Introduction to Management - Financial Statements PDF

Business News Headlines Samsung lines up “no work , No pay” policy for its striking workers Mutual fund investor base to break 50 Million barrier in September GoI envisages Rs 9 Lakh crore investment in power transmission by the year 2032 1.99 million jobs created under E...

Business News Headlines Samsung lines up “no work , No pay” policy for its striking workers Mutual fund investor base to break 50 Million barrier in September GoI envisages Rs 9 Lakh crore investment in power transmission by the year 2032 1.99 million jobs created under EPFO in July. Highest monthly addition ever Lenovo begins AI server production in India. Opens R&D lab in Bangalore Financial Statements  Financial Statements Profit & Loss Statement Balance Sheet Statement Cash Flow Statement  Characteristics of Balance Sheet Statements Balance Sheet is a statement Prepared on a specific date Gives information about financial position Knowledge about assets and liability Assets and liability tally each other Ratio Analysis  1to Ratio Analysis : It is an analysis to quantify the performance of a company and compare it over time and with its peers Liquidity Ratios Leverage Ratios Efficiency Ratios Profitability Ratios Market Value Ratios 09/30/2024 Prof Mayank Pareek 18  Liquidity Ratios A liquidity ratio measures a company’s ability to pay off its current liabilities with assets that can easily be converted into cash. 09/30/2024 Prof Mayank Pareek 19  Liquidity Ratios Current Ratio : Current Assets / Current Liability It measures whether there are enough current assets to pay the current debts Current Assets = Debtors + Inventories + Cash-in-hand + Cash-at-Bank + Receivables + Loans and Advances + Disposable Investments + Advance Tax Current Liabilities = Creditors + Short-term Loans + Bank Overdraft + Cash Credit + Outstanding expenses + Provision for Taxation + Dividend payable 09/30/2024 Prof Mayank Pareek 20  Liquidity Ratios Quick Ratio or Acid Test Ratio Acid Test Ratio : Quick Assets / Current Liability It measures whether there are enough readily convertible quick funds to pay the current loan/debts. Thus, it is better than the Current Ratio. Quick assets include only cash and near cash assets. It does not include inventories as they are not readily convertible into cash. Quick Assets = Current Assets – Inventories – Prepaid Expenses 09/30/2024 Prof Mayank Pareek 21  Working Capital Working capital : Capital/Money required to manage regular operations of a company WC is the difference between a company's current assets (like cash, accounts receivable, and inventories) and its current liabilities (such as accounts payable, short-term debt, and other obligations due within one year). It is a measure of a company's short-term financial health and operational efficiency, reflecting its ability to cover day-to-day expenses and meet short-term obligations.  Liquidity Ratios Net Working Capital It is a measure of cash flow. The answer to this ratio should be positive. Usually, the bankers keep an eye on this ratio to see whether there is a financial crisis or not. Net Working Capital Ratio = Current Assets – Current Liabilities (exclude short- term bank borrowing) 09/30/2024 Prof Mayank Pareek 23  Leverage Ratios A Leverage Ratio measures a company’s inherent financial risk by quantifying the reliance on debt to fund operations and asset purchases, whether it be via debt or equity capital. Leverage Ratio = Total debt/EBIDTA Company’s capital structure : Share capital , Debt How much of business can be financed by internal resources. 09/30/2024 Prof Mayank Pareek 25  Leverage Ratios Debt to Equity Ratio : D E Ratio = Total Debt/Equity The debt-to-equity ratio compares a company’s debt to the shareholders’ equity, with a high ratio suggesting the company’s operations have been financed with more debt. 09/30/2024 Prof Mayank Pareek 26  Efficiency Ratios Ratios that measure the operational efficiency of a business. Reflect on the management and monetary health of a company. 09/30/2024 Prof Mayank Pareek 27  Efficiency Ratios Asset Turnover Ratio : Net Sales / Average Total Assets It measures the amount of income that can be generated per unit of asset Account Receivable Ratio : Net Credit Sales/ Average Account Receivable It measures the efficiency of Payment collection. 09/30/2024 Prof Mayank Pareek 28  Efficiency Ratios Account Payable Ratio : Net Credit Purchase/ Average Account Payable Efficiency of payment to its suppliers. Higher ratio means that company is good in paying to its suppliers Inventory Turnover Ratio : Cost Of Goods Sold / Average Inventory It measures the number of times inventory is turned into sales in a period 09/30/2024 Prof Mayank Pareek 29  Profitability Ratios Profitability ratios are financial metrics used by analysts and investors It measures and evaluates the ability of a company to generate income (profit) relative to revenue. They show how well a company utilizes its assets to produce profit and value to shareholders. 09/30/2024 Prof Mayank Pareek 30  Profitability Ratios Gross Profit Margin: Gross Profit / Sales Revenue High Gross Margin reflects the strength of the core business. Operating Profit Margin : Operating Profit/ Operating Income Good Measure to assess the efficiency of Management 09/30/2024 Prof Mayank Pareek 31  Profitability Ratios Cash Flow Margin: Cash Flow / Sales Revenue Ability of company to convert sales in to cash. Higher cash indicates ability of company to pay to its suppliers and ease of buying assets Return on Equity : Net Profit/ Share Holders equity Watched by investors. Indicates the expected return by a shareholder on its equity Return on Assets : Net Profit/ Total Assets Watched by investors. Indicates the efficiency of the asset utilization 09/30/2024 Prof Mayank Pareek 32  Market Value Ratios Market value ratios are formulas that are used to provide insights into a company’s share price.. Market value ratios give equity analysts a basic framework of a company and can possibly help to identify undervalued or overvalued stocks 09/30/2024 Prof Mayank Pareek 33  Market Value Ratios P/E Ratio : Price per Share/Earning Per Share This ratio measures the current share price against the earnings per share (EPS). The P/E ratio simply indicates the amount an investor would pay for Re 1 of a company’s earnings. Dividend Yield Ratio : Dividend per share/ Share Price Market capitalization = Share price × no. of shares outstanding Book value per share = Shareholders equity /No. shares outstanding 09/30/2024 Prof Mayank Pareek 34