Financial Statements Analysis

Ratio Analyses
Dilip Thosar
July2014
Slide no. 1
July 21, 2014
` `` `
Any student of military strategy would tell you that in order to attack a position, you should
have a ratio of approximately 3 to 1 in favor of the attacker ~Norman Schwarzkopf
You can judge whether housing price is in line with its fundamental value by considering the
ratio of housing prices to rents ~Janet Yellen
Financial Statements Analysis
Ratio Analysis
The Matrix
Has Information
Can you do business
with The Matrix ?
` `` `
The Matrix
Makes a Statement
Can you analyze this
from The Matrix ?
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 2
July 21, 2014
Analysis Of FS
Levels
Business Unit
Company
Industry
Trends
Forecasting: Needs, Seasonalities and Performance
Ratios
Ratio of a financial value of a firm to
Another financial value of the same firm
Same financial value of another firm
Same financial value of a previous period of the same firm
Health. Individual, Over time, In comparison
Benchmarks
Competitive Advantage
Concept of Similar Firms
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 3
July 21, 2014
Example PLBS, BW
53 Retained Earnings transferred to Balance Sheet
Shares trading on market at Rs.560 38 Cash Dividends
91 PAT
g
g. Amount earned for shareholders. 60 Tax
f. Taxable income. 151 PBT
f
e. Cost of borrowed funds. 59 Interest Expense
d. Operating income. 210 PBIT
d
c. Sales comm., adv., officers salaries, etc. SG&A Expenses
c
b. Received, or receivable, from customers. 612 Gross Profit
a. Measures profitability over a time period. 1,599 COGS
b
NOTES: 2,211 Revenue by Sales
Black And White Pvt Ltd. Profit and Loss Statement for theyear ending 31Mar2014
2,169 TOTAL LIABILITIES
a
2,169 TOTAL ASSETS
a
1,139 SHAREHOLDERS' FUNDS 223 Other Long Term Assets
210 Reserves and Surplus
h
50 Long Term Investments
929
Subscribed Capital (92.9 lakh shares each at
Rs.10 par)
g
701 Net FIXED ASSETS
530 LONG TERM LIABILITIES 329 Accumulated Depreciation
g
530 Long Term Debt
f
1,030 Gross Fixed Assets (at cost)
f
500 CURRENT LIABILITIES
e
1,195 CURRENT ASSETS
10 Prepaid Taxes
100 Other Accrued Liabilities
d
5 Prepaid Expenses
16 Accrued Taxes
d
696 Inventory
94 Accounts Payable
c
394 Accounts Receivables
290 Notes Payable 90 Cash
LIABILITIES ASSETS
All figures in lakh Rupees
Black And White Pvt. Ltd. Balance Sheet at the end of 31Mar2014
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 4
July 21, 2014
Black And White Ltd.
Liquidity Ratios
Current Ratio
= Current Assets / Current Liabilities
Firms ability to cover (pay for on time) current liabilities with its current
assets (liquidated on time)
Acid Test Ratio
= (Current Assets Inventory) / Current Liabilities
Firms ability to cover current liabilities with assets that are more liquid than
inventory
Cash Ratio
= (Cash+Cash Equivalents+Liquid investments)/ Current Liabilities
Firms ability to cover current liabilities with most liquid assets (almost cash)
Is a high liquidity ratio good or bad?
What does it mean if aeach liquidity ratio is
=, <, >, >> 1
=,< 0
<, >, >> Industry average
< values for previous period?
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 5
July 21, 2014
Leverage Ratios
Debt Equity Ratio
= Total Debt / Shareholders Equity
Extent to which the firm is financed by debt
Whats the value for BW? 1030/1139 = 0.9
Is that good or bad?
Gearing Ratio
Long Term Liabilities / Shareholders Equity
For BW: 530 / 1139 = 0.465
Debt to Assets Ratio
= Total Debts/Total Assets
Fraction of firms assets that are debt-financed
Whats the value for BW? 1030/2169 = 0.47
Total Capitalization Ratio
= Long-term Debt / Total Capitalization
Total capitalization = L.T.Debt + Equity
Fraction of long-term debt in long-term financing of firm
Whats the value for BW? 530/1669= 0.32
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 6
July 21, 2014
Coverage Ratios
Interest Coverage Ratio
Firms ability to pay off interest from profits
EBIT / Interest Paid
For BW, 210/59 = 3.56
Benchmark and trend?
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 7
July 21, 2014
Activity (Operations) Ratios
Receivable Turnover Ratio
= Credit Sales / Receivables
Quality of receivables and collection
Assumes all sales are on credit
For BW, 2211/394 = 5.61
Average Collection Period (RT in days)
= Days in the Year / Receivable Turnover Ratio
Average no. of days receivables outstanding
For BW, 365/5.61 = 65 days
Payable Turnover Ratio
= Annual Credit Purchases / Accounts Payable
Promptness of payment to suppliers
For BW, 1551/94 = 16.5
Is a high PT ratio good or bad?
Average Payment Period (PT in days)
Days in the Year / Payable Turnover
Average number of days that payables are outstanding
For BA, 365/16.5 = 22.1 days
Inventory Turnover Ratio
= COGS/ Inventory
Effectiveness of the inventory management practices
For BA, 1599/696 = 2.3
Trend and Benchmark?
Inventory in days
365/Inventory Turnover Ratio
For BW, 365/2.3 = 158.7 (Does that look very high?)
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 8
July 21, 2014
Activity Ratios contd.
Asset Turnover Ratio
= Net Sales / Total Assets
Effective utilization of assets to generate sales
For BA, 2211/2169 = 1.02
Is this a very revealing ratio?
Fixed Asset Turnover Ratio
= Net Sales / Fixed Assets
Utilization of fixed assets to generate sales
Capital Employed Turnover Ratio
Turnover/ Shareholders Equity
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 9
July 21, 2014
Gross Profit Margin
= Gross Profits / Net Sales
Efficiency of operations,
pricing policies and financing
612/2211 = 0.277 = 27.5%
Trend and Benchmark?
Net Profit Margin
Profit after Taxes / Net Sales
Profitability of firms sales
after all expenses and taxes
For BW, 91/2211=0.041 = 4.1%
Trend and Benchmark?
Profitability (Operational) Ratios
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 10
July 21, 2014
Profitability (Investment) Ratios
RoI Return on Investment
= Net Profit after Taxes / Total Assets
profitability of firms assets
For BW, 91/2160 =0.042=4.2%
RoE Return on Equity
= Net Profit after Taxes/ Shareholders Equity
Profitability on shareholders investments
For BW, 91/1139 =.08=8%
ROCE Return on Capital Employed
Profit before Interest and Tax / (total assets short term liabilities
EPS Earnings per Share (Basic/Diluted)
Net Profit after Taxes / No. of subscribed equity shares
Increase in shareholders wealth per unit share
For BW, 91/0.929 = 97.95 Rs./share
Diluted: Denominator includes provision like ESOPs granted
DPS Dividend/Share
Dividend payout / No. of subscribed equity shares
Immediate cash payback to shareholder per unit share
For BW, 38/0.929= 40.9 Rs./share
Dividend Yield
Latest Dividend payout per share / Market Price per share
For BW, 40.9/560 = 7.3%
P/E ratio Price Earnings Ratio
Market price per share / Earnings per share
For BW, 560/97.95 = 5.71
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 11
July 21, 2014
Investment Profitability : Du Pont Analysis
Net Profit Margin = Net Profits / Net Sales
Asset Turnover Ratio = Net Sales / Total Assets
Define Equity Multiplier
= Total Assets / Shareholders Equity
Sales profitability X Asset Turnover Ratio * Equity
Multiplier = Net Profits / Shareholders Equity
= RoE !
RoI =
Net profit margin (Sales Profitability)
X Total asset turnover (Asset Usage Efficiency)
X Equity Multiplier (Debt Leverage)
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 12
July 21, 2014
Performance using DuPont Analysis
ROE = (earnings before tax / sales) * (sales / assets) *
(assets / equity) * (1 tax rate)
ROE = Earnings after tax / Equity
= [ (EBIT/Sales) Op.efficiency
* (sales / assets) asset efficiency
- interest expense/assets interest rate
]
* (assets / equity) equity multiplier
* (1 tax rate) effective tax retention rate
What distinct factors affect the return on equity of a firm?
Benchmark and trend a firms performance on RoE and
each of those factors. Comment.
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 13
July 21, 2014
Performance of BW in summary
Inventories are too high
Not controlling creditors (paying them too
soon)
COGS may be too high.
Selling, general, and administrative costs too
high
Every Profitability ratios has been falling and
has below the industry average in every year
Interest coverage ratio is low
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 14
July 21, 2014
Common Size Analysis
Analysis of percentage financial statements
where
all balance sheet items are divided by total
assets and
all income statement items are divided by net
sales
Helps show relative efficiencies
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 15
July 21, 2014
Common Size Analysis : ExampleBW
2.3 2.4 4 50 50 50 Cash Dividends Paid out
4.1 4.9 9.1 91 103 112 Earnings After Taxes
6.8 8.1 15.1 151 171 186 Earnings Before Taxes
2.7 2.4 1.6 59 51 20 Interest Expense
9.5 10.5 16.7 210 222 206 Earnings Before Interest and Tax
18.2 18.2 14.6 402 383 180 SGA(Selling, General and Administrative Expenses)
27.7 28.7 31.3 612 605 386 Gross Profit
72.3 71.3 68.7 1,599 1,501 849 COGS (Cost Of Goods Sold)
100 100 100 2,211 2,106 1,235 Net Sales
Profit/Loss Statement
100 100 100 2169 2044 1223 Total Liabilities (and Equity)
52.51 53.13 55.11 1139 1086 674 Equity and Reserves
24.44 22.16 12.26 530 453 150 Long Term Debt
23.05 24.71 32.62 500 505 399 Total Current Liabilities
4.61 4.89 1.23 100 100 15 Other Accrued Liabilities
0.74 0.78 1.06 16 16 13 Accrued Tax Liability
4.33 4.6 6.62 94 94 81 Accounts Payable
13.37 14.43 23.71 290 295 290 Notes Payable
100 100 100 2,169 2,044 1,223 Total Assets
10.28 10.91 9.08 223 223 111 Other Long Term Assets
2.31 2.45 0 50 50 0 Long Term Investments
32.32 30.87 28.54 701 631 349 Net Fixed Assets
55.09 55.77 62.39 1,195 1,140 763 Total Current Assets
0.69 0.68 0.82 15 14 10 Other Current Assets
32.09 30.14 26.33 696 616 322 Inventory
18.17 20.06 23.14 394 410 283 Accounts Receivables
4.15 4.89 12.1 90 100 148 Cash
2007 2006 2005 2007 2006 2005 Balance Sheet Year
Common-Size (%) Regular (lakh Rs.) Black and White Pvt. Ltd.
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 16
July 21, 2014
Index Analysis
An analysis of percentage financial
statements where all balance sheet or
income statement figures for a base year
equal 100.0 (percent) and subsequent
financial statement items are expressed as
percentages of their values in the base year.
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 17
July 21, 2014
Indexed Analysis for BW
100 100 100 50 50 50 Cash Dividends Paid out
81.3 92 100 91 103 112 Earnings After Taxes
81.2 91.9 100 151 171 186 Earnings Before Taxes
295 255 100 59 51 20 Interest Expense
101.9 107.8 100 210 222 206 Earnings Before Interest and Tax
223.3 212.8 100 402 383 180 SGA(Selling, General and Administrative Expenses)
158.5 156.7 100 612 605 386 Gross Profit
188.3 176.8 100 1,599 1,501 849 COGS (Cost Of Goods Sold)
179 170.5 100 2,211 2,106 1,235 Net Sales
Income Statements
177.4 167.1 100 2,169 2,044 1,223 Total Liabilities (and Equity)
169 161.1 100 1,139 1,086 674 Equity and Reserves
353.3 302 100 530 453 150 Long Term Debt
125.3 126.6 100 500 505 399 Total Current Liabilities
666.7 666.7 100 100 100 15 Other Accrued Liabilities
123.1 123.1 100 16 16 13 Accrued Tax Liability
116 116 100 94 94 81 Accounts Payable
100 101.7 100 290 295 290 Notes Payable
177.4 167.1 100 2,169 2,044 1,223 Total Assets
200.9 200.9 100 223 223 111 Other Long Term Investments
Undefined Undefined 100 50 50 0 Long Term Investments
200.9 180.8 100 701 631 349 Net Fixed Assets
156.6 149.4 100 1,195 1,140 763 Total Current Assets
150 140 100 15 14 10 Other Current Assets
216.1 191.3 100 696 616 322 Inventory
139.2 144.9 100 394 410 283 Accounts Receivables
60.8 67.6 100 90 100 148 Cash
Balance Sheets
2007 2006 2005 2007 2006 2005
Indexed (%) Regular (lakh Rs.) BW Pvt. Ltd.
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 18
July 21, 2014
Assignment 1
Using HUL Annual Reports over last 10 years,
Analyze relevant ratios for every year
Perform index analysis
Perform common size analysis
Add qualitative comments based on the relevant
highlights from Directors Report, Auditors Report and
annexures.
Submission:
Printed Report (1-5 pages), All supporting documents
(eg. Worksheets) in soft copy.
Use of figures from the Annual Report should be clearly
referenced (eg. PL!A5/B6 )
Financial Statements Analysis
Ratio Analyses
Dilip Thosar
July2014
Slide no. 19
July 21, 2014
Session : Questions?