Mba Finance Citi Financial

7/27/2019 Mba Finance Citi Financial

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ANALYSIS

Financial statements present a mass complex data in absolute monetary

terms and reveal little about the liquidity, solvency and profitability of the

business. In financial analysis, the data given in financial statements is

classified into simpler groups and a comparison of various is made with one

another to pin point the strong points in one group while all items relating to

the current liabilities are placed in another group, the comparison between

the two groups will provide useful information

In the words of Finney and Miller :

Financial analysis consists in separating facts according to some definite

plan, arranging them in groups according to certain circumstances and then

presenting them in a convenient and easily read and understandable form.


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PROCESS OF FINANCIAL ANALYSIS

The following procedure is adopted for the analysis of financial statements :-

1) DETERMINATION OF EXTENT OF ANALYSIS :- First of all an

analysis has to determine the extent or scope of his analysis. The

extent of analysis depends upon the object of analysis. The object may

be the ascertainment of firms financial position. Earning capacity,

liquidity, interest, paying capacity etc. If the object is to ascertain the

earning capacity of the firm the data or Profit and loss Account will be

used and if the object is to ascertain the financial position or liquidity

of the firm, the data of Balance Sheet will be used.

2) STUDY OF FINANCIAL STATEMENTS :- Before analyzing, the

analyst should go through the various financial statements of the firm

carefully. He should also acquaint himself with principles adopted by

the firm for preparing these statements.

3) COLLECTION OF OTHER IMPORTANT INFORMATION :- Theanalyst should collect other important information from the

management, which is useful, for financial statements do not reveal

analysis and which.

4) REARRANGEMENT OF FIGURES :- The next step is to rearrange

and classify other important financial statements in useful manner.

Items of similar nature are grouped at one place. For example assets

are divided into fixed and current assets and liabilities are divided into

short term and long term liabilities.

5) APPROXIMATION OF FIGURES :- In order to facilitate analysis,

large figures are summed up and expressed in approximate numbers

as thousands, lacs, crores etc.


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6) COMPARISON :- The next step is to compare the related classes of

figures. For example: - current assets may be compared with current

liabilities, fixed assets with long term sources of funds, debt with

equity and so on. Such comparison can also be made on the basis of

financial statements of the firm for several years.

Financial statements of a firm may also be compared with the

financial statements of the other firm of similar type. For effective

analysis of financial statements any of the tools of analysis like ratio

analysis, trend analysis, common size statements, funds flow

statements etc can be used.

7) STUDY OF TRENDS :- On the basis of comparison of financial

statements for several years, the future trends of important items are

established. It can be ascertained whether the sales, profits, current

assets, current liab, short term borrowings and long term borrowings

etc are increasing or decreasing. By a study of trend of these items, it

can be estimated whether the business is progressing sufficiently or

not.8) INTERPRETATION :- It refers to drawing conclusions on the basis

of above-mentioned procedure. Conclusions are drawn about the

financial position, profitability, efficiency and such other aspects of

the undertaking.


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OBJECTIVES OR PURPOSE OF ANALYSIS OF

FINANCIAL STATEMENTS.

1) TO KNOW THE EARNING CAPACITY OF THE BUSINESS :-

According to Robert Anthony The overall objective of business is

to earn a satisfactory returns on the funds invested in it, consistent

with maintaining a sound financial position. Financial analysis helps

in ascertaining whether adequate profits are being earned on capital

invested in the business. It is also disclosed by the analysis of

financial statements whether these profits are increasing or decreasing

over the years or not.

2) TO KNOW THE SOLVENCY :- It can be ascertained from the

analysis whether the business is in position to pay its short and long

term liab in time. For example, the liquidity ratios (current and quick)

are calculated to ascertain whether the business enterprise hassufficient liquid funds to meet its hort term liab and debt equity ratio

is calculated to ascertain whether the business enterprise has got the

ability to repay the long-term liabilities.

3) TO KNOW THE FINANCIAL STRENGTH :- An important purpose

of financial analysis is to assess the financial strength of the business.

Analysis helps in providing answers to the following questions :

i) Funds required for the purchase of new machinery and

equipment will be available from internal sources of the

business or not?

ii) Based on the current reputation of the business, how much

funds can be raised from external sources?


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4) TO MAKE COMPARATIVE STUDY WITH OTHER FIRMS :-

Another purpose of financial analysis is to help the management to

make a comparative study of the profitability of various firms

engaged in same industry. Such comparison helps the management to

study the position of their firm in respect of sales, expenses,

profitability and working capital etc, in comparison to other firms.

5) TO KNOW THE CAPABILITY OF PAYMENT OF INTEREST

AND DIVIDEND: - The purpose of analysis is to assess whether the

firm will have sufficient funds to pay amount of interest in time and

whether it has the capacity to pay the dividend in which a business is

moving.

6) TO KNOW THE TREND OF THE BUSINESS :- When data about

sales, cost of production, profits, etc are compared for two or more

years of a firm, they indicate the direction in which a business is

moving.

7) TO KNOW THE EFFICIENCY OF MANAGEMENT : - The purpose

of financial analysis is to judge that the financial policies adopted bythe mgt. Are proper or not. For example, if the actual ratios calculated

on basis of statements are in accordance with their standard ratios, the

policies of the mgt. May be said to be proper and efficient.

8) TO PROVIDE USEFUL INFORMATION TO THE

MANAGEMENT: - The object of analysis is to find out the

shortcomings of the business.


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SIGNIFICANCE OR IMPORTANT OF ANALYSIS

OF FINANCIAL STATEMENTS

Various parties are interested in the financial statements of a business due to

various reasons. By analyzing the statements each party can ascertain

whether his interest is safe or not. For ex: - a shareholder would be interested

in the profitability whereas, a short-term creditor would be concerned about

the liquidity that is the firm's ability to pay its current liabilities in time.

1) Significance for management: - Management of a firm is always

interested to know the solvency, profitability, and the capital structure of the

firm. They want to make sure that the business must be in solvent position to

pay the debts as and when they fall due. Similarly, they are interested not

only in the current year profits but also in capacity of the business to earn

more profits in future.

In the words of GERSTERNBERG:

"The management can measure the effectiveness of its own policies anddecisions, determine the advisability of adopting new policies and

procedures and document to owners, the results of their managerial efforts."

2) Significance for investors: - Investors and shareholders of the business are

interested in the earning capacity and the safety of their investment in the

business. With the help .of financial analysis they can make comparison

between the dividend paid by the company and the market value of the

shares.

3) Significance for creditors: - There are 2 types of creditor (1) Short-term

(2) Long-term creditors.


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Short-term creditors want to know the liquidity of the business that is

to know whether the will have sufficient current assets and cash to pay their

debts or not.

Long-term creditors want to know 2 things namely (I) Whether the

company will be able to pay the interest consistently. (2) Whether the

company will be able to pay their debts when they fall due.

4) Significance for government: - Government can judge, on the basis of

analysis of financial statements, which industry is progressing on desired

lines and which industry needs the financial help. Government can assess as

to which are the industries where the profit margins are low in comparison to

the cost of production and on the basis it can take decisions to reduce the

exise duty in those industries.

5) Significance for financial institutions: - All the financial institutes, which

provide finance to the industries such as banks, insurance companies. Unit

Trust etc want to know the profit earning capacity of the business and its

long-term solvency.6) Significance for Employees: - Analysis of financial statements helps the

employees in determining the true profits of the business. On the basis they

can ascertain as to how much bonus and increase in their wages is possible

from profits. Analysis of financial statements also helps the labour unions in

negotiating wages agreements.

7) Significance for stock exchange authorities: - They analyze the financial

statements of the company to determine its price earning ratio and earning

per share (EPS).

8) Significance for taxation authorities: - They analyze the financial

statements of a company to know whether the statements have been prepared

in accordance with the legal provisions and whether the figures of


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production, sales and profits are correct for the purpose of assessment of

excise duties, sales tax respectively.

9) Significance for researchers: - Analysis of financial statements of a

company is of much importance to a researcher who is conducting research

in respect of that company.


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TECHNIQUES USED FOR ANALYSIS

1) Comparative Financial Statements

2) Common size

3) Trend Analysis.

4) Ratio Analysis.

5) Cash Flow Statement

1) COMPARATIVE FINANClAL STATEMENT:

When financial statement figures for two or more years are placed

side by side to facilitate comparison, these are called 'Comparative Financial

Statement'. Such statements not only show the absolute figures of various

years but also provide for columns to indicate the increase or decrease in

these figures from one year to another. In addition, these statements may

also show the change from one year to another in percentage form. Such

comparative statements are of great value in forming the opinion regarding

the progress of the business

Purpose or utility or importance of Comparative Statements.

1) TO MAKE THE DATA SIMPLER AND MORE UNDERSTANDABLE:

- The main aim of preparing comparative financial statements is to put the

data for the number of years in simpler and comparable form. When data for

a number of years are put side by side in a comparative form it becomes

easier to understand' them and the conclusions regarding the profitability and

financial position of the concern can be drawn very easily.

1) TO INDICATE THE TREND : - Comparative financial

statements indicate the trend of change by putting the figures of


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production, sales, expenses, profits, etc for a no. Of years side by

side.

2) TO INDICATE THE STRONG POINTS AND WEAK

POINTS OF THE CONCERN: - Comparison of financial

statements for a number of years may also indicate the strong and

weak points of the firm.

3) TO COMPARE THE FIRM'S PERFORMANCE WITH THE

AVERAGE PERFORMANCE OF THE INDUSTRY:

Comparative financial statements help a business unit to compare

its performance with the average performance of the industry.

4) TO HELP IN FORECASTING : - Comparative study of the

changes in the key figures over a period helps the management in

forecasting the profitability and financial soundness of the business

FORMS OF PRESENTING COMPARATIVE STATEMENTS

In comparative statements data may be presented in any of the following

forms:

(1)To show only the absolute data of various items or in other words

to show only rupees amount of various items. For example, sales in

1992 were 200600 and 1993 was 250000..

(2)To show the increases and decreases in data in terms of money

values. For example, in comparison to 1992 the sales in 1993

increased by Rs.50000.


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(3)To show the increases and decreases in data in terms of money

values. For example: - in comparison to 1992 the sales in 1993

increased by 25%.

(4)COMPARISON EXPRESSED IN RATIO: - Sometimes an

additional column is provided in the comparative statements to

show the changes over the years in terms of ratio. In order to

calculate financial statements to show the changes over the years in

terms of ratio. Ratio of more than I will indicate an increase while

a ratio of less than 1 year will indicate a decrease in the current

year in comparison to the previous year. For example:- if the sales

in 1992 are Rs. 200600 and sales in 1993 are Rs. 250000 the ratio

will be:

250000/200600 = 1.25

(5)USE OF CUMULATIVE FIGURES AND AVERAGES: - For

example sales in 1990, 1991, 1992 & 1993 were Rs 210000,

180000,200600,250000.Average Sales = 8400000/4 = 210000.

COMPARATIVE BALANCE SHEET

The comparative balance sheet as on two or more different dates can

be prepared to show the increase or decrease in various assets, liabilities, and

capital.. Such a comparative balance sheet is very useful in studying the

trends in a business enterprise.

A single year's balance sheet shows only the balances of accounts on a

particular date whereas comparative balance sheet show not only the


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balances of accounts on different dates but also the extent of increase or

decrease in various items of balance sheet.

In a single year's b/s the focus is on size or status of various items

whereas in a comparative b/s emphasis is on change in the size of these

items.

A comparative b/s enables a financial analyst to study the nature, size,

and direction of change precisely as compared to single year's b/s.

The comparative b/s is a connecting link between the income statement

and the b/s, because the income statement presents the result of operating

activities of a business whereas the comparative b/s shows the effect of

operating activities on its assets, liabilities, and capital.

The increase in current liabilities of the same amount will not show

any improvement in the short-term financial position. A student should

study the increase or decrease in current assets and current liabilities and this

will enable him to analyze the current financial position.

The second aspect, which should be studied in current financial

position, is the liquidity position of the concern. If liquid assets like cash in

hand, cash at Bank, bill receivables, debtors, etc. show an increase in the

second year over the first year, this will improve the r liquidity position of

the concern. The increase in inventory can be on account of accumulation of

stocks for want of customers, decrease in demand or inadequate sales

promotion efforts. An increase in inventory may increase working capital of

the business but it will not be good for the business.(2) The long-term financial position of the concern can be analyzed by

studying the changes in fixed assets, long-term liabilities and capital. The

proper financial policy of concern will be to finance fixed assets by the issue

of either long-term securities such as debentures, bonds, loans from financial

institutions or issue of share capital. An increase in fixed assets should be


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compared to the increase in long-term loans and capital. If the increase in

fixed assets is more than the increase in long term securities then part of

fixed assets has been financed from the working capital. In the other hand, if

the increase in long-term securities is more than the increase in fixed-assets

then fixed assets have not only been financed from long-tern sources but part

of working capital has also been financed from long-term sources. A wise

policy will be finance fixed assets by raising long-term funds.

The nature of assets, which have increased or decreased, should also

be studied to form and opinion about the future production possibilities. The

increase in plant and machinery will increase production capacity of the

concern. On the liabilities side, the increase in loaned funds will mean an

increase in interest liability whereas an increase in share capital will not

increase any liability for paying interest. An opinion about the long-term

financial position should be formed after taking into consideration above-

mentioned aspects.

(3) The next aspect to be studied in a comparative balance sheet

question is the profitability of the concern. The study of increase ordecrease in retained earnings, various resources and surpluses, etc.

will enable the interpreter to see whether the profitability has

improved or not. An increase in the balance of Profit and Loss

Account and other resources created from profits will mean an

increase in profitability to the concern. The decrease in such

accounts may mean issue of dividend, issue of bonus shares or

deterioration in profitability of the concern.

(4) After studying various assets and liabilities an opinion should be

formed about the financial position of the concern. One cannot say if short-

term financial position is good then long-term financial position will also be


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good or vice-versa. A concluding word about the overall financial position

must be given at the end.

Guidelines for interpretation of Comparative Balance Sheet:-

While interpreting of Comparative Balance Sheet the interpreter is

expected to study the following aspects:

(1) Current financial position and liquidity position.

(2) Long-term financial position.

(3) Profitability of the concern.

(1) For studying current financial position or short-term

financial position of the concern, one should see the

working capital in both the years. The excess of current

assets over current liabilities will give the exact figures of

the working capital. The increase in working capital will

mean improvement in the current financial position of the

business. Increase in- current assets accompanied by

CASH FLOW STATEMENT

A cash flow statement is a statement inflows and outflows of cash

during a particular period. In other words, it is a summary of sources and

applications of cash during a particular span of time. It analyzes the reasonsfor changes in balance of cash between the two balance sheets dates. The

term 'cash' here stands for cash and cash equivalents.

A cash flow statement is not very much different to funds flow

statement. The only difference is that in a funds flow statement the term'


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fund' is used to mean the working capital while preparing cash flow

statement is prepared to study the change in working capital of the firm. It

does not disclose the source, which bring in casa and applications, which

cause outflows of cash. Therefore, a cash flow statement is prepared and this

explains the causes of changes in the cash balance of the firm by showing

the sources of cash receipts and the purpose for which payments were made.

As such the cash flow statement is also called a " Statement of changes in

financial position cash basis or a funds flow statement basis".

A cash flow statement can be for the past or can be projected for a

future period.

OBJECTS OR USES OF CASH FLOW STATEMENT

The main objectives behind preparing a cash flow statement can be

laid down as under:

(1) USEFUL FOR SHORT TERM FINANCIAL PLANNING: - A cash

flow statement provides information for planning the short-term financial

needs of the firm. Since it provides information regarding the sources and

the utilization of cash during a period, it becomes easier for the management

.10 assess whether it will have adequate cash to meet day 2 day expenses

and pay the creditors in time, to pay long term loans and interest thereon.

(2) USEFUL IN PREPARING CASH. BUDGET: - A cash flow statementprepared for the future period is helpful in preparing a cash budget. It

informs the management about the surplus or deficit periods of cash, that is,

in which months the payment will be in excess of receipts.

(3) COMPARISON WITH THE CASH BUDGET: - A cash budget is

prepared at the commencement of the year; whereas a cash flow statement is


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prepared at the end of the year. A comparison between the two helps in

ascertaining the extent to which the financial resources of the firm have been

generated and used according to the plan.

(4) STUDY OF THE TREND OF CASH RECEIPTS AND PAYMENTS: -

A cash flow statement reveals the speed at which the cash is being generated

from debtors, stock and other current assets at the speed at which the current

liabilities are-being paid..

(5) IT EXPLAINS THE DEVIATIONS. OF THE CASH FROM

EARNINGS: - A firm, may earn huge profits yet it may have paucity of cash

or when it suffered a loss it may still have plenty of cash.

(6) HELPFUL IN MAKING DIVIDEND DECISIONS: -. Hence the

management takes the help of cash flow statement to ascertain the position

of cash generated from operations, which can be used for payment of

dividend.

LIMITATIONS OF CASH FLOW STATEMENT

It does not present the true picture of the liquidity of the firm because

the liquidity does not depend upon cash alone. Liquidity also depends

upon those assets, which can be converted into cash easily. Exclusion

of these assets obstruct the true reporting of the ability of the firm to

meet its liabilities when they become due for payment.

The possibility of window dressing is higher in case of cash position

in comparison to the working capital position of a firm. The cash

balance can be easily maneuvered by postponing purchases and other


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payments and by rapidly collecting cash from debtors before the

balance sheet date.

Cash flow statement ignores non-cash charges. Hence, a cash flow

statement cannot judge the true position of an enterprise.

PROCEDURE OF PREPARING CASH FLOW STATEMENT.

The Institute of Chartered Accountants of India has issued Accounting

standards (AS-3) Revised, for preparing a cash flow statement. This

Accounting Standard has been made mandatory in respect of accounting

periods commencing on or after 1st April 2007, for a certain enterprise.

These enterprises are:

1. Enterprises whose equity or debt securities are listed on a recognized

stock exchange in India and enterprises that is in the process of issuing

equity or debt securities that will be listed on a recognized stock exchange in

India.1. All other commercial, industrial and business enterprises, whose

turnover for the accounting period exceeds Rs. 50 crore.

As Such, the cash flow statement has been prepared according to

AS- 3 / revised.

According to AS-3 Revised, the cash flow statement summarizes the

cash inflows and outflows and the net changes (increases or

decreases) in cash and cash equivalents resulting from operating,

investing, and financing activities of a firm during a period.


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CASH: - It comprises cash in hand and demand deposit with banks.

CASH EQUIVALENTS:. - These are short term, highly liquid

investments that are readily convertible into known amounts of cash

and which present insignificant risk of changes in their values.

Normally an investment will be termed as cash equivalent only if it

has short maturity period, say three months or less, from the date of its

acquisitions. For example;

Treasury bills, commercial papers etc.

CLASSIFICATION OF CASH FLOWS:- according to AS-3

(revised), a cash flow statement should be presented in a manner that

it reports inflows and outflows of cash by classifying them into three

categories, namely: operating, investing and financing activities.

classification of all activities into these three categories helps the users

of cash flow statement to assess the effect of these. activities on cash

and cash equivalents of the enterprise. Such information will behelpful in evaluating the relationship among these three activities.

these three activities are explained as below:

1) CASH FLOWS FROM OPERATING ACTIVITIES :

Operating activities .are the main revenue generating activities of

an enterprise. as such, they include cash flows from those transactions

and events, which enter into the ascertainment of net profit or loss of

the enterprise.examles of cash- flows arising from operating activities,

are:

a) Cash receipts from the sate of goads and rendering of services;

b) Cash receipts from loyalities, fees, commission and other revenue;


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c) Cash payments to suppliers for goods and services;

d) Cash payments to and on behalf of employees;

e) Cash receipts and cash payments of an insurance enterprise for

Premium and claims, annuities and other policy benefits;

f) Cash payments or refund of income taxes unless they can be

specifically identified with financing and investing activities; and

g) Cash receipts and payments relating to future contracts, forward

contracts, option contracts and swap contracts when the contracts are

held for dealing or trading purposes.

2) CASH FLOWS FROM INVESTING ACTIVITIES :

Investing activities include the purpose and sale of long term assets

such as land, buildings, plant and machinery etc. not held for resale.

These activities also include the purchase and sale of such

investments, which are not included in cash equivalents. Cash flow

from investing activities discloses the expenditures incurred forresources intended to generate future income and cash flows.

Examples' of cash flows arising from investing activities are:

a) Cash payments to acquire fixed assets (including intangible) and

also payments for capitalized research and development costs and self

f constructed fixed assets. .

b) Cash receipts from sale of fixed assets (including intangibles);

c) Cash payments to acquire shares, warrants or debt instruments of

other enterprises (other than payments for those instruments

considered to be cash equivalents);


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d) Cash receipts from sale of shares, warrants or debt instruments of

other enterprises (other than payments for those instruments

considered to be cash equivalents);

e) Cash advances and loans made to third parties (other than advances

and loans made by financial enterprises);

f) Cash receipts from the repayment of advances and loans made to

third parties (other than advances and loans of a financial enterprise);

g) Cash payments for future contracts, forward contracts, option

contracts and swap contracts when except when the contracts are held

for dealing or trading purposes-; or the payments are classified as

financial activities;

(h) Cash receipts from future contracts, forward contracts, option

contracts and swap contracts except when the contracts are held to

dealing or trading purposes, or the payments are classified as financial

activities;

i) Cash receipts of insurance claim for property involved in accident;

andii) Cash receipts of interest and dividend

(3) CASH FLOWS FROM FINANCING ACTIVITIES:

Financing activities are the activities that result in change in capital and

borrowings of the enterprises. Examples of cash flows arising from

financing activities are:

a) Cash receipts from issuing shares ot other similar instruments;

b) Cash receipts from issuing debentures, loans, notes, bonds and other short

term or long-term borrowings;


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c) Cash repayments of amounts borrowed, buy-back of equity shares,

redemption of preference shares, Debentures, notes, bonds etc., and

(d) Cash repayment of interest and dividend.

SOME SPECIAL ITEMS:

(i) INTEREST AND DIVIDENDS:- Cash inflow from interest and

dividend and cash outflow on account Of interest and dividend should be

disclosed separately. Cash inflow arising from interest and dividends

received should be shown as cash flow from investing activities whereas

cash outflow on account of interest and dividend paid should be shown as

cash flow from financing activity.

(ii) TAXES ON INCOME:- Tax paid on income is a part of cash flows

from operating activity. Hence, taxes paid are shown as a deduction undercash flows from operating activities.

(iii) EXTRAORDINARY ITEMS:- Cash flows relating to extraordinary

items such as bad debts recovered, claims received from insurance

companies, winning of a lottery or a law suit etc. should be disclosed

separately as arising from operating, investing or financing activities. For

example, the amount received from insurance company on account of loss of

stock by fire, earthquake, flood etc. should be reported as cash flows from

operating activities.

(iv) SIGNIFICANCE NON-CASH TRANSACTIONS:- There are some

investing and financing activities which do not require the use of cash or

cash equivalents. Such non-cash activities should be excluded from the cash


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flow statement. Examples are: the acquisition or assets by issue of

debentures or shares, conversion of debentures into shares etc. Such

significant non-cash transactions should be disclosed outside the cash flow

statement.

Cash Flow Statement for the year

ending---------------

A. Cash flows from Operating Activities :

Net profit before tax and extraordinary

Items:

Adjustments for :

Depreciation

Foreign exchange

Loss on sale of fixed assets

Gain on sale of fixed assets

Interest paid

Interest received

Operating profit before working capital

Changes

Add : Decrease in Current Assets

Increase in Current Liabilities

Less : Increase in Current Assets

Decrease in Current Liabilities

Cash generated from operating

activities

Income Tax Paid


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Cash flow before extraordinary

C. Cash flows from Financing

Activities:

Proceeds from issue of share capital

Proceeds from long term borrowings

Repayments of long term borrowings

Interest paid

Divided paid

Net cash from financing activities

Net Increase (or decrease) in cash in

cash and cash equivalents

(A+B+C)

Cash and cash equivalents at the

beginning of the period Cash and cashequivalent at the end of the period


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Items

(+) or (-) Extraordinary items

Net cash from Operating Activities

B. Cash flows from Investing Activities:

Purchase of fixed assets

Sale of fixed assets

Purchase of investments (long-term)

Sale of investments (long term)

Invest received

Dividend received

Net cash from investing activities


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TREND ANALYSIS:

The financial statements may be analysed by computing trends of

series of information. This method determines the direction upwards or

downwards and involves the computation of the percentage relationship that

each statement item bears to the same item in base year. The information for

a number of years is taken up and one year, generally the first year, is taken

as a base year. The figures of the base year are taken as 100 and trend ratios

for other years are calculated on the basis of base year. The analyst is able to

see the trend of figures, whether upward or downward. For example, is sales

figures for the year 1985 to 1990 are to be studied, then sales of 1985 will be

taken as 100 and the percentage of sales for all other years will be'calculated

in relation to the base year, i.e., 1985. Suppose the following trends are

determined.

1985 100

1986 1201987 110

1988 125

1989 135

1990 140

The trends of sales show that sales have been more in all the years

since 1985. The sales have shown an upward trend except in 1987 when

sales were less than the previous year i.e., 1986. A minute study of trend

shows that rate of increase in sales is less in the years 1989 and 1990. The

increase in sales is 15% in 1988 as compared to 1987 and increase is 10% in

1989 as compared to 1988 and 5% in 1990 as compared to 1989. Though the


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sales are more as compared to the base year but still the rate of increase has

not been constant and requires the study by comparing these trends to other

items like cost of production, etc.

Procedure for Calculating Trends:- '

(1) One year is taken as a base year. Generally, the first or the last is taken as

base year.

(2) The figures of base year are taken as 100.

(3) Trend percentages are calculated in relation to base year. If a figure in

other year is less than the figure in base year the trend percentage will be

less than 100 and it will be more than 100 if figure is more than base year

figure. Each year's figure is divided by the base year's figure.

The interpretation of trend analysis involves a cautious study. The

mere increase or decrease in trend percentage may give misleading results if

studied in isolation. ,An increase of 20% in current assets may be treated

favorable. If this increase in current assets is accompanied by an equivalentincrease in current liabilities, then this increase will be unsatisfactory. The

increase in sales may not increase profits if the cost of production has also

gone up.

The base period should be carefully selected. The base period should

be a normal period The price level changes in subsequent years may reduce

the utility of trend ratios. In the figure of the base period, is very small, then

the ratios calculated on this basis may not give a true idea about the financial

data. The accounting procedures and conventions used for collecting data

and preparation of financial statements should be similar, otherwise the

figures will not be comparable.


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COMMON-SIZE STATEMENT:

The common-size statements, balance sheet and income statement, are

shown in analytical percentages. The figures are shown as percentages of

total assets, total liabilities and total sales. 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. These statements are

also known as component percentage or 100 per cent statements because

every individual item is stated as a percentage of the total 100. The

shortcomings in comparative statements and trend percentages where

changes in items could not be compared with the totals have been covered

up. The analyst is able to assess the figures in relation to total values. The

common size statements may be prepared in the following way:

(1) The total of assets or liabilities are taken as 100.

(2) The individual assets are expressed as a percentage of total assets i.e.,

100 and different liabilities are calculated in relation to total liabilities. For

example, if total assets are Rs. 5 lac and inventory value is Rs. 50, 000, thenit will be 10% of the total assets

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 is called common size balance sheet. For example, following

assets are shown in a common-size balance sheet:


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Rs PercentageCash in hand and at bank 5,000 2.50Sundry debtors 20,000 10.00Stock 25,000 12.50Land and Buildings 50,000 25.00

Plant and Machinery 1,00,000 50.00Total Assets 2,00,000 100.00The total figure of assets Rs. 2,00,000 is taken as 100 and all other

assets are expressed as a percentage of total assets. The relation of each asset

to total asset is expressed in the statement. The relation of each liability to

total liabilities is similarly expressed.

The common-size balance sheet can be used to compare companies of

differing size. The comparison of figures in different periods is not usefulbecause total figures may be affected by a number of factors. It is not

possible to establish standard norms for various assets. The trendsof figures

from year to year may not be studied and even they may not give proper

results.

COMMON SIZE INCOME STATEMENT:

The items in income statement can be shown as percentage of sales to

show the relation of each item to sales. A significant relationship can be

established between items of income statement and volume of sales. The

increases in sales will certainly increase selling expenses and not

administrative or financial expenses. In case the volume of sales increases to

a considerable extent, administrative and financial expenses may go up. In

case the sales are declining, the selling expenses should be reduced at once.

So, a relationship is established between sales and other items in income

statement and this relationship is helpful in evaluating operational activities

of the enterprise.

RATIO ANALYSIS


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INTRODUCTION

We have already studied that there are various methods or techniques

used in analyzing financial statements, such as comparative statements,

trend analysis, common-size statements, schedule of changes in working

capital, fund flow and cash flow analysis, cost-volume-profit analysis and

ration analysis. It is the process of establishing and most powerful tools of

financial analysis.

We have already studied that there are various method or techniques

used in analyzing financial statements, such as comparative statements,

trends; analysis, common size statements, schedule of changes, working

capital, fund flow and cash flow analysis, cost volume-profit analysis and

ratio analysis. The ratio analysis is one of the most powerful tools of

financial analysis. It is the process of establishing and interpreting various

ratios. It is with the help of ratio that the financial statements can be

analyzed more clearly and decisions made from such analyze.

MEANING OF RATIO

A ratio is a simple arithmetical expression of the relationship of one of

the number to another. It may be defined as the indicated quotient of two

mathematical expression. According to accountant handbook by Wixon,

Kell and Bedford a ratio" is an expression of the quantitative relationship

between two number." " According to Kotler a ratio is the relation, a

amount, a, to another, b, expressed a$ the ratio of a to b ; a : b (a is to b) ; as

a simple fraction, integer decimal fraction or percentage." In simple

languages ratio is one number expressed in terms of another and can be

worked out by dividing one number into, other. For example if the current

assets of a firm on a given date are 5,00,000 and the current liabilities are


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Rs. 2,50,000, then the ratio of current assets to current liabilities will work

out' to be 5,00,000/2,50,000 or 2. Such type of ratio is called simple or pure

ratios.

A financial ratio is the relationship between two accounting figures

expressed mathematically. A ratio can also be expressed as percentage by

simply multiplying the ratio by 100. As in the above example, the ratio 2 x

100 or 200% or say current assets are 200% of current liabilities. It is also

expressed as a proportion for example ratio of current assets to current

liabilities is say, 500000 : 250000 or 2 : 1. Some analysts also express ratio

as a rate or time. For example, the ratio of stock turn-over is say

50,000/10,000 or 5 times which simply convey that the stock has been

turned over' 5 times. In the example given above current assets Rs. 5,00,000

and the current liabilities Rs. 2,50,000 we can say that the ratio is two times.

Thus the ratio of two figures 200 and 100 may be expressed in any of the

following ways:(a) 2: I (b) 2 (c) 2/1 (d) 2 to 1 (e) 200%

In all these cases the inferences is that the first figure is double, 200% or 2

times than that of the second.

Ratios provide clues to the financial position of concern. These are the

pointers or indicators of financial strength, position or weakness of an

enterprise. One can draw conclusion about the exact financial positions of a

concern with the help of ratios.

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interoperation of

financial statements. It is the process of establishing and interpreting various


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ratios for helping in making certain decision. However ratio analysis is not

an end in itself. It is only means of better understanding of financial strength

and weakness of a firm. Calculation of mere ratio does not serve any

purpose unless several appropriate ratios which can be calculated from the

information given in the financial statements, but the analyst has to select

the information given in the financial statements, but the analyst has to

select the appropriate and calculate only a few appropriate ratio from the

same keeping in mind the objective- of analysis. The ratios may be used as a

symptom like blood pressure, the pulse rate or the body temperature and

their interpretation depends upon the caliber and competence of the analyst.

The following are the four steps involved in the: ratio analysis:

1. Selection of relevant data from the financial statements depending upon

the objective of the analysis.

2. Calculation of appropriate ratio from the above data.

3. Comparison of the calculated ratio with the ratio of the same firm in the

past, or the ratio developed from projected financial statements or the ratio

of the some other firms or the comparison with the ratio of the industry towhich the firm belongs.

4. Interpretation of ratios.

OBJECTIVES OF RATIO ANALYSIS

To calculate the various ratios of the organization.

To know the financial strength of the enterprise


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INTERPRETATION OF THE RATIOS

The interpretation of the ratio is an important factor. Though

calculation of ratios is also important but it is only a clerical task whereas

interpretation needs skill intelligence and foresightedness. The inherent

limitation of ratio analysis should be kept in mind while interpreting them.

The impact of factor such as price level changes change in accounting

policies window dressing etc. should also be kept in, mind when attempting

to interpret ratios.

A single ratio in itself does not convey much of the sense. To make

ratio useful they have to be further interpreted. For example say the current

ratio of 3: 1 does not convey any sense unless it is interpreted and

conclusion is drawn from it regarding the financial condition of the firm as

to whether it is very strong, good, questionable or poor. The interoperation

of the ratio can be made in the following ways:

SINGLE ABSOLUTE RATIO: - generally speaking one cannot draw anymeaningful conclusion when a single ratio is considered in isolation. But

single ratio may be studied in relation to certain rules of thumb which are

based upon well proven conventions as for example 2: 1 is considered to be

a good ratio for current assets to current liabilities.

GROUP OF RATIO :- ratio may be interpreted by calculating a group of

related ratio. A single ratio supported by the other related additional ratio

becomes more under stable and meaningful. For example the ratio of current

assets to current liabilities may be supported by the ratio of liquid assets to

liquid liabilities to draw more dependable conclusions.

HISTORICAL COMPARlSON: - one of the easiest and most popular

ways of evaluating the performance of the firm is to compare its present


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ratio with the past ratio called comparison overtime. When financial ratio is

compared over a period of time it gives an indication of the direction of

changes and reflects whether the firms performance and financial position

has improved deteriorated or remained constant over a period of time. But

while interpreting ratios from comparison over time one has to be careful

about the changes if any in the firm policies and accounting procedures.

PROJECT RATIO:- ratio can also be calculated for future standards based

upon the projected or Performa financial statements. These future ratios may

be taken as standards for comparison and the ratio calculated on actual

financial statements can be compared with the standard ratio to find out

variance if any such variance help in interpreting and taking corrective

action for improvement in future.

INTER-FIRM COMPARISON: - ratio of one firm can also be compared

with, the ratio of some other selected firms in the same industry at the same

point of time. This kind of comparison helps in evaluating relative financial

position and performance of the firm. But while making use of such

comparison one has to be very careful regarding the different accountingmethods policies and procedures adopted by different firms.

GUIDELINES OR PRECAUTIONS FOR USE RATIOS:

The calculation of ratio may not be difficult task but there use is not

easy. The information on which these are based the constraints of financial

statements objectives for using them the caliber of the analyst etc. ate

important factors which influence the use of ratios. Following guidance or

factors may be kept in mind while interpreting various ratios:

1. ACCURACY OF FINANCIAL STATEMENTS:


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The ratios are calculated from the data available in financial

statements. The reliability of ratio is linked to the accuracy of information in

these statements. Before calculating ratios one should see whether proper

concepts and conventions have been used for preparing financial statements

or not. These statements should also be properly audited by competent

auditors. The precautions will establish the reliability of data given in

financial statement.

2. OBJECTIVES OR PURPOSE OF ANALYSIS:

The type of ratio to be calculated will depend upon the purpose for

which these are required. If the purpose is to study current financial position

then ratios relating to current assets and current liability will be studied. The

purpose of user is also important for the analysis of ratio. A creditor, a

banker, an investor, a shareholder, all has different objects for studying

ratios. The purpose or object for which ratio is required to be studied should

always be kept in mind for studying various ratios: Different objects may

require the study of different ratios.

3. SELECTION OF RATIOS:Another precaution in ratio analysis is the proper selection of

appropriate ratios. The ratio should match the purpose for which these are

required Calculation of large number of ratio without determines their need

in the present context may confuse the things instead of solving them. Only

those ratios should be selected which can throw proper light on the matter to

be discussed.

4. USE OF STANDARDS:

The ratio will give an indication of financial position only when

discussed with reference to certain standards. Unless otherwise these ratio

compared with certain standards one will not be able to reach at conclusion.

These standard may be rules of thumb as in case of current ratio and acid-


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test may be industry standards, may be budget or projected ratios etc. the

comparison of calculated ratio with the standard will help the analyst in

forming his opinion about financial situation of concern.

5. CALIBER OF THE ANALYST:

The ratio is only the tools of analysis and their interpretation will

depend upon the caliber and competence of the analyst. He should be

familiar with various financial statements and the significance of changes

etc, a wrong interpretation may create havoc for the concern since wrong

conclusion may lead to wrong decision. The utility of ratios is linked to the

expertise of the analyst.

6. RATIO PROVIDE ONLY A BASE:

The ratio are only guidance for the analyst, he should not base his

decisions entirely on them. He should study any other relevant information,

situation in the concern; general economic environment, etc. before reaching

final conclusions. The study of ratio in isolation may not always prove

useful. A businessman will not afford a single wrong decision because if any

have far-reaching consequence. The interpreter should use the ratio as guideand may try to solicit any other relevant information, which helps in

reaching a correct decision.

USE AND SIGNIFICANCE OF RATIO ANALYSIS

The ratio is one of the most powerful tools if financial analysis. It is

used as a device to analyze and interpret the financial health of enterprise.

Just like a doctor examine his patient by recording his body temperature,

blood pressure etc. before making his conclusion regarding the illness and


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before giving his treatment a financial analyst analyses the financial

statements with various tools of analysis before commenting upon the

financial health or weakness of an enterprise. A ratio is known as a symptom

like blood pressure the pulse rate or the temperature of an individual. It is

with help of ratio that the financial statements can be analyzed more clearly

and decision made from such analysis.

Thus use of ratios is not confined to financial managers only. As

discussed earlier there are different parties interested in the ratio analysis for

knowing the financial position of a firm for different 'purpose. The supplier

pf goods on credit, banks, financial institution, investors, shareholders and

management all make use of ratio analysis as a tool in evaluating the

financial position and performance of a firm for granting credit, providing

loans or making investment in the firm. With the use of ratio analysis one

can measure the financial condition of a firm and can point out whether the

condition is strong, good, questionable or poor. The conclusion can also be

drawn as to whether the performance of the firm is improving ordeteriorating. Thus ratios have wide application and are of immense use

today.

MANAGING USES OF RATIO ANALYSIS

1. HELPS IN DECISION-MAKING:

Financial statements are prepared primarily for decision-making. But

the information provided in financial statements is not an end in itself and no


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meaningful conclusion can be drawn from these statements alone ratios.

Analysis helps in making decisions from the information providing in these

statements

2. HELPS IN FINANCIAL FORECASTING AND PLANNING

Ratio analysis is of much 4elp in financial forecasting and planning.

Planning is looking ahead and the ratio calculated for a number of years

work as a guide for the future. Meaningful conclusion can be drawn for

future from these ratios. Thus ratio analysis helps in forecasting and

planning.

3. HELPS IN COMMUNICATION:

The financial strength and weakness of a firm are communicated in a

more easy and understandable manner by the use of ratios. The information

contained in the financial statements is conveyed in a meaningful manner to

the one for whom it is meant. Thus ratios help in communicating and

enhance the value of the financial statements.

Help in Co-ordination. Radio even help in co-ordinate, which is of

utmost importance in effective business management. Better communicationof efficiency and weakness of an enterprise results in better co-ordination in

the enterprise.

4. HELP TO CONTROL: -

Ratio analysis even helps in making effective control of the business.

Standard ratio can be based upon the Performa of financial statement and

variances of deviation. If any, can be found by comparing the actual with the

standard so as to take a corrective action at the right time. The weakness or

otherwise, if any, come to the knowledge of the management which help in

effective control of the business.

5. OTHER USES:


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These are so many other uses of the ratio analysis. It is an essential

part of the 'budgetary control and standard costing. Ratios are of immense

important in the analysis and interpretation of financial statement as they

bring the strength or weakness of a firm.

(B) 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 De the security

of his investment and then a return in the form of dividend or interest. For

the first purpose he will try to assess 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. Probability ratios, on the other

hand, will be useful to the investor in making up his mind whether present

financial position of the concern warrants further investment or not.

(C) 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 payment 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 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.

(D) UTILITY OF EMPLOYEES:

The employees are also interested in the financial position of the

concern especially profitability. Their wage increase and amount of fringe

benefits are related to the volume of profits earned by the concern. The


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employees make use of information available in financial statements.

Various profitability ratio relating to gross profit. Operating profit, net profit,

etc. enable employees to put forward their viewpoint for the increase of

wages and other benefits.

E) UTILITY OF GOVERNMENT

Government is interested to know the overall strength of the industry.

Various financial statement published by industrial units are used to

calculate ratios for determining short-term long-term and overall financial

position of concerns. Profitability indexes can also be prepared with the help

of ratios. Government may base its future policies on 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.

LIMITATIONS OF RATIO ANALYSISThe ratio analysis is one of the most powerful tools of financial

management. Though ratios are simple to calculate and easy to understand,

they suffer from some serious limitations:

1. LIMITED USE OF A SINGLE RATIO:

A single ratio usually does not convey much of a sense. To make a

better Interpretation a number of ratio have to be calculated which is likely

to confuse the analyst than help him in making a meaningful conclusion


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2. LACK OF ADEQUATE STANDARDS:

There are no well-accepted standards or rules of thumbs for all ratios,

which can be accept as norms. If renders interpretation of the ratio difficult.

3. INHERENT LIMITATION OF ACCOUNTING

Like financial statements ratios also suffer from the inherent weakness

of accounting records such as their historical nature, Ratios of them are not

necessarily true indicators of the- future.

4. CHANGE OF ACCOUNTING PROCEDURE:

Change in accounting procedure by a firm often makes ratio analysis

misleading. E.g. a change in valuation in methods of inventories, from FIFO

to LIFO increases the cost of sales and reduces considerably the value of

closing stock that make stock turnover ratio to be lucrative and an

unfavorable gross profit ratio.

5. WINDOW DRESSING:-Financial statements can easily be window dressed to present a better

picture of its financial and profitably position to outsiders. Hence one has to

be very careful in making a decision from ratio calculated from such

financial statements. But it may be very difficult for an outsider to know

about the window dressing made by firm.

6. PERSONAL BIAS:

Ratios are only means of financial analysis and not an end in itself f.

Ratio have to be interpreted and different people may be interpreted the

same ratio in different ways.


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RATIOS

1. CURRENT RATIO:

Current ratio may be defined as the relationship between current

assets and current Liabilities. This ratio also known as working capital ratio

is a measure of general liquidity and is most widely used to make the

analysis of a stort-term financial position or liquidity of a firm. It is

calculated by dividing the total of current assets by total of current liabilities.

Thus,

Current Ratio = Current Assets

------------------------------

Current Liabilities

Or Current Assets ; Current Liabilities

COMPONENTS OF CURRENT RATIO

Current assets Current Liabilities

1. Cash in Hand 10. Outstanding Expenses/Accrued

2. Cash at Bank expenses

3. Marketable Securities 11. Bills payble


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(Short-term)

4. Short-term investments 12. Sundry Creditors

5. Bills receivable 13. Short-term Advances

6. Sundry Debtors 14. Income-Tax Payble.

7. Inventory(Stock) 15. Dividents Payble

8. work-in-Process 16. Bank-overdraft (if not a permanent

9. Prepaid Expenses arrangement)

A high current ratio may not be favorable due to the following reasons:

(i) There may be slow moving stocks. The stocks will pile up due to poor

sale.

(ii) The figures of debtors may go up because debt collection may not

satisfactory.

(iii) The cash or bank balances may be lying idle because of insufficient

investment Opportunities.

On the other hand, low current ratio may be due to the following reasons:(i) There may not be sufficient funds to payoff liabilities.

(ii) The business may be trading beyond its capacity. The resouses may

not warrant the activities.

IMPORTANT FACTORS FOR REACHING A CONCLUSION

A number of factors should be taken into consideration before

reaching a conclusion about short-term financial position. Some of these

factors are as such:

(a) Type of Business


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(b) Types of Products

(c) Reputation of the Concern

(d) Seasonal Influence

(e) Type of Assets Available

2. DEBT EQUITY RATIO:

This ratio indicates the relative proportions of debt and euity in

financing the assets of the firm. Thus the ratio shows the relationship

between external equities and internal equities.

D/E = Outsider's Fund

-------------------------------

Shareholders Funds

OUTSIDERS FUND OR EXTERNAL EQUITIES: includes all the long

term and short term debts such as Debentures, Mortgage, Loan, Bank Loan,Public Deposits & CL.

SHAREHOLDERS FUND OR INTERNAL EQUITIES: includes Equity

share capital, Preference, Share Capital, Reserves and credit Balance of P&L

A/C.

INTERPRETATION:-

The debt equity ratio an important financial analysis to appraise the

financial structure of a firm. The ratio is calculated to measure the extent to

which debt financing has been used in business


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A ratio of 1:1 may be usually considered to be satisfactory although

there is no rule or thumb.

A high D/E ratio is a danger sign for creditors. High D/E indicates that

claims or outsiders (Creditors) are greater than those of owners and diseases

margin of safety available to the creditors. Lower than I: I DIE ratio

indicates that more of the funds invested in the business are provided by the

owners.

3. DEBTORS TURNOVER RATIO:

A concern may sell goods on cash as well as on credit. Credit is one of

the important elements of income promotion. The volume of income can be

increased by following a liberal credit policy. But the effect of a liberal

credit policy may result in tying up substantiate funds, of a firm in the form

of advances (or receivables, i.e., advances plus bill receivables). Advances

are expected to be converted into cast with in a short period and are included

in current assets. Hence the liquidity position of a concern to pay its short-term obligations In time depends upon the quality of its advances.

Total Income

-----------------------

Average Advances

Total income- interest received, profits on sale/revolution or income earned

by way of dividend etc.

Average Advances - Opening Advances + Closing Advances

----------------------------------------------------------

2


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Advances include Bills purchased &discounted, Cash Credit, Overdrafts and

loans, Term loans.

INTERPRETATION:

Debtors velocity indicates the number of times the debtors are turned

over during a year. Generally, the higher the value of income turnover the

more efficient is the management of advances/income or more liquid are the

debtors. Similarly, low debtors turnover implies inefficient management of

advances/income and less liquid debtors. But a precaution is needed while

interpreting a very high debtors turnover ratio because a very high turnover

ratio may imply n firm's inability due to lack of resources to sell on credit

thereby losing sales and profits. There is no 'rule of thumb' which may be

used as a norm to interpret the ratio as it may be used as a norm to interpret

the ratio as it may be different from firm to firm, depending upon the nature

of business. This ratio should be compared with other firms doing similar

business and a trend may also be found to make a better interpretation of the

ratio.

4. PERCENTAGE OF PROFIT ON TOTAL ASSETS RATIO:

= Net Profit for the year

---------------------------------------- x 100


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Total Assets

Total Assets = Cash + Fixed Assets + Investments + Investments +

Advances

INTERPRETATION:-

The provides the percentage of net profit a firm is earning on its

investments in assets. This ratio provides the details of efficiency of a firm

i.e. how much profit it can earn with its assets. This ratio shows how much

are the total assets and to what extent profit is earned. A high percentage

means that the firm is from the profitability point of view. It shows that firm

can earn sufficient profits on the assets it has. These types of firms are

successful firms from long- term point of view and provide sufficient

returns.

5. PERCENTAGE OF INTEREST EXPANDED TO TOTAL

EXPENDITURE

= Interest expanded

---------------------------------------- x 100

Total Expenditure

Interest expended includes interest on deposits, interest on RBI/Inter

Bank Borrowings Interest on the other subordinate debt.

Total Expenditure includes interest expended, operating expenses and

other provisions & contingencies.


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INTERPRETATION:

This ratio indicates that what percentage from total expenditure

of a bank is spend on interest. The amount of interest paid by banks on

deposits or borrowings forms how much percentage of total expenditure.

Payment of interest is a regular obligation and hence.. The bank must be

aware what percentage it is actually spending on the interest it pays. This

ratio makes clear as to what % is spent on interest payment to total

expenditure. A high % indicates the debt of the bank is high and so is the

interest payment.

6. PERCENTAGE OF OPERATING EXPENCES TO TOTAL

EXPENDITURE :-

= Operating Expenses

---------------------------------------- x 100

Total Expenditure

Operating expenses- printing & stationary, advertisement & publicity,

Insurance, repairs, low charges, rent, taxes, lighting etc.

Total expenditure:- Interest expended, operating expense & other

contingencies.

INTERPRETATION: -

This ratio clearly brings out the percentage of operating expense to

total expenditure. Operating expense is an expense of day to day working.

To find out what percentage it forms of total expenditure is very essential


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how the bank is spending money for its day to day working. If it is found to

be high all necessary steps may be taken for the purpose.


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7. % NET PROFIT TO TOTAL INCOME:

= Net profit to total income

---------------------------------------- x 100

Total Expenditure

Total income includes the income earned from various sources. It

includes income from investments, pprofit on sale/revolution or income

earned by way of dividend etc.

INTERPRETATION:-

This ratio measures the margin of profits available on total income.

The higher the percentage, the better it is no ideal standard can be fixed but

it should be adequate to cover all the expenses. The ratio provides all the

useful details when compared to the previous period ratio. Important

conclusions can be drawn from this. The reasons for decline can be found

out.

8) DIVIDEND YIELD RATIO :-

Shareholders are the real owners of a company and they interested in

real sense in the earnings distributed and paid to them as dividends.

Therefore, dividend yield ratio is calculated to evaluate the relationship

between dividend per share paid and the market value of the share.

Divined Yield Ratio = Dividend per share

-----------------------------

Market value per share

Dividend per share = Dividend paid to Shareholders

-----------------------------

Number of shares


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12. EARNING PER SHARE( E.P.S.) :

This ratio measure the profit available to the equity shareholders on a

per share basis. All profits left after payment of tax and preference dividend

are available to equity shareholders. This ratio is calculated by dividing the

net profits available to equity shareholders by the number of equity shares

issued:

EARNING PER SHARE = Net Profit- Divided on Preference

shares

------------------------------------------------------

---------------

Number of Equity Shares

SIGNIFICANCE: This ratio is helpful in the determination of the market

price of the equity share of a company. The ratio is also helpful in estimating

the capacity of the company to declare dividends on equity shares.

13. DIVIDEND PER SHARE (D.P.S.):

Profits remaining after payment of tax and preference dividend are

available to equity shareholders. But all of these are not distributed among

them as dividend. Out of these profits, a portion is retained in the business

and the remaining is distributed among equity shareholders as dividend.

D.P.S is the dividend distributed to equity shareholders divided by the

number of equity shares:


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D.P.S. = Dividend Paid To Equity Shareholders

--------------------------------------------------- x 100

Number of equity shares

SWOT ANALYSIS

STRENGH

Strong base of retail customers.

Direct access marketing is their marketing agent

Processing is much quicker than its competitors.

Schemes

WEAKNESSES

Geographical location

Unaware customer

Introductory stage of networking in India

OPPORTUNITY

Branch expansion

Door step services

THREATS

Competitors are coming up with similar and more value added

services.

MAIN COMPETITORS

GE Money

Indus lnd

lDBI


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Some nationalized banks are also coming up with these facilities.

FINDINGS

1) HDFC BANK has achieved a retail deposit base of Rs.1796 crores in just

5 years of operations.

2) Interest of the shareholders remain uppermost in the board of directors

and has decided to maintain dividend of 14% for the year ended on 31st

march 2009.

3) It has largest clientele among new private sector banks across its 112

branches and extension counters.

4) It has brought state of the art banking within the reach of the customer

with benefits like

longer banking hours,

7 days week,

Fully computerized functioning, air conditioned.

And comfortable working environment.

5) It has made the concept of Anywhere, Any time banking a reality with

Remote customer terminal

Tele banking

Mobile banking

6) We have found that males are still more oriented towards financial

sectors and females are not yet actively participating in banking sectors.

7) We have found that middle aged customers are more inclined towards

bank.


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8) It can be concluded that customers mainly come with the reference of

other customers which clearly shows that existing customers are fully

satisfied with bank

services.

9) Mostly customers have found positive difference among HDFC

BANK and other banks. As 89% customers are satisfied and have given

positive response.


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RATIO ANALYSIS & INTERPRETATION:

1. Current Assets

Current Ratio = -------------------------------

Current Liabilities

Cash balances with RBI + Balances with other banks +

Government Securities

Current Ratio = ---------------------------------------------------------------------

B/P + Interest accrued + Unsecured Bonds + Deferred

tax

4059568+123492+110191592011 = ----------------------------------------------- = 5.8:1

932977+276723 + 1370000+208500

3227164+1768259 + 11389850

2012 = ----------------------------------------------- = 5.16:1

1339131 + 240805 +1370000+225300

INTERPRETATION:

The analysis shows that the short-term position of bank is sound. As

compared to ideal ratio 2: 1 both the years show high ratio. It shows that

in 2012 bank has improved its investment in govt. securities & reduced


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cash balances with RBI & the B/P of bank has increased. Which shows a

decrease trend in current ratio.

2. Debt equity ratio

Outsiders fund

Debt/equity = -----------------------------

Shareholders fund

Deposits + borrowing

D/E ratio = ------------------------------------------

Capital + Reserve & Surplus

1422824 +35896017

2011 = ----------------------------------------------- = 17.3:1

1050000 + 1095814

41368784 + 619610

2012 = ----------------------------------------------- = 17.2:1

1050000 + 1387336

INTERPRETATION: As compared to 2011, the debt equity ratio is

slightly improved. There is little increase in deposits but decrease in

borrowing maintain the ratio same as 2011.

Total income

DTR = --------------------------

Average Advances


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4882312

2011 = ------------------ = .29 times

17043040

4723589

2012 = ---------------------- = .22 times

20752944.5

INTERPRETATION:- This ratio in banking sector indicates the rate at

which the advances are collected. There is decreasing trend in this ratio

which indicates that there is an increase in advances as compared to increase

in total income and there is less recovery of advances.

4. PERCENTAGE OF PROFIT ON TOTAL ASSETS RATIO:

Net Profit for the year

= ------------------------------------- * 100

Total assets

318402

2011 = ------------------ * 100 = .74 %

42867278

370021

2012 = ---------------------- * 100 = .76 %

48394598


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INTERPRETATION: - As compared to 2011, the ratio is increased, it

shows that firm is earning sufficient profits from its assets. Hence bank can

provide sufficient returns to its shareholders.

5. PERCENTAGE OF INTEREST EXPANDED TO TOTAL

EXPENDITURE:

Interest expanded

= ---------------------------- * 100

Total Expenditure

2546103

2011 = ------------------ = 55.8 %

4563910

21181542012 = ------------------ = 48 .6 %

4353568

INTERPRETATION: - The ratio shows the decreasing trend which means

the debts in bank is decreasing so the interest payment. Which is good sign

for Bank's growth that bank is earning profit by its capital or assets rather

than debts.

6. PERCENTAGE OF OPERATING EXPENSES TO TOTAL

EXPENDITURE:


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Operating Expenses

= ---------------------------- * 100

Total Expenditure

1249820

2011 = ------------------ * 100 = 27.38 %

4563910

1576147

2012 = ------------------ * 100 = 36.2 %

4353568

INTERPRETATION: The ratio is increased from 2011 , this shows bank is

spending more in its day to day operation. Bank can increase its profits by

reducing its expenses.

7. % NET PROFIT TO TOTAL INCOME:

Net Profit

= ------------------------- * 100

Total income

318402

2011 = ------------------ * 100 = 6.52 %


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4882312

370021

2012 = ------------------ * 100 = 7.83 %

4723589

INTERPRETATION: - This year the % has increased that means the profit

to total income is increased. It shows that the profitability of the bank is

increasing.

Dividend per share

Dividend Yield Ratio = ----------------------------

Market Value per share

Dividend paid to shareholders

Dividend per share = -----------------------------------------Number of shares

136500000

D.P.S. 2011 = ------------------ = Rs. 1.3 per share

105000000

76995000

2012 = ------------------ = Rs 0.73 per share

105000000


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INTERPRETATION: - The ratio is declined as compare to previous year

because this year bank use its profits in making reserve rather than

distributing in shareholders.

1.3

Dividend yield ratio = 2011 ------------------- * 100= 6%

22

.73

2012= -----------------* 100= 2.6%

INTERPRETATION: - The ratio is decreasing in 2012, which is because

of lesser amount paid to shareholders.


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TREND ANALYSIS OF HDFC BANK

1 Deposits: means the debt of the bank, which it owns to other banks

as well as public. Banks pays a regular amount of interest on theses

deposits. Deposits can be saving bank deposits or term deposits orterm deposits or deposits can be from branches in India or abroad.

Deposits

Year Deposits

2006 132.68812007 17661011

2008 260773922009 304557322010 335357072011 358960172012 41368784

Taking 2006 as base tear

Year Deposits

2006 100

2007 133.7252008 197.4532009 230.6052010 253.9262011 271.802012 313.26


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0

50

100

150

200

250

300

350

1 2 3 4 5 6 7

Years

Deposits

Analysis : The above analysis shows that there was a regular increase in

deposits of HDFC Bank over a number of years. The detail show that therehas been a rose in saving bank deposits and term deposits considerably over

the year.

2006 2007 2008 2009 2010 2011 2012


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NET PROFIT :- These are the most important criteria because it is thoughthis we measure the overall profitability of an undertaking

Year Net profit (in 000s)

2006 3235272007 3241752008 3311432009 3482122010 3571942011 3184022012 370021

Taking 2006 as the base year

Year net profit (in 100s)2006 1002007 100.2502008 102.3542009 107.632010 110.4062011 98.41

2012 114.37


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90

95

100

105

110

115

120

1 2 3 4 5 6 7

Years

NetProfit

Analysis : The above analysis clearly brings out that profits are on rising

trend. This shows that bank is financially sound. It is able to cash profits on

its products and services it deals in.


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TOTAL ASSETS: These include both the current as well as fixed

assets of the firm. The cash balances investment, advances, other assets all

form a part of it.

Year Total assets (in 100s)2006 154902972007 211784042008 319483442009 373493272010 388287892011 423945982012 48394598


Year Total assets2006 1002007 136.7202008 206.2472009 241.114

2010 250.6652011 276.742012 312.41


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0

50

100

150

200

250

300

350

1 2 3 4 5 6 7

Years

TotalAsset

s

Analysis : There has been rise in the assets over the years. Thus it can be

said that HDFC Bank holds a large amount of total assets and has been a

regular rise in it over the last six years.


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ADVANCES

They are the assets of the company. Advances include the cash credit,

term loans offered by the banks. These can be secured or unsecured

advances.

Year Advances2006 51878282007 84230302008 130140392009 15064453

2010 161148302011 179712502012 23534639

Taking 2006 as base.

Year Advances2006 100

2007 162.3622008 250.8582009 290.3812010 310.6282011 346.412012 453.65


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0

50

100

150

200

250

300

350

400

450

500

1 2 3 4 5 6 7

Years

Advances

Analysis : The above analysis clearly bring out that there is continuous rise

in advances made by bank. The bank earn interest on these advances. Which

is positive indicator of the growth of the bank..


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INVESTMENT: These are the assets are the banking institution.

Investment made by the bank can be short as well as long term in nature.

Investment can be made by bank in form of shares or debentures etc.

Year Investment (in 100s)2006 67886592007 82257262008 129724502009 146382832010 137127412011 148491242012 15718412


Year Investment2006 1002007 121.1692008 191.0902009 215.6282010 201.995

2011 218.732012 231.53


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0

50

100

150

200

250

1 2 3 4 5 6 7

Years

Investmen

t

Analysis : The above analysis clearing brings out that the investments are on

continuos rise from 2007 to 2009 but 2010 shows decline as compared to

the previous year in the year 2010 a no. of shares have been sold and the

investment in debentures and bonds has decreased considerably.


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COMMON SIZE BALANCE SHEET

Particulars 2011 % 2012 Percentages

Fixed assets

Premises

Other fixed assetsCapitalAdvancesOther assetsInstallments

85114

15192993044701797125028419613829965

.198

3.54.7141.926.638.93

89936

1716641698052353463922700394698956

.185

3.54.14448.634.699.70

Total fixed assets 26552059 61.94 32380016 66.88Current Assets

Cash & Bank balance with RBIBalances with Bank

Government securities

40595681236492

11019159

9.472.88

25.71

32271641768259

11019159

6.663.65

22.76

Total Current Assets (RBI) 16315219 38.06 16014582 33.07

Total Assets (A+B) 42867278 100 48394598 100

Liabilities & Capital

Owners equityReserve & Surplus

10500001095814

2.442.56

10500001387336

2.162.86

Total (C) 2145814 5.00 2437336 5.02

Long Term debtsBorrowingDeposits

142282435896017

3.3283.74

61961041368784

1.2885.48

Total (D) 37318841 87.06 41988394 86.76

Current Liabilities &Provisions (E)

34032623 7.94 3968868 8.20

Total (C+D+E) 42867278 100 48394598 100


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INTERPRETATION

From the above analysis fixed assets has been increased, almost by 5% and

the current assets has been decreased on the liabilities side, They are almost

same with little difference that bring the overall satisfactory position.

COMPARATIVE PROFIT & LOSS ACCOUNT

For the year ended 31st march 2011 & 2012

Particulars 2009 2010 Increase/

Decrease

% Increase /

Decrease

1. Income Interest earned

Other income

3533916

1348396

3399370

1324219

-134546

-24177

-3.80

-1.79

Total (A) 4882312 4723589 -158723 -3.25

2. Expenditure Interest

expended Operating

expenses Provision &

contingencies

2546103

1249820

767987

2118154

1576147

659267

-427649

326327

108720

-16.80

26.10

14.15

Total (B) 4563910 4353568 -210342 -4.60

Net profit for the year

(A-B)

318402 370021 51619 16.21

INTERPRETATION

This indicates there is a decrease in income due the increase in the operating

Mba Finance Citi Financial

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