Performance

evaluation of
companies
Presented by:
Muhammad Arham Aleem 13456
Mohammad Wajahat Ali
Muhammad Soomar Khan- 19575
Mohammad Sabih

Performance
Performance evaluation
evaluation
of
of companies
companies
A Financial Ratio is
an index that
relates two
accounting
numbers and is
obtained by
dividing one
number by the
other.

Types of
Comparisons
Internal
Comparisons
External
Comparisons

External Comparisons
and Sources of
Industry Ratios
This involves
comparing the ratios
of one firm with
those of similar firms
or with industry
averages.
Similarity is
important as one
should compare
apples to apples.

Examples:
Robert Morris
Associates
Dun &
Bradstreet
Almanac of
Business and
Industrial
Financial Ratios

Liquidity Ratios
Balance Sheet Ratios

Current

Liquidity Ratios

Current Assets
Current Liabilities

Shows a firms
ability to cover its
current liabilities
with its current
assets.

For Basket Wonders

December 31, 2003
$1,195 = 2.39
$500

Liquidity Ratio
Comparisons
Current Ratio
Year
2003
2002
2001

BW
2.39
2.26
1.91

Industry
2.15
2.09
2.01

Ratio is stronger than the industry average.

Liquidity Ratios
Balance Sheet Ratios

Acid-Test (Quick)

Liquidity Ratios

Current Assets - Inv

Current Liabilities

Shows a firms
ability to meet
current liabilities
with its most liquid
assets.

For Basket Wonders

December 31, 2003
$1,195 - $696 = 1.00
$500

Liquidity Ratio
Comparisons
Acid-Test Ratio
Year
2003
2002
2001

BW
1.00
1.04
1.11

Industry
1.25
1.23
1.25

Ratio is weaker than the industry average.

Summary of the
Liquidity Ratio
Comparisons
Ratio
BW
Industry
Current
2.39
2.15
Acid-Test 1.00
1.25
Strong current ratio and weak acidtest ratio indicates a potential
problem in the inventories account.
Note that this industry has a
relatively high level of inventories.

Current
Current and
and Acid
Acid test
test Ratio
Ratio
--- Trend
Trend Analysis
Analysis
Comparison
Comparison

Summary of the
Liquidity Trend
Analyses

The current ratio for BW has been rising

at the same time the acid-test ratio has
been declining.

The current ratio for the industry has

been rising slowly at the same time
the acid-test ratio has been relatively
stable.
This indicates that inventories are a
significant problem for BW.

Financial Leverage
Ratios
Balance Sheet Ratios
Financial Leverage
Ratios

Shows the extent to

which the firm is
financed by debt.

Debt-to-Equity
Total Debt
Shareholders Equity
For Basket Wonders
December 31, 2003
$1,030 = .90
$1,139

Financial Leverage
Ratio Comparisons
Debt-to-Equity Ratio
Year
2003
2002
2001

BW
.90
.88
.81

Industry
.90
.90
.89

BW has average debt utilization

relative to the industry average.

Financial Leverage
Ratios
Balance Sheet Ratios
Financial Leverage
Ratios

Shows the
percentage of the
firms assets that
are supported by
debt financing.

Debt-to-Total-Assets
Total Debt
Total Assets
For Basket Wonders
December 31, 2003
$1,030 = .47
$2,169

Financial Leverage
Ratio Comparisons
Debt-to-Total-Asset Ratio
Year
2003
2002
2001

BW
.47
.47
.45

Industry
.47
.47
.47

BW has average debt utilization

relative to the industry average.

Financial Leverage
Ratios
Balance Sheet Ratios
Financial Leverage
Ratios
Shows the relative
importance of longterm debt to the longterm financing of the
firm.

Total Capitalization
(i.e., LT-Debt + Equity)

Total Debt
Total Capitalization
For Basket Wonders
December 31, 2003
$1,030 = .62
$1,669

Financial Leverage
Ratio Comparisons
Total Capitalization Ratio
Year
2003
2002
2001

BW
.62
.62
.67

Industry
.60
.61
.62

BW has average long-term debt utilization

relative to the industry average.

Coverage Ratios
Income Statement
Ratios
Coverage Ratios

Indicates a firms
ability to cover
interest charges.

Interest Coverage
EBIT
Interest Charges
For Basket Wonders
December 31, 2003
$210 = 3.56
$59

Coverage
Ratio Comparisons
Interest Coverage Ratio
Year
2003
2002
2001

BW
3.56
4.35
10.30

Industry
5.19
5.02
4.66

BW has below average interest coverage

relative to the industry average.

Coverage Ratio -Trend Analysis

Comparison

Summary of the
Coverage Trend
Analysis

The interest coverage ratio for BW has

been falling since 2001. It has been
below industry averages for the past
two years.

This indicates that low earnings (EBIT)

may be a potential problem for BW.
Note, we know that debt levels are in
line with the industry averages.

Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates quality of
receivables and how
successful the firm is in
its collections.

Receivable Turnover
(Assume all sales are credit sales.)

Annual Net Credit Sales

Receivables
For Basket Wonders
December 31, 2003

$2,211 = 5.61
$394

Activity Ratios
Income Statement /
Balance Sheet
Ratios

Avg Collection Period

Activity Ratios

For Basket Wonders

December 31, 2003

Average number of
days that receivables
are outstanding.
(or RT in days)

Days in the Year

Receivable Turnover

365
5.61

= 65 days

Activity
Ratio Comparisons
Average Collection Period
Year
2003
2002
2001

BW
65.0
71.1
83.6

Industry
65.7
66.3
69.2

BW has improved the average collection

period to that of the industry average.

Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the
promptness of
payment to suppliers
by the firm.

Payable Turnover
(Assume annual credit
(PT)
purchases = $1,551.)
Annual Credit Purchases
Accounts Payable
For Basket Wonders
December
$1551 31, 2003
= 16.5
$94

Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Average number of
days that payables are
outstanding.

PT in Days
Days in the Year
Payable Turnover
For Basket Wonders
December 31, 2003
365
16.5

= 22.1 days

Activity
Ratio Comparisons
Payable Turnover in Days
Year
2003
2002
2001

BW
22.1
25.4
43.5

Industry
46.7
51.1
48.5

BW has improved the PT in Days.

Is this good?

Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the
effectiveness of the
inventory management
practices of the firm.

Inventory Turnover
Cost of Goods Sold
Inventory
For Basket Wonders
December 31, 2003
$1,599 = 2.30
$696

Activity
Ratio Comparisons
Inventory Turnover Ratio
Year
2003
2002
2001

BW
2.30
2.44
2.64

Industry
3.45
3.76
3.69

BW has a very poor inventory turnover ratio.

Inventory Turnover
Ratio --Trend Analysis
Comparison

Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the overall
effectiveness of the firm
in utilizing its assets to
generate sales.

Total Asset Turnover

Net Sales
Total Assets
For Basket Wonders
December 31, 2003
$2,211 = 1.02
$2,169

Activity
Ratio Comparisons
Total Asset Turnover Ratio
Year
2003
2002
2001

BW
1.02
1.03
1.01

Industry
1.17
1.14
1.13

BW has a weak total asset turnover ratio.

Why is this ratio considered weak?

Profitability Ratios
Income Statement /
Balance Sheet
Ratios
Profitability Ratios
Indicates the efficiency
of operations and firm
pricing policies.

Gross Profit Margin

Gross Profit
Net Sales
For Basket Wonders
December 31, 2003
$612 = .277
$2,211

Profitability
Ratio Comparisons
Gross Profit Margin
Year
2003
2002
2001

BW
27.7%
28.7
31.3

Industry
31.1%
30.8
27.6

BW has a weak Gross Profit Margin.

Gross Profit Margin -Trend Analysis

Comparison

Profitability Ratios
Income Statement /
Balance Sheet
Ratios
Profitability Ratios
Indicates the firms
profitability after taking
account of all expenses
and income taxes.

Net Profit Margin

Net Profit after Taxes
Net Sales
For Basket Wonders
December 31, 2003
$91 = .041
$2,211

Profitability
Comparisons

Ratio

Net Profit Margin

Year
2003
2002
2001

BW
4.1%
4.9
9.0

Industry
8.2%
8.1
7.6

BW has a poor Net Profit Margin.

Net Profit Margin -Trend Analysis

Comparison

Profitability Ratios
Income Statement /
Balance Sheet
Ratios

Return on Investment

Profitability Ratios
Indicates the
profitability on the
assets of the firm (after
all expenses and taxes).

Net Profit after Taxes

Total Assets
For Basket Wonders
December 31, 2003
$91 = .042
$2,160

Profitability
Comparisons

Ratio

Return on Investment
Year
2003
2002
2001

BW
4.2%
5.0
9.1

Industry
9.8%
9.1
10.8

BW has a poor Return on Investment.

Return on Investment
Trend Analysis
Comparison

Profitability Ratios
Income Statement /
Balance Sheet
Ratios
Profitability Ratios
Indicates the profitability
to the shareholders of
the firm (after all
expenses and taxes).

Return on Equity
Net Profit after Taxes
Shareholders Equity
For Basket Wonders
December 31, 2003
$91 = .08
$1,139

Profitability
Comparisons

Ratio

Return on Equity
Year
2003
2002
2001

BW
8.0%
9.4
16.6

Industry
17.9%
17.2
20.4

BW has a poor Return on Equity.

Return on Equity -Trend Analysis

Comparison

Summary
Summary of
of the
the
Profitability
Profitability Trend
Trend
Analyses
Analyses

The profitability ratios for BW have ALL

been falling since 2001. Each has been
below the industry averages for the
past three years.
This indicates that COGS and
administrative costs may both be too
high and a potential problem for BW.
Note, this result is consistent with the
low interest coverage ratio.

Summary
Summary of
of Ratio
Ratio
Analyses
Analyses
Inventories are too high.
May be paying off creditors
(accounts payable) too soon.
COGS may be too high.
Selling, general, and
administrative costs may be too
high.

Other
Other types
types of
of analysis
analysis

In addition to financial ratio

analysis, it is often useful to
express balance sheet and
income statement items as
percentages

1. Common size Analysis

2. Index Size Analysis

Common
Common size
size analysis
analysis

Balance sheet items are divided

by total assets and all income
statement items are divided by
net sales or revenues.

Regular (thousands of $)
Assets

2001

2002

2003

Common-Size (%)
2001

2002

2003

Cash

148

100

90

12.10

4.89

4.15

AR
Inv
Other CA

283
322
10

410
616
14

394
696
15

23.14
26.33
0.82

20.06
30.14
0.68

18.17
32.09
0.69

Tot CA
Net FA
LT Inv
Other LT

763
349
0
111

1,140
631
50
223

1,195
701
50
223

62.39
28.54
0.00
9.08

55.77
30.87
2.45
10.91

55.09
32.32
2.31
10.28

1,223

2,044

2,169

100.0

100.0

100.0

Tot Assets

Regular (thousands of $)
Liab+Equity
Note
Acct
Accr
Other

Pay
Pay
Tax
Accr

2001

2002

2003

Common-Size (%)
2001

2002

2003

290
81
13
15

295
94
16
100

290
94
16
100

23.71
6.62
1.06
1.23

14.43
4.60
0.78
4.89

13.37
4.33
0.74
4.61

Tot CL
LT Debt
Equity

399
150
674

505
453
1,086

500
530
1,139

32.62
12.26
55.11

24.71
22.16
53.13

23.05
24.44
52.51

Tot L+E

1,223

2,044

2,169

100.0

100.0

100.0

Index
Index size
size analysis
analysis
Balance sheet or income
statement figures for a base
year equal 100.0 (percent) and
subsequent financial statement
items are expressed as
percentages of their values in
the base year.

Regular (thousands of $)
Assets
Cash
AR
Inv

2001

2002

2003

Indexed (%)
2001

2002

2003

148
283
322

100
410
616

90
394
696

100.0
100.0
100.0

67.6
144.9
191.3

60.8
139.2
216.1

10

14

15

100.0

140.0

150.0

Tot CA
Net FA

763
349

1,140
631

1,195
701

100.0
100.0

149.4
180.8

156.6
200.9

LT Inv

50

50

100.0

inf.

inf.

111

223

223

100.0

200.9

200.9

1,223

2,044

2,169

100.0

167.1

177.4

Other CA

Other LT
Tot Assets

Regular (thousands of $)
Liab+Equity
Note Pay
Acct Pay
Accr Tax

2001

2002

2003

Indexed (%)
2001

2002

2003

290
81
13

295
94
16

290
94
16

100.0
100.0
100.0

101.7
116.0
123.1

100.0
116.0
123.1

15

100

100

100.0

666.7

666.7

Tot CL
LT Debt
Equity

399
150
674

505
453
1,086

500
530
1,139

100.0
100.0
100.0

126.6
302.0
161.1

125.3
353.3
169.0

Tot L+E

1,223

2,044

2,169

100.0

167.1

177.4

Other Accr

Application of Financial Analysis

in Management
To make an investment in any business, the financial analysis of
a company is examined and on its bases the decision is taken.
The objective would be to discover possible weaknesses and any
problem areas.
Criteria:
Revenue pattern
Profitability
Steady growth

Moreover through Financial Analysis an investor can

understand business profitability, solvency, expected return
and risks to make correct decision.

Financial Analysis help companies to achieve their financial

goals and objectives.

Different Groups
Perspective
As

a Shareholder

Return

on capital
Earning per share
Dividends per share
Dividend yield
Liquidity ratios

Different Groups
Perspective
As

a lender
(Banks)

Debt

to equity ratio
Interest coverage ratio
Dividend payout ratio
Dividend yield

Different Groups
Perspective
As

a Creditor

Profitability

ratios
Liquidity ratios
Accounts Payable turnover Ratio

Limitatations to ratio
analysis
Ratios

are tools of quantitative analysis,

which ignore qualitative points of view.
Ratios are generally distorted by inflation.
Ratios give false result, if they are calculated
from incorrect accounting data.
Ratios are calculated on the basis of past
data. Therefore, they do not provide complete
information for future forecasting.
Ratios may be misleading, if they are based
on false or window-dressed accounting
information.