Description

Financial Statement Analysis
June 2024 Examination
1. In a bustling corporate headquarters, Sarah, a financial analyst, faces a critical task:
assessing the financial health of her company. With quarterly reports due, she delves
into horizontal and vertical analysis to gain deeper insights. As Sarah compares
successive financial statements, she employs horizontal analysis to track trends over
time. This reveals patterns in revenue growth, expense management, and profit
margins, helping her identify areas of strength or concern. Meanwhile, vertical analysis
allows Sarah to dissect financial statements by expressing line items as proportions of a
base figure, typically total revenue or assets. This helps her evaluate the relative
significance of each component within the company’s operations. Ultimately, armed
with the insights from horizontal and vertical analysis, Sarah crafts a comprehensive
report for stakeholders, empowering them to make informed decisions about
investments, strategic direction, and resource allocation. Explain how in this dynamic
world of finance, these two analytical tools prove indispensable. (10 marks)
Ans 1.
Introduction:
In today’s fast-paced corporate environment, financial analysts like Sarah are indispensable
for navigating the complexities of economic trends and organizational performance. As
companies contend with volatile markets and competitive pressures, the ability to accurately
assess financial health becomes crucial. Financial statement analysis, particularly through
horizontal and vertical analysis, serves as a cornerstone in this evaluation process. These tools
enable analysts to uncover vital trends and ratios from financial statements, translating
complex data into actionable insights. This not only enhances the decision-making process
for current operations but also assists in strategizing future business moves. Through a
detailed exploration of these analytical techniques, we can appreciate their role in maintaining
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2. As the annual general meeting approaches, Lisa, the company secretary of a
thriving tech firm, finds herself immersed in preparing the directors’ report. With the
Companies Accounts Rules 2014 guiding her, she meticulously crafts a comprehensive
overview of the company’s performance and prospects. In essence, the directors’ report
serves as a comprehensive narrative of the company’s performance, governance
practices, and commitment to sustainable growth, providing shareholders and
stakeholders with valuable insights into the company’s operations and prospects. Can
you help Lisa identify the content of directors’ report as per the Rule 8 of the
Companies (Accounts) Rule, 2014? (10 marks)
Ans 2.
Introduction
In the corporate governance framework, the directors’ report is an essential document that
offers stakeholders a detailed insight into a company’s operational, financial, and strategic
performance over the fiscal year. Governed by Rule 8 of the Companies (Accounts) Rules,
2014, this report must comply with specific statutory requirements to ensure transparency,
accountability, and informative communication to shareholders. For Lisa, the company
secretary of a thriving tech firm, preparing the directors’ report as the annual general meeting
(AGM) approaches is a task of paramount importance. The report not only reflects the
company’s past achievements and future prospects but also aligns with regulatory mandates,
reinforcing the company’s commitment to ethical governance and sustainable growth.
Understanding the components stipulated by Rule 8 is crucial for crafting a report that is both
3. The two primary objectives of every business are profitability and solvency. Profits
are often used as the basis for judging the performance of a business. However, there
are other aspects too. Furthermore, owing to the summarized nature of financial
statements, a lot of truths are hidden in them. Thus, they need to be analyzed and
interpreted by means of financial ratios to enable the users understand the meaning of
the absolute amounts shown in them, and make informed business decisions. Style Ltd.
and Diva Ltd. are two manufacturing companies operating in the same industry with
similar strategies. Both the companies are well-established with a long heritage of
success. The following is an extract from the financial statements of Style Ltd. and Diva
Ltd. for the year ending March 31, 2023
(₹ in million)
Particulars Style
Ltd.
Diva
Net Sales 300 2L8t0d.
Other Income 20 10
Gross Profit 152 140
Operating Profit/EBITDA/EBIT 67 60
Interest Expense 14 13
Net Profit 27 24
Cash 19 11
Accounts receivable 32 20
Loans given to other companies 43 34
Other current assets 17 26
Inventory 121 99
Other non-current assets 4 1
Net Fixed Assets 94 79
Total Assets 330 270
Accounts Payable 32 21
Current maturities of long-term
borrowings
26 21
Short-term borrowings 9 8
Interest accrued but not due 3 2
Short-term Provisions 35 28
Long-term borrowings 90 80
Paid-up Share Capital 37 37
Retained Earnings 98 73
You are required to compute the following ratios for both the companies and
comment:
a. Leverage- Debt to Equity and Interest Coverage Ratio (5 marks)
Ans 3a.
Introduction
Analyzing the financial health of a business requires more than just a glance at its profits
and losses. Financial ratios provide a deeper insight into a company’s operational
efficiency, financial stability, and overall performance. Specifically, leverage ratios like
Debt to Equity and Interest Coverage Ratio are critical in assessing the financial structure
and risk level of a company. For Style Ltd. and Diva Ltd., these ratios will highlight their
b. Profitability- Gross Profit Margin and Return on Equity (5 marks)
Ans 3b.
Introduction
Profitability ratios such as Gross Profit Margin and Return on Equity (ROE) provide
critical insights into a company’s efficiency at generating profits and managing its
resources to provide returns to shareholders. By examining these ratios for Style Ltd. and
Diva Ltd., we can evaluate their ability to convert sales into profits and their effectiveness
in using equity to generate earnings, respectively. These indicators are vital for assessing