financial statements and credit analysis

By: $treet

Financial Statements

PAT

Net Income

Gross Profit

EBIDTA

Operating Profit

EBIT

Top Line

Bottom Line

Financial Statements

• Balance Sheet - statement of financial position at a given point in time.

• Income Statement - revenues minus expenses for a given time period ending at a specified date.

• Statement of Owner's Equity - also known as Statement of Retained Earnings or Equity Statement.

• Statement of Cash Flows - summarizes sources and uses of cash

Use of Financial Statements

Investors

Creditors

Process of Creation of Financial Statements

• Journal Entry

• General Ledger

• Trial Balance

• Financial Statements

What is the link between the Profit & Loss Statement and the Balance Sheet?

Net Income is transferred to the equity section of the balance sheet.

Key Accounting Concepts

Going Concern

Accrual Basis of Accounting

Matching Principle

Revenue Expenditure v/s Capital Expenditure

Most Important of All…

Liabilities Equity Assets

Key Components of Income Statement

Revenue

COGS

Gross Profit

SG&A

Depreciation Expense

Key Components of Income Statement…Continued

Operating Profit

Interest Expense

Income before Tax

Provision for Income Taxes

Income from continuing operations

Key Components of Income Statement…..Continued

Non Recurring/Extraordinary

Items

Net Income

Preferred Dividends

Basic EPS

Diluted EPS

ITC Mahindra & Mahindra LtdRs. in Cr. Mar-10 Mar-09 Mar-10 Mar-09INCOME :

Sales Turnover 27,623.44 24,363.71 31,328.83 26,777.14Other Income 642.92 526.22 2,866.82 2,564.67

Stock Adjustments -194.77 160.9 -26.69 -179.07Total Income 28,071.59 25,050.83 34,168.96 29,162.74

EXPENDITURE : Raw Materials 6,777.18 6,066.58 15,241.22 12,884.72Excise Duty 8,487.57 7,807.57 2,102.13 2,072.18

Power & Fuel Cost 410.37 415.67 510.77 471.4

Other Manufacturing Expenses

825.94 838.73 1,658.24 1,454.84

Employee Cost 1,467.89 1,326.76 4,582.55 4,274.86

Selling and Administration Expenses

2,432.55 2,341.73 3,367.92 2,909.57

Miscellaneous Expenses 764 711.15 818.94 1,347.92

Less: Preoperative Expenditure Capitalised

75.31 72.55 132.59 107.8

Profit before Interest, Depreciation & Tax

6,981.40 5,615.19 6,019.78 3,855.05

Model Income Statements

ITC Mahindra & Mahindra LtdRs. in Cr. Mar-10 Mar-09 Mar-10 Mar-09

Interest & Financial Charges

91.79 49.57 1,120.57 857.89

Profit before Depreciation & Tax

6,889.61 5,565.62 4,899.21 2,997.16

Depreciation 643.9 580.86 873.52 749.33

Profit Before Tax 6,245.71 4,984.76 4,025.69 2,247.83

Tax 2,034.93 1,625.38 1,154.20 542.24

Profit After Tax 4,210.78 3,359.38 2,871.49 1,705.59

Minority Interest after PAT 48.84 40.93 412.56 311.45

Profit after Minority Interest & P/L of Assoc.

Co.4,168.18 3,324.59 2,478.56 1,405.41

P & L Balance brought forward

785.71 652.56 4,642.70 3,873.20

Appropriations 4,897.62 3,199.74 1,085.20 592

Equity Dividend 3,818.18 1,396.53 564.9 303.73

Corporate Dividend Tax 635.1 248.68 74.23 33.23

Earning Per Share (Rs.) 9.25 8.15 42.49 50.33

Model Income Statements

Common Balance Sheet AccountsAssets

Cash & Equivalents

Accounts Receivable

Inventory

Prepaid Expenses

Investments

Common Balance Sheet AccountsAssets

Property Plant & Equipment

Intangible Assets

Deferred Tax Assets

Common Balance Sheet AccountsLiabilities

Accounts Payable

Accrued Expenses

Unearned Revenue

Notes & Bonds Payable

Finance Lease and Deferred Tax Liabilities

Common Balance Sheet AccountsEquity

Capital Stock

Additional Paid in Capital

Treasury Stock

Retained Earnings

Accumulated Other Comprehensive Income


SOURCES OF FUNDS :

Share Capital 381.82 377.44 282.95 272.62

Reserves & Surplus 14,076.49 13,650.72 9,897.31 6,763.29

Total Shareholders Funds 14,458.31 14,028.16 10,180.26 7,035.91

Secured Loans 0.95 18.86 8,972.45 7,724.71

Unsecured Loans 109.82 167.81 5,317.47 5,101.49

Total Debt 110.77 186.67 14,289.92 12,826.20

Minority Interest 126.38 129.96 2,462.35 3,057.26

Total Liabilities 14,695.46 14,344.79 26,932.53 22,919.37

Model Balance Sheet


APPLICATION OF FUNDS :

Gross Block 12,992.74 11,550.60 14,204.00 13,042.35Less: Accum. Depreciation 4,218.72 3,667.97 5,651.36 5,652.27

Net Block 8,774.02 7,882.63 8,552.64 7,390.08Capital Work in Progress 1,023.58 1,243.12 1,967.69 1,751.73

Investments 5,000.48 2,507.07 4,805.25 3,381.26

Current Assets, Loans & Advances

Inventories 5,092.02 4,794.33 3,548.99 3,271.46Sundry Debtors 1,026.24 817.32 3,335.44 3,564.81

Cash and Bank Balance 1,348.58 1,316.93 2,737.12 2,967.51Loans and Advances 1,901.99 1,901.83 11,499.62 9,658.19

Less: Current Liab. & Prov. Current Liabilities 4,884.91 4,414.92 7,580.72 7,466.78

Provisions 4,586.75 1,703.84 1,938.08 1,615.75

Net Current Assets -102.83 2,711.65 11,602.37 10,379.44

Total Assets 14,695.46 14,344.79 26,932.53 22,919.37

Model Balance Sheet

ACTIVITY RATIOS

LIQUIDITY RATIOS

SOLVENCY RATIOS

PROFITABILITY RATIOS

5Cs of Credit Analysis

Character Capacity (Cash Flow) Capital Collateral Conditions

Balance Sheet of a bank

Money, money, money

• Capital is the amount of money investors put into the bank plus any retained earnings.

• Liabilities is the money the bank borrows from depositors or other sources.

• Assets are loans that the bank makes (and a little cash and other assets).

Modulo operandi of a bank

• Banks make money by lending at a higher rate than they borrow. – Suppose the banks borrowed at 7%, loaned the money at 10%,

for a spread of 3%. The difference between 10% and 7% is called the "net interest spread".

• Banks report something a little different called the "net interest margin". The difference between the "spread" and the "margin" is because not all assets are loans (some might be held as cash for regulatory reasons). – Net Interest Margin (NIM) is the interest earned, minus the

interest paid, divided by total assets.

Basic structure of a bank

Suppose a bank had $100 billion in assets, and a NIM of 4.1% that would be $4.1 billion in annual profits before expenses and charge-offs - on just $10 billion in capital

(Note: The diagram shows 10-to-1 leverage; many banks were levered 30-to-1 or more)

Of course the bank has expenses (all those nice buildings and employees) - and there are always charge-offs for loans that don't get repaid, even in good times.

Common terms in banking

• Cash Reserve Ratio ( CRR) - The portion (expressed as a percent) of depositors' balances banks must have on hand as cash.

• Repo rate - The rate at which the RBI lends money to commercial banks.

• Reverse repo rate – The rate at which RBI takes money from commercial banks.

• Statutory Liquidity Ratio (SLR) - amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves.

Common terms in banking

• Priority sector lending – Loans to certain predefined sectors on subsidized rates.

• Base rate (previously prime lending rate)– The cost of funds to banks. It indicates the rate below which banks are not allowed to lend.

• Current Account, Savings Account (CASA) – Indicates quality of deposits. Low cost of funds

• Non performing assets (NPA) – The an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, as per RBI guidelines.

Assets

• Physical assets• Loans• Reserves• Investment securities

Assets: Loans

Consumer Loans: home loans, personal loans, automobile loans, credit card loans

Businesses Loans: real estate development loans, capital investment loans.

Assets: Reserves

Small in amount but important• Gives the much needed liquidity to banks for daily

transactions, such as processing checks or satisfying cash withdrawals

• Sense of security to customers• Two types of deposits

– Vault cash– Central Bank deposit

Assets: Investment security

• It is buffer between loans and reserves. Few extra reserves which bank is not ready to lock in loans for the long term is put in securities. – more interest than reserves– safer than loans

• Types of securities– Sovereign debt– Interbank money market– Commercial papers

Liabilities

• Transaction deposits• Other types of deposits• Other liabilities

Liabilities: Transaction deposits

Checking accounts or checkable deposits• Any demand deposit account against which checks or drafts of

any kind may be written. Checkable deposit accounts include checking, savings and money market accounts.

• Assets for customers, liabilities for bank• Separate listing in the balance sheet because they are part of the M1 money supply

Liabilities: Other type of deposit

• Savings accounts, certificates of deposit, money market deposits, repurchase agreements, and a host of other accounts that find their way into the M2 and M3 monetary aggregates

• CASA deposits (Current Account , Savings Account)

Liabilities: Other liabilities

• Borrowings from Central Bank and In the interbank money market, commercial papers etc.

Net Worth

What the bank owes the owners

Negative net worth puts the bank in the risk of insolvency

Depositors may loose savings

Loan loss reserves

Measures of money supply

• M1 – includes all physical money such – coins and currency– demand deposits, which are checking accounts– Negotiable Order of Withdrawal (NOW) Accounts.

• M2 – includes M1 in addition to – all time-related deposits – savings deposits – non-institutional money-market funds

• M3 – includes M2 as well as – all large time deposits– institutional money-market funds– short-term repurchase agreements– other larger liquid assets.

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