Date post: | 18-Feb-2016 |
Category: |
Documents |
Upload: | maryam-tajalli |
View: | 217 times |
Download: | 0 times |
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
Introduction to Business Finance (Fall 2015) 1
Balance Sheet shows a firm’s accounting value on a particular date…
• Assets are listed in order of liquidity.• Assets are recorded at historical or fair
market values.
Introduction to Business Finance (Fall 2015) 2
3
Basic Accounting Equation says…Assets = Liabilities + Shareholders’ Equity
CurrentAssets
Fixed Assets1.Tangible fixed assets2.Intangible fixed assets
Current Liabilities
Non-current Liabilities
Shareholders’ Equity
Total Value of Assets Total Value of Liabilities and Shareholders’ Equity
Introduction to Business Finance (Fall 2015) 3
Income Statement measures a firm’s performance over a period of time…
Sales $2000Less: Cost of Good Sold 1200Gross Profit 800Less: Selling and Adm. Expenses 300 EBIT/Operating Income 500Less: Interest 100Taxable Income 400Tax (50%) 200Net Profit $200Less: Preferred Dividends 80Income available to CSH $120
Introduction to Business Finance (Fall 2015) 4
Net Income on income statement is not necessarily the cash income…
The figures on the Statement of Financial Performance may differ from actual cash inflows and outflows during a period due to:– Revenues and costs being recorded when they
are realized, not when they are received or paid.– The existence of non-cash items such as
depreciation.
Introduction to Business Finance (Fall 2015) 5
Statement of cash flows summarizes the sources and uses of cash over a specified period…
• Sources of cash are those activities that bring in cash.
• Uses of cash are those activities that involve spending cash.
Introduction to Business Finance (Fall 2015) 6
Cash Flow Statement divides the cash changes into three main categories:– Operating activities—includes net profit and
changes in operating current accounts
– Investment activities—includes changes in fixed assets and financial investments
– Financing activities—includes changes in notes payable, long-term debt and equity accounts as well as dividends.
Introduction to Business Finance (Fall 2015) 7
LUCKY CEMENT
Three sets of parties are interested in financial analysis…
• Shareholders
• Creditors
• Management
Introduction to Business Finance (Fall 2015) 9
There are different methods of analyzing the financial position and performance…
• Common-Size Statements– Horizontal Analysis– Vertical Analysis
• Ratio Analysis– Trend Analysis– Cross-sectional Analysis
Introduction to Business Finance (Fall 2015) 10
Common-Size Statements are Financial statements that show
only percentages and no absolute dollar amounts…
Introduction to Business Finance (Fall 2015) 11
HORIZONTAL & VERTICAL ANALYSIS
Is based on:1. Profit and Loss Statement2. Balance Sheet
Introduction to Business Finance (Fall 2015) 12
LUCKY CEMENT
2009 2010 2011 2012 2013 2014Turnover 26,330,404 24,508,793 26,017,519 33,322,535 37,810,456 43,083,169Cost of Sales 16,519,138 16,529,932 17,306,400 20,601,261 21,054,058 24,393,064Gross Profit 9,811,267 7,978,861 8,711,119 12,721,274 16,756,398 18,690,105Distribution Cost 2,427,837 3,433,047 3,236,425 3,236,721 3,664,019 3,382,156Administrative Cost 165,936 303,244 313,389 474,135 680,347 760,269Operating Profit 7217494 4,242,570 5,161,305 9,010,418 12,412,032 14,547,680Finance Cost 1236971 569,184 517,788 253,234 75,829 34,225(Other Income)/Charges 803,521 255,872 322,996 433,207 590,335 57,090Profit before taxation 5177002 3417514 4320521 8323977 11745868 14456365Taxation 580453 280057 350121 1541561 1997106 3111962Profit after taxation 4596549 3137457.00 3970400 6782416 9748762 11344403Other Comprehensive Income - - - - -34814 -663Total Comprehensive Income 4596549 3137457 3970400 6782416 9713948 11343740
PROFIT AND LOSS STATEMENTfigures in (Rs. 000)
LUCKY CEMENT2009 2010 2011 2012 2013 2014
Assets EmployedProperty, plant and equipment 30,477 31,378 31,705 31,017 31,008 31,937Intangible Assets - 3 2 1 5 28Long term investments - - - - 5,619 8,158Long term advance 55 55 55 55 547 72Long term deposit & deferred cost 2 2 3 3 3 3Current assets 7,858 6,871 9,444 9,555 13,013 19,600Total Assets 38,392 38,310 41,210 40,631 50,196 59,798Financed ByShareholders’ Equity 23,252 25,096 27,773 33,262 41,035 49,792Long-term liabilitiesLong term finance 4,300 1,659 658 393 127 -Current portion of long term finance - 176 265 265 265 127
4,300 1,834 923 658 393 127Long term deposits and deferred liabilites 1,742 1,914 2,082 3,352 5,187 5,522Current liabilities 9,099 9,642 10,697 3,624 3,846 4,484Current portion of long term finance - (176) (265) (265) (265) (127)
9,099 9,466 10,432 3,359 3,580 4,357Total Funds Invested 38,392 38,310 41,210 40,631 50,196 59,798
BALANCE SHEETFigures in (Rs. million)
Horizontal Analysis involves…
using comparative financial statements to calculate dollar or percentage changes in a financial statement items from one period to the next.
Introduction to Business Finance (Fall 2015) 15
LUCKY CEMENT – Horizontal Analysis
2009 2010 2011 2012 2013 2014Turnover 100.00 (6.92) (1.19) 26.56 43.60 63.63Cost of Sales 100.00 0.07 4.77 24.71 27.45 47.67Gross Profit 100.00 (18.68) (11.21) 29.66 70.79 90.50Distribution Cost 100.00 41.40 33.30 33.32 50.92 39.31Administrative Cost 100.00 82.75 88.86 185.73 310.01 358.17Operating Profit 100.00 (41.22) (28.49) 24.84 71.97 101.56Finance Cost 100.00 (53.99) (58.14) (79.53) (93.87) (97.23)Other Income/Charges 100.00 (68.16) (59.80) (46.09) (26.53) (92.90)Profit before taxation 100.00 (33.99) (16.54) 60.79 126.89 179.24Taxation 100.00 (51.75) (39.68) 165.58 244.06 436.13Profit after taxation 100.00 (31.74) (13.62) 47.55 112.09 146.80Other Comprehensive Income 100.00 - - - (100.00) (100.00)Total Comprehensive Income 100.00 (31.74) (13.62) 47.55 111.33 146.79
Horizontal Analysis PROFIT AND LOSS STATEMENT
LUCKY CEMENT – Horizontal Analysis
2009 2010 2011 2012 2013 2014Share Capital & Reserves 100.00 7.93 19.44 43.05 76.48 114.14Non Current Liabilities 100.00 (40.87) (54.64) (38.01) (12.03) (8.61)Current Liabilities 100.00 5.97 17.56 (60.17) (57.73) (50.72)Total Equity & Liabilities 100.00 (0.21) 7.34 5.83 30.75 55.75Non Current Assets 100.00 2.96 4.03 1.78 21.77 31.65Current Assets 100.00 (12.55) 20.19 21.59 65.61 149.43Total Assets 100.00 (0.21) 7.34 5.83 30.75 55.75
Horizontal Analysis
BALANCE SHEET
In a Vertical Analysis…
for a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of net sales.
Introduction to Business Finance (Fall 2015) 18
LUCKY CEMENT – Vertical analysis
2009 2010 2011 2012 2013 2014Turnover 100.00 100.00 100.00 100.00 100.00 100.00Cost of Sales 62.74 67.44 66.52 61.82 55.68 56.62Gross Profit 37.26 32.56 33.48 38.18 44.32 43.38Distribution Cost 9.22 14.01 12.44 9.71 9.69 7.85Administrative Cost 0.63 1.24 1.20 1.42 1.80 1.76Operating Profit 27.41 17.31 19.84 27.04 32.83 33.77Finance Cost 4.70 2.32 1.99 0.76 0.20 0.08(Other Income)/Charges 3.05 1.04 1.24 1.30 1.56 0.13Profit before taxation 19.66 13.94 16.61 24.98 31.07 33.55Taxation 2.20 1.14 1.35 4.63 5.28 7.22Profit after taxation 17.46 12.80 15.26 20.35 25.78 26.33Other Comprehensive Income - - - - (0.09) -Total Comprehensive Income 17.46 12.80 15.26 20.35 25.69 26.33
Vertical Analysis - %PROFIT AND LOSS STATEMENT
LUCKY CEMENT – Vertical analysis
2009 2010 2011 2012 2013 2014Share Capital & Reserves 60.56 65.50 67.39 81.86 81.75 83.27Non Current Liabilities 15.74 9.33 6.65 9.22 10.59 9.23Current Liabilities 23.70 25.17 25.96 8.92 7.66 7.50Total Equity & Liabilities 100.00 100.00 100.00 100.00 100.00 100.00Non Current Assets 79.53 82.06 77.08 76.48 74.08 67.22Current Assets 20.47 17.94 22.92 23.52 25.92 32.78Total Assets 100.00 100.00 100.00 100.00 100.00 100.00
BALANCE SHEETVertical Analysis - %
Ratios express the logical relationships between items in a
financial statement or from different financial statements of a
single period…
Introduction to Business Finance (Fall 2015) 21
When Numerator and Denominator are from different
statements:If numerator (denominator) is from balance sheet and the denominator (numerator) is from income statement, the figures will have to be adjusted as Balance sheet is made over a point in time whereas Income Statement covers a period.
For example,
Asset Turnover = Sales/ Total Assets
Sales figure is taken from Income StatementTotal Assets figure is obtained from Balance Sheet
Hence, Average of Total Assets will be taken in the denominator instead of total assets.
There are five important categories of ratios…
1. Liquidity Ratios2. Asset Management Ratios3. Debt Management Ratios4. Profitability Ratios5. Market Ratios
Introduction to Business Finance (Fall 2015) 23
LIQUIDITY RATIOS
2009 2010 2011 2012 2013 2014Current ratio 0.86 0.71 0.88 2.64 3.38 4.37Quick ratio 0.36 0.23 0.18 0.8 1.66 2.65
LUCKY CEMENT
measure the ability of the firm to meet its short-term financial obligations…
Introduction to Business Finance (Fall 2015) 24
Liquidity Ratios
Current Ratio = Current Assets/Current Liabilities = 10,600/4,484 = 4.37 (as of 2014)Are there sufficient Current assets to pay off Current Liabilities?
High Ratio Safe Liquidity but might indicate inefficient management of Current Assets
Low Ratio Company might not be able to meet its debt obligations
Liquidity ratiosQuick Ratio = Current Assets- Stock/Current
Liabilities = 10,600-*1,283/4,484 = 2.65 (as of 2014)
*figure of stock is mentioned in the notes to accounts.
What is the liquidity position after the least liquid asset is subtracted?
High Ratio Availability of quick funds but might also indicate pilling up of cash unnecessarily
Low Ratio Inventory is a significant portion of current assets and its removal might reveal liquidity issues.
ASSET MANAGEMENT RATIOS
Inventory turnover times 3.49 3.58 2.84 2.89 3.17 3.02No. of days in Inventory days 104.58 101.96 128.52 126.30 115.14 120.8Debtor turnover times 26.50 23.95 37.16 39.87 27.81 23.00No. of days in Receivables days 13.77 15.24 9.82 9.15 13.12 15.87Creditor turnover times 5.31 5.78 4.88 5.58 6.09 5.56No. of days in Payables days 68.74 63.15 74.80 65.41 59.93 57.39Operating Cycle days 49.61 54.05 63.54 70.04 68.33 65.83Total assets turnover times 0.69 0.64 0.63 0.82 0.75 0.78Fixed assets turnover times 0.86 0.78 0.82 1.07 1.22 1.11
assess how effectively the firm is using assets to generate sales…
Introduction to Business Finance (Fall 2015) 28
Asset Management Ratios
Inventory Turnover Ratio = CGS/Average Inventory
= 21,054 / {(7,510 + 6,415)/2} = 3.02 times
*Average inventory includes stock in trade + stores and spares – any movement in spares.
How many times, on average, the inventory is sold and replaced during the fiscal year?
High Ratio High Sales
Low Ratio Poor liquidity, overstocking but might indicate planned inventory
Receivables Turnover Ratio = Credit Sales/ Average Receivables
= 43,083/{(2,077 +1,668)/2}= 23 times
How many times receivables are collected, on average, during the fiscal year?High Ratio Quick collection of receivables
Low Ratio The longer the receivables are held, risk increases. Company should re-assess its credit policies
Asset Management Ratios
Payables Turnover Ratio=Credit Purchases/Average Payables
=21,330/ {(4,096 + 3,573)/2}= 5.56 times
How many times the company pays its suppliers
bills, on average, during the fiscal year?Low Ratio If it has increased over time, company is delaying payments and hence has cash available but this might spoil the relations with suppliers
High Ratio Company has a policy of quickly paying off its obligations
The figure of purchases = Cost of Sales-Opening Inventory+Closing Inventory.Assumption: All purchases were made on account.
Asset Management Ratios
2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 40
5
10
15
20
25
30
35
40
45
lucky cement - asset managementInventory turnover Debtor turnover Creditor turnover
Days Sales Outstanding = 365/Receivables TO(Av. Collection period) = 365/23 = 15.87 daysDays Sales of Inventory = 365/Inventory TO(Av. Days to sell the inventory) = 365/3.02 = 120.8 daysDays Payables Outstanding = 365/Payables TO(Av. Days to pay creditors) = 365/5.56 days = 65.64 days
States the turnover ratios in terms of days.
Asset Management Ratios
2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 40
20
40
60
80
100
120
140
lucky cement - asset managementNo. of days in Inventory No. of days in Receivables No. of days in Payables
Operating Cycle= DSI + DSO = 120.8 + 15.87 = 136.7 daysShows the time elapse between purchase of raw material and cash collection from sales.Long Cycle Necessitates borrowing
Short Cycle Creates cash flow
Asset Management Ratios
2009 2010 2011 2012 2013 2014
118.35117.2
138.34
135.45
128.26
136.67
LUCKY CEMENT - ASSET MANAGEMENT
Cash Conversion Cycle = DSI+DSO-DPO = 136.7 – 65.6 = 71.1 daysShows the time between the payment of raw material and collection of sales. Long Cycle Delayed inflows
Short Cycle Desirable as it means less time between inflows and outflows
The value is negative since Honda has no receivables and we have assumed that all its purchases are made on account.
Asset Management Ratios
2009 2010 2011 2012 2013 2014160
170
180
190
200
210
220
LUCKY CEMENT - ASSET MANAGEMENT
Asset Turnover = Sales/ Total Assets = 43,083 / {(59,798+
50,196 )/2} = 0.78 How effective is the firm in using its overall assets to generate sales?Gives amount of sales that each unit of asset generates. Hence, the higher the better!
Asset Management Ratios
Fixed Asset TO = Sales/ Total Fixed Assets = 43,083 / {(40,198+
37,190 )/2} = 1.11 (as of 2014)How effective is the firm in using its overall assets to generate sales?Gives amount of sales that each unit of asset generates. Hence, the higher the better!
Asset Management Ratios
2009 2010 2011 2012 2013 20140
0.5
1
1.5
2
2.5
LUCKY CEMENT - ASSET MANAGEMENT
Total assets turnover Fixed assets turnover
DEBT MANAGEMENT RATIOS
quantify the firm's ability to repay long-term debt…
Introduction to Business Finance (Fall 2015) 42
2009 2010 2011 2012 2013 2014Financial leverage ratio times 0.45 0.32 0.26 0.02 0.01 0.02TIE ratio times 5.83 7.45 9.97 35.58 188.55 426.2
Debt Ratio = Total Debt/ Total Assets = 9,160/59,798
= 0.18*total debt includes short term + long term debt
What percentage of company’s total assets are financed through debt (borrowed funds)?
Debt management ratios
High Ratio Highly leveraged firm and high risk.
Low Ratio Usage of internally generated funds to finance the company.
Also called financial leverage ratio
2009 2010 2011 2012 2013 20140
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
lucky cement - debt management
Long term Debt Ratio = LT Debt/ Total Assets = 5,521 / 59,798
= 0.09 (as of 2015)
What percentage of company’s total assets are
financed through long term debt?
Debt management ratios
Introduction to Business Finance (Fall 2015) 45
Times Interest Earned Ratio (TIE)= EBIT/Interest Expense
= 14,490 / 34 = 426.2 times
How many times the company can cover its finance cost from its earnings on a pre-tax basis?High Ratio Favorable. Greater ability of business to repay its interest and debt.
Low Ratio If its < 1. Company’s earnings aren’t suffice to cover interest expense
Debt management ratios
2009 2010 2011 2012 2013 20140
50
100
150
200
250
300
350
400
450
lucky cement - debt management
PROFITABILITY RATIOS
Assess the profitability of the company…
2009 2010 2011 2012 2013 2014Gross profit margin percent 37.26% 32.56% 33.48% 38.18% 44.32% 43.38%Net profit margin percent 17.46% 12.80% 15.26% 20.35% 25.78% 26.33%Return on Equity percent 19.77% 12.50% 14.30% 20.39% 23.67% 22.78%Return on Capital Employed percent 17.40% 11.55% 14.39% 21.85% 25.97% 24.94%
Introduction to Business Finance (Fall 2015) 48
Profitability ratios
Gross Profit Margin= Gross Profit/ Sales= 18,690 / 43,083= 43.38%
Measures the company's manufacturing anddistribution efficiency during the productionprocess.High Ratio Company can make reasonable profits but only cost of production is
accounted for.
Low Ratio Business is unable to meet its cost of production.
Profitability ratios
Net Profit Margin= Net Profit/ Sales= 11,343 / 43,083= 26.33%
Measures the company's overall efficiency during the production process.
Introduction to Business Finance (Fall 2015) 50
2009 2010 2011 2012 2013 20140.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
LUCKY CEMENT - PROFITABILITYGross profit margin Net profit margin
Return On Assets = EBIT(1-T)/Total Assets =
14,401–3,111/{(59,797+50,196)/2} = 20.7%
Measures the earnings power of the assets regardless of how the assets are financed.High Ratio Better, as company is earning more on its assets
Low Ratio Inefficient use of company’s asset
Profitability ratios
Return on Common Equity or Capital Employed (ROCE):Net Profit-Preferred Dividends/Total Equity= 11,343 – 0/{(49,792 + 41,035)/2}= 24.94%
How much profit the company generates with the money invested by common stock owners?The most important ratio for investors. It shows how many dollars in earning result from investment in equity.
Profitability ratios
2009 2010 2011 2012 2013 20140.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
LUCKY CEMENT - PROFITABILITYReturn on Equity Return on Capital Employed
MARKET VALUE RATIOSgive an idea of what the firm's
investors think of the firm's performance and future
prospects…
Introduction to Business Finance (Fall 2015) 55
2009 2010 2011 2012 2013 2014Market Value Per Share rupees 58.53 62.14 70.84 115.39 209.72 410.30Book value per share rupees 71.9 77.6 85.9 102.9 126.9 144.20
2009 2010 2011 2012 2013 2014Earnings per share (after tax) rupees 14.21 9.70 12.28 20.97 30.15 35.12Price / Earning ratio (after tax) times 4.12 6.40 5.77 5.50 6.96 11.70Dividend Yield percent 6.83% 6.44% 5.65% 5.20% 3.81% 2.19%Dividend Payout ratio percent 28.15% 41.23% 32.58% 28.61% 26.54% 25.65%Dividend Cover ratio times 3.55 2.43 3.07 3.50 3.77 3.90
Market vs. Book value
Market Value ratios
2009 2010 2011 2012 2013 20140
50
100
150
200
250
300
350
400
450
LUCKY CEMENT - MARKET VALUE
Market Value Per Share Book value per share
Market to Book Ratio = Market Price/Book Value = 410.3/144.2 = 2.84 (as of 2014)
How much are investors willing to pay per dollar of book value?
Market to book ratio of more than 1 means investors expectations about future profits are positive.
Market Value ratios
Introduction to Business Finance (Fall 2015) 57
Earning per share = Net profit / outstanding shares= 11, 343 / 323= rs. 35.12
*figure for outstanding shares is specified in the annual report
How much are investors willing to pay per dollar of earnings of the firm?High Ratio Company is carrying a lot of risk.
Low Ratio Safer Investments.
Market Value ratios
Price to Earnings Ratio= Market price/ EPS = 410.3/35.12
= 11.7How much are investors willing to pay per dollar of earnings of the firm?High Ratio Company is carrying a lot of risk.
Low Ratio Safer Investments.
Market Value ratios
2009 2010 2011 2012 2013 20140
5
10
15
20
25
30
35
40
LUCKY CEMENT - MARKET VALUEEarnings per share Price / Earning ratio
Dividend yield ratio: DPS / market value per share: 9 / 410.3: 2.19%
It is the return on investment on a stock.
The higher the dividend yield ratio, the greater the return. Hence; a profitable
investment.
Market Value ratios
Introduction to Business Finance (Fall 2015) 61
2009 2010 2011 2012 2013 2014
6.83%6.44%
5.65%5.20%
3.81%
2.19%
lucky cement - Dividend Yield
Dividend payout ratio: DPS / EPS: 9 / 35.12: 25.6%
Shows what % of income is being distributed to common shareholders.
The higher the %, the more returns for the shareholder. Hence; a profitable
investment.
Market Value ratios
Introduction to Business Finance (Fall 2015) 63
2009 2010 2011 2012 2013 2014
28.15%
41.23%
32.58%
28.61%26.54% 25.65%
LUCKY CEMENT - DIVIDEND PAYOUT