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Financial Analysis Ratios

This document from Amity Business School discusses financial statement analysis. It explains that financial statement analysis involves analyzing a company's past performance, present condition, and future prospects by examining key factors like earnings, solvency, and efficiency. Various tools for financial statement analysis are introduced, including ratio analysis, horizontal analysis, and vertical analysis. Specific liquidity, activity, profitability, and market ratios are defined to evaluate financial health and performance.

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340 views17 pages

Financial Analysis Ratios

This document from Amity Business School discusses financial statement analysis. It explains that financial statement analysis involves analyzing a company's past performance, present condition, and future prospects by examining key factors like earnings, solvency, and efficiency. Various tools for financial statement analysis are introduced, including ratio analysis, horizontal analysis, and vertical analysis. Specific liquidity, activity, profitability, and market ratios are defined to evaluate financial health and performance.

Uploaded by

abhishekrcin
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Amity Business School

AMITY BUSINESS SCHOOL


MBA (G)
AFM
Dr. Archana Singh

1
Amity Business School

FINANCIAL STATEMENT
ANALYSIS

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Amity Business School

INTRODUCTION
Financial statement analysis involves analysing
the information provided in the financial statements
to:
Provide information about the organisation’s:
• Past performance
• Present condition
• Future performance
Assess the organisation’s:
• Earnings in terms of power, persistence, quality
and growth
• Solvency

3
Amity Business School

PURPOSE
• Financial Statement Analysis will help
business owners and other interested
people to analyse the data in financial
statements to provide them with better
information about such key factors for
decision making and ultimate business
survival.

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Amity Business School

QUESTIONS?
Is the company being run efficiently in
comparison with other firms in the same industry
or previous year?
Is the company able to continue trading and is it
paying creditors?
Would you recommend investing money in the
business?

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Amity Business School

Effective Financial Statement


Analysis
• To perform an effective financial statement
analysis, you need to be aware of the
organisation’s:
• business strategy
• objectives
• annual report and other documents like articles about
the organisation in newspapers and business reviews.
These are called individual organisational factors.

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Amity Business School

Effective Financial Statement Analysis


Requires that you:
• Understand the nature of the industry in which the
organisation works. This is an industry factor.
• Understand that the overall state of the economy
may also have an impact on the performance of the
organisation.

→ Financial statement analysis is more than just


“crunching numbers”; it involves obtaining a
broader picture of the organisation in order to
evaluate appropriately how that organisation is
performing 7
Amity Business School

Tools of Financial Statement Analysis

The commonly used tools for financial statement


analysis are:
 Financial Ratio Analysis
 Comparative financial statements analysis:
• Horizontal analysis/Trend analysis
• Vertical analysis/Common size analysis/ Component
Percentages

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Amity Business School

RATIO ANALYSIS
Ratio analysis is an extensively used method
of assessing the financial position of a firm.
Techniques can be used in two ways:
1.TIME SERIES ANALYSIS: To analyse trends over
a number of years and to examine the way in which
performance may have changed over time.
2.CROSS-SECTIONAL ANALYSIS: For comparison
with the industry average or with competitors at a
single point in time. This comparison allow a
judgement to be made about the firm's position
within the industry.
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Amity Business School

FIVE GROUPS OF RATIOS


1. LIQUIDITY RATIOS
2. GEARING RATIOS
3. ACTIVITY RAIOS
4. PROFITABILITY RATIOS
5. STOCK MARKET RATIOS

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Amity Business School

LIQUIDITY RATIOS
• The Current ratio = current assets/current
liabilities
Current ratio indicates the extent to which a firm can
meet its short term liabilities firm its current assets
without having to raise finance by borrowing,
issuing more shares or selling fixed assets.
• The Acid Test ratio: Current assets-Stocks/C.
Liabilities
Measures the firms ability to meet its short term
liabilities from its current assets without having to
rely on the sale of its stock. 11
Amity Business School

GEARING RATIOS
• Debt Ratio: Total borrowings/capital employed
measures the proportion of capital employed which is
financed by borrowed funds.
• Debt to equity ratio: Total
borrowings/Shareholders fund
measures the amount of borrowing as a percentage of
shareholders fund.
• Interest cover: profit before interest and
tax/Interest payable
measures how many times interest payments are
covered by operating profits. 12
Amity Business School

ACTIVITY RATIO
• Net Asset Turnover: sales/Net Asset
Measures how efficiently the net assets are used to
generate sales.

• Fixed Asset Turnover: Sales/Fixed Assets

• Stock Turnover: Sales/Stocks


measures the number of times that stocks of finished
goods were sold during the year.
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Amity Business School

PROFITABILITY RATIOS
• ROCE = Operating profit/capital employedx100
measures the performance of the firm regardless of
the method of financing.
• Return on equity= profit after tax/Shareholders
fundx100
measures the profitability of the shareholder's
investment in the firm.
• Operating profit margin =Operating Profit/Sales
x 100
Shows how much RS.1 of sales earn as operating
profit. 14
Amity Business School

STOCK MARKET RATIOS


• EPS : Profit after Tax/Number of ordinary
shares in issues
 measures the earning generated for each
ordinary share.
• Net Dividend Yield : Dividend per
share/Market price per share
 indicates the net dividends rate of return to
ordinary shareholders.
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Amity Business School

STOCK MARKET RATIOS

• Dividends per share : Dividend


Number of issued
ordinary shares

• Dividend payout ratio: Dividends per share


Earnings per share

• Price Earnings ratio: Market price per share


Earnings per share 16
Amity Business School

Thank You

17

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