Proforma financial statement analysis

Financial Management, Ninth

Types of Financial Ratios

Liquidity ratios
Solvency ratios
Turnover ratios
Profitability ratios
Equity-related ratios

Financial Management, Ninth

Liquidity Ratios
Liquidity ratios measure a firms ability to

meet its current obligations.

Current assets
Current liabilities
Current assets Inventories
Quick ratio =
Current liabilities
Cash + Marketable securities
Cash ratio =
Current liabilities
Current ratio =

Financial Management, Ninth

Solvency Ratios
Solvency ratios measure the dependence of

a firm on borrowed funds.

Debt
Debt-equity ratio
Equity (Net Worth)
Debt
Debt
Debt ratio

Debt Equity Capital employed

Earnings before interest and tax
Interest coverage
Interest

Financial Management, Ninth

Turnover Ratios
Turnover or activity ratios measure the firms

efficiency in utilising its assets.

Cost of goods sold or net sales
Inventory turnober
Average (or closing) inventory
Number of days in the year (say, 360)
Days of inventory holding
Inventory turnover
Credit sales or net sales
Debtors turnover
Average (or closing) debtors
Number of days in the year (say, 360)
Collection period
Debtors turnover
Financial Management, Ninth

Turnover Ratios
Net sales
Current assets
Net sales
Net current assets turnover
Net current assets
Net sales
Fixed assets turnover
Net fixed assets
Net sales
Net assets turnover
Net assets or capital employed

Current assets turnover

Financial Management, Ninth

10

Profitability Ratios
Profitability ratios measure a firms overall

efficiency and effectiveness in generating

profit.
Profit before interest and tax (PBIT)
Margin
Net sales
Profit after tax (PAT)
Net margin
Net sales
PBIT
Before tax return on investment
Net assets
Profit after tax
Return on equity
Equity (net worth)
Financial Management, Ninth

11

Equity-related Ratios
Equity-related ratios measure the

shareholders return and value.

Profit after tax
Number of ordinary shares
Dividends
DPS
Number of ordinary shares
DPS
Dividends
Payout ratio

EPS Pr ofit after tax

DPS
Dividend yield
Market value per share
EPS

Financial Management, Ninth

12

Equity-related Ratios
EPS
Earnings yield
Market value per share
Market value per share
P / E ratio =
EPS
Net worth
Book value per share
Number of ordinary shares
Market value per share
M B value
Book value per share
Market value of assets
Tobin ' s q
Economic value of assets

Financial Management, Ninth

13

DuPont Analysis
DuPont Analysis
integrates the important ratios to analyse a firm's profitability.
PBIT
Sales
PBIT
RONA=

Net Assets Net Assets Sales

PAT
Sales
PBIT PAT Net Assets
ROE

Net Worth Net Assets Sales PBIT Net Worth

ROE Assets turnover Margin Leverage

Financial Management, Ninth

14

ISPAT INDUSTRIES LIMITED

RATIO ANALYSIS
Liquidity ratios
Current ratio
1.47
1.24
Quick ratio
0.05
0.06
Activity ratios
Sales/TA
0.30
0.22
Sales/FA
0.81
1.25
Sales/Debtors
5.75
5.69
Sales/Inventory
8.70
5.49
Leverage ratios
Debt/Equity
2.85
2.50
Debt/TA
0.74
0.71
PBIT/Interst
1.90
1.04
Profitability ratios
PBIT/Sales
29.41%
7.30%
Net profit/Sales
13.96%
0.26%
PBIT/TA
8.68%
1.59%
Net profit/NW
15.87%
0.21%

Financial Management, Ninth

15

INFOSYS
Balance Sheeet as at March 31
in Rs.
2,000

2,001
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital
Reserves and surplus
Capital Employed
APPLICATION OF FUNDS
FIXED ASSETS
Original cost
Less: Depreciation
Net book value
Add: Capital work-in-progress
INVESTMENTS
CURRENT ASSETS, LOANS AND ADVANCES
Sundry debtors
Cash and bank balances
Loans and advances
Less: Current liabilities
Provisions
NET CURRENT ASSETS
Net Assets

330,792,085
330,755,000
13,565,599,903 8,002,273,248
13,896,391,988 8,333,028,248

6,311,444,025
2,441,315,982
3,870,128,043
1,706,504,250
5,576,632,293
341,154,821

2,840,305,143
1,336,520,594
1,503,784,549
569,603,505
2,073,388,054
138,348,469

3,023,702,417
3,850,610,285
4,302,793,623
11,177,106,325
1,349,181,176
1,849,320,275
7,978,604,874
13,896,391,988

1,361,781,253
4,317,935,730
2,101,277,161
7,780,994,144
671,506,459
988,195,960
6,121,291,725
8,333,028,248

Financial Management, Ninth

16

INFOSYS
Profit and Loss Account for the year ended March 31
in Rs.
2001
INCOME
Software development services and products
Overseas
Domestic
Other income
EXPENDITURE
Software development expenses
Administrative and other expenses
Provision for investments
Provision for contingencies
Provision for e-inventing the company
Operating profit (PBIDT)
Interest
Depreciation
Profit before tax and extraordinary item
Provision for tax
earlier years
current year
Profit after tax before extraordinary item
Extraordinary item -- transfer of intellectual property right (net of tax)
-- provision no longer required
Net profit after tax and extraordinary item
AMOUNT AVAILABLE FOR APPROPRIATION

2000

18,740,266,421.00 8,696,980,931.00
265,392,386.00 126,256,042.00
593,714,915.00 391,411,095.00
19,599,373,722.00 9,214,648,068.00
9,581,766,650.00 4,662,684,578.00
1,775,470,971.00 694,850,282.00
152,898,608.00
33,300,000.00
35,000,000.00
11,510,136,229.00 5,425,834,860.00
8,089,237,493.00 3,788,813,208.00

Financial Management, Ninth

1,128,945,152.00 532,327,389.00
6,960,292,341.00 3,256,485,819.00
14,000,000.00
2,400,000.00
713,100,000.00 394,600,000.00
6,233,192,341.00 2,859,485,819.00
54,944,000.00
75,670,846.00
6,288,136,341.00 2,935,156,665.00
6,288,136,341.00 2,935,156,665.00

17

INFOSYS
Financial Ratios
2001

2000

Activity Ratios
Income/Assets
Income/Debtors

1.41
6.48

1.11
6.77

Current Ratios
CA/CL
CA/Assets
NCA/Assets

3.49
0.80
0.57

4.69
0.93
0.73

41.27%
35.51%
31.80%

41.12%
35.34%
31.03%

58.21%
50.09%
44.85%

45.47%
39.08%
34.32%

Profitability Ratios
Margin
PBDIT/Income
PBIT/Income
PAT/Income
Return on Investment
PBDIT/Assets
PBIT/Assets
PAT/NW

Financial Management, Ninth

18

SBU PROFIT & LOSS ACCOUNT, YTD 2002

USD in '000
% of
Re v.

YTD
Tota l Reve nue
Onsite reve nue
Offshore re ve nue
Se rvice Cre dit
- Onsite Reve nue %
CONTROLLABLE COSTS
CGS A
Sala ries & Re la te d Costs:
Onsite Sa la rie s
Offshore Sa larie s
GRP Alloca ted
Offshore Sa la rie s
Othe r Sa la ry Ove rhe a ds
Subcontra ctor Costs
Sa la rie s-Onsite
Sa la rie s-Offshore
Fore ign Tra ve l
Ince ntive s
Proje ct Incentive s
SBU Spe cial Incentive s
Data Communica tion Cha rge s
Le ga l Immigra tion Fe es
Othe r Profe ssiona l Fe es
Tota l CGS A Cost
CGS B
Data Communica tion Cha rge s
Me dical Insura nce
Depre cia tion: CGS
Othe rs CGS
Tota l CGS B Cost
TOTAL CGS A + CGS B Costs
Gross Ma rgin

Financial Management, Ninth

14850
12600
2250

100.0%
84.8%
15.2%

85%

6375

42.9%

0
840
34

0.0%
5.7%
0.2%

0
0
250

0.0%
0.0%
1.7%

0
0
0
333
0
7832

0.0%
0.0%
0.0%
2.2%
0.0%
52.7%

90
300
223
0
613
8445
6405

0.6%
2.0%
1.5%
0.0%
4.1%
56.9%
43.1%

19

Utility of Ratio Analysis

Assessment of the firms financial conditions

and capabilities.
Diagnosis of the firms problems, weaknesses
and strengths.
Credit analysis
Security analysis
Comparative analysis
Time series analysis

Financial Management, Ninth

20

Cautions in Using Ratio Analysis

Standards of comparisons
Company differences
Price level
Different definition
Changing situations
Past data

Financial Management, Ninth

21