fin statement analysis_ratio analysis

7/25/2019 Fin Statement Analysis_Ratio Analysis

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Financial Statement

Analysis Ratio Analysis


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INTRODUCTION Ratio Analysis is a comprehensive tool

of analysis in that it seeks to measurean esta!lish cause an e"ectrelationship !et#een either t#o itemsof $S or %&' A(c or !oth the $S an%&' A(c)

Ratio analysis is a relative an morefocuse analysis)


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There are many variants of ratioanalysis an the analyst can carry outthe analysis of a *iven set of +nancialstatements #ith a lot of ,e-i!ility)

There may !e many areas #here ananalyst may have a i"erin* vie# oropinion on the treatment of a ratio


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Si*ni+cance. Inter/+rm comparison

Intra/+rm comparison

Comparison a*ainst in ustry !enchmarks

Analysis of chronolo*ical performanceover a lon* perio


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C'ASSIFICATION Return on Investment Ratios Solvency Ratios

'i0ui ity Ratios Resources1 23ciency or Turnover

Ratios

%ro+ta!ility Ratios Du %ont Analysis 4aluation or Capital 5arket Ratios


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I / R2TURN ON IN42ST52NTRATIOS

5a-imisation of ROI is the ultimateo!6ective of the company mana*ement)It is the ultimate measure of thee3ciency of performance of amana*ement)

5a6or ratios are

7 RON89 2%S: C2%S


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7) RON8 ;>

20 Shhol ers Fun or Net#orth

It is also kno#n as Return on 20uity ;RO2= A 6ust %AT for e-traor inary items 20uity capital to !e taken on 8ei*hte

Avera*e $asis

Simple avera*in* of Res & Surplus an5isc 2-p not #(o to !e one


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$enchmarkin*

/ ?ro#th in the ratio over the %@ anlon*er past/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e/ In ustry Tren s/ Comparison #ith 8ACC/ Comparison #ith the cost of!orro#in*s


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Strate*ic ey Drivers

/ Bualitative an Buantitative *ro#thin sales/ 23cient asset utili ation/ Cost economies/ 23cient ta- plannin*

/ 'o#er cost of !orro#in*s/ Optimum capital structure


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9) 2%S ;Rs)=%AT %ref Div

8ei*hte Avera*e No of 20 shares Outst It seeks to put RON8 in a i"erent

perspective It forms the !asis for the valuation of

shares $ench markin*

same as RON8 Strate*ic ey Drivers

RON8

De!t/20 mi-


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:) C2%S ;Rs)=%AT/%ref Div Non cash char*es

8ei*hte Avera*e No of 20 Shares Outst It is a re+nement of 2%S in that it takes

into account the cash earnin*s an notaccrual/!ase earnin*s

Ratio is si*ni+cant in lon* *estationpro6ect an start/up casesE #here

thou*h the co mi*ht report a loss it maystill !e a!le to serve its o!li*ationsto#ar s its len ers an meet itsoperatin* e-penses)


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$ench markin*Same as RON8

Strate*ic ey Drivers/ 2%S/ %roportion of non/cash char*es


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II SO'42NC@ RATIOS

The capacity of a company to ischar*eits o!li*ations to#ar s lon*/termlen ers)

Useful to analyse the capacity of a co toraise further capital an !orro#in*s)

Useful for FIE $anks an other len ers) / Net asset value

/ De!t/20uity/ Interest Cover/ DSCR


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7) NA4 ;Rs)=20 sh hol ers FunNo of 20 Sh Outst

It measures the net #orth per e0uity share)It is also kno#n as !ook value per share)

No of e0uity sh outst is the year en +*urean not #ei*hte avera*e

This ratio in icates the e3ciency of the com*mt in !uil in* up a !ack/up of reservesan surplus to fall !ack upon) i*her theratio hi*her is the capacity of a co to raise!orro#e as #ell as e0uity capital)


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$ench markin*/ In ustry NA4/ NA4s of lea ers an la**ar in thein ustry/ ?ro#th in NA4 over previous year anlon*er

term/ In ustry tren s


/ RON8 an 2%S/ Divi en %olicy/ Share %remium


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9) De!t 20uity ;Times='on* Term De!t Total Net 8orth

5easures the proportion of e!t ancapital

In case of converti!le e!E converti!lepart is to !e treate as e0uity)

Cos nee to have optimum capitalstructure


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$ench markin*/ Insti norms 7)G.7 ;hi*her for Capintensive

pro6ects= / ecline in ratio over %@ an lon*erterm

/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e/ In ustry Tren s


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Strate*ic ey Drivers/ RON8 an 2%S/ Div policy

/ Share prem/ NA4/ $orro#in* policy


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:) Interest Cover ;Times=%AT Int on 'on* Term De!t Non/Cash

Char*esInt on 'on* Term De!t

Capacity of the co to pay int lia!ility onlon* term !orro#in*s out of cash pro+ts

i*her the ratio lesser the +n risk of efault


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$ench markin*/ Insti norms 9.7/ ?ro#th in the ratio over the %@ anlon*er past/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e

/ In ustry Tren s


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Strate*ic ey Drivers/ RON8/ De!t/20uity

/ Cost of 'on* Term $orro#in*/ %roportion of non/cash char*es inthe

e-pense structure of the co


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H) DSCR ;Times=

%AT Int on 'on* Term De!t Non cashChar*es

Int on 'on* Term De!t Instal of %rinDue

It measures the capacity of a co to paythe instal of the principal ue an theint lia!ility it has incurre on its lon*/

term !orro#in*sE out of its cash pro+ts)


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$ench markin*/ Insti norms DSCR of 7)/ ?ro#th in the ratio over the %@ an lon*erpast



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/ RON8/ De!t e0uity/ Tenure of loans

/ Cost of lon* term !orro#in*s/ %roportion of non/cash char*es in the

e-pense structure of the co


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III 'IBUIDIT@ RATIOS The li0ui ity position of a co is

etermine !y analysin* the structure ofcurrent assets an lia!ilitiesE cre itperio allo#e to the customersE cre itperio availe from the suppliers aninventory hol in* of the co)

/ Current ratio/ Buick ratio/ Collection perio allo#e to customers/ Suppliers cre it/ Inventory hol in* perio


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7) Current ratio ;Times=CAE loans & a vances Short term

investC' %rovi short term e!t

It helps in assessin* the cos capacity toischar*e its ay to ay o!li*ations

$ench markin*/ Insti norms 7)::.7

/ %roportion of non/cash char*es/ ?ro#th in the ratio over the %@ anlon*er past


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/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e

/ In ustry Tren s

Strate*ic key Drivers

/ %roper asset lia!ility m*mt/ Cre it perio availe from suppliers/ Cre it perio allo#e to the customers

/ Inventory hol in*


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9) Buick ratio ;Times=CAE loans & a vancesinventory Short term

investC' %rovi Short term e!t net of 8C limits

Also kno#n as aci test ratio %repai e-penses are also e-clu e It is re+nement of CR #ith ti*hter as #ell as

more realistic properties


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$ench markin*/ Insti norms 7.7

/ ?ro#th in the ratio over the %@ anlon*er past/ Comparison #ith the in ustry lea er

/ Comparison a*ainst in ustry avera*e/ In ustry Tren s/ %roportion of non cash char*es

Strate*ic ey DriversSame as CR


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: Collection %erio allo#e to Customers; ays=

Receiva!les - : GCre it Sales

Sales sh !e *ross sales an not net of e-cise $ench markin*

/ Decline in ratio over %@ an lon*er perio/ ?ro#th in the ratio over the %@ an lon*er

past/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e/ In ustry Tren s


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Strate*ic ey Drivers/ RON8/ %ro uct 0uality an pricin*

/ 5arket share an competition/ Collection policies/ $ran e0uity


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H) Suppliers Cre it ; ays=%aya!les - : G

Cre it %urchases In practice total pur is taken as cre it pur

+*ures are not availa!le $ench markin*

/ ?ro#th in the ratio over the %@ an lon*erpast/ Comparison #ith the in ustry lea er

/ Comparison a*ainst in ustry avera*e/ In ustry Tren s


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/ RON8/ %ro uct 0uality an pricin*/ 5arket share an competition

/ $ran e0uity/ Collection policy of suppliers/ Competition in the suppliers in ustry/ ne*otiatin* levera*e availa!le tocustomers


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G) Inventory ol in* %erio ; ays=Inventory - : G

Cost of ?oo s Sol Avoi unnecessary e-cessive inventory

!uil up) $ench markin*

/ Decline in the ratio over %@ an lon*erterm/ ?ro#th in the ratio over the %@ an lon*er

past/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e

/ In ustry Tren s


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Strate*ic ey Drivers/ Supply chain mana*ement/ Shorter pro uction process

/ Fast pro uct turnover/ 5inimum o!solescence

I4 / R2SOURC2S 2FFICI2NC@


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I4 / R2SOURC2S 2FFICI2NC@OR TURNO42R RATIOS

The e3ciency #ith #hich the assetsan resources of a co are utilise in*eneratin* operational revenue has a

irect !earin* on the top line) / Fi-e assets turnover ratio

/ Net #orth turnover ratio/ De!tors turnover ratio/ Inventory turnover ratio


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7) Fi-e assets Turnover Ratio ;Times=

Net SalesNet $lock of FA

5easures the volume of *ross income*enerate !y the FA) The ratio plays animp role in improvin* the overallpro+ta!ility an +n position of a co)

Capital 8I% sh not !e taken in FA Net sales J sales e-clusive of e-cise

uty


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$ench markin*/ ?ro#th in the ratio over the %@ anlon*er past



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Strate*ic ey Drivers/ %ro uction e3cienciesE min#asta*es an plant shut o#n

/ Invest in appropriate mo erntechnolo*ies/ Optimum plant capacities

/ %ro uct 0uality an pricin*

9) Net #orth Turnover Ratio ;Times=


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9) Net #orth Turnover Ratio ;Times=Net SalesNet #orth

It is the e3ciency in the resourceutilisation from the an*le of e0uity shhol ers

$ench markin*/ ?ro#th in the ratio over the %@ anlon*er past/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e/ In ustry Tren s


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Strate*ic ey Drivers/ %ro uction e3cienciesE min#asta*es an plant shut o#n

/ Invest in appropriate mo erntechnolo*ies/ Optimum plant capacities

/ %ro uct 0uality an pricin*/ Optimum Capital Structure


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:) De!tors Turnover Ratio

H) Inventory Turnover Ratio

$oth ratios alrea y iscusse un er

li0ui ity ratios


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4 %ROFITA$I'IT@ RATIOS Stu y an analysis of pro+ta!ility in

relation to sales forms the very !asis an!ack!one of the ROI ratios) / 5ulti/step %ro+t 5ar*ins to sales ratio

/ Ratios of in ivi ual costs an e-penses toSales

/ Ratios of other incomeE e-traor inaryitems

an prior year a 6ustments to %$T an (ornet sales

/ 2"ective ta- rate

A 5ulti step pro+t mar*in


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A 5ulti step pro+t mar*into sales ratios ;


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Strate*ic ey Drivers/ Bualitative an 0uantitative *ro#th

in salesEe3cient asset utilisation an cost

economies for all ratios

/ A*e of FA for %$IT/ 'o#er cost of !orro#in* anoptimum cap structure for %$T

/ 23cient ta- plannin* for %AT


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$ Ratios of in ivi ualcosts(e-penses to sales ;>) elp m*mt in concentratin* on cost

re uction)

$ench markin*/ Decline in the ratios over the %@ anlon*er term

/ ?ro#th in the ratio over the %@ an


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/ ?ro#th in the ratio over the %@ anlon*er past/ Comparison a*ainst in av ( in lea erStrate*ic ey Drivers/ Bualitative an 0uantitative *ro#th insales

/ 23cient asset utilisation an costeconomies for all ratios/ Cost economies in all items of e-penses

/ Cost of !orro#in*s/ Capital Structure/ A*e of +-e assets

C R ti f th i E


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C Ratios of other incomeEe-traor inary items an prior year

a 6ustments to %$T an (or NetSales ;


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/ Decline in the ratios over the %@ anlon*er term

/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustryavera*e

/ In ustry Tren s

Strate*ic ey Drivers/ Soun Fin a(cin* policies an their

consistency/ Concentration on key !usi activities


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D 2"ective ta- rate ;>%$T

It measures the actual e"ective rateat #hich a co pays income ta- on its%$T as a*ainst the statutory rate ofincome ta-)

$ h ki *


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$ench markin*/ Statutory ta- rate

/ Decline in the ratio over %@ an lon*erterm/ Comparison #ith the in ustry lea er/ Comparison a*ainst in ustry avera*e/ In ustry Tren s

Strate*ic ey Drivers/ Availa!ility an e"ective e-ploitation ofta- savin* opportunities/ Continuous e-pansion( iversi+cation to

claim hi*her ep an incentives


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4I DU %ONT ANA'@SIS RON8 J Net %ro+t 5ar*in - Net 8orth

TurnoverOR

ROTA J Net %ro+t 5ar*in - Total Asset Turnover

RON8 the ultimate overall pro+ta!ility

ratio is a function of Net %ro+t 5ar*inan Net 8orth Turnover) It seeks tomeasure an esta!lish this relationship)


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It may also !e calculate #ithreference to Return on Total Assets)

It ena!les an analyst to un erstan animprovement in the RON8 over the%@E #hether this improvement has!een cause !y improve net pro+tmar*in or improve net #orth

turnover or an improvement in !oth oran improvement in one an an

eterioration another


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$ench markin*

/ ?ro#th in t#o constituent ratiosover the %@ an lon*er term/ Comparison #ith in lea er( in

avera*e/ In ustry tren s/ Comparison #ith the 8ACC/ Comparison #ith the cost of!orro#in*s


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Strate*ic ey Drivers/ Bualitative an 0uantitative *ro#thin sales/ 23cient asset an net #orthutilisation/ Cost economies/ 23cient ta- plannin*/ 'o#er cost of !orro#in*s/ Optimum capital structure


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4II 4A'UATION(CA%ITA'

5AR 2T RATIOS / 2%S

/ %(2

/ NA4/ 5kt %rice to NA4/ 5kt capitalisation

/ @iel to investors

7) %(2 ;times=


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) ( ;5kt %rice per 20 Sh

2%S If D2%S is i" from $2%S then D2%S #ill

form the enominator) The ratio re,ects the investors perception

of a company) $ench markin*

/ In ustry %(2

/ %(2s of the lea er an la**ar in thein ustry/ ?ro#th in %(2 over %@ an lon*er term/ In ustry tren s


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Strate*ic ey Drivers/ 2%S/ Divi en %olicy

/ Future prospects/ Si e of e0uity/ Floatin* stock/ 5arket con itions

9) 5arket %rice to NA4 ;Times=


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) ;5kt %rice

NA4 It re,ects the investment potential of a

share) It also o"ers opportunity to the coto !uy !ack its o#n shares from the

market) $ench markin*

/ In ustry avera*e

/ Ratios of the lea er an la**ar in thein ustry/ ?ro#th in ratio over %@ an lon*er term/ In ustry tren s


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/ NA4/ Divi en policy/ Future prospects

/ Si e of the e0uity/ Floatin* stock/ 5arket con itions

:) 5arket Capitalisation ;Rs)=


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) p ; ) No of 20 Shares Outst - 5kt price

It provi es a macro vie# of the shareprice) It is immensely useful inne*otiatin* mer*ersE takeoversEac0uisitionsE isinvestments an hive/o"

an also important for research purposes) $ench markin*Same as 5kt %rice to NA4

Strate*ic ey Drivers/ All those applica!le to %(2/ NA4


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H) @iel to investors ;>

Initial Invest It is helpful in evaluatin* a potential

invest as #ell as in takin* a hol or e-it

ecision) $ench markin*

/ Same as 5kt %rice to NA4 ratio

Strate*ic ey Drivers/ All those applica!le to %(2 ratio an 5kt

%rice to NA4 ratio

COR2 RATIOS


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COR2 RATIOSI) ROI Ratios

/ RON8/ 2%S

II) Solvency Ratios/ NA4/ De!t 20uity/ DSCR

III) 'i0ui ity Ratios/ Current Ratio/ Buick Ratio


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/ Collection %erio allo#e to Customers/ Suppliers Cre it

/ Inventory ol in* %erioI4) Turnover Ratios

/ Fi-e Assets Turnover Ratio/ Net 8orth Turnover Ratio

4)%ro+ta!ility Ratios/ 5ain ratios throu*h a multi/step common/

si e income statement

/ Ratios of imp in ivi ual costs an e-pensesto sales throu*h a common si e statement


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/ Other incomeE e-traor inary itemsan prior year a 6ustments to%$T(Net Sales/ 2"ective ta- rate

4I)Du %ont Analysis4II)4aluation Ratios

/ NA4

/ %(2/ @iel to Investors

fin statement analysis_ratio analysis

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