Financial

statement
analysis
Financial Statements Basic Relationships
Financial Statements
Cash Flow Statement
Profit & Loss Account Balance Sheet
Primary
Tools India Ltd.
Profit & Loss Account
For the year ended December 31, 2000
Amount in 000 in Rs.
Sales Net
255
Other income 5
Total Revenue 260
Cost of goods sold 130
Gross profit 130
Operating expenses:
Personnel 49
Depreciation 11
Other expenses 28
Operating profit 42
Interest 12
Profit before taxes 30
Income tax provision 12
Net profit after tax 18
Data used for analysis
Absolute terms (Size issue)
Net profits of Companies X, Y and Z; for
the year ended 31
st
March, 2010 are Rs.
100 each.
Sales of Companies X, Y and Z for the
year ended 31
st
March, 2010 are Rs.
1000, 10,000, 20,000 each
Net profit to sales ratio for X, Y, Z stands
at 10%, 1% and 0.5%

Data in relational form
Analysis within one financial statement??
Common size statements/intra component
analysis
Analysis across financial statements??
Ratio analysis/inter component analysis
Data in comparative form
Comparisons of current performance can
be made:
With Companys past performance (trend
analysis/longitudinal analysis)
With Competing Firms (Cross section analysis)
Comparison of same variable over number of years
and across competing firms (pooled analysis)
With Industry averages
With pre determined standards or budgets (for
internal users)
Financial analysis cont..
Year/Company X Y Z
Industry
average
Y1 10 160 150 106.67
Y2 20 155 135 103.33
Y3 30 150 120 100.00
Y4 40 145 105 96.67
Y5 50 140 90 93.33
Y6 60 135 75 90.00
Y7 70 130 60 86.67
Y8 80 125 45 83.33
Y9 90 120 30 80.00
Y10 100 115 15 76.67
(sales in 000s in Rs.)
Time series analysis
10
20
30
40
50
60
70
80
90
100
0
20
40
60
80
100
120
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
X
X
Cross section analysis
10
160
150
0
20
40
60
80
100
120
140
160
180
X Y Z
Y1
Y1
Cross section analysis
0
20
40
60
80
100
120
140
X Y Z
Y10
Y10
Pooled series analysis
10
20
30
40
50
60
70
80
90
100
160
155
150
145
140
135
130
125
120
115
150
135
120
105
90
75
60
45
30
15
0
20
40
60
80
100
120
140
160
180
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
X
Y
Z
Industry level comparison
0
20
40
60
80
100
120
140
160
180
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
X
Y
Z
Industry average
Industry level comparison
Common size financial statements/
intra-component analysis
Express each item on a particular statement
as a percentage of a single base amount.
Total assets
on the balance
sheet
Net sales
on the income
statement
Common size financial statements/
intra-component analysis
Balance sheet of Vinyl Chemicals Limited as
on 31
st
March..
All figures in Rs. Crores
Liabilities 2002 2001 Assets 2002 2001
Current liabilities 8.18 8.64
Cash and bank
balance 1.01 1
Long term
liabilities 12.32 8.08
Accounts
receivables 16.74 13.01
Owners' equity 53.18 49.55
Loans and
advances 3.76 3.44
Inventories 11.53 11.98
Total current assets 33.04 29.43
Other Assets 3.42 4.41
Fixed assets (net) 37.22 32.43
Total 73.68 66.27 Total 73.68 66.27
Vinyl Chemicals Ltd. is a mid
sized organic chemicals
manufacturer owned by the
Pidilite Parekh group
Common size/Intra component analysis for
balance sheet
Liabilities 2002 2001 Assets 2002 2001
Current liabilities 11.10 13.04
Cash and bank
balance 1.37 1.51
Long term liabilities 16.72 12.19 Accounts receivables 22.72 19.63
Owners' equity 72.18 74.77 Loans and advances 5.10 5.19
Inventories 15.65 18.08
Total current assets 44.84 44.41
Other Assets 4.64 6.65
Fixed assets (net) 50.52 48.94
Total 100 100 Total 100 100
Assets
Industry
average 2002 2001
Cash and bank balance 2.00 1.37 1.51
Accounts receivables 21.00 22.72 19.63
Loans and advances 7.00 5.10 5.19
Inventories 25.00 15.65 18.08
Total current assets 55.00 44.84 44.41
Other Assets 3.4 4.64 6.65
Fixed assets (net) 41.60 50.52 48.94
Total 100 100 100
Assets side
Liabilities side
Liabilities
Industry
average 2002 2001
Current liabilities 12 11.10 13.04
Long term liabilities 22 16.72 12.19
Owners' equity 66 72.18 74.77
Total 100 100 100
Income statement of Vinyl Chemicals
Limited for the year ended 31
st
March..
All figures in Rs. Crores
2002 2001
Net Sales 92.46 88.18
COGS (87.17) (90.04)
Gross Profits 5.29 -1.86
Non -operating incomes 3.18 1.11
Interest expense (0.82) (0.58)
Profits before taxes 7.65 -1.33
Taxes (1.62) 0
Profits after taxes 6.03 -1.33
Dividends 1.83 0
Common size/Intra component
analysis for income statement
2002 2001
Net Sales 100.00 100.00
COGS (94.28) (102.11)
Gross Profits 5.72 -2.11
Non -operating incomes 3.44 1.26
Interest expense (0.89) (0.66)
Profits before taxes 8.27 -1.51
Taxes (1.75) 0.00
Profits after taxes 6.52 -1.51
Dividends 1.98 0.00
Common size/Intra component
analysis for income statement

Industry
average 2002 2001
Net Sales 100 100.00 100.00
COGS (83) (94.28) (102.11)
Gross Profits 17 5.72 -2.11
Non -operating incomes 0.5 3.44 1.26
Interest expense (1.5) (0.89) (0.66)
Profits before taxes 16 8.27 -1.51
Taxes (5) (1.75) 0.00
Profits after taxes 11 6.52 -1.51
Dividends 5 1.98 0.00
Ratio analysis/Inter component
analysis
Financial ratios
Liquidity ratios
Efficiency ratios
Current assets
Long lived assets
Solvency ratios (financial leverage)
Profitability ratios
Margin on sales
Overall profitability/Return on investment


Liquidity ratios
Current Assets
Current Ratio =
Current Liabilities

Factors to be considered:
Composition of current assets

Speed of conversion of current assets

into cash
Speed of maturity of current liabilities

Liquidity ratios cont
Quick (Acid-Test) Ratio (QR)

Current Assets Inventory prepaid expense
QR =
Current Liabilities


Absolute liquid ratio (ALR) =

Absolute liquid assets
ALR = Current Liabilities


Absolute liquid assets = Cash + Bank Balance +

Marketable Securities
Expenses Cover
Expense cover ratio (ECR) =

Cash and cash equivalents
ECR =
Average daily operating expenses


Measured in days


Example
Particulars 20X4 20X3
Cash (Rs Million) 19 11
Average Daily expenses (Rs Million) 0.6027 0.5726
Cash holding
sufficient for a
months
expenses
Cash cover (number of days) 32 19
The balance sheet of Shreyas Ltd. as on 31
st

March, 2006 was follows:
Liabilities Rs. Assets Rs.
Share capital 650000 Goodwill 265500
Capital Reserve 2500 Land 129000
General Reserve 162910 Premises 150000
P&L A/c 18777 Plant 234395
5% Debentures 157500 Furniture 8575
Sundry Creditors 73900 Stock 196770
Proposed Dividends 75000 Debtors 227617
Provision for Taxation 25000 MF Liquid Scheme Units 71400
Cash and Bank 121280
Total 1165587 Total 1165587
From the above information compute:
a) Current Ratio
b) Quick Ratio
c) Absolute liquid ratio