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Use of Financial Statements

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22 views14 pages

Use of Financial Statements

Uploaded by

imandimahawatte2008
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Financial Analysis

and
Interpretation

Piyal Hennayake
Balance Sheet Financial Position at
a Set Point in Time

• Assets Liabilities Equity

The owner’s
What the What the contributions +
business owns business owes profit/losses
Future Economic Benefit Future sacrifice of Equity = Assets - Liabilities
Control economic benefit
Past transaction or event Present obligation
Past transaction or event

Classification Classification Classification


Current Current Contributed equity
Non-current Non-current Reserves
Retained profits
Profit and Loss Statement

Knowledge of an entity’s profit is crucial


in assessing past performance and
forming an opinion as to expected
future performance
Statement of Cash-flow

Shows for an entity what money came in and


how it was spent

Classified into 3 main sections


• Operating Activities
• Investing Activities
• Financing Activities
Activity Classification in the Statement
of Cash Flows
Cash inflows Cash outflows
■ Payments to suppliers and
Operating employees
■ Receipts from customers
activities ■ Interest paid
■ Taxes paid

■ Sale of property, plant and


■ Purchase of property, plant
equipment
and equipment
Investing ■ Receipt of loan payments
■ Making loans
activities ■ Sale of equity investments
■ Purchase of equity in other
■ Dividends received
entities
■ Interest received

■ Repayment of borrowed cash


■ Borrowing cash
Financial ■ Proceeds from issuing
■ Payments to redeem the
activities shares, debentures etc
entity’s shares, debentures and
dividends
Financial Statement Analysis

• Horizontal analysis
• Vertical analysis
• Trend analysis
• Ratio analysis
Ratio Analysis

Three Step Process

1 - Calculate a meaningful ratio


2 - Compare the ratio with benchmark
3 - Interpret and seek explanation
Ratio Analysis (Contd.)

• Profitability
• Inform the returns and risks associated with the investment
decision
• Liquidity
• Ability to meet its short term commitments
• Asset Efficiency
• How management is managing its assets
• Capital Structure
• Long term stability and financing decisions
• Market Performance
• Applicable only for listed companies
• Relates the company’s financial performance to the share
price & indicate the market sentiments towards the company
Benchmarks

Usefulness of Ratios is limited unless it is


compared with a relevant benchmark

 Compare the company’s ratios over time


to identify trends
 Compare the company’s ratios with these
of other entities operating in the same
industry (Inter-industry analysis)
 Compare the company’s ratios with
industry averages
ROE Decomposition Analysis
Return on Equity

Return on Assets Leverage

Debt ratio or Debt equity ratio


Profit Asset Interest coverage ratio
Margin Turnover

Gross Profit Expense


Margin Ratios
Cash Flow Statement

• Helps us to look behind accrual


accounting and see actual cash receipts
and payments
• Provides insight into sources and timing
of cash and business needs competing
for cash
• Most useful tool for lenders to asses the
company’s credit worthiness
Sources of Uses of Cash
Cash

Increase in working
Cash Operating Investment
Profit after Tax
Purchasing of Fixed
Decrease in working Asset
Investment

Repayment of Debt
Sale of Fixed Asset
Pool of
and Payment of
Cash Dividend

Increase in Debt Redemption of


Debentures

Increase in Equity Net Loss from


Operations
Sources & Uses of Cash
Increase Decrease

• Assets (Use) Source


• Liabilities & Source (Use)
Equity
Cash Flow Statement Analysis
Cash generated from Operations xxx
(after deducting for gratuity and tax)

Less: Interest (xx)


Capital Repayment of Loans/debentures etc (xx)
Surplus/Deficit

Long Term Funds


Inflows: Proceeds from Loans xx
Issuance of shares xx
Outflow: for long term investments (xx)
Surplus/Deficit

Short Term Funds


Inflows: Interest received/Dividends received xx
Outflow : Dividends paid (xx)
Surplus/Deficit

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