CB - Closure Look at Annual Report

C
r
e
d
i
t

R
e
s
e
a
r
c
h
Section 2
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Section 2
Copyrighteducorporatebridge.com
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Table of Contents
Annual Report Analysis
Ratio Analysis
C
r
e
d
i
t

R
e
s
e
a
r
c
h
C
r
e
d
i
t

R
e
s
e
a
r
c
h
C
r
e
d
i
t

R
e
s
e
a
r
c
h
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Important Sections to look at Annual Report
Management Discussion
Balance Sheet
Profit & Loss a/c
Cash Flow Statement
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Cash Flow Statement
Auditors Notes
Notes to accounts/ Accounting Policies
Schedules
Foot Note
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Balance Sheet
Tells what company owns and owes
Balance Sheet is the financial snapshot of companys health
Balance Sheet has three main categories-
- Assets
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Liabilities
- Equity
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Equity
The difference between what company owns and what it owes
Equity= Total Assets- Total External Liabilities
Two main items-
- Paid up capital
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Reserve & Surplus (includes General Reserve, Retained Earning, etc.)
Two types of shareholdings-
- Equity share capital
- Preference share capital
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Assets
There are two main types of assets
Current assets- Likely to be used up/ converted into cash within one
business cycle
Main current assets being-
-Inventory
-Debtors
C
r
e
d
i
t

R
e
s
e
a
r
c
h
-Debtors
-Cash
Non current Assets- mostly fixed in nature and not converted into cash in
one business cycle
And includes-
-Fixed assets
-Investments
-Intangible assets
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Current Assets
Inventories
Which includes-
-Raw material
-WIP
-Finished Goods
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Debtors (receivables)
Tells speed at which company collects what it owed and tells lot about financial
efficiencies
Cash
Is a cash real indicator of companys health?
Is too much of cash in books good for company?
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Non Current Assets
Fixed Assets
- Plant & Machinery
- Furniture
- Property
Investments
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Investments
- Long term
- Short term
Intangible Assets
- Copyrights
- Patents etc
(not too much of attention needed unless company is in financial distress)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Liabilities
Liabilities can be divided into two parts-
-Current Liabilities
Obligation to pay in a year and includes-
- Creditors
- Loans & Advances (short term)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
-Non Current Liabilities
- Secured
- Unsecured
Is increasing debt levels always bad sign?
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Fictitious and Intangible Assets
Fictitious assets
- Example of fictitious assets are deferred revenue expenditure whose
benefit is derived over long period of time.
- Even accumulated losses are also fictitious assets as they are written
off over a period of time.
- Following are the examples of fictitious assets are-preliminary
expenses, discount on issue on debenture and shares, underwriting
C
r
e
d
i
t

R
e
s
e
a
r
c
h
expenses, discount on issue on debenture and shares, underwriting
commission, miscellaneous expenditure, profit and loss (Dr).
All fictitious assets are intangible but all intangible assets are not
fictitious example goodwill, patents, trademarks, copyrights are
intangible but not fictitious.
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Analysing Profit & Loss a/c
What Profit & Loss a/c tells?
- Earning Growth
- Expenditure / cost
- Interest expense
- Depreciation cost
- Operating profits
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Operating profits
- Net profits
- Dividend / retained profits
- Exceptional items
What it does not tell?
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Analysisng Profit & Loss a/c cont.
Three important sections of Profit & Loss a/c
- Total Revenue
- Operating Cost
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Financing Cost
- Asset cost
- Profitability
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Cash Flow Statement
Shows how company is able to pay for its operations and future growth
Three section of cash flow statement
- Cash flow from operating activities
How much cash company is able to generate from business operations
C
r
e
d
i
t

R
e
s
e
a
r
c
h
How much cash company is able to generate from business operations
(what does negative cash flow from operating activities indicates?)
- Cash flow from investing activities
How much amount is spent on capital expenditure, equipment purchase,
new business acquisition
- Cash flow from financing activities
Cash associated with outside financing activities (Issue of long term debt,
share capital, bonds and is paid back)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Free Cash Flow
It shows the companys ability to pay debt, dividend, share buy back
and facilitates growth of business
Free cash flow = Net income
+ Depreciation/amortisation
- Change in working capital
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Change in working capital
- Capital expenditure
- Can be returned to shareholders
- Invested into business operations
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Net Debt
Net Debt = Long term liabilities- Cash and Cash Equivalent (includes
Cash, Bank Balance, Fixed Deposit, etc.)
True debt outstanding for the company
C
r
e
d
i
t

R
e
s
e
a
r
c
h
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Return on Equity (RoE)
Tells how well companys assets are managed
RoE = Net income after tax
Shareholders Equity
Shareholders Equity = Total Assets- Total External Liability
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Tells how profitably company can expand its business
RoE should be greater than prevailing bank interest rates
It does not tell about debt of the company
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Ratio Analysis
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Ratio Analysis
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Return on Capital Employed (RoCE)
RoCE = Operating Profit/ Capital Employed
where
Operating profit = PBIDT
Capital employed = Total assets Current liabilities
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Capital employed = Total assets Current liabilities
(Cash and assets actually used to carry out business)
RoCe gives better picture than RoE
C
r
e
d
i
t

R
e
s
e
a
r
c
h
RoE V/s RoNW which is better ?
RoCE gives better picture than RoE
RoE does not tell anything about Debt while RoCE takes both debt and
equity while calculating returns
RoCE tells how much companys resources (both debt and equity) is
C
r
e
d
i
t

R
e
s
e
a
r
c
h
RoCE tells how much companys resources (both debt and equity) is
generating profits.
RoCE would be lower when the company is in expansion phase
The gap between RoCE and RoE is on account of leverage
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Ratio Analysis
Financial Ratio (Balance Sheet)
- Current Ratio
- Quick Ratio
- Debt Equity Ratio
Operating Ratio (Profit & Loss a/c)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
- Operating Ratio
- Expense Ratio
- Net Profit Ratio
- Inventory Ratio
Composite Ratio (Both Balance Sheet & Profit & Loss a/c)
- Fixed Assets Turnover
- Debtors Turnover Ratio
- Creditors Turnover Ratio
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Financial Ratio (Balance Sheet Ratio)
Current Ratio
It is relationship between the current assets and current liabilities
Current Ratio = Current Assets/ Current Liabilities
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Net Working Capital
Surplus of long term sources over long term uses (difference of current
assets and current liabilities)
NWC= Current Assets- Current Liabilities
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Current ratio measures short term liquidity of the concern and its
ability to meet short term obligations
Higher ratio may be good from creditors point but in a long run it may
effect profitability
C
r
e
d
i
t

R
e
s
e
a
r
c
h
It denotes liquidity of the concern at a given point
Current ratio should be studied with the changes in Net Working
Capital
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Quick Ratio/ Acid Test Ratio
It is a ratio between Quick Current Assets and Current Liabilities
Quick Current Assets: Cash/ Bank balance + receivables upto 6 months
+Quickly realizable securities ( G Secs, Quoted shares, Bank FDs)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Quick Current Assets / Current Liabilities
(Inventory is not considered as quickly and easily realizable current assets)
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Debt Equity Ratio
It is a relationship between borrowers fund (debt) and owners fund (Equity)
Long term debt= liabilities of long term nature
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Tangible net worth= Total of capital + reserve & surplus intangible assets
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Operating Profit Ratio
Its defined as
(Operating Profit/ Net sales)*100
Operating Profit = Profit before interest, depreciation and tax adjusted
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Operating Profit = Profit before interest, depreciation and tax adjusted
Net Profit Ratio
It is defined as
(Net Profit/ Net sales)*100
It measures overall profitability
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Inventory/Stock Turnover Ratio
(Av inventory/ sales)* 365 for days
(Av inventory/ sales)* 52 for weeks
(Av inventory/ sales)* 12 for months
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Av inventory or stocks = (Opening stock + Closing stock)
2
It tells number of times the inventory is rotated during the relevant
accounting period
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Composite Ratio
Debtors Turnover Ratio
Also called as Debtors Velocity or Average Collection Period or Period of
credit given
(Average Debtors/Sales)*365 for days
Asset Turnover Ratio
C
r
e
d
i
t

R
e
s
e
a
r
c
h
Asset Turnover Ratio
Net Sales/ tangible Assets
Creditors Turnover Ratio
Also called as Creditors Velocity or Average Payable Period, which
determines the creditors payment period
(Average Creditors/Sales)*365 for days

CB - Closure Look at Annual Report

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CB - Closure Look at Annual Report

Uploaded by

Copyright:

Available Formats

C

You might also like