Financial Statements Analysis PDF

FINANCIAL STATEMENTS ANALYSIS Part 1 Dr. Prasanna Kulkarni M. Com., F. C. A., Ph. D. Associate Professor Symbiosis Institute of Digital and Telecom Management (SIDTM) Symbiosis International (Deemed Univ...

FINANCIAL STATEMENTS ANALYSIS Part 1 Dr. Prasanna Kulkarni M. Com., F. C. A., Ph. D. Associate Professor Symbiosis Institute of Digital and Telecom Management (SIDTM) Symbiosis International (Deemed University) (SIU) Lavale, Pune-412115, Maharashtra, India INTRODUCTION Financial statements analysis is an Information System designed to provide data for decision making models such as: Portfolio selection model, Bank lending decision model and Corporate financial management model 2 FINANCIAL STATEMENTS ANALYSIS It focuses on evaluation of past performance through analysis of the financial statements. It involves the study of various methods used for assessing and interpreting the results of past performance and current financial position. It is useful for forecasting and planning future performance. 3 TYPES OF FINANCIAL STATEMENT ANALYSIS According to the Nature of the Analyst External Analysis – Analysis by those who do not have access to internal information. Hence it is on the basis of published financial statement. E.g.: Analysis by investors. Internal Analysis – By those who have an access to all internal information and books of accounts. E.g.: Analysis by employees and managers 4 TYPES OF FINANCIAL STATEMENT ANALYSIS According to Modus Operandi Horizontal Analysis – In this financial statements are reviewed and analyzed for number of years. It is dynamic and useful for long term trend analysis and planning. Vertical Analysis – It is for one accounting period. It has limited use and application. 5 TYPES OF FINANCIAL STATEMENT ANALYSIS According to the objective of analysis: Long Term Analysis – It is used to study long term financial stability, solvency, liquidity and profitability. Short Term Analysis – It is used to study short term financial stability, solvency, liquidity and profitability. 6 THE FINANCIAL STATEMENTS The balance sheet: It provides a snapshot of the financial position at the end of the year by communicating information about assets, liabilities and owners’ equity. The profit & loss a/c.: It measures profitability by summarizing revenues, expenses and net income(or net loss). The cash flow statement: It shows the net increase (or decrease) in cash in a year. It shows the flow of cash into and out of the company and explains the changes in cash position between two balance sheet dates. 7 THE USER GROUPS : Trade creditors: Suppliers of goods/ services on credit. They are interested in the short term liquidity position. Suppliers of long term debt: These are banks/ financial institutions. They want to ensure long term solvency, profitability, debt servicing ability, and survival of the borrower. 8 THE USER GROUPS : Investors: They may be lay-men or professional portfolio managers. They are interested in present and future earning ability and risk. Management: They want to ensure that resources are effectively and efficiently used and that the financial condition is sound. Others: These may be govt. Departments like sales tax, income tax, excise, etc. to ensure that taxes and duties are paid on time. Sales tax and excise are now combined……… 9 TERMS USED IN FINANCIAL ANALYSIS Net Worth (Shareholders’ Funds) = Share Capital + Reserves & Surplus - Fictitious Assets Total Capital employed = Net Worth + Total Debt - Investments 10 TECHNIQUES OF ANALYSIS Horizontal analysis: The amount of each item is compared with corresponding item in an earlier Statement. The increase or decrease together with the percentage is listed. Vertical analysis: It uses percentages to show the relationship of individual figures to the total in a single statement. The percentages for different periods are compared. 11 Horizontal analysis ABC COMPANY LTD. Income Statement for Two Consecutive Years Particulars Current Year Last Year Increase % Increase (Decrease) (% Decrease) (Rs. (Rs. (Rs. Millions) Millions) Millions) Sales 10631 10600 31 0.3 Costs and Expenses Cost of goods sold 7129 6887 242 3.5 Selling & Admn. Exps. 2378 2166 212 9.8 Total Costs and Exps. 9507 9053 454 5.0 Earnings from operations 1124 1547 (423) (27.3) Extraordinary items (563) --- (563) NA Other income and Exps. (31) 77 (108) (140.3) Earnings before Taxes 530 1624 (1094) (67.4) Provision for Tax 198 704 (506) (71.9) Net Earnings 332 920 (588) (63.9) 12 Vertical analysis ABC COMPANY LTD. Income Statement Particulars Amount (%) (Rs.'000) Net Sales 415000 100.0 Less:Cost of goods sold 290000 69.9 Gross Profit 125000 30.1 Operating Expenses Selling Expenses 39500 9.5 Admn. Expenses 49640 12.0 Total Operating Exps. 89140 21.5 Operating Income 35860 8.6 Interest Expense 3000 0.7 Income before Taxes 32860 7.9 Income Tax 14100 3.4 Net Income 18760 4.5 13 TECHNIQUES OF ANALYSIS Trend analysis: (Long Term) It uses index numbers. The base year index is taken as ‘100’ and the figures for other years are expressed in terms of the base year index. Trend analysis indicates fundamental changes in the financials. Common size statements: These express comparisons in percentages, in vertical or horizontal formats. With this technique, even enterprises of different sizes or from different industries can be compared. 14 Trend analysis Base Particulars Year Year Year Year Year 1 2 3 4 5 Sales (Rs. Millions) 192.3 204.4 225.0 299.0 414.6 Base Year Percentage 100 106 117 155 216 Earnings(Rs. Millions) 1.9 3.0 4.0 6.5 10.0 Base Year Percentage 100 158 211 342 526 15 Common size statements – Basic data ABC COMPANY LTD. Income Statement for Three Consecutive Years 20x3 20x2 20x1 Particulars Amount Amount Amount (Rs.000's) (Rs.000's) (Rs.000's) Net Sales 100000 95000 91000 Less:Cost of goods sold 65000 60800 56420 Gross Profit 35000 34200 34580 Operating Expenses: Selling Expenses 14000 11400 10000 Admn. Expenses 16000 15200 13650 Total Operating Exps 30000 26600 23650 Income before Taxes 5000 7600 10930 Income Tax 1500 2280 3279 Net Income 3500 5320 7651 16 Common size statements – Vertical ABC COMPANY LTD. 20x3 20x2 20x1 Particulars Net Sales 100.0 100.0 100.0 Less:Cost of goods sold 65.0 64.0 62.0 Gross Profit 35.0 36.0 38.0 Operating Expenses Selling Expenses 14.0 12.0 11.0 Admn. Expenses 16.0 16.0 15.0 Total Operating Exps 30.0 28.0 26.0 Income before Taxes 5.0 8.0 12.0 Income Tax 1.5 2.4 3.6 Net Income 3.5 5.6 8.4 17