1. - Brijesh Pitroda

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

3. 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.

4. 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.

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

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

7. Horizontal Analysis Example

8. 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 _

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

10. 12,000 – 23,500 = (11,500) (11,500 ÷ 23,500) × 100% = 48.9%

11. Horizontal Analysis Example

12. 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.

13. 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)

14. Trend Analysis Example

17. 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

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

19. 90,000 ÷ 2,89,700 = 31% rounded Vertical Analysis Example

20. 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.

21. Common-Size Analysis Example

24. 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)

25. 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 15500070000 2.21 = 2.21 Liquidity Ratio

26. Sayajirao Industry 2.212.15 3.293.103.41 Sayajirao Industry 2.212.15 3.293.103.41 Year 2012 2011 2010 Current Ratio Ratio is stronger than the industry average. Liquidity Ratio Comparisons

27. 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 155000 - 80000 70000 1.07 = 1.07 Liquidity Ratio

28. Sayajirao Industry 1.071.25 1.291.23 1.001.25 Sayajirao Industry 1.071.25 1.291.23 1.001.25 Year 2012 2011 2010 Acid-Test Ratio Ratio is weaker than the industry average. Acid-Test Ratio Comparisons

29. 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 Current2.21 2.15 Acid-Test1.07 1.25 Summary of the Liquidity Ratio Comparisons

30. 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 75000170000 0.44 = 0.44 Financial Leverage Ratio

31. Sayajirao Industry0.44 0.500.51 0.460.48 Sayajirao Industry0.44 0.500.51 0.460.48 Year 2012 2011 2010 Debt-to-Equity Ratio Sayajirao has average debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

32. 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 75000315000 0.24 = 0.24 Financial Leverage Ratio

33. Sayajirao Industry 0.240.26 0.280.27 0.260.27 Sayajirao Industry 0.240.26 0.280.27 0.260.27 Year 2012 2011 2010 Debt-to-Total Assets Ratio Sayajirao has average debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

34. 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(75000+170000) 0.31 = 0.31 Financial Leverage Ratio

35. Sayajirao Industry 0.310.30 0.330.31 0.310.32 Sayajirao Industry 0.310.30 0.330.31 0.310.32 Year 2012 2011 2010 Total Capitalization Ratio Sayajirao has average long-term debt utilization relative to the industry average. Financial Leverage Ratio Comparisions

36. 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. 314006400 4.91 = 4.91 Coverage Ratio Income Statement Ratios Coverage Ratios

37. Sayajirao Industry 4.915.20 5.576.56 5.767.20 Sayajirao Industry 4.915.20 5.576.56 5.767.20 Year 2012 2011 2010 Interest Coverage Ratio Sayajirao has below average interest coverage relative to the industry average. Coverage Ratio Comparisions

38. Coverage Ratio- Trend Analysis Comparisions

39. Sayajirao industry  The interest coverage ratio for Sayajirao has been falling since 2010. 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 2010. 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

40. 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 45000035000 = 8.66 (Assume all sales are credit sales.) Actiivity Ratio

41. 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 3658.66 = 43 Days Actiivity Ratio

42. Sayajirao Industry 2929.2 3129 4335 Sayajirao Industry 2929.2 3129 4335 Year 2012 2011 2010 Average Collection Period Sayajirao has improved the average collection period to that of the industry average. Activity Ratio Comparisions

43. 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 36000067000 = 5.37 Actiivity Ratio (Assume all annual credit purchases)

44. 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 3655.37 = 68 Days Actiivity Ratio

45. Sayajirao Industry 68 5851 5648 Sayajirao Industry 68 5851 5648 Year 2012 2011 2010 Payable Turnover in Days Sayajirao has improved the PT in Days. Is this good? Activity Ratio Comparisions

46. 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 36000080000 = 4.5 Actiivity Ratio

47. Sayajirao Industry 4.505.45 3.154.76 2.50 3.69 Sayajirao Industry 4.505.45 3.154.76 2.50 3.69 Year 2012 2011 2010 Inventory Turnover Ratio Sayajirao has a very poor inventory turnover ratio. Activity Ratio Comparisions

48. Inventory Turnover Ratio -- Trend Analysis Comparison

49. 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 520000315000 = 1.65 Actiivity Ratio

50. Sayajirao Industry 1.651.75 1.661.79 1.50 1.80 Sayajirao Industry 1.651.75 1.661.79 1.50 1.80 Year 2012 2011 2010 Total Assets Turnover Ratio Sayajirao has a weak total asset turnover ratio. Activity Ratio Comparisions Why is this ratio considered weak?

51. 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 160000520000 = 30.7% Profitability Ratio

52. 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 2012 2011 2010 Gross Profit Margin Sayajirao has a weak Gross Profit Margin. Profitability Ratio Comparisions

53. Gross Profit Margin -- Trend Analysis Comparison

54. 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 17500520000 = 3.3% Profitability Ratio

55. 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 2012 2011 2010 Net Profit Margin Sayajirao has a poor Net Profit Margin. Profitability Ratio Comparisions

56. Net Profit Margin -- Trend Analysis Comparison

57. 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 17500520000 = 5.5% Profitability Ratio

58. 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 2012 2011 2010 Return on Investment Sayajirao has a poor Return on Investment. Profitability Ratio Comparisions

59. Return on Investment – Trend Analysis Comparison

60. 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 17500520000 = 10.2% Profitability Ratio

61. 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 2012 2011 2010 Return on Equity Sayajirao has a poor Return on Equity. Profitability Ratio Comparisions

62. Return on Equity -- Trend Analysis Comparison

63. Summary of the Profitability industry  The profitability ratios for Sayajirao Corporation have ALL been falling since 2010. 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 2010. 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.

64. 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.

65. THANK YOU Any queries/suggestions are welcomed at : brijeshpitroda@gmail.com