 Dear students, in our last two sessions, we have been discussing about analysis of financial statements. Today, we will see some more cases to bring out more clarity in your minds. As you all know, financial statements depict the basic information about the entity. Do you remember what are the major financial statements? One is profit and loss account. It gives you the position of profitability stating the incomes and expenses during a particular period. The second important statement is balance sheet. Balance sheet lists out assets and liabilities and provides the financial position as on a particular day. The third important statement is cash flow statement. In cash flow statement, we deal with the inflows and outflows of cash which are categorized into operating flows, investing flows and financing flows. In this particular module, we are trying to go a next step ahead in a sense that the data as is provided by financial statements is now being analyzed and the analyzed data will be useful, will be used for drawing out some conclusions. There are various stakeholders, for example, owners may be interested in profitability, bankers may be interested in knowing whether they will receive their interest, craters may be interested in knowing whether their payment will be received in time. Like that, from the view point of various stakeholders, we have to gather the relevant data from the financial statement and that could be defined as analysis of financial statement. In this particular module, we are going to see some more cases. Last time we have seen one case on ratios. Let us today look at two more cases involving all the three types of analysis horizontal, vertical as well as ratios. I hope you remember now what are the types of ratios. In our last session, we have discussed the various types of ratios which include the ratios of profitability, the ratios which are related to return and also the ratios which tell you about liquidity and long term solvency or the capital structure. Now, let us go to the cases. Of course, before going to the cases, you should have clarity about how to calculate those ratios. If you have still not learnt them, I will advise you to look at the various formulas. For example, here you are being shown there is a liquidity ratio. The most popular ratio is current ratio. The formula is current assets upon current liabilities. Now, I would not repeat all the ratios. We have learnt about 15, 16 ratios in our last session. Actually, there can be hundreds of ratios because ratio is essentially a relationship between one item versus another item. So, you can link any item to any other item, but there are certain ratios which are important. Like in profitability, there is net profit ratio. In return ratios, there is ROI that is return on investment or ROCE. So, it is very important that we calculate ratios and then compare them with the ratios of the same entity in the last year or earlier years or you may compare with other companies or you may compare with industry averages. Today, we are going to look at a particular balance sheet and PNL account. As you can see here, have a look at the balance sheet first. Here, you can see that the company has accumulated lot of reserves. You can see equity share capital is 58 versus reserves of 9471. Reserves of further increase to 12318. So, you can see there is also good amount of loans, though they are not much in relation to the owner's funds, but company has also taken some loans. Then, you can look at the gross block of the company, net block, investments, current assets, liabilities. If we go down, you can see there is also some data about profit and loss account, though we have not listed the whole of PNL account for want of space, but certain important items like sale turnover, operating profit, PBIT etcetera are listed. I hope everything is clear. Now, with this, we will try to do all the three types of analysis. First, let us start with horizontal analysis. Then we will do vertical analysis followed by ratios. I hope you remember exactly what is to be done. Please try to solve it along with me, so that you can make most of it. Now, here in the next sheet, the same balance sheet is repeated. We have to first start with horizontal analysis. So, anyone can guess now exactly what is to be done in horizontal analysis, which is the statement that is made in horizontal analysis. Anyone can tell me, yeah you are right. In horizontal analysis, we make a comparative balance sheet or a comparative PNL account. So, let us make a comparative statement. So, we have a comparative balance sheet. Now, also try to remember exactly what is done in a comparative balance sheet. Do you remember, yeah you are right. We try to compare the two years as the name suggests. So, we will compare and find the difference. Next what do we do? You are right. We find absolute difference and we also find relative or percentage change. So, here you have absolute change and in the next column, we are going to have percentage change. So, in percentage change, we try to calculate the change with respect to the base year figures. This is the data for March 2008, 2009 for a real company. I am not going to tell what is the name of the company. I request you to guess, if you have some knowledge about different businesses you can guess. Towards the end, I will tell you exactly which company we were referring to. So, you can see that each of the items, there is some change. So, equity capital has nearly doubled from 58 to 117. So, absolute change is 117 minus 58. So, 59 is a change. If you drag it down, then for all these years, you will realize that most of the items have increased except revaluation reserves. You can also see that, I will just rename this. This is total sources. You can not really understand exactly whether the difference is much more or less. It is better to find in percentage terms. So we will relate this 59 as a factor of the base year. So, you get 102. So, I hope you are getting what we are trying to do. So, if in percentage terms, if you see, you will realize that equity capital has increased by 102 percent. That is it has more or less doubled. Reserves have increased by about 30 percent. Secured loans have increased significantly. They have increased by 257 percent. So, though in number, in absolute number, it is 793 does not look that big. If you look in percentage terms, you will realize that company has almost tripled its secured loans. That is why it has increased by 257 percent. Unsecured loans have also increased by 67 percent. On the whole, the debt has increased more. Debt has increased by 83 percent whereas, net worth that is owners fund have increased by 30 percent. I hope you are getting me. So, overall the total resources have increased by 45 percent. Now, the same thing we try to do for calculation of assets. So, now it was simple, I have copied and we have calculated the absolute differences between the two years and also the percentage change. So, what do you observe now? You can see that the gross block has increased by 33 percent, which shows that there is lot of addition of assets during the year. Further, the capital WIP has increased by 49 percent, which is a good sign, which also shows that company has a good amount of future expansion plans. These are the assets under construction. They also have increased. These deposits you can see have gone down. May be the company has used that money for some investments. Another item, which has increased significantly is loans and advances 86 percent, which is not a very good sign, because current assets are usually non return earning assets. So, it is not considered a very good sign, but company has kept the increase in inventory and data is about 35 percent. So, overall this was the position and this is what is horizontal analysis, where in we are trying to calculate comparative balance sheet. Now, let us go down. We also have profit and loss account data, though we do not have the whole of P and L account. So, if we try to compare, you will realize that sales have increased by about 35 percent. So, increase in the daters and inventory of same order is more or less fine and it shows a very healthy growth for the company, because in one year the sales have increased by a good amount. Reported net profit has increased by 60 percent, which is really good. So, company's profitability position is increasing. Where PBDIT has also increased by good portion 49 percent, operating profit the rise is not that much it is 28 percent, still it is a good increase. So, overall we have seen what we have done now is known as horizontal analysis. Now, let us try to repeat it, but now let us do vertical analysis. So, do you remember now what is done in vertical analysis? So, which statement is prepared in vertical analysis? Just try to remember, we have discussed it in our earlier sessions. So, we have made comparative statement. Now, we will try to make a statement, which is known as common size statement. So, what is prepared in common size statement? In common size statement, we essentially try to take each item and relate it to the total. So, in horizontal we had compared the two years. In vertical instead of comparing the two years, for the same year we take the total and compare. So, here we have a figure of total sources, each item on the sources side will be compared with the total of sources. So, this 58 divided by the total sources and usually we will multiply by 100. So, that we get a percentage figure. So, there is nothing like absolute and percentage change now, instead of that we will simply have percentage figures for both the years. So now, the data for that particular year continues, but we try to relate it in terms of percentages. So, if I drag it down, you can get the information more systematically, I think there is some problem with the formula. So, it is B 48 that is this cell divided by 555 and I should have added B dollar 555, so that there is no confusion. So, now it has come right. So, I hope you are getting. So, for each of the cell, we are comparing the respective item upon the total sources. That is why the final figure is going to be 100 percent and overall you do see that very small portion is contributed by equity capital, it is just 0.44 percent, though it has increased now to 0.62 percent. Major contribution towards sources is coming from reserves, which is about 72 percent. The loans were contributing only 24 percent, especially unsecured loan, now it has increased to 28 percent. If you look at the total debt, it was 27 percent, now it has increased relatively by a higher amount, it has become 34 percent. So, when you look at the vertical analysis, you realize that on the whole what is a contribution of each of these items. We will also try to relate calculate it for various assets. So, now you can see it, I hope you are able to get what has been done. Each of the item, we are dividing by the total, so 4189 upon 1339, which is the total of sources and also total of applications. So, we see that out of the total money applied, 31 percent is for gross block. Or the fixed assets at the original cost, if you look at the net position, it is 22 percent. The total investments are 52 percent, now it has slightly gone down to 43 percent, because the company is on an expansion mode and lot of new assets are added. You can see that portion of inventory has gone down, but portion of sundry daters remains quite huge. So, out of the total money, 56 percent is blocked in the form of sundry daters, which is really a very high portion, but in the current year, company has been able to control it somewhat, it has come down to 52 percent. Another very big item you can see is advances, which was 125 percent and which has more or less remained the same, which could be a matter of concern to them. So, overall you can see the net current assets are about 19 percent, but they have increased now to 29 percent, which is not such a good thing and the increase is mainly because the current liabilities have gone down from 90 percent to 80 percent. So, this is the overall position. So, by looking at the vertical statement or a common size statement, you can know the proportion contributed by each item. There is further advantage of this percentages. We can compare it not only for the two years for the same company, we can also compare this percentages with some other company. That is why vertical analysis proves to be very useful for inter firm comparisons on also for comparing this company with the industry. Let us go to PNL account data and try to find the percentage. In case of PNL account, we try to relate it to the total of sale turnover. So, each item will be divided by the sale turnover and multiplied by 100, because we are trying to get the percentage. So, it is clear. So, total sales is 100 percent, operating profit becomes 12 percent, it has slightly gone down from 12.81 to 12.09, PBDIT is around 15 percent, PBDT that is profit before depreciation tax which is also known as cash profit has slightly increased from 13.27 to 14.55. Final net profit or reported net profit as is known as profit after tax it is also that is also used for it has increased from 8.6 to 10.17, which is a good arise. So, I hope once again now there is a clarity on horizontal and vertical analysis. Now, let us go ahead and try to calculate the ratios. So, what are the important ratios? We had seen ratios under three four categories. First we had seen liquidity ratios which I have tried to put here, because they have some linkages with the current assets and liabilities. We had also seen ratios which focus on profitability, returns, stability and so on. Let us try to calculate each of these ratios. The first ratio as you can see is will go in the sequence in which we had gone earlier for liquidity. One of the important ratios is current ratio. So, for calculation of current ratio the formula used is C A upon C L that is current assets divided by current liabilities. So, what are the current assets? Just have a look at the balance sheet carefully. So, which items will you include in current assets? Will include inventories, debtors, fixed assets, cash, loans and advances. In fact total is already given. So, we can directly take 16 419 and current liabilities also the total is given current liabilities and provisions. Do not just take this 11000 actually you should take 13 918 which is the total of current liabilities plus provisions. So, we are dividing this 16 496 upon 13 928. So, I hope there is a clarity. So, what do you see? You can see that the ratio which was 1.18 has slightly increased to 1.30 which is a good sign. I have already written it is there is a increase. What does it show? Increase shows some improvement in the liquidity position of the company. Is it fine? Are you getting me? We will just try to see the remark which I have written. There is a improvement in the liquidity position of the company. I will just change the font to make it more clear. Is it okay? Now what is the next ratio in the same category that is a liquidity category? The next popular ratio is quick ratio. What is the formula of quick ratio? It is Q A upon Q L that is quick assets divided by quick liabilities. So, now tell me what are the quick assets? The ratio is also known as asset test and we can say it is liquid assets upon liquid liabilities one and the same thing. So, look at the current assets which of them are liquid in nature we will include them. So, shall we include inventory? We should not it is not a liquid asset. Dators yes it is a quick asset. Fix assets is a quick assets. Cash is a quick asset. Loans and advances we should not include it is non-quick and in case of liabilities we will include both current liabilities as well as provisions. So, we need to include debtors plus fixed deposits plus cash and bank divided by the total current liabilities there is no need to multiply it by 100 you exactly get ratio as equal to 1. So, we have included B 21 that is sundry debtors. In fixed deposits and bank this total is divided by B 28. If you want you can also do it in some other fashion wherein we will try to take a sum of for more clarity I am showing you. We are going to take a sum of these three items. This is the total of quick assets we divide this by quick liabilities. So, ratio will be this upon this is the correct ratio I hope it is more clear now. So, I will just cancel the earlier things. In the subsequent year also we can do it I will just redo it. So, I think now it is more clear are you getting me? This was the calculation of total quick assets and the ratio you get is 0.58 and 0.59. So, what do you get from the ratio? You will realize that there is almost same type of liquidity position as in the earlier year. If you look from the overall standard this liquidity position is not that good because the standard ratio for quick current ratio is 2 is to 1 and standard quick ratio is 1 is to 1. However, these standards cannot be applied all the time they can change from company to company. So, on the whole we see that there is not much of change as far as immediate solvency is concerned quick ratio calculates immediate solvency position. So, I can say there is no change in immediate solvency position. Just see the remark which I have written no change in the immediate solvency position. So, we have calculated 2 ratios from the liquidity category next we will go to long term solvency or they are also known as leverage ratios. The first important ratio in that category is do you remember? One important ratio in that category is debt equity ratio the formula is debt upon equity or borrowed funds upon owner's fund. Interest coverage also we will try to calculate but later. So, how do you calculate now? How much are the borrowed funds? So, you can see the total of net worth is nothing but the borrowed funds divided by the debt. I am sorry I am doing other way round borrowed fund is 3584 divided by the net worth. So, earlier 0.37 was the contribution of borrowed fund versus owner's fund. Now, it has slightly increased it has somewhat increased to 0.52. So, it shows that now the company's reliance on the borrowed fund has increased which is not that healthy sign from a long term solvency viewpoint but still substantial chunk being contributed by equity there is no risk to the health of the company. So, long term solvency continues to be good. So, we will just calculate one ratio on that and let us go to coverage ratios. So, we have a interest coverage ratio in that category. So, you know the formula it is PBIT upon interest we have to go down look at the P and L data we know the profit before interest and tax. So, it has not been straight away given but we have been given PBT and interest. So, using these two we can calculate PBIT are you getting me. So, PBT is 3511 interest is 502 to total is 3657 this is the profit which is available for paying interest. If you divide it by interest you get the interest coverage ratio this shows how many times the interest is covered by the available profits. So, let us try to calculate it is PBIT divided by interest. So, 7.28 which is a very healthy figure that means company has 7 times more earnings in terms of PBIT which can be used to pay the interest. In the current year it has slightly gone down but still it is a very healthy sign. So, I can say there is sufficient coverage particularly bankers and lenders will be very much interested in knowing the liquidity the interest coverage ratio of the company. Before sanctioning any loan any bank or institution will look at the interest coverage ratio of the company and also of the project. So, we have seen liquidity ratios now we have also seen leverage ratios and the interest coverage ratio. Now, let us go to profitability ratios there are various profitability ratios I have written here one is a beta or PBDIT as it is commonly known as this is the profit before depreciation interest and tax in other words it is also known as cash profit. So, how much percentage of your profit is the total sales is all the profitability ratios calculate there are three popularity ratios popular ratios one is a beta percent next can be operating profit margin and net profit margin will try to calculate all three of them. So, a beta is EBDITA upon sales and always it is into 100. So, you can see here the position of PBDIT is given divided by sales and will multiply by 100. So, 15 percent and in the current year the ratio has improved to 17 percent I think will slightly take it up and we will also try to calculate operating profit this is known as operating profit ratio or sometimes also known as operating profit margin. So, you can say a beta margin for more clarity we have already calculated a beta margin. Now, we are trying to calculate the operating profit ratio or the percentage of operating profit as the name suggest it is operating profit divided by 6 into 100 for this. So, operating profit is available divided by sales into 100 I will try to redo it it is directly coming in percentage terms. So, there is some confusion it is operating profit upon sales. So, it was 13 percent earlier now it has come to 12 percent I am trying to change it to percentage format. So, it is more clear to you now. Now, let us go to third ratio that is known as NPM or net profit margin. So, what does it calculate the net profit divided by sales I have already written the formula N P A T upon sales copy it. So, N P A T is this reported net profit. So, B 43 upon B 36 so it is 9 percent and in the current year it has increased to 10 percent. If you look at all the 3 ratios you will see that there is a increase in a beta margin good increase from 15 to 17 net profit ratio is more or less maintained. So, in absolute terms you feel that there is a increase in net profit substantially from 2173 to 3482, but if you look at ratios you will realize that more or less the margin is maintained. So, increase in the profitability is largely because company could increase its turnover at such the profitability has remained almost constant. This insight you can get if you look at the ratios carefully operating profit margin has slightly gone down though in total totality the profits have substantially increased again due to increases in the turnover. Now, let us go to return ratios in return ratios the first important ratio is R O C E or R O I the formula is P B I T upon capital employed. This is the total money which is earned on the capital employed. So, you have P B I T which is 3657 divided by capital employed we have to go up go to the balance sheet you can see there is a total of sources given that becomes capital employed. Instead of total liabilities let us call it total sources because we are not including current liabilities in total sources we are only including net worth and total debt are you getting me. So, total sources were 13139 now they are 19 016 look at the return which is generated it has more or less remain constant 28 to 29. So, again we were assuming that there is a substantial increase in profit, but if you look at from a return view point since the company's investment or the capital employed has also increased the return remains more or less same. Next is R O N W or return on net worth or return on equity or is called formula is P I T upon net worth here we are trying to look from the view point of the owners. So, profit after tax is the profit which owners earn divided by the net worth of the owners. So, I am just copying and then let us go and try to calculate the correct formula. So, P I T you have this reported net profit divided by net worth or the owners fund. So, 23 percent and in the current year there is a significant increase it has become 28 percent. So, you can see that though the profit at R O C E level is more or less constant the reported net profit or the P N profit after tax has increased substantially. So, there is a increase in R O E. Now, the last ratio in this category that is return is EPS earning per share formula is also given you can see here it is P I T divided by number of equity shares. So, how will you calculate number of equity shares actually it is not given anywhere, but since you know the equity share capital if you assume that each share is worth 1 rupee we can take the same amount as the number of equity shares. So, P I T divided by number of equity shares keep in mind this is not a percentage this tells you that per share what is the earning. So, per share earning has gone down from 37 to 29 why has it gone down actually going down of EPS is not a good sign, but you can see that equity share capital has more than doubled. So, 58 to 117 and that is the reason why EPS has somewhat gone down, but still it is a healthy sign if company has given the bonus share. Now, let us go to P E ratio price earning ratio which is a very important ratio for a stock market investor. So, in this ratio the relationship is calculated between the price and the earnings. So, how many times the investors are willing to pay for the profits earned or the earnings of this company. So, market price is given here divided by the EPS which we have just calculated. So, it is 53 it has more or less remain seen slightly it has increased. We have done 3 types of ratios initially we started with liquidity then we looked at long term solvency that is debt equity or leverage. Then we looked at profitability versus turnover like a beta or net profit margin. Next we have seen return ratios which calculate profitability versus the capital employed. Now, we are looking at activity or turnover ratios which show how efficiently the assets are being managed. So, the first ratio in this category is fixed asset turnover ratio the formula is sales upon fixed assets. So, you have a sales figure divided by the net block sometimes you can also divided by gross block again this is not a percentage it is in terms of number of times. So, it has increased it has slightly gone down from 8.58 and now it has become 8.25 hope you are getting me same way you have got inventory turnover ratio. In inventory turnover ratio we try to relate sales upon inventory sometimes we calculate cost of sales upon inventory in this case the cost of sales is not available. So, we will try to calculate the sales upon inventory. So, I can use the same formula more or less only difference is instead of sales upon fixed assets now it is divided by inventory. So, you can see inventory is B 20. So, we will divide it by B 20. So, ratio is 5.87 there is some increase. It has now become 5.90 though it is a small increase it shows a good sign it shows that there is a improvement in the utilization of inventories. This can be better understood if we convert it in terms of number of days for which we divide inventory by daily sales or sales upon 365 we can also simply divide our inventory turnover ratio and multiplied by 365. So, in terms of number of days earlier you had 62 days of stock now it has gone down and it has become 61 days of stock or the inventory fine. You can go to inventory figures and check out you will find that the increase has happened, but not in that much of proportion. So, in terms of number of days there is one day reduction in the stock not very significant, but at least thus inventory values have gone down. Same ratios we will also try to calculate for daters. So, similar to inventory turnover ratio you also have daters turnover ratio. This is also known as receivable turnover ratio. So, the formula is daters upon sorry sales upon daters. So, you can see the daters is this 21. So, 3.43 the ratio is really very low it has further gone down to 3.41 in terms of number of days they have 106 days of receivables which have further increased to 107. Does not show very good collection record of course it changes from industry to industry. So, here we were trying to calculate various turnover ratios. So, I hope now you have understood various types of ratios. So, we will stop here and we will go for the next case now. Please have a look at all the ratios once again. Could you guess what is the company or could you at least guess is it a manufacturing company or a service company? I think you can guess that it is a manufacturing company because it holds good amount of inventory and it also has large amount of fixed assets which may not be this case for a IT company. So, this was the these are the figures of Larson and Tebro which have been somewhat adapted to make it easy. Now, this is a balance sheet of some other company try to have a look at it and this is a profit and loss account. We will try to do the similar type of analysis first let us look at horizontal analysis. Look at the balance sheet once again we will go for horizontal analysis I have already made it ready to save time, but have a look at it carefully. So, there are two figures absolute difference and percentage difference. In absolute difference we were trying to calculate the change between the two years. So, 295 minus 197 you get 97.86 and it has been converted in percentage terms at 49 percent. I hope everyone is clear. What this statement is known as? This is known as a comparative statement or a comparative balance sheet I will try to give the name to it. Now, look at each of this figure carefully if you just look at the balance sheet you may not understand exactly what are the items which are changing. This gives a better picture because now you understand which items have changed and how much the change contributes to. So, what do you see have a look at each of these items equity shares share capital has increased by 100 percent. So, it has doubled there is no change in the preference capital. So, total share capital nearly 50 percent increase there was in absolute terms substantial increase in the reserves 15712 crores, but in percentage terms it is only 12 percent there are almost no secured unsecured loans. So, changes are negligible go to the application of funds in the applications the first item is gross block. So, you will realize that again there is a 12 percent increase in the gross block the depreciation provision has increased much more. So, net block has increased only by 3 percent capital work in progress has increased by 255 it is a significant increase in percentage terms. You can also see investments have gone up by 1957 which is 33 percent. So, company has lot of surplus funds which is has invested go down. So, you will observe that there is a major decrease in the sundry daters. So, 10 percent decrease in the sundry daters which is a good sign if company is able to recover its earlier money same thing cash balance has slightly increased. If you look at provisions have increased 70 increase to 476 crores or 171 percent increase in provision. So, this is the overall position of the company I hope there is a clarity. So, in the next session we will try to go in for I will just finish it. So, totally the company has increased by 20 percent 21 percent. So, same some we will continue in the next session. So, we are looking at a case we have started with the horizontal analysis we will look at vertical analysis and also go for the ratios of the same. So, I will request you to somewhat brush up your ratios because that is a very important tool and if you try to look at various ratios and various relationships you will get really lot of insights into the raw data in the form of P and L and balance sheet. Thank you so much we will meet in the next session.