Ahmed Moustafa Kamel
FSA Introduction
Financial Statements
1- financial Position “ balance Sheet “
2 – Income Statement
3- Statement Of Comprehensive income
4- Cash Flow Statement
5- Change In Owners Equity Statement
6- Auditor Report ( footnotes )
financial Position “ Balance Sheet “
A balance sheet is a statement of the financial position of a
business which states the assets, liabilities and owner's equity
at a particular point in time. In other words, the balance sheet
illustrates the business's net worth.
The balance sheet may also have details from previous years
so you can do a back-to-back comparison of two consecutive
years. This data will help you track the company performance,
and will identify ways in which you can build up your finances .
Benefits and limitations of balance sheet:
Balance Sheet
Equity Component
1.capital
2.Retained Earning
3.Common stock
4.Preferred Stock
5.Reserves
External Source Of Funds
Difference between Debt and Equity:
Debt:
1. Seniority “liquidation”
2. Definite maturity
3. Low cost
4. Interest fixed amount
Equity:
1. Junior
2. Indefinite maturity
3. High cost
4. Dividends (not predetermined)
Difference between Debt , Equity and Grey Area :
income statement is The income statement summarizes the revenues and expenses generated by
the company over the entire reporting period.
Income Statement
Net Sales
COGs
Depreciation
Gross Profit (GP)
Selling General and Administration cost (SG&A)
Depreciation and Amortization
Net Operating Profit (NOP)
Interest expense
Provisions
Interest Income
Other Expenses
G/L Investments
G/L Capital
G/L FX
Other Revenues
Net Profit Before Tax (NPBT)
Tax
Net Profit After Tax (NPAT)
Unusual Items
G/L Plant
G/L Investment
Net Profit After unusual Items (NPAUI)
Balance Sheet & income statement
12
Accounting Principles
Accrual basis
is a method of recording accounting transactions for revenue when
earned and expenses when incurred. The accrual basis requires the use
of allowances for sales returns, bad debts, and inventory obsolescence,
which are in advance of such items actually occurring. An example of
accrual basis accounting is to record revenue as soon as the related
invoice is issued to the customer.
Matching Principle
The matching principle is one of the basic underlying guidelines in
accounting. The matching principle directs a company to report an
expense on its income statement in the period in which the related revenues
are earned. Further, it results in a liability to appear on the balance sheet for
the end of the accounting period. The matching principle is associated with
the accrual basis of accounting and adjusting entries.
Cash flow statement
In financial accounting, a cash flow statement, also known as statement of cash flows,[1] is a financial
statement that shows how changes in balance sheet accounts and income affect cash and cash
equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially,
the cash flow statement is concerned with the flow of cash in and out of the business. The statement
captures both the current operating results and the accompanying changes in the balance sheet.[1] As
an analytical tool, the statement of cash flows is useful in determining the short-term viability of a
company, particularly its ability to pay bills.
The cash flow statement is partitioned into three segments, namely:
1- cash flow resulting from operating activities.
2-cash flow resulting from investing activities.
3- cash flow resulting from financing activities.
The Company's Sources and uses of Cash
There are four major cash sources and uses available to a
business as follows:
Sourses
1. Net profit (after tax)
Uses
1- Net loss
2. Conversion of an asset to cash
2- increase in assets
3. Increase in liabilities
3- Decrease in liabilities
4. Increase in equity.
4- Reduction in equity
Statement Of Comprehensive income
Comprehensive income is the variation in a company's net assets from non-owner sources
during a specific time period. Comprehensive income includes net income and unrealized
income, such as unrealized gains/losses on hedge/derivative financial instruments and
foreign currency transaction gains/losses. Comprehensive income provides a holistic view
of a company's income not fully captured on the income statement.
One of the most important financial statements is the income statement.
It provides an overview of revenues and expenses, including taxes and
interest. At the end of the income statement is net income; however, net
income only recognizes incurred or earned income and expenses.
Sometimes companies, especially large firms, realize gains or losses from
fluctuations in the value of certain assets. The results of these events are
captured on the cash flow statement; however, the net impact to earnings is
found under "comprehensive" or "other comprehensive income" on the
income statement.
Financial Analysis
Type Of Financial Analysis
1- Horizontal Analysis
2 - Vertical Analysis
3- Ratios Analysis
4- peer analysis (Compare the firm to other similar firms. )
1)Horizontal Analysis
Compare the firm with itself over time.
This technique is concerned with the comparison of two or more
years’ financial data. The horizontal analysis is facilitated by
showing changes between years in both amount and percentage
form, which helps financial analysts to focus on key factors that
have affected profitability or financial position.
1)Horizontal Analysis
1)Horizontal Analysis
1)Horizontal Analysis
2- Vertical Analysis
The procedure of preparing and presenting common size statements.
Common size statement is one that shows the items appearing on it in percentage form
as well as in amount form.
Each item is stated as a percentage of some total of which that item is a part, as
clarified below:
A vertical common-size balance sheet expresses all balance sheet accounts as a
percentage of total assets.
A vertical common-size income statement expresses all income statement items as a
percentage of sales.
2- Vertical Analysis
2- Vertical Analysis
2- Vertical Analysis
Advantages for using the Vertical Analysis Technique:
Knowing the asset composition of the company throughout the years
and comparing it with the industry’s norm (balance sheet).
Determining the financial structure of the company throughout the
years (balance sheet)
Knowing the effect of the company’s costs on the generated sales
(income statement).
2- Vertical Analysis
In vertical analysis, a company's performance and
present financial position as indicated in its ratios, are
compared to that of similar companies or to the
industry norm.
If a company's performance differs significantly from
the industry norm, the reason should be determined,
and the credit impact assessed.
Ratio Analysis
Financial ratio analysis is one of the most popular financial
analysis techniques for companies and particularly small
companies. There are more than 300 ratios.
Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency (or
activity), liquidity, profitability and solvency. Ratio analysis can
provide information on trends within the company , often called
trend analysis. The trend of these ratios over time is studied to
check whether they are improving or deteriorating.
Financial ratio analysis – things to bear in mind
Having said all of this, ratios are not perfect. Shortcomings include:
Ratios largely look at the past, not the future. It may be possible to make
assumptions about future performance using ratios, but they remain only
assumptions;
Inventory valuations - different cmpanies use different methods to value
their inventory. This can affect the accuracy of company comparisons;
Depreciation - cmpanyuse different depreciation methods. The use of
different depreciation methods affects company financial statements
differently and won't lead to valid comparisons;
Information about comparable businesses and an industry sector is not
always available;
Financial ratio analysis – things to bear in mind
Ratios focus on numbers. They should be used in conjunction with a sound non-financial
analysis of the factors that affect financial performance, such as the economic situation,
the level of competition, product quality, customer service, and employee morale;
Window Dressing – Financial information can be “manipulated” in several ways to
make the figures used for ratios more attractive. The companies can use “Window
Dressing” to manipulate their financial statements and make them unreliable for
analytical purposes;
There are often several methods to calculate ratios. It is important to understand how
the ratios have been calculated, namely what has been included and omitted.
There are occasions where ratios may be understated. This is especially true for
seasonal businesses; the financial statements might be completed at a low point of the
business cycle and figures such as inventory and receivables may be lower than at
other times of the year.
Financial ratio analysis – things to bear in mind
Consider the type of business and the type of cash conversion cycle it requires, i.e.
whether the business is cash positive or negative (this depends on the amount of credit
that is given and taken, as well as the level of inventory).
Consider base shift:
If the sales of the company A grow from EGP 10 million to EGP 15 million during a year, it
is an increase of 50%.
If the sales fall the following year from EGP 15 million to EGP 10 million, this is a fall of
33%. Thus, while the sales have fallen by the same amount as they grew in the previous
year, in
percentage terms the fall doesn’t seem as bad: the base figure is not the same.
Conducting a trend analysis for less than three years can produce misleading results.
Businesses operating in different sectors will yield ratios with different results.
Financial ratios
TENOR MATCHING
Tenor Matching
- Accepted tenor mismatching
- Positive WC
- The short source financed the short uses
inflexibility
- Unaccepted tenor mismatching
- Negative WC
- The short source financed the long uses
instability
Working Capital & Working Investment
working capital definition
Total current assets that was financed from capital
• WC calculation Working Capital WC
WC = Current Assets – Current Liabilities
It is the difference of Current Assets and Current Liabilities
Alternatively This is worked out as surplus of Long Term Sources over
Long Tern Uses,
Working Capital (WC)
Working capital is measuring of both a company's efficiency and its short-term financial health. The working
capital is calculated as follows:
Working Capital = Current Assets – Current Liabilities
Working capital is the basic measure of a firm's ability to meet the claims of current creditors from the conversion of current
assets to cash. As long as a company can meet these obligations as they come due, it is not likely to be forced into liquidation
or bankruptcy.
 Working capital is provided by permanent funds such as long-term debt and equity.
 Working capital represents a cushion or margin of protection for current creditors, current assets could shrink by the
amount of working capital before current creditors would incur a loss.
 Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to
satisfy both maturing short-term debt and upcoming operational expenses.
 The management of working capital involves managing inventories, accounts receivable and payable and cash.
Working capital finances the Cash Conversion Cycle of a business-the time required to convert raw materials into finished
goods, finished goods into sales, and accounts receivable into cash. These factors vary with the type of industry and the scale
of production, which varies in turn with seasonality and with sales expansion.

WC adequacy :
The ability of the company WC to cover the CL with excess to cover and absorb the following
Permanent level of inventory
Permanent level of account receivable
Shrinkage
Business Risk
Working Investment "WI“
Working investment concept is used to measure the need for financing that is required to
complete the asset conversion cycle.
Definition:
Working investment is representing the portion of the company's trading assets (i.e.
accounts receivable and inventory) that is exceeding the level of the spontaneous finance
provided by accounts payable and accrued expenses (trading liabilities).
Working Investment = Trading Assets – Trading liabilities
WI = (A/Rs + Inv. + Advance Payment to customer) – (A/Ps +A/Es + Down payment from suppliers)
Items
Cash
Items
WC = CA -CL
Marketable Sec.
Notes Payable
CPLTD
Pledged Deposits
Net Receivables
Accounts Payable
Inventory
TA
SF
Advance Payment to
Suppliers
Accrued Expenses
Down Payment from
Customers
Due from Affiliates (CA)
Taxes Payable
SSF
Sundry Current Assets
Dividends Payable
Due to Affiliates (CL)
Current Assets
WI = TA -SF
Sundry Current Liabilities
Current Liabilities
Types of working investment
1- Working Investment to finance Permanent Levels
2- Working Investment to finance sales growth
3- Working Investment to finance Seasonal lending
1- Working Investment to finance Permanent Levels
Due to the fact that companies have overlapping asset conversion cycles and
thus will have to maintain reasonable level of inventory in each stage of the
production cycle (usually called strategic or safety stock). Hence, the permanent
level of working investment (to finance inventory in this particular case) allows
the company to repeat the trading cycles before the previous cycle has been
completed. This will help the company to meet the demand for its products
without running out of stock accordingly.
The second consideration will arise of situations where the company's
obligations that are due for payment is always maturing before the completion
of the company’s conversion of assets and cash will never be equal to the
amount of their maturing obligations. This will impose a need for a permanent
working investment, which should be ideally financed internally through
earnings retained in the business as part of the company’s equity.
2- Working Investment to finance sales growth
The company's sales growth will certainly lead to increase the level of working
investment. On the other hand, working investment will tend to be at a stable level if
the company's sales volume remains constant.
However, it is most likely that working investment will decrease gradually by the
realized profit that will provide a sort of internal finance when sales is stagnant,
provided that there is no change in other components of the asset conversion cycle
length that may be caused by:
− The change of the company's production cycle length
− The change of the credit tenor offered for its customers
− Or the change in the tenor the accounts payable is paid
3- Working Investment to finance Seasonal lending
As previously concluded, working investments increases is directly connected with
the company's sales increase. Therefore, in businesses that is characterized by
seasonality either in demand such as Electric Heaters products that its sales are
mainly concentrated in winter season or in supply such as the Juice Manufacturer
that will purchase a large stock of the fruits that is available only in a certain season.
As a result, the working investment level will differ in many companies during the
same year impacted by the seasonality nature. The Electric Heater producer is a
typical example of a business that will experience an increased level of sales during
at least one season throughout the year (Seasonality in demand). The Juice
manufacturer is also a good example of seasonality in supply, where the juice sales
are almost constant during the year, while the company will need an extended level
of its working investment to finance the purchase a sufficient stock of the fruits (i.e.
Mango) that will be used during the year. In both cases, increased needs for working
investment financing develop at specific periods in the year.
Relation Between WI & WC
Conclusion
Assets conversion cycle
calculate the length of ACC
Cash conversion cycle
calculate the GAP by days
WI
calculate the amount financing need
WC
measure the company liquidity position
SHORT TERM NEED CALCULATION
STN = WI – PLWI - SHRINKAGE
COGS + SG&A/365
COGS /365
CCC
(GAP) “DAYS”
CCC (GAP) “DAYS “
LIQUIDITY RATIOS
SHOWS A FIRM’S ABILITY TO COVER ITS CURRENT LIABILITIES WITH ITS CURRENT ASSETS.
Liquidity Ratios
Quick ratio
Current Ratios
Or
Acid Ratio
Defiance
interval Ratio
Shrinkage
Ratio
Net Working
Capital
EBITDA
Cash Ratio
Interest
Coverage
Ratio
Liquidity Ratios
Liquidity
1
WC
CA - CL
2
Current Ratio
CA/CL
3
Quick Ratio Or Acid ratio
CA-Inv./CL ( CA - least liquied assets / CL)
4
Cash Ratio
cash+marketable securities/CL
5
Defensive interval Ratio
cash+ cash equivalent / Expenses per day
6
Expenses per day
SG&A + COGS /365
7
Net Working Capital
CA-CL
8
shrankage ratio
WC/CA
9
Interest Coverage
NOP/Interest Expense
10
Liquid surplus : sales ratio
(Liquid surplus / sales)*100
1. Current Ratios
Current Assets
Current Liabilities
The current ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations.
The current ratio is an indication of a firm’s liquidity. Acceptable current ratios
vary from industry to industry. In many cases, a creditor would consider a high
current ratio to be better than a low current ratio, because a high current ratio
indicates that the company is more likely to pay the creditor back. Large
current ratios are not always a good sign for lender. If the company's current
ratio is too high it may indicate that the company is not efficiently using its
current assets or its short-term financing facilities.
Which company has a better Current ratio ?
1st company
20000 : 10000
15000 : 5000
2nd company
20000 : 10000
22000 : 10000
Ratio before change
Ratio after change
Current Ratio Comparisons
Year
2017
2016
2015
HH
2.39
2.26
1.91
Industry
2.15
2.09
2.01
Ratio is stronger than the industry average.
2. Quick ratio
(inventory )
Current Assets – least liquid assets
Current Liabilities
The quick ratio is an indicator of a company’s short-term
liquidity position, and measures a company’s ability to meet
its short-term obligations with its most liquid assets.
it is also called as the acid test ratio. An acid test is a quick
test designed to produce instant result.
Note that inventory is excluded from the sum of assets in the
quick ratio, but included in the current ratio. Ratios are tests
of viability for business entities but do not give a complete
picture of the business' health. (it’s just a stress test )
Quick Ratio Comparisons
Year
2017
2016
2015
HH co
1.00
1.04
1.11
Industry
1.25
1.23
1.25
Ratio is weaker than the industry average.
This ratio compares the liquid surplus (current assets
minus current liabilities) with sales. As sales increase,
the liquid surplus ought to increase in harmony with it.
The ratio ought to stay the same. If not, as sales
increase, the business may need to borrow more
money.
Assets Conversation Cycle
The Asset Conversion Cycle and its Related Methods of Finance
 The asset conversion cycle describes the steps of any business that is starting by
acquiring raw materials, converts these raw materials into finished goods, sells
the goods against receivables, collect the receivables and obtain cash.
 Each company has its own asset conversion cycle that is unique and expresses
the operation process of a business.
 Understanding and evaluating the financial statements of any business will
require a proper study of the company's asset conversion cycle.
The asset conversion cycle is reflected to a large extend in the company's
balance sheet by its financial structure and its asset investments.

Products gap Vs. Financial Gap
61
Why the flow of funds does not match the outflow in the assets conversion cycle?
This is attributed to several factors:
 The length of the production process is usually longer than the period of the
spontaneous finance
 Most of the companies should maintain a stand by stock of raw material to avoid
hindering the production process
 In the same sense, the companies should maintain a reasonable level of finished
goods available for sale, which will increase the time lag.
 Most of the sale transactions are made on credit basis with extended tenor that
increases further the financing gaps.
Not to mention the other factors that might extend the length of the assets
conversion cycle such the difficulties to sell the finished products and problems of
collecting the receivables without delay … etc.

Kind of credit Risks
Operational or Business Risk
Financial Risk
ACC Risk
Operational Risk
Operational Risk
Operational Risk
Operational Risk
Operational Risk
Financial Risk
Financial Risk
Business Risk
Cash Conversion Cycle
The Cash Conversion Cycle (CCC) shows how quickly inventory turns into sales, and
sales into cash, which is then used to pay suppliers for goods and services.
The longer that inventory is held, and receivables take to be paid, the more liquid
resources the business needs to be sure that it can pay suppliers when they are
due.
CCC
Cash Conversion Cycle
CCC
The Cash CONVERSION CYCLE focuses on the time between payments made for materials
and payments received from sales:
Cash
Inventory
Receivables
Conversion = conversion + collection Cycle
period
period
Payables
deferral .
period
What does the cash conversion cycle tell us about working capital management?
Cash Conversion Cycle - Financing Gap
Assets Management Efficiency
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
TA ( trading assets )
SF (spontaneous finance )
WI ( working investment )
Change in WI
WI /SALES
A/R Turnover
Inventory Turnover
RM Turnover
WIP Turnover
FG Turnover
GIT Turnover
Adv. Pay. Turnover
A/R DOH
Inventory DOH
RM DOH
WIP DOH
FG DOH
GIT DOH
Adv. Pay. DOH
AP Turnover
AE Turnover
DP Turnover
AP DOH
AE DOH
DP DOH
Length of ACC
ACC (Tenor)
Gross Plant Turnover
Net Plant Turnover
Total Assets Turnover
‫ االصل مفروض يعيش كام سنة‬Plant Life
‫ االصل عندة كام سنة‬Plant Age
Plant Life remaining ‫متبقى لالصل كام سنة‬
Assets Efficiency
AR+Inventory+AP
AP+AE+DP
TA-SF
CY-PY/PY
WI/ SALES
Sales/AR
COGS/INV
COGS/RM
COGS/WIP
COGS/FG
COGS/GIT
COGS/Adv. Pay.
AR/Sales*365
I/COGS*365
RM/COGS*365
WIP/COGS*365
FG/COGS*365
GIT/COGS*365
Adv. Pay./COGs*365
COGS/AP
COGS/AE
Sales/DP
AP/COGS*365
AE/COGS*365
DP/Sales*365
Trading Assets
TA DOH-SF DOH
Sales/Gross PP&E
Sales/Net PP&E
Sales/T.Assets
Gross PP&E/ Depreciation Exp.
Accumulated Dep./ Depreciation Exp.
Net PP&E/ Depreciation Exp.
Sales
A/R TO = ---------------A/R
Adjusted Ratio
Credit Sales
A/R TO = ---------------A/R
***************************************
A/R
A/R DOH = ------------------- * 365
Sales
INV TO =
INV DOH =
COGS
---------------INV
INV
------------------- * 365
COGS
A/P TO =
COGS
------------------------A/P
Adjusted Ratio
Credit Purchases
A/P TO = ------------------------A/P
**************************************************
A/P
A/P DOH = --------------------------- * 365
COGS
Purchases = ending inv + beginning inv -COGS
INV TO =
COGS
---------------INV
INV
INV DOH = ------------------- * 365
COGS
INV TURN OVER
the Inventory turnover is a measure of the number of times inventory is sold or used in a
time period such as a year. It is calculated to see if a business has an excessive
inventory in comparison to its sales level. The equation for inventory turnover equals the
cost of goods sold divided by the average inventory. Inventory turnover is also known as
inventory turns, merchandise turnover.
INV DOH
The days of inventory on hand is a measure of how quickly a business uses up the
average inventory it keeps in stock. This metric may also be called days' sales of
inventory. Investors and financial analysts use the days of inventory on hand as a tool to
assess how efficiently a company manages its inventory . Because this is an aggregate
measure, it is minimally useful to managers. They are likely to track how many days it
takes sell or use specific products, rather than the aggregate amount.
A/R TO =
CREDIT SALES
---------------A/R
A/R
A/R DOH = ------------------- * 365
Credit SALES
A/R TURN OVER
The receivables turnover ratio is an accounting measure used to quantify a firm's
effectiveness in extending credit and in collecting debts on that credit. The receivables
turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.
A/R DOH
Accounts receivable days is the number of days that a customer invoice is outstanding
before it is collected. The point of the measurement is to determine the effectiveness of
a company's credit and collection efforts in allowing credit to reputable customers, as
well as its ability to collect cash from them in a timely manner. The measurement is
usually applied to the entire set of invoices that a company has outstanding at any point
in time, rather than to a single invoice. When measured at the individual customer level,
the measurement can indicate when a customer is having cash flow troubles, since it
will attempt to stretch out the amount of time before it pays invoices.
A/P TO =
COGS
---------------A/P
A/P
A/P DOH = ------------------- * 365
COGS
A/P TURN OVER
The accounts payable turnover ratio is a short-term liquidity measure used to quantify
the rate at which a company pays off its suppliers. Accounts payable turnover ratio is
calculated by taking the total purchases made from suppliers, or COGS, and dividing it
by the average accounts payable amount during the same period.
A/P DOH
The average number of days a company takes to pay its bills, used as a measure of
how much it depends on trade credit for short-term financing.
(WI / SALES) *100
This is an efficiency ratio. It indicates how the main
components of working capital are being managed in relation
to sales. If the ratio is increasing, it may indicate that the
company is mismanaging its key working assets. Careful
management often results in a fall of this ratio. As sales
increase the ratio should remain the same, or better still
reduce, if the NWAs are being managed successfully. If the
ratio rises, the company will consume more cash. If the ratio
falls the company will be able release cash for other purposes
which may be more profitable – e.g. investment in profitable
new products.
This indicates the amount of earnings retained from a
given level of sales. If the WI-to-sales ratio is greater
than this ratio and sales grow, it usually means that
borrowing will also increase because earnings are not
enough to finance the increased working capital
requirement
Plant Life
Gross PP&E / Depreciation expense
Plant Age
Accumulated Dep./ Depreciation expense
Plant Life remaining
Net PP&E/ Depreciation expense
Example :
Gross Plant = 100,000
Net plant 40,000
Accumulated Dep. = 60,000
Dep. Expense = 10,000
Plant Life = 100,000/ 10,000 = 10 years
Plant Age = 60,000/ 10,000 = 6 years
Plant Life remaining = 40,000/ 10,000 = 4 years
solvency Ratios
The solvency ratio is a key metric used to measure
an enterprise's ability to meet its debt obligations
and is used often by prospective business lenders.
The solvency ratio indicates whether a company's
cash flow is sufficient to meet its short-and long-term
liabilities.
Solvency refers to an enterprise's capacity to meet
its long-term financial commitments.
solvency Ratios
Solvency ratios, also called leverage ratios, measure a company’s
ability to sustain operations indefinitely by comparing debt levels
with equity, assets, and earnings. In other words, solvency ratios
identify going concern issues and a firm’s ability to pay its bills in
the long term. Many people confuse solvency ratios with liquidity
ratios. Although they both measure the ability of a company to
pay off its obligations, solvency ratios focus more on the long-term
sustainability of a company instead of the current liability
payments.
Solvency ratios show a company’s ability to make payments and
pay off its long-term obligations to creditors, bondholders, and
banks. Better solvency ratios indicate a more creditworthy and
financially sound company in the long-term.
SOLVENCY RATIOS
SHOWS THE EXTENT TO WHICH THE FIRM IS FINANCED BY DEBT AND THE ABILITY TO
COVER ITS LONG TERM LIABILITIES .
Solvency Ratios
Debt Ratio
Debt-toEquity
Gearing
Ratio
DCSR
Financial
Leverage
Solvency Ratios
Solvency
1
Financial Leverage
Total liabilities/ total Equity
2
Cost of Debts
Interest Expense/average Funded Debts
3
Average Funded Debits
STD0+STD1+MTL0+MTL1+CPLTD0+CPLTD1/2
4
Assets Leverage
Total Assets / Equity
5
Gearing Ratio
Total banks debt / Equity
6
Debit Ratio
Total liabilities/Total Assets
Capital structure
Financial Leverage
Total liabilities
TOTAL Equity
Leverage – the relationship between the amounts invested in a
business by its owners (equity) and by outsiders (debt). The higher
the leverage ratio, the higher the risk is.
the use of debt rather than fresh equity in the purchase of an
asset, with the expectation that the after-tax profit to equity holders
from the transaction will exceed the borrowing cost, frequently by
several multiples, Normally, the lender will set a limit on how much
risk it is prepared to take and will set a limit on how much leverage
it will permit.
Debt-to-Equity Ratio Comparisons
Year
2017
2016
2015
HH
.90
.88
.81
Industry
.90
.90
.89
HH has average debt utilization
relative to the industry average.
Assets Leverage
Total Assets
Shareholders’
Equity
The asset to equity ratio reveals the proportion of an
company’s assets that has been funded by shareholders
equity. The low of this ratio shows the proportion of assets
that has been funded with debt. For example, a company
has EGP1,000,000 of assets and EGP100,000 of equity,
which means that only 10% of the assets have been
funded with equity, and a massive 90% has been funded
with debt.
Gearing Ratio
Total BANK”STL+CPLTD+LTL”
Shareholders’ Equity
Quite closely related to solvency ratio, gearing ratio is a
general term recounting a financial ratio comparing some
form of owner’s capital (equity) to banks debits . Moreover,
gearing is a quantification of financial leverage, indicative
of the extent to which a firm’s activities are financed by
owner’s finances vs. Banks's finances..
DEBIT Ratio
Total liabilities
Total ASSETS
The debt ratio is a financial ratio that measures the
extent of a company’s leverage. The debt ratio is
defined as the ratio of total debt to total assets.
It can be interpreted as the proportion of a company’s
assets that are financed by debt.
Interest Coverage
NOP
Interest Expense
The interest coverage ratio (ICR) is a measure of a company's
ability to meet its interest payments. Interest coverage ratio is
equal to earnings before interest and taxes (NOP) for a time
period, often one year, divided by interest expenses for the
same time period. The interest coverage ratio is a measure of
the number of times a company could make the interest
payments on its debt with its NOP. It determines how easily a
company can pay interest expenses on outstanding debt.
Financial Payments Coverage
“Debit Service Coverage Ratio “
DSCR
EBITDA
Financial payment
the debt-service coverage ratio (DSCR) is a measurement of the cash flow
available to pay current debt obligations.
The debt service coverage ratio (DSCR), also known as "debt coverage ratio"
(DCR), is the ratio of cash available to debt servicing for interest, principal and
lease payments. It is a popular benchmark used in the measurement of an
entity's ability to produce enough cash to cover its debt (including lease)
payments. The higher this ratio is, the easier it is to obtain a loan.
FP =“CPLTD +Interest Exp.+ Leasing Exp
DSCR CALCULATION
NOPAT
FP
cash flow
NPAUI
interest Expense +
interest Income other expences +
other income Minority Interest Expense +
Net gain + or loss - on sale of plant
Equity Investment Income provision for income taxes ( + / - )
actual income taxes paid provision for deferred taxes ( + / - )
actual deferred taxes paid NOPAT
Normalize Operating Profit After Taxes
DSCR CALCULATION
COPAT
FP
cash flow
NPAUI
interest Expense +
interest Income other expences +
other income Minority Interest Expense +
Net gain + or loss - on sale of plant
Equity Investment Income provision for income taxes ( + / - )
actual income taxes paid provision for deferred taxes ( + / - )
actual deferred taxes paid NOPAT
Depreciation Expense +
Amortization Expense +
COPAT
Normalize Operating Profit After Taxes
Cash Operating Profit After Taxes
DSCR CALCULATION
NPAUI
interest Expense +
interest Income other expences +
other income Minority Interest Expense +
Net gain + or loss - on sale of plant
Equity Investment Income provision for income taxes ( + / - )
actual income taxes paid provision for deferred taxes ( + / - )
actual deferred taxes paid NOPAT
Depreciation Expense +
Amortization Expense +
COPAT
Account Receviable ( + / - )
Inventory (+ / - )
Account Payable ( + / - )
Accrued Expenses ( + / - )
CACO
FP
cash flow
Normalize Operating Profit After Taxes
Cash Operating Profit After Taxes
subtotal (change of WI )
Sundry Current Assets ( + /- )
Sundry Current Liabilities ( + / - )
CACO
Cash After Current Operation
DSCR CALCULATION
EBITDA
FP
EBITDA
I +TAX+DEP.+ AMOZ
Profitability
Measure the company’s ability to manage costs and expenses, while growing revenues,
to generate earnings
Profitability
Profitability
1
COGs/Sales
COGs/Sales
2
Gross Profit Margin
GP/Sales
3
SG&A/Sales
SG&A/Sales
4
NOP Margin
NOP/Sales
5
NPBT Margin
NPBT/Sales
6
NPAT Margin
NPAT/Sales
7
EBITDA Margin
EBITDA/Sales
8
Dividends Payout
Dividends/NPAUI
9
Sales Growth
CY-PY/PY
10
COGs changes
CY-PY/PY
11
ROE ( Return on Equity)
NPAT/equity
12
ROA ( Return on Assets)
NPAT/T.Assets
13
ROS (Return on Sales)
NPAT/Sales
COGS TO SALES
= COGS
SALES
This ratio displays the percentage of sales revenue used to
pay for expenses which vary directly with sales. The Cost of
Goods Sold (COGS) to Sales Ratio is calculated based on
the Cost of Goods Sold and Revenues generated for a
specific period.
The cost of sales to revenue ratio compares the expenses
generated by your sales activity to the company's
revenue. It can help you gauge the performance of the
business.
Gross Profit Margin
Gross Profit
Net Sales
Gross profit margin is a profitability ratio that calculates the percentage of sales that exceed
the cost of goods sold. In other words, it measures how efficiently a company uses its materials
and labor to produce and sell products profitably. You can think of it as the amount of money
from product sales left over after all of the direct costs associated with manufacturing the
product have been paid. These direct costs are typically called cost of goods sold or COGS
and usually consist of raw materials and direct labor.
The gross profit ratio is important because it shows management and lender how profitable
the core business activities are without taking into consideration the indirect costs. In other
words, it shows how efficiently a company can produce and sell its products. This gives lender
a key insight into how healthy the company actually is.
Gross Profit Margin Comparisons
Year
2017
2016
2015
HH
27.7%
28.7
31.3
Industry
31.1%
30.8
27.6
HH has a weak Gross Profit Margin.
SG&A TO SALES
= SG&A
SALES
Definition: SG&A to Sales is the ratio of selling,
general and administrative costs to sales. Selling,
general, and administrative (SG&A) expenses
represent most operating expenses including
marketing costs, employee salaries, pension
costs, insurance, etc.
NOP Margin
= NOP
SALES
A measure of how well a company controls its costs. It is
calculated by dividing a company’s Normalize operating profit by
its sales and expressing the result as a percentage. The higher the
profit margin is, the better the company is thought to control costs.
lender use the profit margin to compare companies in the same
industry and well as between industries to determine which are
the most profitable.
ROS
Net Profit after Taxes
Net Sales
Return on sales (ROS) is a ratio used to evaluate a
company's operational efficiency and profitability.
This measure provides insight into how much profit is being
produced per pound of sales. An increasing ROS indicates
that a company is growing more efficiently, while a
decreasing ROS could signal impending financial troubles.
ROS Comparisons
Year
2017
2016
2015
HH
4.1%
4.9
9.0
Industry
8.2%
8.1
7.6
HH has a poor ROS.
Return on assets
ROA
Net Profit after Taxes
Total Assets
Return on assets (ROA) is an indicator of how profitable a
company is relative to its total assets.
ROA gives a manager, or analyst an idea as to how
efficient a company's management is at using its assets to
generate earnings. Return on assets is displayed as a
percentage.
Return on assets
Comparisons
Year
2017
2016
2015
HH
4.2%
5.0
9.1
Industry
9.8%
9.1
10.8
HH has a poor Return on Assets.
Which company is better from profitability wise ?
1st company
2nd company
NPAT
13,000
NPAT
5,000
TOTAL ASSETS
100,000
TOTAL ASSETS
20,000
EBITDA MARGIN
EBITDA
SALES
EBITDA margin is an assessment of a firm's operating profitability as a percentage of its total
revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA)
divided by total revenue. Because EBITDA excludes interest, depreciation, amortization and
taxes, EBITDA margin can provide an investor, business owner or financial professional with
a clear view of a company's operating profitability and cash flow.
Calculating the EBITDA margin allows people to compare
companies of different sizes in different industries because it
breaks down operating profit as a percentage of revenue. This
means that an investor, owner or analyst can understand how
much operating cash is generated for each pound of revenue
earned and use the margin as a comparative benchmark.
Return on Equity
ROE
Net Profit after Taxes
Shareholders’ Equity
The return on equity ratio or ROE is a profitability ratio that measures the ability
of a firm to generate profits from its shareholders investments in the company.
In other words, the return on equity ratio shows how much profit each pound
of common stockholders’ equity generates.
So a return on 20% means that every 100 pound of common stockholders’
equity generates 20 pound of net income. This is an important measurement
for potential investors because they want to see how efficiently a company
will use their money to generate net income.
ROE is also and indicator of how effective management is at using equity
financing to fund operations and grow the company.
Return on Equity Comparisons
Year
2017
2016
2015
HH Industry
8.0% 17.9%
9.4
17.2
16.6
20.4
HH has a poor Return on Equity.
Dupont Formula
ROA
ROS
NPAT
ATO
NET
SALES
NET
SALES
CA
NET SALES
TOTAL COST
& EXP
TOTAL
ASSETS
Study the effect of the
items
F.A
Dupont Formula
ROE
ATO
ROS
NPAT
NET
SALES
NET
SALES
The equity finance the assets
the sales generate profit
Assets leverage
ASSETS
ASSETS
EQUITY
the assets generate sales
Study the effect of each items on the
ROE
Conclusion – Ratio Analysis
Ratios are a symptom of what might be happening within the SME and a cause for further
investigation. For example, a fall in sales that causes a company to turn from profitable to
unprofitable probably has a host of reasons, either within or without the SMEs control.
The experienced analyst does not need all the ratios. There are hundreds of ratios, but it is
only necessary to use the ratios that are appropriate in each case. Typically, the
experienced analyst begins by examining whether the business is growing or declining,
whether it is protected from unnecessary risks, and whether it is sufficiently profitable to
continue growing. If a quick review of those ratios raises concerns or unanswered questions,
there should be further investigation into additional ratios
Alone ratios can be quite meaningless. They need to be:
Conclusion – Ratio Analysis
Competitor and industry information is often available from:
Customers (at branch level)
The bank head office;
Professional financial databases;
Periodic industry reports.
Ratios - If they are used properly, the ratios will show:
How a business is performing. Is it getting better or worse?
How it compares with other similar businesses.
On their own, ratios will solve nothing. But they will highlight problem areas and
show where the company should concentrate effort to improve performance.
The main strength of ratio analysis is that it encourages a systematic approach
to analyzing performance.
How to write a comment
trend analysis
Reason
opinion
SPREADING FINANCIAL STATEMENTS
WHAT IS SPREADING FINANCIAL STATEMENTS?
Spreading financial statements is defined as the process by which a bank
transfers information from a borrower’s financial statements into the bank’s
financial analysis spreadsheet program. When the financial information is
input correctly, the spreadsheet can generate meaningful financial reports
to assist the bank in its analysis of the financial condition of the company.
Reports which result from banks' financial statement analysis include, but are
not limited to:
Common size balance sheet
Common size income statement
Financial Ratios
Statement of Cash Flows
Gray Area:
1. Subordination debt.
2. Partners account
3. Shareholder’s account
4. Deferred taxes
5. Minority interest
6. Provisions (not related to business i.e. legal)
7. Translation gain or loss
8. Pension liability
9. Preferred stocks
Types of audit reports
1. Unqualified Opinion report
2. Qualified Opinion report
3. Adverse Opinion report
4. Disclaimer of Opinion report
Accepted to
the bank
Valuation
1
Dividends Payout
Dividends/NPAUI
2
EBITDA TO LTD INT
EBITDA / LTD INTEREST
3
NPAUI/Average number of
Earnings per share (EPS)
shares
Question
ASSETS
Liabilities & equity
Cash
5
OVD
35
Receivables
22
A/P
4
Inventory
13
A/E
4
Intangibles assets
20
Tax payable
1
Fixed assets
40
SNCL
5
Equity
51
Total
100
Total Assets
100
Calculate the following :
1- WC
2- WI
3- TENOR MATCHING
4- financial leverage
5- liquidity ratios
6- Determine the financial problem
7- how to solve financial problems
8- if the obligor apply to increase his facilities by 2 MIO , what’s your decision ? If
you know that the obligor purchase additional inv. with all cash available and sold
its inv on credit . By 40% markup
Case Study :
Case Study :
Calculate the following :
1- WC
2- WI
3- TENOR MATCHING
4- financial leverage
5- liquidity ratios
6 -profitability ratios
7 -length of ACC
8 -The gap
9 -Assets Efficiency Ratios ( DOH & TO )
10- Short term need if you know that the PL as follow
10% of inv is PL & 5 % of A/R IS pl
the 5 C’s of Credit
The five C’s, or characteristics, of credit — character, capacity, capital,
conditions and collateral — are a framework used by many traditional lenders
to evaluate potential borrowers.
1. Character
2. Capacity / Cash flow
3. Capital
4. Conditions
5. Collateral
008 What happens to an SME’s working capital if it decides to pay
suppliers sooner?
- Working capital falls
- Working capital increases
- Working capital stays the same.
- Insufficient information.
- None of the above.
009 If an SME improves its production efficiency, what should happen
to the working capital?
- The working capital should rise
- The working capital should stay the same
- The working capital should fall
- Insufficient information.
Account receivable turn over (4 times) shortened
credit period from 60 days to 30 days and raised
standard for accepting credit customer)
Current ratio (2:1) collected a large account
receivable