fsafsa A nalyzing F inancial P erformance

fsafsa Presented by Khuram Shahzad

fsafsa 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

fsafsa a nalyzing f inancial p erformance Financial ratios Ratio is an arithmetic relationship between two figures FRA is a study of ratios between various items in fin statements

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

fsafsa a nalyzing f inancial p erformance financial ratios- classification Liquidity Leverage Turnover Profitability Valuation

fsafsa Atlas Battery: P/L Account for the year ending 31 st March, 20x8 20x8 20x7 (Rs in Mil) Net Sales COGS Stocks wages & salaries other Mfg Exp Gross Profit Operating Expenses Depreciation Gn Adm Selling Operating Profit Non Operating surplus/deficit -- 6 Profit before interest and tax Interest Profit before tax Tax Profit after tax Dividend Retained Earnings 6 15 Per Share Data (Rs) EPS Dividend Per share Mkt Price Per Share Book Value per share

fsafsa Atlas Battery: Balance Sheet as on 31 st March,20x8 (Rs in Mill) 20x8 20x7  Current Liabilities  Provisions  Current Assets  Loans & Advances I Sources of Funds 1 Share Holders’ funds a) Share Capital 150 b) Reserves & Surplus Loan Funds 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

fsafsa Horizon Ltd: Balance Sheet as on 31 st March,20x8 (Rs in Mill) 20x8 20x7  Current Liabilities  Provisions  Current Assets  Loans & Advances 1 Fixed Assets Investments long term short term CA, Loans and Advances Inventories debtors Cash & Bank Balance 10 6 Loans & Advances 5 10 Less CL and Provisions Net Current Assets Misc Expenditure and Losses

fsafsa Liquidity Ratios

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

fsafsa Leverage Ratios (Refers to use of debt finance)

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

fsafsa Turnover Ratios (Measure how efficiently assets are employed)

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

fsafsa Turnover Ratios activity ratios how assets are employed Fixed Assets Turnover Total Assets Turnover Net Sales Average Total Assets 701/( )/2 = /( )/2 =1.58 Net Sales Av. Net fixed assets

fsafsa Profitability Ratios Profit Margin Ratios Rate of Return Ratios

fsafsa  Gross Profit Margin Ratio  Net Profit Margin Ratio  Return on Assets  Earning Power  ROCE  Return on Equity

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

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

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

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

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

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

fsafsa Comparison with Industry Time Series of Financial Ratios

fsafsa Comparison Comparison of Ratios of Horizon with Industry Average Ratio Horizon Ltd Industry Av. Liquidity Current Ratio Acid Test Ratio Leverage Debt Equity ratio Debt Ratio Interest Coverage Ratio Turnover Inventory turnover Acct Receivable TO FA Turnover Total Assets Turnover 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%

fsafsa Time Series Times Series of Certain Ratios Debt-Equity ratio Total Assets turnover Net P margin(%) Return on Equity(%) Earning Power

fsafsa du pont analysis

fsafsa 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

fsafsa a nalyzing f inancial p erformance 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)

fsafsa a nalyzing f inancial p erformance du pont analysis ROA Net Profit Net Sales Av.Total Assets x ROE Net Profit Net Sales Av.Total Assets x Av Equity x NPMTATR NPMTATREFR

fsafsa a nalyzing f inancial p erformance du pont analysis ROA Net Profit Net Sales Av.Total Assets x ROE Net Profit Net Sales Av.Total Assets x Av Equity x NPMTATR x =7.178% 7.7 x1.81 =12.99% =12.99%

fsafsa a nalyzing f inancial p erformance du pont analysis x X 4.85 X1.48 X 1.81= How these results can be improved?

fsafsa Common-Size Statements standardized financial statements

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

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

fsafsa Common-Size Statements

fsafsa a nalyzing f inancial p erformance 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

fsafsa a nalyzing f inancial p erformance 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 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 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

fsafsa a nalyzing f inancial p erformance Using financial statement analysis Problems Lack of Underlying Theory Conglomerate Firms Price Level Changes Variations in Accounting Policies Window Dressing Interpretation of Results Correlation among Results

fsafsa a nalyzing f inancial p erformance 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 Out of Boxthinking

fsafsa Matrix Ltd :P/L Account in the year Ending 31 st March, 20x1 20x1 20x0 (Rs in Mil) Q Net Sales COGS Stocks W & Salaries Other Mfg. Exp Gross Profit Operating Exp Depreciation Selling & Gn Adm PBIT Interest PBT Tax PAT Dividend Retained Earning 50 50

fsafsa Matrix Ltd : B/S as at 31 st March 20x1 20x1 20x0 Q I Sources of Funds 1 Shareholders Funds a) share capital b) Reserves & Surplus Loan Fund a) Secured Loans i) Due after 1 year ii) Due Within 1 year b) Unsecured Loans i) Due after 1 year ii) Due within 1 year Total II Application of Funds 1 Net Fixed Assets Investments a) Long Term b) Current CA, loans & Advances a) Inventories b) Sundry Debtors c) Cash & Bank d) Loans & Advances Less CL and Provisions Net Current Assets Total Rs in Million