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INTRODUCTION:
MEANING:
For large corporations, these statements are often complex and may include
an extensive set of notes to the financial statements and management
discussion and analysis. The notes typically describe each item on the
balance sheet, income statement and cash flow statement in further detail.
Notes to financial statements are considered an integral part of the financial
statements.
INTERNAL ANALYSIS:
VERTICAL ANALYSIS:
There are basically three steps involved in the financial statement analysis
they are as follows:
1. SELECTION.
2. CLASSIFICATION.
3. INTERPRETATION.
1. SELECTION:
The first step involves selection of information (data) relevant to the purpose
of financial statements.
2. CLASSIFICATION:
The second step involves the methodical classification of the data according
to their similar heads.
3. INTERPRETATION:
The third and final step involves drawing of inferences and conclusion. The
data is interpreted in a simple and understandable way. The conclusion
drawn from interpretation is presented to the management in the form of
reports.
METHODS OR DEVICES OF FINANCIAL ANALYSIS
The analysis and interpretation of financial statements is used to determine
financial position and results of operation as well. The following methods of
analysis generally used are as follows:
1. Comparative statements.
2. Trend analysis.
3. Common size statements.
4. Funds flow analysis.
5. Cash flow analysis.
6. Ratio analysis.
7. Cost-volume-profit analysis.
COMPARITIVE STATEMENTS
TREND ANALYSIS
The funds flow statement explains the various sources from which funds are
raised and uses to which funds are put. It shows the change in assets and
liabilities from the end period of time to the end of another period of time
i.e. between the two balance sheet dates an analysis of funds flow statement
helps in answering the following questions raised
RATIO ANALYSIS
How much should the firm produce and sell in order to reach a target
profit level?
USERS OF FINANCIAL ANALYSIS
TRADE CREDITORS
Trade creditors are interested firms ability to meet their claims over very
short period of time. Their analysis will therefore be evaluation of the firms
liquidity position.
On the other hand suppliers are concerned with firms long term solvency
and survival. They analyze firms profitability over time, its ability to
generate cash to be able to pay interest and repay principal and relationship
between various sources.
INVESTORS
Investors are those persons who invested their money in the firms earnings.
They restore confidence in that firms that show steady growth in earnings.
As such they concentrate on analysis of the firms present and future
profitability.
MANAGEMENT
INTRODUCTION:
False results.
Limited comparability
absence of standard university accepted terminology
Price level change affects ratios.
Classification of ratios depends upon the objectives for which they are
calculated. It may also depend the availability of data. Analysis of financial
statement is made with a view to ascertain the efficiency and financial
soundness of the company as such ratios can be classified on basis of
purpose.
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
PROFITABILITY RATIO
This shows the relationship between the gross profit and sales. Gross profit
ratio shows the margin of profit on sales. This indicates how much profit is
earned on your products without consideration of selling administration
costs.
INTERPRETATION
Gross profit ratio reveals profit earning capacity of business with reference
to its sales. Increase in gross profit will mean reduction in cost of production
or direct expenses or reasonable good price and decrease in ratio will
indicate increased cost of production or sales at less price.
Net profit ratio is very useful to the proprietors and prospective investors
because it reveals profitability of the concern. Net profit or net income is the
gross ratio picked up from the profit and loss account.
INTERPRETATION
Net profit ratio shows the operational efficiency of the business. Decrease in
the ratio indicates marginal in efficiency and excessive selling and
distribution expenses. In the same way increase shows better performance.
Increase or decrease in the ratio is determined in comparison to previous
years performance.
OPERATING RATIO
INTERPRETATION
Operating ratio reveals the cost content and operational expenses absorbed
in the sales. In case the operating ratio is higher the business will have to
identify the causes for its increase. Higher ratio indicates lower efficiency
because a major part which is possible if the operating cost is reduced.
EXPENSES RATIO
This ratio indicates relationship between net profit and net worth. The term
worth here means capital or share holders fund.
Here net worth =equity & preference capital + reserves + accumulated profit
The ratio measures the return per share receivable by equity or ordinary
shareholders are virtually the owners of the company. Dividend payable to
them is ascertained after deducting operating and non operating expenses
and even the interest payable to debenture holders and dividend to
preference share holders.
INTERPRETATION
This ratio measures the market worth of the share of the company. Higher
earnings per share show better future prospects of the company.
This indicates the market value of every rupee earnings of the firm and is
compared with industry average.
INTERPRETATION
Higher ratio indicates the share is overvalued and ratio shows the share is
undervalued.
This ratio indicates to what proportion of earnings per share has been used
for paying dividend and what has been retained for plugging back. This ratio
is very important for share holders point of view as it tells him that if a
company has used or substantially the whole of its earnings for paying
dividend and retained nothing for future growth and expansion purposes
then there will be dim enhances of capital appreciation in the price of share
of such company.
This ratio ensures weather the capital employed has been effectively used or
not. This is also the test of management efficiency and business
performance.
INTERPRETATION
This ratio measures the relationship between working capital and sales. The
ratio shows the number of times the working capital results in sales.
Working capital as usual in the excess of current assets over the current
liabilities.
INTERPRETATION
The higher is the ratio the lower is the investment in working capital and the
greater are the profits. However a very high turnover of working capital is as
sign of over trading and may put the concern into financial difficulties. On
the other hand low working capital turnover ratio indicates that working
capital is not efficiently utilized.
Fixed assets are in the business for producing goods to be sold. The effective
utilization of assets will results in increased production and reduced cost. It
also ensures weather investment in the assets have judicious or not.
INTERPRETATION
This ratio shows how well the fixed assets are being used in the business.
The ratio is important in case of manufacturing concern because sales are
produced not only by the use of current assets but also amount invested in
the fixed assets. The higher the ratio the better is the performance. On the
other hand low ratio indicates that fixed assets are not being efficiently
utilized.
This ratio measures how many times the average stock is sold during the
year. Promptness of sales indicates better performance of the business. It
also shows efficiency of the concern. Immediate sale of goods produced
require further production which consequently activates the productive
process and is responsible for rapid development of the business.
INTERPRETATION
INTERPRETATION
Debtors turnover ratio indicates the efficiency with which debts are collected
it will be in the interest of business if the ratio is higher it indicates that debts
are collected quickly.
The ratio explains the velocity with which creditors are paid and establishes
the relationship between creditors and amount paid to them, accounts payble
includes creditors and bills payable.
LIQUIDITY RATIOS
CURRENT RATIO
This ratio indicates ratio between all current assets and all current liabilities
another way of expressing liquidity of the firm. Test of liquidity focuses on
the relationship between current assets and current liabilities.
INTERPRETATION
This ratio is rough indication of firms ability to service its current
obligation. Generally the higher current ratio the greater cushion between the
current obligations and firms ability to pay them. The stronger ratio reflects
a numerical superiority of current assets liabilities. However the composition
and quality of current assets is a critical factor in analysis of an individual
firms liquidity. One problem with the current ratio is it ignores timing of
cash received and paid out ratios are arrayed from the highest positive to the
lowest positive.
QUICK RATIOS
The ratio between all assets (quickly convertible into cash) and all current
liabilities. Specifically excludes inventory cash and equivalent plus trade
receivables divided by total current liabilities. Indicates a firms ability to
satisfy current liabilities with its most liquid assets.
INTERPRETAION
Absolute liquid ratio is known as cash ratio since cash is the most liquid
asset. A financial analyst may examine cash and its equivalent to current
liabilities. Trade investments or marketable securities are equivalent of cash.
Therefore they may be included in the computation of cash ratio.
INTERPRETAION
This ratio gains much significance only when it is used in conjunction with
the current and liquid ratios. A standard of 0.5: 1 absolute liquidity ratio is
considered an acceptable norm. That is, from the point of view of absolute
liquidity, fifty cents worth of absolute liquid assets are considered sufficient
for one dollar worth of liquid liabilities. However, this ratio is not in much
use.
DEBT EQUITY
INTERPRETATION
Comparison of how much of the business was financed through debt and
how much was financed through equity. For this calculation it is common
practice to include loans from owners in equity rather than in debt. The ratio
the greater is the risk to present or future creditors.
The ratio shows the relationship between long term funds i.e. share holders
funds plus long term loans and fixed assets. It has been an established policy
that fixed assets are purchased out of working capital.
LONG TERM FUNDS NET FIXED ASSETS
INTERPRETATION
The ratio indicates long term financial soundness of the business. It also
indicates weather investments have been properly made or not. The ideal
ratio should be more than one in case it is less than one it will mean that the
business has been financing the purchase of fixed assets out of working
capital which is a wrong policy.
INTERPRETATION
This ratio will differ from industry and therefore no standard can be laid
down. A decrease in the ratio may mean that trading is slack or more
mechanization has been put through an increase in the ratio may reveal that
inventories and debtors have unduly increased or fixed assets have been
intensely used. An increase in the ratio accompanied by increase in profit
indicates the business is expanding.
PROPERIETARY RATIO
INTERPRETATION
This ratio should be 1: 3 i.e. one third of assets minus current liabilities
should be acquired by share holders funds and the other tow third of the
assets should be financed by outsiders funds it focuses the attention on the
general financial strength of the business enterprise.
CAPITAL GEARING RATIO
This ratio establishes the relationship between the interest bearing securities
and equity shares of the company.
INTERPRETATION
Fixed interest bearing securities carry with them the fixed rate of dividend or
interest and include preference share capital and debentures. A company is
said to be highly geared if the major share of total capital is in the form of
fixed interest bearing securities or this ratio must be carefully planned as it
effects the companys capacity to maintain a uniform dividend policy during
difficult trading period that may occur .
This ratio indicates the relationship between reserves and capital more
reserves show financial soundness of the firm. It will be able to meet future
losses if any out of these reserves.
RESERVES CAPITAL
COMPARITIVE STATEMENT ANALYSIS
The comparative balance sheet shows the different assets and liabilities of
date to another. The comparative balance sheet has two columns for the
Liquidity position
concern one should examine the working capital in both the years.
(ii) For studying the long-term financial position of the concern, one
capital.
improved or not.
This statement traditionally is known as trading and profit and loss A/c.
Important components of income statement are net sales, cost of goods sold,
selling expenses, office expenses etc. The figures of the above components
and changes are noted. The comparative income statement gives an idea
business. Like comparative balance sheet, income statement also has four
columns. The first two columns are shown figures of various items for two
years. Third and fourth columns are used to show increase or decrease in
Following:
The increase or decrease in net profit is calculated that will give an idea
The common size statements (Balance Sheet and Income Statement) are
shown in analytical percentages. The figures of these statements are shown
as percentages of total assets, total liabilities and total sales respectively.
Take the example of Balance Sheet. The total assets are taken as 100 and
different assets are expressed as a percentage of the total. Similarly, various
liabilities are taken as a part of total liabilities.
Common size balance sheet
A statement where balance sheet items are expressed in the ratio of each
asset to total assets and the ratio of each liability is expressed in the ratio
of total liabilities is called common size balance sheet.
INTERPRETATION
From the above graph and table shows that current ratio of the company is
increasing from 2004-05 to 2007-08 current assets are in an increasing
position at 2008-09 the ratio has decreased. The current ratio shows the
ability to meet the liabilities and to improve the safety of the company the
current ratio is quite good and the company has to take certain steps to
maintain the standards. It is submitted that indirect norms are not considered
due to lack of information. No specific industry standards are available for
such I have taken general standards only. The higher the current ratio the
greater the cushion between the current obligations and the firms ability to
pay them. The stronger ratio reflects a numerical superiority of current assets
and liabilities.
Interpretation:
The ratio is in satisfactory level by increasing ratios from past years. The
ratio is compared to 2. In 2008-09 it has decreased this indicates that
increase in liabilities. The any value of less than 1:1 implies a reciprocal
dependency on inventory or other current assets to liquidate short term debt
indicator of the business vulnerability to risk. It is submitted that company is
a public enterprise indirect specific norms are not considered due to lack of
information by maintaining standards of the company the liquidity position
can be improved.
Interpretation:
The above chart and table shows past five absolute quick ratios. The ratio is
not satisfactory the highest position is at 2004-05 after that it started
decreasing; the ratios are all below 1. The current assets are decreasing and
the liabilities are increasing this shows that the company is not able to
maintain the cash ratio .It is submitted that indirect norms are not considered
due to lack of information. No specific industry standards are available for
such I have taken general standards only.
Year Long term liabilities Share holders fund Debt equity ratio
2004-2005 266.30 32182.98 0.82
2005-2006 0 36345.74 0
2006-2007 0 46407.72 0
Interpretation:
The debt equity ratio is calculated to make comparison between the equity
capital invested and financed through debt. In 2004-05 it is in the highest
position after that it started decreasing in 2005-06 and 2006-07 there is no
long term credit and in 2007 and in 2008 it was increasing the company has
to maintain the ratio to avoid the risk. By maintaining the eps can be
improved. It is submitted that indirect norms are not considered due to lack
of information .No specific industry standards are available for such I have
taken general standards only.
Interpretation:
The proprietary ratio shows the financial strength of the company the higher
the ratio shows better the position of the company. The ratios are fluctuating
the highest ratio is in 2004-05 and after that the company started decreasing.
The financial position of the company is not satisfactory. The firm has to
take certain steps to increase the capital by which the eps can be improved
and the companys financial position can be improved. It is submitted that
indirect norms are not considered due to lack of information. No specific
industry standards are available for such I have taken general standards only.
Interpretation:
The above chart shows past five yeas fixed asset ratio. The ratio is not
satisfactory in 2004-05 is the highest after that it started decreasing. The
fixed asset ratio shows more efficient management in utilization of fixed
assets. The ratio should never be more than 1. A ratio of 0.67 is considered
as ideal .the company has never met the ideal position. It is submitted that
indirect norms are not considered due to lack of information. No specific
industry standards are available for such I have taken general standards only.
Company has to maintain the standards and improve the long term
investments.
INTEREST COVERAGE RATIO = PBIT FIXED INTEREST
Interpretation:
The interest coverage ratio shows how many times the profit covers the
interest. It is healthy to have profit more than interest payable. The net
income should be more than the fixed interest element by six to seven times
thus making a safe margin. The above chart and table shows companys
position is not satisfactory. The highest ratio is in 2006-07 after it started
huge decrease in 2008-09 it has decreased about 90% of growth rate. The
company is maintaining the huge loans and due to that profit has decreased.
Company has to reduce the borrowings of loans by which the profit can
increase and it has to maintain standards of the company. It is submitted that
indirect norms are not considered due to lack of information. No specific
industry standards are available for such I have taken general standards only.
TURN OVER RATIOS:
Interpretation:
The stock turnover ratio indicates how fast stocks are moving and converted
into sales quickly. The past years ratios of the company is not satisfactory it
is in decreasing position the highest position is in 2006-07. The company has
to maintain the (jit) just in time it has to reduce the lead time in production
of goods and maintain the standards of the company which may improve the
sales of the company. However too high and too low ratio call may also
affect the company. It is submitted that indirect norms are not considered
due to lack of information.No specific industry standards are available for
such I have taken general standards only.
Interpretation:
The higher the working capital ratio increases the efficient utilization of
funds. The past years of the company are not satisfactory the ratios are in
decreasing position highest are in 2004-05. This shows that the company is
having excess current liabilities. The company has to maintain certain
standards to reduce the current liabilities by maintaining the efficient bank
balance. This can improve the funds utilization of the company. It is
submitted that indirect norms are not considered due to lack of information.
No specific industry standards are available for such I have taken general
standards only.
Interpretation:
The gross profit shows the efficient utilization of resources and earning
capacity of the business with reference to sales. Increase in gross profit will
mean reduction in cost of production this leads to reasonable good price of
product. Decrease in the ratio will mean the increase in cost of production.
The above graph shows the gross profit ratios are quite satisfactory all the
ratios are in increasing position. The company has to maintain the same
standards in increasing position. It is submitted that indirect norms are not
considered due to lack of information. No specific industry standards are
available for such I have taken general standards only.
Interpretation:
The net profit shows the operational efficiency of the business. The past
years of the company is in increasing position but in 2008-09 there is a huge
decrease of nearly 9%growth. It is caused due to increase in administration
and remuneration of the employees. The company has to reduce all the
expenses stated which may improve the net profit of the company. And
maintain the standards of the company. It is submitted that indirect norms
are not considered due to lack of information. No specific industry standards
are available for such I have taken general standards only.
Interpretation:
The operating profits reveal that the cost content and operational expenses
absorbed in the sales. The higher the operating profits the higher operating
management. The past years operating ratio is quite good but in 2008-09 the
ratio has decreased. It is due to the increase in operational expenses i.e.
increasing salaries of employees, administration and other expense by which
the profit can be improved. The operational expenses affects the company a
lot so company has to take certain steps to improve it. It is submitted that
indirect norms are not considered due to lack of information. No specific
industry standards are available for such I have taken general standards only.
INTERPRETATION
The total fixed assets have been increasing gradually with 2.53% in 2006-07
to2007-08 and in 2007-08 and 2008-09 13.79% in increasing stage. The over
all of past years percentage shows that the total assets has increased about
85% taking base year as 2006-07 from 19858.25 to 23710.15 lakhs. The
increase in fixed assets shows that company is making huge investment for
the future projects.
The past percentages of current assets are moving upwards and downwards
gradually. In 2006-07 to 2007-08 the inventory is increasing about 0.41% in
2007-08 to 2008-09 is 84.20% this shows that company is maintaining huge
stock in the company. This increases the cost and there may decrease in the
gestation period.
The cash and bank balances of the company have increased about 9.35% in
2006-07 to 2007-08 and there is deficit balance in 2007-08 to 2008-09
about-12.97%. This shows that the company is not able to maintain average
cash balance. While the sundry debtors are in decreasing stage the expenses
on the capital assets have been increasing. The company has to maintain the
average cash balance for benefits.
INTERPRETATION:
INCOMES:
EXPENDITURE:
Liquidity analysis:
Turnover analysis:
The performance of the inventory ratio, net profit ratio, operating profit ratio
and working capital ratio is very bad and not satisfactory in this year. While
other ratios are fluctuating and quite satisfactory. The efforts can be made by
the company to improve the performance.
SUGGESTIONS