Annual Report Analysis
SARATH & ASSOCIATES
Chartered Accountants
Email : info@sarathcas.in
Ph : 040 – 2335 4322/7090
Annual Reports
• Generally, Annual Reports are mostly prepared by
Companies.
• In case of other business entities like Partnership Firm,
Proprietorship concerns, there would not be any ‘separate’
Annual Report
• These are basically sent to Shareholders and also
submitted to various ‘Users’ such as Bankers, Investors,
Govt. Authorities etc.,
• Covers a financial year period
Annual Report includes
• Summary of Financial Highlights
• Narrative, Text, Graphic and Images related to
Operations, Financial Performance, Market Analysis
etc.,
• Management’s Discussion & Analysis
• Directors’ Report showing various reporting
compliances under Companies Act
• Auditor’s Report
• Financial Statements which covers Balance Sheet,
Profit & Loss Account, Cash Flow Statement,
Explanatory Notes relating to Accounts etc.,
Statements useful for Analysis
What is Analysis?
Establishing the relationship with each other in such way
that the conclusion can be drawn.
Financial Statement Analysis
• Involves gaining an understanding of an organization's
financial situation by reviewing its financial reports
• Also involves in interpretation of Financial data
• Results of Analysis can be used to make investment and
lending decisions
Objectives of Analysis
• Understand & Diagnose the Financial information with a
view to judge profitability and Financial Soundness of the
Company.
• Make forecast about the future aspects of the Company
• Assess the operational efficiency and managerial
effectiveness
• To assess the solvency position of the firm
• To make Inter-firm comparison.
• To help in decision making and Control.
• To do such other analysis as per the ‘User concerned’
External Users of Annual Report
User How Used
Investors Analyze whether the Company is earning sufficient profits
and its projections for the future, so as to decide to further
invest in the Company or Sell of the Shares they are
already holding
Lenders Whether the Company is capable of repaying the loans, if
granted
If already granted, how effectively these are being used
Suppliers Whether the Company is a Sound Company; whether any
Credit can be offered to them
Govt. Whether the Company is regular in paying its Taxes; are
there any Defaults; whether financial figures (Sales/
Purchases/Other Income) are in line with various Filings
being made to them??
Internal Users of Annual Report
User How Used
Board of What are the present Resources available?
Directors What is the status of present Loans? Are they paid
regularly and as per schedule
What the profitability trend? Based on actuals, what are
the future projections
Whether it is better to expand/buy new assets
What are the present markets of operations?? Future plans
for the same
Whether it is better to Buy new Lands/Properties or lease
them?
Whether the Company can raise additional loans? If so,
how much
Whether it is better to go for Own production or
outsource the function. Examples of Future Group
(Heritage), (D Mart) etc.,
Techniques for Financial Statement
Analysis
Horizontal Analysis/Trend Analysis.
Vertical Analysis/Common Size Analysis
Ratio Analysis
Horizontal Analysis
• Horizontal analysis or Trend Analysis, is the process of
comparing line items in comparative financial
statements or financial ratios across a number of years in
an effort to track the history and progress of a company's
performance
• Using the previous year’s data of a business enterprise,
trend analysis can be done to observe percentage
changes over time in selected data.
• This is done to compare accounts/performance metrics
over time to see if the company is improving or
declining.
Horizontal Analysis
Vertical Analysis
• Vertical analysis is a percentage analysis of financial
statements.
• Each line item listed in the financial statement is listed as
the percentage of another line item.
• Vertical analysis makes it much easier to compare the
financial statements of one company with another and
across industries.
Example for Vertical Analysis:
By showing the various expense line items in the
income statement as a percentage of sales, one can see
how these are contributing to profit margins and
whether profitability is improving over time.
Sales 5,000,000 100%
Cost of goods sold 1,000,000 20%
Gross profit 4,000,000 80%
General and Administrative Expenses 2,000,000 40%
Operating Income 2,000,000 40%
Taxes (%25) 500,000 10%
Net income 1,500,000 30%
Ratio Analysis
• Ratio Analysis is a vital tool for Financial Analysis.
• It is based on the rule that a single accounting figure by
itself may not communicate any meaningful information
but when expressed as a relative to some other figure ,it
may definitely provide some significant information.
• Ratio Analysis is comparison of different numbers from
the balance sheet, income statement and Cash Flow
statement against the figures of previous years, other
companies, the industry or even the economy in general
for the purpose of Financial Analysis.
Importance of Ratio Analysis
• The importance of ratio analysis lies in the fact that it
presents facts on a comparative basis and enables
drawing of inferences regarding the performance of a
Company.
• It is relevant in assessing the performance of a Company
in respect of the following aspects:
o Liquidity Position – how quickly converted to Money
o Long Term Solvency (Long Term/Short Term – ILFS case)
o Operating Efficiency (How effectively funds are used)
o Overall Profitability (Trend over period – when high/low)
o Inter-firm Comparison (within same Industry how
performed)
Liquidity Position Ratios
• Liquidity ratios are measurements used to examine the
ability of an organization to pay off its short-term
obligations (within One Year)
• These are used by the prospective creditors and lenders
to decide whether to extend Credit or Debt respectively,
to the companies (Short Term Funding, Long Term Funding
etc)
• The Higher the ratio, the better the ability of a company
of pay off its obligations in a timely manner.
Solvency Ratios
• Solvency ratios show a company’s ability to make
payments and pay off its long-term obligations to
creditors, bondholders, and banks.
• In other words, solvency ratios identify going concern
issues and a firm’s ability to pay its bills in the long
term.
• These are also known as Leverage Ratios
• These are used while availing Long Term Loans from
Banks or Financial Institutions (Big Projects/Factories
etc.)
One of the most frequently used Ratio is Debt-to-
Equity Ratio:
• The (D/E) ratio is calculated by dividing a Company's
total liabilities by its shareholder equity.
• The Ratio also helps in identifying how much debt
business has raised compared to its Equity Contribution.
D/E Ratio=Total Debt/ Total Equity.
• This is the fundamental Ratio which any Banker will
follow while granting loan.
• A good debt to equity ratio is around 1 to 1.5.
• However, the ideal debt to equity ratio will vary
depending on the industry because some industries use
more debt financing than others.
• Capital-intensive industries like the financial and
manufacturing industries often have higher ratios that
can be greater than 2.
Balance Sheet as on 31.03.2018 – Actual Figures
Particulars Amount (Rs.) Ratios
LIABILITIES
I. Capital 4,500,000 4,500,000 Debt 11,000,000
II. Reserves & Surplus 1,000,000 1,000,000
Equity 4,500,000
III. Non Current Liabilities
Secured Loans- Term Loan 7,000,000
Debt Equity Ratio 2.44
Unsecured Loans 4,000,000 11,000,000
IV. Current Liabilities
Working Capital Loan 2,400,000 Total Outside Liabilities 17,000,000
Trade Payables 2,000,000
Short term provisions 700,000 Total Net worth 5,500,000
Other Current Liabilities 900,000 6,000,000
TOL/TNW Ratio 3.09
TOTAL 22,500,000
ASSETS
I. Non Current Assets
Land & Building 6,000,000 Current Assets 6,700,000
Plant & Machinery 5,800,000
Current liabilities 6,000,000
Cap-Ex Advance 4,000,000 15,800,000
II. Current Assets
Current Ratio 1.12
Inventory 1,600,000
Trade Receivables 2,500,000
Cash & Bank Balances 2,600,000 6,700,000
TOTAL 22,500,000
Balance Sheet as on 31.03.2018 – After Manipulation to suit Eligibility
Particulars Amount Ratios
LIABILITIES
I. Capital 7,500,000 7,500,000 Debt 8,000,000
II. Reserves & Surplus 1,000,000 1,000,000 Equity 7,500,000
III. Non Current Liabilities
Debt Equity Ratio 1.07
Secured Loans- Term Loan 7,000,000
Unsecured Loans 1,000,000 8,000,000
Total Outside Liabilities 14,000,000
IV. Current Liabilities
Total Net worth 8,500,000
Working Capital Loan 2,400,000
TOL/TNW Ratio 1.65
Trade Payables 2,000,000
Short term provisions 700,000
Current Assets 8,700,000
Other Current Liabilities 900,000 6,000,000
Current liabilities 6,000,000
TOTAL 22,500,000
ASSETS
Current Ratio 1.45
I. Non Current Assets
Land & Building 6,000,000
Plant & Machinery 5,800,000
Capex Advance 2,000,000 13,800,000
II. Current Assets
Inventory 2,600,000
Trade Receivables 2,500,000
Cash & Bank Balances 3,600,000 8,700,000
ANALYSIS FOR TAXES COLLECTION ANGLE
While most of the Analysis are from Shareholders or Bankers’
angle, as Tax Collecting Officers, more emphasis has to be made
on following Analysis
• Increase in payment of penalties and fines to the Commercial
Taxes Department or any other – Why these are paid?? Are
they paid regularly (indicating regular offender)
• Sales and Purchases increased in a particular a manner but
the GST output payment on such sales not increased in the
same manner. What could be the reasons?
• Security Deposits with Govt and other Statutory Bodies are
waived off during the year i.e. may be due to non compliance
of such statutory rules. What are the instances?? What could be
the reason for the same
ANALYSIS FOR TAXES COLLECTION ANGLE
• Salary Vs Employees
• Salary Vs Provident Fund
• Salary Vs TDS
• Labour Turnover Vs Professional Taxes
• Mismatch between filings and Financial Statements –
reasons for the same – How many times occurred earlier
THANK YOU
SARATH & ASSOCIATES
Chartered Accountants
E mail : info@sarathcas.in
