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Report - Financial Statement Analysis
Report - Financial Statement Analysis
INTRODUCTION
OBJECTIVE:
RATIO ANALYSIS:
Fundamental Analysis has a very broad scope. One aspect looks at the general
(qualitative) factors of a company. The other side considers tangible and
measurable factors (quantitative). This means crunching and analyzing
numbers from the financial statements. If used in conjunction with other
methods, quantitative analysis can produce excellent results.
Ratio analysis isn't just comparing different numbers from the balance sheet,
income statement, and cash flow statement. It's comparing the number against
previous years, other companies, the industry, or even the economy in general.
Ratios look at the relationships between individual values and relate them
to how a company has performed in the past, and might perform in the
future.
MEANING OF RATIO:
However, you must be careful not to place too much importance on one
ratio. You obtain a better indication of the direction in which a company is
moving when several ratios are taken as a group.
OBJECTIVE OF RATIOS
FORMS OF RATIO:
For example the equity share capital of a company is Rs. 20,00,000 & the
preference share capital is Rs. 5,00,000, the ratio of equity share capital to
preference share capital is 20,00,000: 5,00,000 or simply 4:1.
In the above case the equity share capital may also be described as 4 times
that of preference share capital. Similarly, the cash sales of a firm are Rs.
12,00,000 & credit sales are Rs. 30,00,000. sothe ratio of credit sales to cash
sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that
the credit sales are 2.5 times that of cash sales.
C]As a percentage:
1]Calculation of ratio
TYPES OF COMPARISONS
One of the way of comparing the ratio or ratios of the firm is to compare
them with the ratio or ratios of some other selected firm in the same
industry at the same point of time. So it involves the comparison of two or
more firm’s financial ratio at the same point of time. The cross section
analysis helps the analyst to find out as to how a particular firm has performed
in relation to its competitors. The firms performance may be compared with
the performance of the leader in the industry in order to uncover the major
operational inefficiencies. The cross section analysis is easy to be undertaken
as most of the data required for this may be available in financial statement
of the firm.
2]Time series analysis:
The analysis is called Time series analysis when the performance of a firm is
evaluated over a period of time. By comparing the present performance of a
firm with the performance of the same firm over the last few years, an
assessment can be made about the trend in progress of the firm, about the
direction of progress of the firm. Time series analysis helps to the firm to
assess whether the firm is approaching the long-term goals or not. The Time
series analysis looks for (1) important trends in financial performance (2)
shift in trend over the years (3) significant deviation if any from the other
set of data\
3]Combined analysis:
If the cross section & time analysis, both are combined together to study
the behavior & pattern of ratio, then meaningful & comprehensive
evaluation of the performance of the firm can definitely be made. A trend of
ratio of a firm compared with the trend of the ratio of the standard firm can give
good results. For example, the ratio of operating expenses to net sales for
firm may be higher than the industry average however, over the years it
has been declining for the firm, whereas the industry average has not shown
any significant changes.
4) One ratio may not throw light on any performance of the firm.
Therefore, a group of ratios must be preferred. This will be conductive
to counter checks.
5) Last but not least, the analyst must find out that the two figures
being used to calculate a ratio must be related to each other,
otherwise there is no purpose of calculating a ratio.
CLASSIFICATION OF RATIO
CLASSIFICATION OF RATIO
BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER
STATEMENT
1] BALANCE SHEET
1] LIQUIDITY RATIO
1] RATIOS FOR
2] REVENUE 3] ACTIVITY
RATIOCREDITORS
2]Revenue ratio:
Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratio study the relationship between the profitability
& the sales of the concern. Revenue ratios are Gross profit ratio, Operating
ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover
ratio.
3]Composite ratio:
These ratios indicate the relationship between two items, of which one is
found in the balance sheet & other in revenue statement.
BASED ON FUNCTION:
1] Liquidity ratios:
It shows the relationship between the current assets & current liabilities of
the concern e.g. liquid ratios & current ratios.
2] Leverage ratios:
It shows the relationship between proprietors funds & debts used in financing
the assets of the concern e.g. capital gearing ratios, debt equity ratios, &
Proprietory ratios.
3] Activity ratios:
It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors
turnover ratios.
4] Profitability ratios:
a) It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios
5] Coverage ratios:
It shows the relationship between the profit on the one hand & the claims of
the outsiders to be paid out of such profit e.g. dividend payout ratios & debt
service ratios.
BASED ON USER:
This ratio compares the current assests with the current liabilities. It is also
known as ‘working capital ratio’ or ‘ solvency ratio’. It is expressed in the
form of pure ratio.
E.g. 2:1
Formula :
Current assets
Current ratio =
Current liabilities
The current assests of a firm represents those assets which can be, in the
ordinary course of business, converted into cash within a short period
time, normally not exceeding one year. The current liabilities defined as
liabilities which are short term maturing obligations to be met, as originally
contemplated, with in a year.
Current ratio (CR) is the ratio of total current assets (CA) to total current
liabilities (CL).
Current assets include cash and bank balances; inventory of raw
materials, semi-
finished and finished goods; marketable securities; debtors (net of provision
for bad and
doubtful debts); bills receivable; and prepaid expenses. Current liabilities
consist of trade creditors, bills payable, bank credit, provision for taxation,
dividends payable and outstanding expenses. This ratio measures the
liquidity of the current assets and the ability of a company to meet its short-
term debt obligation.
CR measures the ability of the company to meet its CL, i.e., CA gets
converted into cash in the operating cycle of the firm and provides the funds
needed to pay for CL. The higher the current ratio, the greater the short-term
solvency. This compares assets, which will become liquid within
approximately twelve months with liabilities, which will be due for payment
in the same period and is intended to indicate whether there are sufficient
short-term assets to meet the short- term liabilities. Recommended current
ratio is 2: 1. Any ratio below indicates that the entity may face liquidity
problem but also Ratio over 2: 1 as above indicates over trading, that is the
entity is under utilizing its current assets.
Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare
the quick assets with the quick liabilities. It is expressed in the form of pure
ratio. E.g. 1:1.
The term quick assets refer to current assets, which can be converted
into, cash immediately or at a short notice without diminution of value.
Formula:
Quick assets
Liquid ratio =
Quick liabilities
Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA
refers to those current assets that can be converted into cash immediately
without any value strength. QA includes cash and bank balances, short-term
marketable securities, and sundry debtors. Inventory and prepaid expenses
are excluded since these cannot be turned into cash as and when required.
QR indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. This is a fairly stringent measure of
liquidity because it is based on those current assets, which are highly liquid.
Inventories are excluded from the numerator of this ratio because they are
deemed the least liquid component of current assets. Generally, a quick ratio
of 1:1 is considered good. One drawback of the quick ratio is that it ignores
the timing of receipts and payments.
This is also called as super quick ratio. This ratio considers only the absolute
liquidity available with the firm.
Formula:
Cash ratio =
Since cash and bank balances and short term marketable securities are the
most liquid assets of a firm, financial analysts look at the cash ratio. If the
super liquid assets are too much in relation to the current liabilities then it
may affect the profitability of the firm.
INVESTMENT / SHAREHOLDER
Earnings per Share are calculated to find out overall profitability of the
organization. An earnings per Share represents earning of the company
whether or not dividends are declared. If there is only one class of shares, the
earning per share are determined by dividing net profit by the number of
equity shares.
EPS measures the profits available to the equity shareholders on each share
held.
Formula:
NPAT
The higher EPS will attract more investors to acquire shares in the company
as it indicates that the business is more profitable enough to pay the dividends in
time. But remember not all profit earned is going to be distributed as dividends
the company also retains some profits for the business
Meaning:
DPS shows how much is paid as dividend to the shareholders on each share held.
Formula:
Meaning:
Dividend Pay-out Ratio shows the relationship between the dividend paid to
equity
Formula:
D/P ratio shows the percentage share of net profits after taxes and after
preference
dividend has been paid to the preference equity holders.
GEARING
Formula:
PROFITABILITY
GROSS PROFIT
RATIO:- Meaning:
This ratio measures the relationship between gross profit and sales. It is
defined as the excess of the net sales over cost of goods sold or excess of
revenue over cost. This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of production
as well as pricing. This ratio helps to judge how efficient the concern is I
managing its production, purchase, selling & inventory, how good its control
is over the direct cost, how productive the concern , how much amount is
left to meet other expenses & earn net profit.
Formula:
Gross profit
Net sales
Meaning:
Net Profit ratio indicates the relationship between the net profit & the sales it is
usually expressed in the form of a percentage.
Formula:
NPAT
Net sales
This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures the
overall efficiency of production, administration, selling, financing, pricing
and tax management. Jointly considered, the gross and net profit margin
ratios provide an understanding of the cost and profit structure of a firm.
Meaning:
The profitability of the firm can also be analyzed from the point of view of the
total funds employed in the firm. The term fund employed or the capital
employed refers to the total long-term source of funds. It means that the
capital employed comprises of shareholder funds plus long-term debts.
Alternatively it can also be defined as fixed assets plus net working capital.
Capital employed refers to the long-term funds invested by the creditors and
the owners of a firm. It is the sum of long-term liabilities and owner's equity.
ROCE indicates the efficiency with which the long-term funds of a firm are
utilized.
Formula:
NPAT
Capital employed
FINANCIAL
These ratios determine how quickly certain current assets can be converted
into cash. They are also called efficiency ratios or asset utilization ratios as
they measure the efficiency of a firm in managing assets. These ratios are
based on the relationship between the level of activity represented by sales
or cost of goods sold and levels of investment in various assets. The
important turnover ratios are debtors turnover ratio, average collection
period, inventory/stock turnover ratio, fixed assets turnover ratio, and total
assets turnover ratio. These are described below:
DEBTORS TURNOVER RATIO
(DTO) Meaning:
Formula:
Credit sales
Average debtors
ITR refers to the number of times the inventory is sold and replaced
during the accounting period.
Formula:
COGS
Average stock
ITR reflects the efficiency of inventory management. The higher the ratio,
the more efficient is the management of inventories, and vice versa.
However, a high inventory turnover may also result from a low level of
inventory, which may lead to frequent stock outs and loss of sales and
customer goodwill. For calculating ITR, the average of inventories at the
beginning and the end of the year is taken. In general, averages may be
used when a flow figure (in this case, cost of goods sold) is related to a stock
figure (inventories).
The FAT ratio measures the net sales per rupee of investment in fixed
assets. Formula:
Net sales
This ratio measures the efficiency with which fixed assets are employed. A
high ratio indicates a high degree of efficiency in asset utilization while a low
ratio reflects an inefficient use of assets. However, this ratio should be used
with caution because when the fixed assets of a firm are old and substantially
depreciated, the fixed assets turnover ratio tends to be high (because the
denominator of the ratio is very low).
PROPRIETORS
RATIO: Meaning:
Formula:
Proprietary fund
Total fund
Shareholders fund
Proprietary ratio =
Meaning:
This ratio shows the relationship between the closing stock & the working
capital. It helps to judge the quantum of inventories in relation to the
working capital of the business. The purpose of this ratio is to show the
extent to which working capital is blocked in inventories. The ratio highlights
the predominance of stocks in the current financial position of the company.
It is expressed as a percentage.
Formula:
Stock
Working Capital
Stock working capital ratio is a liquidity ratio. It indicates the composition &
quality of the working capital. This ratio also helps to study the solvency
of a concern. It is a qualitative test of solvency. It shows the extent of funds
blocked in stock. If investment in stock is higher it means that the amount of
liquid assets is lower.
DEBT EQUITY
RATIO: MEANING:
This ratio compares the long-term debts with shareholders fund. The
relationship between borrowed funds & owners capital is a popular
measure of the long term financial solvency of a firm. This relationship is
shown by debt equity ratio. Alternatively, this ratio indicates the relative
proportion of debt & equity in financing the assets of the firm. It is usually
expressed as a pure ratio. E.g. 2:1
Formula:
RETURN ON PROPRIETOR
FUND: Meaning:
Formula:
NPAT
Proprietor’s fund
It is same as debtors turnover ratio. It shows the speed at which payments are
made to the supplier for purchase made from them. It is a relation between
net credit purchase and average creditors
Average creditors
Months in a year
1]Liquidity position,
2]Long-term solvency,
3]Operating efficiency,
4]Overall profitability,
1]LIQUIDITY POSITION: -
With the help of Ratio analysis conclusion can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligation when they become due.
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the
liquidity ratio of a firm. The liquidity ratio are particularly useful in credit
analysis by bank & other suppliers of short term loans.
3]OPERATING EFFICIENCY:
Yet another dimension of the useful of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of
efficiency in management & utilization of its assets. The various activity ratios
measures this kind of operational efficiency. In fact, the solvency of a firm
is, in the ultimate analysis, dependent upon the sales revenues generated
by the use of its assets- total as well as its components.
4]OVERALL PROFITABILITY:
Unlike the outsides parties, which are interested in one aspect of the financial
position of a firm, the management is constantly concerned about overall
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meets its short term as well as long term obligations to its creditors,
to ensure a reasonable return to its owners & secure optimum utilization of
the assets of the firm. This is possible if an integrated view is taken & all the
ratios are considered together.
Ratio analysis not only throws light on the financial position of firm but also
serves as a stepping-stone to remedial measures. This is made possible due
to inter firm comparison & comparison with the industry averages. A single
figure of a particular ratio is meaningless unless it is related to some standard
or norm. one of the popular techniques is to compare the ratios of a firm with
the industry average. It should be reasonably expected that the performance
of a firm should be in broad conformity with that of the industry to which it
belongs. An inter firm comparison would demonstrate the firms position vice-
versa its competitors. If the results are at variance either with the industry
average or with the those of the competitors, the firm can seek to identify the
probable reasons & in light, take remedial measures.
6]TREND ANALYSIS:
Finally, ratio analysis enables a firm to take the time dimension into account.
In other words, whether the financial position of a firm is improving or
deteriorating over the years. This is made possible by the use of trend
analysis. The significance of the trend analysis of ratio lies in the fact that
the analysts can know the direction of movement, that is, whether the
movement is favorable or unfavorable. For example, the ratio may be low as
compared to the norm but the trend may be upward. On the other
hand, though the present level may be satisfactory but the trend may be a
declining one.
> The comparison of actual ratios with base year ratios or standard
ratios helps the management analyze the financial performance of
the firm.
1] Information problems
> Ratios require quantitative information for analysis but it is not decisive
about analytical output .
> The figures in a set of accounts are likely to be at least several months
out of date, and so might not give a proper indication of the company’s
current financial position.
> Where historical cost convention is used, asset valuations in the
balance sheet could be misleading. Ratios based on this information will
not be very useful for decision-making.
> When comparing performance over time, there is need to consider the
changes in price. The movement in performance should be in line with
the changes in price.
> When comparing performance over time, there is need to consider the
changes in technology. The movement in performance should be in line
with the changes in technology.
3] Inter-firm comparison
> Inter-firm comparison may not be useful unless the firms compared
are of the same size and age, and employ similar production methods
and accounting practices.
> Ratios are calculated on the basis of past financial statements. They
do not indicate future trends and they do not consider economic
conditions.
PURPOSE OF RATIO ANLYSIS:
3] 5 main areas:-
Ø Financial – the rate at which the company sells its stock and the
efficiency with which it uses its assets
Ratio analysis helps to appraise the firm in terms of their profitability &
efficiency of performance, either individually or in relation to those of other
firms in the same industry. The process of this appraisal is not complete
until the ratio so computed can be compared with something, as the ratio
all by them do not mean anything. This comparison may be in the form of
intra firm comparison, inter firm comparison or comparison with standard
ratios. Thus proper comparison of ratios may reveal where a firm is placed as
compared with earlier period or in comparison with the other firms in the
same industry.
As the ratio analysis is concerned with all the aspect of a firms financial
analysis i.e. liquidity, solvency, activity, profitability & overall
performance, it enables the interested persons to know the financial &
operational characteristics of an organisation & take the suitable decision.
EVALUATION OF APLAB LIMITED THROUGH RATIO
COMPANY PROFILE
THE COMPANY –
ABOUT APLAB:
• Aplab started its operation in October 1962.
MISSION:
VISION:
GOAL:
4]To understand the customer’s needs and provide solutions than merely
selling products.
• “Do it right the first time & every time” is their team commitment
* our way of doing business, it ensures as growth & prosperity.
APLAB had planned to enter the 21st Century with a program for a fast and
healthy growth in the global market based on company’s high technology
foundation and the reputation of four decades for prompt customer service
and as a reliable solution provider. After completing three years in the new
era, we can say with pride that we have been delivering our promises to our
customers and the shareholders.
APLAB has entered the field of Professional Services starting with the
Banking and the Petroleum Industry. Focus on developing embedded system
software has been also enhanced. We believe that professional services
sector is poised to grow at a very rapid pace.
EXPORT
APLAB currently exports over 25% of its production to Western Europe,
Canada & USA. Over 30 million U.S. Dollars, Sweden, Belgium, Canada,
and USA & Australia.
PRODUCTS OF APLAB:
a. TEST & MEASUREMENT INSTRUMENTS
d. ATM INSTACASH
ATM INSTACASH