Class

___________ is expressing all figures in a financial statement as a percentage of a single figure from the same state

• In the P&L account, expense statements, all figures are stated as a percentage of the total balance.

1. Vertical Analysis or common size statement
2. Horizontal analysis
   • Comparison over time, when the figure for the current year is compared with the previous year.
   • We are moving horizontally through the financial statement.
   • Each computation is mapped with respect to the change in the previous year, in both money terms and percentage terms.
   • Trend Analysis
     • When we do it for more than an year.
     • E.g. compound annual growth rate over the last 5-10 years.
3. Ratio analysis
   • E.g. What is the PG/UG mix? 7:4
   • We don’t need to bind in terms of number.

Companies present so much of data, but can you make sense out of it?

• We have Current Assets and Non-current assets

• Goodwill is the difference between the net worth of the company (assets - liability) in terms of market value (say 200) and that in terms of market value (say 600). Then there is a goodwill of 400.

  • If goodwill doesn’t exist on the balance sheet, then the
  • Capital Reserves loosely means “negative goodwill”.

• The price of the bond fluctuates because of the change in interest rates, because the liabilities (the face value) of the bond remains constant.

	Bond A	Bond B
FV	1000	1000
Interest Rate	8%	10%

• What do we do if we want the absolute value of the coupon be constant (100)? We increase the price

$$\frac{1000}{x}=8\%⟹x=1250$$

Liquidity Ratio

Current Ratio

$$\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}=\frac{2}{1}$$

• It is said that 2:1 is an ideal ratio, so that even if there is a 50% erosion in the asset value, we can still pay off our liabilities.
• Maximum Permissible Bank Finance norms say that the ideal ratio is 1.33 : 1
• Some part of the current liabilities should be financed by long term financial assets like Equity Fund and Long Term Debt (not explicitly)

Liabilities	Assets
Equity Finance
Long term Debt	Current Assets
Current Liabilities

GuptGyaan Amazon makes 70% of its sales in December, historical data suggested. So, it should be ready with the inventory. Understand your business, be smart on your feet.

Quick Ratio

$$\text{Quick Ratio}=\frac{\text{CA}-\text{Inventory}-\text{Prepaid Expenses}}{\text{Current Liabilities}}$$

• Ideal value for quick ratio is 1:1.
• The numerator is called quick assets. So, quick ratio can be written as $\frac{\text{Quick Assets}}{\text{Current Liabilities}}$

Cash Ratio

Also known as Super Quick Ratio

$$\text{Cash Ratio}=\frac{\text{Cash and Bank Balances}+\text{Markatable Surplus}}{\text{Current Liabilities}}$$

Basic Defense Interval / Interval Measure

$$=\frac{\text{Quick Assets}}{\text{Daily Operating Expenses}}$$

And also, Daily operating Expenses

$$=\frac{\text{Cost of Goods Sold}+\text{Selling Administration and other General expenses}-\text{Depreciation and other non-cash expenditure}}{\text{No. of days in a year}}$$

Net working capital

$$=\text{Current Assets}-\text{Current Liabilities (Excluding short-term bank borrowing)}$$

• Gross working capital = Current Assets
• Net working capital = Current Assets - Current Liabilities

One drawback of these ratio is that they are static.

This means that they can be manipulated. Thus, we should take the ratios with a pinch of salt. We have to ensure that these ratios are not manipulated. For example,

• If The current assets are 2000, and current liabilities are 1000.
• Then the Current ratio will be 2:1, but say we used 600 cash to pay off the liabilities, then the ratio becomes 2.33:1 thus it can be manipulated.