FIN630 Investment Analysis & Portfolio Management GDB Solution Fall 2012

Learning Objective: Developing an understanding to draw conclusions from a published set of financial statements in terms of ratio analysis.

Learning Outcome: After going through this GDB, the students would be able to analyze any company’s profitability and its implication upon associated stakeholders.

Model Manufacturers Limited is engaged in the business of manufacturing, sale and export of “Hypothetical” products. Following is the comparative income statement taken from its recent published annual report. For the year 2011, this income statement shows losses at many stages.

Required: Identify the implications of these losses including EBIT on the concerned stakeholders associated with this company.
Solution:
A company may include this performance measure in its financial statements to give an idea of the earnings the company generates from its ongoing operations. This measure is used especially when there is a period of large one-time special losses.

This non-GAAP measure along, with a myriad of others, is used in an attempt to make earnings figures either appear better than they actually are, or to give a more accurate picture of the operating results of the company. This makes it vital to understand the measure being used by the company along with its reasoning behind including it.

EBIT is the A measure of a company’s financial performance that looks at earnings before the inclusion of interest, taxes, depreciation, amortization and losses. These losses can be related to non-recurring expenses such as a loss in derivatives used to hedge currency or expense risks.

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