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RATIO ANALYSIS

INTRODUCTION TO FINANCE

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Due to ongoing advancements in technology, new legislation, and other innovation, the field of finance is rapidly changing. Introduction to finance develops the three components of finance in an interactive framework that is consistent with the responsibilities of all- financial professionals, managers, intermediaries, and investors in today's economy. In the last decade, the academic study of finance has experienced an infusion of new concept and quantitative methodologies that pace it among the most sophisticated and growing areas of business and economics.

New developments in the traditional areas of finance theory of rational investor portfolio choice, interpretation and determination of security prices, efficient corporate decision making has been approached from the perspective of a single integrating paradigm derived from economic theory. In our present day economy finance is defined as provision of money at a time when it is required. Every enterprise whether it is big, medium or small needs finance to carry out its operation and to achieve its target. Infact, finance is so indispensable today that it is rightly said to be lifeblood of enterprise without adequate finance no enterprise can possibly accomplish it objectives. The importance of corporation finance has arisen because of the fact that present day business activities are predominantly on a company or corporate form of organization. The advent of corporate enterprises has resulted into: the increase in size and influence of the business enterprise wide distribution of corporate ownership separation of ownership and management These factors have increased the importance of finance.

BUSINESS FINANCE

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Business finance is the activity, which is concerned with the acquisition and conservation of capital funds in meeting the financial requirements and overall objectives of the firm. Business finance deals primarily with raising, administering and disbursing funds by private own business units operating in non- financial fields of industry. To sum up in simple words we can say that financial management as practiced by business firms can be called corporation finance or business finance.

AIMS OF FINANCE: Acquiring sufficient funds Proper utilization of funds Increasing profitability Maximizing firms value Estimating financial requirements Deciding capital structure Selecting a source of finance Selecting a pattern of investment Proper cash management Implementing financial control Proper use of surplus

FINANCIAL STATEMENTS Financial statements (or financial reports) are formal records of a business' financial activities. It is a collection of data organized according to logical and consistent accounting procedures. These statements provide an overview of a business' profitability and financial condition in both short and long term.

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A sound understanding of financial statements helps you: Identify unfavorable trends and tendencies in your business's operations (for example, the unhealthy buildup of inventory or accounts receivable) before the situation becomes critical.

DEFINITION: According to John N. Myer the financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets and liabilities and the income statement showing the results of operations during a certain period

OBJECTIVES OF FINANCIAL STATEMENTS: The primary objective of financial statements is to assist in decision making. The Accounting Principles Board of America (APB) states the following other objectives:

To provide reliable financial information about economic resources and obligations of a business firm. To provide other needed information about changes in such economic resources and obligations. To provide reliable information about changes in net resources (resources less obligations) arising out of business activities. To provide financial information that assists in estimating the earning potentials of business. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

TYPES OF FINANCIAL STATEMENTS: Generally Accepted Accounting Principles (GAAP) specifies that a complete set of financial statements must include:

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Balance Sheet: The American Institute of Certified Public Accountants defines Balance Sheet as, A tabular statement of summary of balances (debits and credits) carried forward after an actual and constructive closing of books of account and kept according to principles of accounting. The purpose of the balance sheet is to show the resources that the company has, i.e., its assets, and from where those resources come from, i.e. its liabilities and investments by owners and outsiders. The balance sheet shows all the assets owned by the concern and all the liabilities and claims it owes to owners and outsiders. The Companies Act, 1956 has prescribed a particular form for showing assets and liabilities in the balance sheet for companies registered under this act.

Income Statement (Profit and Loss Account): Income statement is prepared to determine the operational position of the concern. It is a statement of revenues earned and the expenses incurred for earning that revenue. If there is excess of revenues over expenditures it will show a profit and if the expenditures are more than the income then there will be a loss. The income statement may be prepared in the form of a Manufacturing Account to find out the cost of production, in the form of Trading Account to determine gross profit or gross loss, in the form of a Profit and Loss Account to determine net profit or net loss.

A statement of Retained Earnings may also be prepared to show the distribution of profits. Statement of Changes in Owners Equity (Retained Earnings)

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The term owners equity refers to the claims of the owners of the business (shareholders) against the assets of the firm. It consists of two elements 1. Paid-up share capital, i.e. the initial amount of funds invested by the Shareholders 2. Retained earnings or reserves and surplus representing undistributed Profits. The statement of changes in owners equity simply shows the beginning balance of each owners equity account, the reasons for increases and decreases in each, and its ending balance. A statement of retained earnings is also known as Profit and Loss Appropriation Account or Income Disposal Statement. As the name suggests it shows appropriations of earnings. The balance in this account will show the amount of profit retained in hand and carried forward. Statement of Changes in Financial Position. The basic financial statements, that is; the balance sheet and the profit and loss account or income statement of a business reveal the net effect of the various transactions on the operational and financial position of the company. But there are many transactions that do not operate through profit and loss account. Thus, for a better understanding another statement called statement of changes in financial position has to be prepared to show the changes in assets and liabilities from the end of one period to the end of another point of time. The objective of this statement is to show the movement of funds (working capital or cash) during a particular period. The statement of changes in financial position may take any of the following two forms: i) Funds Flow Statement: The funds flow statement is designed to analyze the changes in the financial condition of a business enterprise between two periods. The word Fund is used to denote working capital. This statement will show the sources from which the funds are received and the uses to which these have been put. This statement helps the management in policy formulation and performance appraisal.

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ii) Cash Flow Statement: A statement of changes in the financial position of a firm on cash basis is called Cash Flow Statement. It summarises the causes of changes in cash position of a business enterprise between dates of two balances sheets. This statement is very much similar to the statement of changes in working capital, that is; funds flow statement. A cash flow statement focuses attention on cash changes only. It describes the sources of cash and its uses.

CHARACTERISTICS OF IDEAL FINANCIAL STATEMENT: The financial statements are prepared with a view to depict financial position of the concern. The financial statements should be prepared in such a way that they are able to give a clear and orderly picture of the concern. The ideal financial statements have the following characteristics:

1) Depict True Financial Position 2) Effective Presentation 3) Relevance 4) Attractive 5) Easiness 6) Comparability 7) Analytical Representation 8) Brief

IMPORTANCE OF FINANCIAL STATEMENTS The financial statements are mirror which reflects the financial position and operating strength or weakness of the concern. These statements are useful to management,

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investors, creditors, bankers, workers, government and public at large. Following major uses of financial statements: As a report of stewardship. As a basis for fiscal policy. To determine the legality of dividends. As guide to advice dividend action. As a basis for the granting of credit. As informative for prospective investors in an enterprise As a guide to the value of investment already made. As an aid to government supervision. As a basis for price or rate regulation. As a basis for taxation. USERS OF FINANCIAL STATEMENTS Financial statements are used by a diverse group of parties, both inside and outside a business. Generally, these users are: Internal Users: are owners, managers, employees and other parties who are directly connected with a company. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analyses are then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's report to its stockholders, as it form part of its Annual Report. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for a diverse number of reasons.

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Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analysis are often used by investors and is prepared by professionals (Financial Analysts), thus providing them with the basis in making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. Government entities (Tax Authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company. Media and the general public are also interested in financial statements for a variety of reasons.

LIMITATIONS OF FINANCIAL STATEMENTS The following are the main limitations of the financial statements: Interim and not final reports: Financial statements do not depict the exact position and are essentially interim reports. The exact position can be only known if the business is closed. 1) Lack of precision and definiteness 2) Lack of objective judgment 3) Record only monetary facts 4) Historical in nature 5) Artificial view 6) Scope of manipulations

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FINANCIAL ANALYSIS The term financial analysis also known as analysis and interpretation of financial statements, refers to the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship between the items of balance sheet, profit and loss account and other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. It is an attempt to determine: 1) The significance and meaning of the financial statement data so that forecast may be made of the future earnings. 2) Ability to pay interest and debt maturities (both current and long term). 3) Profitability of a sound business policy. 4) The operational efficiency of the concern as a whole and of its various parts or departments. 5) The comparative study in regard to one firm with another firm or one department with another department. Types of financial statement analysis Different types of financial statements analysis can be made on the basis of: According to the nature of the analyst and the material used by him. On this basis, the financial analysis can be external and internal analysis: External Analysis: It is made by those persons who are not connected with the enterprise. They do not have access to the enterprise. They do not have access to the detailed record of the company and have to depend mostly on published statements.

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Such type of analysis is made by investors, credit agencies, governmental agencies and research scholars.

Internal Analysis: The internal analysis is made by those persons who have access to the books of accounts. They are members of the organization. Analysis of financial statements or other financial data for managerial purpose is the internal type of analysis. The internal analyst can give more reliable result than the external analyst because every type of information is at his disposal. According to the objectives of the analysis. On this basis the analysis can be longterm and short-term analysis. Long-term Analysis: This analysis is made in order to study the longterm financial stability, solvency and liquidity as well as profitability and earning capacity of a business concern. The purpose of making such type of analysis is to know whether in the long-run the concern will be able to earn a minimum amount which will be sufficient to maintain a reasonable rate of return on the investment so as to provide the funds required for modernization, growth and development of the business and to meet its costs of capital. Short-term Analysis: This is made to determine the short-term solvency, stability and liquidity as well as earning capacity of the business. The purpose of this analysis is to know whether in the short run a business concern will have adequate funds of readily available to meet its short-term requirements and sufficient borrowing capacity to meet contingencies in the near future. This analysis is made with reference to items of current assets and current liabilities (working capital analysis).

According to the modus operandi of the analysis. On this basis, the analysis may be horizontal analysis and vertical analysis.

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Horizontal (or dynamic) Analysis: This analysis is made to review and analyze financial statements of a number of years and, therefore, based on financial data taken from several years. This is very useful for long-term trend analysis and planning. Comparative financial statement is an example of this type of analysis. Vertical (or Static) Analysis: This analysis is made to review and analyze the financial statements of one particular year only. Ratio analysis of the financial year relating to a particular accounting year is an example of this type of analysis. TECHNIQUES (DEVICES OR METHODS) OF FINANCIAL ANALYSIS The following techniques can be used in connection with analysis and interpretation of financial statements: Comparative financial statements The comparative financial statements are statements of the financial position at different periods of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. The statements of two or more periods are prepared to show absolute data of two or more years, increases or decreases in absolute data in value and in terms of percentages. The two comparative statements are: i) Comparative Balance Sheet: the comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates. ii) Comparative Income Statement: the comparative income statement gives the results of the operations of a business. It gives an idea of the progress of a business over a period of time.

TREND PERCENTAGE ANALYSIS

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Trend analysis is an important tool of horizontal financial analysis. This analysis enables to know the changes in the financial function and operating efficiency between the time period chosen. By studying the trends of each item we can know the direction of changes and based upon the direction of changes, the opinions can be formed. These trend ratios may be compared with industry in order to know the strong or weak points of a concern. COMMON SIZE STATEMENT Common size financial statements are those in which figures reported are converted to some common base. Vertical analysis is required for an interpretation of underlying causes of changes over a period of time. For this, items in the financial statements are presented as percentages or ratios to total of the items and a common base for comparison is provided. Common size statements may be used for: i) Common Size Balance Sheet: a statement in which balance sheet items are

expressed as the ratio of each asset to total assets and the ratio of each liability is expressed as a ratio of total liabilities. ii) Common Size Income Statement: the items in income statement can be shown as percentages of sales to show the relation of each item to sales. A significant relationship can be established. FUNDS FLOW STATEMENT (OR ANALYSIS) This statement is prepared in order to reveal clearly the various sources where from the funds are procured to finance the activities of a business concern during the accounting period and also brings to highlight the uses to which these funds are put during the said period.

CASH FLOW STATEMENT (OR ANALYSIS) This statement is prepared to know clearly the various items of inflow and outflow of cash. It is an essential tool for short-term financial analysis and is very helpful in the

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evaluation of current liquidity of a business concern. It helps the business executives of a business in the efficient cash management and internal financial management. Statement of Changes in Working Capital (Net Working Capital Analysis) This statement is prepared to know the net change in working capital of the business between two specified dates. It is prepared from current assets and current liabilities of the said dates to show the net increase or decrease in working capital. RATIO ANALYSIS It is done to develop meaningful relationship between individual items or group of items usually shown in the periodical financial statements published by the concern. An accounting ratio shows the relationship between the two inter-related accounting figures as gross profit to sales, current assets to current liabilities, loaned capital to owned capital etc. Ratios should not be calculated between the two unrelated figures as it will not serve any useful purpose.

LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

Analysis of financial statements is a very important device but the person using this device must keep in mind its limitations. The following are the main limitations of the analysis: 1) Historical nature of financial statements: The basic nature of these statements is historical, that is; relating to the past period. Past can never be a precise and infallible index of the future and can never be hundred per cent helpful for the future forecast and planning. 2) No substitute for judgment: Analysis of financial statements is a tool which can be used profitably by an expert analyst but may lead to faulty conclusions if used by unskilled analyst. The results of analysis, thus, should not be taken as judgments or conclusions.

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3) Reliability of figures: The reliability of analysis depends on reliability of the figures of the financial statements under scrutiny. The entire working of analysis will be vitiated by manipulations in the income statement, window dressing in the balance sheet, questionable procedures adopted by the accountant for the valuation of fixed assets and such other factors. 4) Single year analysis is not much valuable and useful: The analysis of these

statements relating to a single year only will have limited use and value. It will not be advisable to depend fully on such analysis. Analysis should be extended over a number of years so that the results may be compared to draw meaningful conclusions. 5) Results may have different interpretation: The results or indications derived from the analysis of these statements may be differently interpreted by different users. For example, a high current ratio may suit the banker, a supplier of goods or the short-term lender but it may be index of inefficiency of the management due to non-utilization of funds. 6) Change in accounting methods: Analysis will be effective if the figure derived from the financial statements are comparable. Due to change in accounting methods (i.e., depreciation method, or method of valuation of stock), the figures of the current period may have no comparable base, then the whole exercise of analysis will become futile and will be of little value. 7) Pitfalls in inter-firm comparison: When different firms are adopting different procedures, records, objectives, policies and different items under similar headings, comparison will become more difficult. If done, it will not provide reliable basis to assess the performance, efficiency, profitability and financial condition of the firm as compared to industry as a whole. 8) Price level changes reduce the validity of the analysis: The continuous and rapid changes in the value of money, in the present day economy, also reduce the validity of the analysis. Acquisition of assets at different levels of prices make comparison

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useless as no meaningful conclusions can be drawn from a comparative analysis of such items relating to several accounting periods. 9) Shortcoming of the tool of analysis: There are different tools of analysis available to the analyst. Which tool is to be used in a particular situation depends on the skill, training, intelligence and expertise of the analyst. If wrong tool is used, it may give misleading results and may lead to wrong conclusions or inferences which may be harmful to the interest of business.

MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. MEANING OF RATIO ANALYSIS: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but their group of ratio he would prefer depends on the purpose and the objective of analysis. OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability

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C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing

FORMS OF RATIO: Since a ratio is a mathematical relationship between to or more variables / accounting figures, such relationship can be expressed in different ways as follows A] As a pure ratio: B] As a rate of times: C] As a percentage:

CLASSIFICATION OF RATIO BASED ON FINANCIAL 1 Balance sheet Ratio 2 Revenue Statement Ratio

3 Composite Ratio BASED ON FUNCTION 1) Liquidity Ratio 2) Leverage Ratio 3) Activity Ratio 4) Profitability Ratio 5) Coverage Ratio

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BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet, P&L A/C, or both. One-way of classification of ratios is based upon the sources from which are taken. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, etc

2] Revenue ratio: These ratios study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, etc 3] Composite ratio: These ratios indicate the relationship between two items, of which one is found in the balance sheet & other in revenue statement. The types of composite ratios-return on capital employed, return on proprietors fund, return on equity capital, debtors turnover ratios, creditors turnover ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios. 1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios.

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2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary ratios. 3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios. 4] Profitability ratios: It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios .It shows the relationship between profit & investment e.g. return on investment, return on equity capital. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios. BASED ON USER: 1] Ratios for the shareholders: Return on proprietors fund, return on equity capital 2] Ratios for management: Return on capital employed, turnover ratios, operating ratios, expenses ratios 3] Ratios for long-term creditors: Debt equity ratios, return on capital employed, proprietor ratios. IMPORTANCE OF RATIO ANALYSIS: As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] Liquidity position 2] Long-term solvency 3] Operating efficiency 4] Overall profitability

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5] Inter firm comparison 6] Trend analysis.

1] LIQUIDITY POSITION: The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the short term liabilities within a year. The liquidity ratio is particularly useful in credit analysis by bank & other suppliers of short term loans. 2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors, security analyst & the present & potential owners of a business. 3] OPERATING EFFICIENCY Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measure this kind of operational efficiency. 4] OVERALL PROFITABILITY: Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. 5] INTER FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages.

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ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations. These limitations are described below: The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the companys current financial position. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decisionmaking. Changes in accounting policy may affect the comparison of results between different accounting years as misleading. Ratios provide only quantitative information, not qualitative information. Ratios are calculated on the basis of past financial statements. They do not indicate future trends and they do not consider economic conditions

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MANAGERIAL USES OF RATIO ANALYSIS i) Ratio analysis helps in making decisions from the information provided in these financial statements. ii) It helps in financial forecasting and planning. iii) The financial strength and weakness of a firm are communicated in a more easy and understandable manner by the use of ratios. iv) Ratios even help in co-ordination which is of utmost importance ineffective. v) Ratio analysis even helps in making effective control of the business. vi) These are so many other uses of the ratio analysis. It is an essential part of the budgetary control and standard costing. UTILITY TO SHAREHOLDERS/INVESTORS An investor in the company will like to assess the financial position of the concern where he is going to invest. His first interest will be the security of his investment and then a return in the form of dividend or interest. For the first purpose he will try to asses the value of fixed assets and the loans raised against them. The investor will feel satisfied only if the concern has sufficient amount of assets. Long-term solvency ratios will help him in assessing financial position of the concern. Profitability ratios, on the other hand, will be useful to determine profitability position. Ratio analysis will be useful to the investor in making up his mind whether present financial position of the concern warrants further investment or not. UTILITY TO CREDITORS The creditors or suppliers extend short-term credit to the concern. They are interested to know whether financial position of the concern warrants their payments at a specified time or not. The concern pays short- term creditors out of its current assets. If the current assets are quite sufficient to meet current liabilities then the creditor will not hesitate in extending credit facilities. Current and acid-test ratios will give an idea about the current financial position of the concern.

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UTILITY TO EMPLOYEES The employees are also interested in the financial position of the concern Especially profitability. Their wage increases and amount of fringe Benefits are related to the volume of profits earned by the concern. The Employees make use of information available in financial statements. Various profitability ratios relating to gross profit, operating profit, net profit, etc. enable employees to put forward their viewpoint for the increase of wages and other benefits.

UTILITY TO GOVERNMENT Government is interested to know the overall strength of the industry. Various financial statements published by industrial units are used to calculate ratios for determining short-term, long-term and overall financial position of the concerns. Profitability indexes can also be prepared with the help of ratios. Government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of overall financial strength of public as well as private sector. In the absence of the reliable economic information, governmental plans and policies may not prove successful.

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RESEARCH DESIGN

INTRODUCTION Accounting ratios or ratio analysis establishes relationship between closely related financial statements. If the items appearing in the financial statements are to be really meaningful and useful, they should be analyzed in such a way that one item can be compared with another. Ratio analysis is one of the tools available to analyze financial statements.

TITLE OF THE STUDY: A STUDY ON RATIO ANALYSIS OF HYUNDAI MOTOR COMPANY

STATEMENT OF PROBLEM Manufacturing industries involves huge investment and to be successful these industries requires efficient management. In the present prevailing conditions it is very important to understand the financial conditions of the company as on any given date. So, it is necessary for the management to analyze the financial statement in detail. Financial statements contain large numbers of financials figures. From a study of these absolute figures it is important to derive a precise idea about their financial position. To get a clear picture, it is necessary to establish a relationship between closely related figures, say, inventory and sale etc. hence this project report contains analysis of financial statements ratio analysis and interpretation.

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OBJECTIVES OF THE STUDY: To analyze and interpret the financial statement of the company through ratio analysis. To study the profitability of the company and give necessary recommendations to the company. To find out the liquidity position of the company.

SCOPE OF THE STUDY The study of the financial statements through the tools of ratio analysis confined to HYUNDAI MOTOR COMPANY. Analysis of the financial and Ratio statement helps in taking important managerial decision, which helps to improve the solvency, liquidity, profitability and earning capacity of the business concern. It helps to review the overall working of the company and helps the management to control various costs such as manufacturing costs, administration cost and selling cost. It also facilities the organization to have efficient office management. Above all it helps to evaluate the performance of the business concern in the light of objective of the organization. Thus it helps to implement the principle of management by exception.

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OBJECTIVES: 1. To analyse the short-term solvency or financial position of Hyundai motor company. Through Liquidity ratios. 2. To analyse Hyundai motor companys ability to meet the interest costs and repayment schedules of its long-term obligations using Long-term Solvency and Leverage Ratios. 3. To analyse the efficiency of resources employed in Hyundai motor company using Activity Ratios. 4. To measure the results of business operations or overall performance and efficiency of Hyundai motor conpany using Profitability Ratios.

LIMITATIONS 1. The analyzed data does not take into consideration qualitative data that influence decision. 2. The main limitation in the study was time due to which, ratio and analysis only for Five years could be done and detailed study on the company was not possible. 3. The study was mainly on secondary data for the analysis of the performance of the company. Period The study was conducted during the period beginning from January 2012 to March 2012 taking into account the statement for past 5 years i.e. 2007, 2008,2009,2010and 2011

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Research Methodology Primary Data: Primary data was collected through the interaction with the manager and assistant manager of ADVAITH HYUNDAI Secondary Data: Information regarding the company has been provided by the specific organization, information regarding key concepts like ratio analysis and analysis of balance sheet has been obtained from popular books and websites. Annual Reports of Hyundai motor company has been of immense help for reference. TOOLS OF DATA COLLECTION: Data was collected from the annual reports of the company for the past five years dated 2007-2008, 2008-2009, 2009-2010,2010-2011 PLAN OF ANALYSIS: Data collected with the help of balance sheet and profit and loss a/c for the purpose of calculating the various ratios. Tables, graphs and charts are shown wherever necessary to facilitate better understanding. Technique of Analysis: Five years of balance sheet and profit and loss account stated in the annual report

were used for the analysis. Liquidity Ratios. Long-term Solvency Ratios, Activity Ratios, Profitability Ratios etc. were used as tool of analysis. Based on the computation the financial position and performance of the business were evaluated and suggestions were made regarding the performance of the company, the methods were evaluated by extracting information from the balance sheet of five years, then the best alternative was chosen and based on which the liquidity, turnover, profitability and solvency position of the company was known.

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OPERATIONAL DEFINITIONS Working capital: The fund required for the actual running of any business or unit, the purchase of raw materials for meeting the manufacturing, selling and administrative expenses etc., is termed as working capital. Working capital is life blood for business. The working capital is also known as operating capital. A most important value, it represents the amount of day to day operating liquidity available to a business. Working capital can be divided into two categories viz. permanent and temporary. Net worth: Equity share capital, preference share capital, reserve and surplus less the intangible assets (including losses). Capital employed: Is equal to total of fixed assets are reduced by current liabilities. Proprietary ratio: is a test of financial & credit strength of the business. It relates shareholders fund to total assets. This ratio determines the long term or ultimate solvency of the company. Debt equity ratio: It is also called as leverage ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. Leverage is also known as gearing or trading on equity. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity. Cost of capital: It is the cut off rate for determining estimated future cash proceeds of a project and eventually deciding whether the project is worth undertaking or not. It is also the minimum rate of return that a firm must earn on its investment which will maintain the market value of share at its current level.

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COMPANY PROFILE

ABOUT ADVAITH HYUNDAI:

Advaith Hyundai is a wholly owned company of the Advaith Group. One of the largest automotive retail corporations in India, the Advaith Group is focused on delivering a world class customer experience across all its business functions. Advaith Hyundai has an enviable record of consistently being World's largest and most awarded Hyundai dealer with 4 showrooms conveniently located across Bangalore on Residency Road, Outer Ring Road, Vasanthnagar and Bannerghatta Road. The facility on Outer Ring Road is Hyundai's largest 3Sfacility in India With a 1200 strong work force committed to exceeding customer expectation, Advaith Hyundai services are at par with Hyundai global standards. The Service Centres are continuously upgraded and equipped with the state-of-the art equipment, in line with Hyundai's exacting worldwide standards. The Advaith Hyundai showrooms are a one-stop shop to meet all customer needs, displaying the latest cars from the Hyundai stable, the latest range of popular and exquisite accessories, vehicle financing options and expert customer guidance to help select the right Hyundai car.

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INTRODUCTION ABOUT HYUNDAI MOTOR COMPANY: Hyundai Motor Company is a Korean automaker which along with Kia comprises the Hyundai Kia Automotive Group, the worlds fifth largest automaker as of 2009. As of 2009, it is the world's fastest growing automaker. In 2008, Hyundai ranked as the eighth largest automaker. Headquartered in Seoul, South Korea, Hyundai operates the worlds largest integrated automobile manufacturing facility in Ulsan, which is capable of producing 1.6 million units annually. The company employs about 75,000 persons around the world. Hyundai vehicles are sold in 193 countries through some

6,000 dealerships and showrooms worldwide. The Hyundai logo, a slanted, stylized H, symbolizes the company shaking hands with its customer.

HISTORY: Chung Ju-Yung founded the Hyundai Engineering and Construction Company in 1947. Hyundai Motor Company was later established in 1967. The companys first model, the Cortina, was released in cooperation with Ford Motor Company in 1968. When Hyundai wanted to develop their own car, they hired George Turnbull, the former Managing Director of Austin Morris at British Leyland. He in turn hired five other top British car engineers.They were Kenneth Barnett body design, engineers John Simpson and Edward Chapman, John Crosthwaite ex-BRM as chassis engineer and Peter Slater as chief development engineer. In 1975, the Pony, the first Korean car, was released, with styling by Giorgio Giugiaro of ItalDesign and powertrain technology provided by Japans Mitsubishi Motors. Exports began in the following year to Ecuador and soon thereafter to the Benelux countries. In 1991, the company succeeded in developing its first proprietary gasoline engine, the four-cylinder Alpha, and transmission, thus paving the way for technological independence.

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In 1983, Hyundai exported the Pony to Canada, but not to the United States because the Pony didn't pass emissions standards there. Canadian sales greatly exceeded expectations, and it was at one point the top-selling car on the Canadian market. The Pony afforded a much higher degree of quality and refinement in the lowest price auto segment than the Eastern-bloc imports of the period then available. In 1986, Hyundai began to sell cars in the United States, and the Excel was nominated as "Best Product #10" by Fortune magazine, largely because of its affordability. The company began to produce models with its own technology in 1988, beginning with the midsize Sonata. In 1996, Hyundai Motors India Limited was established with a production plant in Irrungattukotai near Chennai, India. In 1998, Hyundai began to overhaul its image in an attempt to establish itself as a world-class brand. Chung Ju Yung transferred leadership of Hyundai Motor to his son, Chung Mong Koo, in 1999.Hyundai's parent company, Hyundai Motor Group, invested heavily in the quality, design, manufacturing, and long-term research of its vehicles. It added a 10-year or 100,000-mile (160,000 km) warranty to cars sold in the United States and launched an aggressive marketing campaign. In 2004, Hyundai was ranked second in "initial quality" in a survey/study by J.D. Power and Associates. Hyundai is now one of the top 100 most valuable brands worldwide. Since 2002, Hyundai has also been one of the worldwide official sponsors of the FIFA World Cup. In 2006, the South Korean government initiated an investigation of Chung Mong Koo's practices as head of Hyundai, suspecting him of corruption. On April 28, 2006, Chung was arrested, and charged for embezzlement of 100 billion South Korean won (US$106 million). As a result, Hyundai Vice Chairman and CEO, Kim Dong-jin, replaced him as head of the company. Research & Development

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Hyundai has 5 R&D centres worldwide. Located in South Korea, California, United States, Germany, Japan and Hyderabad, India.[13

HYUNDAI IN INDIA

Hyundai Motor India Limited (HMIL) is a wholly owned subsidiary of Hyundai Motor Company (HMC), South Korea and is the largest passenger car exporter and the second largest car manufacturer in India. HMIL presently markets 6 models of passenger cars across segments. The A2 segment includes the Santro, i10 and the i20, the A3 segment includes the Accent and the Verna, the A5 segment includes the Sonata Transform and the SUV segment includes the Santa Fe.

HMILs fully integrated state-of-the-art manufacturing plant near Chennai boasts of the most advanced production, quality and testing capabilities in the country. To cater to rising demand, HMIL commissioned its second plant in February 2008, which produces an additional 300,000 units per annum, raising HMILs total production capacity to 600,000 units per annum.

In continuation with its commitment to providing Indian customers with cutting-edge global technology, HMIL has set up a modern multi-million dollar research and development facility in the cyber city of Hyderabad. It aims to become a centre of excellence for automobile engineering and ensure quick turnaround time to changingconsumerneeds. As HMCs global export hub for compact cars, HMIL is the first automotive company in India to achieve the export of 10 lakh cars in just over a decade. HMIL currently exports cars to more than 110 countries across EU, Africa, Middle East, Latin America, Asia and Australia. It has been the number one exporter of passenger car of the country for the sixth year in a row.
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To support its growth and expansion plans, HMIL currently has a 315 strong dealer network and 640 strong service points across India, which will see further expansion in 2010. Hyundai Motor India Limited is currently the second largest carmaker after Maruti Suzuki and largest auto exporter in India. It is making India the global manufacturing base for small cars. Hyundai sells several models in India, the most popular being the Santro Xing, i10 and the i20. Other models include Getz second

Prime, Accent, Terracan, Elantra (Discontinued),

generation Verna, Tucson, Santa Fe and the Sonata Transform. Hyundai has two manufacturing plants in India located at Sriperumbudur in the Indian state of Tamil Nadu. Both plants have a combined annual capacity of 600,000 units.In the year 2007 Hyundai opened its R&D facilty in Hyderabad Andhra pradesh , employing now nearly 450 engineers from different parts of the country.Basically the Hyundai Motors India Engineering (HMIE) gives technical & engineering support in Vehicle development and CAD & CAE support to Hyundai's main R&D center in Namyang Korea

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AWARDS AND ACHIEVEMENTS

2009: Hyundai i20 awarded 'Five Star Rating' for Safety by European New Car Assessment Programme (NCAP).

Hyundai Motor wins the Manufacturer of the Year award at the NDTV Profit Car & Bike Awards 2009.

Hyundai Motor India was named the Manufacturer of the Year award and the 'Best Variant' award for its i-10 Kappa engine at the UTVi Autocar Awards 2009. Hyundai Motor India wins the Highest Resale Value award at the Apollo Tyres Auto India Best Brand Survey Awards for the year 2009. 2010: Hyundai i10 wins 'Small Family Favourite Car Award' by CarWale.com

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Hyundai i20 wins the Viewers Choice Award at the Overdrive CNBC TV 18 Awards 2010.

Hyundai Motor India Ltd wins the award for Customer Service at the Apollo Auto India Best Brand Awards 2010.

Hyundai i20 wins the Design of the Year award at the NDTV Profit Car & Bike Awards 2010.

Hyundai i10 brand ambassador Shahrukh Khan wins the Brand Ambassador of the Year award at NDTV Profit Car & Bike Awards 2010.

Hyundai Motor Company achieved much in 2007 despite the challenging business climate. Numerous sections of the world media have praised Hyundai's high quality. Improvements in customer satisfaction and a continuous sales growth demonstrates Hyundai Motor's ability to increase its market share. Hyundai's success, watched closely worldwide, is a result of continuous and aggressive innovations that have been implemented on behalf of our customers. Customer satisfaction is our number one value. Hyundai Motor Company considers its most important mission to be bringing the enjoyment of elegance and confidence to its customers, rather than just selling products. Hyundai strives to bring its customers luxury and style. Therefore, Hyundai

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will continue to stabilize its global management by establishing an effective cooperation system among production bases around the world. Hyundai Motor Company's management goal in 2009 is customeroriented management and continuous

For example, second plants in China and India will begin full operation, construction of plants in the Czech Republic will be completed, and construction of plants in Russia will commence. The focus will be on effective management and stable production operation bases in each area and maximization of sales and marketing goals.

Best company! Best sales does not necessarily mean Best company. Being the best company is possible only if customers, the community, the environment, and the company are in harmony. Hyundai Motor Company has continued to engage in environmental management activities such as development of environmentally friendly technologies and clean production, in order to address environmental issues. In addition, Hyundai Motor Company is continuously striving to fulfill its obligations as a responsible enterprise - as a good 'citizen' - through social contributions to the communities we serve. Such a paradigm shift is possible because we are Hyundai Motor Company. Hyundai seeks innovation with global vision, challenges itself to embrace new company values, and continues to evolve with our customers.

ADVANCED MANAGEMENT PHILOSOPHY OF A WORLD CLASS AUTOMOBILE COMPANY: Competition among automobile companies throughout the world has been fierce. In spite of these conditions, Hyundai Motor Company has made a giant leap forward thanks to its advanced management philosophy, designed to ensure a better future for Hyundai Motor Company and its customers. This management philosophy has become even more solid since the inauguration of MongKoo Chung as Chairman and CEO in

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1999. Hyundai Motor Company is growing into a brand appreciated by its customers because it is continuously striving to achieve the single goal of making good quality products with an emphasis on the customer first principle across all management levels, including production, sales, and service. Moreover, Hyundai Motor will continue building its brand image as a top global automobile company by handling every task with transparency and fairness from the perspective of business ethics. Marching into the future through the move forward and growth. It will be reborn as a truly global company gaining a competitive edge in the global market. ACCELERATING GLOBAL MANAGEMENT BY EXPANDING THE

WORLDWIDE PRODUCTIONS BASE: Further expanding its global reach, Hyundai Motor Company established its European manufacturing base through construction of a production plant with an annual capacity of 300,000 units in the Czech Republic in 2009. Additionally, the construction of the Russia plant with an annual capacity of 150,000 units is set for full operation from 2011, bringing a strong foothold in the European market. The plant in Brazil is expected to play a key role in reinforcing the Companys market share in Central and South America. EXCEPTIONAL BUSINESS PERFORMANCE DESPITE GLOBAL

ECONOMIC CRISIS THROUGH SUPERIOR PRODUCT QUALITY AND AGGRESSIVE MARKETING STRATEGIES In 2009, Hyundai Motor Company succeeded in selling 2.4 million vehicles overseas, a meaningful accomplishment considering the global economic crisis. In particular, Elantra, Genesis, Genesis Coupe, Santa Fe, and Veracruz were recognized as the best and safest cars in their categories by leading agencies and the media in the US. Also, Hyundai achieved cumulative export sales of 1 million cars in Africa during the 33 years since it first began exporting to the region. Hyundai Motor Company pledges

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continuous growth by maximizing brand value in developed markets and expanding its sales capacity in emerging markets. AWARDED 10 BEST ENGINES FOR THE SECOND CONSECUTIVE YEAR: The TAU 4.6 engine was selected as a winner of the 201110 Best Engines of the US automotive media Wards AutoWorld for the second consecutive year. Earning favorable reviews including the engines velvety power delivery, aggressive tipin, and a remarkable combination of satisfactory exhaust emission and amazing fuel efficiency, Hyundai Motors high product quality was proven once again, this time in engine technologythe heart of an automobile. Hyundai Motor pledges to concentrate its technical capabilities and pay special attention to the development of high fuel efficiency-related technologies to become a true global environmental leader. HYUNDAIS COMPETITIVE EDGE: Hyundai Motor Company was named Carmaker of the Year by AM, UKs leading auto trade magazine, in the AM Awards 2010. Carmaker of the Year is awarded to companies that launch innovative vehicles that pioneer changes in the auto industry through continuous investment in R&D and advanced dealer network programs. Highly recognized for its sharp sales increase, first-rate dealership programs, and growth in brand awareness, Hyundai Motor Company beat other candidates including Ford, Jaguar, and Landrover to be selected as the winner of the coveted title. In 2008, UKs Autocar selected Hyundai Motor Company as Automaker of the Year, praising Hyundai for having grown into a top-class global automaker with its competitive products. SELECTED AS THE TOP 100TH GLOBAL BRAND FOR THE 5TH CONSECUTIVE YEAR Once again, Hyundai Motor placed in the Top 100 Global Brands in 2011 based on a joint study conducted by Business Week and Interbrand. By enhancing Hyundais brand image through high quality products and unique marketing initiatives amidst the downturn in the automotive market, Hyundai Motor is steadily climbing the ranks

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since it first entered the Top 100 Global Brands in 2005. Hyundai will continue to strengthen its management and pursue the highest in quality so that Hyundai Motor Company will equal global premium brand in the minds of consumers worldwide.

Under the Board of Directors, there are the Audit Committee and External Director Candidates Recommendation Committee. We further established the Ethics Committee in 2007. BOARD OF DIRECTORS The Board of Directors makes decisions on matters defined by the laws or articles of incorporation, matters delegated by the general shareholders meeting, and key matters related to the basic guidelines for company operations and work execution. Moreover, we have the authority to supervise duties of directors and management, and consist of four internal directors and five external directors. The Board of Directors holds regular meetings and special meetings, if necessary.

The Audit Committee under the Board of Directors consists of four external directors. It is responsible for auditing finance and management of HMC. It has the authority to review reports on business management and financial status. The Audit Committee approves matters related to audit, the shareholders meeting, directors, and the board of directors. It can access business and management information for auditing.

The External Director Candidates Recommendation Committee consists of two internal directors and two external directors. External directors should be

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recommended by the External Director Candidates Recommendation Committee. The 2007 Shareholders Meeting approved the directors compensation ceiling of 10 billion won. From January 1 to December 31, 2007, total compensation paid to internal and external directors was 7.737 billion. The Ethics Committee, which monitors internal transactions and supervises transparency and ethics management. The Ethics Committee consists of five external directors, one executive, and two advisors. It reviews matters related to the Anti-Trust and Fair Trading Act, transactions between parties in special relations specified in the Securities Trading Act, voluntary compliance with fair trading regulations, policies on ethics management and social contribution, and the Ethics Charter.

MANAGEMENT PHILOSOPHY With the spirit of creative challenge, we will strive to create a more affluent lifestyle for humanity, and contribute to the harmony and co-prosperity with shareholders, customers, employees and other stakeholders in the automobile industry. The spirit of creative challenge has been a driving force in leading HMC to where it is today. It is the permanent key factor for HMC to actively respond to change in the management system and seek creative and selfinnovative system. With the spirit of creative challenge, we create profits, the primary objective of a private enterprise. Furthermore, we take responsibility for the environment and society we belong to, and offer sustainable mobility in order to implement our corporate philosophy and provide benefits to all stakeholders including shareholders, customers, executives, employees, suppliers, and communities.

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VISION HYUNDAI announced "Innovation for Customers" as their mid longterm vision with five core strategies: global orientation, respect for human values, customer satisfaction, technology innovation, and cultural creation.the company desire to create an automobile culture of putting customer first via developing humancentered and environmentfriendly technological innovation.

MANAGEMENT POLICY Based on a respect for human dignity,Hyundai makes efforts to meet the expectations of all stakeholders including customers and business partners by building a constructive relationship amongst management, labor, executives and employees. Also, they focus on communicating Corporate values internally and externally, and gaining confidence from all stakeholders.

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MID-AND LONG-TERM STRATEGIES Hyundai developed five midand longterm strategies: global management, higher brand values, business innovation, environmental management, and strengthening product competitiveness. Especially, select environmental management as one of their strategies to meet the needs of stakeholders and the society .. they intend to promote sustainability development and preservation of the environment. HYUNDAI CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility(CSR) has become the key issue in company-society relations. CSR has taken a position of the core pillars of Hyundai Motor as the company strives to establish a new Sustainable Business Management System based on its five primary business principles.

Hyundai Motor Company does not see itself as a mere profit-making entity. It is a Contributing member of global society based on the responsible corporate citizenship. It is one of the main purposes to make a better world in close cooperation with all people and groups, including stake holders, employees, customers, shareholders, suppliers, and local communities

Specifically in April of 2007, Hyundai Motor announced its socially responsible management plan to fulfill its responsibility to global society. THE CONCEPTUAL FOCUS Hyundai Motor socially responsible management covers three conceptual areas economic responsibility, social responsibility, and environmental responsibility.

AREA OF STRATEGIC FOCUS Corporate social responsibility covers three areas: trust-based management, environmental management, and social contribution.

For trust-based management, we will focus on enhancement of labour relations, mutually beneficial cooperation with suppliers, ethics management, and transparent

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management. As for environmental management, we will proactively respond to global trends and regulations related to the environment. For social contribution, we plan to enlarge our capacity and obtain expertise to effectively carry out global social contribution projects and participate in volunteering programs to contribute to development of local communities.

GLOBAL CSR WEBSITE In 2007, a year dedicated to global social contribution, Hyundai Motor Company prepared its infrastructure to execute corporate social responsibility , as well as social contributions. It established the 'Hyundai Motor Global CSR Network' with primary production and sales subsidiaries around the world, and will establish a network covering all its subsidiaries worldwide, by continuously extending the network. Hyundai also laid foundations by promoting global CSR (Corporate Social Responsibility) activities, and by developing and opening the 'Global CSR Web site' for information exchange.

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ANALYSIS AND INTERPRETATON

Meaning of Analysis Analysis is the process of critically examining in detail accounting information given in the financial statements. Analyzing financial statements is a process of evaluating relationship between component parts of financial statements to obtain a better understanding of firms position and performance. The analysis of financial statements refers to the treatment to the information contained in the financial statements in such a way so as to afford a full diagnosis of the profitability and financial position of the firm. For this purpose, financial statements are classified methodically, analyzed and compared with the figures of previous year or similar other firms.

Meaning of interpretation Analysis and interpretation are closely related. Interpretation is not possible without analysis and without interpretation analysis has no value. Various account balances appear in the financial statements. These accounts balances do not represents homogenous data so it is difficult to interpret them and draw conclusions. This requires an analysis of the data in the financial statements so as to bring some homogeneity to the figures shown in the financial statements. Interpretation is thus drawing of inference and stating what the figures in the financial statements really mean.

LIQUIDITY RATIO

Liquidity means ability of a firm to meet its current liabilities. The liquidity ratios, therefore, try to establish a relationship between current liabilities, which are the obligations soon becoming due and current assets, which presumably provide the source from which these obligations will be met. The failure of a company to meet its obligation due to lack of adequate liquidity will result in bad credit ratings, loss of creditors confidence or even in

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law suits against the company. The following ratios are commonly used to indicate the liquidity of business:

Current ratio

Liquid Ratio (Acid Test or Quick Ratio)

Absolute Liquid Ratio or Cash Ratio

Inventory Turnover Ratio.

CURRENT RATIO

This ratio is most commonly used to perform the short-term financial analysis. Also known as the working capital ratio, this ratio matches the current assets of the firm to its current liabilities. Current assets include cash in hand and at bank, readily marketable securities, bills receivable, debtors less provision for bad and doubtful debts, stock in trade, prepaid expenses, any other asset which, in the normal course of business will be converted in cash in a years time. Current Liabilities include all obligations maturing within a year, such as sundry creditors, bills payable, bank overdraft, income tax payable, dividends payable, outstanding expenses, provision for taxation and unclaimed dividends.

Formula: Current ratio = Current Assets/Current Liabilities Significance and Objective: Current ratio throws good light on the short-term financial position and policy. It is an indicator of a firms ability to promptly meet its short-term liabilities. A relatively high

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current ratio indicates that the firm is liquid and has the ability to meet its current liabilities. On the other hand, a relatively low current ratio indicates that the firm will find it difficult to pay its bills.

Ideal ratio:

A ratio equal or near to the thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

TABLE-4.1 TABLE DEPICTING CURRENT RATIO

PARTICULARS CURRENT ASSETS CURRENT LIABILITIES CURRENT RATIO INFERENCE:

2007 408.43

2008 646.09

2009 745.12

2010 694.26

2011 2,408.27

1,192.98 1,171.50 1,455.57 1,678.93 3,965.69 0.34 0.55 0.51 0.41 0.60

From the above table it can inferred that the current ratio is higher in the year 2011 at a rate of 0.60 which shows an increasing trend. Hyundai has shown good performance in terms of the current ratio as it has been increasing year by year which is a good sign. The current ratio depicts that the company has sufficient current assets to meet its current debt.

In the year 2011 the company current ratio is very high which will have an adverse impact on the profitability of organization. Very high current ratio is not desirable.

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CHART 4.1 CHART DEPICTING CURRENT RATIO

Interpretation: As a convention the minimum of 2:1 ratio is referred to as a bankers rule of thumb or standard of liquidity for a firm. A ratio equal or near to the rule of 2:1 i.e., current assets double the current liabilities is considered to be satisfactory. From the above table it can be inferred that over the FIVE years there is good performance in terms of the current ratio as it has been increasing year by year which is a good sign. The current ratio depicts that the company has sufficient current assets to meet its current debt.

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2.QUICK OR ACID TEST RATIO This ratio is also known as acid test ratio or liquid ratio. It is a more severe test of liquidity of a company. It shows the ability of a business to meet its immediate financial commitments. It is used to supplement the information given by the current ratio.

Formula:

Quick ratio = Quick (or Liquid) Assets/Quick Liabilities Liquid Assets = Current Assets Inventory Pre-paid Expenses Liquid liabilities = Current Liabilities Bank Over Draft

Significance and Objective: When quick ratio is used along with current ratio, it gives a better picture of the firms ability to meet its short-term liabilities out of its short-term assets. This ratio is of great importance for banks and financial institutions.

Ideal ratio: An acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims.

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TABLE 4.2

TABLE DEPICTING LIQUID RATIO PARTICULARS 2007 LIQUID ASSETS CURRENT LIABILITIES LIQUID RATIO 0.15 0.31 0.29 0.21 0.49 1192.98 1171.50 1455.57 1678.93 3965.69 181.88 2008 371.32 2009 428.02 2010 3 67.43 2011 1971.87

INFERENCE: From the above table it can be inferred that the liquid ratio is higher in 2010 at a rate of 0.49 and has shown increasing trend over the years.This indicates that the firm has sufficient liquid assets to provide a cover to the current liabilities

CHART 4.2

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CHART DEPICTING LIQUID RATIO

0.5 0.4 Liquid 0.3 Ratio 0.2 0.31 0.1 0 2006 2007 2008 Year
Interpretation: It is generally thought that if quick assets are equal to current liabilities then the concern may be able to meet its short-term obligation. As a convention quick ratio of 1:1 is considered satisfactory. From the above table it can be inferred that the company has a quick ratio whch is more than the ideal ratio n all the five years which indicates that the liquid assets are more sufficient to provide a cover to the current liabilities.

0.49 0.29 0.21

0.15

2009

2010

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