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14
MANAGEMENT,
THAPAR
LMT SCHOOL OF
UNIVERSITY
Masters of Business Administration
Horizontal Analysis
The tool facilitates a quick review of the current years
performance and financial position of a company over
the previous year.
Work out the increase/decrease in each line item of B/S
and P/L. Analysis includes finding out if growth in PAT is
proportionate to growth in sales, growth in total assets
is proportionate to growth in sales and likewise.
%change = ((current years figure previous years
figure)/previous years figure)*100
8/17/15
8/17/15
Net sales
up by
24.4%
Material,
interest
and
finance
charges
and extraordinary
expenses
grew more
than net
sales
Depreciati
on down
by 0.38%
PAT up by
10.13%
much
lower than
sales 3
Total assets/liabilities
up by 14.36%
Net worth up by 16%
Net fixed assets up by
12.17% whereas net
sales up by 24.4%.
Efficient utilization of
fixed assets
Investments grew by
10.08% but nonoperating income only
6.22%
Inventory up by only
13.47% whereas net
sales up by 24.4%.
Efficient Inventory
Management
4
PBDIT is
14.27% of net
sales in 2007
vis--vis
15.88% in
2006, PAT also
down to
13.33% of net
sales in 2007
vis--vis
15.06% in 2006
Material costs
are higher in
2007 at
74.26%
8/17/15
Sundry debtors
are higher in
2007 at 7.32%
of total sources
of funds vis-vis 4.77% of
total sources of
funds in 2006
Higher current
assets and
current
liabilities, but
lower net
current assets
8/17/15
Trend Analysis
An extension of horizontal analysis, it
compares the performance and financial
position for more than two years.
Take the value of the base year as 100 or 1
and restate all successive years figures
accordingly. Two years comparison provide
indication of growth, several years
comparison leads to conclusive judgement.
8/17/15
Consistent
rise in sales
except in the
last year
PBT growth
always much
lower than
sales growth
PAT growth
always much
lower than
sales growth
Consistent
rise in
dividend
payout
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Ratio Analysis
Return on Investment Ratios
Name of
Ratio
Formula
State
results
as
Importance
Return on
Net Worth
(PAT Preference
Dividend)*100/Avg.
Net Worth
Rs.
Cash
(PAT-Preference
Rs.
In case of long gestation
Earnings per Dividend+ Nonprojects and start-up
Share
cash charges)/Avg.
cases
no. of equity shares
8/17/15
10
outstandingFinancial Statement Analysis
Solvency ratios
Name of
Ratio
Formula
State
results
as
Importance
Net Asset
Value
Net Worth/no. of
equity shares
outstanding
Rs.
Efficiency in building up a
back-up of reserves and
surplus
Debt Equity
times
Interest
Cover
(PAT + Interest on
long term debt +
non-cash
charges)/interest
on long term debt
times
Assesses whether a
company is comfortably
placed to service its
interest obligations out of
revenues it is generating
Debt
Service
Coverage
8/17/15
Ratio
(PAT + Interest on
times
long term debt +
non-cash charges)/
(interest onFinancial
long Statement Analysis
Assesses whether a
company is comfortably
placed to service its due
outstanding long-term 11
Liquidity Ratios
Name of
Ratio
Formula
State
result
s as
Importance
Current
Ratio
times
Quick
Ratio
(Acid-test
ratio)
times
Collection
period
Account Receivables*365/Credit
Sales
days
days
Suppliers
credit
Account Payables*365/Credit
Purchases
(Use total Purchases if credit
purchases are not known)
8/17/15
Inventory
Financial Statementdays
Analysis
Inventory *365/COGS
12
Assesses how fast a company
Turnover Ratios
Name of
Ratio
Formula
State
result
s as
Importance
Fixed
Asset
Turnover
Ratio
times
times
Inventory
Turnover
Ratio
COGS/ Inventory
times
Name of
Ratio
Formula
State
result
s as
Importance
Gross
Profit
Margin
Net8/17/15
Profit
Margin
Net Income*100/NetFinancial
sales Statement %
Analysis
Profitability Ratios
DU PONT ANALYSIS
RONW
* Net Worth
Turnover
* Net Sales/ Net
Worth (Equity
Capital + Reserves
and Surplus
Miscellaneous
expenditure not
written off)
8/17/15
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