analysis & interpretation of financial information · 2015-04-20 · introduction in simple...
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Analysis & Interpretation of
Financial Statements
USQ UNIVERSITY OF SOUTHERN QUEENSLAND
MBA - ACC5502
Accounting & Financial Management / S1 / 2015
M B G Wimalarathna
[FCA, FCMA, MCIM, FMAAT, MCPM, (MBA–PIM/USJ)]
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Introduction In simple term, Analysis of Financial Statements (AFS) is a mechanism used to re-
produce financial/non-financial information/data which are being already
prepared and presented in a formal manner by the particular organization.
Further, Analysis of Financial Statements expresses already reported
Financial/Non-Financial information of an organization in relative as well as more
descriptive manner.
AFS requires stakeholders (Internal, Inter-related & External) to take decisions &
form opinions on entity’s past & future performance and position.
AFS - Techniques/Methods
Trend Analysis. (Analyze past & do predict)
Horizontal Analysis. (Current Vs Previous)
Vertical Analysis. (Current Vs Current)
Ratio Analysis. (Mix of all above)
Discussion:
How to use in decision making? What are the key shortcomings? When can’t use?
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Comparable Sources/Benchmarks
To arrive at clear conclusion and make an effective decision, a
particular user must Compare the results attained under any
techniques discussed in above with suitable/sound comparative
source (benchmark).
Commonly acceptable Sources (Benchmarks);
Previous (immediate) years’ similar data/figures.
Forecasted/budgeted similar data/figures.
Competitors’ similar data/figures. (Apple to Apple)
Industry norms.
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Ratio Analysis
Ratio Analysis is the most common/well known technique used in
Financial Statements Analysis.
Key Categories,
Profitability.
Efficiency. View point of the
Liquidity. Company.
Gearing/Capital Structure.
Investors/Market Performance. (Investors’ point of view.)
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Profitability Ratios
What are the key categories?
Primary
1. ROE. (Return On Equity) NP.atri O/SHS. x100
What? Avg. Equity
How to calculate?
2. ROA. (Return On Assets) EBIT x100
What? Avg. Assets
How to calculate?
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What does this measure & indicate to users/Stakeholders?
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Secondary
1. GP Margin. (Gross Profit) ) GP x100
What? Total Sales
How to calculate?
2. OP Margin. (Operating Profit) ) OP x100
What? Total Sales
How to calculate?
3. NP Margin. (Net Profit) ) NP x100
What? Total Sales
How to calculate?
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Efficiency Ratios
1. Asset Turnover Ratio Total Sales
Avg. total Assets
What? (Times / x)
How to calculate?
2. Inventory/Stock Turnover Ratio
Cost of Sales
What? Avg. Stock
How to calculate?
3. Debtors Turnover Ratio
Total Credit Sales
What? Avg. Drs.
How to calculate?
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What does this measure & indicate to users/Stakeholders?
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4. Stock Residency Period - Direct/Indirect
Avg. Stock x 365/50/12
What? Cost of Sales
How to calculate?
5. Debtors Collection Period - Direct/Indirect
Avg.Debtors x365/50/12
What? Total Credit Sales
How to calculate?
6. Activity Cycle
SRP + DCP
What?
How to calculate?
Discussion:
If Figures are not available, how to perform the calculation?
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Liquidity Ratios
What does this measure & indicate to users / stakeholders?
1. Current Ratio. CA
CL
What?
How to calculate?
2. Quick Asset/Acid Test Ratio. (CA - St.)
CL Traditional. Is this correct?
What?
How to calculate?
3. Cash Flow Ratio.
NCF. OP. act
CL
What?
How to calculate?
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Gearing/Capital Structure Ratios
1. Debt to equity Ratio.
Total Liabilities x 100
What? Total Equity
How to calculate?
2. Debt Ratio.
Total Liabilities x 100
Total Assets
What?
How to calculate?
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What does this measure & indicate to users / stakeholders?
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3. Equity Ratio. Total Equity x 100 Total Assets
What?
How to calculate?
4. Interest Coverage Ratio. EBIT
F/Cost
What?
How to calculate?
5. Debt Coverage Ratio. NCL
NCF.op.act
What?
How to calculate?
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Investors'/Market Performance Ratios
1. Net Tangible asset backing per share (OS/HE-IA)
O/SC
What?
How to calculate?
2. EPS NP. atri.OSHs
WA. O/Sc
What?
How to calculate?
3. Operating cash flow per share (NCF. op. - Pr. Divi)
WA. O/Sc
What?
How to calculate?
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What does this measure & indicate to users / stakeholders?
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4. Dividend per share Divi. paid + proposed
WA. O/Sc
What?
How to calculate?
5. PE Ratio MPS
EPS
What?
How to calculate?
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Ratio Analysis Vs Other Techniques Why Ratio Analysis has become most popular?
Is Ratio Analysis the best for AFS? Shortcomings of ratio analysis.
End Product of the AFS End Product / result of AFS is the formal report compiled by using results attained under any techniques / methods discussed before.
Discussion:
Why writing a report is important?
Guidelines for effective report writing.
Format
Language
be polite
be specific
be simple (do not use much Technical Jargon)
be focus
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Recommended Format
Details of the sender / analyzer
Date of the report
Addressee (with formal approach)
Title of the report
Introductory Paragraph
Body of the report (results of the analysis)
End Paragraph
Signature of the Analyzer
Annexure: comprehensive analysis of the accounting ratios including graphs and other relevant qualitative information.
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