FINANCIAL STATEMENT ANALYSIS (RATIO ANALYSIS)

FINANCIAL STATEMENTS RATIO ANALYSIS Ratio Analysis In ratio analysis, a simple arithmetical relationship of one number to another is calculated. It is the process of establishing and interpreting various ratios for helping in making certain decision.

FINANCIAL STATEMENTS RATIO ANALYSIS This technique enables, Selection of relevant data from the financial statement depending upon the objective of the analysis, Comparison of calculated ratio, Interpretation of ratios, Historical comparison, Projected ratio, Inter-firm comparison.

FINANCIAL STATEMENTS RATIO ANALYSIS Ratio Analysis Ratio categories which are produced for financial analysis purpose are as follows: Liquidity, Activity, Solvency and Financial Structure, Profitability Category Issues Examined Liquidity Indicates ability of a firm to meet short-term obligations. Activity Indicates efficiency and effectiveness of operations and asset management. Solvency and Financial Structure Indicates the ability of a firm to meet long-term obligations and capital structure decisions Profitability Indicates ability to retain earnings (growth) after covering costs Cash Flow Quality of cash flows.

FINANCIAL STATEMENTS LIQUIDITY ANALYSIS Current Assets Assets 31.12.2010 Balance Sheet Liabilities Current Assets Current Liabilities Non-Current Assets Non-Current Liabilities Equity Liquidity analysis is based on current assets and current liabilities and ratios directly related to short-term operating health. This ratio analysis focuses on the short-term cash needs of a firm. As a conclusion, liquidity analysis focuses on working capital and operating cycle of a firm.

FINANCIAL STATEMENTS LIQUIDITY ANALYSIS ABC CO. 31.12.20X1 BALANCE SHEET CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents Bank Loans Financial Assets Trade Payables Trade Receivables Tax Payable Inventories Provisions NON-CURRENT ASSETS NON-CURRENT LIABILITIES Property, Plant and Equipment EQUITY As a conclusion, liquidity analysis focuses on working capital and operating cycle of a firm. In liquidity analysis, the relation between the components of working capital are analyzed.

FINANCIAL STATEMENTS LIQUIDITY RATIOS Liquidity Analysis ABC CO. 31.12.20X1 BALANCE SHEET CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents Bank Loans Financial Assets Trade Payables Trade Receivables Tax Payable Inventories Provisions NON-CURRENT ASSETS NON-CURRENT LIABILITIES Property, Plant and Equipment EQUITY Liquidity Analysis As known, the components of working capital is current assets and current liabilities. Therefore the common liquidity ratios includes ratios which analyze the relationship between current assets and current liabilities. This ratios are; The Current Ratio The Quick Ratio The Cash Ratio

FINANCIAL STATEMENTS LIQUIDITY RATIOS CR1  Negative Working Capital Current Ratio (CR) Current ratio indicates whether the company has adequate assets (cash or assets that easily convert to cash) to pay (cover) its short term obligations at balance sheet date.

Quick Ratio (Acid-Test or Liquidity Ratio) FINANCIAL STATEMENTS LIQUIDITY RATIOS Quick Ratio (Acid-Test or Liquidity Ratio) This ratio aims to remove the less liquid assets from current assets. The removal includes inventories and pre-paid expenses. This ratio provides information about the ability of easily converted assets to pay short-term obligations.

FINANCIAL STATEMENTS LIQUIDITY RATIOS QR1  Easily converted cash assets are not adequate to pay short-term liabilities, and the firm has to convert its inventories into cash. This ratio indicates the percentage of inventory must be converted to cash to pay its short term obligations.

FINANCIAL STATEMENTS LIQUIDITY RATIOS Cash Ratio ABC CO. 31.12.20X1 BALANCE SHEET CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents Bank Loans Financial Assets Trade Payables Trade Receivables Tax Payable Inventories Provisions NON-CURRENT ASSETS NON-CURRENT LIABILITIES Property, Plant and Equipment EQUITY Cash Ratio Cash ratio indicates whether the company has adequate cash to pay (cover) its current liabilities at balance sheet date.

FINANCIAL STATEMENTS LIQUIDITY RATIOS Ex: ABC Co.’s items of current assets and liabilities are as follows: ABC CO. 31.12.20X1 BALANCE SHEET CURRENT ASSETS 100 CURRENT LIABILITIES 60 Cash and cash equivalents 20 Bank Loans 15 Financial Assets Trade Payables 25 Trade Receivables 35 Tax Payable 10 Inventories 30 Provisions NON-CURRENT ASSETS 200 NON-CURRENT LIABILITIES 90 Property, Plant and Equipment Bonds 55 EQUITY 150 TOTAL 300

FINANCIAL STATEMENTS LIQUIDITY RATIOS ABC CO. 31.12.20X1 BALANCE SHEET CURRENT ASSETS 100 CURRENT LIABILITIES 60 Cash and cash equivalents 20 Bank Loans 15 Financial Assets Trade Payables 25 Trade Receivables 35 Tax Payable 10 Inventories 30 Provisions

Working capital is a measure of liquidity of a business. FINANCIAL STATEMENTS LIQUIDITY ANALYSIS Working capital is a measure of liquidity of a business. The components of working capital consist of cash, trade receivables, inventory and trade payables. The operating cycle is the average period of time required for a company to make an initial outlay of cash to produce and sell the goods, and receive cash from customers.

FINANCIAL STATEMENTS LIQUIDITY RATIOS The operating cycle is useful for estimating the amount of working capital that a company will need in order to maintain or grow its business. A company with an extremely short operating cycle requires less cash. Therefore, it can still grow while selling at small margins. Conversely, if a business have long operating cycle, needs to accelerate selling cycle. Otherwise it requires additional financing to perform its operating activity.

Activity ratios identify how day-to-day operations function. FINANCIAL STATEMENTS ACTIVITY RATIOS On this perspective, the operating cycle, cash cycle becomes a significant issue to determine the liquidity. Activity ratios identify how day-to-day operations function. These ratios are also called efficiency or turnover ratios.

FINANCIAL STATEMENTS ACTIVITY RATIOS These ratios describe how well a firm is using its investment in various asset classes: Inventory Turnover Ratio Accounts Receivable Turnover Ratio Debt Turnover Ratio Assets Turnover Ratio Tangible Assets Turnover Ratio

Inventory Turnover Ratio FINANCIAL STATEMENTS ACTIVITY RATIOS Inventory Turnover Ratio Inventory Turnover Ratio combines an item from income statement (cost of goods sold) with an item in balance sheet (inventories). The ratio indicates how many times inventory was acquired and sold over the year.

Inventory Turnover Ratio FINANCIAL STATEMENTS ACTIVITY RATIOS Inventory Turnover Ratio The ratio indicates how many times inventory was acquired and sold over the year. From a different point of view, this ratio indicates how many days inventory was held before it was sold. The longer that inventory must be held and stored before use or sale, the greater the overall storage costs. This ratio is also used in estimating cash needs.

Accounts Receivable (A/R) Turnover Ratio FINANCIAL STATEMENTS ACTIVITY RATIOS Accounts Receivable (A/R) Turnover Ratio This ratio indicates how many times over the year or reporting period credit sale is made to a customer and subsequently collected.

FINANCIAL STATEMENTS ACTIVITY RATIOS OR Accounts Payable (A/P) Turnover Ratio OR

LEDGER ENTRIES OF INVENTORIES FINANCIAL STATEMENTS ACTIVITY RATIOS Ex: The current assets, sales and cost of goods sold of ABC Co. are as follows  BALANCE SHEET OF ABC CO. 2008 2009 ASSETS Current Assets 100 150 Cash and Cash Equivalents 20 30 Financial Assets 10 Trade Receivables 40 50 Inventories 60 70 Current Liabilities Accounts Payables INCOME STATEMENT 2008 2009 Sales 1.000 1.300 Cost of Goods Sold (600) (800) Purchases= (Cost of Goods Sold + Ending Inventory) - Beginning Inventory Purchases = (800 +70) – 60 = 810 LEDGER ENTRIES OF INVENTORIES Beginning Inventory 60 Purchases 810 Cost of Goods Sold 800 Ending Inventory 70 Beginning Inventory 60 Purchases 810 Ending Inventory (70) Cost of Goods Sold 800

FINANCIAL STATEMENTS ACTIVITY RATIOS BALANCE SHEET OF ABC CO. 2008 2009 ASSETS Current Assets 100 150 Cash and Cash Equivalents 20 30 Financial Assets 10 Trade Receivables 40 50 Inventories 60 70 Current Liabilities Accounts Payable INCOME STATEMENT 2008 2009 Sales 1.000 1.300 Cost of Goods Sold (600) (800)

FINANCIAL STATEMENTS ACTIVITY RATIOS BALANCE SHEET OF ABC CO. 2008 2009 ASSETS Current Assets 100 150 Cash and Cash Equivalents 20 30 Financial Assets 10 Trade Receivables 40 50 Inventories 60 70 Current Liabilities Accounts Payable INCOME STATEMENT 2008 2009 Sales 1.000 1.300 Cost of Goods Sold (600) (800)

FINANCIAL STATEMENTS LIQUIDITY RATIOS Operating Cycle Days to Sell Inventory 40 days Receivables Collection Period 12 days Days of Accounts Payable (17 days) Cash Cycle Period 35 days

FINANCIAL STATEMENTS LIQUIDITY RATIOS If a company has short operating cycle comparing with industry requires less cash. Conversely, if a business have long operating cycle, needs to accelerate selling cycle. Otherwise it requires additional financing to perform its operating activity.

Financial Statements Analyses Of Arçelik Co. 2007 2008 2009 2010 2011   2007 2008 2009 2010 2011 CURRENT ASSETS 4.239.725 Cash and Cash Equivalents 401.492 415.586 904.734 1.317.166 1.173.889 Financial Assets 26.039 4.444 1.185 2.932 Trade Receivables 2.460.710 2.584.559 2.237.265 2.337.039 3.196.888 Inventories 1.296.726 1.303.931 906.786 987.526 1.530.141 Other Current Assets 98.941 103.172 108.980 117.984 146.017 NON-CURRENT ASSETS 2.287.074 2.426.514 2.264.449 2.560.859 3.147.886 TOTAL ASSETS 6.526.799 6.666.239 6.504.174 6.800.584 7.387.611 CURRENT LIABILITIES 3.157.154 2.991.628 3.179.663 2.341.989 3.530.620 Financial Liabilities 2.076.459 1.914.505 1.923.727 839.220 1.628.943 Other Financial Liabilities 97.107 89.368 105231 129769 183886 Trade Payables 660.740 635.899 762.402 968.962 1.249.531 Provisions for Tax 4.741 4.063 14.356 18.970 23.250 Provisions 187.430 198.294 204.659 205.160 232.390 Other Liabilities 130.677 149.499 169.288 179.908 212.620 NON-CURRENT LIABILITIES 1.223.915 1.866.844 503.492 1.572.036 1.944.953 EQUITY 2.145.730 2.001.329 2.743.503 3.407.734 3.545.592 TOTAL LIABILITIES AND EQUITY 6.859.801 6.426.658 7.321.759 9.021.165 INCOME STATEMENT Sales 6.622.544 6.852.289 6.591.895 6.936.420 8.437.239 Cost of Goods Sold (4.851.025) (4.905.292) (4.417.892) (4.868.473) (5.897.009) Gross Profit 1.771.519 1.946.997 2.174.003 2.067.947 2.540.230

Financial Statements Analyses Of Arçelik Co. ARCELİK INDUSTRY AVERAGES   ARCELİK INDUSTRY AVERAGES 2008 2009 2010 2011 Liquidity Analysis Working Capital 1.516.434 1.082.825 2.535.980 2.686.920 Current Ratio 1.52 1.35 2.15 1.80 2.04 1.85 1.69 1.55 Quick Ratio 1.04 1.02 1.65 1.30 1.18 1.15 1.13 1.01 Cash Ratio 0.14 0.29 0.60 0.35 0.25 0.39 0.21 Inventories/Total Assets 0.22 0.30 0.33 Trade Payables/Total Assets 0.38 0.32 0.48 0.37 0.36 Acc. Receivable Turnover 2.66 2.74 3.04 3.07 0.0 3.4 3.7 3.5 Days Acc. Receivable 135 131 118 117 105 98 101 Inventory Turnover 3.76 4.00 5.14 4.68 2.4 5.8 6.6 7.0 Days Inventory 96 90 70 77 150 62 54 51 Acc. Payable Turnover 10.78 9.43 8.01 7.61 Days Acc. Payable 33 38 45 47

Financial Statements Analyses Of Arçelik Co. 2009 Operating Cycle of Arçelik Operating Cycle of Industry Cash Cycle of Arçelik Days to Sell Inventory 90 days 105 days Receivables Collection Period 131 days 62 days Days of Accounts Payable (38 days) 221 days 167 days 183 days 2010 Operating Cycle of Arçelik Operating Cycle of Industry Cash Cycle of Arçelik Days to Sell Inventory 70 days 98 days 90 days Receivables Collection Period 118 days 54 days 131 days Days of Accounts Payable (45 days) 188 days 152 days 176 days