F I N A N C I A L S TAT E M E N T

A N A LY S I S
Basic Credit Analysis Training
Programme

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 Learning Objectives
• At the end of this module, participants should
easily:
 Read and understand all the terms in a
customer’s financial statement report
 Spread the financial statement using the bank’s
customized
spreadsheet
 Generate appropriate ratios from the
spreadsheet
 Interprete the ratios and make conclusions
regarding the customer’s financial health
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 Course Outline
• Financial Statement Analysis
• Some Key Terms
• Components of Annual Report
• The Art of Spreading
• Group discussions and brainstorming
• Generating ratios for lending:
 Profitability
 Asset Management or Efficiency
 Liquidity
 Leverage
 Cash Flow
• Interpretation of RatiosThe KRC Limited
Financial Statement Analysis
Financial analysis is the practice of examining a
company’s performance from the perspective of its
industry and economic environment to arrive at a
decision or recommendation.
Fundamental financial analysis commences with the
information found in a company’s financial reports.

Components of a financial report include

 Balance Sheet
 Income Statement
 Cash Flow Statement
 Equity Statement

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Financial Statement Analysis
The Balance Sheet
Key features:
•Shows the financial position of a business.
•Stated as a “snapshot” or financial picture
of the company at a specified point in time
(i.e., as of December 31, 2022)
•Has three sections: assets, liabilities, and
shareholder’s equity
•Assets = Liabilities + Shareholders Equity

Assets: What the company owns

Liabilities: What the company owes.
Equity: The amount of funds belonging
to the owners of the company.

The difference between a company’s

assets and its liabilities is called the “
net asset”. It is the same as its
shareholder’s funds or equity

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Financial Statement Analysis
The Income Statement
Key features:
•Shows the revenues and expenses of a business
•Expressed over a period (i.e., 1 year, 1 quarter, year-to-date,
etc.)
•Uses accounting principles such as matching and accruals to
represent figures (not presented on a cash basis)
•Used to assess profitability

• Sales or Turnover: The total revenue realized by the

company within the period.
• Cost of goods sold / Cost of sales: The direct cost
associated with the company’s core production process.
• Gross profit: Sales- cost of sales
• Operating expenses: The indirect cost associated with the
day–to–day running of the business.
• Profit before Tax
• Tax
• Profit after Tax

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Financial Statement Analysis
The Statement of Cashflow
Key features:
•Shows the increases and decreases in
cash
•Expressed over a period of time (i.e., 1
year, 1 quarter, year-to-date, etc.)
•Undoes accrual accounting principles to
show pure cash movements
•Has three sections: cash from
operations, cash used in investing and
cash from financing
•Shows the net change in the cash
balance from the start to the end of the
period

Sources: Shows the sources of cash

in a business i.e., equity, loan or
sales.
Uses: shows the uses of cash within
a specified period i.e., capital or
operating expenditure, tax etc.
Closing Balance: Sources- uses. The
closing balance of one period
becomes the opening balance of the
following period.

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Financial Statement Analysis
The Auditor’s report
External Auditors
The auditor has a responsibility to plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether caused by
error or fraud.
The auditor's responsibility is to express an opinion on the
financial statements.

A reputable auditor and unqualified

Caution… statement
does not preclude fraud or misinterpretation or
conflict of interest.

Opinion
In our opinion, the accompanying financial statements
give a true and fair view of the financial position of
Nestle Nigeria Plc as at 31 December 2022, and its
financial performance and cash flows for the year then
ended in accordance with International Financial Reporting
Standards, the provisions of the Companies and Allied
Matters Act, 2020 and in compliance with the Financial
Reporting Council of Nigeria Act No. 6, 2011

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Financial Statement Analysis
Types of Auditor’s report

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 Terms to Note
• Balance Sheet
 Marketable Securities
 Inventory/Stock
 Accounts Receivables, Trade Receivables, Trade
Debtors
 Prepayments/Prepaid Expenses
 Accounts Payables, Trade Payables, Trade
Creditors
 Taxation Payable
 Unearned Revenue/Income
 Plant
 Investments in Subsidiaries

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 Terms to Note
• Income Statement
 Sales, Revenue, Turnover
 Cost of Sales, Cost of Goods Sold
 Operating Expenses/ Selling, General & Admin
Expenses
 Depreciation Expense
 Sundry Income
 Income Tax Expense
 Impairments
 Other gains & losses

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F I N A N C I A L S TAT E M E N T
A N A LY S I S
- Spreads
- Ratios
- Ratios Interpretation

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THE ART OF SPREADING
- Objectives
- Limitations
- Steps in Spreading

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 Spreads
• What is spreading and why do we need to do
it?

• The spreading process transfers the

quantitative information from the customer’s
financial statement report to the bank’s
spreadsheet for lending.

• The process care and quality of the

spreadsheet determines the ratios and
influence lending decisions

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 Objectives of Spreading
• Standardizes companies' financials

• Allows historical comparative analysis

• Facilitates quick and easy analysis

• Allows Intra and Intercompany

comparison

• Allows trend analysis

• Compresses voluminous data into few

sheets
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 Limitations of Spreading
• Financials are historical.
• Financial statements prepared at specific
periods; year-end figures can be
manipulated to reflect favorable positions.
• Spreadsheets exclude non-financial
information like workforce quality, R&D,
Product basket, industry differences etc.
• Choice and change of accounting
methods and dates affect comparison
of ratios.

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 Steps in Spreading
STEPS ACTIVITIES
ONE Determine appropriate spreadsheet for borrower.
- Financial?
- Non-Financial?

TWO Obtain 3-5 years financial statements (Audited)

THREE Enter Balance Sheet items first:
- Assets arranged in descending order of e.g. cash, account
receivable, inventory through to fixed assets
Liabilities follow the same pattern
FOUR Enter Income Statement Items
Reconcile Net worth
FIVE Compute Ratios
FSA - Steps

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 CLASS EXERCISE

Exercise 1

Spread the financials of

Honeywell Flour Mill

Exercise 2

Divide the Class into groups to spread

the financials of Nestle Nigeria Plc.

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R AT I O A N A LY S I S
- Purpose
- Ratios Generation
- Ratios Interpretation
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What are Financial Ratios?

• Financial ratios are tools used to analyze a

company’s financial performance by comparing
two or more financial variables.

• These ratios are calculated by dividing one

financial variable by another and they help
investors and stakeholders gain insights into a
company’s financial health and performance.
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 Ratio Analysis
• Purposes - Financial ratios are used
for:
 Comparison of risk/return of different
firms to help investors and creditors
make investment and credit decisions.
 Evaluation of changes in performance
over time.
 Comparison among firms within a
single industry.
 Provides quick and relatively simple
means of examining the financial condition
of a business.
 Provides the profile of a firm in terms
of economic characteristics,
competitive strategies, investment
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 Types of Ratio Analysis
• Vertical Analysis
 An “up and down” analysis of the
financial statement also called common
sizing.
 Statement of Financial Position
as a percentage of
total assets
 Income statement items as a percentage
of sales
• Trend Analysis
 Historical analyses comparing year-on-year
performance
 Critical for forming assumptions for
projections. THE KRC LIMITED
 Vertical Analysis
N'000

ASSETS: 2021 2020 2021 (C/S) 2020 (C/S)

Cash & Cash Eqv. 16,720,040 30,349,614 3.46% 6.83%

Marketable Securities

Deposit for FX & Imports 11,891,422 11,575,510 2.46% 2.60%

Prepayments 2,852,868 3,745,422 0.59% 0.84%

Deposit for Supplies/Advance Payment to Suppliers 17,212,728 3,522,110 3.57% 0.79%

Accounts Receivables 2,865,288 3,983,145 0.59% 0.90%

Inventory 62,067,403 35,992,172 12.86% 8.10%

Due from Related Parties 3,524,255 1,354,963 0.73% 0.30%

Sundry CA (other debtors) 1,112,485 1,597,218 0.23% 0.36%

TOTAL CURRENT ASSETS 118,246,489 92,120,154 24.50% 20.73%

Leasehold, Land & Building 76,106,392 73,485,235 15.77% 16.53%

Plant & Machinery / Returnable Packaging Materials 360,148,168 333,538,048 74.62% 75.05%

Motor Vehicles 31,578,991 29,177,737 6.54% 6.57%

Furniture & Equipment 37,829,837 34,781,475 7.84% 7.83%

Less Accumulated Depreciation (300,898,230) (274,731,044) -62.34% -61.82%

Construction-in-Progress 50,865,376 16,117,670 10.54% 3.63%

TOTAL FIXED ASSETS 255,630,534 212,369,121 52.97% 47.78%

 Horizontal Analysis
ASSETS: 2021 2020 Horizontal

Cash & Cash Eqv. 16,720,040 30,349,614 -44.91%

Marketable Securities

Deposit for FX & Imports 11,891,422 11,575,510 2.73%

Prepayments 2,852,868 3,745,422 -23.83%

Deposit for Supplies/Advance Payment to Suppliers 17,212,728 3,522,110 388.71%

Accounts Receivables 2,865,288 3,983,145 -28.06%

Inventory 62,067,403 35,992,172 72.45%

Due from Related Parties 3,524,255 1,354,963 160.10%

Sundry CA (other debtors) 1,112,485 1,597,218 -30.35%

TOTAL CURRENT ASSETS 118,246,489 92,120,154 28.36%

 Ratio Analysis
• Ratios can be grouped into certain categories, which
reflect particular aspects of financial performance
or position.
 Profitability Ratios
 Efficiency Ratios
 Liquidity Ratios
 Gearing Ratios
 Investment Ratios

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 Profitability Ratios
• Profitability ratios express the profits made in relation to
other key figures in the financial statements or to some
business resource.
• The following ratios are used:
Ratio Formula
Change in Sales (Difference in Sales/Prior yr sales) *100
COS/Sales (%) (COS/Sales) * 100
GPM (%) (Gross Profit/Sales) *100
SGA/Sales (%) (Operating Expenses/Sales) *100
OPM (%) (Operating Profit/Sales) *100
Insert PBT & PAT From Spreadsheet
ROS (%) (NPAT/Sales) * 100
EBIT Insert from spreadsheet

ROA (NPAT/Total Assets) * 100

ROE (NPAT/Networth) *100
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 Efficiency Ratios
• Efficiency ratios look at the ways in which various resources
of the business are managed.
• The following ratios look at the asset management:
Ratio Formula
Trading Assets – TA (N’m) Inventory (INV) + Accounts Receivables (AR)
Spontaneous Financing - SF Accounts Payable (AP) + Accrued Expenses (AE)
(N’m)
Working Investment – WI TA - SF
(N’m)
ARDOH (Days) (AR/Sales) * 365
INVDOH (Days) ((INV/COS) * 365
APDOH (Days) (AP/COS) * 365
ATO (Asset Turnover) Sales /Total Assets
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 Liquidity Ratios
• These ratios examine the relationship between liquid resources
held and creditors due for payment in the near future.

Ratio Formula
Working Capital - WC (N’m) Current Assets (CA) – Current Liabilities
(CL)
Current Ratio - CR CA/CL
Quick Ratio – QR (Acid Test (CA-INV)/CL
Ratio)
Cash Ratio (Cash + Marketable Securities)/CL

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 Leverage Ratios
• The level of gearing of a business is a very important factor in
assessing risk. High leverage ratios indicate commitments to
pay interest and principal. It increases the risk of bankruptcy
in the business.
Ratio Formula
Debt to Total Capital - DTC Total Interest Bearing Debt/Total Capital
Debt to Equity Ratio - DER Total interest bearing Debt/Total Equity
Asset Leverage - ALEV Total Assets/Networth
Interest Cover (IC) EBIT/Interest Expense

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Ratio Analysis for Lenders
Profitability
• Did they sell? How? Why?
• Production & Direct cost increases
• Management of operating expenses
• Did they borrow from banks? Impact on profitability
• Any tax rebates?
• Returns to Shareholders

Efficiency
• Are they managing their resources well?
• Were they able to increase non interest bearing
liabilities?
• Are receivables collection strategies working?
• How long do they hold inventory? Why?
• How quickly do they pay suppliers?

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Ratio Analysis for Lenders
Liquidity
• What funding structure are they pursuing? Aggressive,
moderate? Conservative? Why?
• Can they pay bills when they fall due?
• If there were issues impacting conversion of inventory
can they still pay bills?

Leverage
• Can they meet long term obligations as they fall due?
• Does EBIT cover interest expense
• Compared to industry players are they over leveraged?

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 CLASS EXERCISE

Generate and Interpret the

ratios generated from the
Spread of Nestle Nigeria
annual report.

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 CLASS EXERCISE

Nestle Nigeria Plc.

Interpreting the RATIOS.

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 Profitability Ratios
Name Gross Profit Net Profit Margin Return on Assets Return on
Margin (NPM) (ROA) Equity
(GPM) (ROE)
Description The viability of the The percentage of sales Return on every N1 of The percentage Return
business i.e. the that is converted into assets to shareholders on
profitability of core profit their investment
manufacturing or
retailing activity

Calculation Profit After Tax Profit After Tax Profit After

Gross Profit (PAT) (PAT) Tax (PAT)

Turnover Turnover Total Assets Shareholder

Funds
Explanation The percentage of Sales With a high GPM, can Is the company Profitability of equity
that is left after taking the company control making sufficient investment. Can the
away direct costs indirect cost and make profit from its assets shareholders get
good profit better return for
similar or less risk

Caution Measures only direct cost Affected by exceptional Historical. Affected by Book value of equity
items volatility of assets is used . Affected by
gearing and retention

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 Efficiency Ratios
Name Account Receivable Days Inventory Days on Account Payables Cash
on Hand (ARDOH) Hand (INV DOH) Days on Hand Conversion
(APDOH) Cycles
(Financing
Need)
Description Number of days before Number of Days Number of days Number of days
trade debts are inventory is held before taken to settle working capital is
collected sale creditors financed by non-
spontaneous fund

Calculation Trade Receivable x Trade Payable x

365 Inventory x 365 365 ARDOH + INVDOH

Revenue Cost of Sales Cost of Sales Less APDOH

Explanation The number of days of Days between receipt Number of days of Number of days
credit debtors are given of goods and sale. Can credit that the company is
to pay or actually taking indicate problem with creditors are giving actually out of
sales to us cash i.e. after
considering credit
from creditors
Note Compare to agreed credit Watch components and Compare to peer Watch the trend.
period and peer figures trend average
Note: DDOH + Inv
DOH = Operating
Cycle
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 Liquidity Ratios
Name Current Ratio Acid Test Cash Ratio Quick Sales
Value
Description Measures the Measures the Measures the Cash value of
company’s ability to company’s abilities to company’s abilities to all the
pay its short- term pay its short-term pay its short- term companies
assets liabilities in the event liabilities from cash easily salable
of stocks being and cash equivalents assets
illiquid
Calculation Cash + short A simple list
Current Assets - term marketable with a
Current Assets Inventory securities summed
total
Current Liabilities Current Liabilities Current Liabilities

Explanation The higher the How much of the How well can the firm How much of
better from a short- term creditors pay short-term creditors short- term
creditor’s can be paid without in a crisis situation? If creditors can be
perspective. A value selling stock? i.e. they have to be settled paid immediately
of from debtors and immediately in a crisis
1.5 to 2.0 is other current assets situation?
most common items
Caution Too high implies poor A static historical May lead to undue Assume
management measure emphasis on near- lender’s ability
cash (non-earning) to quickly take
items control
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 Leverage Ratios
Name Debt to Assets Debt to Debt to Equity
Capitalization
Description Measures the extent to which What proportion of all long Measures all lender’s claims
borrowed funds have been term claims is made up compared to ownership
used to finance the company’s of long term debts claims
assets

Calculation Total Debt Long-Term Debt Long-Term Debt

Total Assets Capitalization Networth

Explanation The higher the figure the By excluding short term The classic measure of
riskier from a lender’s view debt we get a clearer exposure. Industry
point picture of relative long term averages influence
commitment in the firm perceptions

Caution Assets may not reflect Be careful what is Assume ability to quickly
current market values included as LTD i.e. take control
deferred tax

Note Can be used as covenant Capitalization includes long Exclude intangibles

restriction term debt & net worth.
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Thank You

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