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Corporate Reporting and Analysis - Ratios

The document provides an overview of financial statement analysis, covering credit ratings, solvency, profitability, liquidity management, growth analysis, valuation, and comparative analysis. It includes key ratios and formulas for assessing a company's financial health, such as debt-equity ratio, interest coverage ratio, EBITDA margin, and price-to-earnings ratio. Visualizations are suggested for better understanding of the concepts presented.

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Payal Mahant
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21 views4 pages

Corporate Reporting and Analysis - Ratios

The document provides an overview of financial statement analysis, covering credit ratings, solvency, profitability, liquidity management, growth analysis, valuation, and comparative analysis. It includes key ratios and formulas for assessing a company's financial health, such as debt-equity ratio, interest coverage ratio, EBITDA margin, and price-to-earnings ratio. Visualizations are suggested for better understanding of the concepts presented.

Uploaded by

Payal Mahant
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Simplified Financial Statement Analysis (FSA)

📌 1. Credit Ratings & Solvency

What are Credit Ratings?

 Credit ratings indicate a company's ability to repay its debts. Higher ratings mean
lower risk.

 Rating Scale: AAA (Best) → D (Worst)

Example:

 A company with a AAA rating is considered very safe for investors. If it issues bonds,
investors are likely to buy them due to minimal risk of default.

Solvency Ratios

 Debt-Equity Ratio: Measures how much debt a company uses compared to its equity.

o Formula: Debt / Equity

o Example: If a company has ₹100,000 in debt and ₹200,000 in equity, the ratio
= 0.5. A lower ratio is preferable, indicating financial stability.

o Visualization:

 📊 A bar chart showing Debt and Equity proportions (e.g., Debt =


₹100,000, Equity = ₹200,000)

 Interest Coverage Ratio: Indicates a company’s ability to pay interest on its debt.

o Formula: EBIT / Interest Expenses

o Example: If EBIT = ₹50,000 and Interest = ₹10,000, the ratio = 5. Higher ratios
are better.

o Visualization:

 📊 A pie chart showing EBIT distribution with Interest expense as a


portion.

Asset Securitization

 A process where banks convert loans (e.g., mortgages) into tradable securities to get
liquidity.

 Example: A bank packages its mortgage loans into a pool and sells securities backed
by these loans to investors. The bank receives liquidity and reduces its risk of default.

o Visualization:
 📈 Flowchart showing loan pooling → securitization → sale to
investors.

📌 2. Profitability Analysis

Profitability Ratios

 EBIDTA Margin: Measures operational efficiency.

o Formula: EBIDTA / Net Sales × 100

o Example: ₹5,00,000 EBIDTA on ₹20,00,000 sales = 25% Margin.

o Visualization: 📊 Bar chart comparing revenue and EBIDTA.

 Net Profit Margin (PAT Margin): Measures profitability after all expenses.

o Formula: PAT / Net Sales × 100

o Example: ₹2,00,000 PAT on ₹20,00,000 sales = 10% Margin.

o Visualization: 📊 Pie chart dividing Net Sales by PAT.

Return on Capital Employed (ROCE)

 Measures overall profitability and efficiency.

o Formula: EBIT / Capital Employed

o Example: If EBIT is ₹1,000 and Capital Employed is ₹5,000, ROCE = 20%.

o Visualization: 📊 Bar chart showing EBIT vs Capital Employed.

Return on Equity (RoE)

 Measures profitability generated from shareholders’ equity.

o Formula: PAT / Net Worth

o Example: If PAT is ₹1,000 and Net Worth is ₹10,000, RoE = 10%.

o Visualization: 📈 Line chart showing PAT and Net Worth over time.

📌 3. Liquidity Management

Working Capital Management

 Ensures short-term financial health by managing current assets and liabilities.

 Current Ratio: Measures liquidity position.


o Formula: Current Assets / Current Liabilities

o Example: ₹1,000,000 / ₹500,000 = 2.0 (Good Liquidity)

o Visualization: 📊 Bar chart comparing Current Assets and Current Liabilities.

 Quick Ratio: Excludes inventory for a more stringent liquidity measure.

o Formula: (Current Assets - Inventory) / Current Liabilities

Negative Working Capital

 Occurs when current liabilities exceed current assets.

 Example: Companies like Hindustan Unilever & Tata Motors operate with negative
working capital effectively by managing receivables and payables well.

o Visualization: 📈 Line chart showing positive and negative working capital


scenarios.

📌 4. Growth Analysis

Compounded Annual Growth Rate (CAGR)

 Measures growth over a period of time.

o Formula:

o CAGR = ((Ending Value / Beginning Value) ^ (1 / No. of Years)) - 1

o Example: If sales grew from ₹100 crores to ₹250 crores over 5 years, CAGR =
25.74%.

o Visualization: 📈 Graph showing sales growth over 5 years.

Business Life-Cycle Stages

1. Idea (Startup): High growth potential but high risk.

2. Testing (Early Growth): Proving the business model, improving processes.

3. Scaling (Growth): Rapid revenue growth, but profit margins may vary.

4. Maturity (Stable Growth): Stable revenue with consistent profit margins.

5. Decline (End Game): Lower growth, potentially reduced profits.

 Visualization: 📊 A lifecycle curve diagram.

📌 5. Valuation
Price to Earnings (P/E) Ratio

 Compares share price to earnings per share (EPS).

o Formula: Market Price / EPS

o Example: ₹200 / ₹10 = 20 (P/E Ratio)

o Visualization: 📊 Comparison of Market Price and EPS.

Earnings Per Share (EPS)

 Measures profitability per share.

o Formula: PAT / No. of Shares

o Example: ₹1,000,000 PAT / 100,000 shares = ₹10 EPS.

📌 6. Comparative Analysis

Horizontal Analysis

 Compares financial data over multiple periods.

o Example: Revenue increasing from ₹1,200,000 to ₹1,498,000 is a 24.8%


increase.

o Visualization: 📈 A trend chart showing revenue growth.

Vertical Analysis

 Shows each item as a percentage of a base figure (e.g., Sales or Total Assets).

o Example: Current Liabilities as a percentage of Total Assets.

I have added visualization suggestions for each concept. Let me know if you want me to
include actual graphs and diagrams for a clearer understanding. 😊

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