Chapter 8 · 12 of 100 marks · workbook pages 145-186
Company Analysis: Financial Analysis
The heaviest numerical chapter: the three statements, notes and audit reports, every ratio family, DuPont, forecasting, peer comparison, and the statement-reading skills the caselets test.
Focus
- Accounting basics
- Balance sheet
- P&L
- Cash flow
- Notes
- Audit report
- Ratios
- DuPont
- Forecasting
Must know
- Balance sheet is a point-in-time statement; P&L and cash flow cover a period.
- Cash flow is classified into operating, investing, and financing activities.
- Ratio analysis supports descriptive, comparative, and predictive analysis.
- Profitability, return, leverage, liquidity, and efficiency ratios must be interpreted together, not in isolation.
- DuPont decomposes ROE into margin, asset turnover, and leverage drivers.
Traps
- PAT can rise while cash flow quality deteriorates.
- High leverage can lift ROE but increase risk.
- Notes and audit qualifications can change the interpretation of numbers.
Formulas in this chapter
Full sheet- EBITDA Margin: EBITDA margin = EBITDA / Net sales
- PAT Margin: PAT margin = PAT / Net sales
- Return on Equity (ROE): ROE = PAT / Net worth
- Return on Capital Employed (ROCE): ROCE = EBIT / Capital employed
- Debt to Equity (D/E): D/E = Total adjusted debt / Net worth
- Interest Coverage: Interest coverage = EBIT / Interest expense
- Current Ratio: Current ratio = Current assets / Current liabilities
- Quick Ratio: Quick ratio = (Current assets - Inventory) / Current liabilities
- Asset Turnover: Asset turnover = Net sales / Total assets
- DuPont ROE: ROE = Net profit margin x Asset turnover x Equity multiplier