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Financial statement analysis involves analyzing a company's balance sheet, income statement, and statement of cash flows to assess key factors like profitability and solvency that are important for business survival. Ratios calculated from the financial statements, such as current ratio and return on equity, can be used to evaluate a company's past performance, present condition, and future prospects. Comparing ratios over time and against industry benchmarks provides insights into a company's efficiency, liquidity, debt levels, and profitability. While useful, financial statement analysis has limitations and should not be the only data considered when evaluating a company's health.

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Shekhar Jadhav
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390 views21 pages

Financial+Statement+Analysis Latest

Financial statement analysis involves analyzing a company's balance sheet, income statement, and statement of cash flows to assess key factors like profitability and solvency that are important for business survival. Ratios calculated from the financial statements, such as current ratio and return on equity, can be used to evaluate a company's past performance, present condition, and future prospects. Comparing ratios over time and against industry benchmarks provides insights into a company's efficiency, liquidity, debt levels, and profitability. While useful, financial statement analysis has limitations and should not be the only data considered when evaluating a company's health.

Uploaded by

Shekhar Jadhav
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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Financial Statement

Analysis
Business Survival:

There are two key factors for business survival:


• Profitability
• Solvency

• Profitability is important if the business is to generate revenue


(income) in excess of the expenses incurred in operating that
business.

• The solvency of a business is important because it looks at the


ability of the business in meeting its financial obligations.
Financial Statement Analysis

• 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.
Financial Statement Analysis (contd.)

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
The financial statements.
They typically include three basic financial statements:-

Balance sheet: Reports on a company's assets, liabilities, and Ownership


equity at a given point in time.

Income statement: Reports on a company's income, expenses, and


profits over a period of time

Statement of cash flows: reports on a company's cash flow activities,


particularly its operating, investing and financing activities.
Tools of Financial Statement Analysis:

The commonly used tools for financial statement analysis are:

Ratio analysis

•Comparative analysis

•Du-pont analysis
Financial Ratio Analysis Meaning:

• A financial ratio is a relationship between two or more accounting


numbers.

• Financial ratio analysis is the selection, valuation and


interpretation of financial data in easier to understand ratios, which
have been identified as critical indicators of financial performance
of the business and can be used for strategy and decision making
Functions/Utility of Ratios Analysis

1. Aids understanding of Financial Statements better


2. Indicates relationships
3. Allows for Comparisons
4. Shows trend over time
5. Tool for Efficiency Appraisal
6. Helps in Financial Forecasting
7. Useful in setting control standards
Solvency-Short Term Ratios

• Current Ratio =

Total Current Assets / Total Current Liabilities

• Quick Ratio =

Cash + Government Securities + Receivables / Total Current Liabilities


Solvency-Long Term Ratios

• Proprietors Ratio= Proprietors Fund


Total Assets

• Debt Equity Ratio= Debt


Equity

• Capital Gearing Ratio= Cap bearing fixed rate of int. & div
Cap not bearing fixed rate of int.& div
Activity Ratio

• Stock Turnover Ratio = COGS

Average Stock
• Debtors Turnover Ratio = Credit Sales

Debtors+Bills Receivables
• Creditors Turnover Ratio = Credit Purchases

Creditors+Bills
Payable
Other income statement ratios

• Gross Profit % = Gross Profit * 100


Net Sales
• Net Profit % = Net Profit after tax * 100
Net Sales

Or in some cases, firms use the net profit before tax figure.

Net Profit % = Net Profit before tax *100


Net Sales
• Return on Assets = Net Profit * 100
Average Total Assets

• Return on Equity = Net Profit *100


Average Total Equity
Asset Management Ratios

• Asset Turnover = Net Sales


Average Total Assets

• Inventory Turnover = Cost of Goods Sold


Average Inventory

• Average Collection Period = Average accounts Receivable


Average daily net credit sales
Profitability-Sales

•Return on investments = PBIT *100


Capital Employed
•Return on proprietors funds = PAT *100
Proprietor funds
•Dividend Payout Ratio = Dividend per share
Earning per share
Financial Structure or Capitalisation Ratios
Measures the riskiness of business in terms of debt gearing.

• Debt ratio = Debt *100


Total Assets

• Equity ratio = Equity *100


Total Assets

• Times Interest Earned = Earnings before Interest and Tax


Interest
Market Test Ratios

• Earnings per share = Net Profit after tax


Number of issued ordinary shares

• Dividends per share = Dividends


Number of issued ordinary shares

• Price Earnings ratio = Market price per share


Earnings per share
The DuPont System

ROE

ROA E q u ity M u ltip lie r

P ro fit M a rg in T o ta l A s s e t T u rn o v e r

ROE  Profit Margin  Total Asset Turnover  Equity Multiplier


Net profit Sales Avg Assets
  
Sales Avg Assets Avg Equity
COMPARATIVE STATEMENTS

• Statements of financial position at different period of time

• Elements of the statements are shown in comparative form

• Gives idea of financial position in two or more period

• Practically two financial statements viz., Balance sheet and income

statement are prepared in comparative form and analysis is done


COMPARATIVE RATIO ANALYSIS

COMPARATIVE BALANCE SHEET


STATEMENTS
Limitations of Financial Statement Analysis
Ratios may have intrinsic problems:
• They are calculated from accounting data, and if there are mistakes in this….

• The comparisons may be made against the wrong benchmarks.

• Ratios (like Balance sheet) are calculated at a point in time and significant
changes may occur within short period.
• Relying only on ratios when analyzing an entity’s performance is not advisable.
• Strong financial statement analysis does not necessarily mean that the
organisation has a strong financial future.
• Financial statement analysis might look good but there may be other factors that
can cause an organisation to collapse.
Thank you……..

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