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A nalyzing F inancial P erformance

A nalyzing F inancial P erformance. P resented b y. K huram S hahzad 0 83268. a nalyzing f inancial p erformance. Financial ratios. du pont analysis. s tandardized financial s tatements. Applications of financial analysis. Problems in using FSA. GOING BEYOND THE NUMBERS.

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A nalyzing F inancial P erformance

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  1. Analyzing Financial Performance

  2. Presented by Khuram Shahzad 083268

  3. analyzing financial performance Financial ratios du pont analysis standardized financial statements Applications of financial analysis Problems in using FSA GOING BEYOND THE NUMBERS

  4. analyzing financial performance Financial ratios Ratiois an arithmetic relationship between two figures FRA is a study of ratios between various items in fin statements

  5. Interpretation is drawing conclusions to serve as basis for decisions and actions

  6. analyzing financial performance financial ratios- classification • Liquidity • Leverage • Turnover • Profitability • Valuation

  7. (Rs in Mil) Atlas Battery:P/L Account for the year ending 31st March, 20x8 20x8 20x7 Net Sales 701 623 COGS 552 475 Stocks 421 370 wages & salaries 68 55 other Mfg Exp 63 50 Gross Profit 149 148 Operating Expenses 60 49 Depreciation 30 26 Gn Adm 12 11 Selling 18 12 Operating Profit 89 99 Non Operating surplus/deficit -- 6 Profit before interest and tax 89 105 Interest 21 22 Profit before tax 68 83 Tax 34 41 Profit after tax 34 42 Dividend 28 27 Retained Earnings 6 15 Per Share Data (Rs) EPS 2.27 2.80 Dividend Per share 1.80 1.80 Mkt Price Per Share 21.0 20.0 Book Value per share 17.47 17.07

  8. Atlas Battery: Balance Sheet as on 31st March,20x8 (Rs in Mill) 20x8 20x7 I Sources of Funds 1 Share Holders’ funds 262 256 a) Share Capital 150 b) Reserves & Surplus 112 2 Loan Funds 212 156 a) Secured Loans 143 Due after 1 year 108 Due within 1 year 35 b) Unsecured Loans 69 Due after 1 year 29 Due within 1 year 40 474 412 • Current Assets • Loans & Advances • Current Liabilities • Provisions

  9. Horizon Ltd: Balance Sheet as on 31st March,20x8 (Rs in Mill) 20x8 20x7 1 Fixed Assets 330 322 2 Investments 15 15 long term 12 12 short term 3 3 3 CA, Loans and Advances 234 156 Inventories 105 72 debtors 114 68 Cash & Bank Balance 10 6 Loans & Advances 5 10 Less CL and Provisions 105 81 Net Current Assets 129 75 4 Misc Expenditure and Losses -- -- 474 412 • Current Assets • Loans & Advances • Current Liabilities • Provisions

  10. Liquidity Ratios

  11. Liquidity Ratios 237/180 =1.32 Current Assets Current Liabilities Current Ratio = (237-105)/180 =0.73 Current Assets-inventory Current Liabilities Acid Test Ratio = (10+3)/180 =0.07 Cash & Bank Bal + C investment Current Liabilities Cash Ratio =

  12. Leverage Ratios (Refers to use of debt finance)

  13. Leverage Ratios Debt Equity 212 / 262 =0.809 =80.9% Debt Equity Ratio = Financial Leverage Refers to Use of Debt Finance Debt Assets Debt Asset Ratio 212 /474 = 0.45 = 45% = 89/21 = 4.23 = Profit before Int and Taxes Interest Interest Coverage Ratio

  14. Turnover Ratios (Measure how efficiently assets are employed)

  15. Inventory Turnover Cost of Goods Sold Average Inventory 552/(105+72)/2 =6.24 Turnover Ratios activity ratios how assets are employed Debtors’ Turnover Net Credit Sales Average Sundry Debtors 701/(114+68)/2 =7.70 Average Collection Period Average Sundry Debtors Av. Daily Credit Sales (114+68)/2 (701/365) =47.4 days 365 7.70 =47.4 days 365 Debtors’ Turnover

  16. Fixed Assets Turnover 701/(330+322)/2 =2.15 Net Sales Av. Net fixed assets Turnover Ratios activity ratios how assets are employed Total Assets Turnover Net Sales Average Total Assets 701/(474+412)/2 =1.58

  17. Profitability Ratios Profit Margin Ratios Rate of Return Ratios

  18. Gross Profit Margin Ratio • Net Profit Margin Ratio • Return on Assets • Earning Power • ROCE • Return on Equity

  19. GP Margin Ratio Gross Profit Net Sales 149/701 =21% Profitability Margin Ratios Net Profit Net Sales 34/701 =4.9% NP Margin Ratio

  20. Return on Assets Profit after Tax Av. Total Assets 34/(412+474)/2 =7.7% Earning Power PBIT Av. total Assets 89/(412+474)/2 =20.1% Profitability Return Ratios PBIT(1-Tax Rate) Av.total Assets ROCE 89(1-0.5)/(412+474)/2 =10.1% Return on Equity Equity Earnings Av. Equity 34/(262+256)/2 =13.1%

  21. Profitability Ratios-points to ponder Historical Value of Assets Bias in inflationary periods Numerator represents current values Denominator represents historical values

  22. Valuation Ratios (How Equity Stock is assessed in Capital Market)

  23. Price Earning Ratio Market Price Per Share Earning per Share 21.0/2.27 =9.25 Dividend +Price Change Initial Price Valuation Ratios Yield 1.8/20.=9 1.0/20=5 9+5=14% + Dividend Initial Price Price Change Initial Price Dividend Yield Capital Gain/loss

  24. Market Value to Book Value Ratio Market Price Per Share Book Value per Share 21/17.47 =1.20 Valuation Ratios Q Ratio James Tobin Market Value of Equity & Liab Est. replacement cost of Assets Dividend Yield Capital Gain/loss

  25. Comparison with Industry • Time Series of Financial Ratios

  26. Comparison of Ratios of Horizon with Industry Average Ratio Horizon Ltd Industry Av. Liquidity Current Ratio 1.32 1.26 Acid Test Ratio 0.73 0.69 Leverage Debt Equity ratio 0.81 1.25 Debt Ratio 0.45 0.56 Interest Coverage Ratio 4.23 4.14 Turnover Inventory turnover 6.24 6.43 Acct Receivable TO 7.70 7.50 FA Turnover 2.15 2.23 Total Assets Turnover 1.58 1.26 Profitability GP Margin Ratio 21.0% 18.0% NP Margin Ratio 4.9% 4.0% Return on Assets 7.7% 6.9% Earning power 20.0% 17.7% REOC 10.1% 8.8% Return on Equity 13.1% 11.9% Comparison

  27. Times Series of Certain Ratios 1 2 3 4 5 Debt-Equity ratio 0.91 0.98 0.65 0.61 0.81 Total Assets turnover 1.51 1.59 1.58 1.53 1.58 Net P margin(%) 8.8 11.6 9.80 6.6 4.9 Return on Equity(%) 25.4 30.7 24.5 16.7 13.1 Earning Power 13.6 15.3 10.3 7.1 9.3 Time Series

  28. du pont analysis

  29. Profile of Profitability of a Firm (DU PONT ANALYSIS) Overall Profitability depends upon 2 elements • Profit Margin • On Sales • Selling Price • Cost and • Expenses • Turnover of Firm • Total Assets • Sales Du pont added another Dimension to it

  30. analyzing financial performance du pont analysis • Du Pont Company pioneered this system of FA • Analyze Return on Assets • With the help of Net Profit Margin (NPM) & • Total Assets Turnover Ratio (TATR) • Extended to get Return on Equity (ROE)

  31. analyzing financial performance ROA Net Profit Net Sales Net Sales Av.Total Assets x du pont analysis NPM TATR ROE Net Profit Net Sales x Net Sales Av.Total Assets Av. Total Assets Av Equity x NPM TATR EFR

  32. analyzing financial performance ROA 34 701 701 474 x Net Profit Net Sales Net Sales Av.Total Assets x du pont analysis =7.178% NPM TATR 7.7 x1.81 =12.99% ROE Net Profit Net Sales Net Sales Av.Total Assets x x Av. Total Assets Av Equity

  33. analyzing financial performance 34 701 701 474 474262 x X du pont analysis 4.85 X1.48 X 1.81= 12.99 How these results can be improved?

  34. Common-Size Statements standardized financial statements

  35. Common-Size Statements Net sales is usually the base and is expressed as 100%.

  36. 2004 Cost ÷ 2004 Sales × 100% ( Rs 360,000 ÷ Rs520,000 ) × 100% = 69.2% Common-Size Statements 2003 Cost ÷ 2003 Sales × 100% ( Rs315,000 ÷ Rs480,000 ) × 100% = 65.6%

  37. Common-Size Statements

  38. analyzing financial performance Applications of financial analysis • Assessing Corporate Excellence • Judging Creditworthiness • 4c’s-character,capital,capacity,collatral • Forecasting Bankruptcy • Edward Altman • Z=1.2wc/Total Assets+1.4retained Earnings/TA • +3.3EBIT/TA +.6Market value of Equity/Book value • of Debt+1.0 Sales/TA • Z Score less than 1.81 bankrupt • Z score more than2.99 healthy • Valuing Equity Shares • Estimating Market Risk • Indicators of Corporate • Excellence (IDBI) • Growth rate of Sales • Growth rate of Assets • PBT to C Employed • WC to Gross Sales • Debt Equity Ratio

  39. analyzing financial performance Applications of financial analysis The Economics Times Inc in mkt Capitalization Inc In Revenue Inc in Profit Return on Net worth Annual Growth of EPS (3yrs) Sales for latest year Profit after tax • Assessing Corporate Excellence • Judging Creditworthiness • 4c’s-character,capital,capacity,collatral • Forecasting Bankruptcy • Edward Altman • Z=1.2wc/Total Assets+1.4retained Earnings/TA • +3.3EBIT/TA +.6Market value of Equity/ • Book valueof Debt+1.0 Sales/TA • Z Score less than 1.81 bankrupt • Z score more than2.99 healthy • Valuing Equity Shares • Estimating Market Risk

  40. analyzing financial performance Using financial statement analysis • Lack of Underlying Theory • Conglomerate Firms • Price Level Changes • Variations in Accounting Policies • Window Dressing • Interpretation of Results • Correlation among Results Problems

  41. GOING BEYOND THE NUMBERS • Are the company’s revenue tied to one key customer? • To what extent are the co’s revenue tied to one key Product. • To what extent company rely on single supplier? • What % of company’s business is generated overseas? • Competition • Future Prospects • Legal Regulatory Environment analyzing financial performance Out of Box thinking

  42. Matrix Ltd :P/L Account in the year Ending 31st March, 20x1 20x1 20x0 (Rs in Mil) Net Sales 1065 950 COGS 805 720 Stocks 600 520 W & Salaries 120 110 Other Mfg. Exp 85 90 Gross Profit 260 230 Operating Exp Depreciation 90 75 Selling & Gn Adm 50 40 PBIT 170 155 Interest 35 30 PBT 135 125 Tax 50 40 PAT 85 80 Dividend 35 30 Retained Earning 50 50 Q

  43. Matrix Ltd : B/S as at 31st March 20x1 Rs in Million 20x1 20x0 I Sources of Funds 1 Shareholders Funds 505 455 a) share capital 125 125 b) Reserves & Surplus 380 330 2 Loan Fund 280 260 a) Secured Loans 180 160 i) Due after 1 year 130 135 ii) Due Within 1 year 50 25 b) Unsecured Loans 100 100 i) Due after 1 year 60 70 ii) Due within 1 year 40 30 Total 785 715 II Application of Funds 1 Net Fixed Assets 550 495 2 Investments 30 25 a) Long Term 20 20 b) Current 10 5 3 CA, loans & Advances 335 333 a) Inventories 160 138 b) Sundry Debtors 120 115 c) Cash & Bank 25 20 d) Loans & Advances 50 60 Less CL and Provisions 150 138 Net Current Assets 205 195 Total 785 715 Q

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