SP Jain Center of Management, Dubai/Singapore
Advanced Financial Statement Analysis
Q1. Using the information provided in the Profit and Loss Account and Balance sheet of Tata Motors,
(a) Carry out the Dupont Analysis (ROE and its components) for the financial years 2004, 2005 and 2006.
(b) For the last year 2005-2006, do the fund flow analysis, clearly highlighting the
(i) Funds from Operations
(ii) Funds from Investing
(iii) Funds from Financing
(c) Compute the operating leverage and financial leverage for all the years.
(20 marks)
Q2. The financial data for Hindustan Manufacturing Company are given in Exhibit 3.1 and 3.2.
Exhibit 3.1
P & L A/C of HMC for the year ending 31st March
| PARTICULARS | 2004 | | 2005 | | 2006 |
| A. NET SALES* | 2338.9 | | 2825.69 | | 3717.23 |
| B. COST OF GOODS SOLD** | 1929.04 | | 2322.8 | | 3053.66 |
| C. GROSS PROFIT (A - B) | 409.86 | | 502.89 | | 663.57 |
| D. LESS: SELLING & ADMIN. EXP. | 239.72 | | 262.1 | | 357.87 |
| E. OPERATING INCOME (C - D) | 170.14 | | 240.79 | | 305.7 |
| F. ADD: OTHER INCOME | 15.24 | | 25.38 | | 36.91 |
| G. EBIT (E + F) | 185.38 | | 266.17 | | 342.61 |
| H. LESS: INTEREST | 59.84 | | 124.98 | | 143.46 |
| I. PBT (G - H) | 125.54 | | 141.19 | | 199.15 |
| J. PROVISION FOR TAX | 41.79 | | 30 | | 64.29 |
| K. PAT (I - J) | 83.75 | | 111.19 | | 134.86 |
| L. EFFECTIVE TAX RATE*** | 33% | | 21% | | 32% |
| M. DIVIDEND DISTRIBUTED | 33.75 | | 39.38 | | 45 |
| N. RETAINED EARNINGS | 50 | | 71.81 | | 89.86 |
* Net of excise duty
** Depreciation included
*** Provision for tax divided by profit before tax
Exhibit 3.2
Balance Sheet as on 31st March
| PARTICULARS | 2004 | 2005 | 2006 |
| A. NET WORTH | | | |
| SHARE CAPITAL | 225 | 225 | 225 |
| RESERVE | 286.13 | 357.95 | 447.81 |
| NET WORTH | 511.13 | 582.95 | 672.81 |
| | | | |
| B. BORROWINGS | | | |
| LONG TERM: DEBENTURES | - | 75.75 | 76.46 |
| OTHERS | 199.87 | 285.9 | 312.73 |
| LONG TERM DEBT | 199.87 | 361.65 | 389.19 |
| SHORT TERM: BANK BORROWINGS | 442.92 | 641.39 | 839.87 |
| NET BORROWINGS | 642.79 | 1003.04 | 1229.06 |
| | | | |
| C. CAPITAL EMPLOYED (A + B) | 1153.92 | 1585.99 | 1901.87 |
| | | | |
| D. FIXED ASSETS | | | |
| GROSS BLOCK | 653.49 | 841.64 | 921.55 |
| LESS: DEPRECIATION | 159.55 | 194.46 | 235.44 |
| NET BLOCK | 493.94 | 647.18 | 686.11 |
| OTHER NON-CURRENT ASSETS | 52.76 | 16.44 | 60.72 |
| NET FIXED ASSETS | 546.7 | 663.62 | 746.83 |
| | | | |
| E. CURRENT ASSETS | | | |
| INVENTORIES: | | | |
| RAW MATERIAL | 243.42 | 384.06 | 457.74 |
| STOCK IN PROCESS | 85.74 | 150.55 | 230.84 |
| FINISHED GOODS | 147.12 | 244.28 | 461.81 |
| TOTAL INVENTORIES | 476.28 | 778.89 | 1150.39 |
| DEBTORS | 253.16 | 340.61 | 483.18 |
| CASH AND BANK BALANCE | 8.37 | 98.84 | 26.08 |
| OTHERS | 128.27 | 186.21 | 211.27 |
| NET CURRENT ASSETS | 866.08 | 1404.55 | 1870.92 |
| | | | |
| F. LESS: CURRENT LIABILITIES* | | | |
| TRADE CREDITORS | 35.99 | 211.21 | 339.35 |
| PROVISION AND OTHERS | 222.87 | 270.97 | 376.53 |
| CURRENT LIABILITIES | 258.86 | 482.18 | 715.88 |
| | | | |
| G. NET CURRENT ASSETS (E - F) | 607.22 | 922.37 | 1155.04 |
| | | | |
| H. NET ASSETS (D + G) | 1153.92 | 1585.99 | 1901.87 |
* If bank borrowings are considered, then the current liabilities for 2004 through 2006 will be: Rs. 701.78 lakh; Rs. 1123.57 lakhs; and Rs. 1555.57 lakhs.
Consider the following details about the company. HMC is a leading producer and exporter of engineering items such as steel pipes, ingots, billets etc. The company started with a share capital of Rs. 25 lakhs in the early sixties, which has now increased to Rs. 225 lakhs. The number of outstanding shares is 22.5 lakhs. The average market price of the company’s shares during 2004-2006 has been: Rs. 26.38 in 2004, Rs. 34.50 in 2005 and Rs. 29.25 in 2006.
For the financial year 2006, you are required to compute the following ratios:
1. Current ratio
2. Acid-test ratio
3. Cash ratio
4. Debt-equity ratio
5. Debt-asset ratio
6. Interest coverage ratio
7. Inventory turnover
8. Debtors turnover
9. Average Collection Period
10. Fixed assets turnover
11. Total assets turnover
12. Gross Profit Margin ratio
13. Net Profit Margin ratio
14. Return on assets
15. Return on capital employed
16. Return on equity
17. Price-earnings ratio
18. Dividend yield
19. Dividend payout
20. Market value to book value ratio (Hint: Book value = Net worth/No. of shares outstanding) (16 marks)
Q4. Answer the following questions in brief. Each question carries 1 mark.
(a) The price-book value ratio of a stable firm is determined by the differential between ………. and ………., which is also a measure of ……….
(b) State whether you agree/disagree with the following statements with a short explanation.
i. A company can achieve earnings growth but all growth need not be value creating.
ii. Growth is a function of ROE alone.
iii. As leverage increases, the beta will also increase, thereby pushing up the cost of equity.
iv. For a given growth (limited by industry related factors) P/BV is indirectly linked to ROE and directly to ke.
v. Other things remaining equal, a higher growth stock will have a higher price/book value ratio than a lower growth stock.
vi. Lower growth firms look more overvalued than higher growth firms.
(c) Briefly state the components of EVA.
(d) Briefly explain the rationale behind buyback of shares.
(e) Mathematically state the relation between ROC and ROE.
(10 marks)
Q5A. Sevilla Chemicals earned $1 billion in after-tax operating income on capital invested of $5 billion last year. The firm’s cost of equity is 12%, its debt to capital ratio is 25%, and the after tax cost of debt is 4.5%.
(a) Estimate the economic value added by Sevilla Chemicals last year.
(b) Assume now that the entire chemical industry earned $40 billion after taxes on capital invested of $180 billion, and that the cost of capital for the industry is 10%. Estimate the economic value added by the entire industry.
(c) Based on economic value added, how did Sevilla do relative to the industry?
(5 marks)
Q6. The following data appears on the cash flow statement of a company ABC for the year 2003:
Capital investments: 12,50,500
PAT 9,17,500
Depreciation: 16,13,000
The other information available to you is:
Gross Plant Property & Equipment 31/03/2002: 84,31,500
Gross Plant ,Property & Equipment , 31/03/2003: 84,30,000
Accumulated Depreciation 31/03/2003 : 38,74,000
During the year the Company also got rid of a fully depreciated equipment
i) Find out the gross value of the equipment that the company got rid off.?
ii) Find out the change in the Net PPE for the current year--- (2.5 x 2= 5 marks)
Q7. NB Manufacturing has a current stock price of $49.86. It also has a Price to Book Value of 3.57 and a Book Value per share of $13.97. The following facts &assumptions are given to you:
ROE= 20% Ke= 9.4% Growth Rate : 6% ( Constant Growth Rate)
What’s the fundamental P/BV?
ii) Given the growth rate of 6% what’s the ROE required to justify the P/BV of 3.57. What’s the impact on Free Cash Flow with this ROE?
iii) Given the ROE of 20%, What’s the Growth required to justify a P/BV of 3.57? What’s the impact on Free Cash Flow with this growth and ROE OF 20%?—(2+2+2 =6 MARKS)
Q8. Q4. Using the following information , complete the Balance Sheet
Long –term debt to net worth: 0.5:1
Total Asset Turnover: 2.5: 1
Average Collection period : 18 days ( Assuming 360 days)
Inventory Turnover: 9 times
Gross Profit Margin: 10%
Acid Test Ratio : 1:1
For receivables turnover the driver is sales and for inventory turnover the driver is COGS.
Common Stock: 100,000 Property , Plant & Equip: --------
Retained Earnings: 100,000 Inventory:-------
Long- Term Debt : ------- Accounts Receivable:---------
Current Liabilities: 100,000 Cash : ----------- - (8 marks)
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