Description
The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.
Importance of Financial Statements Analysis
Miss.Y.Lingesiya. BBA(Hons),MBA(Pera) Dept. of Management Studies University of Jaffna
After the discussion, you will be able to
? understand
the concepts of financial
statements ? explain the meaning, need and purpose of financial statements analysis ? identify the parties interested in analysis of financial statements ? explain the ratio analysis to interpret financial statements
? Businesses
are mainly concern with the financial activities order to ascertain the financial status of the business every enterprises prepares certain statements known as financial statements. They are
– – – – Balance Sheet Income Statement/Profit &Loss Account Statement of Retained Earnings Statement of Cash Flows
? In
Taken together, these statements give an accounting picture of the firm’s operation and financial position The financial statements report what has actually happened to assets, earnings and dividends over the past few years
Balance Sheet
A statement of a firm’s assets, liabilities and equity on a specific date. Assets: economic resources that help generating resources Liabilities: firm’s obligations to creditors Equity: investment made by owners in the firm
Moon Lanka PLC’s Balance Sheets
31.3.2008 Rs .000’s Fixed Assets Current Assets Stocks Debtors Cash and Bank Balances Total Assets Stated capital(No. of Shares 212) Retained earnings Debenture Current Liabilities Trade payables Income tax liabilities Short term loans 696 ? 1,250 6,350 201 40 396 2,382 468 964 30 6,350 2,120 340 1,944 370 752 66 2,382 795 318 632 4,888 31.3.2007 Rs.000’s 1,194
Assets = Liabilities + Owners’ Equity 6,350 = 3,890 + 2,460 Analyzing the Liquidity
Current ratio Current assets Current liabilities
1,462 = 0.751:1 1,946
Interpretation :? Rule of thumb current ratio = 2:1 . But 0.75:1 indicates company unable to pay its bills. Quick (Acid test )ratio Current assets – stocks Current liabilities
1,462-468= 0.51:1 1,946
Interpretation :? Rule of thumb quick ratio = 1:1 . But 0.51:1 indicates company unable to pay its bills and company is poor position in liquidity. Companies Net Working Capital Current Assets- Current Liabilities
= 1,462-1,946 = -484
Interpretation :? it indicates that there is negative working capital in this company. Current liabilities exceed current assets by Rs.484
Profit and Loss Account/ Income Statement
? Summary
of revenues, expenses and net income (or net loss) of a firm. It serves as a measure of the firm’s profitability
Revenue: Revenues are amounts that the customers pay to the firm for providing them goods and services Expenses: The cost of the economic resources used to earn revenues during a period of time
Profit and Loss Account
2008 Rs.000 Sales Cost of sales (including purchases Rs.1300) Gross profit Administrative and distribution cost
Net profit before interest, taxation
2007 Rs.000 1,860 1,389 471 261
210
2,014 1,553 461 249
212
Debenture interest Profit before tax Taxation Profit after tax Dividend Retained profit b/f Retained profit c/f
163 49 14 35 13 22 318 340
26 184 80 104 16 88 230 318
Analyzing Profitability
Gross profit ratio Gross Profit x 100 Sales 461 / 2014 x 100= 22.88% Interpretation: Company takes, 22.88 % of gross profit on sales Profit Margin PBIT x 100 Sales 212/2014 x 100 = 10.5 %
Interpretation: Company takes, 10.5 % of profit margin on sales ROCE PBIT / CE 212/4404 x100 = 4.81%
Interpretation: For every Rs. 100 of capital employed financing, the firm generates Rs4.81 ROE PAT x 100 Shareholders fund 35 /2460 x100=1.422%
Interpretation: For every Rs. 100 of common equity financing, the firm generates Rs.1.422
Analyzing Activity
Debtors ratio Average collection period Trade debtors x 365 Credit sales 964/2014 x 365 = 175 days Interpretation: The company takes, on average 175 days to collect account receivables. Possibility to facing bad debts problems Creditors ratio Average payment period Trade creditors x 365 Credit purchases 696/1300 x 365 = 195 days
Interpretation: The company takes, on average 195 days to pay. Company is in crucial position to take loans in future Stock turnover Stock turnover Cost of sales Stocks Stocks x 365 Cost of sales 1553/468= 3.3 times 468/1553 x 365 = 110 days
Interpretation: The company takes, on average 110 days to sell an average items of its inventory
Analyzing the Debt
Debt Ratio Total liabilities Total Assets 3890/6350 x100= 61.25%
Interpretation: 61.25 % of assets have been financing by debt
Debt- equity ratio Long term debt Stock holders equity 1944/2460 x100= 79%
Interpretation: For every Rs of common equity financing the firm uses Rs 0.79 of long term debt
Times Interest Earned EBIT Interest Rs 212/Rs 163 = 1.29
Interpretation: For every Rs of interest, the firm has Rs 1.29 of earnings available to pay Rule of thumb : 3 to 5
Market Value Ratio
Earnings Per Share Earnings available for 35/212 =Rs 0.165 ordinary share holders No. of ordinary shares
Interpretation: earnings are Rs 0.165 per share
Dividend Per Share Dividend No.of Shares 13/212 = Rs.0.0613
Interpretation: dividends are Rs 0.0613 per share
Dividend Cover Profit available to ordinary shareholders Dividend 35/13 = 2.69
Cash Flow Statement
Cash flow from operating activities Net profit before tax Trade and other receivables Inventories Trade and other payables Tax Short term loan Net cash from operating activities Cash flow from investing activities Purchase Fixed Assets Cash flow from financing activities Shares Debentures Dividend Cash and cash equivalent @ opening Cash and cash equivalent @ end of the year 1,325 1,312 ?13 2,624 ?36 66 30 ?3,694 ?3,694 ?2,660 ?212 ?98 495 ?54 854 985 1,034 49
•
•
•
Financial statements are mainly prepared for decision making purposes. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise Financial analysis serves the following purposes
• • • • • •
Measuring the profitability Indicating the trend of achievements Assessing the growth potential of the business Comparative position in relation to other firms Assess overall financial strengths Assess solvency of the firm
Interested Parties
Investors ii. Management iii. Trade unions iv. Lenders v. Suppliers and trade creditors vi. Tax authorities vii. Researchers viii. Employees ix. Govt. and their agencies x. Stock exchange
i.
Examples of External Uses of Statement Analysis
•
•
•
Trade Creditors - Focus on the liquidity of the firm. Bondholders - Focus on the long-term cash flow of the firm. Shareholders - Focus on the profitability and long-term health of the firm.
Examples of Internal Uses of Statement Analysis
•
•
•
Plan - Focus on assessing the current financial position and evaluating potential firm opportunities. Control - Focus on return on investment for various assets and asset efficiency. Understand - Focus on understanding how suppliers of funds analyze the firm.
Questions ?
Thank you
doc_946060964.pdf
The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.
Importance of Financial Statements Analysis
Miss.Y.Lingesiya. BBA(Hons),MBA(Pera) Dept. of Management Studies University of Jaffna
After the discussion, you will be able to
? understand
the concepts of financial
statements ? explain the meaning, need and purpose of financial statements analysis ? identify the parties interested in analysis of financial statements ? explain the ratio analysis to interpret financial statements
? Businesses
are mainly concern with the financial activities order to ascertain the financial status of the business every enterprises prepares certain statements known as financial statements. They are
– – – – Balance Sheet Income Statement/Profit &Loss Account Statement of Retained Earnings Statement of Cash Flows
? In
Taken together, these statements give an accounting picture of the firm’s operation and financial position The financial statements report what has actually happened to assets, earnings and dividends over the past few years
Balance Sheet
A statement of a firm’s assets, liabilities and equity on a specific date. Assets: economic resources that help generating resources Liabilities: firm’s obligations to creditors Equity: investment made by owners in the firm
Moon Lanka PLC’s Balance Sheets
31.3.2008 Rs .000’s Fixed Assets Current Assets Stocks Debtors Cash and Bank Balances Total Assets Stated capital(No. of Shares 212) Retained earnings Debenture Current Liabilities Trade payables Income tax liabilities Short term loans 696 ? 1,250 6,350 201 40 396 2,382 468 964 30 6,350 2,120 340 1,944 370 752 66 2,382 795 318 632 4,888 31.3.2007 Rs.000’s 1,194
Assets = Liabilities + Owners’ Equity 6,350 = 3,890 + 2,460 Analyzing the Liquidity
Current ratio Current assets Current liabilities
1,462 = 0.751:1 1,946
Interpretation :? Rule of thumb current ratio = 2:1 . But 0.75:1 indicates company unable to pay its bills. Quick (Acid test )ratio Current assets – stocks Current liabilities
1,462-468= 0.51:1 1,946
Interpretation :? Rule of thumb quick ratio = 1:1 . But 0.51:1 indicates company unable to pay its bills and company is poor position in liquidity. Companies Net Working Capital Current Assets- Current Liabilities
= 1,462-1,946 = -484
Interpretation :? it indicates that there is negative working capital in this company. Current liabilities exceed current assets by Rs.484
Profit and Loss Account/ Income Statement
? Summary
of revenues, expenses and net income (or net loss) of a firm. It serves as a measure of the firm’s profitability
Revenue: Revenues are amounts that the customers pay to the firm for providing them goods and services Expenses: The cost of the economic resources used to earn revenues during a period of time
Profit and Loss Account
2008 Rs.000 Sales Cost of sales (including purchases Rs.1300) Gross profit Administrative and distribution cost
Net profit before interest, taxation
2007 Rs.000 1,860 1,389 471 261
210
2,014 1,553 461 249
212
Debenture interest Profit before tax Taxation Profit after tax Dividend Retained profit b/f Retained profit c/f
163 49 14 35 13 22 318 340
26 184 80 104 16 88 230 318
Analyzing Profitability
Gross profit ratio Gross Profit x 100 Sales 461 / 2014 x 100= 22.88% Interpretation: Company takes, 22.88 % of gross profit on sales Profit Margin PBIT x 100 Sales 212/2014 x 100 = 10.5 %
Interpretation: Company takes, 10.5 % of profit margin on sales ROCE PBIT / CE 212/4404 x100 = 4.81%
Interpretation: For every Rs. 100 of capital employed financing, the firm generates Rs4.81 ROE PAT x 100 Shareholders fund 35 /2460 x100=1.422%
Interpretation: For every Rs. 100 of common equity financing, the firm generates Rs.1.422
Analyzing Activity
Debtors ratio Average collection period Trade debtors x 365 Credit sales 964/2014 x 365 = 175 days Interpretation: The company takes, on average 175 days to collect account receivables. Possibility to facing bad debts problems Creditors ratio Average payment period Trade creditors x 365 Credit purchases 696/1300 x 365 = 195 days
Interpretation: The company takes, on average 195 days to pay. Company is in crucial position to take loans in future Stock turnover Stock turnover Cost of sales Stocks Stocks x 365 Cost of sales 1553/468= 3.3 times 468/1553 x 365 = 110 days
Interpretation: The company takes, on average 110 days to sell an average items of its inventory
Analyzing the Debt
Debt Ratio Total liabilities Total Assets 3890/6350 x100= 61.25%
Interpretation: 61.25 % of assets have been financing by debt
Debt- equity ratio Long term debt Stock holders equity 1944/2460 x100= 79%
Interpretation: For every Rs of common equity financing the firm uses Rs 0.79 of long term debt
Times Interest Earned EBIT Interest Rs 212/Rs 163 = 1.29
Interpretation: For every Rs of interest, the firm has Rs 1.29 of earnings available to pay Rule of thumb : 3 to 5
Market Value Ratio
Earnings Per Share Earnings available for 35/212 =Rs 0.165 ordinary share holders No. of ordinary shares
Interpretation: earnings are Rs 0.165 per share
Dividend Per Share Dividend No.of Shares 13/212 = Rs.0.0613
Interpretation: dividends are Rs 0.0613 per share
Dividend Cover Profit available to ordinary shareholders Dividend 35/13 = 2.69
Cash Flow Statement
Cash flow from operating activities Net profit before tax Trade and other receivables Inventories Trade and other payables Tax Short term loan Net cash from operating activities Cash flow from investing activities Purchase Fixed Assets Cash flow from financing activities Shares Debentures Dividend Cash and cash equivalent @ opening Cash and cash equivalent @ end of the year 1,325 1,312 ?13 2,624 ?36 66 30 ?3,694 ?3,694 ?2,660 ?212 ?98 495 ?54 854 985 1,034 49
•
•
•
Financial statements are mainly prepared for decision making purposes. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise Financial analysis serves the following purposes
• • • • • •
Measuring the profitability Indicating the trend of achievements Assessing the growth potential of the business Comparative position in relation to other firms Assess overall financial strengths Assess solvency of the firm
Interested Parties
Investors ii. Management iii. Trade unions iv. Lenders v. Suppliers and trade creditors vi. Tax authorities vii. Researchers viii. Employees ix. Govt. and their agencies x. Stock exchange
i.
Examples of External Uses of Statement Analysis
•
•
•
Trade Creditors - Focus on the liquidity of the firm. Bondholders - Focus on the long-term cash flow of the firm. Shareholders - Focus on the profitability and long-term health of the firm.
Examples of Internal Uses of Statement Analysis
•
•
•
Plan - Focus on assessing the current financial position and evaluating potential firm opportunities. Control - Focus on return on investment for various assets and asset efficiency. Understand - Focus on understanding how suppliers of funds analyze the firm.
Questions ?
Thank you
doc_946060964.pdf