Financial Statement And Analysis

Financial Statements is a statement prepared by company at end of its accounting period. It includes:
i. Income Statement
ii. Statement of Retained Earnings
iii. Balance Sheet
iv. Cash Flow Statement
A ratio analysis is the analysis of various aspects of financial information in financial statement. It helps in general
assessments of liquidity, solvency, profitability, and efficiency of the company.
Purpose of Ratio Analysis
1. To determine financial strength and weakness.
2. For future planning and forecasting.
3. To compare with industries average.
4. To communicate financial positions.

Net Sales (sales – sales return)

Less: COGS
Gross profit

Less: Operating expense

Office Expense
Depreciation
Selling & Distribution Expense
Add: Other operating income (eg discount received)
Operating profit

Less: Non operating expense/loss (eg loss on sale of fixed asset, loss by fire)
Add: Non operating income ( eg Interest, dividend received)

Earning Before Interest & Tax (EBIT)

Less: Interest
Earning Before Tax (EBT)
Less: Taxes
Net income/ Earning After Tax (EAT)

Less: Preference Dividend

Profit for Equity(common) shareholders
Less : Equity Dividend
Retained earnings

*Net income or Earning After Tax (EAT) = EBT (1-Tax rate)

Types of Financial Ratios:

1. Liquidity Ratios (...times)
a. Current Ratio (CR) = Ideal ratio is 2 times.

b. Quick Ratio/ Liquid Ratio/Acid Test Ratio = Ideal ratio is 1 times.

Quick Assets = Current Asset – Inventory(stock) – Prepaid Expense.

c. Cash Ratio =

Working Capital = Current Assets – Current Liability

Compiled by Vishal Thapa

2. Turnover Ratios/Activity Ratio (...times)

a. Inventory Turnover Ratio = or

o Average inventory =
o COGS = Sales – Gross profit or COGS = Opening stock + Purchase + Direct Expense – Closing Stock

b. Day’s sales in Inventory =

c. Receivable Turnover Ratio = or

o Receivable = Debtors + A/c receivable + Bills receivable

o Average receivable =
o Net Credit sales= Total sales – Cash sale – Sales return

d. Days Sales Outstanding (DSO)/ Average Collection Period (ACP)

or

e. Average Payable Period(APP) =

f. Fixed Assets Turnover Ratio=

o Net Fixed asset = Fixed asset - Depreciation

g. Total Assets Turnover Ratio =

h. Capital Employed Turnover ratio =

3. Leverage Ratios/ Solvency Ratio/ Capital Structure Ratio – shows long term liquidity.

a. Total liabilities to Asset Ratio (Total Debt Ratio)=

b. Debt to Equity Ratio = or

c. Total Liability to Equity Ratio=

d. Debt to total capital ratio =

e. Equity Multiplier (EM) = or or 1 + Debt/equity ratio

f. Interest Coverage Ratio/ Time interest earning(TIE) = (…times)

g. Fixed Coverage Ratio = (…times)

o Fixed charges = Interest + Preference dividend + Debt/ Lease payment.

h. Cash Coverage Ratio =

i. EBITDA Coverage Ratio =

Compiled by Vishal Thapa

4. Profitability Ratios (...%)
a. Gross profit Margin = x 100%

b. Net profit Margin = x 100%

c. Operating Margin(Operating profit ratio) = x 100%

d. Total Operating Expense Ratio = x 100%

o Operating Exp = COGS + Office exp + Selling exp + Depreciation. ( It doesnot include interest)

e. Basic Earning Power= x 100%

f. Return on Equity (ROE) = x 100%

g. Return on Common Stock (Common shareholder equity) = x 100%

o Common Stock = Shareholders Fund – Preference Share capital

h. Return on Assets (ROA) = x 100%

i. Return on Capital Employed(Return on Investment) = X 100%

5. Market Value Ratios

a. Earnings Per Share (EPS) = ( Rs. per share)

b. Dividend Per Share(DPS) = (Rs. per share)

c. Retained earnings per share = EPS – DPS

[Total Retained Earnings = Retained Earnings per share X No of outstanding common share]

d. Dividend Payout Ratio(DPR) = or X 100%

e. Dividend Yield (DY) = X 100%

f. Earning Yield (EY) = X 100%

g. Price Earning Ratio(PE Ratio) = (...times)

h. Market-to-Book Ratio = (....times)

i. Book Value Per Share(BVPS) =

6. DuPont Analysis
ROA = Profit Margin X Total Assets Turnover

ROE = ROA X Equity Multiplier

(Profit Margin X Total Assets Turnover) X Equity Multiplier
=( X ) X

Compiled by Vishal Thapa

Notes:

Equity Share capital + Reserve & Surplus/Funds – Fictitious Asset + Preference Capital + Loan/Debentures + Current liabilities

Equity Shareholder Fund/Common Stock

Equity/ Shareholders fund Long term Debt

Total Capital/Capital Employed/Investment

Total Assets

 Long Term Debt = Debenture + Bond + All loans except short term loan.
 Total debt = Long term debt + Current liabilities
 Equity or Shareholder Fund = Equity Share capital + Preference Share capital + retained earnings + Reserve & Surplus – Ficititious asset
(Shareholder Fund = Net worth = Book value)
 Total Capital (Capital employed) = Shareholder fund + Long term debt
 Total Asset = Shareholders fund + Total Debt
 Fictitious Asset = Preliminary Expense, Underwriting commission, Discount on issue of share or debentures, heavy
advertisement(deferred expense), premium on redemption of debenture, P& L a/c (debit balance)
 Net income = Net income after tax.
 Turnover ko case ma Sales mathi hunxa ra je ko turnover nikalnu cha tyo tala rakhne.
 Margin ko case ma Sales tala rakhne ra je ko margin nikalnu cha tyo mathi rakhne.
 Bichama To/ on ayema je agadi cha tyo mathi rakhne ra je paxadi cha tyo tala rakhne .
 Per share ko case ma No of Shares tala rakhne ra je ko per share nikalnu cha tyo mathi rakhne.

Current Assets Current Liabilities

Sundry Debtors, Book debt, Account receivable, Bills receivable, Creditors, Accounts payable, Bills payable, Notes payable,
Notes receivable, cash & Bank, marketable securities, Prepaid Outstanding expenses, Advance income, Bank overdraft,
expenses, short term investment, accrued income, Inventory. Provision for tax, Provision for dividend.

Ratio Explanation Decision

Liquidity ratio
Current Ratio Current Ratio of 2:1 or 2 times indicate Current Asset is 2 times of Higher mean better liquidity
current liability. position.
Quick Ratio It measures ability to meet current debt immediately

Turnover ratio - Higher the better management & utilization of asset

Inventory Turnover It is rate at which stock is sold. Higher ratio means strong sales, 4.33 times means COGS is 4.33
Ratio company manages stock effectively and not holding excess capital in times of average inventory
unsold stock.
Days sales in Days sales in inventory of 65 days means inventory remains on shelf -
inventory for 65 days before it is sold.
Debtor Turnover It determines efficiency at which debtors are converted into cash. DTR of 14 times means credit sale
Ratio was 14 times of debtors.
Average Collection It measures how rapidly cash is collected from debtor. ACP – 72 days means debtors is
Period being collected in each 72 days.
Total Assets It shows management of resource (assets) with respect to generating TATR of 1.13 indicate firm turned
Turnover Ratio sales. over its total asset 1.13 times

Profitability Ratio- Higher the better

Return On Equity It means ability of generating profit by utilizing shareholders funds. Higher ratio means higher
efficiency of management.
Return On Capital It means ability of generating profit by utilizing capital employed. Higher means better management
Employed/ Return & utilization of capital employed/
On Asset total asset.
Basic Earning Power How well a company generates income from its assets. Higher the better.

Compiled by Vishal Thapa

 Leverage Ratio
Debt equity It shows proportion of debt & equity used to purchase assets. Good D/E is below 2.
Debt to total asset It measures how much total assets is financed by the debt. -
TIE ratio Ability of business to meet interest. Ideal ratio is > 1. Higher the better

Market Value Ratios

EPS/DPS If it is higher then it means higher efficiency & profitability of business. Higher the better
EPS: shows each equity share has earned Rs..
DPS: shows each equity share has been distributed dividend of Rs…
Dividend Payout Portion of dividend distributed out of total earning. -
Price Earning Ratio Higher ratio means uniformity between market value of each share & Shows market value per share is ….
EPS. Helps to access value of stock & check either it is overvalued or Times of EPS. High PE – Stock price
undervalued. is high compared to earning which
could mean its overvalued.

Compiled by Vishal Thapa