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for BSNL internal circulation only E5-E6 Analysis of Financial Performance
for BSNL internal circulation only
E5-E6Analysis of Financial
Performance
for BSNL internal circulation only
Financial Statements - Meaning
• The financial statements are nothing but the
financial information presented in concise and
capsule form, and the financial information is the
information relating to the financial position of
any firm.
• Final Product of the Accounting Process.
• Indicate the completion of the accounting work
for the period.
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Financial Statements - Meaning
• Should comply with the format and rules laid
down by an enactment concerning the
enterprise.
• Comprises of
– Balance Sheet
– Profit & Loss Account (Income Statement)
– Cash Flow Statement
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Proforma Balance SheetAs On ______________________
Capital and Liabilities Amount Assets Amount
Share Capital
Reserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities
Provisions
XXX
XXX
XXX
XXX
XXX
XXX
Fixed Assets
XXX
Less: Dep.
XXX
Investments
Current Assets
Loans & Advances
Miscellaneous
Expenditures
XXX
XXX
XXX
XXX
XXX
XXX XXX
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Proforma Profit & Loss AccountFor the Year Ending ______________________
Particulars Amount Particulars Amount
Cost of Goods Sold
Operating Expenses
Non-Operating
Expenses
Interest
Provision for Tax
Net Profit (Balancing fig)
XXX
XXX
XXX
XXX
XXX
XXX
Net Sales
Other Income
XXX
XXX
XXX XXX
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Analysis of Financial Statements –
Meaning and Necessity
• Analysis
– A comparison of one figure with another is a
process of analysis and is helpful in analyzing
the situation and diagnosing the problem.
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Analysis of Financial Statements –
Meaning and Necessity
• Financial Statement Analysis
– Process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.
– Involves making comparisons and establishing relationship among related items.
– It is linked with the purpose and interest of the agency involved.
for BSNL internal circulation onlyALTTC, Ghaziabad
Analysis of Financial
Statements – Purpose
• Purpose may be to seek information relating to:
– Profitability
– Solvency
– Liquidity
for BSNL internal circulation onlyALTTC, Ghaziabad
Analysis of Financial
Statements – Agency/Users
• Investors
• Government Authorities
• Creditors
• Banker
• Employees
• Management
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Analysis of Financial
Statements – Different Ways
• External and Internal
– External
– Internal
• Dynamic and Static
– Dynamic (Horizontal)
– Static (Vertical)
for BSNL internal circulation onlyALTTC, Ghaziabad
Analysis of Financial Statements
– Techniques / Tools
• Comparative Financial Statements
• Common-Size Financial Statements
• Trend Percentages Analysis
• Ratio Analysis
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Ratio Analysis - Meaning
• A ratio is a relationship expressed in
mathematical terms between two individual or
groups of figures connected with each other in
some logical manner.
• Form of Ratios:
– As a pure ratio like 4:1
– As a rate of times like 2.5 times
– As a percentage like 20%
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Ratio Analysis - Uses
• Ratios – Useful by product of financial statements.
• Ratios – Provide standardized measure of firm’s
financial position, profitability and riskiness.
• Ratios – Useful in analyzing the performance of a
firm from different points of view.
for BSNL internal circulation onlyALTTC, Ghaziabad
Ratio Analysis - Uses
• Helps in Inter-Firm Comparison.
• Helps in Intra-Firm Comparison.
• To analyse the weak spots as well as strong
points of the enterprise.
for BSNL internal circulation only
Ratio Analysis - Classification
• Liquidity Ratios
• Profitability Ratios
• Turnover Ratios
• Leverage Ratios
• Valuation Ratios
for BSNL internal circulation onlyALTTC, Ghaziabad
Ratios
Liquidity
Ratios
Profitability
Ratios
Turnover
Ratios
Leverage
Ratios
Valuation
Ratios
Current
Ratio
Quick
Ratio
GP Ratio NP Ratio ROA Ratio ROCE
Ratio
Debt Equity
Ratio
Debt Ratio Interest
Coverage
Ratio
Inventory
Turn over
Ratio
Debtors Turn
Over Ratio
Creditors
Turn over
Ratio
Fixed Assets
Turn over Ratio
Assets Turn
over Ratio
Price – Earning
Ratio
MV
to BV Ratio
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Liquidity Ratios
• Current Ratio = Current Assets
Current Liabilities
• Quick Ratio = Quick Assets
Current Liabilities
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Profitability Ratios
• Gross Profit Ratio = Gross Profit *100
Net Sales
• Net Profit Ratio = Net Profit *100
Net Sales
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Profitability Ratios
• Return on Assets Ratio
= Net Profit *100
Average Total Assets
• Return on Capital Employed Ratio
= Net Profit *100
Average Capital Employed
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Turnover Ratios
• Inventory Turnover Ratio
= Cost of Goods Sold
Average Inventory
• Debtors Turnover Ratio
= Net Credit Sales
Average Debtors
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Turnover Ratios
• Creditors Turnover Ratio
= Net Credit Purchases
Average Creditors
• Fixed Assets Turnover Ratio
= Net Sales _
Average Fixed Assets
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Turnover Ratios
• Assets Turnover Ratio
= Net Sales _
Average Assets
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Leverage Ratios
• Debt Equity Ratio
= Long Term Debt _
Total Shareholders Funds
• Debt Ratio
= Total Debts
Total Assets
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Leverage Ratios
• Interest Coverage Ratio
= Earnings before Interest & Tax
Interest
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Valuation Ratios
• Price-Earnings Ratio
= Market Price Per Share
Earnings Per Share
• Market Value to Book Value Ratio
= Market Price Per Share
Book Value Per Share
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Some Working Capital Ratios
• Current Ratio
• Liquid Ratio
• Current Assets to Total Assets Ratio
• Current Assets to Total Sales Ratio
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Ratio Analysis - Limitations
• Ratios are meaningful only in conjunction with the firm’s
past performance or other firms or industry average.
Taken by itself, a ratio provides only a limited
information.
• Ratios are subject to misinterpretation. Eg. A higher
Current Ratio is considered better but beyond a certain
limit it may signify inefficient use of resources of firm.
for BSNL internal circulation only
Ratio Analysis - Limitations
• Ratios are based on Accounting data based on historical
cost concept.
• Ratios are based on Accounting data that are based on
diverse accounting practices and principles.
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