Principles of Business Finance

Lecture 5 – BBA2K20
By Hassan Ali Solangi - Lecturer
Sindh University Campus at Thatta
 Lecture 5
Tools of Financial Analysis
and Planning - II
Tools of Financial Analysis and Planning II
Learning Objectives
■ Financial Statements Analysis (Ratios)
• Balance Sheet Ratios
o Liquidity Ratios and Analysis
o Debt Management Ratios and Analysis

■ Trend Analysis (Common Size Analysis of

Financial Statements)
Tools of Financial Analysis and Planning II
Financial Statements Analysis

Balance Sheet

Income Statement

Cash Flow Statement

Tools of Financial Analysis and Planning II
Financial Statements Analysis
■ Financial statement analysis is the process of analyzing a
company's financial statements for decision-making purposes.
■ External stakeholders use it to understand the overall health of
an organization as well as to evaluate financial performance and
business value
Tools of Financial Analysis and Planning II
Financial Statements Ratios Analysis
■ Financial Ratios highlight different aspects of performance
■ Ratios are most meaningful when compared with similar figures

Three comparisons:
► History
Prior performance - look for trends
► Competitors
Identify strong - weak spots relative to competitors
► Budget
Is performance better or worse than expected
Tools of Financial Analysis and Planning II
Financial Statements Ratios Analysis
Categories of Ratios
Ratios are categorized as:

 Liquidity Ratios

 Debt Management Rations

 Asset Management Ratios

 Profitability Ratios

 Market Rations
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
 Liquidity Ratios

 Debt Management Rations

Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Liquidity Ratios
Liquidity Ratios measure the ability to meet short term financial
obligations:

o Current Ratio: It is Primary measurement of a

company’s liquidity

o Quick Ratio: A liquidity measure that does not

depend on inventory and is called Acid Test Ratio
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Liquidity Ratios
Current Assets
1. Current Ratio =
Current Liabilities

1. Current Ratio = 7500

2500
= 3.0
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Liquidity Ratios
Current Assets - Inventory
2. Quick Ratio =
Current Liabilities

7500 - 3200
2. Quick Ratio = = 1.72
2500
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Debt Management Ratios
Debt Management Ratios measures the firm’s debt level relative to
Assets, Equity, and Income

o Debt Ratio: This ratio illustrate concept of debt

including current liabilities

o Debt to Equity Ratio: Measure the mix of debt

and equity in total capital
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Debt Management Ratios
Long Term Debt + Current Liabilities
1. Debt Ratio =
Total Assets

6,200 + 2,500
1. Debt Ratio = = 72.50%
12,000
Tools of Financial Analysis and Planning II
Ratios Analysis
Balance Sheet Ratios
Debt Management Ratios
Long Term Debt
2. Debt to Equity Ratio =
Equity

6,200
2. Debt to Equity Ratio = = 1.9 : 1
3,300
Tools of Financial Analysis and Planning II
Trend Analysis (Common Size Analysis)
■ Common-size and trend analysis enable investors
and companies to compare the elements that
make up the financial statements.

■ It focuses more on the internal structure of the

financial statements.
■ The trend analysis consists of horizontal analysis
which shows the changes to the accounts in a year
to year basis.
Tools of Financial Analysis and Planning II
Trend Analysis (Common Size Analysis)
■ An analysis of percentage financial statements where all
balance sheet items are divided by total assets and all
income statement items are divided by net sales or
revenues. The percentages can be related to totals, such
as total assets or total net sales, or to some base year.
Tools of Financial Analysis and Planning II
Trend Analysis (Common Size Analysis)
Common Size
Analysis of
Balance
Sheet
Example:
Tools of Financial Analysis and Planning II
Trend Analysis (Common Size Analysis)
Common Size
Analysis of
Income
Statement
Example: