Financial Statement Analysis

Prof. C. P. Gupta Department of Financial Studies

University of Delhi, South Campus New Delhi

The Challenge is to make meaningful sense from Accounting Numbers!!!!!!!!!!!!!!!!!!!!!!

Rs. Rs.

Rs. Rs.

Rs. Rs.

Rs. Rs.

First Step is towards …

Our journey starts with……

BALANCE SHEET…

¨ A statement that shows assets and liabilities of a company at a particular date

¨ A statement that shows balances of various accounts to be carried to next accounting period

BALANCE SHEET BALANCE SHEET

¨ an important accounting identity i.e Liabilities = Assets

BALANCE SHEET gives … BALANCE SHEET gives …

Liabilities Assets

Another way to understand …

BALANCE SHEET…

¨ A statement that shows the sources

and the application of funds.

BALANCE SHEET… A DIFFERENT PERSPECTIVE!!!

BALANCE SHEET… A DIFFERENT PERSPECTIVE!!!

Liabilities Assets

Balance Sheet as on ...

Sources of funds Application of funds

What a company owes

What a company owns

Now, we try to understand the financial statements of TATA STEEL!

First…

The Balance Sheet …

The Sources of Fund…

BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…

(Rs. in Crores)

Particulars 2008 2009 2010 2011

SOURCES OF FUNDS:

SHAREHOLDER'S FUNDS

Share Capital 6,203.30 6,203.45 887.41 959.41

Share Warrants 178.20

Reserves and Surplus 21,097.43 23,972.81 36,074.39 45,807.02

Total Shareholders' Fund

27,300.73

30,176.26

36,961.80

46,944.63

LOAN FUNDS

Secured Loans 3,520.58 3,913.05 2,259.32 2,009.20

Unsecured Loans 14,501.11 23,033.13 22,979.88 26,291.94

18,021.69 26,946.18 25,239.20 28,301.14

DEFERRED TAX LIABILITY (NET) 681.80 585.73 867.67 936.80

PROVISION FOR EMPLOYEE SEPARATION COMPENSATION 1,071.30 1,033.60 957.16 873.34

TOTAL

47,075.52

58,741.77

64,025.83

78,555.91

The Balance Sheet …

The Uses of Fund…

BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…(Rs. in Crores)

Particulars 2008 2009 2010 2011APPLICATION OF FUNDS FIXED ASSETS Gross Block 20,847.04 23,544.69 26,149.66 29,815.64 Less: Amortization 100.47 100.47 106.07 126.30 Less: Depreciation 8,123.01 8,962.00 10,037.56 10,914.86

Net Block 12,623.56 14,482.22 16,006.03 18,774.48 Capital Work in Progress - - - - 12,623.56 14,482.22 16,006.03 18,774.48 INVESTMENTS 4,103.19 42,371.78 44,979.67 46,564.94

FOREIGN CURRENCY MONETARY ITEM TRANSLATION DIFFERENCE ACCOUNT - 471.66 (206.95) -

CURRENT ASSETS, LOANS & ADVANCES Inventories: Stores and Spare Parts 557.67 612.19 623.76 716.18 Inventories: Stock-in-Trade 2,047.31 2,868.28 2,453.99 3,237.58 Sundry Debtors 543.48 635.98 434.83 428.03 Cash in Hand and at Bank 465.04 1,590.60 3,234.14 4,141.54 Loans and Advances 33,348.74 4,578.04 5,499.68 15,688.97 Interest Accrued on Investments 0.20 - 0.29 -

36,962.44 10,285.09 12,246.69 24,212.30

Less: CURRENT LIABILITIES & PROVISIONS Current Liabilities 3,855.26 6,039.86 6,653.09 7,447.83 Provisions 2,913.52 2,934.19 2,346.52 3,547.98

6,768.78 8,974.05 8,999.61 10,995.81

Net Current Assets 30,193.66 1,311.04 3,247.08 13,216.49 Miscellaneous Expenses (to the extent not written off or adjusted) 155.11 105.07 - -

TOTAL 47,075.52 58,741.77 64,025.83 78,555.91

Sources of Funds… Tata Steel

FROM WHERE THE FUNDS OF TATA STEEL LIMITED ARE RAISED?

(Rs. IN CRORES) 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11

SHARE CAPITAL 369.18

553.67

553.67

727.73

6,203.30

6,203.45

887.41

1,137.61

RESERVES AND SURPLUS

4,830.67

7,120.85

9,905.36

13,914.83

21,624.12

24,453.47 36,942.06

46,743.82

LOANS

3,382.21

2,739.70

2,516.15

9,645.33

18,021.69

26,946.18 25,239.20

29,801.14

CURRENT LIABILITIES & PROVISIONS

2,715.37

3,699.99

3,808.72

5,453.66

6,768.78

8,974.05

8,999.61

10,995.81

OTHERS

1,563.06

1,514.26

1,388.71

1,107.08

1,071.30

561.94

1,164.11

873.34

TOTAL SOURCES OF FUNDS

12,860.49

15,628.47

18,172.61

30,848.63

53,689.19

67,139.09 73,232.39

89,551.72

1.27%

52.20%

33.28%

12.28%0.98%

SOURCES OF FUNDS-2011: TATA STEEL

SHARE CAPITAL

RESERVES AND SURPLUS

LOANS

CURRENT LIABILITIES & PROVISIONS

OTHERS

Where this money is utilized?

Uses of Funds… Tata Steel

WHERE THE FUNDS OF TATA STEEL LIMITED ARE USED?

(Rs. IN CRORES) 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11

FIXED ASSETS (Rs. IN CRORES)

7,857.85

9,112.24

9,865.05

11,040.56

12,623.56

14,482.22

16,006.03

18,774.48

INVESTMENTS

2,194.12

2,432.65

4,069.96

6,106.18

4,103.19

42,371.78

44,979.67

46,564.94

CURRENT ASSETS

2,808.52

4,083.58

4,237.60

13,701.89

36,962.44

10,285.09

12,246.69

24,212.30

TOTAL ASSETS

12,860.49

15,628.47

18,172.61

30,848.63

53,689.19

67,139.09

73,232.39

89,551.72

20.96%

52.00%

27.04%

USES OF FUNDS - 2011: TATA STEEL

FIXED ASSETS (Rs. IN CRORES)

INVESTMENTS

CURRENT ASSETS

REVISED BALANCE SHEET FORMAT…Revised Schedule - VI

INTRODUCTION

• Old Schedule VI had outlived its utility;

• Revised Schedule VI effective from 1st April, 2011;

• Being a statutory format its early adoption is not permitted;

• Revised Schedule VI has been framed as per the existing

non-converged Indian Accounting Standards notified under

the Companies (Accounting Standards), Rules, 2006;

NEW FORMAT OF BALANCE SHEET

EQUITIES AND LIABILITIES

Shareholders’ Funds Capital Reserve & Surplus Money Reserved against share warrants

Share Application money pending Allotment

Non Current Liabilities

Current Liabilities

TOTAL

ASSETS

Non-Current Assets Fixed Assets Non Current Investments/Assets

Current Assets

TOTAL

REQUIREMENTS UNDER REVISED SCHEDULE VI

• Accounting Standards will prevail over the Schedule;

• Revised Schedule VI has eliminated the concept of ‘schedule’;

• Terms in the Revised Schedule VI will carry the meaning as defined

by the applicable Accounting Standards;

• All items of assets and liabilities are to be bifurcated between

Current and Non-Current portions and presented separately on

the face of the Balance Sheet


• Vertical format for presentation only prescribed;• Prescribes minimum disclosure requirements. AS disclosures are

additional;• Source of Funds now is Equity and Liabilities;• Application of Funds now is Assets;• Shareholding of more than 5% shares in the company now needs to

be disclosed;• Share allotments for non-cash consideration, buy back to be disclosed;• Statement of Profit and Loss (Dr. Bal.) will be disclosed under the

head “Reserves and Surplus” as a negative item.


• Share application money pending allotment not refundable is to be included under ‘Equity’ and share application money to the extent refundable is to be separately shown under ‘Other current liabilities’.

• “Sundry Debtors” has been replaced with the term “Trade Receivables”;

• Disclosure of trade receivables outstanding for a period exceeding six months from the date the bill/invoice is due for payment;

• Tangible assets under lease are required to be separately specified under each class of asset;

• Current Liabilities will no longer be shown as deduction from Current Assets


• Defaults in repayment of loans and interest to be

specified in each case;

• New name for P & L Account as “Statement of Profit and

Loss”;

• Segregation of Revenue components into revenue from:

1. sale of products,

2. sale of services, and

3. other operating revenues


• Separate head for Intangible Assets and Intangible Assets under

Development;

• Information about Investments bought/ sold need not be disclosed;

• Capital Advances have to be shown separately under “Loans and

Advances” instead of CWIP/ Fixed Assets;

• Miscellaneous Expenditure as a separate head does not exists now.


• Net exchange gain/loss on foreign currency borrowings

to the extent considered as an adjustment to interest cost

needs to be disclosed separately as finance cost.


• Disclosures no longer required:

– Disclosures relating to managerial remuneration and computation of net profits for calculation of commission;

– Information relating to licensed capacity, installed capacity and actual production;

– Information on investments purchased and sold during the year;

– Investments, sundry debtors and loans & advances pertaining to companies under the same management;

– Maximum amounts due on account of loans and advances from directors or officers of the company

An item is classified as current if it is involved in the entity's operating cycle; or is expected to be realized/ settled within twelve

months; or If it is held primary for trading; or Is cash or cash equivalent; or If entity does not have unconditional right to defer

settlement of liability for atleast 12 months after reporting period

Other assets and liabilities are non current

CURRENT/ NON-CURRENT DISTINCTION

BALANCE SHEET OF TATA STEEL LIMITED

2011-12 2010-11

Now, we move to …

PROFIT AND LOSS ACCOUNT…

PROFIT & LOSS ACCOUNTPROFIT & LOSS ACCOUNT It records flows of income and

expenses over a period of time.

The flows are recorded on the ACCRUAL basis and not on the cash/fund basis.

The NET BALANCE of Profit and Loss Account is either Profit After Tax or Net Loss.

INCOME side… …

TOP LINE!!!

PROFIT AND LOSS ACCOUNT OF TATA STEEL LIMITED FOR THE YEAR ENDING ON 31ST MARCH…

(Rs. in Crores)Particulars 2008 2009 2010 2011

INCOME

Sale of Products and Services

22,191.80

26,843.73

26,757.80

31,902.14

Less: Excise Duty

2,498.52

2,527.96

1,735.82

2,505.79

19,693.28

24,315.77

25,021.98

29,396.35

Other Incomes

335.00

308.27

853.79

790.67

Total Income

20,028.2

8

24,624.0

4

25,875.7

7

30,187.0

2

PROFIT AND LOSS ACCOUNT OF TATA STEEL LIMITED FOR THE YEAR ENDING ON 31ST MARCH…

(Rs. in Crores)

Particulars 2008 2009 2010 2011

EXPENDITURE

Manufacturing, and Other Expenses

11,645.24

15,525.99

16,396.00

18,162.27

Depreciation

834.61

973.40

1,083.18

1,146.19

12,479.85

16,499.39

17,479.18

19,308.46

Less: Expenditure (Other than Interest) Transferred to Capital and Other Accounts

175.50

343.65

326.11

198.78

12,304.35

16,155.74

17,153.07

19,109.68

Interest

878.70

1,152.69

1,508.40

1,300.49

Total Expenditure

13,183.05

17,308.43

18,661.47

20,410.17

PROFIT/(LOSS) BEFORE TAXATION AND EXCEPTIONAL ITEMS

6,845.23

7,315.61

7,214.30

9,776.85

Employee Separation Compensation

(226.18) -

-

-

Profit on the Sale of Long-Term Investments -

-

-

-

Contribution For Sports Infrastructure

(150.00) -

-

-

Exchange Gain/(Loss)

597.31 -

-

-

PROFIT/(LOSS) BEFORE TAXATION

7,066.36

7,315.61

7,214.30

9,776.85

Current Tax

2,252.00

2,173.00

1,998.00

2,857.00

Education Cess on Income Tax -

-

-

-

Fringe Benefit Tax

19.00

16.00 -

-

Deferred Tax

108.33 (75.13)

169.50

54.16

PROFIT/(LOSS) AFTER TAXATION

4,687.03

5,201.74

5,046.80

6,865.69

EXPENSES side… …

Mastering Terms …

¨ EBIDTA – Earnings Before Interest

Depreciation Taxation and Amortization

¨ PBIT- Profit Before Interest and Taxation

¨ PBT - Profit Before Taxation

¨ PAT- Profit Before Taxation

Our Challenge No. 1: Determining the ability of a company to pay its current liabilities.

THIS CHALLENGE MEANS …

How to determine the liquidity position of the company?

NET WORKING CAPITAL

CURRENT ASSETS – CURRENT LIABILITIES

IS CALLED

NET WORKING CAPITAL

LIQUIDITY RATIOS

Current assets CURRENT RATIO =

Current liabilities

Quick Assets QUICK RATIO =

Current liabilities

Quick Assets are (Current Assets – Inventory-Loans and Advances)

LIQUIDITY RATIOS

CASH TO CURRENT LIABILITIES RATIO

= CASH AND BANK BALANCE /CURRENT

LIABILITIES

AVERAGE COLLECTION PERIOD

= DEBTORS*365/SALES

LIQUIDITY ANALYSIS of TATA STEEL LIMITED ………….

31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11

CURRENT RATIO 1.03 1.10 1.11 2.51 5.46 1.15 1.36 2.20

QUICK RATIO 0.33 0.22 0.22 1.52 0.15 0.25 0.41 0.42

CASH TO CURRENT LIABILITIES 9.23% 6.67% 7.57% 140.85% 6.87% 17.72% 35.94% 37.66%

AVERAGE COLLECTION PERIOD (in days) 20 13 11 12 9 9 6 5

NET WORKING CAPITAL (IN CRORES OF RUPEES)

93.15 383.59 428.88 8,248.23 30,193.66 1,311.04 3,247.08 13,216.49

The Challenge of Working Capital Management has to be seen in the light of …

LIQUIDITY

PROFITABILITYThe task before the Management is to keep

HARMONY between them.

Our Challenge No. 2: How to measure a

company’s ability to Generate Sufficient

Profits.

CHALLENGE # 2:How to know …“whether a company is earning desired

profits?”


How to determine the profitability of the company?How to determine the profitability of the company?

Operating Profit Ratio = EBIT/Sales

Net Profit Ratio = Net Profit/Sales

Return on Net Worth/Equity = Profit After Tax/Net Worth

Return on Total Assets = Profit before interest and Tax /Total Assets

PROFITABILITY RATIOS

Earning Per Share = Net

Profit/No. of Shares

Return on Capital Employed = Profit Before Interest and Tax/Capital Employed

PROFITABILITY RATIOS

PROFITABILITY ANALYSIS of TATA STEEL LIMITED ………….

31-Mar-0431-Mar-0531-Mar-0631-Mar-0731-Mar-0831-Mar-0931-Mar-1031-Mar-11

RETURN ON INVESTMENT(%) 23.41% 35.67% 29.78% 21.35% 14.39% 12.61% 11.91% 12.37%

RETURN ON CAPITAL EMPLOYED(%)

29.68% 46.73% 37.67% 25.94% 16.46% 14.56% 13.58% 14.10%

RETURN ON EQUITY(%) 33.58% 45.27% 33.52% 28.83% 16.84% 16.97% 16.46% 18.15%

OPERATING PROFIT MARGIN(%) 28.13% 38.45% 35.74% 37.53% 39.22% 34.83% 34.86% 37.68%

NET PROFIT MARGIN(%) 16.32% 23.96% 23.16% 24.06% 23.80% 21.39% 20.17% 23.36%

EPS (Rs.) 47.33 62.77 63.35 72.74 63.85 69.45 56.28 71.58

2004 2005 2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

30%

35%

40%

23.41%

35.67%

29.78%

21.35%

14.39%12.61% 11.91% 12.37%

RETURN ON INVESTMENT(%): TATA STEEL

2004 2005 2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

33.58%

45.27%

33.52%

28.83%

16.84% 16.97%13.34% 14.34%

RETURN ON EQUITY(%): TATA STEEL

2004 2005 2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

30%

35%

40%

28.13%

38.45%35.74%

37.53%39.22%

34.83% 34.86%37.68%

OPERATING PROFIT MARGIN(%): TATA STEEL

2004 2005 2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

16.32%

23.96% 23.16%24.06% 23.80%

21.39%20.17%

23.36%

NET PROFIT MARGIN(%): TATA STEEL

CHALLENGE # 3: How to know “whether a company is a sound company?”


How to determine the soundness of the company?How to determine the soundness of the company?

It is a challenge of Measuring the

Company’s Ability to Pay Long-Term Debt

NET WORTH

SHARE CAPITAL +

RESERVES AND SURPLUS –

FICTITIOUS ASSETS

IS CALLED

NET WORTH

SOLVENCY RATIOSDebt Equity Ratio = Long Term

Debts/Net Worth

Equity to Total Assets Ratio = Net Worth/Total Assets

Interest Coverage Ratio = Profit Before Interest and Tax/Interest paid

SOLVENCY ANALYSIS of TATA STEEL LIMITED ………….

31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11

TOTAL DEBT/EQUITY RATIO (%) 65.04% 35.70% 24.06% 65.87% 64.76% 87.90% 66.72% 59.11%

TOTAL LIABILITIES/TOTAL ASSETS RATIO

59.57% 50.89% 42.45% 52.53% 48.17% 55.04% 48.06% 44.86%

TIMES INTEREST EARNED RATIO 24.64 29.84 45.69 37.88 8.79 7.35 5.78 8.52

NET WORTH (Rs. Crores)

5,199.85

7,674.52

10,459.03

14,642.56

27,827.42

30,656.92

37,829.47

47,881.43

NET WORTH TO TOTAL ASSETS RATIO

40.43% 49.11% 57.55% 47.47% 51.83% 45.66% 51.66% 53.47%

2004 2005 2006 2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

5,199.85 7,674.52

10,459.03 14,642.56

27,827.42 30,656.92

37,829.47

47,881.43

NET WORTH(Rs. in Crores) : TATA STEEL

2004 2005 2006 2007 2008 2009 2010 20110%

10%

20%

30%

40%

50%

60%

70%

80%

90%

65.04%

35.70%

24.06%

65.87% 64.76%

87.90%

66.72%

59.11%

DEBT EQUITY RATIO(%): TATA STEEL

CHALLENGE # 4: How to know “PERFORMANCE OF A COMPANY’S SHARE?”


How to determine the performance of the share of a company at a stock market?

How to determine the performance of the share of a company at a stock market?

MARKET RATIOS Book Value Per Share = Net Worth/No. of

Equity Shares

Earning Per Share Ratio (EPS) = Net Profit/No. of Equity Shares

Dividend Per Share Ratio (DPS) = Dividend paid/No. of Equity Shares

Price Earning Ratio or P/E Ratio = Market Price/EPS

Market Value to Book Value = Market Price/Book Value

MARKET ANALYSIS of TATA STEEL LIMITED ………….

31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-112-Jul-2012

EPS Rs. 47.33 Rs. 62.77 Rs. 63.35 Rs. 72.74 Rs. 63.85 Rs. 69.45 Rs. 56.28 Rs. 71.58

DPS Rs. 10.00 Rs. 13.00 Rs. 13.00 Rs. 15.50 Rs. 16.00 Rs. 16.00 Rs. 8.00 Rs. 12.00

BOOK VALUE PER SHARE Rs. 140.92 Rs. 138.66 Rs. 188.97 Rs. 252.25 Rs. 380.89 Rs. 419.62 Rs. 426.38 Rs. 499.18

CLOSING PRICE PER SHARE Rs. 383.50 Rs. 400.90 Rs. 542.75 Rs. 449.60 Rs. 693.15 Rs. 206.00 Rs. 632.65 Rs. 620.50Rs. 447.00

P/E RATIO 8.10 6.39 8.57 6.18 10.86 2.97 11.24 8.67 6.25

MARKET CAPTIALISATION (Rs. IN CRORES)

Rs. 14,150.46

Rs. 22,188.73

Rs. 30,039.74

Rs. 26,098.06

Rs. 50,640.45

Rs. 15,050.04

Rs. 56,129.61

Rs. 59,518.36

Rs. 43,422.03

DIVIDEND PAYOUT RATIO 23.84% 23.64% 23.40% 26.16% 29.73% 28.69% 17.41% 19.05%

MARKET PRICE TO BOOK VALUE 2.72 2.89 2.87 1.78 1.82 0.49 1.48 1.24 1.17

Rs. 0

Rs. 10,000

Rs. 20,000

Rs. 30,000

Rs. 40,000

Rs. 50,000

Rs. 60,000

31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 2-Jul-2012

Rs. 14,150.46

Rs. 22,188.73

Rs. 30,039.74

Rs. 26,098.06

Rs. 50,640.45

Rs. 15,050.04

Rs. 56,129.61

Rs. 59,518.36

Rs. 43,422.03

MARKET CAPTIALISATION (Rs. IN CRORES)- TATA STEEL LTD

Closing Price as on 02-07-2012is Rs. 447.00

Now, how do you feel?

THANK YOU VERY MUCHTHANK YOU VERY MUCH

Financial Statement Analysis

Economy & Finance

Transcript of Financial Statement Analysis