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FINANCIAL STATEMENT
ANALYSIS
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Business Survival:
There are two key factors for business survival:
Profitability
Solvency
Profitability is important if the business is to generate revenue
(income) in excess of the expenses incurred in operating that
business.
The solvency of a business is important because it looks at the
ability of the business in meeting its financial obligations.
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Financial Statement Analysis
Financial Statement Analysis will help business owners and other
interested people to analyse the data in financial statements to
provide them with better information about such key factors for
decision making and ultimate business survival.
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Financial Statement Analysis (contd.)
Financial statement analysis involves analysing the information provided
in the financial statements to:
Provide information about the organisations:
Past performance
Present condition
Future performance
Assess the organisations:
Earnings in terms of power, persistence, quality and growth
Solvency
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The financial statements.
They typically include three basic financial statements:-
Balance sheet: Reports on a company's assets, liabilities, and Ownership
equity at a given point in time.
Income statement: Reports on a company's income, expenses, and
profits over a period of time
Statement of cash flows: reports on a company's cash flow activities,
particularly its operating, investing and financing activities.
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Tools ofFinancial Statement Analysis:
The commonly used tools for financial statement analysis are:
Ratio analysis
Comparative analysis
Du-pont analysis
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Financial Ratio Analysis Meaning:
A financial ratio is a relationship between two or more accounting
numbers.
Financial ratio analysis is the selection, valuation and
interpretation of financial data in easier to understand ratios, which
have been identified as critical indicators of financial performance
of the business and can be used for strategy and decision making
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Functions/Utility of Ratios Analysis
1. Aids understanding ofFinancial Statements better
2. Indicates relationships
3. Allows forComparisons
4. Shows trend over time
5. Tool for Efficiency Appraisal
6. Helps in Financial Forecasting
7. Useful in setting control standards
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Solvency-Short Term Ratios
Current Ratio =
Total Current Assets / Total Current Liabilities
Quick Ratio =
Cash + Government Securities + Receivables / Total Current Liabilities
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Solvency-Long Term Ratios
Proprietors Ratio= Proprietors Fund
Total Assets
Debt Equity Ratio= Debt
Equity
Capital Gearing Ratio= Cap bearing fixed rate of int. & div
Cap not bearing fixed rate of int.& div
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Activity Ratio
StockTurnover Ratio = COGS
Average Stock
Debtors Turnover Ratio = Credit Sales
Debtors+Bills Receivables
Creditors Turnover Ratio = Credit Purchases
Creditors+Bills Payable
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Other income statement ratios
Gross Profit % = Gross Profit * 100
Net Sales
Net Profit % = Net Profit after tax * 100
Net Sales
Or in some cases, firms use the net profit before tax figure.
Net Profit % = Net Profit before tax *100
Net Sales
Return on Assets = Net Profit * 100Average Total Assets
Return on Equity = Net Profit *100
Average Total Equity
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Asset Management Ratios
Asset Turnover = Net Sales
Average Total Assets
Inventory Turnover = Cost of Goods Sold
Average Inventory
Average Collection Period = Average accounts Receivable
Average daily net credit sales
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Profitability-Sales
Return on investments = PBIT *100
Capital Employed
Return on proprietors funds=
PAT *
100
Proprietor funds
Dividend Payout Ratio = Dividend per share
Earning per share
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Market Test Ratios
Earnings per share = Net Profit after tax
Number of issued ordinary shares
Dividends per share = Dividends
Number of issued ordinary shares
Price Earnings ratio = Market price per share
Earnings per share
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The DuPont System
Profit Margin Total Asset Turnover
ROA Equity Multiplier
ROE
EquityAvg
AssetsAvg
AssetsAvg
Sales
Sales
profitNetultiplierEquityTurnoverAssetTotalarginProfitROE
vv!
vv!
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COMPARATIVE STATEMENTS
Statements of financial position at different period of time
Elements of the statements are shown in comparative form
Gives idea of financial position in two or more period
Practically two financial statements viz., Balance sheet and income
statement are prepared in comparative form and analysis is done
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COMPARATIVE RATIO ANALYSIS
COMPARATIVE BALANCE SHEET
STATEMENTS
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Limitations ofFinancial Statement Analysis
Ratios may have intrinsic problems:
They are calculated from accounting data, and if there are mistakes in this.
The comparisons may be made against the wrong benchmarks.
Ratios (like Balance sheet) are calculated at a point in time and significant
changes may occur within short period.
Relying only on ratios when analyzing an entitys performance is not
advisable.
Strong financial statement analysis does not necessarily mean that the
organisation has a strong financial future.
Financial statement analysis might look good but there may be other factors
that can cause an organisation to collapse.
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THANK YOUuu..