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Financial Statement Analysis

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Financial Statement Analysis-FIN621
VU
Lesson-43
CASE STUDY
Assumption
The company you have chosen has hired you as a financial consultant.
Assignment
Based on your analysis of the firm's financial statements and any relevant
supplementary information you can obtain about the firm and its operating environment, identify areas
in which the company is performing well (strengths) and problem areas (weaknesses); Also advise
management of corrective measures for improvement.
Data
The time period for the analysis should include five full years or four years plus interim
statements for the most recent year. In addition to the financial statements and other material in the
annual reports, you should review relevant materials from outside sources such as newspapers,
periodicals and investment resources.
Outline
The following outline is provided for guidance, but the analysis should be adjusted, as
appropriate, to conform to the individual characteristics of the firm.
Suggested Outline for the Financial Statement Analysis
I.
Introduction
A.
Objective of paper
B.
Summary of Findings
II.
Firm, Industry, and Environment
A.
Description of firm and its management
B.
Discussion of competitive environment
C.
Economic climate and outlook
D.
Other factors, e.g. governmental regulations, Labour relations,
Litigations.
III.
Evaluation of Financial Statements
A.
Overview
B.
Short-term liquidity
C.
Operating efficiency
D.
Capital structure and long-term solvency
E.
Profitability
F.
Market measures
IV.
Outlook, Summary, and Conclusions
A.
Outlook for performance, earnings projection
B.
Summary and Conclusions
Table-1
XYZ
SUGAR
MILLS
154
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Financial Statement Analysis-FIN621
VU
BALANCE
SHEET
AS
ON
JUNE
30,
.
Rs. in million
Year
1977
1978
1979
1980
CAPITAL & LIABILITIES
Owners' equity
Original  Investment by the Controlling
10
10
10
10
Corporation (CC)
Current A/C with CC
55
59
65
71
Total equity
65
69
75
81
Less accumulated losses
66
82
94
114
(1)
(13)
(19)
(33)
Net equity
Current Liabilities
1977
1978
1979
1980
Short-term borrowing
25
26
29
37
Trade creditors (liabilities for
7
12
11
4
expenses)
Liabilities for other finances 8
17
13
10
40
55
53
51
Fixed Liabilities
Long-term loans
10
13
15
20
49
55
49
38
Total capital & Liabilities
Assets
Fixed assets
16
15
14
14
Current assets
- Cash
5
4
3
2
-Receivable from Bibo
12
13
15
17
-Other Receivables
2
2
3
3
-Pre-paid
1
1
1
1
- Inventory
13
20
13
1
Total current assets
33
40
35
24
Total Assets
49
55
49
38
ANALYSIS OF BALANCE SHEET
No.
Table Data/Facts
Findings
155
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Financial Statement Analysis-FIN621
VU
1
1
Balance Sheets for the
·
Accumulated losses (Rs.114 million as at
June
year 1976-80
30, 1980)
·
Constantly losing enterprise.
2
2
Accumulated
losses
·
Losses increasing over the years.
over the period.
3
1
Balance Sheet
a) Capital cost of the project was Rs.26
million,
met through:
-  Equity Fund from CC Rs.10 million.
-  Loans from CC: Rs.16 million
b) "Current account with "CC" comprises, funds
given by CC over the years as working capital.
c) Total equity as on 30.06.1980
= Rs.81 million.
d) Equity completely eroded by accumulated loss of
Rs.114 million.
e) Equity eroded since 1976-77
4
1
Borrowing
(short-
a) Increased from Rs.35 million in 1976-77 to
term & long term)
Rs.57 million in 1979-80.
b) Debt burden increasing because of unit's
inability to repay the principal owing to
persistent losses.
c) Vicious circle.
d) Huge financial charges (Rs.8 million during
1979-80)
156