Financial Statement

and Ratio Analysis

Basic modules
 1 Financial Statements
2 Ratio Analysis

Sections
 1 Financial Statement
2 Ratio Analysis

Sections
Financial Statement

Financial Statements are important communication instruments as they tell us about a

company’s financial performance, changes in its financial position and cash flows at the end
of an accounting period.

These statements include

• The Balance Sheet
• The Statement of Profit & Loss
• The Statement of Cash Flows

In a company’s annual reports, two types of financial statements are presented – standalone
(includes only the parent company) and consolidated (inclusive of subsidiaries, JVs, and
associate companies).
Financial Statement : Profit / Loss statement

The Profit and Loss

Statement

- (minus)
Revenue Expenses

Profit • Profit and Loss (P&L) Statement presents

information about the revenues generated and
the expenses incurred by the company
- Tax
• Helps the reader understand the net profit /
income earned by the company in the
specified financial year.
Profit after Tax
• The basic equation underlying the P&L
statement is Net Income = Revenue –
Expenses.
Financial Statement : Profit / Loss statement
Revenue
Revenue represents the gross inflow of
cash, receivables or other consideration
arising during the ordinary course of
the company from the sale of goods,
providing services and use by the
others of company resources.
It shows how the total inflows of
economic resources to a company
Expenses
Expenses are basically anything that
causes an outflow for the company.
These include cost of goods sold, SG&A
expenses, R&D expenses, Interest
expenses, Employee benefit expenses,
Depreciation and amortisation expenses,
Tax-related expense and other expenses.
Financial Statement: Hindustan Unilever Ltd.

Source: https://blog.stockedge.com/
Financial Statement: Profit / Loss statement
Financial Statement : Balance Sheet

• Presents information about the value of the resources controlled by a company at a

specific point of time.

• This is done by showing what a company owns (assets) and what a company owes (equity
and liabilities).

• Total Assets = Total Equity + Total Liabilities”.

 Financial Statement : Balance Sheet

Balance Sheet

Assets Equity & Liabilities

Current Assets Non-Current Assets Equity Liabilitie

s
Sum total of
Highly liquid ,
Share
include Cash, Tangible Intangible Others
Capital and Current Liabilities Non-Current Liabilities
inventory, trade
Reserves &
Receivables
Physical Non- Include WIP, Surplus
Assets Expected to Expected to
physical Loans Out,
settle with a settle later
Assets DTAs
year than 1 year
Financial Statement: Balance Sheet
Financial Statement: Cashflow statement

• These activities are associated

with the day-to-day normal
operations of the company that
create revenue

• Cash inflows result from cash

sales and from collection of
accounts receivables.

• Cash outflows result from cash

payments for inventory, salaries,
taxes, other operating-related
expenses and paying accounts
payable.
Financial Statement: Cashflow statement

• These are the activities associated

with any sales or purchases of assets
and financial investments along with
income received from financial
investments.

• Purchase of an asset represents

money spent for any capital expansion

• Sale of an asset represents money

received because of selling existing
property, plant, equipment or part of
business operations.
• Purchase of a financial investment represents outflow of
cash due to investment of surplus cash in financial
instruments (bank FD, MF and corporate bonds).

• Sale of a financial investment represents inflow of cash due

to redemption of such financial investments.
Financial Statement: Cashflow statement

• It includes activities related to

obtaining or repaying capital, such as
equity and debt.

• Two primary sources of capital:

Shareholders and Financial creditors.

• Cash inflows: Cash receipts from

issuing stock (common or preferred) or
bonds (borrowing from FIs).

• Cash outflows: Cash payments to

repurchase equity (e.g. treasury
stock), pay divident or to repay bonds
and other borrowings from financial
institutions.
 1 Financial Statement
2 Ratio Analysis

Sections
 Ratio Analysis

Ratios

Liquidity Solvency Profitability Turnover

To measure the To measure how

To measure the capability of a efficiently a
company to To measure the
capability of a company is
maintain its ability of the
company meeting converting its
financial health by company to
its short-term debt working capital
meeting long-term generate profits.
obligations components into
debt obligations revenue
Ratio Analysis: Liquidity Ratio

To measure the capability of a company meeting its short-term debt obligations

Ratio Description Formula

Current Ratio To assess a company’s ability to

meet its current liabilities

Quick Ratio A more conservative approach

when compared to current ratio,
as it only include highly-liquid
assets only.

Cash Ratio It measures the immediate

liquidity position of a company in
the state of crisis, also known as
‘absolute liquidity ratio’
Ratio Analysis: Solvency Ratio

Measure capability of a company’s cash flow to sustain the long-term financial health of the company by
meeting its long-term debt obligations.
Ratio Description Formula

Debt to Total Assets Used to measure the amount of assets

that have been finance through debt
and not equity

Equity Ratio Measures the proportion of owners’

fund used to finance company's assets.

Debt to Equity Ratio Measures the degree to which a

company is financing its operations
through debt for every unit of equity.

Financial Leverage Measures the amount of assets

Ratio supported by one money unit of equity,
also known as ‘equity multiplier’
Ratio Analysis: Solvency Ratio

Measure capability of a company’s cash flow to sustain the long-term financial health of the company by
meeting its long-term debt obligations.

Ratio Description Formula

Proprietary Ratio Indicates the portion of total

assets financed by shareholders.

Capital Gearing Ratio Shows the proportion of fixed

interest bearing capital to funds
belonging to equity shareholders

Interest Coverage Used to determine a company’s

Ratio ability to fulfil the interest
obligations on its existing debt.
Ratio Analysis: Solvency Ratio

Measure capability of a company’s cash flow to sustain the long-term financial health of the company by
meeting its long-term debt obligations.
Ratio Description Formula

Debt Service Used to determine a company's ability to

Coverage Ratio fulfil all debt-related obligations (such as
interest payments and principal
instalments).
Preference Dividend Measures a company's ability to pay
Coverage Ratio dividend on preference capital.

Fixed Charges Measures how many times a company's

Coverage Ratio cash flow meets its fixed-charge
obligations.
Ratio Analysis: Profitability Ratio

Measure the profitability or the operational efficiency of an entity. These ratios reflect the results of
business operations

Ratio Description Formula

Gross Profit Margin Used to measure the proportion of money left

from revenues after deducting the costs of goods
sold.

Net Profit Ratio Measures the percentage of profit from its net
sales, after deducting all sales related expenses.

Return on Equity Used to measure the returns earned by a

company on its equity share capital.

Return on Measure the return on investments made by the ROI = Net Investment Gain / Cost
Investment owner. of Investment
Ratio Analysis: Profitability Ratio

Measure the profitability or the operational efficiency of an entity. These ratios reflect the results of
business operations

Ratio Description Formula

Return on Capital Measures how efficiently a company is

Employed (ROCE) utilising its capital to generate profits.

Operating Margin Indicates the percentage of money that is

left after factoring for cost of goods sold

EBITDA Margin Measures a company’s operating

profitability as a percentage of its operating
revenue
Price to Earnings Measures the amount that investors are
Ratio (P/E Ratio) willing to pay for each rupee of the
company's earnings.
Ratio Analysis: Activity / Turnover Ratio

Measure how efficiently a company is using its working capital components to convert them into revenue.
Expressed in terms of times or rate. Referred to as efficiency, performance or asset management ratios.
Ratio Description Formula

Total Assets Turnover Measures a company’s ability to

Ratio generate revenue for each money
unit value of assets.
Fixed Asset Turnover Measures how efficiently a company
Ratio is able to generate revenue from its
investments in fixed assets.
Capital Turnover Ratio Measures the relationship between
the sales of a company and its net
assets (total assets – total liabilities).
 Ratio Analysis: Activity / Turnover Ratio

Measure the profitability or the operational efficiency of an entity. These ratios reflect the results of
business operations
Ratio Description Formula

Current Assets Measures how efficiently a firm is able

Turnover Ratio to generate revenue using its current
assets.
Working Capital Measures how effectively a company is
Turnover Ratio using its working capital to support a
given level of sales.
Where, Average working capital =

Receivables (Debtors) Measures the speed of receivables

Turnover Ratio being collected and how that affects the
liquidity position of the firm.
 Ratio Analysis: Activity / Turnover Ratio

Measure the profitability or the operational efficiency of an entity. These ratios reflect the results of
business operations

Ratio Description Formula

Payables Shows the speed of which the firm is able

Turnover Ratio to pay off its liabilities.

Inventory Established the relationship between the

Turnover Ratio cost of goods sold during the year and
average inventory held during the year.
Cash Used to calculate the number of days it
Conversion takes for a company to convert its
Cycle working capital into revenue. Where,
 Ratio Analysis

Ratios

Liquidity Solvency Profitability Turnover

To measure the To measure how

To measure the capability of a efficiently a
company to To measure the
capability of a company is
maintain its ability of the
company meeting converting its
financial health by company to
its short-term debt working capital
meeting long-term generate profits.
obligations components into
debt obligations revenue
Ernst & Young LLP
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