1. fsafsa A nalyzing F inancial P erformance

2. fsafsa Presented by Khuram Shahzad 083268

3. 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

4. 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

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

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

7. fsafsa Atlas Battery: P/L Account for the year ending 31 st March, 20x8 20x8 20x7 (Rs in Mil) Net Sales 701 623 COGS 552 475 Stocks 421 370 wages & salaries 68 55 other Mfg Exp 63 50 Gross Profit 149 148 Operating Expenses 60 49 Depreciation 30 26 Gn Adm 12 11 Selling 18 12 Operating Profit 89 99 Non Operating surplus/deficit -- 6 Profit before interest and tax 89 105 Interest 21 22 Profit before tax 68 83 Tax 34 41 Profit after tax 34 42 Dividend 28 27 Retained Earnings 6 15 Per Share Data (Rs) EPS 2.27 2.80 Dividend Per share 1.80 1.80 Mkt Price Per Share 21.0 20.0 Book Value per share 17.47 17.07

8. 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 262 256 a) Share Capital 150 b) Reserves & Surplus 112 2 Loan Funds 212 156 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 40 474 412

9. 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 330 322 2 Investments 15 15 long term 12 12 short term 3 3 3 CA, Loans and Advances 234 156 Inventories 105 72 debtors 114 68 Cash & Bank Balance 10 6 Loans & Advances 5 10 Less CL and Provisions 105 81 Net Current Assets 129 75 4 Misc Expenditure and Losses -- -- 474 412

10. fsafsa Liquidity Ratios

11. 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 (237-105)/180 =0.73 (10+3)/180 =0.07

12. fsafsa Leverage Ratios (Refers to use of debt finance)

13. 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%

14. fsafsa Turnover Ratios (Measure how efficiently assets are employed)

15. 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/(105+72 )/2 =6.24 701/(114+68 )/2 =7.70 (114+68 )/2 (701/365) =47.4 days 365 Debtors’ Turnover 365 7.70 =47.4 days

16. fsafsa Turnover Ratios activity ratios how assets are employed Fixed Assets Turnover Total Assets Turnover Net Sales Average Total Assets 701/(330+322)/2 =2.15 701 /(474+412)/2 =1.58 Net Sales Av. Net fixed assets

17. fsafsa Profitability Ratios Profit Margin Ratios Rate of Return Ratios

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

19. 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%

20. fsafsa Profitability Return Ratios Equity Earnings Av. Equity Return on Equity 34/(262+256)/2 =13.1% ROCE PBIT(1-Tax Rate) Av.total Assets 89(1-0.5)/(412+474)/2 =10.1% Earning Power PBIT Av. total Assets 89/(412+474)/2 =20.1% Profit after Tax Av. Total Assets Return on Assets 34/(412+474)/2 =7.7%

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

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

23. 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 =9.25 1.8/20.=9 1.0/20=5 9+5=14%

24. 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

25. fsafsa Comparison with Industry Time Series of Financial Ratios

26. fsafsa Comparison Comparison of Ratios of Horizon with Industry Average Ratio Horizon Ltd Industry Av. Liquidity Current Ratio 1.32 1.26 Acid Test Ratio 0.73 0.69 Leverage Debt Equity ratio 0.81 1.25 Debt Ratio 0.45 0.56 Interest Coverage Ratio 4.23 4.14 Turnover Inventory turnover 6.24 6.43 Acct Receivable TO 7.70 7.50 FA Turnover 2.15 2.23 Total Assets Turnover 1.58 1.26 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%

27. fsafsa Time Series Times Series of Certain Ratios 1 2 3 4 5 Debt-Equity ratio 0.91 0.98 0.65 0.61 0.81 Total Assets turnover 1.51 1.59 1.58 1.53 1.58 Net P margin(%) 8.8 11.6 9.80 6.6 4.9 Return on Equity(%) 25.4 30.7 24.5 16.7 13.1 Earning Power 13.6 15.3 10.3 7.1 9.3

28. fsafsa du pont analysis

29. 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

30. 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)

31. 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

32. 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 34701 701474 x =7.178% 7.7 x1.81 =12.99% =12.99%

33. fsafsa a nalyzing f inancial p erformance du pont analysis 34701 701474 x 474 262 X 4.85 X1.48 X 1.81= 12.99 How these results can be improved?

34. fsafsa Common-Size Statements standardized financial statements

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

36. 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%

37. fsafsa Common-Size Statements

38. 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

39. 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

40. 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

41. 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

42. fsafsa Matrix Ltd :P/L Account in the year Ending 31 st March, 20x1 20x1 20x0 (Rs in Mil) Q Net Sales 1065 950 COGS 805 720 Stocks 600 520 W & Salaries 120 110 Other Mfg. Exp 85 90 Gross Profit 260 230 Operating Exp Depreciation 90 75 Selling & Gn Adm 50 40 PBIT 170 155 Interest 35 30 PBT 135 125 Tax 50 40 PAT 85 80 Dividend 35 30 Retained Earning 50 50

43. fsafsa Matrix Ltd : B/S as at 31 st March 20x1 20x1 20x0 Q I Sources of Funds 1 Shareholders Funds 505 455 a) share capital 125 125 b) Reserves & Surplus 380 330 2 Loan Fund 280 260 a) Secured Loans 180 160 i) Due after 1 year 130 135 ii) Due Within 1 year 50 25 b) Unsecured Loans 100 100 i) Due after 1 year 60 70 ii) Due within 1 year 40 30 Total 785 715 II Application of Funds 1 Net Fixed Assets 550 495 2 Investments 30 25 a) Long Term 20 20 b) Current 10 5 3 CA, loans & Advances 335 333 a) Inventories 160 138 b) Sundry Debtors 120 115 c) Cash & Bank 25 20 d) Loans & Advances 50 60 Less CL and Provisions 150 138 Net Current Assets 205 195 Total 785 715 Rs in Million