Financial Statements

Presented By Faye Colaco

Ratio Analysis
It is the technique of interpretation of financial statements

with the help of the accounting ratios derived from the financial statements One can measure the financial conditions of a firm and can point out whether the condition is strong, good, questionable or poor

Types of Ratios
In view if requirements of the various uses of ratios, it can be

classified into three important categories: 1. Liquidity ratios

Liquidity ratios measure the firms ability to meet current obligations.

2.

Leverage ratios
Show the proportion of debt and equity in financing the firms assets

3.

Profitability ratios
Overall performance and effectiveness of the firm.

Liquidity ratios
Current Ratios The ratio between the current assets and current liabilities is known as Current Ratio. This is always expressed as pure ratio. It indicates the ability of the concern to meet its current liability. The standard or ideal current ratio should be 2:1 i.e.; current asset should be two times the current liabilities.
1.

Current Ratio= (Current Assets) / (Current Liabilities)

Cont
2.

Quick Ratio
The ratio between quick assets/ quick liabilities is called as

quick ratio.
Quick assets include all current assets excluding inventory and prepaid

expenses. Quick liabilities include all current liabilities excluding cash credit and bank overdraft.

This ratio is also called as liquid ratio or acid test ratio. The

ideal ratio is 1:1. A comparison of current ratio and quick ratio is that the quick ratio indicates over stocking by a concern if it has a low quick ratio.

Quick Ratio = (Quick Assets) / (Quick Liabilities)

Leverage Ratios
Debt Equity Ratio The debt equity ratio is determined to ascertain the soundness of the long-term financial policy of the company. It is also known as external-internal equity ratio.
1.
The term external refers to total outside liabilities

The term internal equity refers to shareholders fund or the

proprietary funds including share capital (+/-) profit and loss account plus reserve fund
In case the ratio is 1 it is considered to be satisfactory.

Debt Equity Ratio = (Debt) / (Equity)

Cont
2.

Solvency Ratio
This ratio indicates the financial soundness of business

enterprises and it is used to compare the performance with an other business enterprises for two or more years. High ratio indicates more financial soundness and vice-versa.
Total assets include fixed assets, current assets and intangible assets Total liabilities except net worth.

Solvency Ratio = (Total Assets) / (Total Liabilities)

Cont
3.

Total Assets to Common Equity Ratio

The ratio indicates the proportion of amount invested in fixed

assets out of common equity. The ratio is used to compare the performance. Higher the ratio, more dependence on outside funds

Total Assets to Common Equity Ratio = (Total Assets) / (Common Equity)

Profitability Ratios
1.

Gross Profit Ratio

This ratio expresses the relationship between gross profit and

sales.
It is the excess of net sales over the cost of goods sold (cost of goods sold

means opening stock of finished goods plus purchase of finished goods plus all direct expense incurred on finished goods minus closing stock of finished goods). Sales refer to the total sales that are cash sales plus credit sales.

Gross Profit Ratio = {(Gross Profit) / (Net Sales)} X100

Cont
2.

Net Profit Ratio

This ratio expresses relationship between net profits to sales and

indicates the quantum of profit earned by the concern.

Net profit means the final balance of operating and non-operating

incomes after meeting all expenses i.e., both operating and nonoperating.

Higher Net profit ratio indicates that the profitability of the

concern is good.

Net Profit Ratio = {(Net Profit) / (Net Sales)} X100

Cont
3.

Operating Cost Ratio

Operating ratio is the ratio between operating cost and sales. Operating cost refers to all expenses incurred for operating or running a business. It comprises cost of goods sold (That is opening stock of finished goods plus purchases of finished goods minus closing stock of finished goods) plus operating expenses such as office and administrative expenses and selling and distribution expenses. The operating cost ratio indicates the efficiency of business.

Operating Cost Ratio = {(Operating Cost) / (Net Sales)} X100

Cont
4.

Return on Investment
This ratio expresses the relationship between return on

operational profits and capital employed.

Operational profit or net profit before deducting interest on long term

loans and deposits, debenture and taxes. Capital employed refers to total long term funds employed or used in the business.

This ratio measure the productivity of the capital employed

in this business. The standard or ideal ratio is 15%. If the ratio (actual) is higher than shows the higher productivity of the capital employed. Return on Investment Ratio = {(Operational Profit) / (Capital Employed)} X100

Cont
5.

Return on Equity
A return on shareholders equity is calculated to see the profitability

of the owners investment. The shareholders equity or net worth will include paid up share capital, share premium and reserves and surplus less accumulated losses. Net worth can also be found by subtracting total liabilities from total assets.

6.

Return on Equity = (Profit after Tax) / (Net Worth) *100 Earning Per Share
The earning per share helps in determining the market price of the

equity shares of the company. It also helps in estimating the companys capacity to pay dividend to its equity shareholders.

Earning Per Share = (Profit after Tax) / (Number of Equity Shares)

Example
Trading and Profit and Loss Account for year ending 31/12/08 (Rs. Lakhs) To. Op Stock Purchases Wages 195 By Sales 715 Closing Stock 260 1,300 260

Freight G/P
Total To Depreciation Adm expenses Selling and Dist Int on Debentures Income tax N/P Total

65 325
1,560 Total 39 By G/P 65 Profit on sale of machinery 104 52 26 65 351 351 1,560 325 26

Solution
Common Size Income Statement for year ending 31/12/08 (Rs. Lakhs) Net Sales COGS Gross Margin Less: Operating Expenses Adm expenses Selling and Dist , Depr Total Operating expenses Operating Income Less: Interest Profit before tax and extraordinary income 65 143 208 117 52 65 1,300 975 325 Cost of Goods Sold Opening Inventory +Purchases + Wages +Freight 195 715 260 65

- Closing Inventory COGS

260 975

Add: Profit from sale of machinery(Extra ordinary) Income tax

Net Profit

26 26
65

Common Size Income Statement for year ending 31/12/08 (Rs. Lakhs) % Net Sales COGS Gross Margin Less: Operating Expenses Adm expenses Selling and Dist , Depr Total Operating expenses Operating Income Less: Interest Profit before tax and extraordinary income 65 143 208 117 52 65 5 8 16 9 4 5 1,300 975 325 100 75 25

Add: Profit from sale of machinery(Extra ordinary) Income tax

Net Profit

26 26
65

2 2
5

Balance Sheet
Balance Sheet as on 31/12/08 (Rs. Lakhs) Equity Fund Long term liabilities 390 Fixed Assets 650 Current Assets 780 520 1,300

Current Liabilities
Total

260
1,300 Total Common Size Balance Sheet as on 31/12/08 (Rs. Lakhs)

Equity Fund Long term liabilities

390 650

30 Fixed Assets 50 Current Assets

780 520 1,300

60 40 100

Current Liabilities
Total

260
1,300

20
100 Total

Problem
Balances(Rs. Lakhs) Details Cash in hand and bank Marketable Securities Inventories T. Debtors Long term Loan Rs. 19 31 180 160 205 Details T.Creditors Income tax payable O/s liabilities Annual Sales Net Profit Rs. 115 15 25 900 150

Gross Profit
Equity Capital

225
350

Reserves and Surplus

120

Cont
Find:
Current Ratio Quick Ratio Gross Profit Ratio Return on Equity

Solution
Current Ratio = Current assets/Current Liabilities

= 390/155 = 2.52
Current assets (Rs. In Lakhs) Cash in hand and bank+ Marketable Securities +Inventories +T. Debtors = 19+ 31+180+160 = 390 Current Liabilities T.Creditors+ Income tax payable +O/s liabilities = 115+15+25 = 155

Quick Ratio = (Quick Assets) / (Quick Liabilities)

= (390-180)/155 = 210/155 = 1.36 Gross Profit Ratio = G/P /Sales *100 = 225/900 *100 = 25% Return on Equity = (Profit after Tax) / (Net Worth) *100 = 150/(350+120) *100 = 31.92%

Home Work
Income Statement for year ending (Rs. Crores) 31/03/2008 31/03/2009 Net Sales Other income COGS Gross Margin Operating Expenses Adm expenses Selling and Dist Total Operating expenses 12.44 4.42 16.86 14.36 5.36 19.72 132.00 12.00 102.96 41.04 144.00 15.00 110.02 48.98

Operating Income
Interest Income Income tax Earnings

24.18
3.00 21.18 7.94 13.24

29.26
4.01 25.25 9.47 15.78

Balance Sheet
Balance Sheet as on (Rs. Crores) as on 31/12/08 Equity Fund 27.00 31/12/09 27.00 Fixed Assets 31/12/08 31.25 14.56 13.20 1.50 8.55 20.71 51.96 31/12/09 37.50 16.64 15.43 1.75 11.25 22.57 60.07

Reserves and Surplus

4.96

6.36 Current Assets Inventory Debtors Cash Less: Current Liabilities Net Current Assets
26.71 60.07 Total

Debt(Long term) Total

20.00 51.96

Cont
Find:

Current Ratio Quick Ratio Gross Profit Ratio Net Profit Ratio Return on Equity Earnings per share

Given: Above are the financial statements of Safal Ltd. Comment on the finding. Total no. of shares outstanding are 2.69 crores.

Problem 2

Find:

Current ratio, Quick ratio, Total assets to equity ratio, Debt to equity ratio, Gross Profit ratio, Net Profit ratio and Return on shareholders equity

Cont

Thank You