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Module 1: Ratio Analysis and Return on Equity

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Namaste.In last three sessions, we have discussed a lot about Financial Statement Analysis andits Interpretations.We have seen variety of ratios and to which stakeholders which ratios are important.Now, let us start actual playing with numbers.So, today we are going to actually work on certain company’s data so that you get thefeel to calculate those things.As I have told you earlier, these sheets are shared with you.So, please take a printout.If you have still not taken take it right now.You can hold the video take the printout.Now, we are going to discuss about Shipping Corporation of India and we will be calculatingcomparative as well as common size statement which is horizontal and vertical analysisas we discussed in the first session.So, let us do it on the actual data.Now, this is a profit and loss account of Shipping Corporation of India.I hope you know about this company.This is a public sector undertaking Government Company which is a one of the leading shippingcompanies in India and in we have got date of March, 16 and 17.This is not a very good year for the company you can see here revenue from operations hasdropped from 4000 to 3400.We will look at various expenses.So, first we are going to start with what is known as horizontal analysis.So, in horizontal analysis what we do is we compare the 2 years.We want to study this year March 17.So, we collect the data of last year that is March 16 and each of the figures will comparewith earlier year.So, what we prepare is known as a comparative statement.Now, it is very easy to make it is very much common sense.So, I request you to make it along with you.So, we will give a title, this is a comparative statement.Now, what is done in comparative statement is we have got 2 year data.So, we will calculate the difference, the increase or decrease in the year.So, if you take the first figure, normally we expect an increase I have deliberatelytaken a company where there is a decrease.So, you can see that the revenue from operations gross has fallen from 4078 to 3407.So, minus 671 is a difference or increase in the current year; not increase, it is adecrease so, it is a minus increase.Now, even this absolute figure does not tell you about what is relatively relative change,relative increase or decrease.So, what we will do is we will calculate this as a percentage to the base that is to thelast year.So, we get minus 0.16; that means, 16 percent fall in the revenue.Are you getting?So, each of the figures now we are going to compare, first find the difference and thenfind the percentage change.Now, calculating all these figures is very simple of course, when you calculate on calciyou will have to calculate every figure, but overall we will be able to do the same thingfor all the figures.So, we will see now one by one figures.So, revenue from operations gross and net both are same.They have fallen by 16 percent.Then other non operating revenue; I do not know why this showing the same thing ok.Again it is a 16 percent.So, I got a bit confuse it is correct, but it is a increase of 16 percent from 34 itbecame 39.So, here the third figure that is other operating revenue has increased by 16 percent, coincidentlyboth figures came 16.Then the total operating revenue shows a fall of 16 percent because the anyway other operatingrevenue was negligible.The major component was the revenue from operations.Other income you can see has also fallen by 19 percent 19000 crores, but sorry 19 croreswhich comes to 12 percent fall.So, total revenue again as a 16 percent fall.This figure is not required; it is just a total.Operating and direct expenses, there are more or less same from 2339; they have fallen to2149 that is a fall of 0.08 percent, negligible change.Employee benefits are almost same, salaries have almost not changed more or less it isthe same figure.Finance cost has again almost remained constant, marginal increase of 0.7 percent; depreciationis also more or less constant.Other expenses it is very slight fall.So, you can see that total expenses more or less are same.They have only decrease by minus 0.11 percent.Naturally you can now see the impact of profitability of all this while the revenue has come downby 16 percent revenues are expenses are more or less constant.If you think of shipping industry, you will realise that they have same number of ships,same number of crew.So, depreciation cost is more or less same, maintenance cost is same, the salary costis same, operating expenses are almost same.So, only the fall is in the revenue which led to significant fall in the profits.So, profits have come down by 244 which comes to 0.50 percent fall.So, you can see from 421 to 177; that means, less than half the profit ok.So, more than 50 percent fall in the profit.If you look at the absolute amounts, you can understand 660 crore loss of revenue of which440 was made up by reduction in expenses, but overall reduction in profit by 244 crore.That is why nearly 50 percent fall of profit because there other expenses came down by240 at least they were saved otherwise they would have more or less gone into losses.Net profit before tax is same.Current tax again is more or less constant.Now, if you think a bit you will be surprised as to why the current tax has not changedbecause normally profits fall, the income tax on that also should have come down.But, what happens is if shipping is a unique industry where income tax is charged on thefreight carried by them that is why there is no major fall in income tax; they havegot some mat credit entitlement.Do you remember, what is this?We had discussed in one of the cases earlier.This is known as Minimum Alternate Tax.So, in the earlier year they have paid more tax as a MAT.They are now getting credit for it that last year they have got credit of 24, this yearthey have got credit of 11; no major change.Deferred taxes, anyway is a very small amount.So, there is no significant change in it, there is no tax of earlier years.So, total tax expenses are more or less constant slight fall in the tax expenses.So, overall profit after tax, you can see is a major fall from 275 to 135.So, 65 percent more or less fall in the profit.Then there is a small prior period item.What is meant by prior period item?These are items of earlier year, but now you have got some extra information’s.So, you are doing the kind of rectification, then no extraordinary item.So, final profit from continuing operations has come down by 241.So, a fall of 64 percent and that is reported as a profit for the period.Are you getting everything?This is a very simple starting point of analysis known as comparative statement where we takelast year’s figure and compare it with this year’s figures and do comparison both inabsolute value and also in percentage.This is a very useful simple statement for the performance analysis.Now, we will go for the balance sheet.Same way like earlier we will try to calculate comparative balance sheet and analyse it.So, either you can call it difference or you can call it change and we will also calculatepercentage change.So, please calculate it along with me.So, current year figure minus last year figure and take it as a percentage to the base, percentageto last year’s figure.Equity capital of course, has not changed.So, have a look at it, there is no change in equity capital so, zero change.Reserves and surplus has slightly gone down.Why it would have gone down?There are some prior period item and a few changes companies profits have gone down,but company had paid dividend.That is why their reserves available with them have slightly gone down.You can see company as substantial reserves on a capital of 461, they have reserves of6444.In current year, it is now 6400.So, it is a negligible fall only one percent fall in the reserves.Total share holders funds are also more or less same; it is again a 1 percent fall.Now, look at the long term borrowings.From 4598, there is a substantial reduction in long term borrowing; almost one third oftheir debt they have paid.So, minus 1520, it is a reduction of 33 percent of their debt.Why they would have done that?Maybe their loans there was a due date of loan and they have repaid the loan.There is another possibility that these loans were costly in nature, paying high interest.So, they decided to repay it, but they have done a major repayment.If you look at the deferred tax liability, it has increased from 0 to 343.So, you cannot calculate percentage, but it is a sizeable increase.Other long term liabilities are anyway negligible.Long term provisions have gone down.So, if you take the total noncurrent liability there is a major fall, 26 percent fall; mainlythis fall is because of repayment of long term borrowings.Now, let us go to their current liabilities.They had no short term borrowing they have increased the short term borrowing from 0to 974.Now, if you read this together you will understand that part of their long term borrowings whichwhere this are now converted into short term borrowing.Why this would have happened?Maybe because this is their last year of repayment, ok.Suppose they have issued a 10 year debenture, 9 years are over this is the last year.This is the year in which repayment would be due.That is why you can see here total reduction is 1520 of that 974 is now a short term borrowing.In the always keep in mind that long term means one which is repayable for more than1 year.So, if you take a loan say for 8 years; for 7 years it will be shown as a long term inthe eighth year it will be shown as a short term or if you are repaying in instalmentwhich is more common whatever are the instalments due in the current year that would be calledas a short term borrowing ok.So, not that all the long term borrowings were completely paid, partly they were paidremaining are due in the current year.So, now they are reflected as short term borrowing.Trade payables, there is a significant increase from 989 to 2900.So, you can see it is more than 100 percent 190 almost 200 percent increase you can say.They are more or less doubled or they are rather they are tripled from 1000 to or nearly3000.We do not know the reasons.There is one possibility that company has having some cash crunch.So, they are delaying their trade payables.So, one needs to investigate more.Now, we will look at cash flow statement that time we will get to know little more aboutit, but you can see here clearly that the trade payables have increased three timesand the quantum is also very big it is 3000 crore.It is almost now more or less equal to their long term borrowings.Now, the current payables have substantially reduced.Perhaps maybe some of their other current payables are now converted into trade payables.We will have to study their finances more to understand it, but as of now you can seethat other current payables have substantially gone down.It is a 90 percent fall in that figure.Then, short term provisions; they have also gone down almost by 86 percent.Current liabilities, total you can see has increased now because of the major increasein the trade payables.Although other current liabilities and trade payables are more or less upsetting each other,but still overall you can see rise in 1242 as a current liability which is mainly contributedby rise in the short term borrowings.Now, in the last session we have discussed the current ratio.If you now calculate current ratio you will realise that the ratio would have fallen.We will do later on, but as of now we will see that we can see that nearly 50 percentrise in the total current liabilities.Now, let us go to assets.Assets you can see are more or less same.So, no major ship they have acquired.It is almost same base of asset only 2 percent change that to fall mainly because of depreciation.Intangible assets are anyway almost nil, negligible.Work in progress, there is a small work in progress.Other assets – a sets is for sale or sold are not there for sale are not there.Total fixed assets have marginally fallen by 1 percent.Noncurrent investments have slightly increased.It is not a very it is not a major amount though in terms of percentage it is a 173percent increase.Long term loans and advances, you can see there is a fall, maybe they have recoveredsome of their long term advances.So, total noncurrent assets are not much change in it.It is a 3 percent change.Now, let us go to current ones.They had a very small amount in current investments which we have disposed off now, 37 crores.Inventory – it is a shipping company, not very large inventory they need.There is a slight increase in inventory.There is a slight decrease in trade payables which is understandable because their revenuehas fallen.Cash and cash equivalents are more or less constant from 1200 to 1300 crore.Short term loans and advances have slightly increased; as a percentage it is a major increased100 and 14 percent but amount wise it is not a big increase and other current assets isanyway has small amount.So, if you look at total current assets there is a increase of 323.So, around 13 percent increase in current assets.So, are you getting?This is known as comparative balance sheet.I hope it is very simple, so, you would have understood the calculation.I am just tempted to calculate current ratio though in detail we will solve the cases lateron, but just for one calculation let us do it now.I hope you remember the formula.It is current asset divided by current liabilities.So, in the last year in the current year it is 2727, total current assets divided by totalcurrent liability of 4000.So, current ratio is 0.67.In the last year it was 0.84.So, you can see here because of the rise in current liabilities rise of about 44 percentthere is a fall in the ratio.Are you getting it?Now, traditionally speaking this is not a comfortable position because they have muchmore current liabilities than their current assets.But, because it is the shipping company and it is a government company it may not comein trouble, but otherwise these are troublesome figures.Are you getting me?Now, let us go to cash flow.This is the summary of their cash flow statement in two years March 16 and 17.Let us do the calculation of comparative figures.Now, you know current year minus last year.So, major fall in net profit which we had already calculatedand as a percentage it is a 60 percent fall in net profit before tax.Now, what do you see from cash from operating activities?It is a major fall nearly 50 percent fall from 1327 to 682.So, significant fall in cash generated from operating activities.Cash generated from investing where negative 202 they are now negative 85.So, it is 116 and cash from financing activity is also substantially negative from minus1000 to minus 500.So, it is a increase of 582 about 50 percent decrease, but since the figure was negativenow here in the change it appears like an increase.Overall there are no much changes in the cash and cash equivalent.Though yes, if you look from the compare the opening and closing in the last year it wasrelatively higher now it has come down ok.So, particularly if you look at these three figures, you will realise that there has beena major fall in operating cash flows which are somehow made good by reducing to someextent reducing investment and to some extent reducing their repayment of loan.Are you getting me?So, what we did now for all the three statements was calculation of comparative statement.This is known as horizontal analysis.Now, for the same company let us go for vertical analysis.Now, this is a P and L account.Now, in vertical analysis what we did in the horizontal analysis was comparing the twoyears, but it was comparison of absolute values and then we converted as a percentage.Now, in common size statement we will compare everything with the base and convert theminto percentages.I think it is a simple job.So, you try to do it yourself.We will be actually calculating it in the next session.Till that time.Namaste.Thank you.