Analysis of Financial Statements, Valuation and Accounting for Financial Restructuring
Financial statement analysis, valuation and restructuring combine ratio diagnosis, cash-flow quality and accounting for debt and equity changes.
Core rules
- Ratio analysis: profitability, liquidity, solvency and efficiency; DuPont decomposes ROE into margin, asset turnover and leverage. Compare like-for-like and adjust for accounting policy differences.
- Cash flow analysis: distinguish operating cash flow from EBITDA; adjust for non-recurring items, working capital and capitalised costs.
- Valuation: DCF uses free cash flows and WACC; terminal value uses Gordon growth or an exit multiple. Relative valuation uses EV/EBITDA, P/E and P/B with comparability adjustments.
- Restructuring: Ind AS 109 applies a 10% test to debt modification; if the change is not substantial, adjust the carrying amount and recognise the difference in P&L. Substantial modification derecognises the old liability and recognises a new one at fair value.
- Schemes of arrangement require NCLT approval, and demergers need carrying amount allocation and disclosure.
Worked example
A loan carrying ₹1,000 is modified; the PV of new cash flows at the original effective rate is ₹920. The difference is 8%, below 10%, so no extinguishment. The liability is reduced to ₹920 and ₹80 is recognised in P&L.
Traps
- Using post-restructuring cash flows with the old discount rate incorrectly.
- Ignoring circularity in WACC and terminal value.
- Comparing companies with different lease or inventory policies.
- Treating a capital reduction as income.