Project - Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS

FINAL PROJECT

TOPIC: FINANCIALRATIO ANALYSIS

OF MR. DENIM (PVT.) LTD.

SUBMITTED TO: MR. UMAR SAFDAR KAYANI

SUBMITTED BY: WAQAS SHABBIR

SP08-MBA-098 ZOHAIB AFTAB

SP08-MBA-100

SUBMISSION DATE: MAY29, 2009

SECTION “B”

COMSATS INSTITUTE OF INFORMATION TECHNOLOGY

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RATIO ANALYSIS

Financial ratios are useful indicators of a firm's performance and

financial situation. Most ratios can be calculated from information

provided by the financial statements. Financial ratios can be used to

analyze trends and to compare the firm's financials to those of other

firms. In some cases, ratio analysis can predict future bankruptcy.

Financial ratios can be classified according to the information

they provide. The following types of ratios frequently are used:

LIQUIDITY RATIOS

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Absolute Quick Ratio Cash/Current Liabilities

Net Working Capital Ratio Current Assets-Current Liabilities

Defensive Interval Cash/One Year Projected Expenditure

ACTIVITY RATIOS

Inventory Turn Over Cost of Good Sold/Inventory

Inventory Turn Over In Days 360*Inventory/Cost of Good Sold


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Debtor Turnover Sales/Trade Debtor

Collection Period 360*Receivable/Sale

Working Capital Turnover Sales/Working Capital

Fixed Asset Turnover Sales/Fixed Assets

Total Asset Turnover Sales/Total Assets

Payment Period 360*Creditor/Purchase

Operating CycleInventory Turn Over in Days + Receivable Turn Over in Days

SOLVENCY RATIOS

Times Interest Earned EBIT/Interest

Debt Ratio Total Debts/Total Assets

Equity Ratio Equity/Total Assets

Debt to Equity Long term debts/Equity

Debt To tangible net worth Total Debts/(Equity-Intangible Assets)

PROFITABILITY RATIOS

Net Profit Ratio Net Profit/Sale

Operating Profit Ratio Operating Profit/Sales

Gross Profit Ratio Gross Profit/Sale


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Operating Ratio Operating Expense/Sale

Return on Total Assets Net Profit/Total Assets

Return on Equity Net Profit/Equity

Return on Fixed Assets Net Profit/Fixed Assets

Return on InvestmentNet Profit/Total Assets-Investments-Deferred Cost

MARKET ANALYSIS

Degree of Financial Leverage EBIT/EBT

Price Earning Ratio Market Price per share/Earning Per share

Earning Per Share Net Profit/Number of Share issued

Book Value Per Share Total Equity/Number of Share issued

Dividend Yield Ratio Dividend Per Share/Market Value Per Share

Dividend Payout Ratio Dividend Per Share/Earning Per Share

Diluted Earning Per Share

Stock Dividend Per Share/Diluted Earning Per Share

Percentage of Retained Earnings (Total Income-Dividend)/Total Income


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LIQUIDITY RATIOS

Liquidity ratios provide information about a firm's ability to meet its

short-term financial obligations. They are of particular interest to those

extending short-term credit to the firm. Two frequently used liquidity

ratios are the current ratio (or working capital ratio) and the quick

ratio.

Items Required in Liquidity Ratio:

Current Assets

Current Liabilities

Inventory

Cash

Marketable Securities

CURRENT RATIO

Current Ratio = Current Assets

Current LiabilitiesQUICK RATIO

Quick Ratio = Current Assets - Inventory

Current Liabilities

CASH RATIO/ ABSOLUTE LIQUID RATIO

Cash Ratio = Cash + Marketable Securities


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Current Liabilities

WORKING CAPITAL RATIO

Net Working capital Ratio=Working Capital/Total Assets

LIQUDITY ANALYSIS

RATIOS YEARS RESULT

S

REASON OF

CHANGE

2007 2006

CURRENT RATIO 1.12 1.03 Favorable Increase in Book

Debts, A/R and

Cash.

QUICK RATIO 0.86 0.68 Favorable Increase in Book

Debts, A/R and

Cash.

ABSOLUTE RATIO 0.05 0.012 Favorable Increase in Cash

WORKING

CAPITAL

76,852,450 12,523,260 Favorable Increase in

current assets

NEW WORKING

CAPITAL RATIO

0.067 0.01367 Favorable Increase in

working capital

by 513.67 %.


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INTERPRETATION OF LIQUIDITY RATIOS

After the Liquidity Ratio Analysis of MR. Denim I considered the

liquidity of Denim is improved as compare to its previous year and it

gives favorable results. Short-term creditors prefer a high current ratio

since it reduces their risk because less the current liabilities and higher

the current ratio which means less the accounts payables and short

term liabilities hence short term creditors will be paid soon.

Liquidity analysis of MR. Denim shows positive results. The contribution

of highly liquid assets is very much encouraging because increase in

cash is 422.5%. Increase in cash will also helpful for the company to

maintain the business operations effectively by paying the supplier in

time and get benefits of discounts. It will also enhance the credibility of

the company, which further helpful for the suppliers and customer’s

attraction Inventories are decreased by 2.05%. Decrease in inventory

means there are less produced goods for satisfying the customers,

which ultimately cause of decrease in sales of company. Account

Receivables and Book Debts are increased by 48% and 78 %, which

means the net sales of the company this year is increased because of

that cash in hand, is increased 422.5 % compared to last year.

One drawback of the current ratio is that it includes inventory is

difficult to liquidate quickly and that have uncertain liquidation values.

The quick ratio is an alternative measure of liquidity that does not

include inventory in the current assets.


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Finally, the cash/Absolute Liquid ratio is the most conservative liquidity

ratio and the cash ratio of MR. Denim is improved very much as

compared to base year. The reason is sufficient increase in cash in

hand. This healthy increase in ratio result will assure that MR. Denim

can be paid its suppliers any time if needed urgently.

Working Capital of MR. Denim is also increased by 513.67 % as

compare to base year, which is also a good sign, and show that

company has enough capital to maintain its business operations. This

will also produce the credibility among suppliers and customers of the

company. Overall Company has a good strong current asset ratio and

also maintained quick ratio along with the healthy working capital so

liquidity of MR. Denim (PVT) Limited is in better position.

ACTIVITY RATIOS

Activity ratios indicate of how efficiently the firm utilizes its assets.

They sometimes are referred to as efficiency ratios, asset utilization

ratios, or asset management ratios.

Items Required in Activity Ratios:

Annual Sales

Purchases

Accounts Receivable

Accounts Payable

Net Fixed Assets

Total Assets


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ACCOUNT RECEIVABLES TURNOVER

Receivables Turnover =

Annual Credit Sales

Accounts Receivable

AVERAGE COLLECTION PERIOD

Average Collection Period = 360

Accounts Receivable Turnover

ACCOUNT PAYABLE TURNOVER

Account Payables Turnover = Purchases

Accounts Payables

AVERAGE PAYMENT PERIOD

Average Payment Period = 360

Accounts Payable Turnover

FIXED ASSET TURNOVER

Fixed Asset Turnover = Sale


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Net Fixed Asset

TOTAL ASSET TURNOVER

Total Asset Turnover = Sale

Total Assets

ACTIVITY ANALYSIS

RATIOS YEARS RESULTS REASON OF

CHANGE

2007 2006

INVENTORY

TURNOVER

6.20

Times

4.68

Times

Favorable Decrease in

Inventory more as

compare to CGS

INVENTORY

TURNOVER IN DAYS

58

Days

77

Days

Favorable Decrease in

Inventory more as

compare to CGS

DOBTORS

TURNOVER

4.32 6.03 Unfavorable Increase in sales by

27.10%

COLLECTION

PERIOD

84

Days

58

Days

Unfavorabl

e

Increase in sales by

27.10%

CREDITORS

TURNOVER

32 20.03 Favorable Creditors decreased

by 20.82.

PAYMENT PERIOD 11

Days

18

Days

Favorable Creditors decreased

by 20.82.


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FIXED ASSETS

TURNOVER

2.58 2.18 Favorable Increase in Fixed

Assets by 4.02%

TOTAL ASSETS

TURNOVER

0.90 0.88 Favorable Increase in Total

Assets by 24.41%.

WORKING CAPITAL

TURNOVER RATIO

13.43

Times

65

Times

Unfavorable Working capital

increased by

513.67%

OPERATING CYCLE 142

Days

135

Days

Unfavorable High average

collection period.

INTERPRETATION OF ACTIVITY RATIOS

Activity ratios are also known as efficiency or turnover ratios, measure

how effectively and efficiently the firm is utilizing its assets. Activity

ratios are also known as management ratios. Some of the aspects of

activity analysis are closely related to liquidity analysis. In this

session we will primarily focus on how effectively the firm is managing

two specific groups receivables and inventories and its total assets in

general.

Management of MR. Denim Limited is very efficient to operate its fixed

assets and overall efficiency of management has gone better as

compared with base year. Total assets, current assets, fixed assets;

working capital and cash all are increased with decent percentage,

which gives the proof of efficient management. Overall management

has been very successful in deploying its resources for the best of

company, which will definitely contribute to higher profits for company.


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Also management is very much efficient to pay its payables because

average collection period is higher than average payment periods

which mean management can use idle funds. Higher collection period

shows too liberal and inefficient credit collection performance and a

lower payment period shows in time payments to various stakeholders

and built repute about the company among its stakeholders. Less

inventory period will also helpful for the company to increase its sales

volume.

SOLVENCY RATIOS

The solvency ratios measure business risk, which shows the ability if

the business to pay its long term debts. Investors are very interested in

these ratios because they indicate the amount of debt your company

can handle. They also indicate the amount of investment you have in

your company

Items Required in Solvency Ratio:

EBIT

Interest Expense

Total Debts

Total Assets

Net Profit

Equity

TIMES INTEREST EARNED


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Times Interest Earned = EBIT

Interest Expense

DEBT RATIO

Debt Ratio = Total Debts

Total AssetsEQUITY RATIO

Equity Ratio = Equity

Total Assets

DEBT TO EQUITY RATIO

Debt to Equity Ratio = Total Debt

Equity

SOLVENCY ANALYSIS


CHANGE

2007 2006

TIME INTEREST

EARNED

1.61 1.01 Favorable Increase in profit

margin

DEBT RATIO 0.626 0.636 Favorable Increase in total


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assets by 24.41 %

PROPERITY/EQUITY

RATIO

37.35% 36.1% Favorable Increase in equity

by 28.7% & Total

Assets by 24.41%

DEBT TO EQUITY

RATIO

1.678 1.76 Favorable Increase in Equity

by 28.7%

INTERPRETATION ON SOLVENCY RATIOS

Solvency Analysis of MR. Denim (PVT) Limited is favorable because all

the ratios provided the favorable result which is a good strong and

positive indication towards firm’s ability to fulfill its long-term debts.

Time interest earned ratio shows that although financial cost is

increased but Earning before interest and tax increased by 28.58%

which means management has utilized the debt funds efficiently which

produced high profits and hence percentage of earnings through debts

are more than percentage of financial cost (interest payable) which is

14.8%.

Debt ratio is also decreased which is favorable for the company

because it means less contribution of external debts in business and

ultimately less interest will be paid and hence more profits will be

achieved. Result also shows that total equity of the company has

increased with 28.7% and total debts reduced by 4.3% which is also a

good sign for the company and it means that most of the working of

the company is done by equity rather than to use of external debts

which also reduced the fixed cost and financial burden on company. It


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also indicates that more percentage of the assets is being financed by

owner’s equity. Company’s current liabilities also increased by 32.7 %

but long term liabilities (loans) has decreased by 28.7% which is a

major contribution and because of this financial cost of business is

decreased. Company should try to reduce its current liabilities.

Although current year debt ratio result is favorable but this is because

of increase in current liabilities. Company’s Long Term debts paying

worth/ability is also improved.

PROFITABILITY RATIOS

Profitability ratios offer several different measures of the success of the

firm at generating profits.

Items Required In Profitability Ratios:

Sales

Cost of Goods Sold

Net Profit

Total Assets

Shareholder’s Equity

GROSS PROFIT MARGIN

Gross Profit Margin = Sales - Cost of Goods Sold

Sales

OPERATING PROFIT MARGIN


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Operating Profit Margin = Operating Profit

Sales

NET PROFIT MARGIN

Net Profit Margin = Net Profit After Tax

Sales

OPERATING RATIO

Operating Ratio = Operating Expenses

Sales

RETURN ON ASSETS

Return on Assets = Net Income

Total Assets

RETURN ON EQUITY

Return on Equity = Net Income

Shareholder Equity

RETURN ON INVESTMENT


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Return on Investment = Net Income

Investment

RETURN ON FIXED ASSET

Return on Fixed Asset = Net Income

Fixed Assets

PRIFITABILITY ANALYSIS


CHANGE

2007 2006

NET PROFIT RATIO 9.18% 9.4% Unfavorabl

e

N.P increased

with less % as

compare to sales

GROSSPROFIT RATIO 22.12% 22.8% Unfavorabl

e

G.P increased

with less % as

compare to sales

OPERATING PROFIT

RATIO

9.23% 9.77% Unfavorabl

e

O.P increased

with less % as

compare to sales

OPERATING RATIO 12.88% 13.02% Favorable Increase in sales


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by 27.10%.

RETURN ON

TOTALASSETS

8.32% 8.33% Unfavorabl

e

N.P increased

with less % as

compare to Total

Assets

RETURN ON EQUITY 22.3% 23% Unfavorabl

e

N.P increased

with less % as

compare to

Equity

RETURN ON FIXED

ASSETS

23.76% 19.88 Favorable Increase in fixed

assets by 4.02%

INTERPRETATION ON PROFITABILITY RATIOS

After calculating all the ratios of Profitability of MR. Denim I considered

that profitability of the company is in unfavorable condition.

Profitability is a tool to check the final outcome of the firm. As ratios

include in Profitability are calculated by use of Sales and profits also it

includes ROA, ROI and ROE ratios that’s why potential customers,

investors, creditors, Govt., owner and even all of the stakeholders of

the company have shown their deep interest in Profitability analysis.

The company’s profitability analysis shows the Unfavorable result. The

main reason of favorable condition is Increase in GP, NP, and OP with

less percentage as compare to sales in the comparative years.

Company also earns profit but comparing to its base year this profit is

decreased. This decrease in ratios is also because of increase in admin

and selling expenses. Inefficient utilization of resources is also one


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reason of unfavorable results. Return on equity and total asset is also

decreased which may damage the credibility of the company.

“The analysis of the changes in a given item of information

over a period of time or a comparative analysis of a

company's financial ratios over time”

Trend analysis is basically used to determine the trend of the firm. It

provides trend of items involved in Income statement and Balance

Sheet. E.g. how much percentage of sales is increased this year

comparing to base year. Considering these trends in mind

management takes the future decisions. Trend analysis is not only

useful for management but also for potential investors of the company

who can evaluate the performance of the company by comparing with


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Trend Analysis


previous years performance. Basically there are two types of Trend

analysis, which are:

1. Horizontal Analysis

2.Vertical Analysis (Common size Financial Statement)

Horizontal analysis is basically compares horizontally the items of

income statement and balance sheet with previous years keeping one

base year as 100%. At least four years data is required for conducting

Horizontal Trend Analysis. When an analyst compares financial

information more than three years for a single company, the process is

referred to as HORIZONTAL ANALYSIS.

In Horizontal Trend Analysis the analyst computes percentage

changes from year to year for all financial statement items, such as

cash and inventory. Trend analysis involves calculating each year's

financial statement balances as percentages of the first year, also

known as the Base year. When expressed as percentages, the base


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Horizontal Analysis

http://www.answers.com/topic/vertical-analysis

http://www.answers.com/topic/horizontal-analysis


year figures are always 100 percent, and percentage changes from the

base year can be determined.

As we know that minimum four years data is required to conduct the

Horizontal Trend Analysis of a company, so here this analysis could not

be performed due to unavailability of financial data.

Vertical Analysis is basically vertically analyze or compare the items

include in Income Statement and Balance Sheet. Mainly one of the

item is consider as base and keep that item equal to 100 all the

remaining items are divided by that base and evaluating the answers.

In VERTICAL ANALYSIS analyst uses base of income statement is

net sales revenue, while in balance sheet it is total assets. This

approach to financial statement analysis, also known as component

percentages, produces common-size financial statements.

Common-size balance sheets and income statements can be more

easily compared, whether across the years for a single company or

across different companies. Vertical Analysis requires minimum two

years data.


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Vertical Analysis


Vertical Analysis of MR. Denim’s INCOME STATEMENT

FACTOR 2006 2007 SPEED DIRECTION RESULT

Sales 100 100

C.G.S 77.2 77.88 (0.68) UpwardUnfavorable

Gross Profit 22.8 22.12 (0.67) DownwardUnfavorable

Selling Expense 3.98 4.04 0.066 UpwardUnfavorable

Admin Expense 3.18 2.77 (0.40) DownwardFavorable

Operating Profit 9.78 9.23 (0.54) Downward Unfavorable

Other Operating Income

0.41 0.86 0.45 Upward Favorable

Profit Before Interest & Tax

15.63 15.3 (0.33) Downward Unfavorable

Financial Cost 5.85 6.07 0.22 Upward Unfavorable

Profit Before Tax 10.2 10.1 (0.1) Downward Unfavorable


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Tax 0.8 0.91 0.11 Upward Unfavorable

Net Income 9.4 9.12 (0.21) DownwardUnfavorabl

e

Vertical Analysis of MR. Denim’s BALANCE SHEET

ITEMS 2006 2007 SPEED DIRECTION RESULT

CURRENT ASSETS

Cash0.65 2.73 2.08 Upward Favorable

Prepayments, Advances and Deposits


Book Debts 14.71 21 6.28 Upward Favorable

Stock in Trade 14.61 11.50 (14.05) Downward Unfavorable

Stores and Spares


Total Current Assets


FIXED ASSETS

Property, Plant and Equipment

41.11 32.81 (0.83) DownwardUnfavorable

Fixed Assets SubjectTo Finance Lease

0.76 2.21 1.45 UpwardFavorable


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Capital Work in Progress


Total Fixed Assets

44.33 36.49 (7.84) DownwardUnfavorabl

eLong Term Deposits


TOTAL ASSETS 100 100 - - -

EQUITY

Share Capital 1.91 1.54 (0.37) Downward Unfavorable

Un-appropriated Profit


Total Equity 36.1 37.34 1.24 Upward Favorable

NON CURRENT LIABILITIES

Long term Loans 10.58 6.08 (4.52) Downward Favorable

CURRENT LIABILITIESShort term Borrowings

46.61 55.05 8.44 Upward Unfavorable

Long term financing

4.01 0 (4.01) Downward Favorable

Trade & Other payables

2.41 1.53 (0.87) Downward Favorable

Current Liabilities

53.04 56.6 3.55 UpwardUnfavorabl

e


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