Market Scenario & BSNL status · Financial Statement Analysis (FSA) involves analysis of firm’sfinancial statements to derive information which can be used in decision making. The

For internal circulation of BSNL only

E5-E6 TELECOM Financial Statement Analysis

WELCOME

• This is a presentation for the E5-E6 Telecom

Module for the Topic:

Financial Statement Analysis

• Eligibility: Those who have got the Up gradation

from E5 to E6.

• This presentation is last updated on 17-3-2011.

• You may also visit the Digital library of BSNL to

see current version of this topic as well as

updated version if any.


In this presentation

• Introduction

• Importance of financial statement analysis

• Annual reports and financial statements

• What You Need to Know About Financial

Statements

• Financial ratio analysis

• Uses of Ratio analysis

• Limitations of Ratio analysis


Introduction

Financial Statement Analysis (FSA) involves

analysis of firm’s financial statements to derive

information which can be used in decision

making.

The FSA:--

– Indicates about firm’s capacity to meet its long-

term debt commitment.

– Reveals about financial health of the firm.

– Indicates how efficiently the firm is utilizing its

assets.


Introduction-cont’d

– Indicates about firm’s capacity in generating

adequate return for the investors.

– Tells whether firm can sustain/survive competition.

– Indicates about financing pattern adopted by the firm.

Though FSA uses historical data, the objective is

to forecast the future.


Importance of FSA

The FSA is an important tool for knowing

performance of the firm. The performance of the

firm can be assessed by computing key ratios

and doing analysis of following:-

Firm’s relative performance in the industry.

Firm’s relative performance against leader in the

industry.

Comparison of current year performance w.r.t.

previous years.


Importance of FSA-cont’d

Identifying variables driving the key ratios.

Establishing linkages among the ratios.

Revealing about future performance of the firm for

various stakeholders such as shareholders,

bondholders, lenders, employees, customers etc.



FSA is performed by both management and external

groups.

Analysis by management:-

Helps in evaluating overall current performance.

Identify problems/opportunity areas.

Helps in developing plans.

Helps in finalizing future strategic direction.



Analysis by external groups (such as investors,

credit rating agencies, regulators, lenders,

suppliers, customers etc.):-

Helps in investment decisions.

Helps in taking decisions like extension of credit.

Helps in issuing credit ratings for the firms.


Annual Reports and Financial Statements

Annual reports contain:-

(a) Chairman’s / Managing Director’s / CEO’s

letter to shareholders.

(b) Financial statements.

(c) Other information.


Chairman’s/Managing Director’s/ CEO’s letter

• Summarizes the operations of last year.

• Explanations for good/bad performance.

• Discussions on the goals for immediate and long

term future.


Financial Statements

Financial statements

– Are typically published every quarter and annually.

– Are prepared as per GAAP which refers to the

standard framework of guidelines for financial

accounting used in any given jurisdiction; generally

known as Accounting Standards.

– Are audited by independent auditors.

– Comprises of Balance sheet, Income statement,

Statement of retained earnings and Cash flow

statement .


Balance Sheet

• Known as statement of financial position.

• Provides value of firm’s assets, liabilities and

equity on a particular date.

• Value of assets equals value of liabilities plus

owner’s equity.

• Items in the balance sheet are listed based on

conservative principle i.e. if estimating or in

doubt of the actual value, the value of assets is

not be overstated and the value of liabilities is

not be understated.


Balance Sheet-cont’d

• The balance sheet records the monetary value of the

assets owned by the firm.

• Two major asset classes are tangible assets and

intangible assets. Tangible assets contain various

subclasses, including current assets and long-

term/fixed assets.

• Current assets include cash, marketable securities,

accounts receivable, inventory, pre-paid expenses

etc. while long-term/fixed assets include such items

as land, buildings, equipments, long-term bonds etc.


Balance Sheet-cont’d• Current assets are more liquid than the long-term/fixed

assets.

• Intangible assets are non-physical resources and rights

that have a value to the firm because they give the firm

some kind of advantage in the market place. Examples

are goodwill, copyrights, trademarks, patents, computer

programmes etc.

• Liabilities include current liabilities like bank advances,

income tax payable, accounts payable, deferred income

tax, minority interest in subsidiary companies, long-term

debt (bonds, capital leases).


Balance Sheet-cont’d• Shareholder’s Equity is the net worth of a company.

it is also known as owner’s or Stockholders' Equity.

• It represents the stockholders' claim to the firm’s'

assets after all creditors and debts have been paid.

• It includes share capital plus retained earnings minus

treasury shares.

• Net worth = Total assets-total liabilities

• Net worth or Book Value of a firm is the accounting

value of a firm.


Balance Sheet-cont’d• Book Value per Share = Total shareholder’s equity – preferred equity

Total outstanding shares

• In simple terms, Book Value per share would be

the amount of money that a holder of a common

share would get if a company were to liquidate.

• Market capitalization = Market price per share x

number of shares outstanding.

• All assets (except land) lose their value over time.

This is accounted for through depreciation (for

fixed assets), depletion (for natural resources)

and amortization (for intangible assets).


Limitations of Balance Sheet

• It records values of assets and liabilities in terms

of their original cost. This could be misleading

for fixed assets as value of fixed assets may

change over period of time.

• It is difficult to value intangible assets.


Income Statement

• It is also known as

– Statement of Earnings or

– Profit & Loss Statement or

– Statement of Operations.

• It provides information on the various revenue

and expense items during a certain period.

• Items are based on accrual principle i.e.

transactions (such as sales) are recognized

when they occur and not when actual cash is

received.


Income Statement-cont’d

• The expenses are matched to when the revenue

is recognized and not when the actual payment

is made.

• There could be wide discrepancy between a

firm’s revenue and actual cash flow.


Income Statement-cont’dThere are several forms of income statement. An example of a generic form is as

follows:-

Sales Revenue - Cost of goods Sold

= Gross Profit

- Selling and Administrative expenses - Depreciation

= Earnings Before Interest and Taxes (EBIT)

- interest expenses (on bank loans and bonds) + interest income

= Earnings before Taxes (EBT)

- taxes (current and deferred)

= Earnings after Taxes (EAT)

+ income from subsidiaries +/- Gains/Losses from discontinued operations

+/- Gain/loss on extraordinary items

= Net Earnings

- Preferred Stock Dividends

= Earnings available for common shareholders


Limitations of Income Statement

• Net income may not be equal to actual cash

flow.

• Several items like depreciation are subjectively

determined.

• Depreciation is based on historical cost of the

asset thus, during periods of inflation,

depreciation expense will be understated

thereby leading to inflated earnings.

• A traditional statement only records transactions

and not “opportunities”.


Statement of Retained Earnings

• It is also known as

– Statement of Owner's Equity or

– Equity Statement or

– Statement of Shareholder’s Equity.

• It explains the changes in a company's retained

earnings over the reporting period.

• It may appear in the balance sheet, in a

combined income statement & changes in

retained earnings statement, or as a separate

schedule.


Cash Flow Statement

• It shows how firm obtained cash and for what

purpose it is being used.

• Cash balance at the end =

Cash at beginning

+ net cash flow from operations

+ net cash flow from financing activities

+ net cash flow from investing activities


Other information in Annual Report

• Notes to financial statements.

• The auditor’s report.


What You Need to Know About Financial Statements

• Frequent restructuring charges and write-

downs

• Reserve reversals

• Footnotes to financials statements

• Sales/Non-sale

• Cash Flow is King


Financial Ratio Analysis• It is a popular way to analyze financial statements.

• Ratios can be used for identifying internal trend or

external trend.

• Ratios are diagnostic tools that help in identifying

problem areas and opportunity.

• There is no “one” way of classifying various ratios. There

is no specific rule for ideal or acceptable number for a

ratio.

• The key financial ratios that are determined by the

financial analysts provide insights on (a) liquidity (b)

degree of financial leverage or debt (c) profitability (d)

efficiency and (e) value.


Liquidity Ratios

• Current Ratio = Total Current Assets

Total Current Liabilities

• Quick Test Ratio = Total Current Assets- Inventories

Total Current Liabilities


Leverage or Debt Ratios

• Asset – Equity Ratio = Assets

Shareholder’s Equity

• Total Debt Ratio = Total Debt / Total Assets

• Debt-Equity Ratio = Total Debt / Equity

• Long-term Debt to Capital = Debt

Debt + Equity


Leverage or Debt Ratios-cont’d

• Interest Coverage Ratio = Earnings Before IT

Annual Interest Expense

• Cash Flow Coverage = Net Cash Flow

Interest Expense

Net Cash flow is equal to Net Income +/- non-cash

items (equity income + minority interest in earnings of

subsidiary + deferred income taxes + depreciation +

depletion + amortization expenses).


Profitability Ratios

• Sales Growth Rate = (current year Sales- last year Sales) x 100

last year Sales

• Gross Profit Margins = Sales – cost of sold goods

Sales

• Operating Profit Margin = Operating profit i.e. EBIT

Net Sales


Profitability Ratios-cont’d

• Return on Assets (RoA) = Net Income

Total Assets

• Return on Equity (RoE) = Net Income

Shareholder’s Equity


Profitability ratios

• Pay Out Ratio = Cash Dividends

Net Income

• Retention Ratio = Retained Earnings

Net Income

• Sustainable Growth Rate = RoE x Retention Ratio


Efficiency Ratios

• Inventory Turnover Ratio = Cost of Goods sold

Average Inventory

• Days in Inventory Ratio = Average Inventory x 365

Cost of Sales

• Asset Turnover Ratio = Net Sales

Total Assets

• Receivable Turnover Ratio = Credit Sales

Accounts Receivable

• Average Collection Period = Accounts Receivable x 365

Net Sales


Efficiency Ratios

• Accounts Payable Turnover Ratio = Purchases

Accounts

Payable

• Days AP Outstanding Ratio = Accounts payable

x 365

Cost of Sales

• Financing Period = Average Collection Period +

Days in Inventory – Days AP Outstanding


Value Ratios

• Earnings per Share = Net Earnings – Preferred Dividend

No of outstanding shares

• Earnings Yield = 1/EPS

• Cash Flow per Share = Net cash flow

No of outstanding shares

• Dividend Yield = Annual Dividend

Current market price of Share

• Price-Earning Ratio = Market price of Share

EPS


Use of Ratio Analysis

• To evaluate performance over a period.

• To set bench mark or standards for

performance.

• To highlight problem areas.

• To highlight areas where future potential exists.

• To enable external agencies in assessing the

credit worthiness/profitability of the firm.


Limitations of Ratios

• There is considerable amount of subjectivity

involved in the whole process.

• Difficult to arrive at clear decision as some ratios

could be favorable while others are unfavorable.

• Ratios may not be strictly comparable for

different firms due to a variety of factors.

• Ratios are based on past performance so

making reasonable projections about future

trend is difficult.


Limitations of Ratios• FS provide an assessment of the cost and not value.

• FS does not include all items like value of human

capital.

• Accounting standards and practices vary across the

countries and thus hamper meaningful global

comparison.

• Management decision making is a dynamic process

while ratio analysis is a static analysis based on

historical data.

• The linkage among various ratios in not readily

obvious.For internal circulation of BSNL only

For internal circulation of BSNLonly

Documents

Market Scenario & BSNL status · Financial Statement Analysis (FSA) involves analysis of firm’sfinancial statements to derive information which can be used in decision making. The