Financial statement analysis.pptx
- 2. Chapter 6 Financial Statement Analysis Presented by: Saira Younis
- 3. Chapter details • Financial Statements • A Possible Framework for Analysis • Balance Sheet Ratios • Income Statement Ratios • Income Statement/Balance Sheet Ratios • Common-Size and Index Analysis
- 4. Financial statements are like a fine perfume- to be sniffed but not swallowed. (Abraham Brilloff)
- 5. Examples of External Uses of Statement Analysis Trade Creditors • Focus on the liquidity of the firm. Bondholders • Focus on the long term cash flow of the firm. Shareholders • Focus on the profitability and long term health of the firm.
- 6. Examples of Internal Uses of Statement Analysis Plan • Focus on assessing the current financial position and evaluating potential firm opportunities. Control • Focus on return on investment for various assets and asset efficiency. Understand • Focus on understanding how suppliers of funds analyze the firm.
- 7. Types of Financial Statements Income Statement • A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance Sheet • A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
- 8. Income statement (MTM) 2014 2015 2016 2017 2018 Sales 24371128 26967899 23183485 23393876 30842159 CGS (20435316) (22988317) (19971238) (20008592) (26990855) Gross profit 3935812 3979582 3212247 3385284 3851304 Distribution cost (1159311) (1472973) (1396012) (1478067) (2063381) Administrative expenses (443232) (477492) (472516) (480722) (549235) Other expenses (61996) (54498) (48644) (10675) (108238) Other income 45327 60424 341212 218041 1070524 Finance cost (1142456) (1002893) (718568) (640673) (896395) Profit before taxation 1174144 1032150 917719 993188 1304579 Taxation (235845) (278037) (188501) (106187) (191531) Profit after taxation 938299 754113 729218 887001 1113048 Earnings per share 14.95 11.88 11.64 12.76 16.11
- 9. Balance sheet (MTM) EQUITY AND LIABILITIES Share capital and reserves 2014 2015 2016 2017 2018 Authorized share capital 1850000 1850000 1850000 1850000 1850000 Issued, subscribed and paid up share capital 953333 948333 948333 986666 986666 Reserves 4865452 5507259 5875555 7460699 6945641 Total equity 5818785 6455592 6823888 8447365 10335874 surplus on revaluation of freehold land 606233 606233 900234 900234 900234 Non-current liabilities Long term financing 1523918 949443 1105335 5119282 4650568 Liabilities against assets subject to finance lease 87331 93849 52468 22657 6816 Deferred liability for gratuity 426889 431923 566816 609886 724353 2038138 1475215 1724619 5751825 5381737 Current liabilities Trade and other payables 2445831 2205160 2156675 1971985 2676834 Accrued mark-up 224442 155647 91040 126698 191768 Short term borrowings 9933466 11044430 10056494 8907948 11962878 Current portion of non-current liabilities 810797 750675 788853 686368 1469563 Provision for taxation 235845 278037 188501 106187 191531 13650381 14433949 13281563 11799186 16503387 Total liabilities 15688519 15909164 15006182 17551011 21885124 Total equity and liabilities 22113537 22970989 22730304 26898610 32220998
- 10. Balance sheet (MTM) ASSETS 2014 2015 2016 2017 2018 Non-current assets Property, plant and equipment 5772898 6582729 6713395 8377317 10028337 Long term advances 3819 713 289 8149 1814 Long term security deposits 50707 50183 45802 47387 47110 5827424 6633625 6759486 8432853 10077261 Current assets Stores, spare parts and loose tools 1137030 1010124 956585 1312256 1579156 Stock in trade 7215963 5275563 5277633 6916511 5810871 Trade debts 5415608 6911990 6067959 5618714 9276084 Loans and advances 575559 315190 303928 354523 380772 Short term deposits and prepayments 497242 550694 576012 688858 939770 Other receivables 1000862 1106224 1562048 2672080 3536704 Cash and other bank balances 444849 1167579 1226653 902816 620380 16286113 16337364 15970818 18465757 22143737 Total assets 22113537 22970989 22730304 26898610 32220998
- 11. Framework for Financial Analysis 1. Analysis of the funds needs of the firm. • Analytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets • Trend / Seasonal Component How much funding will be required in the future? Is there a seasonal component?
- 12. Framework for Financial Analysis 2. Analysis of the financial condition and profitability of the firm Health of a Firm • Financial Ratios 1. Individually 2. Over time 3. In comparison
- 13. Framework for Financial Analysis • A Financial Manager must consider all three jointly when determining the financing needs of the firm. 1.Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business risk of the firm.
- 14. Use of Financial Ratios A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other.
- 15. External Comparisons and Sources of Industry Ratios • This involves comparing the ratios of one firm with those of similar firms or with industry averages. • Similarity is important as one should compare “apples to apples.
- 16. Liquidity Ratios • Shows a firm’s ability to cover its current liabilities with its current assets. – Balance Sheet Ratios – Liquidity Ratios Current Ratio: Current assets/Current Liabilities
- 17. Liquidity Ratios Acid-Test(Quick) • Shows a firm’s ability to meet current liabilities with its most liquid assets. • Current Assets –Inv/Current Liabilities
- 18. Financial Leverage Ratios Debt-to-Equity • Total Debt/Shareholders’ Equity Shows the extent to which the firm is financed by debt.
- 19. Financial Leverage Ratios Debt-to-Total Assets Total Debt/Total Assets • Shows the percentage of the firm’s assets that are supported by debt financing.
- 20. Financial Leverage Ratios Long-term Debt/Total Capitalization Total Capitalization= (LT.Debt + Equity) Shows the relative importance of long-term debt to the long-term financing of the firm.
- 21. Coverage Ratios • Income Statement Ratios Interest Coverage EBIT/Interest Charges Indicates a firm’s ability to cover interest charges.
- 22. Activity Ratios Income Statement /Balance Sheet Receivable Turnover Annual Net Credit Sales/Receivables Indicates quality of receivables and how successful the firm is in its collections.
- 23. Activity Ratios Avg Collection Period Days in the Year/Receivable Turnover=(or Receivable Turnover in days) Average number of days that receivables are outstanding.
- 24. Activity Ratios Payable Turnover (PT) Annual Credit Purchases/Accounts Payable • Indicates the rapidity of payment to suppliers by the firm.
- 25. Activity Ratios PT in Days • Days in the Year/Payable Turnover Average number of days that payables are outstanding.
- 26. Activity Ratios Total Asset Turnover • Net Sales/Total Assets Indicates the overall effectiveness of the firm in utilizing its assets to generate sales.
- 27. Activity Ratios Inventory Turnover • Cost of Goods Sold/Inventory • Indicates the effectiveness of the inventory management practices of the firm.
- 28. Profitability Ratios Gross Profit Margin • Gross Profit/Net Sales • Indicates the efficiency of operations and firm pricing policies.
- 29. Profitability Ratios Return on Investment Net Profit after Taxes/Total Assets • Indicates the profitability on the assets of the firm (after all expenses and taxes).
- 30. Profitability Ratios Return on Equity • Net Profit after Taxes/Shareholders’ Equity • Indicates the profitability to the shareholders of the firm (after all expenses and taxes).
- 31. Common-size Analysis An Analysis of percentage financial statements where all balance sheet Items are divided by total assets and all income statement items are divided by net sales or revenues.
- 32. Common-size Analysis EQUITY AND LIABILITIES Share capital and reserves 2014 2015 2016 2017 2018 Authorized share capital 8.37% 8.05% 8.14% 6.88% 5.74% Issued, subscribed and paid up share capital 4.31% 4.13% 4.17% 3.67% 3.06% Reserves 22.00% 23.97% 25.85% 27.74% 21.56% Total equity 26.31% 28.10% 30.02% 31.40% 32.08% surplus on revaluation of freehold land 2.74% 2.64% 3.96% 3.35% 2.79% Liabilities Non-current liabilities Long term financing 6.89% 4.13% 4.86% 19.03% 14.43% Liabilities against assets subject to finance lease 0.39% 0.41% 0.23% 0.08% 0.02% Deferred liability for gratuity 1.93% 1.88% 2.49% 2.27% 2.25% Current liabilities Trade and other payables 11.06% 9.60% 9.49% 7.33% 8.31% Accrued mark-up 1.01% 0.68% 0.40% 0.47% 0.60% Short term borrowings 44.92% 48.08% 44.24% 33.12% 37.13% Current portion of non-current liabilities 3.67% 3.27% 3.47% 2.55% 4.56% Provision for taxation 1.07% 1.21% 0.83% 0.39% 0.59% Total liabilities 70.95% 69.26% 66.02% 65.25% 67.92% Total equity and liabilities 100% 100% 100% 100% 100%
- 33. Common-size Analysis ASSETS 2014 2015 2016 2017 2018 Non-current assets Property, plant and equipment 26.11% 28.66% 29.54% 31.14% 31.12% Long term advances 0.017% 0.003% 0.001% 0.03% 0.006% Long term security deposits 0.23% 0.218% 0.202% 0.18% 0.146% Current assets Stores, spare parts and loose tools 5.14% 4.40% 4.21% 4.88% 4.90% Stock in trade 32.63% 23.00% 23.22% 25.71% 18.03% Trade debts 24.49% 30.09% 26.70% 20.89% 28.79% Loans and advances 2.60% 1.37% 1.34% 1.32% 1.18% Short term deposits and prepayments 2.25% 2.40% 2.53% 2.56% 2.92% Other receivables 4.53% 4.82% 6.87% 9.93% 10.98% Cash and other bank balances 2.01% 5.08% 5.40% 3.36% 1.93% Total assets 100% 100% 100% 100% 100%
- 34. Common-size Analysis 2014 2015 2016 2017 2018 Sales 100% 100% 100% 100% 100% CGS 83.85% 85.24% 86.14% 85.53% 87.51% Gross profit 16.15% 14.76% 13.86% 14.47% 12.49% Distribution cost 4.76% 5.46% 6.02% 6.32% 6.69% Administrative expenses 1.82% 1.77% 2.04% 2.05% 1.78% Other expenses 0.25% 0.20% 0.21% 0.05% 0.35% Other income 0.19% 0.22% 1.47% 0.93% 3.47% Finance cost 4.69% 3.72% 3.10% 2.74% 2.91% Profit before taxation 4.82% 3.83% 3.96% 4.25% 4.23% Taxation 0.97% 1.03% 0.81% 0.45% 0.62% Profit after taxation 3.85% 2.80% 3.15% 3.79% 3.61% Earnings per share 0% 0% 0% 0% 0%
- 35. Index Analyses An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0(percent) and subsequent financial statement items are expressed as percentages of their values in the base year.
- 36. Index Analyses EQUITY AND LIABILITIES Share capital and reserves 2014 2015 2016 2017 2018 Authorized share capital 100% 100% 100% 100% 100% Issued, subscribed and paid up share capital 100% 100% 100% 104% 104% Reserves 100% 113% 121% 153% 143% Total equity 100% 111% 117% 145% 178% surplus on revaluation of freehold land 100% 100% 149% 149% 149% Liabilities Non-current liabilities Long term financing 100% 62% 73% 336% 305% Liabilities against assets subject to finance lease 100% 108% 60% 26% 8% Deferred liability for gratuity 100% 101% 133% 143% 170% Current liabilities Trade and other payables 100% 90% 88% 81% 109% Accrued mark-up 100% 69% 41% 57% 85% Short term borrowings 100% 111% 101% 90% 120% Current portion of non-current liabilities 100% 93% 97% 85% 181% Provision for taxation 100% 118% 80% 45% 81% Total liabilities 100% 101% 96% 112% 140% Total equity and liabilities 100% 104% 103% 122% 146%
- 37. Index Analyses ASSETS 2014 2015 2016 2017 2018 Non-current assets Property, plant and equipment 100% 114% 117% 145% 174% Long term advances 100% 19% 8% 213% 48% Long term security deposits 100% 99% 90% 94% 93% 114% 116% 145% 173% Current assets Stores, spare parts and loose tools 100% 89% 84% 115% 139% Stock in trade 100% 73% 73% 96% 81% Trade debts 100% 128% 112% 104% 171% Loans and advances 100% 55% 53% 62% 66% Short term deposits and prepayments 100% 111% 116% 139% 189% Other receivables 100% 111% 156% 267% 353% Cash and other bank balances 100% 263% 276% 203% 140% 100% 98% 113% 136% Total assets 100% 104% 103% 122% 146%
- 38. Index Analyses 2014 2015 2016 2017 2018 Sales 100% 111% 95% 96% 127% CGS 100% 113% 98% 98% 132% Gross profit 100% 101% 82% 86% 98% Distribution cost 100% 127% 120% 128% 178% Administrative expenses 100% 108% 107% 109% 124% Other expenses 100% 88% 79% 17% 175% Other income 100% 133% 753% 481% 2362% Finance cost 100% 88% 63% 56% 79% Profit before taxation 100% 88% 78% 85% 111% Taxation 100% 118% 80% 45% 81% Profit after taxation 100% 80% 78% 95% 119% Earnings per share 100% 80% 78% 85% 108%