Financial Statements

Analysis

Presented by:
Abid Khan
Muhammad Hashim
Shah Zaman
 The Analysis of Financial Statements
 The Use Of Financial
Ratios
 Analyzing Liquidity
 Analyzing Activity
 Analyzing Debt
 Analyzing Profitability
 A Complete Ratio Analysis
2
The Analysis of Financial Statements
 THE USE OF FINANCIAL
RATIOS
– Financial Ratio are used as a
relative measure that facilitates
the evaluation of efficiency or
condition of a particular aspect
of a firm's operations and status
– Ratio Analysis involves
methods of calculating and
interpreting financial ratios in
order to assess a firm's
performance and status
3
Example
(1) (2) (1)/(2)
Year End Current Assets/Current Liab. Current Ratio

1994 $550,000 /$500,000 1.10

1995 $550,000 /$600,000 .92
 Interested Parties
4

Three sets of parties are interested

in ratio analysis:
Shareholders
Creditors
Management
5
Types of Ratio Comparisons
There are two types of
ratio comparisons that
can be made:
 Cross-Sectional Analysis
 Time-Series Analysis
– Combined Analysis uses
both types of analysis to
assess a firm's trends
versus its competitors or
the industry
 Words of Caution Regarding
6 Ratio Analysis
 A single ratio rarely tells enough to make a sound
judgment.
 Financial statements used in ratio analysis must be
from similar points in time.
 Audited financial statements are more reliable than
unaudited statements.
 The financial data used to compute ratios must be
developed in the same manner.
 Inflation can distort comparisons.
 Groups of Financial Ratios
7

 Liquidity
 Activity
 Debt
 Profitability
 Analyzing Liquidity
8

 Liquidity refers to the

solvency of the firm's
overall financial
position, i.e. a "liquid
firm" is one that can
easily meet its short-
term obligations as
they come due.
 Three Important Liquidity Measures
9

Net Working Capital (NWC)

NWC = Current Assets - Current Liabilities
Current Ratio (CR)
Current Assets
CR =
Current Liabilities
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory
QR =
Current Liabilities
10
Analyzing Activity
 Activity is a more
sophisticated analysis
of a firm's liquidity,
evaluating the speed
with which certain
accounts are converted
into sales or cash; also
measures a firm's
efficiency
 Five Important Activity Measures
11

Cost of Goods Sold

Inventory Turnover (IT) IT =
Inventory

Accounts Receivable
Average Collection Period (ACP) ACP =
Annual Sales/360

Accounts Payable
Average Payment Period (APP) APP=
Annual Purchases/360
Sales
Fixed Asset Turnover (FAT) FAT =
Net Fixed Assets

Sales
Total Asset Turnover (TAT) TAT =
Total Assets
 Analyzing Debt
12

 Debt is a true "double-edged" sword as it allows for

the generation of profits with the use of other people's
(creditors) money, but creates claims on earnings with
a higher priority than those of the firm's owners.
 Measures of Debt
13

There are Two General Types of

Debt Measures
–Degree of Indebtedness
–Ability to Service Debts
 Four Important Debt Measures
14

Total Liabilities
Debt Ratio DR=
Total Assets
(DR)
Long-Term Debt
Debt-Equity Ratio DER=
(DER) Stockholders’ Equity

Earnings Before Interest

& Taxes (EBIT)
Times Interest Earned TIE=
Interest
Ratio (TIE)
Earnings Before Interest &
Taxes + Lease Payments
FPC=
Fixed Payment Coverage Ratio Interest + Lease Payments +
(FPC) {(Principal Payments +
Preferred Stock Dividends) X
[1 / (1 -T)]}
15
Analyzing Profitability
– Profitability Measures assess the firm's ability
to operate efficiently and are of concern to
owners, creditors, and management
– A Common-Size Income Statement, which
expresses each income statement item as a
percentage of sales, allows for easy evaluation
of the firm’s profitability relative to sales.
 Seven Basic Profitability Measures
16
Gross Profit Margin (GPM)
Gross Profits
GPM=
Operating Profit Margin Sales

(OPM) OPM =
Operating Profits (EBIT)
Sales
Net Profit Margin (NPM) Net Profit After Taxes
NPM=
Sales
Return on Total Assets Net Profit After Taxes
(ROA) ROA=
Total Assets
Return On Equity (ROE) ROE=
Net Profit After Taxes
Stockholders’ Equity
Earnings Per Share (EPS) Earnings Available for
Common Stockholder’s
EPS =
Price/Earnings (P/E) Ratio Number of Shares of Common
Stock Outstanding
Market Price Per Share of
Common Stock
P/E =
Earnings Per Share
19
Summarizing All Ratios
 An approach that
views all aspects of
the firm's activities to
isolate key areas of
concern
 Comparisons are made
to industry standards
(cross-sectional analysis)
 Comparisons to the
firm itself over time
are also made (time-
series analysis)
 Al-Noor Sugar Mills
An Introduction, Common
Size financial Statements

By Shah Zaman
 About the Mills
• Company Information
Al-Noor Sugar Mills Limited is a public company
incorporated in Pakistan under the Companies
Act, 1913 (now Companies Ordinance, 1984). Its
shares are quoted on Karachi and Lahore Stock
Exchange in Pakistan and is principally engaged
in the production and sale of refined sugar and
medium density fiber board.
 Mission Statement

To gain strength through industry leadership in the

manufacturing and marketing of sugar and Lasani Wood
and to have a strong presence in these product markets
while retaining the options to diversify in other profitable
venture.
To operate ethically while maximizing profits and
satisfying customers needs and stake holder's interests.
To assist in the socio economic development of Pakistan
especially in the rulra areas through industrial expansion
and development.
 Al-Noor Sugar Mills

Common size Financial Statements

Trend analysis
Cross sectional Analysis
 Balance Sheet 2006 2007 2008 2006 2007 2008

ASSETS

Cash 48,694 47,597 86,463 100% 98% 178%

Stores and Spares 131,668 144,818 188,578 100% 110% 143%

Stock in trade 230,809 393,723 1,009,052 100% 171% 437%

trade debts 43,166 28,978 11,314 100% 171% 26%

loans and advances 112,300 144,861 149,526 100% 129% 133%

trade deposits 3,638 5,254 7,164 100% 144% 197%

other receivables 11,081 23,271 417 100% 190% 4%

Total Current assts 100%

Fixed Assets 100%

property plant, Equip 1,472,955 1,527,982 2,264,422 100% 104% 154%

Long term investments 8,607 10,263 37,751 100% 119% 80%

Long term deposits 10,742 11,317 5,071 100% 105% 47%

total assets 2072660 2,338,064 3775726 100% 42%

LIABILITIES & EQUITY

short term liabilities

Trade and other payables 317,484 317,484 526,054 100% 100% 166%
Interest markup accrued 25,138 14,446 28,416 100% 57% 113%
short term borrowings 397,809 270,955 862,684 100% 68% 218%
Current portion of long term
liab 105,139 118,679 123,808 100% 113% 123%
provision for income tax 7,460 2,089 0 100% 28% 0%
long term financing 67,470 325,000 237,500 100% 482% 315%
liabilities against assets
subject to finance lease 77,568 70,840 28,261 100% 91% 46%
long term deposits 5,035 4,874 4,869 100% 97% 64%
deferred liabilities 344,112 346,074 492,058 100% 101% 122%
Authorized capital
(20,000,000, @Rs. 10 each) 200,000 200,000 200,000 100% 100% 100%
Paid up capital 185,703 185,703 185,703 100% 100% 100%
General revenue reserve 190,000 190,000 190,000 100% 100% 100%
Inappropriate profit 111,468 154,659 366,139 100% 139% 310%

total stockholders equity 1

total equity and liabilities 2072660 2,338,04 3775726

 Analysis
• In reviewing the basic financial ratios, we
will examine the ratios of Al-Noor Sugar
Mills for the fiscal years ended September
30, 2008 and September 30, 2007. Al-Noor
Sugar Mills is a growing company.
 Analysis
(Al-Noor Sugar Mills)

By Muhammad Hashim Shah

Analysis
• Note that while Al-Noor Sugar Mills’s
earnings rose from 2007 to 2008, the
earnings generated per dollar of assets fell
over the period. In 2007, Al-Noor Sugar
Mills earned 10.22 cents before financing
costs on every dollar of average assets;
however, in 2008, Al-Noor Sugar Mills
earned only 9.63 cents before financing
costs on every dollar of average assets.
The ratio, return on assets, allows the
analyst to compare the earnings
generating ability of the company relative
to the invested assets.
 Analysis- profit margin
• Al-Noor Sugar Mills’s profit margin
increased in 2008. For every Rupee in
sales, Al-Noor Sugar Mills earned 3 Passas
in income before financing costs in 2008
and only 2.61 cents in 2007. Thus, the fall
in ROA is not due to the reduction in
income before financing costs per Rupee of
sales.
 Profit Margin
• Al-Noor Sugar Mills’s rise in profit margin
in 2008 is due to the reduction of cost of
sales rather than to the reduction of selling,
general and administrative expenses relative
to sales.
 Analysis- ROA
• It appears that Al-Noor Sugar Mills’s fall in
ROA was driven by a fall in ATO, not a fall
in PM. The firm had difficulty generating
sales from the assets in 2008 relative to
2007. For every Rupee of average assets,
Al-Noor Sugar Mills generated only Rs.3.21
in sales in 2008 while Al-Noor Sugar Mills
generated Rs.3.92 in sales in 2007.
 Analysis- A/R turnover
• Most of Al-Noor Sugar Mills’s transactions
are for cash or credit cards; therefore, the
number of days’ sales outstanding is very
small, approximately 4 days.
 Analysis- Inventory turnover
• It has taken Al-Noor Sugar Mills longer to
sell its inventory, on average, in 2008
relative to 2007. While it took
approximately 44 days on average to sell
inventory in 2007, it took Al-Noor Sugar
Mills approximately 50 days on average to
sell inventory in 2008.
 Plant Assets turnover
• Al-Noor Sugar Mills has generated fewer sales per
dollar of assets in 2008 relative to 2007. While
Al-Noor Sugar Mills generated Rs.14.31 in sales
per dollar of average assets in 2007, the average
assets generated only Rs.11.73 in sales in 2008.
Therefore, part of the explanation for the reduction
in asset turnover is the reduction in the
productivity of the plant assets at generating sales.
 Analysis
• These results suggest that while Al-Noor
Sugar Mills did generate greater income and
sales in 2008 versus 2007, it generated less
income (before financing costs) per dollar
of average assets, it took longer to sell its
inventory, and it generated fewer sales from
each dollar of plant assets.
 Analysis-Return on Equity
• Al-Noor Sugar Mills’s ROE has fallen in 2008 but
it has not fallen as much as the fall in ROA.
• Note that Al-Noor Sugar Mills’s return on equity
is higher than its return on assets. This is due to
the use of leverage. Financing with debt and
preferred stock can increase the return to common
shareholders if the return on assets is greater than
the cost of debt.
 Analysis- Debt-Asset Ratio

• Al-Noor Sugar Mills has relied more on

debt in 2008 relative to 2007. In 2008, 11%
of Al-Noor Sugar Mills’s assets are
financed with debt while in 2007 only 6%
of the assets were financed through debt.
Analysis-Interest Coverage Ratio
• Al-Noor Sugar Mills’s interest coverage
ratio has decreased dramatically with the
heavier reliance on debt in 2008 relative to
2007.
 Analysis- Current Ratio
• Al-Noor Sugar Mills’s current ratio is
relatively low. Analysts often suggest that
the current ratio of a healthy company
should be approximately 2.0. While Al-
Noor Sugar Mills’s current ratio is well
below 2.0, note that Al-Noor Sugar Mills’s
current ratio has increased from 2007 to
2008.
 How is Al-Noor Sugar Mills
doing?
• If you recall, Al-Noor
Sugar Mills had increasing
income and increasing
sales. The ratios allow us
to determine the sales and
income relative to the
assets and book value that
the firm had available to
generate income and sales.
 Conclusion and Synthesis
• While Al-Noor Sugar Mills did have large increases in sales
and earnings in 2008, it did not have increases in profitability.

• Al-Noor Sugar Mills also had high growth in its assets and
debt in 2008. Taking into account the assets that Al-Noor
Sugar Mills had to use during 2008, Al-Noor Sugar Mills
looks less profitable in 2008 relative to 2007 per Rupee of
invested assets and book value.
• In addition, its key drivers of operations have become less
productive. In particular, Al-Noor Sugar Mills had more
difficulty in 2008 in selling inventory and generated fewer
sales per dollar of plant assets.
• Ratio analysis leaves one with more insight into Al-Noor
Sugar Mills and its changes over the year.