BBA/B.Com Financial Statement Analysis DEC 2024

Description

Financial Statement Analysis

December 2024 Examination

 

 

 

Q1. Please forecast Future Net Income and Cash Flow:  (10 Marks)

Year	Revenue (₹ crores)	Net Income (₹ crores)	Operating Cash Flow (₹ crores)
2021	100	10	15
2022	115	12	18
2023	130	14	21

 

• Revenue Growth Rate: 12% annually
• Net Income Margin: 10% of Revenue (consistent with past years)
• Operating Cash Flow to Revenue Ratio: 16% (based on past trends)

 

Ans 1.

Introduction

Forecasting future financial metrics, such as net income and cash flow, provides valuable insight into a company’s expected performance, enabling more informed decisions on investment, expansion, and overall financial health. The forecast model is based on historical data and established assumptions, including a steady revenue growth rate of 12% per year, a consistent net income margin of 10%, and an operating cash flow to revenue ratio of 16%. Utilizing these assumptions, we can project revenue, net income, and cash flow for the next few years. This analysis will calculate projected

 

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Q2. Let’s assume we are evaluating five companies from different sectors:       (10 Marks)

1. Company A – Technology
2. Company B – Consumer Goods
3. Company C – Healthcare
4. Company D – Financial Services
5. Company E – Industrial Manufacturing

 

Company	Revenue Growth (YoY)	ROE (%)	Debt-to-Equity Ratio
Company A	15%	18%	0.5
Company B	8%	12%	0.3
Company C	20%	25%	0.7
Company D	12%	10%	2.5
Company E	5%	7%	1.2

 

Screening Criteria:

1. Revenue Growth: At least 10% year-over-year growth for the past three years.
2. Return on Equity (ROE): Minimum of 15% to ensure the company is generating good returns for shareholders.
3. Debt-to-Equity Ratio: Less than 0.8 to avoid companies with excessive leverage

Please screen the potential investments and shortlist the companies.

Ans 2.

Introduction

Evaluating companies across sectors based on key financial metrics provides investors with a clear understanding of each company’s growth, profitability, and financial stability. In this case, we are examining five companies from diverse sectors—Technology, Consumer Goods, Healthcare, Financial Services, and Industrial Manufacturing—using a multi-criteria screening approach. This method allows us to identify companies that exhibit strong revenue growth, high returns on equity (ROE), and reasonable leverage, as indicated by their debt-to-equity ratio.

Revenue growth is a fundamental indicator of a company’s expansion capabilities and competitive standing, while ROE reveals how effectively a company generates profits from shareholder investments. The debt-to-equity ratio serves as a measure of financial risk, indicating the degree of leverage used

 

Q3.  You  are  a  manager  of  an  Equity  Research  company  you  have  to  make  a  note explaining types of comparative statements on the basis of:

1. Profit & Loss Account (5 Marks)

Ans 1.

Introduction

Comparative statements are a valuable tool for equity research and financial analysis, allowing managers and investors to understand financial performance over multiple periods and identify trends, strengths, and areas needing improvement. In the context of the Profit & Loss Account, comparative statements help evaluate changes in revenue, expenses, and net profit, enabling better investment decisions and performance assessment. As a manager in an Equity Research company, it is essential to provide clients with insights derived from these statements, which illustrate financial stability, growth, and profitability trends. This note explores the types of comparative Profit

 

1. Balance Sheet (5 Marks)

Ans 3b.

Introduction

The Balance Sheet is a crucial financial statement in equity research, providing a snapshot of a company’s financial position at a specific point in time. It reflects the company’s assets, liabilities, and shareholders’ equity, allowing stakeholders to assess financial stability, liquidity, and capital structure. Comparative Balance Sheet analysis is essential in equity research as it helps identify financial trends, assess solvency, and understand changes in a company’s financial position over multiple periods. As a manager in an Equity Research company, explaining the types of