a nalyzing f inancial p erformance

fsa

Analyzing Financial Performance

fsa

Presented by

Khuram Shahzad083268

fsa analyzing financial performance

Financial ratios

du pont analysis

standardized financial statements

Applications of financial analysis

Problems in using FSA

GOING BEYOND THE NUMBERS

fsaanalyzing financial performance

Financial ratios

Ratio is an arithmetic relationship between two figures

FRA is a study of ratios between various items in fin statements

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is drawing conclusions

to serve as basis for decisions and actions

Interpretation

fsaanalyzing financial performance

financial ratios- classification

Liquidity Leverage Turnover Profitability Valuation

fsaAtlas Battery:P/L Account for the year ending 31st March, 20x8

20x8 20x7

(Rs in Mil)

Net Sales 701 623 COGS 552 475 Stocks 421 370 wages & salaries 68 55 other Mfg Exp 63 50Gross Profit 149 148Operating Expenses 60 49 Depreciation 30 26 Gn Adm 12 11 Selling 18 12Operating Profit 89 99Non Operating surplus/deficit -- 6Profit before interest and tax 89 105Interest 21 22Profit before tax 68 83Tax 34 41Profit after tax 34 42Dividend 28 27Retained Earnings 6 15Per Share Data (Rs) EPS 2.27 2.80Dividend Per share 1.80 1.80Mkt Price Per Share 21.0 20.0Book Value per share 17.47 17.07

fsaAtlas Battery: Balance Sheet as on 31st March,20x8 (Rs in Mill)

20x8 20x7

Current LiabilitiesProvisions

Current AssetsLoans & Advances

I Sources of Funds 1 Share Holders’ funds 262 256 a) Share Capital 150 b) Reserves & Surplus 112 2 Loan Funds 212 156

a) Secured Loans 143 Due after 1 year 108 Due within 1 year 35 b) Unsecured Loans 69 Due after 1 year 29 Due within 1 year 40

474 412

fsaHorizon Ltd: Balance Sheet as on 31st March,20x8 (Rs in Mill)

20x8 20x7

Current LiabilitiesProvisions

Current AssetsLoans & Advances

1 Fixed Assets 330 3222 Investments 15 15 long term 12 12 short term 3 33 CA, Loans and Advances 234 156 Inventories 105 72 debtors 114 68 Cash & Bank Balance 10 6 Loans & Advances 5 10Less CL and Provisions 105 81 Net Current Assets 129 75

4 Misc Expenditure and Losses -- --

474 412

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Liquidity Ratios

fsa Liquidity Ratios

Current Ratio

=Current Assets

Current Liabilities

Acid TestRatio

=Current Assets-inventory

Current Liabilities

CashRatio =

Cash & Bank Bal + C investment

Current Liabilities

237/180=1.32

(237-105)/180 =0.73

(10+3)/180 =0.07

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Leverage Ratios

(Refers to use of debt finance)

fsa Leverage Ratios

Debt Equity Ratio

=Debt

Equity

DebtAssetRatio

=Debt

Assets

InterestCoverage Ratio

=

Profit before Int and Taxes

Interest

89/21 = 4.23

FinancialLeverageRefers to Use ofDebtFinance

212 / 262 =0.809 =80.9%

212 /474 = 0.45 = 45%

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Turnover Ratios

(Measure how efficiently assets are employed)

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TurnoverRatios

activityratios

how assetsareemployed

InventoryTurnover

Cost of Goods SoldAverage Inventory

Debtors’Turnover

Net Credit SalesAverage Sundry Debtors

AverageCollection

Period

Average Sundry DebtorsAv. Daily Credit Sales

552/(105+72)/2=6.24

701/(114+68)/2=7.70

(114+68)/2(701/365)

=47.4 days

365Debtors’ Turnover

365 7.70

=47.4 days

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TurnoverRatios

activityratios

how assetsareemployed

Fixed Assets

Turnover

TotalAssets

Turnover

Net SalesAverage Total Assets

701/(330+322)/2

=2.15

701/(474+412)/2

=1.58

Net Sales

Av. Net fixed assets

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Profitability Ratios

ProfitMarginRatios

Rate ofReturnRatios

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Gross Profit Margin Ratio

Net Profit Margin Ratio

Return on Assets

Earning Power

ROCE

Return on Equity

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ProfitabilityMarginRatios

GP MarginRatio

Gross ProfitNet Sales

NP MarginRatio

Net ProfitNet Sales

149/701=21%

34/701=4.9%

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ProfitabilityReturnRatios

Equity EarningsAv. Equity

Return onEquity

34/(262+256)/2=13.1%

ROCEPBIT(1-Tax Rate)Av.total Assets

89(1-0.5)/(412+474)/2

=10.1%

EarningPower

PBITAv. total Assets

89/(412+474)/2=20.1%

Profit after TaxAv. Total Assets

Return onAssets

34/(412+474)/2=7.7%

fsaProfitability Ratios-points to ponder

Historical Value of AssetsHistorical Value of Assets

Bias in inflationary periodsBias in inflationary periods

Numerator represents current valuesNumerator represents current values

Denominator represents historical valuesDenominator represents historical values

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Valuation Ratios(How Equity Stock is assessed in Capital Market)(How Equity Stock is assessed in Capital Market)

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ValuationRatios

Market Price Per ShareEarning per Share

Price Earning

Ratio

Dividend +Price ChangeInitial Price

Yield

DividendInitial Price

Price ChangeInitial Price

+

Dividend Yield Capital Gain/loss

21.0/2.27=9.25

1.8/20.=91.0/20=59+5=14%

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ValuationRatios

Market Price Per ShareBook Value per Share

MarketValue to

BookValueRatio

Market Value of Equity & LiabEst. replacement cost of Assets

Q RatioJames Tobin

Dividend Yield Capital Gain/loss

21/17.47=1.20

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Comparison with Industry

Time Series of Financial Ratios

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Comparison

Comparison of Ratios of Horizon with Industry Average

Ratio Horizon Ltd Industry Av.

Liquidity Current Ratio 1.32 1.26 Acid Test Ratio 0.73 0.69Leverage Debt Equity ratio 0.81 1.25 Debt Ratio 0.45 0.56 Interest Coverage Ratio 4.23 4.14Turnover Inventory turnover 6.24 6.43 Acct Receivable TO 7.70 7.50 FA Turnover 2.15 2.23 Total Assets Turnover 1.58 1.26Profitability GP Margin Ratio 21.0% 18.0% NP Margin Ratio 4.9% 4.0% Return on Assets 7.7% 6.9% Earning power 20.0% 17.7% REOC 10.1% 8.8% Return on Equity 13.1% 11.9%

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Time Series

Times Series of Certain Ratios

1 2 3 4 5

Debt-Equity ratio 0.91 0.98 0.65 0.61 0.81

Total Assets turnover 1.51 1.59 1.58 1.53 1.58

Net P margin(%) 8.8 11.6 9.80 6.6 4.9 Return on Equity(%) 25.4 30.7 24.5 16.7 13.1

Earning Power 13.6 15.3 10.3 7.1 9.3

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du pont analysis

fsa Profile of Profitability of a Firm (DU PONT ANALYSIS)

Overall Profitability depends upon 2 elementsOverall Profitability depends upon 2 elements

Profit Margin On Sales

•Selling Price•Cost and•Expenses

Turnover of Firm

•Total Assets•Sales

Du pont added another Dimension to it


du pont analysis

Du Pont Company pioneered this system of FA

Analyze Return on Assets

With the help of Net Profit Margin (NPM) &

Total Assets Turnover Ratio (TATR)

Extended to get Return on Equity (ROE)


du pont analysis

ROANet ProfitNet Sales

Net Sales Av.Total Assetsx

ROE Net ProfitNet Sales

Net SalesAv.Total Assets

x Av. Total AssetsAv Equity

x

NPMNPM TATRTATR

NPMNPM TATRTATR EFREFR


du pont analysis

ROANet ProfitNet Sales

Net Sales Av.Total Assetsx

ROENet ProfitNet Sales

Net SalesAv.Total Assetsx Av. Total Assets

Av Equityx

NPMNPM TATRTATR

3434

701701

701701474474

xx

=7.178%=7.178%

7.7 x1.817.7 x1.81 =12.99%=12.99%


du pont analysis

3434

701701

701701474474

xx 474474262262

XX

4.85 X1.48 X 1.81= 12.99 4.85 X1.48 X 1.81= 12.99

How these results can be improved?

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Common-Size Statementsstandardized financial statements

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2004 2003 2004 2003Net sales Rs 520000 Rs 480000 100.0 100.0 Cost of goods sold 360,000 315,000

Gross margin 160,00 165,000 Operating expenses 128,600 126,000

Net operating income 314,000 39,000 Interest expense 6,400 7,000

Net income before taxes 7,000 32,000 Less income taxes (30%) 2,100 9,600

Net income Rs17,500 Rs 22,400

Common-Size Statements

Net sales Net sales is usually the base and is expressed as 100%.

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Common-Size Percentages

2004 2003 2004 2003Net sales Rs 520,000 Rs480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6

Gross margin 160,000 165,000 Operating expenses 128,600 126,000

Net operating income 31,400 39,000 Interest expense 6,400 7,000

Net income before taxes 25,000 32,000 Less income taxes (30%) 7,500 9,600

Net income Rs17,5000 Rs 22,400

Common-Size Statements

2003 Cost ÷ 2003 Sales × 100% ( Rs315,000 ÷ Rs480,000 ) × 100% = 65.6%

2004 Cost ÷ 2004 Sales × 100% ( Rs 360,000 ÷ Rs520,000 ) × 100% = 69.2%

fsaCommon-Size Statements

Comparative Income StatementsFor the Years Ended December 31

Common-Size Percentages

2004 2003 2004 2003Net sales Rs 520000 Rs 480000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6

Gross margin 160,000 165,000 30.8 34.4 Operating expenses 128,600 126,000 24.8 26.2

Net operating income 314,000 39,000 6.0 8.2 Interest expense 6,400 7,000 1.2 1.5

Net income before taxes 25,000 32,000 4.8 6.7 Less income taxes (30%) 7,500 9,600 1.4 2.0

Net income Rs 17500 Rs 22400 3.4 4.7


Applications of financial analysis Assessing Corporate Excellence

Judging Creditworthiness 4c’s-character,capital,capacity,collatral

Forecasting Bankruptcy

Edward Altman

Z=1.2wc/Total Assets+1.4retained Earnings/TA +3.3EBIT/TA +.6Market value of Equity/Book value of Debt+1.0 Sales/TA

Z Score less than 1.81 bankruptZ score more than2.99 healthy

Valuing Equity Shares

Estimating Market Risk

Indicators of Corporate Excellence (IDBI)

Growth rate of SalesGrowth rate of AssetsPBT to C EmployedWC to Gross SalesDebt Equity Ratio


Applications of financial analysis Assessing Corporate Excellence

Judging Creditworthiness 4c’s-character,capital,capacity,collatral

Forecasting Bankruptcy

Edward Altman

Z=1.2wc/Total Assets+1.4retained Earnings/TA +3.3EBIT/TA +.6Market value of Equity/Book valueof Debt+1.0 Sales/TA

Z Score less than 1.81 bankruptZ score more than2.99 healthy

Valuing Equity Shares

Estimating Market Risk

The Economics Times

Inc in mkt Capitalization

Inc In Revenue

Inc in Profit

Return on Net worth

Annual Growth of EPS (3yrs)

Sales for latest year

Profit after tax


Using financial statement analysis

Problems

Lack of Underlying Theory Conglomerate Firms Price Level Changes Variations in Accounting Policies Window Dressing Interpretation of Results Correlation among Results

fsa

analyzing

financial

performance

GOING BEYOND THE NUMBERS

Are the company’s revenue tied to one key customer?

To what extent are the co’s revenue tied to one key Product.

To what extent company rely on single supplier?

What % of company’s business is generated overseas?

Competition

Future Prospects

Legal Regulatory Environment

Out ofOut of

Box Box

thinkingthinking

fsa Matrix Ltd :P/L Account in the year Ending 31st March, 20x1

20x1 20x0 (Rs in Mil)

Q

Net Sales 1065 950COGS 805 720 Stocks 600 520 W & Salaries 120 110 Other Mfg. Exp 85 90 Gross Profit 260 230Operating Exp Depreciation 90 75 Selling & Gn Adm 50 40PBIT 170 155Interest 35 30PBT 135 125Tax 50 40PAT 85 80Dividend 35 30Retained Earning 50 50

fsaMatrix Ltd : B/S as at 31st March 20x1

20x1 20x0

Q

I Sources of Funds 1 Shareholders Funds 505 455 a) share capital 125 125 b) Reserves & Surplus 380 330 2 Loan Fund 280 260 a) Secured Loans 180 160 i) Due after 1 year 130 135 ii) Due Within 1 year 50 25 b) Unsecured Loans 100 100 i) Due after 1 year 60 70 ii) Due within 1 year 40 30Total 785 715II Application of Funds 1 Net Fixed Assets 550 495 2 Investments 30 25 a) Long Term 20 20 b) Current 10 5 3 CA, loans & Advances 335 333 a) Inventories 160 138 b) Sundry Debtors 120 115 c) Cash & Bank 25 20 d) Loans & Advances 50 60 Less CL and Provisions 150 138 Net Current Assets 205 195Total 785 715

Rs in Million

a nalyzing f inancial p erformance

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