- Brijesh Pitroda

The analysis of a Business' Health starts with Financial Statement Analysis.

Financial Statement Analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.

Who analyzes financial statements? –Internal users Management Owner Employees –External users Investors creditors regulatory agencies stock market analysts AUDITORS Focus on Planning, evaluating and controlling company operations. Focus on Liqudity, long term cashflow, profitability and long term health(i.e. Solvency) of the firm.

1.Horizontal Analysis 2.Vertical Analysis 3.Ratio Analysis Methods of Financial Statement Analysis Trend/ Index Analysis Common-Size Statements

Horizontal Analysis Uses comparative financial statements to calculate amount or percentage changes in a financial statement item from one period to the next

Horizontal Analysis Example

Since we are measuring the amount of the change between 2011 and 2012, the amounts for 2011 become the “base” year figures. Amount Change Amount Change Current Year Figure Current Year Figure Base Year Figure Base Year Figure = Calculating Change in Amounts Horizontal Analysis Example _

Percentage Change Percentage Change Amount Change Base Year Figure Amount Change Base Year Figure 100 = × Calculating Change in Percentage Horizontal Analysis Example

12,000 – 23,500 = (11,500) (11,500 ÷ 23,500) × 100% = 48.9%

Horizontal Analysis Example

Sales increased by 8.3% while net income decreased by 21.9%. Horizontal Analysis Example There were also increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income.

Trend Analysis Show changes over time in given financial statement items (can helps us in determine how the firm is likely to perform over time)

Trend Analysis Example

Vertical Analysis For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales

Vertical Analysis Example 40,000 ÷ 2,89,700 = 14% rounded 40,000 ÷ 3,15,000 = 13% rounded

90,000 ÷ 2,89,700 = 31% rounded Vertical Analysis Example

Common-Size Analysis An analysis of percentage financial statements where all balance sheet items are divided by total assets or liabilities and all income statement items are divided by net sales or revenues.

Common-Size Analysis Example

Ratio Analysis Which express a logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)

Current Ratio Current Assets Current Liabilities For SAYAJIRAO December 31, 2012 Current Ratio Current Assets Current Liabilities For SAYAJIRAO December 31, 2012 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios = 2.21 Liquidity Ratio

Sayajirao Industry Sayajirao Industry Year Current Ratio Ratio is stronger than the industry average. Liquidity Ratio Comparisons

Acid-Test (Quick) Current Assets - Inv Current Liabilities For SAYAJIRAO December 31, 2012 Acid-Test (Quick) Current Assets - Inv Current Liabilities For SAYAJIRAO December 31, 2012 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios = 1.07 Liquidity Ratio

Sayajirao Industry Sayajirao Industry Year Acid-Test Ratio Ratio is weaker than the industry average. Acid-Test Ratio Comparisons

Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. Ratio Sayajirao Industry Ratio Sayajirao Industry Current Acid-Test Summary of the Liquidity Ratio Comparisons

Debt-to-Equity Total Debt Shareholders’ Equity For SAYAJIRAO December 31, 2012 Debt-to-Equity Total Debt Shareholders’ Equity For SAYAJIRAO December 31, 2012 Shows the extent to which the firm is financed by debt. Balance Sheet Ratios Financial Leverage Ratios = 0.44 Financial Leverage Ratio

Sayajirao Industry Sayajirao Industry Year Debt-to-Equity Ratio Sayajirao has average debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

Debt-to-Total-Assets Total Debt Total Assets For SAYAJIRAO December 31, 2012 Debt-to-Total-Assets Total Debt Total Assets For SAYAJIRAO December 31, 2012 Shows the percentage of the firm’s assets that are supported by debt financing. Balance Sheet Ratios Financial Leverage Ratios = 0.24 Financial Leverage Ratio

Sayajirao Industry Sayajirao Industry Year Debt-to-Total Assets Ratio Sayajirao has average debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

Total Capitalization (i.e., LT-Debt + Equity) Long term Debt Total Capitalization For SAYAJIRAO December 31, 2012 Total Capitalization (i.e., LT-Debt + Equity) Long term Debt Total Capitalization For SAYAJIRAO December 31, 2012 Shows the relative importance of long-term debt to the long-term financing of the firm. Balance Sheet Ratios Financial Leverage Ratios 75000( ) 0.31 = 0.31 Financial Leverage Ratio

Sayajirao Industry Sayajirao Industry Year Total Capitalization Ratio Sayajirao has average long-term debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

Interest CoverageEBIT Interest Charged For SAYAJIRAO December 31, 2012 Interest CoverageEBIT Interest Charged For SAYAJIRAO December 31, 2012 Indicates a firm’s ability to cover interest charges = 4.91 Coverage Ratio Income Statement Ratios Coverage Ratios

Sayajirao Industry Sayajirao Industry Year Interest Coverage Ratio Sayajirao has below average interest coverage relative to the industry average. Coverage Ratio Comparisions

Coverage Ratio- Trend Analysis Comparisions

Sayajirao industry  The interest coverage ratio for Sayajirao has been falling since It has been below industry averages for the past two years. low earnings Sayajirao  This indicates that low earnings (EBIT) may be a potential problem for Sayajirao. debt levels industry  Note, we know that debt levels are in line with the industry averages. Sayajirao industry  The interest coverage ratio for Sayajirao has been falling since It has been below industry averages for the past two years. low earnings Sayajirao  This indicates that low earnings (EBIT) may be a potential problem for Sayajirao. debt levels industry  Note, we know that debt levels are in line with the industry averages. Summary of the Coverage Trend Analysis

Receivable Turnover Annual Net Credit Sales Receivables For SAYAJIRAO December 31, 2012 Receivable Turnover Annual Net Credit Sales Receivables For SAYAJIRAO December 31, 2012 Indicates quality of receivables and how successful the firm is in its collections. Income Statement / Balance Sheet Ratios Activity Ratios = 8.66 (Assume all sales are credit sales.) Actiivity Ratio

Avg. Collection Period Days in the Year Receivable Turnover For SAYAJIRAO December 31, 2012 Avg. Collection Period Days in the Year Receivable Turnover For SAYAJIRAO December 31, 2012 Average number of days that receivables are outstanding. (or RT in days) Income Statement / Balance Sheet Ratios Activity Ratios = 43 Days Actiivity Ratio

Sayajirao Industry Sayajirao Industry Year Average Collection Period Sayajirao has improved the average collection period to that of the industry average. Activity Ratio Comparisions

Payable Turnover Annual Credit Purchases Accounts Payables For SAYAJIRAO December 31, 2012 Payable Turnover Annual Credit Purchases Accounts Payables For SAYAJIRAO December 31, 2012 Indicates the promptness of payment to suppliers by the firm. Income Statement / Balance Sheet Ratios Activity Ratios = 5.37 Actiivity Ratio (Assume all annual credit purchases)

PT in days Days in the Year Payable Turnover For SAYAJIRAO December 31, 2012 PT in days Days in the Year Payable Turnover For SAYAJIRAO December 31, 2012 Average number of days that payables are outstanding. Income Statement / Balance Sheet Ratios Activity Ratios = 68 Days Actiivity Ratio

Sayajirao Industry Sayajirao Industry Year Payable Turnover in Days Sayajirao has improved the PT in Days. Is this good? Activity Ratio Comparisions

Inventory Turnover Cost of good sold Inventories For SAYAJIRAO December 31, 2012 Inventory Turnover Cost of good sold Inventories For SAYAJIRAO December 31, 2012 Indicates the effectiveness of the inventory management practices of the firm. Income Statement / Balance Sheet Ratios Activity Ratios = 4.5 Actiivity Ratio

Sayajirao Industry Sayajirao Industry Year Inventory Turnover Ratio Sayajirao has a very poor inventory turnover ratio. Activity Ratio Comparisions

Inventory Turnover Ratio -- Trend Analysis Comparison

Total Assets Turnover Net Sales Total Assets For SAYAJIRAO December 31, 2012 Total Assets Turnover Net Sales Total Assets For SAYAJIRAO December 31, 2012 Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement / Balance Sheet Ratios Activity Ratios = 1.65 Actiivity Ratio

Sayajirao Industry Sayajirao Industry Year Total Assets Turnover Ratio Sayajirao has a weak total asset turnover ratio. Activity Ratio Comparisions Why is this ratio considered weak?

Gross profit Margin Gross Profit Net Sales For SAYAJIRAO December 31, 2012 Gross profit Margin Gross Profit Net Sales For SAYAJIRAO December 31, 2012 Indicates the efficiency of operations and firm pricing policies. Income Statement / Balance Sheet Ratios Profitability Ratios = 30.7% Profitability Ratio

Sayajirao Industry 30.7%35.1% 34.3%36.8% 33.3%36.6% Sayajirao Industry 30.7%35.1% 34.3%36.8% 33.3%36.6% Year Gross Profit Margin Sayajirao has a weak Gross Profit Margin. Profitability Ratio Comparisions

Gross Profit Margin -- Trend Analysis Comparison

Net profit Margin Net Profit after tax Net Sales For SAYAJIRAO December 31, 2012 Net profit Margin Net Profit after tax Net Sales For SAYAJIRAO December 31, 2012 Indicates the firm’s profitability after taking account of all expenses and income taxes. Income Statement / Balance Sheet Ratios Profitability Ratios = 3.3% Profitability Ratio

Sayajirao Industry 3.3%5.2% 4.6%6.1% 4.0%6.1% Sayajirao Industry 3.3%5.2% 4.6%6.1% 4.0%6.1% Year Net Profit Margin Sayajirao has a poor Net Profit Margin. Profitability Ratio Comparisions

Net Profit Margin -- Trend Analysis Comparison

Return on Investment Net Profit after tax Total Assets For SAYAJIRAO December 31, 2012 Return on Investment Net Profit after tax Total Assets For SAYAJIRAO December 31, 2012 Indicates the profitability on the assets of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios = 5.5% Profitability Ratio

Sayajirao Industry 5.5%8.1% 7.7%9.8% 6.0%9.3% Sayajirao Industry 5.5%8.1% 7.7%9.8% 6.0%9.3% Year Return on Investment Sayajirao has a poor Return on Investment. Profitability Ratio Comparisions

Return on Investment – Trend Analysis Comparison

Return on Equity Net Profit after tax Shareholder’s Equity For SAYAJIRAO December 31, 2012 Return on Equity Net Profit after tax Shareholder’s Equity For SAYAJIRAO December 31, 2012 Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Income Statement / Balance Sheet Ratios Profitability Ratios = 10.2% Profitability Ratio

Sayajirao Industry 10.2%17.9% 14.0%17.2% 10.6%18.4% Sayajirao Industry 10.2%17.9% 14.0%17.2% 10.6%18.4% Year Return on Equity Sayajirao has a poor Return on Equity. Profitability Ratio Comparisions

Return on Equity -- Trend Analysis Comparison

Summary of the Profitability industry  The profitability ratios for Sayajirao Corporation have ALL been falling since Each has been below the industry averages for the past three years. COGS administrative costs  This indicates that COGS and administrative costs may both be too high which is a potential problem for Sayajirao Corporation.  Note, this result is also consistent with the low interest coverage ratio. industry  The profitability ratios for Sayajirao Corporation have ALL been falling since Each has been below the industry averages for the past three years. COGS administrative costs  This indicates that COGS and administrative costs may both be too high which is a potential problem for Sayajirao Corporation.  Note, this result is also consistent with the low interest coverage ratio.

Summary of Ratio Analyses  Inventories are too high.  Low Sales.  COGS may be too high.  Selling, general, and administrative costs may be too high.  Inventories are too high.  Low Sales.  COGS may be too high.  Selling, general, and administrative costs may be too high.

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