Management Accounting - I: - Dr. Sandeep Goel
Management Accounting - I: - Dr. Sandeep Goel
Management Accounting - I: - Dr. Sandeep Goel
ACCOUNTING - I
FINANCIAL ANALYSIS
Internal users
External users
TOOLS/TECHNIQUES OF FINANCIAL
ANALYSIS
Horizontal Analysis
Vertical Analysis
Trend Analysis
Ratio Analysis
Du Pont Analysis
Comparative Analysis / Horizontal Analysis
Profit Variants
- Gross Profit ( Sales – COGS)
- EBITDA (Cash Operating Profit)
- EBIT(PBIT) / (Operating profit)
- EBT(PBT)
- EAT(PAT) / Net Profit
Multi-Step Profit and Loss Account
RIL
(Rs. in crore)
2008-09
Sales 146,328.07
Less: Cost of production of goods sold (COGS) / Direct Expenses 118,306.32
Gross Profit - GP 28,021.75 19.15%
Less: Indirect expenses before depreciation, interest & tax 8,062.05
Profit
= Income – Expenses
Profit Variants
- Gross Profit ( Sales – COGS)
- EBITDA (Cash Operating Profit)
- EBIT(PBIT) / (Operating profit)
- EBT(PBT)
- EAT(PAT) / Net Profit
Profitability Ratios
To find out whether the Company is earning desired profits
or not?
2. Cash Operating Profit Ratio = Cash Operating Profit / EBITDA
Sales
2005 2004
Gross Profit
Sales 2600 2200
Less:Cost of production of goods sold
Raw materials consumed (1490) (1260)
Excise duty (215) (195)
Manufacturing expenses (160) (120)
Stock adjustment 85 1780 120 1445
820 745
Gross profit margin (%) (820 x 100) 31.54 (745 x 100 ) 33.86
2600 2200
Gross profit margin 31.54 % 33.86 %
(Rs. in lakhs)
2005 2004
Cash Operating Profit (EBITDA)
Gross profit 820 745
Less:Operating expenses (except depreciation)
Administration expenses (65) (40)
Selling and distribution expenses (80) (145) (60) (100)
675 645
Cash operating profit margin (%) (675 x 100) 25.96 (645 x 100 )
29.32
2600 2200
Cash operating profit margin 25.96 % 29.32 %
(Rs. in lakhs)
2005 2004
Operating Profit (EBIT)
Cash operating profit 675 645
Less: Depreciation (125) (100)
550 545
Operating profit margin (%) (550 x 100) 21.15 (545 x 100 ) 24.77
2600 2200
(Rs. in lakhs)
2005 2004
Net Profit (PAT)
Operating profit 550 545
Add: Non- operating income
Other income 165 120
Profit on sale of fixed assets 95 -
Profit on sale of investment - 260 35 155
Less:Non- operating expenses
Interest (165) (180)
Loss on sale of fixed assets - (25)
Loss on sale of investments (20) (185) - (205)
EBT 625 495
Operating profit margin 21.15 % 24.77 %
(Rs. in lakhs)
2005 2004
Net Profit (PAT)
EBT 625 495
Less: Provision for tax (188 ) (149)
437 346
Net profit margin (%) (437 x 100) 16.81 (346 x 100 ) 15.73
2600 2200
2005 2004
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
March,05 March,06 March,07 March,08 March,09
Cash Operating Profit Ratio (%) 23.87 27.20 28.81 30.82 26.24
Operating Profit Ratio (%) 21.64 24.94 26.67 28.56 23.95
Net Profit Ratio (%) 13.90 16.49 18.19 20.15 16.13
BEL - COST EFFICIENCY
84.00
82.00
80.00
78.00
76.00
74.00
72.00
March,05 March,06 March,07 March,08 March,09
Operating Ratio (%) 82.88 76.00 79.88 78.00 79.34
RIL - PROFITABILITY
100.00
80.00
60.00
40.00
20.00
0.00
March,08 March,09
Gross Profit Ratio(%) 93.96 96.44
Cash Operating Profit Ratio (%) 16.61 13.64
Operating Profit Ratio (%) 13.13 10.09
Net Profit Ratio (%) 13.97 10.46
TCS - PROFITABILITY
150.00
100.00
50.00
0.00
March,08 March,09
Gross Profit Ratio(%) 95.76 119.32
Cash Operating Profit Ratio (%) 26.11 26.87
Operating Profit Ratio (%) 23.61 25.01
Net Profit Ratio (%) 24.65 20.96
6. Return on Investment/
Return on Capital Employed =
EBIT
Capital Employed*
*Capital Employed =
Net Worth + Preference Share Capital + Long-term loans
Less: Miscellaneous Expenses / Fictitious Assets
or
Net Block + Working Capital
7. Return on Equity/
Return on Net Worth =
PAT - Preference Dividend – Dividend distribution Tax
Net Worth*
2005 2004
Operating Profit (EBIT) 550 545
Capital Employed
Equity share capital 1900 1250
6010 4780
Less: Miscellaneous expenses 75 50
5935 4730
Or
2005 2004
Operating Profit (EBIT) 550 545
Capital Employed 5935 4730
50.00
40.00
30.00
20.00
10.00
0.00
March,05 March,06 March,07 March,08 March,09
ROI (%) 48.67 46.71 44.00 36.22 29.08
ROE (%) 28.32 28.76 27.96 25.73 19.71
RIL- RETURN EARNED
25.00
20.00
15.00
10.00
5.00
0.00
March,08 March,09
ROI (%) 14.53 7.03
ROE (%) 23.55 11.86
TCS- RETURN EARNED
50.00
40.00
30.00
20.00
10.00
0.00
March,08 March,09
ROI (%) 41.00 41.23
ROE (%) 38.85 33.13
3. Following are the financials of Reality Ltd. For two years:
(Rs. in million)
Particulars 1999-2000 1998-1999
PAT (after preference dividend) 1250 620
14% Preference Shares (of Rs. 100 each) 200 200
Equity Shares (of Rs. 10 each) 600 500
Reserves ands Surplus 1200 1050
Pay-out Ratio 50% 40%
Market Price Per Share (Rs.) 40 30
Miscellaneous Expenditure (not written off) 125 150
During the year, fresh shares were issued at premium of Rs. 30 on October 1, 1999.
Calculate dividend yield and earning per share.
Realty Ltd.
Solution (Rs. in million)
1999-2000 1998-1999
Proposed dividend* 625 310
Dividend yield (Rs. per share) [625 /(40x60)] 0.26 [ 310/(30x50)] 0.21
*Pay-out ratio = Proposed dividend x 100 [For finding out pay-out, PAT
PAT should be after pref.
Dividend ]
Basic EPS
Particulars
Outstanding Equity shares (number in lakhs) 150
14% Convertible Preference Shares of Rs. 100 each (number in 10
lakhs) [each preference share is convertible into two equity shares]
13% Convertible Debentures of Rs. 100 each (number in lakhs) [each 10
preference share is convertible into two equity shares]
Employee stock option [Exercise Price Rs. 70] (number in lakhs) 8
Average Fair Value Per Share (on the basis of weekly closing share 120
prices during January – March, 2001)
Tax Rate 35%
Tax on Preference Dividend 20%
= Rs. 6.88
Effect of dilution Increase in Increase in Ranking as per
on earnings PAT (Profit available no. of shares dilutive impact
to equity shareholders)
(Rs. lakhs) (Rs. lakhs)
14% Convertible 168(140+28) 20 3
preference shares
13% Convertible 84.50* 20 2
Debentures
ESOPs - 8 1
6.48
BEL - RETURN DISTRIBUTED
120.00
100.00
80.00
60.00
40.00
20.00
0.00
March,05 March,06 March,07 March,08 March,09
EPS 55.80 72.88 89.86 103.34 93.23
DPS 11.20 14.60 18.00 20.70 18.70
D/P Ratio (%) 20.07 20.03 20.03 20.03 20.06
RIL - RETURN DISTRIBUTED
150.00
100.00
50.00
0.00
March,08 March,09
EPS 131.98 95.25
DPS 11.22 12.06
D/P Ratio (%) 8.50 12.66
TCS - RETURN DISTRIBUTED
50.00
40.00
30.00
20.00
10.00
0.00
March,08 March,09
EPS 43.69 45.53
DPS 14.00 14.00
D/P Ratio (%) 32.04 30.75
CORPORATE CASES
Profitability Ratios (2002 - 2003)
Company NPM% Payout% EPS Rs. ROCE % ROE%
HLL’s figures are for calendar yr. 2002; P&G’s for yr. July 2002-June 2003.
All other companies follow April- March.
Analysis
1. FMCG (HLL &P&G) High payout ratio
200.00
150.00
100.00
50.00
0.00
March,05 March,06 March,07 March,08 March,09
Debtors Turnover Ratio 4.59 3.47 2.33 2.00 2.03
Average Collection Period (Days) 79 105 156 183 180
RIL - DEBTORS MANAGEMENT
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
March,08 March,09
Debtors Turnover Ratio 22.36 32.01
Average Collection Period (Days) 16 11
TCS - DEBTORS MANAGEMENT
80.00
60.00
40.00
20.00
0.00
March,08 March,09
Debtors Turnover Ratio 4.88 6.03
Average Collection Period (Days) 75 61
BEL - INVENTORY MANAGEMENT
200.00
150.00
100.00
50.00
0.00
March,05 March,06 March,07 March,08 March,09
Inventory Turnover Ratio 3.02 3.41 3.17 3.04 1.91
Inventory Holding Period (Days) 121 107 115 120 191
RIL - INVENTORY MANAGEMENT
50.00
40.00
30.00
20.00
10.00
0.00
March,08 March,09
Inventory Turnover Ratio 7.62 7.97
Inventory Holding Period (Days) 48 46
1,000.00
800.00
600.00
400.00
200.00
0.00
March,08 March,09
Inventory Turnover Ratio 505.98 842.07
Inventory Holding Period (Days) 1 0
BEL - ASSETS MANAGEMENT
10.00
8.00
6.00
4.00
2.00
0.00
March,05 March,06 March,07 March,08 March,09
Working Capital Turnover Ratio 2.90 2.33 1.97 1.56 1.47
Fixed Assets Turnover Ratio 8.76 9.03 9.42 9.13 8.99
RIL - ASSETS MANAGEMENT
8.00
6.00
4.00
2.00
0.00
March,08 March,09
Working Capital Turnover Ratio 7.39 7.70
Fixed Assets Turnover Ratio 1.64 0.86
8.00
6.00
4.00
2.00
0.00
March,08 March,09
Working Capital Turnover Ratio 4.89 5.22
Fixed Assets Turnover Ratio 6.46 6.68
CORPORATE CASES
Assets Efficiency Ratios (2002 - 2003)
Company Fixed Assets Inventory Production Collection Suppliers
Turnover Holding Period Cycle Period Credit
(Days) (Days) (Days) (Days)
HINDALCO 1.640 77 22 27 35
NALCO 0.792 333 21 22 27
HLL’s figures are for calendar yr. 2002; P&G’s for yr. July 2002-June 2003.
All other companies follow April- March.
Analysis
1. FMCG (HLL &P&G) Fixed assets’ efficiency is very
high as compared to others
*Fixed Assets comprise of Net Block and Capital Work- in- Progress
Issue:
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
March,05 March,06 March,07 March,08 March,09
Provision for obsolescence (%) 4.66% 5.94% 5.67% 5.05% 3.51%
What about Debtors ?
Doubtful Debts as a Percent of Total Debts in BEL
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
March,05 March,06 March,07 March,08 March,09
Doubtful Debts (%) 20.37% 17.14% 14.55% 13.57% 13.26%
Debtors Composition
30000
25000 3484
3234
20000 2884
14237
15000 12829
2105 9887
10000
7479
5000 7047 7728 8545
2698
0
March,06 March,07 March,08 March,09
Doubtful 2105 2884 3234 3484
Good - Less than 6 months 7479 9887 12829 14237
Good - Over 6 Months 2698 7047 7728 8545
Liquidity Ratios
To find out whether the Company can meet its current
obligations as and when they arise?
Current Ratio = Current Assets
Current Liabilities
Liquid Ratio = Liquid assets
Current Liabilities
Super Quick Ratio = Cash and Bank
Current Liabilities
1. Compute the short-term solvency ratios from the following details:
Balance Sheet as at 31 st March, 2001
(Rs. in lakhs)
Notes
1. Debtors are net of provisions for doubtful debts of Rs. 25 lakhs as on 31
March, 2001(Rs. 20 lakhs in the previous year).
2. Investments include Rs. 5 lakhs of short -term investments (Rs. 2 lakhs in
previous year).
3. Staff Advance are for a period of 2 years.
Solution
(Rs. in lakhs)
2001 2000
A. Current assets
Inventories 175 210
Debtors (net of provisions) 125 175
Prepaid expenses 45 25
Cash and bank balance 30 10
Advance income tax 40 30
Short-term investments 5 2
420 452
(Rs. in lakhs)
2001 2000
B. Current liabilities
Cash credit 75 100
Sundry creditors 80 90
Provision for tax 25 20
Proposed dividend 50 30
230 240
2001 2000
Current ratio 420/230 452/240
= 1.83 = 1.88
2002
Current credit terms of suppliers 75 days
Revised term (with cash discount of 14 % p.a.) 14 days
2.00
1.50
1.00
0.50
0.00
March,0 March,0 March,0 March,0 March,0
5 6 7 8 9
Current Ratio 1.41 1.49 1.62 1.71 1.71
Liquid Ratio 1.02 1.15 1.24 1.35 1.35
Super Quick Ratio 0.49 0.59 0.64 0.66 0.66
RIL - LIQUIDITY
2.00
1.50
1.00
0.50
0.00
March,08 March,09
Current Ratio 1.78 1.53
Liquid Ratio 1.19 1.12
Super Quick Ratio 0.18 0.62
TCS - LIQUIDITY
2.50
2.00
1.50
1.00
0.50
0.00
March,08 March,09
Current Ratio 2.04 1.87
Liquid Ratio 2.04 1.86
Super Quick Ratio 0.15 0.32
Solvency Ratios
To find out whether the Company is financially sound, i.e.
whether the Company can meet its long-term obligations on the
due time?
Debt- Equity Ratio = Long-term Debt
Shareholders’ Funds*
*Shareholders’ Funds = Net Worth + Preference Share Capital
Less: Fictitious Assets / Miscellaneous Expenses
Interest Coverage Ratio = EBIT
Interest on Long- term Loans
Debt – service Coverage Ratio
PAT +Depreciation + Other Non-cash charges + Interest
Interest on Long- term Loans +Installments paid during the
year on long-term loans
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
March,05 March,06 March,07 March,08 March,09
Debt-Equity Ratio 0.01 0.00 0.00 0.00 0.00
Interest Coverage Ratio 76.38 34.45 1317.50 5858.00 102.56
RIL - SOLVENCY
20.00
15.00
10.00
5.00
0.00
March,08 March,09
Debt-Equity Ratio 0.45 0.58
Interest Coverage Ratio 16.97 8.46
TCS - SOLVENCY
1400.00
1200.00
1000.00
800.00
600.00
400.00
200.00
0.00
March,08 March,09
Debt-Equity Ratio 0.00 0.00
Interest Coverage Ratio 1,262.42 753.14
Market Based / Valuation Ratios
To find out how the market responses to company’s performance?
Price – Earning Ratio (P/E) = Market price per share / EPS
Price-to-Book Ratio = Market price per share / Book value per share
BEL - VALUATION
2000.00
1500.00
1000.00
500.00
0.00
March,05 March,06 March,07 March,08 March,09
Book Value per share 197.05 253.39 321.43 401.63 472.96
Market Value per share 665.00 1321.70 1501.00 1057.00 882.90
Market Value to Book Value per share 3.37 5.22 4.67 2.63 1.87
RIL - VALUATION
2500.00
2000.00
1500.00
1000.00
500.00
0.00
March,08 March,09
Book Value per share 560.44 803.13
Market Value per share 2264.50 1523.20
Market Value to Book Value per share 4.04 1.90
TCS - VALUATION
1000.00
800.00
600.00
400.00
200.00
0.00
March,08 March,09
Book Value per share 112.45 137.40
Market Value per share 810.90 540.00
Market Value to Book Value per share 7.21 3.93
BEL - PRICE EARNING RATIO
20.00
15.00
10.00
5.00
0.00
March,05 March,06 March,07 March,08 March,09
Price - Earning ratio 11.92 18.14 16.70 10.23 9.47
17.50
17.00
16.50
16.00
15.50
15.00
March,08 March,09
Price - Earning ratio 17.16 15.99
March,08 March,09
EPS 131.98 95.25
20.00
15.00
10.00
5.00
0.00
March,08 March,09
Price - Earning ratio 18.56 11.86
March,08 March,09
EPS 43.69 45.53
2.50
2.00
1.50
1.00
0.50
0.00
March,05 March,06 March,07 March,08 March,09
Dividend Yield (%) 1.68 1.10 1.20 1.96 2.12
14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
March,05 March,06 March,07 March,08 March,09
Market capitalisation (Rs. in cr.) 5320.00 10573.60 12008.00 8456.00 7064.00
RIL - MARKET CAPITALISATION
350000.00
300000.00
250000.00
200000.00
150000.00
100000.00
50000.00
0.00
March,08 March,09
Market capitalisation (Rs. in cr.) 329099.79 239675.52
TCS - MARKET CAPITALISATION
80000.00
60000.00
40000.00
20000.00
0.00
March,08 March,09
Market capitalisation (Rs. in cr.) 79354.67 52844.40
DU PONT ANALYSIS
• It enables to understand the performance of RONW in a
better way.
Return on Equity/ = Net Profit Ratio X Total Assets Turnover Ratio X Assets to Equity Ratio /
Return on Net Worth Financial Leverage Ratio
ROE/RONW = PAT
X 100
Equity Shareholders'Funds
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,05 28.32 13.90 0.77 2.66
March,06 28.76 16.49 0.70 2.48
March,07 27.96 18.19 0.70 2.21
March,08 25.73 20.15 0.60 2.11
March,09 19.71 16.13 0.55 2.21
BEL VS. BHEL - ROE COMPARISON
(2008-09 )
25
20
15
10
0
ROE (%) PAT/Sales (%) Sales/Assets Assets/Equity
BEL 19.71 16.13 0.55 2.21
BHEL 24.25 11.19 0.71 3.06
RIL - DU PONT ANALYSIS
25.00
20.00
15.00
10.00
5.00
0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,08 23.55 13.97 1.09 1.57
March,09 11.86 10.46 0.65 1.77
TCS - DU PONT ANALYSIS
40.00
30.00
20.00
10.00
0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,08 38.85 24.65 1.80 0.92
March,09 33.13 20.96 1.78 0.94
DISCLOSURES IN ANNUAL REPORT
• Financial Statements
• Chairman’s/MD’s Address
• Directors’ Report
• Auditors’ Report