 Dear students, in our earlier sessions we have discussed about financial analysis of a company. So, we have taken a few balance sheets, PNL accounts and tried to use various techniques to do the analysis of financial statements. Let us do some revision today. Do you remember what are the major techniques to analyze financial statements of a company? I think some of you would be remembering ratio analysis, because that is one of the most important techniques. There are a few techniques little simpler than that, do you remember them? One of them is vertical analysis, horizontal analysis, we can also have trend analysis. So, there are a few techniques which are used to go in depth about a financial statement. So, financial statement just gives a raw data. I hope now you know looking at a financial statement, trying to understand the health of the company, the profitability of the company or what is a liquidity. But if we go more into depth, try to calculate a few ratios or try to do comparison, then we get more information. Now, let us try to do a few cases, so that the concepts are strengthened more clear in your mind. As you know the DLF is quiet in news these days. There are many allegations about the way DLF has provided loans to some of the political big ways and so on. So, I felt it will be interesting to know and analyze the company's balance sheets. You know that DLF is one of the companies into builders and developer business, they are infrastructure creators. So, let us look at their financial statement. Now, here is a balance sheet of DLF for March 11 and March 12. Let us have a keen look at the balance sheet and then we will try to use one by one various methods of analysis. So, what do you see from the balance sheet? One by one if you observe the items, you will realize that for example, secure loans have come down, the total of the balance sheet has also come down, which is rather unusual. Generally the business expands, here you can see there is a slight contraction. You can see that equity share capital is relatively very less and company is substantially dependent on loans. You will observe that total does not match here, if you are a keen observer. So, some item is missing that also you will have to find out. Then applications of funds, various assets and liabilities are given. You will see that net block is a very small amount because these are into building construction. A bigger amount is that of net assets, net current assets, the total of current assets is around 24000 crores. Below the balance sheet some information about P and L is also available. So, let us try to analyze the company. So, what are the various ways of analyzing? Please solve along with me. You can get the print out of this sheet, I request you to take the print out, so that you will actually enjoy solving the problem. So, what are the various ways? Can you remember how and in what form we can analyze the company? The simplest way is just making comparisons. So, you look at March 11 and March 12 figures and compare. That is one of the easiest ways. In comparison with the past year, what technique it is called? Do you remember? What type of analysis that is known as? Some of you must be rightly telling it is horizontal analysis. So, let us start with horizontal analysis. In horizontal analysis, we make statements which are known as, which is known as comparative statement. So, we will try to make comparative balance sheet and whatever the data available, we will try to compare. Before that, as I was mentioning to you, you will observe that these totals may not be this total. So, let us first calculate the total and check out whether the total matches actually. So, you will see that the total is only 12 315 whereas, given total of funds is 26 472. So, something is missing. What could be that missing item? Can you guess? I will also do it for March 11, again you will realize that there is a gap. So, what could be that missing item? I think most of you would have guessed reserves are not available. So, it will be appropriate for us to calculate the reserves. So, we assume that only missing item is reserves and try to calculate the reserves. So, reserve will be 26 minus 12. So, there will be a problem of circular formula. So, let us first do it outside. So, you get 14 and this is just for as a working node. So, reserve figure is 14 and 14152 and 13470. Let us try to put these figures here. It would not readily accept. So, I will first paste it outside as values and then those values will be put in here. So, you can see now the difference has become 0 and we have started and the totals are now matching. So, this is the first working for us calculation of reserves. I will put it as a working node just to keep in your mind that we had to first calculate the reserves. So, if you remove this reserve figure and put it outside the total was like this. So, this was the total prior to calculation of reserve and based on the difference we have calculated the amount of reserve. So, this was the first thing we have tried to do. Now on asset side also or the application side also let us try to check whether the total is correct. So, amongst the available items we add net block plus capital WIP plus investment plus net current assets. You can see for both the years the figure is matching. So, there is no difference and a few P and L items are given. So, we will try to separate those items up to contingent liability we have balance sheet items. In P and L items the pat is available and tax depreciation and interest are given. So, with that we will try to work back some of the items. So, which profits we can calculate from given data. So, PAT is available from PAT if we add back the tax what profit will you get we will get what is known as PBT. So, we were given profit after tax we have calculated profit before tax right. Then we can also add back interest to get what is known as popularly known as PBIT and we can also calculate PBDIT if we add back depreciation. So, a few more levels of profits we have calculated what does the PAT convey to you profit after tax is a final profit which is available to the owners profit before tax is obviously the profit available to the owners, but before tax PBIT is useful from the lender's perspective because it tells you how much profit was generated from running of the business minus the I mean without considering the tax aspects without considering the interest aspects and PBDIT tells us about cash availability. So, it is the cash operating profit. Some of you would have heard the term EBITDA EBITDA and PBDIT is same I will also mention it because nowadays this term EBITDA has become quite common. This is the American terminology it show it full form is earning before depreciation interest tax and amortization which is same as PBDIT. Now, we were doing horizontal analysis. So, in horizontal analysis I hope you remember first we just find the difference and then we will try to find the difference in percentage terms. So, how does it look like in percentage terms that we will like to find out let me slightly minimize the columns. So, that you can clearly see the difference. So, we will find the difference and the percentage difference. So, in percentage difference we try to link the difference and divided by the base year that is March 11. So, in equity capital you can see there is no difference. So, answer is 0 percentage difference would be difference upon the base year into 100. So, again we get 0 there this we try to drag. So, you will realize that reserves have increased by 687 which is a increase of about 5 percent I will minimize reduce the decimals up to 2. So, that figures are more clear and more readable it is visible to all. So, you can see that 5 percent increase in the reserves loans went down by 2856 secured loans particularly that is a 19 percent reduction in the loans and total balance sheet size that is the total of sources have also reduced by 2300 crores which is about 8 percent reduction. Now same thing we will calculate we will apply for various items on applications. So, I do not think much of the discussion is required it is very apparent to you we can also extend it to various P and L items. Please I observe the items carefully so that you can yourself analyze. You will realize that the gross block has increased by 22 percent capital work in progress has slightly gone down sundry debtors have increased substantially by 92 percent and cash and bank balances have also increased fixed deposits of 42 which were there earlier have now been taken out fully and perhaps they are added to cash and bank. Current liabilities have also increased substantially it is a increase of 3600 crore it is a huge rise. So, you will observe that the total of current assets have not increased much, but current liabilities have increased. So, the net current assets there is a fall of 2631 it is about 14 percent fall contingent liabilities have also increased by 25 percent. If you look at profits you will realize that net profit has gone down by 14 percent PBT has also gone down by 4 percent there was a major increase in the tax burden, but PBDIT has slightly shown improvement. So, at operations level there was no fall in profit the fall in profit is mainly because of increase in the interest burden and increase in the tax. You will be surprised that if the loan amount is falling why is the interest rising perhaps the loan has reduced towards the end of the year only. So, the interest burden has not gone down we do not know the reasons, but you can observe that there is something abnormal here in increase in the interest by 20 percent whereas, the loans are falling by secured loans you can see have fallen by 20 percent unsecured loans have fallen by 63 percent. So, this needs to be looked into right now we cannot tell the reason as to why it has happened, but we can say that this needs to be analyzed further that is why I have made it in a different color. So, is it clear to you whatever we have done now is a very simple analysis that is known as horizontal analysis. Now, let us try to go ahead and try to do vertical analysis and just renaming it if you are doing in on computer please rename at your end or you can mention specifically if you are doing it by pen and paper. Now, let us do it what is known as vertical analysis. So, how is vertical analysis done are you able to remember yes I think some of you are remembering it right. So, we take the total as the base here and every figure is attempted to be calculated as a percentage of that base. So, here instead of difference and percentage difference we will just take the same years and the total will be considered as 100 and what we do is each figure. So, if we have share capital we divide it by the total and multiplied by 100. So, that we know that in percentage terms how much it is I will make this B dollar 10 and we can change format the sales and make it percentage. So, you get 1.28 percent now it is copied all across. So, it is clear to you so you can observe that share capital anyway is very negligible the major funding comes from reserves and it has increased from 46 percent to 53 percent secured loans have gone down from 50 percent to 44 percent and so on. Let us try to do it on assets as well on assets also you can see some of the changes you will observe that investment was one of the major applications and it has remain more or less same it has slightly gone up to 26 percent. Inventory is pretty high from 29 percent it has gone up to 30 percent what will be their inventory they are into activity of builders. So, their land bank is their major inventory so you will observe that there is a slight increase there so any other major deviations you can see total current liabilities which were 22 percent have increased to 36 percent particularly the current liabilities has increased from 18 to 34 percent even the current assets particularly loans and advances you can see there is a increase. In fact that is where the allegations about DLF advancing loans to certain political big wigs so you can see here there is a increase in the loans and advances though in absolute terms that increases not much in percentage terms you can see the increase. So, here is a vertical analysis we can do we cannot do it for P and L items because we are not provided with the total sales so is it clear to you now which is the third analysis and the most important analysis you are right that is ratio analysis. Let us try to do the ratio analysis as well so the results figure which we have found out I am just putting it into that sheet now before going for the analysis what are the important type of ratios on the balance sheet particularly from the sources of fund side we can calculate the leverage so we can calculate debt equity ratio which is one of the most important ratios to calculate the leverage. We can also see how much is the interest burden which is known as interest coverage ratio so we will start with those ratios now in debt equity ratio what is the formula the first and one of the most important ratios is debt equity ratio. So, what is the formula for debt equity ratio debt upon equity as the name suggests or the total of borrowed funds upon total of owners funds so here we will have to first calculate what is the total of owners funds so I will just try to calculate it please do it along with me so you know that equity capital plus reserves is nothing but the owners fund what is the other name for owners funds it is also known as net worth. So, net worth of the company is 14497 earlier it was 138110 we also calculate total debt which is 11917975 now it has gone down so now the debt equity ratio is a relationship between debt and equity so the formula is debt upon debt plus equity I am sorry it is debt upon equity so we have the debt which is equal to you can see 11975 or it is equal to B15 divided by equity which is B12 so you will observe that debt equity ratio is 11975 upon 14497 so it is 87 percent generally there is a high reliance on the debt same thing is extended to the next year so there is 109 percent of debt equity ratio the next important ratio in leverage is interest coverage ratio as the name suggests here we will try to find how best is the interest covered so interest is paid from PBIT so PBIT upon interest you can see the formula here now we have been given we have calculated PBIT so let us first try to copy whatever we have calculated so interest coverage ratio is PBIT divided by interest so you can see earlier it was 2.23 now it is 1.97 but still it is reasonably well covered because out of PBIT of 3055 there is a burden of 2000 so now the interest coverage has gone down from 2.23 to 1.97 it is not a very good sign you can see from the lenders perspective it is risky very high part of PBIT is committed for interest suppose there is default at any point of time PBIT goes down company will find it difficult to pay the interest so debt equity ratio has gone down from 109 to 83 which is a good sign more stability for the company but interest coverage does not so good sign we had already seen that why interest has increased there is a question mark and because the interest has increased substantially the interest coverage ratio is negatively affected now let us try to look at the liquidity for liquidity I think you know the important ratio is current ratio it is current assets upon current liabilities so current assets is 24855 divided by total current liabilities so you can see there is a major fall earlier it was 3.84 now it has gone down to 2.59 so what will you say about their liquidity is it a good position there is a lot of cause of concern one because there is a fall from 3.83 to 2.59 but there is one more reason you can observe that good part of their equity consists of inventory sorry good part of their current assets consists of inventory since inventory for this company DLF is land it is highly illiquid so always there will be a question whether this inventory can realistically be considered as a current asset for other companies the inventory is fast moving but for a developer company like DLF since inventory is very slow moving inventory is not a very high quality current asset so we will go a little next step and apart from current assets let us also try to calculate quick asset quick ratio what is the other name for quick ratio it is also known as asset test what is the formula for asset test QA upon QL QA means quick assets upon quick liabilities now have a look at their current assets we have got inventory sundry daters cash loans deposits so which of them you can consider as quick usually you can consider sundry daters cash and fixed deposits as quick asset I am saying usually because we do not know the composition of daters but if we assume that we can receive them in reasonably short time say about 1 to 3 months we can consider daters as a quick asset cash is always considered as a quick asset and fixed deposits also can be considered as quick asset so it is QA upon QL so QA is nothing but daters plus cash plus FD what is QL you can see that QL consists of quick liabilities which in turn which are we have 2 figures here current liabilities and provisions I think both are considered as quick liabilities if we have some liability which is not payable immediately that can be removed but currently we do not have any such liability so both should be considered so the quick ratio is you can see this is a very big cause of concern quick ratio is as low as 0.09 they have quick assets of only 886 versus quick liabilities of 9596 so they are going to have big difficulty in able to pay this current liabilities and those quick current liabilities themselves have increased substantial so we look at the earlier year the earlier year also the position was bad it was only 0.07 now it has gone down to 0 it has slightly increased to 0.09 but quick liabilities have increased substantially there is also a slight rise in quick assets mainly you can see that the cash balance has increased but overall their immediate liquidity position as it is called is not very sound we may also try to find the ratio of cash availability now since there are some concerns about their liquidity position let us also try to see how much cash they have available for paying their quick liabilities so it is cash divided by ql you know that the cash balance is 367 divided by ql so the cash ratio is very low it was only 2 percent now it has slightly increased to 3.8 percent but overall the cash availability has remained low so we have now studied two aspects liquidity and first we studied leverage leverage is also known as long term stability of the company in that we have looked at debt equity ratio and interest coverage ratio now we have tried to find liquidity by calculating three ratios now the next important aspect is of course profitability in profitability we have to link various items to sales now let us look at the sales figure and take it here which is right now not given so now a beta is earnings before interest and tax divided by sales we have calculated these figures of a beta etcetera the formulas are already ready so you can immediately get the answer you can see that a beta margin is more or less stable there is a slight increase in the sales so a beta has increased from 30 to 31 percent we can find npm net profit margin which is p at divided by sales p at is 1045 sales figure as given so it has increased it has fallen slightly from 13 percent to 10 percent why the sale has npm has fallen you can observe the P and L figures you will realize that there is a increase in taxation and increase in the interest that has mainly caused increase in the fall in the npm so you can see the net profit has fallen from 13 to 10 but there is no much change at operations so a beta is more or less constant because of rising interest and tax the npm has fallen next we look at ROCE that is return on capital employed what is the formula for ROCE it is PBIT or the operating profits divided by capital employed so here we see that from the perspective of a long term investor what is the business earning on the capital employed that is why it is PBIT divided by capital employed PBIT figure is something which we have calculated 3055 capital employed means the total of funds that is total of net worth plus total debt we have ready figure available with us so you can see ROCE is 12 percent for the current year let us see how much it was in the last year it is more or less constant last year it was 10 percent now it has increased to 12 percent now let us try to find out return on net worth which is also popularly known as ROE or the return on equity now what is the formula for ROE it is packed upon NW because here we are looking from the owners perspective so the profit which owners get is nothing but profit after tax we divided by the net worth which is the funds of the owners so PAT is 1041 divided by the net worth which we have just now calculated so 7 percent is a return on net worth and 9 percent is a return on net worth in the earlier year you can see there is a slight fall why is this fall cost this fall is mainly cost because of higher interest and tax that which led to fall in PAT and since PAT has fallen RONW has also fallen now let us try to find out EPS the earnings per share which is the very interesting and important ratio for the small investor who want to know how much profit they have earned per share so it is PAT upon number of equity shares PAT is 1045 the number of equity shares is 169 so you can see it is 6.13 is a EPS EPS or earning per share is one of the highly reputed figure the next important ratio is PE ratio price earning ratio the formula is market price divided by EPS in this case since we do not know the market price we will not be able to find the PE ratio so let us keep it so now we have done various profitability ratios what are the two types of profitability ratios the first type is profitability in relation to sales so when we calculated a beta and NPM we calculated the profitability divided by sales or in relation to sales the second time type is profitability in relation to investment for which we calculated ROCE and RONW and EPS is the profitability mainly calculated on per share basis so we have done leverage ratios liquidity ratios and now profitability ratios now what is the next type of ratios next type of ratios are known as activity ratios or the turnover ratios where we try to relate the sales to the assets they have so we try to find out how effectively the company is able to utilize the assets that is why they are known as activity or turnover ratios so the first ratio is fixed asset turnover ratio the formula is sales upon fixed assets so sale figure is given to us divided by fixed assets so we can either take gross block or net block generally we take gross block here so we have got 3.91 last year it was 4.61 this is not a very important ratio for a company like DLF because it is a real estate company they hardly have any fixed assets you can see out of the total assets the composition of fixed assets is that way very small for a manufacturing company FA turnover is a very important ratio because we want to know there how effectively they are using their fixed assets in this case it is not so important but we have calculated it next is inventory turnover it is sales upon inventory so we get 1.526 earlier year it was 1.18 you can see that both the figures are not change much sales have slightly increase inventory has slightly fallen leading to slight increase in the turnover overall it is not a very healthy turnover 1.26 but being into infrastructure or builders and developers business it is bound to be relatively low it cannot be very high now let us try to calculate the number of days of inventory so this is again sales so here it is reverse of the earlier it is inventory divided by sales by 360 so we do 360 because we try to find the daily sales so we take the inventory and divided by daily sales so here we have got 285 that means they have 285 days of inventory in their hand earlier it was 306 again this ratio is not so important for a manufacturing company or a trading company the days of inventory is very important whether they have 30 days inventory 40 days 50 days 60 days but for builders it could be relatively high let us also try to find debtors turnover so it is inventory sorry sales divided by debtors so it is 19.76 earlier it was 36.57 so you can see that the sales have not increase much but debtors have increased so the turnover has fallen which is not a good sign that means they have more amount to be recovered this is debtors turnover or receivable turnover as it is known as sometimes now what could be important turnover ratio for this company since they have very high extent of current assets current asset turnover overall could be very important and we can also calculate working capital turnover I think let us calculate working capital turnover so this will take care of all current assets and current liabilities so what will be the formula just as we had sales upon debtors here instead of debtors we will take sales upon working capital so what is working capital current assets minus current liabilities. So numerator is unchanged for denominator we will take this figure of net current assets so you can see here the working capital has gone down from 17 to 15 and working capital turnover ratio has slightly increased but overall it is a low turnover ratio we can also find the turnover for the current assets only so the formula will be sales upon current assets total of current asset figures are available in the balance sheet that figure you can take so you can see here it has remain more or less constant. So we have tried to find various operating ratios now or we see how effectively they utilize their assets so they are also known as activity or turnover ratios so we have done a variety of ratios now I think that would have given you some insight into the operation of the company on the whole you can see that there is a rise in the current liabilities which is of concern the liquidity of the company is of concern the profitability you can see has gone down in terms of NPM but that is not a big problem that is mainly because of rise in taxes the EBITDA has remained more or less constant there is not much there is a decrease in the loans in the current year which is a good sign so companies dependents on outsider funds has reduced overall the size of the balance sheet itself has fallen which is not a good sign it does not show the growth of the company. Now let us look at the I hope you have understood the various aspects of it let us try to go for the in depth analysis of a different type of company this time I have chosen Mahendra Satyam you know basically it was company known as Satyam Infotech there was lot of malpractices for which the enquiries are on the company went into losses so I have chosen the year March 9 and 10 where there was a completely turbulent atmosphere in the company then the company was taken over by Mahendra's and now is running effectively but so have a look at their balance sheet and PNL so equity share capital you can see has slightly increased there is a very large amount of money parked up in the share application money the reserves were turned negative in March 09 the reserves were minus 657 now the company showing a good sign the reserves are 2062 current liabilities contingent liabilities secure loans so here the balance sheet has not been arranged properly first thing we have to do is to arrange the balance sheet we have also been given some information from PNL account. Let us first try and start with the arrangement of balance sheet in the proper structure so that we can use it for other calculations how do you arrange the balance sheet in a suitable format here you can see all the items which are there in the balance sheet but we have to make it in the format suitable for analysis so if you remember we have got this equity share capital share application money and reserves they all are in one category that total could be called as yes what it is called as it is called as net worth or also known as owner's funds then you can see here current liability then contingent liability then secure loans actually current and contingent liabilities need not be there on the funds side they are more items which are reduced current liability must be reduced from current assets so it need not be here so then you have secured unsecured loan then it has provision gross block and so on so the first heading for the company balance sheet is sources of funds so we are trying to analyze it in the form suitable for analysis so we will start with the sources of funds here you can see gross block accumulated depreciation and so on so that could be called as applications of funds I hope you know these things that gross block minus accumulated depreciation we get net block so we will try to find the net block then you have got capital WIP after capital WIP what should be the next heading in this case instead of giving the next heading they have started with cash but what will be the correct next heading first heading is fixed assets so we have covered net block and capital WIP the next heading is investments so I have tried to copy the investment then after investments we go for working capital items and in working capital we will take current assets and current liabilities so again we have current assets in current assets you can have cash and bank debtors and so on so we have got cash loans investments we have already copied it upwards then inventories debtors fixed deposits then the P and L items start but we will try to arrange the current assets properly I hope all of you are able to do it with me so here we have major headings investments and working capital within that now we have started with current assets and have put all current assets in one place now from current assets what should we reduce we should reduce current liabilities and provisions so current liabilities are given here and provisions are given here so we will remove those figures and put them at proper place I will just do it fast I think for your benefit so total CA minus total CLs is the working capital figure sometimes it is called as net current assets so now all the three headings are clear with us net block plus capital WIP plus investments plus working capital now on liability side we have already removed this current liabilities contingent liability also we should not take this is not an item in the balance sheet it is just given as a footnote so I have removed it keep it down so what we are left is with now secured and unsecured loans we will take the total of it that is the total debt and the total of net worth plus debt is the total of sources so now the whole balance sheet is analyzed in the format which is suitable for analysis in the next session we will try to actually analyze it by various methods thank you so much.