financial statement analysis

FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSIS

Have you ever wondered what an analyst does with the financial statements of a company?

Do you believe that the financial position of a

company as revealed by its financial statements

is as clear as a blue sky without any clouds?

FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISA good growth of a company in the recent past A good growth of a company in the recent past

implies the same story in future and hence, it implies the same story in future and hence, it

represents a good investment opportunity!!! Will represents a good investment opportunity!!! Will

you like to grab it?you like to grab it?

FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISDo not you ever wonder that a company is Do not you ever wonder that a company is

earning good profits but they have no earning good profits but they have no

money to pay any dividend to the money to pay any dividend to the

shareholders??!!!!!!!!!shareholders??!!!!!!!!!

And, so on…………………………………

If you are really and seriously looking answers of all these…

Then ...

Financial Statement Analysis …

• Financial Statement Analysis comprises all techniques employed by users of financial statements to show important relationships in the financial statements so as to understand business and make decisions in a better way.

• … is a process of evaluating the relationship between components parts of financial statements to obtain a better understanding of a firm’s financial position and performance.

Steps in Financial Statement Analysis …

First StepSelect Information relevant to decision under consideration

Second StepProcess the information to

Highlight significant relationships

Third StepInterpret and draw

Necessary inferences

Who are the people doing Financial Statement Analysis?

• Two sets of

people…

– INTERNAL USERS

– EXTERNAL USERS

What is the source of information for the EXTERNAL PEOPLE?

• External users rely External users rely on publicly-available on publicly-available information to information to perform financial perform financial analysisanalysis

• Such information is Such information is contained in a contained in a company’s annual company’s annual reportreport

THREE BASIC FINANCIAL STATEMENTS

Annual Report contains…

FOOTNOTES/SCHEDULES TO THE FINANCIAL STATEMENTS

SUMMARY OF ACCOUNTING METHODS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS

FOUR BASIC FINANCIAL STATEMENTS

AUDITOR’S REPORT

COMPARATIVE FINANCIAL DATA FOR A SERIES OF YEARS

EXAMPLE #1……………………….THREE BASIC FINANCIAL

STATEMENTS

EXAMPLE #2……………………….

EXAMPLE #3……………………….

SUMMARY OF ACCOUNTING METHODS3

EXAMPLE #4……………………….MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL STATEMENTS4

EXAMPLE #5……………………….

AUDITOR’S REPORT

EXAMPLE #6……………………….

COMPARATIVE FINANCIAL DATA FOR A SERIES OF YEARS

Now, we are ready with ‘ALL NECESSARY BAGGAGE OF FINANCIAL INFORMATION’.

FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISAnd, proceed for understanding financial statements of Tata Steel …

First, we take Balance sheet …

…Sources of Funds Side

Particulars 2007 2008

SOURCES OF FUNDS:SHAREHOLDER'S FUNDS

Share Capital 580.67 6,203.30 Share Warrants 147.06 Reserves and Surplus 13,368.42 21,097.43

Total Shareholders' Fund 14,096.15 27,300.73

LOAN FUNDSSecured Loans 3,758.92 3,520.58 Unsecured Loans 5,886.41 14,501.11

9,645.33 18,021.69

DEFERRED TAX LIABILITY (NET) 748.94 681.80

PROVISION FOR EMPLOYEE SEPARATION COMPENSATION 1,107.08 1,071.30

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

9,645.33 18,021.69

TOTAL 25,597.50 47,075.52

(Rs. in Crores)

Innovative Ways of Funding… Share WarrantsShare Warrants – a way to keep a “Source of Funds” ready for

any future requirement.

Right IssueRight Issue – a quicker way of raising funds as compared to ‘general public issue’ and with some kind of ‘underwriting’ from Tata Sons.

2% Cumulative Convertible Preference Shares2% Cumulative Convertible Preference Shares – a way to keep a ‘least pressure on company’s cash flows’.

Foreign Currency Convertible Alternative Reference Foreign Currency Convertible Alternative Reference SecuritiesSecurities– carrying a coupon of 1% p.a. and if it is to be redeemed then, it will be redeemable at a premium of 23.34% of the principal amount.

Now, let’s move to …

…Application of Funds Side

BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…(Rs. in Crores)

APPLICATION OF FUNDS

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Less: Amortization 100.41 100.47

Less: Depreciation 7,385.96 8,123.01

Net Block 11,040.56 12,623.56

Capital Work in Progress

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

CURRENT ASSETS, LOANS & ADVANCES

Inventories: Stores and Spare Parts 505.44 557.67

Inventories: Stock-in-Trade 1,827.54 2,047.31

Sundry Debtors 631.63 543.48

Cash in Hand and at Bank 7,681.35 465.04

Loans and Advances 3,055.73 33,348.74

Interest Accrued on Investments 0.20 0.20

13,701.89 36,962.44

Less: CURRENT LIABILITIES & PROVISIONS

Current Liabilities 3,523.20 3,855.26

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

Net Current Assets 8,248.23 30,193.66

Miscellaneous Expenses (to the extent not written off or adjusted) 202.53 155.11

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

FIXED ASSETS

Gross Block 18,526.93 20,847.04

Net Block 11,040.56 12,623.56

11,040.56 12,623.56

INVESTMENTS 6,106.18 4,103.19

13,701.89 36,962.44

Provisions 1,930.46 2,913.52

5,453.66 6,768.78

TOTAL 25,597.50 47,075.52

Have you ever Have you ever thought that ……thought that ……

Sources of funds are not Sources of funds are not the same thing as the same thing as LIABILITIES!!!!!!LIABILITIES!!!!!!

Application of funds is Application of funds is not the same thing as not the same thing as

ASSETS!!!!!!ASSETS!!!!!!

Fund…Fund…

• … is understood as ‘LONG-TERM SOURCE’.

• … is defined as Current Assets – Current Liabilities.

• …remember that Fund is not the same thing as cash and hence, Funds from Operation is not the same as Cash from Operations.

Remember Remember ……• First, Sources of Funds side of a Balance Sheet

does not represent the TOTAL LIABILITIESTOTAL LIABILITIES of a company.

• Second, Application of Funds side of a Balance Sheet does not represent ‘everything of this side’ as TOTAL ASSETSTOTAL ASSETS.

• Third, the focus of representing a Balance Sheet as SOURCES OF FUND and APPLICATION OF FUNDS is ‘a long-term focus’.

Now, let’s move towards Now, let’s move towards understanding of ……understanding of ……

PROFIT AND LOSS ACCOUNT…PROFIT AND LOSS ACCOUNT…

TOP – LINE OF TATA STEEL

INCOMESale of Products and Services 19,762.57 22,191.80

Less: Excise Duty 2,210.55 2,498.52 17,552.02 19,693.28

Other Incomes 433.67 335.00

Total Income 17,985.69 20,028.28

PROFIT AND LOSS ACCOUNT OF TATA STEEL LIMITED FOR THE YEAR ENDING ON 31ST MARCH…

(Rs. in Crores)

M – L

EXPENDITUREManufacturing, and Other Expenses 10,814.77 11,645.24 Depreciation 819.29 834.61

11,634.06 12,479.85

Less: Expenditure (Other than Interest) Transferred to Capital and Other Accounts

236.02 175.50

11,398.04 12,304.35

Interest 173.90 878.70

Total Expenditure 11,571.94 13,183.05 PROFIT/(LOSS) BEFORE TAXATION AND

EXCEPTIONAL ITEMS 6,413.75 6,845.23

Employee Separation Compensation (152.10) 221.13 Profit on the Sale of Long-Term InvestmentsContribution For Sports Infrastructure (150.00)Exchange Gain/ (Loss) 597.31

PROFIT/(LOSS) BEFORE TAXATION 6,261.65 7,066.36 Current Tax 2,076.01 2,252.00 Education Cess on Income TaxFringe Benefit Tax 16.00 19.00 Deferred Tax (52.51) 108.33

PROFIT/(LOSS) AFTER TAXATION 4,222.15 4,687.03

(Rs. in Crores)

APPROPRIATION OF PROFIT OF TATA STEEL

Particulars 2007 2008APPROPRIATION OF PROFIT

PROFIT/(LOSS) AFTER TAXATION 4,222.15 4,687.03 Add:

Balance brought forward 2,976.16 4,593.98

PROFIT/(LOSS) AVAILABLE FOR APPROPRIATION

7,198.31 9,281.01

APPROPRIATIONProposed Dividend 943.91 1,168.93

Dividend on Cumulative Convertible Preference Shares

Tax on dividend 160.42 202.43 General Reserve 1,500.00 1,500.00 Balance Carried to The Balance Sheet 4,593.98 6,387.46

Total 7,198.31 9,281.01

(Rs. in Crores)

Now, we move to …Now, we move to …

CASH FLOW STATEMENT …

2007 2008

6261.65 7066.36

819.29 834.61

(11.19) (28.26)

(15.63) (9.98)

— —

6.22 0.06

(82.69) (124.30)

0.10 —

— —

(77.35) (50.33)

(324.16) (170.67)

251.25 929.03

152.10 226.18

0.97 0.95

65.10 57.99

150.00

(743.60)

7045.66 8138.04

(21.94) (143.44)

(158.22) (272.00)

512.04 806.34

331.88 390.90

7377.54 8528.94(2034.59) (2060.20)

5342.95 6468.74(224.85) (214.54)

5118.10 6254.20

Amount received on cancellation of forward covers/ options

Reversal of Impairment Loss

Impairment of Assets

Contribution for sports infrastructure written off

Exchange (Gain)/ Loss on revaluation of foreign currency loans

Direct Taxes paid

Cash Flow before Exceptional ItemEmployee Separation Compensation paid

Net Cash Flow from Operating Activities

Inventories

Trade and other Payables

Cash Generated from Operations

Operating Profit before Working Capital Changes

Adjustments forTrade and other Receivables

Amortisation of long term loan expenses

(Profit)/ Loss on sale of long term investments

Interest charged to Profit and Loss Account

Miscellaneous Expenditure - Employee Separation Compensation (amortised)

Provision for Wealth Tax

Provision for diminution in value of investments

Loss on cancellation of own debentures

Interest income

Dividend income/ Income from Investments

A) CASH FLOW FROM OPERATING ACTIVITIES

CASH FLOW STATEMENT OF TATA STEEL LTD FOR THE YEAR ENDING ON MARCH 31,

(All Rupees in Crores)

Net Profit Before Tax

Adjustments for:Depreciation

(Profit)/ Loss on sale of Assets/ Discarded Assets written off

(Profit)/ Loss on sale of current investments

2007 2008

(2007.68) (2458.97)

17.85 63.88

(18306.13) (31595.17)

(118.17) (29587.40)

14623.48 34110.46

(20.00) (85.80)

— —

58.89 63.75

324.16 170.67

(5427.60) (29318.58)

Purchase of investments in Subsidiaries

Exceptional Items :Sale of long term investments in subsidiary

Sale of other investments

Dividend received

Net Cash used in Investing Activities

Sale of Investments

Intercorporate deposits

Shareholder's loan to subsidiary

Interest received

Purchases of Fixed Assets

Sales of Fixed Assets

Purchases of Investments

B) CASH FLOW FROM INVESTING ACTIVITIES

2007 2008

1393.20 4881.455472.52

147.06 —5.59 —

8043.69 17632.70(916.31) (10386.61)

93.65 134.41(118.88) (202.38)

(227.85) (746.07)(717.69) (937.95)

7702.46 15848.07

7392.96 (7216.31)

288.39 7681.35

7681.35 465.04

Opening Balance - Cash and Cash Equivalents

Closing Balance - Cash and Cash Equivalents

Net Cash from Financing Activities

Net increase in Cash and Cash Equivalents

Amount received on cancellation of forward covers/optionsLong term loan expenses

Capital contributions received

Proceeds from borrowingsRepayment of borrowings

Interest paidDividends paid

Issue of Equity Capital

Issue of Share Warrants

Issue of Cumulative Convertible Preference Shares

C) CASH FLOW FROM FINANCING ACTIVITIES

Is there any relation between Is there any relation between the pattern of cash flows and the pattern of cash flows and

business life cycle?business life cycle?

All this is ………… our beginning to a new story…………………………………………

WHAT NEXT IN OUR WHAT NEXT IN OUR AGENDA?AGENDA?

Share Warrants… The preferential issue of equity shares/ Fully Convertible

Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines.

An amount equivalent to at least ten percent of the price fixed as per Chapter-XIII of DISCLOSURE AND INVESTOR PROTECTION GUIDELINES, SEBI shall become payable for the warrants on the date of their allotment.

Security Premium Account … The Securities Premium Account may be applied by the

company-

(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or commission paid or discount allowed on, any issue of shares or debentures of the company; or

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

Deferred Tax Assets/Deferred Tax Liabilities

ACCOUNTING STANDARD 22:• The differences between taxable income and accounting income can be classified into

PERMANENT DIFFERENCES and TIMING DIFFERENCES. Permanent differences are those differences between taxable Permanent differences are those differences between taxable

income and accounting income which originate in one period and income and accounting income which originate in one period and do not reverse subsequently. do not reverse subsequently.

Timing differences are those differences between taxable income Timing differences are those differences between taxable income and accounting income for a period that originate in one period and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.and are capable of reversal in one or more subsequent periods.

• The tax effects of timing differences are included in the tax expense in the The tax effects of timing differences are included in the tax expense in the statement of profit and loss; and as deferred tax assets or as deferred tax liabilities, statement of profit and loss; and as deferred tax assets or as deferred tax liabilities, in the balance sheet.in the balance sheet.

FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSISLook at the following information and suggest what should be the cost of plant and machinery purchased!!!!!

Suggest at what cost the

asset will be shown in

the Balance Sheet.

What is the difference between …

Depreciation

Amortization

Depletion

Impairment

All assets are subject to depreciation except

freehold land.

Impairment Loss (AS-28) An enterprise should assess at each balance sheet

date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset.

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

This Standard defines recoverable amount as the higher of an asset’s net selling price and value in use.

Accounting for Investments…(AS 13)Accounting for Investments…(AS 13)

InvestmentsInvestments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not 'investments'.

A Current InvestmentCurrent Investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.

A Long Term Investment is an investment other than a current investment.

An Investment Property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.

Types of Investments…(AS 13)Types of Investments…(AS 13)

Current Investments

Long Term Investments

Current Investments … A current investment is an investment that is by its

nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.

The carrying amount for current investments is the lower of cost and fair value. In respect of investments for which an active market exists, market value generally provides the best evidence of fair value.

For current investments, any reduction to fair value and any reversals of such reductions are included in the profit and loss account.

Long-Term Investment … A long term investment is an investment other

than a current investment.

Long-term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognize the decline.

Where there is a decline, other than temporary, in the

carrying amounts of long term investments, the resultant reduction in the carrying amount is charged is charged to the profit and loss statement.to the profit and loss statement.

Disclosure – AS 13 Investments should be disclosed

in financial statements as the

aggregate amount of quoted and quoted and

unquoted investmentsunquoted investments, giving the

aggregate market value of quoted

investments.

What’s the difference between Reserve and Provision?

Provision is charged to Profit and Loss Account where as Reserve is an appropriation of profit.

Provision is charged to Profit and Loss Account before calculating the net profit or loss, but Reserve can be made only when there is profit.

Provision is created for specific purpose, while ReserveReserve may be created for general purpose as well.

Provision are not invested in outside securities. ReservesReserves reduces divisible profit can be invested in outside securities.

financial statement analysis

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users of financial statements

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annual reportcontains

current liabilities

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companys annual report

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