analysis of financial statements - baroda branch of wirc ... · pdf file09-mar-13 1 - brijesh...

09-Mar-13

1

- Brijesh Pitroda

The analysis of a Business' Health starts with Financial Statement Analysis.

• Financial Statement Analysisinvolves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company This is accomplished byof the company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.

Baroda Branch of WICASA

Students' Studycircle

09-Mar-13

2

Who analyzes financial statements?

–Internal users• Management• Owner• Employees

Focus on Planning, evaluating and

controlling company operations.

• Employees–External users• Investors• creditors• regulatory agencies• stock market analysts• auditors

Focus on Liqudity, long term cashflow, profitability

and long term health(i.e. Solvency) of the firm.

• Horizontal Analysis

• Vertical Analysis

Methods ofFinancial Statement Analysis

y

• Common-Size Statements

• Trend/ Index Analysis

• Ratio Analysis

Horizontal Analysis

Using comparative financialstatements to calculate amount

t h ior percentage changes in afinancial statement item fromone period to the next



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2012 2011Assets

Comparative Balance SheetsDecember 31, 2011 and 2012

SAYAJIRAO CORPORATION

Horizontal Analysis Example

AssetsNon-current asstes: Land 40,000 40,000 Buildings and equipment, net 120,000 85,000 Total Non-current assets 160,000 125,000 Current assets: Inventory 80,000 100,000 Accounts receivable, net 60,000 40,000 Prepaid expenses 3,000 1,200 Cash 12,000 23,500 Total current assets 155,000 164,700

315000 289700

AmountChange

Current YearFigure

Base YearFigure=

Calculating Change in Amounts


_

Since we are measuring the amount of the change between 2011 and 2012, the amounts for 2011 become the “base” year figures.

Change Figure Figure

PercentageChange

Amount ChangeBase Year Figure

100%= ×

Calculating Change in Amounts


Change Base Year Figure



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Increase (Decrease)2012 2011 Amount %

AssetsNon-current asstes:

SAYAJIRAO CORPORATIONComparative Balance SheetsDecember 31, 2011 and 2012


Land 40,000 40,000 - 0.0 Buildings and equipment, net 120,000 85,000 35,000 41.2 Total Non-current assets 160,000 125,000 35,000 28.0Current assets: Inventory 80,000 100,000 (20,000) (20.0) Accounts receivable, net 60,000 40,000 20,000 50.0 Prepaid expenses 3,000 1,200 1,800 150.0 Cash 12,000 23,500 (11,500) (48.9) Total current assets 155,000 164,700 (9,700) (5.9)

315,000 289,700 25,300 8.7

12,000 – 23,500 = (11,500)

(11,500 ÷ 23,500) × 100% = 48.9%

SAYAJIRAO CORPORATION Comparative Balance Sheets December 31, 2011 and 2012

Increase (Decrease)2012 2011 Amount %

Equity and liabilities

Stockholders' funds:


Stockholders funds: Share Capital 90,000 90,000 - 0.0 Reserves and surplus 80,000 69,700 10,300 14.8

170,000 159,700 10,300 6.4Non-Current liabilities: Bonds payable, 8% 75,000 80,000 (5,000) (6.3)Current liabilities: Accounts payable 67000 44000 23000 52.3 Notes payable 3,000 6,000 (3,000) (50.0)Total current liabilities 70,000 50,000 20,000 40.0

145,000 130,000 15,000 11.5 Total liabilities 315000 289700 25300 8.7

SAYAJIRAO CORPORATIONComparative Income Statements

For the Years Ended December 31, 2011 and 2012Increase (Decrease)

2012 2011 Amount %Net sales 520000 480000 40000 8.3

Horizontal Analysis ExampleThere were also increases in both cost ofgoods sold (14.3%) and operatingexpenses (2.1%). These increased costsmore than offset the increase in sales,yielding an overall decrease in netincome.

Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)Operating expenses 128,600 126,000 2,600 2.1Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)Net income before taxes 25,000 32,000 (7,000) (21.9)Less income taxes (30%) 7,500 9,600 (2,100) (21.9)Net income 17500 22400 -4900 (21.9)

Sales increased by 8.3% while net income decreased by 21.9%.



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Vertical Analysis

For a single financial statement,each item is expressed as apercentage of a significant total,e.g., all income statement itemsare expressed as a percentage ofsales

2011 2012 2011 2012Assets

Non current asstes:

Amount % of Total Assets


December 31, 2011 and 2012Balance Sheets

Vertical Analysis Example

Non-current asstes: Land 40,000 40,000 14 13 Buildings and equipment, net 85,000 120,000 29 38 Current assets: Inventory 100,000 80,000 35 25 Accounts receivable, net 40,000 60,000 14 19 Prepaid expenses 1,200 3,000 0 1 Cash 23,500 12,000 8 4

289,700 315,000 100 100

40,000 ÷ 2,89,700 = 14% rounded40,000 ÷ 3,15,000 = 13% rounded

2011 2012 2011 2012Equity and liabilities

Amount % of Total Liabilities


December 31, 2011 and 2012Balance Sheets

Vertical Analysis Example

Equity and liabilities Stockholders' funds: Share Capital 90,000 90,000 31 29 Reserves and surplus 69,700 80,000 24 25 Non-Current liabilities: Bonds payable, 8% 80,000 75,000 28 24 Current liabilities: Accounts payable 44,000 67,000 15 21 Notes payable 6,000 3,000 2 1 Total 289,700 315,000 100 100

90,000 ÷ 2,89,700 = 31% rounded



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Common-Size Analysis

An analysis of percentage financialstatements where all balance sheetitems are divided by total assets orli biliti d ll i t t tliabilities and all income statementitems are divided by net sales orrevenues.

2010 2011 2012 2010 2011 2012Assets

Non-current asstes: Land 40,000 40,000 40,000 13 14 13

Amount Common-Size (%)

SAYAJIRAO CORPORATIONCommon-Size Balance Sheets

Common-Size Analysis Example

, , , Buildings and equipment, net 80,000 85,000 120,000 27 29 38 Total Non-current assets 120,000 125,000 160,000 40 43 51 Current assets: Inventory 120,000 100,000 80,000 40 35 25 Accounts receivable, net 35,000 40,000 60,000 12 14 19 Prepaid expenses 1,000 1,200 3,000 0 0 1 Cash 24,000 23,500 12,000 8 8 4 Total current assets 180,000 164,700 155,000 60 57 49

300,000 289,700 315,000 100 100 100

2010 2011 2012 2010 2011 2012 Equity and liabilities

Stockholders' funds: Share Capital 90,000 90,000 90,000 30 31 29

Amount Common-Size(%)

SAYAJIRAO CORPORATIONCommon-Size Balance Sheets


Reserves and surplus 79,600 69,700 80,000 27 24 25 169,600 159,700 170,000 57 55 54

Non-Current liabilities: Bonds payable, 8% 77,700 80,000 75,000 26 28 24 Current liabilities: Accounts payable 45,700 44,000 67,000 15 15 21 Notes payable 7,000 6,000 3,000 2 2 1 Total current liabilities 52,700 50,000 70,000 18 17 22

130,400 130,000 145,000 43 45 46 Total 300,000 289,700 315,000 100 100 100



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2010 2011 2012 2010 2011 2012Net sales 450,000 480,000 520,000 100 100 100Cost of goods sold 300,000 315,000 360,000 67 66 69

Amount Common-Size (%)

SAYAJIRAO CORPORATIONCommon-Size Income Statements


Cost of goods sold 300,000 315,000 360,000 67 66 69Gross margin 150,000 165,000 160,000 33 34 31Operating expenses 120,000 126,000 128,600 27 26 25Net operating income 30,000 39,000 31,400 7 8 6Interest expense 5,200 7,000 6,400 1 1 1Net income before taxes 24,800 32,000 25,000 6 7 5Less income taxes (30%) 6,700 9,600 7,500 1 2 1Net income 18,100 22,400 17,500 4 5 3

Indexed Analysis

Show changes over time in givenfinancial statement items (can helpevaluate financial information of

l )several years)

2010 2011 2012 2010 2011 2012Assets

Non-current asstes:Land 40,000 40,000 40,000 100 100 100

Amount Indexed (%)

SAYAJIRAO CORPORATIONIndexed Balance Sheets

Indexed Analysis Example

Land 40,000 40,000 40,000 100 100 100 Buildings and equipment, net 80,000 85,000 120,000 100 106 150 Total Non-current assets 120,000 125,000 160,000 100 104 133Current assets: Inventory 120,000 100,000 80,000 100 83 67 Accounts receivable, net 35,000 40,000 60,000 100 114 171 Prepaid expenses 1,000 1,200 3,000 100 120 300 Cash 24,000 23,500 12,000 100 98 50 Total current assets 180,000 164,700 155,000 100 92 86

300,000 289,700 315,000 100 97 105



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2010 2011 2012 2010 2011 2012 Equity and liabilities

Stockholders' funds: Share Capital 90,000 90,000 90,000 100 100 100

Amount Indexed (%)

SAYAJIRAO CORPORATIONIndexed Balance Sheets


p Reserves and surplus 79,600 69,700 80,000 100 88 101

169,600 159,700 170,000 100 94 100 Non-Current liabilities: Bonds payable, 8% 77,700 80,000 75,000 100 103 97 Current liabilities: Accounts payable 45,700 44,000 67,000 100 96 147 Notes payable 7,000 6,000 3,000 100 86 43 Total current liabilities 52,700 50,000 70,000 100 95 133

130,400 130,000 145,000 100 100 111 Total 300,000 289,700 315,000 100 97 105

2010 2011 2012 2010 2011 2012Net sales 450,000 480,000 520,000 100 107 116C t f d ld 300 000 315 000 360 000 100 105 120

Amount Indexed (%)

SAYAJIRAO CORPORATIONIndexed Income Statements


Cost of goods sold 300,000 315,000 360,000 100 105 120Gross margin 150,000 165,000 160,000 100 110 107Operating expenses 120,000 126,000 128,600 100 105 107Net operating income 30,000 39,000 31,400 100 130 105Interest expense 5,200 7,000 6,400 100 135 123Net income before taxes 24,800 32,000 25,000 100 129 101Less income taxes (30%) 6,700 9,600 7,500 100 143 112Net income 18,100 22,400 17,500 100 124 97

500

520

540

Bas

e

Trend/Indexed line for Sales


400

420

440

460

480

2010 2011 2012

% o

f 100

YearsSales

Expenses



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Ratio Analysis

Expression of logical relationships between items in a financial statement of a single period (e g percentage relationship(e.g., percentage relationship between revenue and net income)

Current Ratio

Current AssetsCurrent AssetsC t Li bilitiC t Li biliti

Current Ratio

Current AssetsCurrent AssetsC t Li bilitiC t Li biliti

Balance Sheet Ratios

Liquidity Ratios

Liquidity Ratio

Current LiabilitiesCurrent Liabilities

For SAYAJIRAO December 31, 2012



Shows a firm’s ability to cover its current liabilities with its current assets.

Liquidity Ratios

1550001550007000070000

= 2.212.21

Sayajirao IndustrySayajirao IndustryYear

CurrentCurrent RatioRatio

Liquidity Ratio Comparisons

2.21 2.153.29 3.103.41 3.41

2.21 2.153.29 3.103.41 3.41

201220112010

Ratio is stronger than the industry average.



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Acid-Test (Quick)

CurrentCurrent Assets Assets -- InvInvC t Li bilitiC t Li biliti

Acid-Test (Quick)

CurrentCurrent Assets Assets -- InvInvC t Li bilitiC t Li biliti


Liquidity Ratios

Liquidity Ratio





Shows a firm’s ability to meet current

liabilities with its most liquid assets.

Liquidity Ratios

155000 155000 -- 80000 80000 7000070000

= 1.071.07


AcidAcid--Test RatioTest Ratio

Acid-Test Ratio Comparisons

1.07 1.251.29 1.231.00 1.25

1.07 1.251.29 1.231.00 1.25

201220112010

Ratio is weaker than the industry average.

RatioRatio SayajiraoSayajirao IndustryIndustryCurrent 2.21 2.15Acid-Test 1.07 1.25

Summary of the Liquidity Ratio Comparisons

• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.

• Note that this industry has a relatively high level of inventories.

• Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.

• Note that this industry has a relatively high level of inventories.

Acid Test 1.07 1.25



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Debt-to-Equity

Total DebtTotal DebtSh h ld ’ E itSh h ld ’ E it

Debt-to-Equity

Total DebtTotal DebtSh h ld ’ E itSh h ld ’ E it


Financial Leverage

Financial Leverage Ratio

Shareholders’ EquityShareholders’ Equity


Shareholders’ EquityShareholders’ Equity


Shows the extent to which the firm is financed by debt.

Financial LeverageRatios

7500075000170000170000

= 0.440.44


DebtDebt--toto--Equity RatioEquity Ratio

Financial Leverage Ratio Comparisions

0.44 0.440.50 0.510.46 0.48

0.44 0.440.50 0.510.46 0.48

201220112010

Sayajirao has average debt utilization relative to the industry average.

Debt-to-Total-Assets

Total DebtTotal DebtTotal AssetsTotal Assets

Debt-to-Total-Assets

Total DebtTotal DebtTotal AssetsTotal Assets


Financial Leverage


Total AssetsTotal Assets




Shows the percentage of the firm’s assets that are supported by debt

financing.


7500075000315000315000

= 0.240.24



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DebtDebt--toto--Total Assets RatioTotal Assets Ratio


0.24 0.260.28 0.270.26 0.27

0.24 0.260.28 0.270.26 0.27

201220112010

Sayajirao has average debt utilization relative to the industry average.

Total Capitalization(i.e., LT-Debt + Equity)

Long term DebtLong term Debt

Total Capitalization(i.e., LT-Debt + Equity)

Long term DebtLong term Debt


Financial Leverage


ggTotal CapitalizationTotal Capitalization


ggTotal CapitalizationTotal Capitalization


Shows the relative importance of long-term

debt to the long-term financing of the firm.


7500075000(75000+170000)(75000+170000) = 0.310.31


Total Capitalization RatioTotal Capitalization Ratio


0.31 0.300.33 0.310.31 0.32

0.31 0.300.33 0.310.31 0.32

201220112010

Sayajirao has average long-term debt utilization relative to the industry average.



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Interest Coverage

EBITEBITInterestInterest ChargedCharged

Interest Coverage

EBITEBITInterestInterest ChargedCharged

Coverage Ratio

Income StatementRatios

InterestInterest ChargedCharged


InterestInterest ChargedCharged


Indicates a firm’s ability to cover interest

charges. 314003140064006400 = 4.914.91

Coverage Ratios


Interest Coverage RatioInterest Coverage Ratio

Coverage Ratio Comparisions

4.91 5.205.57 6.565.76 7.20

4.91 5.205.57 6.565.76 7.20

201220112010

Sayajirao has below average interest coverage relative to the industry average.

7.0

8.0

e

Trend Analysis of Interest Coverage Ratio

Coverage Ratio- Trend Analysis Comparisions

3.0

4.0

5.0

6.0

2010 2011 2012

Rat

io V

alue

Analysis Year

SayajiraoIndustry



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The interest coverage ratio for BWBW has been falling since 2010. It has been below industryindustry averages for the past two years.

The interest coverage ratio for BWBW has been falling since 2010. It has been below industryindustry averages for the past two years.

Summary of the CoverageTrend Analysis

This indicates that low earningslow earnings (EBIT) may be a potential problem for BWBW.

Note, we know that debt levelsdebt levels are in line with the industryindustry averages.

This indicates that low earningslow earnings (EBIT) may be a potential problem for BWBW.

Note, we know that debt levelsdebt levels are in line with the industryindustry averages.

Receivable Turnover

Annual Net Credit SalesAnnual Net Credit SalesR i blR i bl

Receivable Turnover

Annual Net Credit SalesAnnual Net Credit SalesR i blR i bl

Income Statement /Balance Sheet

Ratios

(Assume all sales are credit sales.)

Actiivity Ratio

ReceivablesReceivables

• For SAYAJIRAO December 31, 2012

ReceivablesReceivables

• For SAYAJIRAO December 31, 2012Indicates quality of

receivables and how successful the firm is in its

collections.

Activity Ratios

4500004500003500035000

= 8.66

Avg. Collection Period

Days in the YearDays in the YearR i bl TR i bl T

Avg. Collection Period

Days in the YearDays in the YearR i bl TR i bl T


Ratios

Actiivity Ratio

Receivable TurnoverReceivable Turnover


Receivable TurnoverReceivable Turnover

• For SAYAJIRAO December 31, 2012Average number of days

that receivables are outstanding.

(or RT in days)

Activity Ratios

3653658.668.66

= 43 Days



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Average Collection PeriodAverage Collection Period

Activity Ratio Comparisions

29 29.231 2943 35

29 29.231 2943 35

201220112010

Sayajirao has improved the average collection period to that of the industry average.

Payable Turnover

Annual Credit PurchasesAnnual Credit PurchasesAccounts PayablesAccounts Payables

Payable Turnover

Annual Credit PurchasesAnnual Credit PurchasesAccounts PayablesAccounts Payables


Ratios

Actiivity Ratio(Assume all annual credit

purchases)

Accounts PayablesAccounts Payables


Accounts PayablesAccounts Payables


Indicates the promptness of payment to suppliers by

the firm.

Activity Ratios

3600003600006700067000

= 5.37

PT in days

Days in the YearDays in the YearP bl TP bl T

PT in days

Days in the YearDays in the YearP bl TP bl T


Ratios

Actiivity Ratio

Payable TurnoverPayable Turnover


Payable TurnoverPayable Turnover

• For SAYAJIRAO December 31, 2012Average number of days

that payables are outstanding.

Activity Ratios

3653655.375.37

= 68 Days



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Payable Turnover in DaysPayable Turnover in Days


68 5851 5156 48

68 5851 5156 48

201220112010

Sayajirao has improved the PT in Days.Is this good?Is this good?

Inventory Turnover

Cost of good soldCost of good soldI t iI t i

Inventory Turnover

Cost of good soldCost of good soldI t iI t i


Ratios

Actiivity Ratio

InventoriesInventories


InventoriesInventories

• For SAYAJIRAO December 31, 2012Indicates the

effectiveness of the inventory management

practices of the firm.

Activity Ratios

3600003600008000080000

= 4.5


Inventory Turnover RatioInventory Turnover Ratio


4.50 5.453.15 4.762.50 3.69

4.50 5.453.15 4.762.50 3.69

201220112010

Sayajirao has a very poor inventory turnover ratio.



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Inventory Turnover Ratio --Trend Analysis ComparisonInventory Turnover Ratio --Trend Analysis Comparison

5.05.56.0

e

Trend Analysis of Inventory Turnover Ratio

2.02.53.03.54.04.5

2010 2011 2012

Rat

io V

alue

Analysis Year

SayajiraoIndustry

Total Assets Turnover

Net SalesNet Sales

Total Assets Turnover

Net SalesNet Sales


Ratios

Actiivity Ratio




• For SAYAJIRAO December 31, 2012Indicates the overall

effectiveness of the firm in utilizing its assets to

generate sales.

Activity Ratios

520000520000315000315000 = 1.65


Total Assets Turnover RatioTotal Assets Turnover Ratio


1.65 1.751.66 1.791.50 1.80

1.65 1.751.66 1.791.50 1.80

201220112010

Sayajirao has a weak total asset turnover ratio.Why Why is this ratio considered weak?is this ratio considered weak?



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Gross profit Margin

Gross ProfitGross Profit

Gross profit Margin

Gross ProfitGross Profit


Ratios

Profitability Ratio

Net SalesNet Sales


Net SalesNet Sales

• For SAYAJIRAO December 31, 2012Indicates the efficiency of

operations and firm pricing policies.

Profitability Ratios

160000160000520000520000 = 30.7%


Gross Profit MarginGross Profit Margin

Profitability Ratio Comparisions

30.7% 35.1%34.3% 36.8%33.3% 36.6%

30.7% 35.1%34.3% 36.8%33.3% 36.6%

201220112010

Sayajirao has a weak Gross Profit Margin.

Gross Profit Margin --Trend Analysis Comparison

Gross Profit Margin --Trend Analysis Comparison

35.036.037.0

(%)

Trend Analysis of Gross Profit Margin

30.031.032.033.034.035.0

2010 2011 2012

Rat

io V

alue

(

Analysis Year

Sayajirao

Industry



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Net profit Margin

Net Profit after taxNet Profit after tax

Net profit Margin



Ratios

Profitability Ratio

Net SalesNet Sales


Net SalesNet Sales

• For SAYAJIRAO December 31, 2012Indicates the firm’s

profitability after taking account of all expenses

and income taxes.


1750017500520000520000 = 3.3%


Net Profit MarginNet Profit Margin


3.3% 5.2%4.6% 6.1%4.0% 6.1%

3.3% 5.2%4.6% 6.1%4.0% 6.1%

201220112010

Sayajirao has a poor Net Profit Margin.

Net Profit Margin --Trend Analysis Comparison

Net Profit Margin --Trend Analysis Comparison

6

7

(%)

Trend Analysis of Net Profit Margin

3

4

5

2010 2011 2012

Rat

io V

alue

Analysis Year

SayajiraoIndustry



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Return on Investment


Return on Investment



Ratios

Profitability Ratio




• For SAYAJIRAO December 31, 2012Indicates the profitability

on the assets of the firm (after all expenses and

taxes).


1750017500520000520000 = 5.5%


Return on InvestmentReturn on Investment


5.5% 8.1%7.7% 9.8%6.0% 9.3%

5.5% 8.1%7.7% 9.8%6.0% 9.3%

201220112010

Sayajirao has a poor Return on Investment.

Return on Investment –Trend Analysis Comparison

Return on Investment –Trend Analysis Comparison

10

12

(%)

Trend Analysis of Return on Investment

Sayajirao

Industry

4

6

8

2010 2011 2012

Rat

io V

alue

(

Analysis Year

y



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Return on Equity


Return on Equity



Ratios

Profitability Ratio

Shareholder’s EquityShareholder’s Equity


Shareholder’s EquityShareholder’s Equity

• For SAYAJIRAO December 31, 2012Indicates the profitability

to the shareholders of the firm (after all expenses

and taxes).


1750017500520000520000 = 10.2%


Return on EquityReturn on Equity


10.2% 17.9%14.0% 17.2%10.6% 18.4%

10.2% 17.9%14.0% 17.2%10.6% 18.4%

201220112010

Sayajirao has a poor Return on Equity.

Return on Equity --Trend Analysis Comparison

Return on Equity --Trend Analysis Comparison

17.5

21.0

(%)

Trend Analysis of Return on Equity

7.0

10.5

14.0

2010 2011 2012

Rat

io V

alue

(

Analysis Year

Sayajirao

Industry



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Summary of the Profitability Trend Analyses

Summary of the Profitability Trend Analyses

The profitability ratios for SayajiraoCorporation have ALL been falling since 2010. Each has been below the industryindustry

f th t th

The profitability ratios for SayajiraoCorporation have ALL been falling since 2010. Each has been below the industryindustry

f th t thaverages for the past three years.This indicates that COGSCOGS and administrative administrative costscosts may both be too high and a potential problem for Sayajirao Corporation.Note, this result is consistent with the low interest coverage ratio.

averages for the past three years.This indicates that COGSCOGS and administrative administrative costscosts may both be too high and a potential problem for Sayajirao Corporation.Note, this result is consistent with the low interest coverage ratio.

Summary of Ratio AnalysesSummary of Ratio Analyses

Inventories are too high.May be paying off creditors (accounts payable) too soon

Inventories are too high.May be paying off creditors (accounts payable) too soon(accounts payable) too soon.COGS may be too high.Selling, general, and administrative costs may be too high.

(accounts payable) too soon.COGS may be too high.Selling, general, and administrative costs may be too high.

Any queries/suggestions are welcomed at:[email protected]



analysis of financial statements - baroda branch of wirc ... · pdf file09-mar-13 1 - brijesh...

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