MRp Chapter 4

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Chapter 4

Introduction of

Financial statement &

Its analysis


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4.1 INTRODUCTION

The position of finance in business can be match with the position of blood in the human

Body. Finance is the life blood of the business. Finance, today is not only limited up toFunction that circulate business but also extended its boundaries. Today success or failure of

Any business concerned heavily depends upon how effective finance management a firm has.

It is the portfolio that gives maximum return at minimum cost. Further different parties, both

Inside and outside of the firm are interested in financial position of firm and fixed interval

They often evaluate financial position by assessing financial statement of firm.

To understand the financial performance & condition of a firm, its sta!eholders loo! at three

Financial statement, vi" the Balance sheet, #rofit & $oss A%c & the sources & uses of funds

tatement. The Balance sheet showed the financial position of the business at a given point of

Time. The p & $ A%' reflects the financial performance of the firm over a period of time. For

The purpose of ta!ing decision by shareholders, creditors, & other persons regarding their

Individual matters it is necessary for them to analy"e various financial statements.

The financial Analysis is a process of evaluating the relationship between component parts of

financial statement to obtain a better understanding of the firms position & performance. The

First step is to select the information relevant to the decision under consideration from the

Total information contained in financial statement. The second step is to arrange the

Information in a way to highlight significant relationship. The final step is interpretation &

(rawing of conclusion. The basic limitation of the Traditional financial statement comprises

The Balance sheet & #& $ A%' is that they do not give all the information related to financial

)peration of the firm.

There are total *+ companies in atch industry. #erforming financial analysis with all is

(ifficult. -ence, we have done financial analysis of some of the companies based on selected

'riteria. To scrutini"e the companies, we have gone for filteration through 'apitalineoftware,

The results of this filteration is presented in the following table

tage of Filteration filteration Base esult

tage / atch 'ompany *+

tage * ales 0 ** 'r. +


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tage 1 2et #rofit03/ $a!h 4

tage 3 5#0 s. /.6/ 6

Financial analysis has done on the basis of certain criteria. I have selected three companies in

Indian mar!et that is IT, )pal luxury and 7(($ $td. This 3 company is selected on3

criteria that are ales, 2et profit and 5arning per share.

This chapter deals ith the folloin! issues related to research study

O"#ecti$es of Financial %nalysis

The aim of the pro8ect is to study wor!ing procedure and financial analysis of AT'-

I2(9T:. The tudy will highlight the following ob8ective.

tudy the ratio analysis of atch industry.

tudy the cash flow statement

'ommon si"e statement

4. FIN%NCI%' %N%'()I) & T*C+NI,U*).

As stated earlier success or failure of any firm heavily depends on its financial management.

The function of financial management is to manage the inflow and outflow of firm in such a

way so that firm can carry out its ob8ective easily. For earning out the ob8ective management

also have to be familiar with the financial position of firm time by time. o for !nowing of

financial position management has to go for financial analysis. ;anagement can analy"e

firms financial position by evaluating and analy"ing financial statement of the firm. -ere we

define some techni


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4..1 Ratio %nalysis

Introduction-

atio, broadly spea!ing, is the numerical relationship between to numbers, and hence

atio analysis of statement stands for the process of determining and presenting the

elationship of items and groups of items in the statement

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

a device to analysis and interpret the financial statements can be analy"e more clearly

and decision made from such analysis. A ratio can be expressed in three different ways.

The use of ratio is not confined to financial manager only. There are different parties in

atio analysis for !nowing the financial position of the firm for different purposes. The

upplier of goods on credit, ban!s, financial institution, investors, shareholders and

;anagement ma!e use of ratio analysis as a tool in evaluating the financial position and

#erformance of a firm for granting credit, providing loans for ma!ing investments in the

Firm. Thus, ratios have wide applications and are of immergence use today.

ummary of atio=>

*. $i


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4../ 'imitations of Ratio %nalysis-

(espite usefulness, financial ratio analysis has some disadvantages. ome !ey demerits offinancial ratio analysis are=

*. (ifferent companies operate in different industries each having different environmental

conditions such as regulation, mar!et structure, etc. uch factors are so significant that a

comparison of two companies from different industries might be misleading.

1. Financial accounting information is affected by estimates and assumptions. Accounting

standards allow different accounting policies, which impairs comparability and henceratio analysis is less useful in such situations.

3. atio analysis explains relationships between past information while users are more

concerned about current and future information.


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'i0uidity ratio-

4..1.1 Current ratio-

It establishes the relationship between 'urrent Assets & 'urrent $iabilities. It attempts to

;easure the ability of a firm to meet its current obligations

'urrent Assets

'urrent atio ? >>>>>>>>>>>>>>>>>>>>>>>>

'urrent $iabilities

:ear IT 7(($ TI;5@ TITA2 A5A5

1/*4 3.+3 /.C* /.D1 *.+1 *.E4

1/*6 6.14 /.D4 /.CE *.6* *.DE

1/*3 D.+E /.D3 *.34 *.33 3

1/*1 C.*3 /.DD *.+4 *.1D 3.16

1/** *6.4E /.C+ *.E1 *.1C 6.+6


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2011 2012 2013 2014 20150

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5 4.64

3.243

1.87 1.75

Current Ratio

Year

Axis Title

AVERAGE

Interpretation-

According to accounting principle, a current ratio is supported to be an ideal ratio.

It means that current assets of a business should, at twice of its current liabilities. The higher

ratio indicates the better li>>>>>>>>>>>>>>>>>>>

'urrent $iability


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4..1./

De"t

*0uity

Ratio-

'on!

term de"t

)hareholders fund

De"te0uity ratio?

:5A IT 7(($ TI;5@ TITA2 A5A5

1/*4 / *.** / /.*+ /.+61/*6 / *.*D /.CD /.*D /.ED

1/*3 / *./4 /.*D / /.+1

1/*1 / /.D+ /./+ /./3 /.31

1/** / /.DC / /./D /.6C


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Interpretation-

This ratio

shows the

ratio of

borrowed

to owned

funds of

the company.The -igher (ebt 5


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The higher the fixed assets turnover ratio, more effective the company investment in net

property,

plant, and

e


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2011 2012 2013 2014 20150

1

2

3

4

5

6

5.17

4.83

3.59 3.85

4.5

Inventory Turnover Ratio

Series 3

Axis Title

AVERAGE

Interpretation -

In previous year the ratio will lower that is 4.*E and 3.4C time , but it is (ecrease from year

1/** to 1/*3 it is indicate that high movement of inventory. But year 1/*6 to 1/*4 ratio will be

low that 3.D4 and 6.4 times in a past year, so it represent sound efficiency of the company buying

and selling its product.


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4..1.5 De"tor turno$er Ratio-

Credit sales

De"tors

Interpretation -

This ratio is decreasing. It is lower in 1/** & 1/*3 i.e. *C.41 to *C.3/ times. This ratio indicates

the speed with which debtors amount receivable are being collected. In year 1/*4 the ratio more

effective in company. In current year the ratio will be 1*.6* times. o, we can say that company

is able to turnover its debtors *C.3 times in a year which is prompt. There are a more efforts for

the same previous year. o, finally good for company.

The reason behind this is following a strict collection or credit policy because to increase in sales

and the increase in debtors is low.

De"tors turno$er ratio?

:5A IT 7(($ TI;5@ TITA2 A5A5

1/*4 4.C1 E.1E 1.* E/.34 1*.6*

1/*6 +.34 +.4C *.DE +C.3D 1*./61/*3 E.+4 4.+ *.4 +1.66 *C.3/

1/*1 4./D 4.C1 1.*3 +6.D1 *C.6C

1/** +.3 4.D6 1.44 +3.6 *C.41


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4..1.6. Interest Co$er Ratio-

*7IT

Interest

*2penses

2011 2012 2013 2014 20150

10

20

30

40

50

60

70

60.2

35.5

50.3

57.4

30.46

Interest Cover Ratio

YEAR

Axis Title

AVERAGE

Interpretation-

This Interest 'overage atio indicates how many times the interest charges are covered by the

profits available to pay interest charges. This ratio measures the margin of safety for long>term

Interest Co$er ratio?

:5A IT 7(($ TI;5@ TITA2 A5A51/*4 */C.33 1.1C >3.D+ *6./C 3/.6+

1/*6 13C.4 *.D1 >14.D* *1.++ 4E./6

1/*3 1*E.4 *./4 >3D.1* 1/.DE 4/.3/

1/*1 ***.D+ 3.C4 + 1/.*D 34.4/

1/** C3 1.D+ *1+.4E *D.34 +/.1/


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lenders. This higher the ratio, more secure the lenders is in respect of payment of interest

regularly. If profit 8ust e

MRp Chapter 4

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