Types of Financial Statements
• Income Statement
• Balance Sheet
• Statement of Retained earning or Profit and
Loss Appropriation account
• Funds Flow Statement
• Cash Flow statement
Techniques of Financial
Statement Analysis
• Comparative Statements ( of two years are
present together)
• Common Size Statements (% of the total
figures)
• Trend Analysis ( Changes from various
periods.)
• Funds and Cash Flow Analysis
• Ratio Analysis
Ratio Analysis
It concentrates on the interrelationship among
the figures appearing in the Income Statement,
Balance Sheet, Statement of retained earnings,
Statement of Changes in the financial position.
It helps the management to analyze the past
performance of the firm and and to make further
projections.
Categories of Ratios
• Liquidity ratios ( ability of the firm to meet its
short term liabilities)
• Solvency ratios (ability of the firm to meet its long
term liabilities
• Activity ratios ( to measure the effectiveness and
efficiency with which the firm is managing its
current assets.)
• Profitability ratios ( to measure the profitability
condition of the company)
• Market test Ratios it relates the firm’s stock price
to its earnings and book value per share.
Liquidity ratios
Current ratio= Current assets ( Ideal is 2:1)
Current Liabilities
Quick Ratio = Liquid asset ( Ideal is 1:1)
Current Liabilities
Super Quick Ratio = Cash + marketable securities
( Ideal is 0.5:1) Current Liabilities
Solvency ratios
Debt Equity ratios = External Equities
Internal Equities
Proprietary Ratio = Shareholder’s funds
Total assets
Fixed assets to net worth ratio= Fixed assets
Total Long term funds
Capital Gearing ratio = Fixed Interest Bearing Funds
Equity Shareholder’s Fund
Interest Coverage Ratios = PBDIT
Interest
Dividend Cover = PAT
Dividend
Activity or Turnover ratios
Stock Turnover Ratio= Cost of Goods Sold
Average Inventory
Debtors Turnover ratio = Net Credit Sales
Average Drs. + B/R
Average Collection period = No. of working Days
Debtors Turnover ratio
Creditors Turnover ratio = Net Credit Purchases
Average Crs. + B/P
Average Payment period = No. of working Days
Creditors Turnover ratio
General Profitability Ratios
Gross Profit Ratio = Gross profit *100
Net Sales
Operating ratio= Cost of Goods Sold + Operating Expenses
Net sales
Expense Ratio = Particular Expense *100
Net Sales
Net profit Ratio = Net Profit after Tax *100
Net Sales
Overall Profitability Ratios
Return on Capital employed=
Net Profit after Tax and Preference Dividend
Paid up equity Share Capital
Earnings Per Share = Net Profit after Tax and Preference Dividend
Number of Equity Share
Return on Shareholder’s Fund=
Net profit after Interest and Tax
Shareholder’s Fund
Return on Investment = Net profit before interest and Tax
Total Investment
Net profit * Sales
Sales Investment in Assets
Market Test ratios:
Dividend Payout Ratio = Dividend per Share
EPS
Dividend yield = Dividend per share
Market price per share
P/E Ratio = Current Market price
EPS
Ingredients
Current assets- Cash in Hand and Bank, Bills Receivable, Marketable
securities, Prepaid Expenses,Closing Stock
Current Liabilities: Sundry Creditors, Bills Payable, bank overdraft,
Outstanding Expenses, Short term loans, income received in advance,
accrued expenses.
Liquid assets: Current assets- (Closing Stock+ Prepaid expenses)
Absolute Liquid assets: Cash at hand and Bank, marketable securities.
Average: (Opening + Closing)/2
Inventory only means stock of finished goods in Inventory turnover
Ratio.
External Equity: short and long term creditors
Internal Equities or net worth : Equity and preference Share capital,
Reserves minus fictitious assets.
Total assets: Assets- Fictitious assets
Fixed Interest Bearing Funds- Debentures, Long
Term Loans and Preference Share Capital.
Gross profit- sales minus COGS
