CA Final · Financial Reporting

Analysis of Financial Statements: formula sheet

Full chapter guide

Key formulas

Absolute change: Absolute change = Current year amount − Previous year amount; Used in comparative statements. A decrease is shown as a negative figure.
Percentage change: % change = (Current year − Previous year) ÷ Previous year × 100; The base is always the earlier year. If the base is zero or negative, the percentage is not meaningful and should be stated as such.
Common-size percentage: Item % = Item amount ÷ Base amount × 100; Base is revenue from operations for the profit and loss statement and total assets for the balance sheet.
Trend index: Trend % = Amount in the given year ÷ Amount in the base year × 100; The base year equals 100. Choose a normal year as the base.
Year-on-year growth from an index: Growth in year t = (Index t ÷ Index t−1 − 1) × 100; Do not subtract index points and call it growth in percent unless the earlier index is 100.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Expressed as a number, e.g. 1.5 : 1. The old 2 : 1 benchmark is only a rule of thumb, not a rule. Judge against the industry.
Quick (acid-test) ratio: Quick ratio = Quick assets ÷ Current liabilities, where Quick assets = Current assets − Inventories − Prepaid expenses; Some texts exclude only inventories. Follow the definition given in the question. If none is given, state your definition.
Absolute cash ratio: Cash ratio = (Cash and bank balances + Marketable current investments) ÷ Current liabilities; The strictest liquidity test. Shows ability to pay at once from cash-like items.
Debt-equity ratio: Debt-equity = Total debt ÷ Shareholders' equity; Debt usually means long-term and short-term borrowings. Equity is share capital plus other equity. A wider version uses total outside liabilities. State the definition you use.
Debt to total capital: Debt ÷ (Debt + Equity) × 100; Shows the share of capital that is borrowed.
Proprietary ratio: Proprietary ratio = Shareholders' equity ÷ Total assets; Higher means more owner funding and a greater safety cushion for creditors.
Interest coverage ratio: Interest coverage = EBIT ÷ Finance costs; EBIT = Profit before tax + Finance costs. Result is in 'times'. A low value means little margin before interest cannot be met.
Debt service coverage ratio (DSCR): DSCR = Earnings available for debt service ÷ (Interest + Principal repayment due in the year); Earnings available = Profit after tax + Depreciation + Other non-cash charges + Finance costs. Use the components the question specifies.
Gross profit margin: Gross profit ÷ Revenue from operations × 100; Gross profit = Revenue − Cost of goods sold. Shows pricing and direct cost control.
Operating profit margin: Operating profit (EBIT) ÷ Revenue from operations × 100; EBIT is profit before finance costs and tax. State whether other income is included.
Net profit margin: Profit after tax ÷ Revenue from operations × 100; Some questions use profit before tax. Follow the question.
Capital employed: Total assets − Current liabilities = Equity + Non-current liabilities; Both routes give the same figure. Use average capital employed if the question asks.
Return on capital employed (ROCE): EBIT ÷ Capital employed × 100; Pre-tax measure. Compare it with the cost of borrowing.
Return on equity (ROE): (Profit after tax − Preference dividend) ÷ Equity shareholders' funds × 100; Use average equity if the question asks. Equity includes share capital and reserves.
Return on assets (ROA): Profit after tax ÷ Total assets × 100; Some texts add back after-tax interest. State your definition.
Asset turnover: Revenue from operations ÷ Total assets; Measures revenue earned per rupee of assets.
Equity multiplier: Total assets ÷ Equity; Higher value means more leverage.
DuPont identity (three-step): ROE = Net profit margin × Asset turnover × Equity multiplier; Works when the same profit, revenue, asset and equity figures are used in all three parts.
Inventory turnover ratio: Cost of goods sold ÷ Average inventory; Average inventory = (Opening + Closing) ÷ 2. If only closing stock is given, use it and say so. If COGS is not given, use sales only if the question directs.
Inventory holding period (days): 365 ÷ Inventory turnover = Average inventory ÷ COGS × 365; Use 360 if the question states it.
Debtors turnover ratio: Net credit sales ÷ Average trade receivables; Use total sales if credit sales are not separated. Use trade receivables including bills receivable.
Average collection period (days): 365 ÷ Debtors turnover = Average debtors ÷ Credit sales × 365; Compare with the credit terms allowed to customers.
Creditors turnover ratio: Net credit purchases ÷ Average trade payables; If purchases are not given, derive: COGS + Closing stock − Opening stock.
Average payment period (days): 365 ÷ Creditors turnover = Average creditors ÷ Credit purchases × 365; Include bills payable with trade payables.
Fixed asset turnover: Net sales ÷ Average net fixed assets; Uses net block after depreciation.
Total asset turnover: Net sales ÷ Average total assets; Working capital turnover is Net sales ÷ Net working capital in the same way.
Operating cycle: Inventory days + Debtors days; Add raw material, WIP and finished goods periods if a manufacturer's data is split.
Cash conversion cycle: Inventory days + Debtors days − Creditors days; Also called net operating cycle.
Earnings per share (EPS): (Profit after tax − Preference dividend) ÷ Weighted average number of equity shares; Basic EPS follows Ind AS 33; diluted EPS adjusts for potential equity shares.
Price earnings ratio (P/E): Market price per share ÷ EPS; Earnings yield is the inverse: EPS ÷ Market price.
Dividend yield: Dividend per share ÷ Market price per share × 100; Use dividend per share on the same share class.
Dividend payout ratio: Dividend per share ÷ EPS × 100; Retention ratio = 100% − Payout ratio.
Percentage change (trend): Change % = (Current year − Base year) ÷ Base year × 100; Use the earlier year as the base. Say whether the change is favourable or adverse.
Common-size statement: Item % = Item ÷ Base total × 100; Base is total revenue for the P&L and total assets (or total equity and liabilities) for the balance sheet. Helps compare firms of different size.
Current ratio: Current assets ÷ Current liabilities; Window dressing often targets this ratio. Compare with the industry norm, not a fixed rule such as 2:1.
Debt-equity ratio: Total debt ÷ Shareholders' equity; Define debt clearly in your answer, as definitions vary.
DuPont analysis: ROE = Net profit margin × Asset turnover × Equity multiplier; Net profit margin = PAT ÷ Revenue; Asset turnover = Revenue ÷ Average total assets; Equity multiplier = Average total assets ÷ Average equity. Use consistent averages or closing figures.
Interpretation structure: Observation → Reason → Implication → Limitation; Use this order for every ratio comment in a descriptive answer.

Quick revision

Techniques: comparative statements, common-size statements, trend analysis, ratio analysis and cash flow analysis.
Current ratio = Current assets ÷ Current liabilities.
Quick ratio = Quick assets ÷ Current liabilities, where quick assets exclude inventories and usually prepaid items.
Debt-equity ratio = Debt ÷ Equity; state clearly which definition of debt you use.
Interest coverage = EBIT ÷ Interest expense on borrowings.
Gross profit ratio = Gross profit ÷ Revenue from operations × 100.
Return on capital employed = EBIT ÷ Capital employed × 100; state your definition of capital employed.
Inventory turnover = Cost of goods sold ÷ Average inventory.
Debtors turnover = Credit sales ÷ Average trade receivables; days = 365 ÷ turnover.
Earnings per share and price-earnings ratio are market-based; P/E = Market price per share ÷ EPS.
Always compare a ratio with a benchmark before you comment on it.
Limitations: historical cost, window dressing, differing accounting policies, non-financial factors ignored, and no single ratio is conclusive.

Common mistakes

Using the current year as the base for percentage change Fix: The base is always the earlier period in comparative and trend work.
Using the wrong base for common-size statements Fix: Use revenue from operations for the profit and loss statement and total assets for the balance sheet, unless the question says otherwise.
Including inventories and prepaid expenses in quick assets. Fix: Always start from current assets and subtract inventories and prepaid expenses (or as the question defines). Then check that quick ratio is not higher than current ratio.
Using PBT or PAT instead of EBIT in interest coverage. Fix: Add finance costs back to PBT to reach EBIT. Then divide by finance costs.
Using profit after tax in the numerator of ROCE. Fix: ROCE uses EBIT, because capital employed includes debt, so the return must be measured before paying lenders. It is a pre-tax measure by convention.
Computing capital employed as only equity plus long-term debt but forgetting other non-current liabilities, or using total assets without deducting current liabilities. Fix: Use Total assets − Current liabilities and cross-check with Equity + Non-current liabilities. Write the definition.
Using total sales for inventory turnover when COGS is available. Fix: Stock is carried at cost, so use COGS. Use sales only when the question gives no cost data and says so.
Using closing balance when opening and closing are both given. Fix: Take (Opening + Closing) ÷ 2 whenever both balances exist, unless the question says otherwise.
Computing ratios but writing no conclusion. Fix: Spend at least half your time on comments. Use observation, reason, implication.
Saying a higher ratio is always better. Fix: Judge against the benchmark. A very high current ratio may mean idle cash or slow stock, and high turnover may mean under-investment.

Exam tips

Write the base explicitly in your table heading. Examiners give marks for choosing the correct base.
Expect case MCQs that ask which technique suits a stated purpose, such as comparing two firms of different size. The answer is common-size.
In written answers, keep a short split: objectives, technique, working, interpretation, limitations.
Always link the finding to the user named in the case. A generic comment earns fewer marks.
Study this topic with ratio analysis, since questions often combine common-size or trend work with ratio comments.
Write the formula and your definition of quick assets or debt before calculating. Marks are given for method even if one figure is off.
In case-scenario MCQs, read which items are inventories, prepaid or non-current before picking the numerator. Options are often built from the common errors.
In descriptive answers, give a full interpretation: level, trend, reason and recommendation. A bare number scores little.