1. Financial Analysis

2. Objectives of Financial Analysis Why financial statements and reports are analyzed? to evaluate adequacy of profits adequacy of financial strength ability to generate enough cash and cash equivalents and the timing and certainty of their generation future growth outlook of the company

3. Stakeholders and their interests Creditors Equity holders Customers Top management Employees Banks/Lenders

4. Sources of Information Company reports Directors’ Report, Management Discussion and Analysis, Financial Statements, Schedules and Notes to Financial Statements, Auditor’s Report Stock Exchanges Business periodicals and television Information services Sophisticated users of financial statements invariably seek more information for their purposes. Banks often demand additional information for processing loan requests. Credit rating agencies need considerably more information from companies requesting ratings than that available from published reports.

5. Sources of Information Information requiredSources Financial performance Annual Reports, Quarterly Earnings Releases Credit rating CRISIL and ICRA publications Current economic and business developments Business periodicals, RBI reports, Industry newsletters, articles in business magazines, televisions channels Share prices BSE/NSE websites, stock market pages of financial newspapers, business pages of general newspapers

6. Standards of Comparison Rule-of-thumb indicators Should be used with great caution A firm which has a current ratio of 2:1 may have slow moving inventories and old debtors Past performance Will show broadly whether the company is improving or declining Problems with historical comparisons: fundamental changes in a company’s environment, accounting policy changes, non-operating items are not predictable Internal standards: goals for profit, return on investments, sales growth, market share, new product launches, budgets, standard costs Not available to outsiders

7. Standards of Comparison Industry standards Can be compared with other companies Comparisons are difficult for diversified companies that operate in several unrelated lines of business Companies often follow different accounting policies Lack of uniformity in financial years HUL reports for the year ended March 31 P & G fiscal year ends on June 30

8. Tools of Financial Analysis -Multi-step Income Statement -Comparative Financial Statements -Common-size Financial Statements -Trend Analysis -Ratio Analysis -Cash Flow Analysis

9. Horizontal Analysis/ Comparative Financial Statements Facilitates a quick review of current year’s performance and financial position over the previous year

10. Horizontal P & L A/c for the year ended 31 st March 2007

12. Horizontal Balance Sheet as at 31 st March 2007

15. Analysis of Comparative P & L A/c and Balance Sheet:

18. Vertical Analysis/ Common-size Financial Statements Since no two balance sheets will have the same items, they cannot be compared and analyzed based on absolute figures In Balance Sheet, each item is restated taking the total of sources/applications of funds as 100. In case of Income Statement, net sales is taken as 100, and all the items are restated proportionately.

19. Common-sized P & L A/c for the year ended 31 st March 2007

21. Common-sized Balance Sheet as at 31 st March 2007

23. Trend Analysis Extension of horizontal analysis Horizontal analysis compares only two years’ position, trend analysis compares the same for more than two years Base year figures are taken as 100 and figures of all remaining years are accordingly restated. Two years’ comparison may provide indication of growth, but it may not lead to a conclusive judgment It becomes prudent to confirm the findings of horizontal analysis through trend analysis over a longer period

24. Liberty Shoes Ltd. Extracts from Annual Report 2001-02

26. Results for the year Consistent rise in sales but declined from 2.80 times to 2.42 times in the latest year. PBT growth always much lower than the sales growth. Even went lower in 2001–02 than the base year despite 2.42 times growth in sales. Heavy pressure on margins. The same applies to PAT. In this case even 2000–01 figure lower than the base year, though the company has provided Note 1 to explain this. Consistent rise in dividend payout despite negative growth in PAT except 2001–02. One reason is a small capital base of just Rs. 5.07 crores all through. It needs to be noted that 1999–00 dividend is actually 75% but annualised. Likewise the 2000– 01 dividend is 45% but annualized.

27. Quantitative details Consistent rise in production except 1999–00 and 2000–01. Though explained by the company by way of Note 2 for 2000– 01. Positive volume-value growth in all the years except the latest one and 1998–99. During these two years rise in quantity sold is more than the value of sales. Pressure on margins confirmed.

28. Position at the year end Growth in gross block and sales neck-to-neck. Sales growth even down in the latest year. Low fixed asset efficiency. Net current assets shot up in the last three years despite no significant sales growth. Large amounts locked up in working capital. Net worth growth never in line with the growth in gross block. High leverage. High dividend distribution.

29. Overall assessment Margins under pressure. Low fixed asset efficiency. Large amounts locked up in working capital. Need to set these areas of concern right. High dividend only due to small capital base and no bonus issue. Growth in the number of employees 3.30 times, but sales, PAT and net worth per employee down from Rs. 9.94 lakh, Rs. 2.05 lakh and Rs. 7.54 lakh respectively, in the base year to Rs. 7.29 lakhs, Rs. 0.61 lakh and Rs. 4.71 lakh respectively, in the latest year 2001–02. Very dismal performance. Stagnant growth outlook unless the company improves its efficiency or acquires new businesses.