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Table of Contents
Annual Report Analysis
Ratio Analysis
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Important Sections to look at Annual Report
Management Discussion
Balance Sheet
Profit & Loss a/c
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Auditors Notes
Notes to accounts/ Accounting Policies
Schedules
Foot Note
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Balance Sheet
Tells what company owns and owes
Balance Sheet is the financial snapshot of companys health
Balance Sheet has three main categories-
- Assets
CreditR - Liabilities
- Equity
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Equity
The difference between what company owns and what it owes
Equity= Total Assets- Total External Liabilities
Two main items-
- Paid up capital
CreditR - Reserve & Surplus (includes General Reserve, Retained Earning, etc.)
Two types of shareholdings-
- Equity share capital
- Preference share capital
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Assets
There are two main types of assets
Current assets- Likely to be used up/ converted into cash within onebusiness cycle
Main current assets being-
-Inventory
CreditR -Debtors
-Cash
Non current Assets- mostly fixed in nature and not converted into cash inone business cycle
And includes-
-Fixed assets
-Investments
-Intangible assets
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Current Assets
Inventories
Which includes-
-Raw material
-WIP
-Finished Goods
CreditR Debtors (receivables)
Tells speed at which company collects what it owed and tells lot about financialefficiencies
Cash
Is a cash real indicator of companys health?
Is too much of cash in books good for company?
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Non Current Assets
Fixed Assets
- Plant & Machinery
- Furniture
- Property
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- Long term
- Short term
Intangible Assets
- Copyrights
- Patents etc
(not too much of attention needed unless company is in financial distress)
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Liabilities
Liabilities can be divided into two parts-
-Current Liabilities
Obligation to pay in a year and includes-
- Creditors
- Loans & Advances (short term)
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-Non Current Liabilities
- Secured
- Unsecured
Is increasing debt levels always bad sign?
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Fictitious and Intangible Assets
Fictitious assets
- Example of fictitious assets are deferred revenue expenditure whosebenefit is derived over long period of time.
- Even accumulated losses are also fictitious assets as they are writtenoff over a period of time.
- Following are the examples of fictitious assets are-preliminaryex enses discount on issue on debenture and shares underwritin
CreditR
commission, miscellaneous expenditure, profit and loss (Dr).
All fictitious assets are intangible but all intangible assets are notfictitious example goodwill, patents, trademarks, copyrights areintangible but not fictitious.
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Analysing Profit & Loss a/c
What Profit & Loss a/c tells?
- Earning Growth
- Expenditure / cost
- Interest expense
- Depreciation cost-
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- Net profits
- Dividend / retained profits
- Exceptional items
What it does not tell?
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Analysisng Profit & Loss a/c cont.
Three important sections of Profit & Loss a/c
- Total Revenue
- Operating Cost
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- Financing Cost
- Asset cost
- Profitability
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Cash Flow Statement
Shows how company is able to pay for its operations and future growth
Three section of cash flow statement
- Cash flow from operating activities
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(what does negative cash flow from operating activities indicates?)
- Cash flow from investing activities
How much amount is spent on capital expenditure, equipment purchase,
new business acquisition
- Cash flow from financing activities
Cash associated with outside financing activities (Issue of long term debt,share capital, bonds and is paid back)
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Free Cash Flow
It shows the companys ability to pay debt, dividend, share buy backand facilitates growth of business
Free cash flow = Net income
+ Depreciation/amortisation- Chan e in workin ca ital
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- Capital expenditure
- Can be returned to shareholders
- Invested into business operations
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Net Debt
Net Debt = Long term liabilities- Cash and Cash Equivalent (includesCash, Bank Balance, Fixed Deposit, etc.)
True debt outstanding for the company
CreditR
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Return on Equity (RoE)
Tells how well companys assets are managed
RoE = Net income after tax
Shareholders Equity
Shareholders Equity = Total Assets- Total External Liability
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Tells how profitably company can expand its business
RoE should be greater than prevailing bank interest rates
It does not tell about debt of the company
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Return on Capital Employed (RoCE)
RoCE = Operating Profit/ Capital Employed
where
Operating profit = PBIDT
Ca ital em lo ed = Total assets Current liabilities
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(Cash and assets actually used to carry out business)
RoCe gives better picture than RoE
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Ratio Analysis
Financial Ratio (Balance Sheet)- Current Ratio- Quick Ratio- Debt Equity Ratio
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- Operating Ratio- Expense Ratio- Net Profit Ratio- Inventory Ratio
Composite Ratio (Both Balance Sheet & Profit & Loss a/c)- Fixed Assets Turnover- Debtors Turnover Ratio- Creditors Turnover Ratio
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Financial Ratio (Balance Sheet Ratio)
Current Ratio
It is relationship between the current assets and current liabilities
Current Ratio = Current Assets/ Current Liabilities
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Net Working Capital
Surplus of long term sources over long term uses (difference of currentassets and current liabilities)
NWC= Current Assets- Current Liabilities
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Financial Ratio (Balance Sheet Ratio)
Quick Ratio/ Acid Test Ratio
It is a ratio between Quick Current Assets and Current Liabilities
Quick Current Assets: Cash/ Bank balance + receivables upto 6 months
+Quickly realizable securities ( G Secs, Quoted shares, Bank FDs)
CreditR
Quick Current Assets / Current Liabilities
(Inventory is not considered as quickly and easily realizable current assets)
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Financial Ratio (Balance Sheet Ratio)
Debt Equity Ratio
It is a relationship between borrowers fund (debt) and owners fund (Equity)
Long term debt= liabilities of long term nature
CreditR
Tangible net worth= Total of capital + reserve & surplus intangible assets
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Operating Ratio (Profit & Loss a/c)
Operating Profit Ratio
Its defined as
(Operating Profit/ Net sales)*100
=
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Net Profit Ratio
It is defined as
(Net Profit/ Net sales)*100
It measures overall profitability
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Operating Ratio (Profit & Loss a/c)
Inventory/Stock Turnover Ratio
(Av inventory/ sales)* 365 for days
(Av inventory/ sales)* 52 for weeks
(Av inventory/ sales)* 12 for months
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Av inventory or stocks = (Opening stock + Closing stock)
2
It tells number of times the inventory is rotated during the relevant
accounting period
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Composite Ratio
Debtors Turnover Ratio
Also called as Debtors Velocity or Average Collection Period or Period ofcredit given
(Average Debtors/Sales)*365 for days
CreditR sse urnover a o
Net Sales/ tangible Assets
Creditors Turnover Ratio
Also called as Creditors Velocity or Average Payable Period, whichdetermines the creditors payment period
(Average Creditors/Sales)*365 for days