fm-analysing financial performance

8/14/2019 FM-analysing financial performance

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fsa

analyzing financial performance


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fsa analyzing financial performance

financial ratios

du pont analysis

standardized financial statements

Applications of financial analysis

Problems in using FSA

GOING BEYOND THE NUMBERS


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fsaanalyzing financial performance

financial ratios

Ratiois an arithmetic relationship between two figures

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


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fsa

is drawing conclusions

to serve as basis for

decisions and actions

Interpretation


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fsaanalyzing financial performance

financial ratios- classification

Liquidity

Leverage

TurnoverProfitability

Valuation


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fsaHorizon Ltd :P/L Account for the year ending 31st March, 20x1

20x1 20x0

(Rs in Mil

Net Sales 701 623

COGS 552 475

Stocks 421 370

wages & salaries 68 55other Mfg Exp 63 50

Gross Profit 149 148

Operating Expenses 60 49

Depreciation 30 26

Gn Adm 12 11

Selling 18 12

Operating Profit 89 99

Non Operating surplus/deficit -- 6

Profit before interest and tax 89 105

Interest 21 22

Profit before tax 68 83

Tax 34 41

Profit after tax 34 42Dividend 28 27

Retained Earnings 6 15

Per Share Data (Rs)

EPS 2.27 2.80

Dividend Per share 1.80 1.80

Mkt Price Per Share 21.0 20.0Book Value per share 17.47 17.07


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fsaHorizon Ltd: Balance Sheet as on 31st March,20x1 (Rs in

Mill) 20x1 20x0

Current Liabilities

Provisions

Current AssetsLoans & Advances

I Sources of Funds1 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


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fsaHorizon Ltd: Balance Sheet as on 31st March,20x1 (Rs in

Mill) 20x1 20x0

Current Liabilities

Provisions

Current AssetsLoans & Advances

1 Fixed Assets 330 322

2 Investments 15 15

long term 12 12

short term 3 3

3 CA, Loans and Advances 234 156

Inventories 105 72

debtors 114 68Cash & Bank Balance 10 6

Loans & Advances 5 10

Less CL and Provisions 105 81

Net Current Assets 129 75

4 Misc Expenditure and Losses -- --

474 412


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fsa

Liquidity Ratios


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fsa Liquidity Ratios

Current

Ratio=

Current Assets

Current Liabilities

Acid

Test

Ratio

=Current Assets-inventory

Current Liabilities

Cash

Ratio =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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fsa

Leverage Ratios

(Refers to use of debt finance)


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fsa Leverage Ratios

Debt

Equity

Ratio

=Debt

Equity

Debt

Asset

Ratio

=Debt

Assets

Interest

Coverage

Ratio

=

Profit before Int and Taxes

Interest

89/21

= 4.23

Financial

Leverage

Refers to

Use of

Debt

Finance

212 / 262

=0.809

=80.9%

212 /474

= 0.45

= 45%


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fsa

Turnover Ratios

(Measure how efficiently assets are employed)


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fsa

Turnover

Ratios

activity

ratios

how assets

are

employed

Inventory

TurnoverCost of Goods Sold

Average Inventory

Debtors

TurnoverNet Credit Sales

Average Sundry Debtors

Average

Collection

Period

Average Sundry Debtors

Av. Daily Credit Sales

552/(105+72)/2

=6.24

701/(114+68)/2

=7.70

(114+68)/2

(701/365)

=47.4 days

365

Debtors Turnover

365

7.70

=47.4 days


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fsa

Turnover

Ratios

activity

ratios

how assets

are

employed

Fixed

Assets

Turnover

Total

Assets

Turnover

Net Sales

Average Total Assets

701/(330+322)/2

=2.15

701/(474+412)/2

=1.58

Net Sales

Av. Net fixed assets


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fsa

Profitability Ratios

Profit

MarginRatios

Rate of

ReturnRatios


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fsa

Gross Profit Margin Ratio

Net Profit Margin Ratio

Return on Assets

Earning Power

ROCE

Return on Equity


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fsa

Profitability

MarginRatios

GP Margin

Ratio

Gross Profit

Net Sales

NP Margin

Ratio

Net Profit

Net Sales

149/701

=21%

34/701

=4.9%


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fsa

Profitability

ReturnRatios

Equity Earnings

Av. Equity

Return on

Equity

34/(262+256)/2

=13.1%

ROCEPBIT(1-Tax Rate)

Av.total Assets

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

=10.1%

Earning

Power

PBIT

Av. total Assets

89/(412+474)/2

=20.1%

Profit after Tax

Av. Total Assets

Return on

Assets

34/(412+474)/2

=7.7%


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fsa

Profitability 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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fsa

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


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fsa

Valuation

Ratios

Market Price Per Share

Earning per Share

Price

Earning

Ratio

Dividend +Price Change

Initial Price

Yield

Dividend

Initial PricePrice Change

Initial Price+

Dividend Yield Capital Gain/loss

21.0/2.27

=9.25

1.8/20.=91.0/20=5

9+5=14%


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fsa

Valuation

Ratios

Market Price Per Share

Book Value per Share

MarketValue to

Book

Value

Ratio

Market Value of Equity & LiabEst. replacement cost of Assets

Q Ratio

JamesTobin

Dividend Yield Capital Gain/loss

21/17.47

=1.20


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fsa

Comparison with Industry

Time Series of Financial Ratios


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fsa

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 0.69

Leverage

Debt Equity ratio 0.81 1.25Debt Ratio 0.45 0.56

Interest Coverage Ratio 4.23 4.14

Turnover Inventory turnover 6.24 6.43

Acct Receivable TO 7.70 7.50

FA Turnover 2.15 2.23

Total Assets Turnover 1.58 1.26

Profitability

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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fsa

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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fsa

du pont analysis


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

Overall Profitability depends upon 2 elementsOverall Profitability depends upon 2 elements

Profit MarginOn Sales

Selling PriceCost andExpenses

Turnover of Firm

Total AssetsSales

Du pont added another Dimension to it


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du pont

analysisDu 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)


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du pont

analysis

ROANet Profit

Net Sales

Net Sales

Av.Total Assetsx

ROENet Profit

Net SalesNet Sales

Av.Total Assetsx Av. Total Assets

Av Equityx

NPMNPM TATRTATR

NPMNPM TATRTATR EFREFR


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du pont

analysis

ROANet Profit

Net Sales

Net Sales

Av.Total Assetsx

ROENet Profit

Net Sales Net SalesAv.Total Assetsx Av. Total Assets

Av Equityx

NPMNPM TATRTATR

3434

701701

701701

474474xx

=7.178%=7.178%

7.7 x1.817.7 x1.81

=12.99%=12.99%


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du pont

analysis

3434

701701

701701

474474xx 44

742742

6262

XX

4.85 X1.48 X 1.81= 12.994.85 X1.48 X 1.81= 12.99

How these results can be improved?


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fsa

Common-Size Statementsstandardized

financialstatements


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fsa

2004 2003 2004 2003

Net sales Rs 520000 Rs 48000 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 salesNet sales is

usually thebase and is

expressed

as 100%.

2004 Cost 2004 Sales 100%


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fsa

Common-Size

Percentages

2004 2003 2004 2003

Net 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%

2004 Cost 2004 Sales 100%

( Rs 360,000 Rs520,000 ) 100% = 69.2%


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fsaCommon-Size Statements

Comparative Income Statements

For the Years Ended December 31

Common-Size

Percentages

2004 2003 2004 2003

Net sales Rs 52000 Rs 48000 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

a f f


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Applications

of financial

analysis Assessing Corporate Excellence

Judging Creditworthiness4cs-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


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f a l i fi i l p f


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Using

financial

statementanalysis

Problems

Lack of Underlying Theory

Conglomerate Firms

Price Level Changes

Variations in Accounting PoliciesWindow Dressing

Interpretation of Results

Correlation among Results

f


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fsa

analyzingfinancialperformance

GOING BEYOND THE NUMBERS

Are the companys revenue tied to one key customer?

To what extent are the cos revenue tied to one key Product.

To what extent company rely on single supplier?

What % of companys business is generated overseas?

Competition

Future Prospects

Legal Regulatory Environment

Out ofOut of

BoxBox

thinkingthinking

fMatrix Ltd :P/L Account in the year Ending 31st March 20x1


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fsaMatrix Ltd :P/L Account in the year Ending 31 March, 20x1

20x1 20x0 (Rs in Mil)

Q

Net Sales 1065 950

COGS 805 720Stocks 600 520

W & Salaries 120 110

Other Mfg. Exp 85 90

Gross Profit 260 230

Operating Exp

Depreciation 90 75Selling & Gn Adm 50

40

PBIT 170

155

Interest 35 30

PBT 135

125

Tax 50

40

PAT 85

80

Dividend 35

fMatrix Ltd : B/S as at 31st March 20x1 Rs in Million


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fsa 20x1 20x0

Q

I Sources of Funds

1 Shareholders Funds 505 455a) 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 785 715

II 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 333a) Inventories 160 138

b) Sundry Debtors 120 115

c) Cash & Bank 25 20

d) Loans & Advances 50 60

Less CL and Provisions 150 138

fm-analysing financial performance

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