PRESENTATION ON Finincial Statement Final

PRESENTATION
GAZA PRAISE
NYANGADZAI DZOMBA
RUTH BASAROKUDYA
PELLARGER MUCHEMBERE
Interpretation of financial statements
 Under this financial statement we are going to look three items namely
 1. importance and purpose of analysis of financial statements
 2. Ratios
 3. Analysis of financial statements
Importance of Financial statements
 For investors for both current and potentials

 For management
 For the employee
 For lenders and borrowers
 For stakeholder such as suppliers
FINANCIAL STATEMENT ANALYSIS
 It is basically a study of relationship among various financial facts and figures

as given in a set of financial statements, and the interpretation thereof to
gain an insight into the profitability, financial position, liquidity and
operational efficiency of the firm to assess its financial health and future
prospects
OBJECTIVES OF FINANCIAL STATEMENTS
 To assess the current profitability and operational efficiency of the firm as a

whole as well as its different departments so as to judge the financial health
of the firm.
 To ascertain the relative importance of different components of the
financial position of the firm.
 To identify the reasons for change in the profitability/financial position of
the firm.
 To judge the ability of the firm to repay its debt and assessing the short-term
as well as the long-term liquidity position of the firm.
TECHNIQUES OF FINANCIAL STATEMENT
ANALYSIS
 Ratio Analysis: It is defined as the systematic use of ratios to interpret the
financial statements so that, the strength and weaknesses of a firm as well
as, its historical performance and current financial condition can be
determined.
RATIOS
 Factors affecting Ratios

 A) the state of the economy
 B) government polices
 C) management style
 D) nature and size of business
 E) company Norms and values
FIVE MAIN CATEGORIES OF FINANCIAL
RATIOS
 Profitability ratios
 Liquidity ratios
 Gearing ratios
 Activity (Operating) ratios
 Investors’ ratio
PROFITABILITY
 The key issue here is the amount of profit the business is making.
 Is it enough considering the volume of goods sold?
 Is it enough to justify the amount of capital invested in the business?
 How does it compare with prior periods?
 How does it compare with other firms in the same industry?
FORMULARS TO CALCULATE
PROFITABILITY
 Gross Profit Margin = Gross Profit /total Revenue x100
 Net Profit Margin = Net Profit after Tax X100/ Revenue
 Return on Capital Employed = PBIT and Dividends X 100/ Total Capital
Employed [Including interest bearing debt]
 Return on Equity = PAIT and PSD * 100 /Equity Capital [Ordinary Shares +
Reserves]
 PBIT : Profit before Interest and Tax
 PAIT : Profit after Interest and Tax
 PSD : Preference Shares’ Dividend
Liquidity ratios
 measure a company's ability to pay off its short-term debts as they become
due, using the company's current or quick assets. Liquidity ratios include the
current ratio, quick ratio, and working capital ratio.
The main liquidity ratios are Current Ratio = Current Assets / Current Liabilities
 Acid Test Ratio = (Current Assets – Inventory): Current Liabilities
gearing
 refers to the way the company is financed. It is concerned with two types of
financing, namely Debt (borrowings) and Equity (shareholders’ funds).
Gearing can be understood as long term liquidity. There are three main ratios
used to assess gearing:
 Debt / Equity Ratio = Total Interest Bearing/ Debt Total Equity
 Debt / Total Capital = Total Interest Bearing Debt Debt +
Activity /efficiency ACTIVITY
 Activity / Efficiency Activity ratios try to assess how well the business utilizes
the resources at its disposal.
 The main areas of concern are as follows Asset turnover = Sales Revenue
Total Assets less Current Liabilities Stock turnover = Cost of Sales Average
Inventory
 Trade receivables collection period = Trade Receivables X 365 (in days) Credit
Sales
 Trade payables payment period = Trade Payables X365 (in days) Credit
Purchases \ Expenses as % of sales = Total Expenses * 100 Sales
INVESTOR’S RATIOS
 These ratios are especially relevant to investors, especially in listed

companies which have a verifiable share value. The most important ones are
as follows
 Earnings per share = Profit Attributable to Ordinary Shareholders /No. of
Ordinary Shares
 Price earnings ratio = Price per Share Earnings per share Earnings yield =
Earnings per Share *100 Price per Share
 Dividend per share = Total Ordinary Dividend for the Year No. of Ordinary
Shares Dividend yield = Dividend per Share * 100
HORIZONTAL ANALYSIS
 Is a financial statement analysis technique that, shows changes in the

amounts of corresponding financial statement items over a period of time. It
is a useful tool to evaluate the trend situations.
 The statements for two or more periods are used in horizontal analysis.
 The earliest period is usually used as the base period and the items on the
statements for all later periods are compared with items on the statements of
the base period.
 Horizontal Analysis Formula 100% + {[(Amount in comparison year – Amount in
base year) / Amount in base year] x 100}
VERTICAL ANALYSISI
 Vertical analysis is a popular method of financial statement analysis that shows each
item on a statement as a percentage of a base figure within the statement.
 To conduct a vertical analysis of statement of financial position, the total of assets
and the total of liabilities and shareholders’ equity are generally used as base
figures.
 All individual assets (or groups of assets if condensed form statement of financial
position is used) are shown as a percentage of total assets.
 The current liabilities, long term debts and equities are shown as a percentage of
the total liabilities and stockholders’ equity.
 To conduct a vertical analysis of income statement, sales figure is generally used as
the base and all other components of income statement like cost of sales, gross
profit, operating expenses, income tax, and net income etc. are shown as a
percentage of sales. In a vertical analysis the percentage is computed by using the
following formula
 Percentage of Base = Amount of Individual Item X 100 Amount of Base Item A basic
vertical analysis needs an individual statement for a reporting period but
comparative statements may be prepared to increase the usefulness of the analysis
EXAMPLE ON PROFITABILITY
Exercise: 1 The following summarized figures are related to GAZA private limited company for the
year ended 31st, March, a business is operating in the retail sector
Particulars 2020 2019 “000” “000”
Revenue 35,000 32,000
Gross profit 6,000 5,800
Operating expenses (2,850) (2,300)
Interest on debenture debt (500) (500)
Income tax (1,100) (1,400)
Profit after tax 1,550 1,600
Equity capital plus reserves at year end 17,500 17,000
Debentures in issue throughout the period 6,250 6,250
Required Analyze the profitability of the above business in as much detail as the information permits
SOLUTIONS
 GROSS PROFIT MARGIN =GROSS PROFIT /SALES REVENUE X100

6000/35000 X 100=17,1428
 NET PROFIT MARGIN=NET PROFIT AFTER TAX/SALES REVENUE X 100

1550/35000X100=4,42857
LIQUIDITY
 The following summarized figures are related to XYZ private limited company for the year ended 31st,
March,
 A business is operating in the retail sector. Particulars 2020 2019 “000” “000”
 Revenue 45,000 32,000
 Profit after tax 1,550 1,600
 Current assets (total) 5,600 4,400
 Current liabilities (total) 5,100 2,900
 Inventories 5,100 2,750
 Trade receivables 200 100 Cash 300 1,550
 Trade payables 3,500 1,500
 Income tax payable 1,100 1,400
 Bank overdraft 500 100
 Required to analyze the liquidity of the above business in as much detail as the information permits.
SOLUTIONS ON LIDUIDITY
 CURRENT RATIOS=CURRENT ASSET /CURRENT LIABILITIES

$55OO/$5100 =1,0784
EXAMPLES
Financial ratio 2020/2019 2019/2018

Profitability ratio
Gross profit ratio 40% 38%
Net profit ratio 15% 17%
LIQUIDITY
CURRENT RATIO 1.66: 1.00 1.96: 1.00
QUICK RATIO 0.9:1.00 1.1 :1.00
ACTIVITY RATIO
INVENTORY HOLDING 30DAYS 34 DAYS
PERIOD
TRADE RECEIVABLE 34DAYS 30 DAYS
PERIOD
GEARING RATIOS 1.90 TIMES 1.3TIMES
INTERPRETATION ON RATIO ANALYSIS
PROFITABILITY RATIOS
 According to the calculated profitability ratios of the company, it can be
seen that, gross profit ratio has been increased by 2% however, net profit
ratio has been decreased by 2% in 2019/2020. The company has achieved
better gross profit margin in 2019/2020 than 2018/2019, however company
failed to achieve better net profit margin in 2019/2020.
LIQUIDITY RATIOS
 Liquidity ratios show that, company had a better liquidity position in

2018/2019 than 2019/2020. Further, it can be seen that, company failed to
achieve optimum industry average liquidity position in 2019/2020 than
2018/2019.
ACTIVITY RATIOS
 Activity ratios illustrate that, positive achievement in terms of inventory

holding period which, has been reduced by four days. However, company
failed to achieve better/ maintain trade collection period which, has been
increased by four days. It will lead for the high amount of bad debts in the
future than 2018/2019.
GEARING RATIOS
 Gearing Ratios Debt to equity ratio has been increased by 0.6 times on the
other hand, interest coverage ratio has been decreased by 0.7 times in
2019/2020. Those ratios highlighted that, debt and interest payment for the
financial year 2019/2020 have been increased than 2018/2019.
INVESTORS RATIOS
 ) Investors ratios clearly show that, earning per share and dividend per share
have been decreased in 2019/2020. It will lead for the dissatisfaction of the
existing investors and potential investors regarding investment of the
company in the future.
IN CONCLUSION
 Most of the calculated financial ratios clearly shows that profitability,

liquidity, activity, gearing and investors’ ratios were better in 2018/2019
when compare to 2019/2020. Based on that, it could be concluded that,
company had better financial performance and maintained better financial
position in 2018/2019 than 2019/2020.
RECOMENDATIONS
 The company has achieved better gross profit margin however it failed to achieve better net profit
margin in 2019/2020.
 Company should focus to control/ deduct its operating and non-operating cost by using cost cutting/
reduction techniques to increase net profit margin in the future.
 Company had low inventory holding period in 2019/2020, it is better to avoid un-necessary inventory
related cost.
 However, liquidity position is low level in 2019/2020, company should maintain optimum level of
inventory and trade receivable period (through possible discount for early settlement and instalment
payment method) to have optimum level of liquidity position as well healthy activities of the company.
 The company should try to have optimum level of debt capital which leads for the high amount of
interest cost. Also it is more risk for the company due to that, company has to increase equity capital
or decrease debt capital. It is better to thing to increase equity capital through the share issues and
increase reserves of the companies.
 If company is able to consider the above recommendations, it will lead for the positive impact on the
investors’ ratios in the future.

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PRESENTATION

 For investors for both current and potentials

 It is basically a study of relationship among various financial facts and figures

 To assess the current profitability and operational efficiency of the firm as a

 Factors affecting Ratios

 These ratios are especially relevant to investors, especially in listed

 Is a financial statement analysis technique that, shows changes in the

 GROSS PROFIT MARGIN =GROSS PROFIT /SALES REVENUE X100

 NET PROFIT MARGIN=NET PROFIT AFTER TAX/SALES REVENUE X 100

 CURRENT RATIOS=CURRENT ASSET /CURRENT LIABILITIES

Financial ratio 2020/2019 2019/2018

 Liquidity ratios show that, company had a better liquidity position in

 Activity ratios illustrate that, positive achievement in terms of inventory

 Most of the calculated financial ratios clearly shows that profitability,

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