Why Financial Statement Analysis

“Financial statement analysis is the process of reviewing and analyzing a company's financial statements

to make better investment decisions. These statements include the profit/loss statement, balance sheet,

statement of cash flows, and a statement of retained earnings.” Financial Statement Analysis of an

organization, to gain information about the current and future financial health of a company. The

process of assessing the businesses, projects, budgets and other finance related entities to

determine their suitability for investment. Most of the financial analyzers are study about

company’s financial statements and analyze commodity prices, sales, costs, expenses, and tax

rates to determine a company's value by estimating its future earnings. Financial Statement

Analysis also helpful for deciding how much investor spends money in the company.

Beneficiaries of Financial Statement Analysis

Financial statements are widely used by company executives and investors in assessing the overall

status and financial condition of the company. An investor who is interested to invest his money in a

Colgate-Palmolive company or any other will be keen to know about the economic performance and

financial conditions of the company to ensure profitability and better return on investment. Financial

Statement analysis is a depth reviewing and analyzing for investors, that what Colgate-Palmolive

Company’s financial position and strength and how much they invest in the company.

For the comparison and analysis of financial statement of Colgate Palmolive and Shield

Corporation we used one of the most commonly used tool i.e. Ratio analysis. Ratio analysis is a

tool used for quantitative analysis of company’s financial information. Ratios are calculated from

current year information and are then compared with previous year’s ratios. Ratios may also be

used to compare between these two companies. It is mainly used to assess the financial health of

company and help for investors, which company is good for investment. These ratios are mainly

divided into four main types:

1. Liquidity Ratio

2. Profitability Ratio

3. Turnover Ratio

4. Solvency or leverage Ratio

Liquidity Ratio

Liquidity ratio measures the ability of a firm to meet its short term obligations, in other words it

shows the ability of a company to pay its short term obligations when they fall due. It reflects the

short term solvency of company. Company or a firm should ensure required liquidity and take

measures to avoid suffering from lack of liquidity. If a company fails to meet its short term

obligations it will result in bad credit image and loss of creditor’s confidence. Very high liquidity

is also not pleasing as it shows that funds are idle and are not used efficiently.

The different ratios that explain about the liquidity of the firm are

i. Current Ratio

ii. Acid Test Ratio / quick ratio

iii. Absolute liquid ration / cash ratio

Current Ratio

Current ratio compares current assets with current liability and measures the ability of a company

to meet its short term obligations. Higher the ratio more capable company is to pay off its

obligation. A ratio less than one suggest that company does not have enough of current assets to

pay off its short term obligations if they came due at this point. This shows that company has not

good financial health On the other hand if the current assets are more than current liabilities and

ratio is higher than one then company is considered to have good financial health.. This ratio also

gives sense of efficiency of operating cycle of how efficiently it converts its product into cash.

Formula: CURRENT ASSETS / CURRENT LIABILITIES

ATLAS BATTERY EXIDE PAKISTAN

YEARS Formula/Calculation Ratio Formula/Calculation Ratio

2007 440,235 / 356,363 1.23 : 1 753,537 / 479,882 1.60 : 1

2008 684,862 / 564,815 1.21 : 1 1,255,585 / 895,686 1.40 : 1

2009 662,423 / 509,197 1.30 : 1 1,346,232 / 1,011,724 1.33 : 1

2010 756,814 / 544,754 1.40 : 1 2,107,704 / 1,710,480 1.23 : 1

2011 1,172,913 / 813,725 1.44 : 1 2,959,417 / 2,366,350 1.25 : 1

2012 1,496,313 / 938,546 2.0 : 1 2,892,389 / 1,993,234 1.45 : 1

2013 2,468,341 / 1,462,754 2.0 : 1 2,743,749 / 1,421,511 2.0 : 1

2014 3,894,029 / 2,557,886 1.52 : 1 4,792,792 / 3,302,413 1.45 : 1

Graphical Representation

2007 2008 2009 2010 2011 2012 2013 20140

0.5

1

1.5

2

2.5

Atlas Battery

Exide Pakistan

Analysis

Both Companies has irregular increasing and decreasing trends but the increasing trends are

more significant which shows the progress in liquidity condition of both companies. When we

separately analyze the ratios of both Atlas Battery and Exide Pakistan it is always greater than 1.

This shows that both companies has more assets against liabilities and is capable to pay off its

short term obligations. But when we compare, the Atlas Battery depicts sound financial standing,

it continuously growing against Exide Pakistan. In 2007 to 2009 Exide Pakistan was good

liquidity conditions but they do not maintain and growing their assets against liabilities. On the

other side Atlas Battery improve their assets against liabilities.

Quick Ratio

Quick ratio is more conformist than current ratio, a better known liquidity ratio. It is known as

Acid Test Ratio. Quick ratio measures a company’s ability to meet its short term obligations by

using its quick assets which include cash, marketable securities and A/R. In other word quick

assets include all current assets except inventory. The reason why inventory is excluded from

current assets is the fact that is difficult in some situations to turn inventory into cash

immediately. Higher the ratio more financially secure a company is in short term.

Lower or decreasing quick ratios suggest that company is over leveraged, struggling to maintain

or grow sales, paying bills too quickly or collecting receivables too slowly. On the other hand

Higher or increasing quick ratio depicts that company is quickly converting receivables into

cash, and easily able to cover its financial obligations. Companies with high quick ratios are

expected to have high inventory turnover ratios.

Formula: Current Assets – Inventory / Current Liablilities

ATLAS BATTERY EXIDE PAKISTAN

YEARS Formula/Calculation Ratio Formula/Calculation Ratio

2007 440,235 - 306,171 / 356,363 0.40 : 1 753,537 - 556,077 / 479,882 0.41 : 1

2008 684,862 - 410,672 / 564,815 0.50 : 1 1,255,585 – 920,042/ 895,686 0.40 : 1

2009 662,423 - 434,594 / 509,197 0.45 : 1 1,346,232 – 859857/ 1,011,724 0.48 : 1

2010 756,814 - 531,597 / 544,754 0.41 : 1 2,107,704 - 1,457,671/ 1,710480 0.40 : 1

2011 1,172,913 - 717,004 / 813,725 0.60 : 1 2,959,417 - 1,856,140 / 2,366,350 0.5 : 1

2012 1,496,313 - 811,490 / 938,546 1.0 : 1 2,892,389 - 1,497,121 / 1,993,234 1.0 : 1

2013 2,468,341 - 1,477,258 / 1,462,754 1.0 : 1 2,743,749 - 1,605,155 / 1,421,511 1.0 : 1

2014 3,894,029 - 2,551,256 / 2,557,886 0.52 : 1 4,792,792 - 2,355,195 / 3,302,413 1.0 : 1

Graphical Representation

2007 2008 2009 2010 2011 2012 2013 20140

0.2

0.4

0.6

0.8

1

1.2

Atlas BatteryExide Pakistan

Analysis

Analysis of Atlas Battery and Exide Pakistan quick ratio for eight years shows an irregular trend.

In 2007 to 11 both companies has less than 1 its ratio. Companies assets have not meet with

liabilities, they do not paid liabilities and it depicts unfavorable financial situation of both

companies during four years. In 2012 and 13 Atlas Battery ratio has 1 they just grow and able to

paid our liabilities and it’s financially favorable for the company. But in 2014 Quick Liquidity

ratio is again going down and company again do not able to pay the liabilities. On the other side

Exide Pakistan, from 2012 to 2014 quick ratio is 1 which shows that the company has most

liquid assets of a business are equal to its total debts and its favorable to the company. In this

quick ratio Exide Pakistan are very strong because their assets just equal to their liabilities.

Absolute Liquid Ratio

Absolute liquid ratio also known as Super quick ratio or Cash ratio, it further specifies the

liquidity of firm. It eliminates account receivables (Sundry Debtors and Bill receivables) also due

to the doubt in considering their time and amount of realization. For this reason Absolute liquid

ratio only relates cash, bank and marketable securities to current liabilities. As absolute liquidity

ratio follows very strict standards of liquidity therefore acceptability of this ratio is 50%. It

means that this ratio worth one half of the value of current liabilities is satisfactory liquid

position of company.

Formula: Current Assets – Inventory – Account Receivable / Current Liabilities

ATLAS BATTERY EXIDE PAKISTAN

Years Formula/Calculation Ratio Formula/Calculation Ratio

2007 440,235 - 306,171 - 3,130 / 356,363 0.40 : 1 753,537 - 556,077 -16,671 / 479,882

0.40

2008 684,862 - 410,672 - 76,431 / 564,815 0.35 : 1 1,255,585 – 920,042 – 54,391 / 895,686

0.31

2009 662,423 - 434,594 - 21,229 / 509,197 0.40 : 1 1,346,232 – 859857 – 19,234 / 1,011,724

0.5

2010 756,814 - 531,597 - 32,347 / 544,754 0.35 : 1 2,107,704 – 1,457,671 – 19,563 / 1,710480

0.40

2011 1,172,913 - 717,004 - 212,027 / 813,725 0.30 : 1 2,959,417 - 1,856,140 - 36,358 / 2,366,350

0.45

2012 1,496,313 - 811,490 - 448,452 / 938,546 0.25 : 1 2,892,389 - 1,497,121 - 32,522 / 1,993,234

0.7

20132,468,341 - 1,477,258 - 722,111 /

1,462,7540.20 : 1 2,743,749 - 1,605,155 - 73,245 /

1,421,5110.75

2014 3,894,029 - 2,551,256 - 842,739/ 2,557,886

0.24 : 1 4,792,792 - 2,355,195 - 48,969 / 3,302,413

0.72

Graphical Representation

2007 2008 2009 2010 2011 2012 2013 20140

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Atlas BatteryExide Pakistan

Analysis

Due to strict standards of liquidity followed by this ratio normal norm for acceptability of this

ratio is 0.5:1. When we compare both companies, Atlas Battery has low cash ratio throughout the

eight years. In 2007 and 2009 company have highest 0.4 cash ratio and the remaining years

company has continuous decreasing its cash ratio. Exide Pakistan performance on cash ratio is

satisfactory, in 2007, 2008 and 2010 company have lowest cash ratio and remaining years

company has increasing their cash ratio. Exide Pakistan has better performance in against Atlas

Battery.