Financial Management II

Financial Control and Ratio Analysis

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis

A basic limitation of the traditional financial

statements comprising the balance sheet and the
profit and loss account is that they do not give all
the information related to the financial operations
of a firm.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis

Nevertheless, they provide some extremely useful

information to the extent that the balance sheet
mirrors the financial position on a particular date
in terms of the structure of assets, liabilities and
owners’ equity, and so on.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis

The profit and loss account shows the results of

operations during a certain period of time in
terms of revenues obtained and the cost incurred
during the year.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis
Steps in the Financial Statement Analysis:

The first task of a financial analyst is to select the

information relevant to the decision under
consideration from the total information
contained in the financial statements.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis
Steps in the Financial Statement Analysis:

The second step is to arrange the information in a

way to highlight significant relationships.

The final step is interpretation and drawing of

inferences and conclusions.

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis
Steps in the Financial Statement Analysis:

In brief, financial analysis is the process of

selection, relation and evaluation

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Financial Statement Analysis
Ratio Analysis:

• Liquidity
• Activity/Turnover/Efficiency
• Solvency
• Profitability

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Liquidity Ratios:
Liquidity ratio: Stock - inventory

Tells about short-term liquidity position of the company.

• Current ratio = Total current assets/Total current liabilities

• Quick ratio = (Total current assets- stock)/Total current

liabilities

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Turnover Ratios:
Turnover/activity or efficiency ratio: Tells how efficiently
firm is utilizing the assets or stock to convert them into
sales.

• Stock turnover ratio: Sales/Stock

• Total assets turnover ratio: Sales/Total assets

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Solvency Ratios:
Solvency ratio: ability of the firm to meet long term
liabilities (repayment of loans).

• Debt ratio: long-term debt/total assets

• Interest coverage ratio: EBIT/Interest

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad
Profitability Ratios:
Profitability ratio: Tells about the financial soundness of the
firm.

Two types: with respect to sales and to capital (or assets)

• Net profit margin: Net Profit/Sales (%)

• ROA: Net profit/Total assets (%)

• Return to shareholders’ capital: Net profit/Equity share
capital
Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business
School (IBS) Hyderabad
Financial Control and Ratio Analysis

Thank You

Dr. Ajay Prasad Adepu, Assistant Professor ICFAI Business

School (IBS) Hyderabad