AIM- ADBI Joint Workshop

Upgrading Accounting and Auditing

Competency for Development and Risk
Management

Financial Analysis
Theory & Practices
April 14th, 2004 Tadashi Sekikawa

©2000 Deloitte Touche Tohmatsu

 „ The views expressed in this paper are the views of the
authors and do not necessarily reflect the views or policies
of the Asian Development Bank Institute (ADBI), the Asian
Development Bank (ADB), or its Board of Directors, or the
governments they represent. ADBI does not guarantee the
accuracy of the data included in this paper and accepts no
responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with
ADB official terms.

© 2000 Deloitte Touche Tohmatsu

 Introduction
Key Objectives of the Session
Understanding:
- Basic theory of financial analysis
- Ratios, how to calculate, what they indicate
Utilizing:
- how to analyze the result

© 2000 Deloitte Touche Tohmatsu

 Who Needs Financial Analysis?

1. Investor
2. Lender
3. Government/Regulator
4. Employee
5. Customers, Suppliers

© 2000 Deloitte Touche Tohmatsu

 Numbers vs. Ratio
Numbers: Sales, profit, Total assets,……
Ratio: Calculation of percentage of numbers

Why Do WE Need Ratios ?

Comparability
Difference in size, inflation, etc

© 2000 Deloitte Touche Tohmatsu

 Static vs. Time-series

Why do we need time-series analysis?

•More information
•Elimination of effect of irregular events
•Tendency

© 2000 Deloitte Touche Tohmatsu

 Various Ratios
Type of Ratios:

1. Profitability
2. Efficiency
3. Safety, Stability
4. Growth

© 2000 Deloitte Touche Tohmatsu

 Profitability

Gross profit ratio = gross profit / sales

Return on sales = net income /sales
Return on total asset = net income / total assets
Return on equity = net income / shareholders’ equity

© 2000 Deloitte Touche Tohmatsu

 Efficiency
Turnover of equity
= sales / shareholders’ equity
Turnover of total assets = sales / total assets
Turnover of receivables = sales / receivables
Turnover of inventories
= cost of sales / inventories
Sales per employee
= sales / number of employee

© 2000 Deloitte Touche Tohmatsu

 Safety (Stability)

Current Ratio = current assets / current liability

Quick Ratio = quick assets (*) / current liability
Equity Ratio = shareholders’ equity / total assets
Net Interest to Sales
= (interest expense – interest income) / sales

(*) Quick assets = current assets - inventories

© 2000 Deloitte Touche Tohmatsu

 Growth

Growth Rate of Sales

= Increase in sales / sales
= (CY sales – LY sales) / LY sales

Growth Rate of Profit

= Increase in profit / profit
= (CY profit – LY profit) / LY profit

© 2000 Deloitte Touche Tohmatsu

 Exercise 1

- Two beer brewery companies in Japan

Kirin and Asahi
- Three years consolidated financial statements
- Calculate Ratios by teams

© 2000 Deloitte Touche Tohmatsu

 Exercise 2

- The same case in Exercise 1

- Based on the ratios calculated in Exercise 1

Team A: Investor
Team B: Banker
Team C: Looking for Job
Team D: Invite Investment

© 2000 Deloitte Touche Tohmatsu

 Advance 1: Split of Ratio

Ex.1: Return on total asset

= net income / total assets
= (net income / sales) x (sales / total assets)
= return on sales x turnover of total asset

Return on net asset = ???

© 2000 Deloitte Touche Tohmatsu

 Advance 2: Rate vs. Period
Ex.1: turnover of total asset
= sales / total assets
Number of months of total assets
= total assets / sales x 12
= 1 / turnover of total asset x 12

EX.2: Turnover of inventories

= cost of sales / inventories
Number of month of inventories
=???
© 2000 Deloitte Touche Tohmatsu
 Closing

Do you achieve key objectives of the

session?

Key Objectives of the Session

Understanding:
- Basic theory of financial analysis
- Ratios, how to calculate, what they indicate
Utilizing:
- how to analyze the result

© 2000 Deloitte Touche Tohmatsu