Analysis & Interpretation of

Financial Statements

USQ UNIVERSITY OF SOUTHERN QUEENSLAND

MBA - ACC5502

Accounting & Financial Management / S1 / 2015

M B G Wimalarathna

[FCA, FCMA, MCIM, FMAAT, MCPM, (MBA–PIM/USJ)]

Introduction In simple term, Analysis of Financial Statements (AFS) is a mechanism used to re-

produce financial/non-financial information/data which are being already

prepared and presented in a formal manner by the particular organization.

Further, Analysis of Financial Statements expresses already reported

Financial/Non-Financial information of an organization in relative as well as more

descriptive manner.

AFS requires stakeholders (Internal, Inter-related & External) to take decisions &

form opinions on entity’s past & future performance and position.

AFS - Techniques/Methods

Trend Analysis. (Analyze past & do predict)

Horizontal Analysis. (Current Vs Previous)

Vertical Analysis. (Current Vs Current)

Ratio Analysis. (Mix of all above)

Discussion:

How to use in decision making? What are the key shortcomings? When can’t use?

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Comparable Sources/Benchmarks

To arrive at clear conclusion and make an effective decision, a

particular user must Compare the results attained under any

techniques discussed in above with suitable/sound comparative

source (benchmark).

Commonly acceptable Sources (Benchmarks);

Previous (immediate) years’ similar data/figures.

Forecasted/budgeted similar data/figures.

Competitors’ similar data/figures. (Apple to Apple)

Industry norms.

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Ratio Analysis

Ratio Analysis is the most common/well known technique used in

Financial Statements Analysis.

Key Categories,

Profitability.

Efficiency. View point of the

Liquidity. Company.

Gearing/Capital Structure.

Investors/Market Performance. (Investors’ point of view.)

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Profitability Ratios

What are the key categories?

Primary

1. ROE. (Return On Equity) NP.atri O/SHS. x100

What? Avg. Equity

How to calculate?

2. ROA. (Return On Assets) EBIT x100

What? Avg. Assets

How to calculate?

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What does this measure & indicate to users/Stakeholders?

Secondary

1. GP Margin. (Gross Profit) ) GP x100

What? Total Sales

How to calculate?

2. OP Margin. (Operating Profit) ) OP x100

What? Total Sales

How to calculate?

3. NP Margin. (Net Profit) ) NP x100

What? Total Sales

How to calculate?

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Efficiency Ratios

1. Asset Turnover Ratio Total Sales

Avg. total Assets

What? (Times / x)

How to calculate?

2. Inventory/Stock Turnover Ratio

Cost of Sales

What? Avg. Stock

How to calculate?

3. Debtors Turnover Ratio

Total Credit Sales

What? Avg. Drs.

How to calculate?

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What does this measure & indicate to users/Stakeholders?

4. Stock Residency Period - Direct/Indirect

Avg. Stock x 365/50/12

What? Cost of Sales

How to calculate?

5. Debtors Collection Period - Direct/Indirect

Avg.Debtors x365/50/12

What? Total Credit Sales

How to calculate?

6. Activity Cycle

SRP + DCP

What?

How to calculate?

Discussion:

If Figures are not available, how to perform the calculation?

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Liquidity Ratios

What does this measure & indicate to users / stakeholders?

1. Current Ratio. CA

CL

What?

How to calculate?

2. Quick Asset/Acid Test Ratio. (CA - St.)

CL Traditional. Is this correct?

What?

How to calculate?

3. Cash Flow Ratio.

NCF. OP. act

CL

What?

How to calculate?

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Gearing/Capital Structure Ratios

1. Debt to equity Ratio.

Total Liabilities x 100

What? Total Equity

How to calculate?

2. Debt Ratio.

Total Liabilities x 100

Total Assets

What?

How to calculate?

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What does this measure & indicate to users / stakeholders?

3. Equity Ratio. Total Equity x 100 Total Assets

What?

How to calculate?

4. Interest Coverage Ratio. EBIT

F/Cost

What?

How to calculate?

5. Debt Coverage Ratio. NCL

NCF.op.act

What?

How to calculate?

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Investors'/Market Performance Ratios

1. Net Tangible asset backing per share (OS/HE-IA)

O/SC

What?

How to calculate?

2. EPS NP. atri.OSHs

WA. O/Sc

What?

How to calculate?

3. Operating cash flow per share (NCF. op. - Pr. Divi)

WA. O/Sc

What?

How to calculate?

1

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What does this measure & indicate to users / stakeholders?

4. Dividend per share Divi. paid + proposed

WA. O/Sc

What?

How to calculate?

5. PE Ratio MPS

EPS

What?

How to calculate?

1

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Ratio Analysis Vs Other Techniques Why Ratio Analysis has become most popular?

Is Ratio Analysis the best for AFS? Shortcomings of ratio analysis.

End Product of the AFS End Product / result of AFS is the formal report compiled by using results attained under any techniques / methods discussed before.

Discussion:

Why writing a report is important?

Guidelines for effective report writing.

Format

Language

be polite

be specific

be simple (do not use much Technical Jargon)

be focus

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Recommended Format

Details of the sender / analyzer

Date of the report

Addressee (with formal approach)

Title of the report

Introductory Paragraph

Body of the report (results of the analysis)

End Paragraph

Signature of the Analyzer

Annexure: comprehensive analysis of the accounting ratios including graphs and other relevant qualitative information.

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