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KEY FINANCIAL STATEMENTS & RATIO ANALYSIS

 



KEY FINANCIAL STATEMENTS

In India, the key financial statements used by companies to communicate their financial performance and position are the Balance Sheet, Income Statement, and Cash Flow Statement. These statements are prepared in accordance with the Indian Accounting Standards (Ind AS) or the Generally Accepted Accounting Principles (GAAP).

 Balance Sheet:

A company's financial situation at a certain period is captured in the balance sheet. It lists the company's assets, liabilities, and equity owned by shareholders. The balance sheet equation is Assets = Liabilities + Shareholders' Equity. The Balance Sheet includes various categories such as current assets, non-current assets, current liabilities, non-current liabilities, and shareholders' equity. It helps in understanding the company's liquidity, solvency, and overall financial health.

 Income Statement:

The Income Statement, also known as the Profit and Loss Statement, presents the company's revenues, expenses, gains, and losses over a specific period, typically a fiscal year. It provides information on the company's financial performance, including net sales or revenue, cost of goods sold, operating expenses, non-operating expenses, taxes, and net income or loss. The Income Statement shows whether the company has generated a profit or incurred a loss during the reporting period.

 Cash Flow Statement:

The Cash Flow Statement details the company's cash inflows and outflows for a certain time period. It divides cash flows into the three areas of financing, investment, and operational operations. The statement shows how changes in the Balance Sheet accounts impact the company's cash position. It helps in evaluating the company's ability to generate cash, its operating and investing activities, and the financing sources utilized.

 It's important to note that these financial statements are prepared by companies following the applicable accounting standards and regulations, such as the Companies Act and the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI).

 

RATIO ANALYSIS

Ratio analysis is a financial analysis technique that involves calculating and interpreting various ratios derived from the financial statements. These ratios help in assessing different aspects of a company's performance and financial health. Here are some commonly used ratios categorized under liquidity, solvency, profitability, and valuation:

 Liquidity Ratios:

Current Ratio: Current Assets / Current Liabilities

Quick Ratio (Acid-Test Ratio): (Current Assets - Inventory) / Current Liabilities

Cash Ratio: Cash and Cash Equivalents / Current Liabilities

These ratios measure a company's ability to meet its short-term obligations and determine its liquidity position.

 Solvency Ratios:

Debt-to-Equity Ratio: Total Debt / Shareholders' Equity

Debt Ratio: Total Debt / Total Assets

Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense

These ratios evaluate a company's long-term solvency and its ability to meet its debt obligations.

 Profitability Ratios:

Gross Profit Margin: (Revenue - Cost of Goods Sold) / Revenue

Operating Profit Margin: Operating Income / Revenue

Net Profit Margin: Net Income / Revenue

Return on Assets (ROA): Net Income / Total Assets

Return on Equity (ROE): Net Income / Shareholders' Equity

These ratios measure a company's ability to generate profits from its operations and assess its overall profitability.

Valuation Ratios:

 Price-to-Earnings Ratio (P/E Ratio): Market Price per Share / Earnings per Share (EPS)

Price-to-Sales Ratio (P/S Ratio): Market Price per Share / Sales per Share

Price-to-Book Ratio (P/B Ratio): Market Price per Share / Book Value per Share

These ratios help in evaluating the relative valuation of a company's stock or shares.

These ratios provide insights into different aspects of a company's financial performance and position. However, it's important to note that ratio analysis should be done in conjunction with other qualitative and quantitative factors to get a comprehensive understanding of a company's financial health and performance.

Fortunity Academy is a Share Market Classes and Trading Training Institute located at Dadar, Mumbai. Students learn how to analyse financial accounts, assess business fundamentals, and spot prospective investment possibilities in stock market classes or stock market courses. We are also learning how to read stock charts, spot market trends, and use technical indicators to decide what to trade. To assist students in protecting their investment, risk management strategies are also emphasised. These include stop-loss orders and adjusting position sizes. When it comes to stock market investment, we can offer advice and knowledge.

www.fortunityacademy.in

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