1. FINANCIAL STATEMENT ANALYSIS

2. Important Questions Managers, shareholders, creditors and other interested groups seek answers to the following important questions about a firm: What is the financial position of the firm at a given point of time? How has the firm performed financially over a given period of time? What have been the sources and uses of cash over a period of time? The accountant prepares the balance sheet, the profit and loss account, and the statement of cash flows to answer the above questions.

3. Balance Sheet Horizontal Form Liabilities + Equity Assets  Share capital  Fixed assets  Reserves and surplus  Investments  Secured loans  Current assets, loans and  Unsecured loans advances  Current liabilities and  Miscellaneous provisions expenditure and losses

4. Balance Sheet Vertical (or Report) Form I.Sources of Funds (1) Shareholders’ funds: (a) Capital (b) Reserves and Surplus (2) Loan funds: (a) Secured loans (b) Unsecured loans II.Application of funds (1) Fixed assets (2) Investments (3) Current assets, loans and advances Less: Current liabilities and provisions: Net current assets (4) Miscellaneous expenditures and losses

5. Liabilities Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Current Liabilities and Provisions

6. Assets Fixed Assets Investments Current Assets, Loans, & Advances Miscellaneous Expenditure & Losses

7. Profit & Loss Account Of Horizon Ltd, For The Year Ending On March 31, 20 X 1 (Rs. in million) 20 x 1 20 x 0 Net sales 701 623 Cost of goods sold 552 475 Stocks421 Wages and salaries 68 Other manufacturing expenses 63 Gross profit 149 148 Operating expenses 60 49 Depreciation 30 General administration 12 Selling 18 Operating profit 89 99 Other income (expense) – 06 Profit before interest and tax 89 105 Interest 21 22 Profit before tax 68 83 Provision for tax 34 41 Profit after tax 34 42

8. Profit And Loss Account Items  Net Sales  Cost of Goods Sold  Gross Profit  Operating Expenses  Operating Profit  Non-operating Gains and Losses  Profit Before Interest and Taxes  Interest  Profit before Tax  Income Tax Provision  Profit After Tax  Prior Period Adjustments  Amount Available for Appropriation  Appropriations  Balance Carried Forward

9. Liquidity Ratios Current Ratio Current assets Current liabilities Acid-Test Ratio Quick assets Current liabilities Cash Ratio Cash and bank Current balances investments Current liabilities +

10. Leverage Ratios Debt-equity Ratio Debt Equity Debt-asset Ratio Debt Assets Interest Coverage Ratio Profit before interest and tax Interest

11. Turnover Ratios Inventory Turnover Cost of goods sold Average inventory Debtors’ Turnover Net credit sales Average debtors Fixed Assets Turnover Net sales Average net fixed assets Total Assets Turnover Net sales Average total assets

12. Profitability Ratios Gross Profit Margin Ratio Gross profit Net sales Net Profit Margin Ratio Net profit Net sales Return on Assets (ROA) Profit after tax Average total assets

13. Profitability Ratios Earning Power Profit before interest and tax Average total assets Return on Capital Employed Profit before interest and tax (1 – Tax rate) Average total assets Return on Equity Equity earnings Average equity

14. Valuation Ratios  Price-earnings Ratio Market price per share Earnings per share  Yield Dividend Price change + Initial price Initial price Dividend yield Capital gains/losses yield

15. Comparison With Industry Averages RatiosFormula Horizon Industry Limited Average Liquidity Current assets Current ratio 1.32 1.26 Current liabilities Quick assets Acid-test ratio 0.73 0.69 Current liabilities Leverage Debt Debt-equity ratio 0.81 1.25 Equity Debt Debt-ratio 0.45 0.56 Assets PBIT Interest coverage ratio 4.23 4.14 Interest Turnover Net sales Inventory turnover 6.24 6.43 Average Inventory Net credit sales Accounts receivable turnover 7.70 7.50 Average accounts receivable Net sales Fixed assets turnover 2.15 2.23 Average net fixed assets Net sales Total assets turnover 1.58 1.26 Average Total assets

16. RatiosFormula Horizon Industry Limited Average Profitability Gross profit Gross profit margin ratio 21.0% 18.0% Net sales Net profit Net profit margin ratio 4.7% 4.0% Net sales Net profit Return on assets 7.7% 6.9% Average total assets PBIT Earning power 20.1% 17.7% Average total assets PBIT (1–T) Return on capital employed 10.1% 8.8% Average total assets Equity earnings Return on equity 13.1% 11.9% Average net worth Valuation Market price per share Price-earnings ratio 9.25 9.26 Earnings per share Dividend + Price change Yield 14. 0% 14.1% Initial price Market price per share Market value to book 1.20 1.16 value ratio Book value per share

17. Time Series Of Certain Financial Ratios 1 2 3 4 5 Debt-equity ratio 0.91 0.98 0.65 0.61 0.81 Total assets turnover ratio 1.51 1.59 1.58 1.53 1.58 Net profit margin (%) 8.8 11.6 9.8 6.6 4.9 Return on equity (%) 25.4 30.7 24.5 16.7 13.1 Price-earnings ratio 18.6 15.3 10.3 7.1 9.3

18. Dupont Analysis Basic Du Pont Analysis Net profit Net profit Net sales = x Aveage total assets Net sales Average total assets ROA = NPM xTATR Extended Du Pont Analysis Net profitNet profit Sales Average total assets = x x Equity Sales Average total assets Average equity ROE NPM x TATR x 1/(1 – DAR)

19. Return on Total Assets 7.7 % Net Profit Margin 4.9% Total Assets Turnover 1.58 Net Profit 34 Net Sales 701 Net Sales 701 Average Total Assets 443 Net Sales +/- Non operating Surplus/Deficit 701 Total Costs 667 Average Fixed assets 326 Average Investments 15 Average Net Current Assets 102 Du Pont Chart Applied To Horizon Limited X   – + +

20. Extension Of The Du Pont Chart Return of Equity 13.1% Return of Assets 7.7% Average Total Assets To Average Equity Ratio 1.70

21. Applications Of Financial Analysis Financial ratios may be employed to: Assess corporate excellence Judge creditworthiness Forecast bankruptcy Value equity shares Predict bond ratings Estimate market risk

22. Problems In Financial Statement Analysis Development of Benchmarks Price Level Changes Variations in Accounting Policies Interpretation of Results