Analyising financial statements questions

Hi,

I can understand analysing FS could be tough. I hope the following tips would be of your help.

-Knowing the formulae:
So when I say knowing the ratios and formulae does not only mean that you know, like for instance, ROCE = [ PBIT / CAPITAL EMPLOYED ] .
I also mean, you must be able to understand these formulae, break them down into parts and should able to point out that how change in one thing can have a change on the value of the other item and hence, the overall ratio.

Let’s take ROCE (again).
As to what mentioned in the NOTES and also is evident from the FS they have provided in the question, that they company in the current year has invested on and purchased a new equipment( non- current asset).

Now saying so this will obviously have a knock-on effect on the capital employed ( here we are using TOTAL ASSETS – CURRENT LIABILITIES = CAPITAL EMPLOYED) which will ‘increase” due to the addition and hence “decreasing” the overall ROCE.
Stating this as reason for the increase from previous year’s ratio.
[please note this is just a generic example there could other factors too]

So if you are able to understand the correlation in the formulae you will be able to built points.

– Read the scenario and notes properly, highlight any important points.
Like for instances, the company has decided to take up a new contract in the current year or has laid of its staff etc. Then link these to the ratios and changes in them.

– Compare the FS from previous year and current year, given in the question: At times the notes provided are very minimal and so then you may have to rely on the FS provided in the scenario to build on points.
Look out for revaluation surplus, loan notes, tangible non current assets and anything that can have a knock-on effect on the ratios and performance of the company.

Other than these, there are some techniques that are recommended to adapt for the answers:

– Exam technique ( a more general tip) : It is important that you first read the requirements of the question and then read the scenario. This not only saves time but also helps you to know what you need to look for.

– Plan out your answer : on a rough paper just put down the crucial points. Starting with a plan saves time and provides a direction…You don’t start off blank.

-Don’t state the obvious: do not just go about by stating (for example), ” the ROCE has increased this year by 5%”
The examiner knows and can obviously see that!
What is the change? Why is there this change? and what has caused this change?…The examiner is looking for the answers to these 3 questions.

-Presentation; Well, this will help your answer be more marker-friendly.
Write in paragraphs and give sub-headings ( like, Profitability, Liquidity, Solvency and Conclusion)

-Format: Again, this will give a more professional look to your answer. I have come across questions where students are required to write a report to the management or BOD. So write your answer in the report format.

-READ THE EXAMINER’S REPORTS AND COMMENTS! : This will help you know what actually the examiner is looking for and is expecting from students and also the common mistakes students make (so that you can avoid them!).

-Don’t forget to time your answer and practise as many questions as you can!

Hope this helps