A STUDY ON FINANCIAL STATEMENT ANALYSIS AT TELEDNA COMMUNICATIONS PVT LTD,BANGALORE

A STUDY ON FINANCIAL STATEMENT ANALYSIS AT TELEDNA COMMUNICATIONS PVT LTD,BANGALORE

CHAPTER-1 INDUSTRY ANALYSISToday the Indian Telecommunications network with overall 375 Million subscribers is the second largest network in the world after China. India is also the fastest growing telecom market in the world with an addition of 9- 10 million monthly subscribers. The Teledensity of the Country has increased from77.58 at the end of December 2014 to 78.16 at the end ofJanuary showing a stupendous annual growth of about 50%, one of the highest in any sector of the Indian Economy. The Department of Telecommunications has been able to provide state of the art world-class infrastructure at globally competitive tariffs and reduce the digital divide by extending connectivity to the unconnected areas. India has emerged as a major base for the telecom industry worldwide. Thus Indian telecom sector has come a long way in achieving its dream of providing affordable and effective communication facilities to Indian citizens. As a result common man today has access to this most needed facility. The reform measures coupled with the proactive policies of the Department of Telecommunications have resulted in an unprecedented growth of the telecom sector.

The thrust areas presently are:

1. Building a modern and efficient infrastructure ensuring greater competitive environment

2. with equal opportunities and level playing field for all stakeholders.

3. Strengthening research and development for manufacturing, Value added Services

4. Efficient and transparent spectrum management.

5. To accelerate broadband penetration.

6. Universal service to all uncovered areas including rural areas.

7. Enabling Indian telecom companies to become global players.

Recent things to watch in Indian telecom sector are:

1. 4G and BWA auctions

2. MVNO

3. Mobile Number Portability

4. New Policy for Value Added Services

5. Market dynamics once the recently licensed new telecom operators start rolling Out

6. Services.

7. Increased thrust on telecom equipment manufacturing and exports.

8. Reduction in Mobile Termination Charges as the cost per line has substantially Reduced

9. Due to technological advancement and increase in traffic.

Growth in telecom sector

India's telecom sector has shown massive upsurge in the recent years in all respects of industrial growth. From the status of state monopoly with very limited growth, it has grown in to the level of an industry. Telephone, whether fixed landline or mobile, is an essential necessity for the people of India. This changing phase was possible with the economic development that followed the process of structuring the economy in the capitalistic pattern. Removal of restrictions on foreign capital investment and industrial de-licensing resulted in fast growth of this sector. At present the country's telecom industry has achieved a growth rate of 21 per cent.

Till 2000, though cellular phone companies were present, fixed landlines were popular in most parts of the country, with government of India setting up the Telecom Regulatory Authority of India, and measures to allow new players country, the featured products in the segment came in to prominence. Today the industry offers services such as fixed landlines, WLL, GSM mobiles, CDMA and IP services to customers. Increasing competition among players allowed the prices drastically down by making the mobile facility accessible to the urban middle class population, and to a great extend in the rural areas. Major players in the sector are BSNL, MTNL, Bharti Teleservices, Hutchison Essar, BPL, Tata, Idea, etc. With the growth of telecom services, telecom equipment and accessories manufacturing has also grown in a big way.

Indian Telecom sector, like any other industrial sector in the country, has gone through many phases of growth and diversification. Starting from telegraphic and telephonic systems in the 19th century, the field of telephonic communication has now expanded to make use of advanced technologies like GSM, CDMA, and WLL to the great 3G Technology in mobile phones. Day by day, both the Public Players and the Private Players are putting in their resources and efforts to improve the telecommunication technology so as to give the maximum to their customers.

Indian Mobile Subscriber Growth 2000 -2014 :With growth innumbers, our Telecom Industry has also evolved. We now have 4G too. Mobile internet speeds are increasing, and more and more people are now coming on the Internet thanks to growth in Smartphones.

We present to you the chart that shows this growth from 3.1 million mobile users to 920 million in 2014.

TELECOM SUBSCRIBER BASE IN INDIA

History and Growth:

The history of Indian telecom can be started with the introduction oftelegraph. The Indian postal and telecom sectors are one of the worlds oldest. In 1850, the first experimental electric telegraph line was started betweenCalcuttaandDiamond Harbour. In 1851, it was opened for the use of theBritish East India Company. The Posts and Telegraphs department occupied a small corner of the Public Works DepartmentIndian telecommunication Industry is one of the fastest growing telecom markets in the world. The Industry has grown over twenty times in just ten years, from under 37 million subscribers in the year 2001 to over 846 million subscribers in the year 2011.India has theworld's second-largestmobile phone user base with over 929.37 million users as of May 2012.It has theworld's third-largestInternet user-base with over 137 million as of June 2012.The two major reasons that have fuelled this growth are low tariffs coupled with falling handset prices.

Surprisingly, CDMA market has increased it market share upto 70% thanks to Reliance Communication. However, across the globe, CDMA has been losing out numbers to popular GSM technology, contrary to the scenario in India.

The other reason that has tremendously helped the telecom Industry is the regulatory changes and reforms that have been pushed for last 10 years by successive Indian governments. According to Telecom Regulatory Authority of India (TRAI) the rate of market expansion would increase with further regulatory and structural reforms. Even though the fixed line market share has been dropping consistently, the overall (fixed and mobile) subscribers have risen to more than 200 million by first quarter of 2007. The telecom reforms have allowed the foreign telecommunication companies to enter Indian market which has still got huge potential. International telecom companies like Vodafone have made entry into Indian market in a big way.

Further developments and milestones

Pre-1902 Cable telegraph

1902 Firstwireless telegraphstation established betweenSagar IslandandSandhead.

1907 First Central Battery of telephones introduced inKanpur.

19131914 First Automatic Exchange installed inShimla.

1927 Radio-telegraph system between the UK and India, withImperial Wireless Chainbeam stations atKhadkiandDaund. Inaugurated byLord Irwinon 23 July by exchanging greetings withKing George V.

1933 Radiotelephonesystem inaugurated between the UK and India.

1953 12 channel carrier system introduced.

1960 Firstsubscriber trunk dialingroute commissioned betweenLucknowandKanpur.[citation needed]

1975 FirstPCMsystem commissioned betweenMumbaiCity andAndheritelephone exchanges.

1976 Firstdigitalmicrowavejunction.

1979 Firstoptical fibresystem for local junction commissioned atPune.

1980 Firstsatellite earth stationfor domestic communications established atSikandarabad, [[Uttar Pradesh|U.P.] Noida Sector 62SCMS].

1983 FirstanalogueStored Programme Control exchange fortrunk linescommissioned at Mumbai.

1984 C-DOTestablished for indigenous development and production ofdigitalexchanges.

1995 Firstmobile telephoneservice started on non-commercial basis on 15 August 1995 inDelhi. 1995 Internet Introduced in India starting with laxmi nagar Delhi on 15 August 1995

The global telecommunication services market shrank by 0.2% in 2009 to reach a value of $1,217.8 billion. In 2014, the global telecommunication services market is forecast to have a value of $1,383.2 billion, an increase of 13.6% since 2009. The global telecommunication services market grew by 8% in 2009 to reach a volume of 3.9 billion subscribers. In 2014, the global telecommunication services market is forecast to have a volume of 4.9 billion subscribers, an increase of 25.1% since 2009.

Two telecom players dominate this market - BhartiAirtel with 22.74% market share and Idea Cellular along with other players like BSNL (Bharat Sanchar Nigam Limited) and AT&T. One segment of the market that has been puzzling is broadband Internet. Despite the manner in which the countrys Internet market has been booming, Indias move into high-speed broadband Internet access has been distinctly slow. And, while there appears to be considerable enthusiasm amongst the population for the Internet itself, this has not been reflected in broadband subscription numbers.

According to a study by GSMA, it has been expected that Smartphones will account for two out of every three mobile connections globally by 2020 and India is all set to become the fourth largest Smartphone market.India is projected to have 213 million mobile internet users by June 2015, a 23 per cent rise over a six month period, according to Mobile Internet in India 2014 report. The broadband services user-base in India is expected to grow to 250 million connections by 2017, according to the UK-based GSM Association (GSMA).

The Ministry of Communications and Information Technology (MCIT) is has very aggressive plans to increase the pace of growth, targeting 250 million telephone subscribers by end-2007 and 500 million by 2010. Most of the expansion in subscribers is set to occur in rural India. Indias rural telephone density has been languishing at around 1.9%. So, if 70% of total population is rural, the scope for growth in this Industry is unprecedented.

Since 2012, the growth seems to have been stagnated, but the real reason is that TRAI has taken steps to weed out inactive numbers from the system. Many mobile operators lost significant amount of numbers. So while new subscribers were being added, nearly equal numbers went out of the system and hence the stagnation. Earlier the active subscriberratio was nearly 60% which has now reached to nearly 85 percent.

Composition of telephone subscribers in India

The wireless segment (96.9 per cent of total telephone subscriptions) dominates the market, while the wire line segment accounts for the rest.

3. MARKET PLAYERS

Key Players

As on 31st October, 2014, the private access service providers held 90.55% market share of the wireless subscribers whereas BSNL and MTNL, the two PSU access service providers, held only 9.45% market share. Wireline subscriber base declined from 27.41 million at the end of September, 2014 to 27.28 million at the end of October, 2014. Net reduction in the wire line subscriber base was 0.12 million at the monthly decline rate of 0.45%. The share of urban and rural subscribers in total wire line subscribers were 79.90% and 20.10% respectively at the end of October, 2014.

The Overall Wireline Tele-density decreased from 2.20 in September, 2014 to 2.18 in October, 2014, with Urban Wireline Tele-density and Rural Wireline Tele-density being 5.66 and 0.64 respectively. BSNL and MTNL, the two PSU access service providers, held 76.06% of the wireline market share. Wireless market share in terms of total subscribers in India -BhartiAirtel is the market leader, with a 22.7 per cent share of total subscription, followed by Vodafone (18.4 per cent share).

Government Initiatives

The government has fast-tracked reforms in the telecom sector and plans to clear the proposal allowing spectrum trading and sharing ahead of the year-end deadline as it wants to lift the business sentiment for the forthcoming airwave auction. Some of the other major initiatives taken by the government are as follows:

The Government of Uttar Pradesh (UP) has secured investment deals valued at Rs 5,000 crore (US$ 804.64 million) for setting up mobile manufacturing units in the state.

The Government of India plans to roll out free high-speed wi-fi in 2,500 cities and towns across the country over the next three years and the programme, involving an investment of up to Rs 7,000 crore (US$ 1.12 billion), will be implemented by state-owned Bharat Sanchar Nigam Ltd (BSNL).

Citizens of India are expected to get a minimum of 2 megabits per second (MBPS) Wi-Fi speed at every government owned service point such as railways stations, airports, bus stops, hospitals and all government departments that deal with the public on a daily basis.

The Union Cabinet of India has approved the largest ever telecom spectrum auction that is targeted to fetch at least Rs 64,840 crore (US$ 10.43 billion). The government will sell 380.75 megahertz (MHz) of second generation (2G) spectrum in three bandsthe premium 900 MHz, 1800 MHz and 800 MHz.

To speed up the national optical fibre network (NOFN) project, the Department of Telecommunications (DoT) has advised officials to use public buildings such as post offices, railway stations and schools.

The Government of Kerala has decided to allow mobile telecom service providers to set up towers on government land and buildings. This is the first time that a State Government has opened its own land, buildings and offices to mobile companies.

Road ahead

India will emerge as a leading player in the virtual world by having 700 million internet users of the 4.7 billion global users by 2025, as per a Microsoft report.With the governments favourable regulation policies and 4G services hitting the market, rapid growth is expected in the Indian telecommunication sector in the next few years. Also, with developments in this sector, services such as security and surveillance, remote monitoring of ATM machines, home automation, traffic management, retail, logistics and grid energy could eventually facilitate optimisation of resources. Even after achieving astounding growth over the past few years, Indian telecom market has still a huge untapped potential to grow further.

With a large population, India is yet to have complete access to telecommunications across the length and breadth of India. With overall tele-density in India still being 66.17% and rural tele-density at 31.22%, there is significant growth opportunity for the sector, especially in rural areas, especially with 3G and BWA yet to make significant inroads.

The future progress of telecom in India is very promising. The addition of over 18 million connections per month during 2010 puts the telecom sector on a strong footing. The target of 600 million telephones by the end of 11th five year plan has already been achieved in February, 2010.Rural tele-density target has been set at 40% by 2014. Industry estimates suggest that there is a potential to reach beyond one billion telephones in India by 2015.

According to industry estimates, the revenues of the Indian telecom industry are projected to reach US$ 45 billion by 2012, compared with US$ 33 billion in 2009. It has also been projected that the users for the broadband base are going to reach 100 million mark by 2014, particularly after the telecom companies roll out their 3G services, as per a research study conducted by Crisil.

Exchange Rate Used: INR 1 = US$ 0.016 as on March 24, 2015

Investment Policy

With daily increasing subscriber base, there have been a lot of investments and developments in the sector. The industry has attracted FDI worth US$ 16,994.68 million during the period April 2000 to January 2015, according to the data released by Department of Industrial Policy and Promotion (DIPP).

At present 74% to 100% FDI is permitted for various telecom services. 100% FDI is permitted in the area of telecom equipment manufacturing and provision of IT enabled services. This has made telecom one of major sectors attracting FDI inflows in India. For Basic and cellular, Unified Access Services, National / International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services - FDI up to 74% (including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters/ Investing Company) is permitted. FDI up to 49% is permitted under automatic route and beyond 49% by relevant FIPB guidelines.

For ISP (with gateways), end to end bandwidth and Radio Paging Service - FDI up to 74% is permitted subject to licensing and security requirements. Here also, FDI up to 49% is permitted under automatic route and beyond 49% by FIPB guidelines.

For ISP (without gateway), Infrastructure Providers providing dark fibre, right of way, duct space, Tower (Category-I), Electronic Mail and Voice Mail - FDI up to 100% is allowed subject to the conditions that such companies would divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. Again, FDI up to 49% is permitted under automatic route and beyond 49% by FIPB guidelines.For manufacture of Telecom Equipments - FDI up to 100% is allowed through automatic entry route.

Some of the major developments in the recent past are:

Sterlite Technologies Ltd has announced an annual seed fund of US$ 100,000 to strengthen Indias investments in broadband technology research, by investing in Indian start-ups, working on innovative broadband deployment technologies.

Maxx Mobilink plans to start production of mobile handsets at its Haridwar plant, beginning with assembling devices from April 2015. Maxx will invest over Rs 6 crore (US$ 965,615.81) initially in setting up the R&D laboratory.

Huawei Technologies has won two contracts worth a combined US$ 120 million from Bharti Airtel and Idea Cellular to upgrade their wire line networks.

Tata Communications has invested in acquiring capacity in Seabras-1, a submarine cable being developed between the US and Brazil, seeking to increase services in the Latin American region.

Bharti Airtel and IHS Holding have signed an agreement under which latter will acquire about 1,100 telecom towers across Zambia and Rwanda.

Ericsson has won a seven-year deal worth more than US$ 1 billion to manage the network of Reliance Communications across 11 service areas, making the Swedish telecom gear maker the only service provider to manage the pan-India network of a mobile phone operator.

PORTERS FIVE FORCES ANALYSIS ON TELECOM INDUSTRY

THREAT OF NEW ENTRANTS Ownership of telecom license

Finance THREAT OF SUSTITUTES Cable TV-direct lines, broadband services

POWER OF SUPPLIERS Less Power

Talented engineers & managers POWER OF BUYERS Increased choice-high bargaining power Switching costs- Individual &large business customers

RIVILARY AMONG EXISTING FIRMS WITHIN AN INDUSTRY Usage of phone ,competition is high Price Value added services Profitability low

CHAPTER II

COMPANY ANALYSIS

TELEDNA COMMUNICATIONS PRIVATE LIMITED

Details About Company

TELEDNA COMMUNICATIONS PRIVATE LIMITED is a private companyIn operation since 2001 with the vision of becoming the most responsive as well as themost respected provider of VAS Solutions globally. TeleDNA has helped and is helping many mobile service providers and enterprises to increase revenues with its advanced product suite.

TeleDNA product portfolio has highly scalable and robust platforms which can be deployed in Tier 1, Tier 2 or Tier 3 mobile operator networks With more than 65 product installations around the world,[4]TeleDNA systems are field proven and have almost all vendors network interfaces ready. As such, TeleDNA provides very fast roll-out and short time-to market to service providers.

With many firsts to its credit, TeleDNA as a unique Product company has raised to the standards of even replacing the competition and gaining about 50% market share in providing robust platforms to mobile operators in India. The robustness and scalability of the platforms has been demonstrated during peak with examples such as messaging platform handling more than 500 million messages every New Year.

Directors of Company

1. Ramganesh Iyer- B.Tech from IIT, Bombay, IIM, Ahmadabad.

2.Surya Mantha -Engineering degree from IIT Kanpur, MS from Virginia Tech, a PhD from the University ofUtah and an MBA from the William E. Simon School at the University of Rochester.

3. Venu Chittoory- Chartered Accountant.

4. Madan Galla-Madan has a MS in Computer Science from Western Kentucky University.

Company Name: Teledna Communications Private Limited

Industry: Telecommunications

Area served world wide

Head quarters Bangalore,india

CEO Udit shanker

Year of incorporation: 2001

Products Smart Messaging Platform, Mobile application distribution platform, Cell Broadcast Center, Location Based Services Access Platform, Teledna mobile application

Services Data Vas technology Provider

Website: www.teledna.com

Company Address: AMR Tech park Bommanahalli Bangalore, Karnataka

MANAGEMENT TEAM1. UDIT SHANKER chief Executive Officer2. ASHISH KATHURIA Chief Sales Officer 3. V.SWAMINATHAN Chief Financial Officer 4. ANAND KUMAR H VP Engineering and Global Delivery Nature of the Company:TeleDNA is one of the Mobile VAS (Value Added Services) companies, which develops and markets the VAS Infrastructure products like SMSC, MMSC, CBC, and SDP along with an Innovative VAS Application Platform, which is named as mZone. It has its centre in Bangalore, India with its sales and support centers in US and other parts of the world.

It provides end-to-end integration and customization through the use of various technologies to serve its clients across the globe. TeleDNAs unique A1 (All in One) messaging VAS Infrastructure Platform is designed and developed to ensure savings on operational costs with features like Highest TPS to foot Print Ratio, Centralized Anti Spamming and Geo Redundancy.TeleDNAs VAS Application Platform provides a variety of applications to Mobile Operators for VAS revenues. TeleDNA provides Managed Services to enhance VAS revenues for Operators by increasing the bottom lines for the operators.Cell Broadcast System is emerging as an important broadcast medium for emergency alerts worldwide. Disaster management agencies are debating on the possibility of using social medium for emergency alerts, Smart phones are making this possible.Cell Broadcast System has made it possible for the agencies to make announcement to millions of citizens in seconds.As per GSMA, there will be more than 200 Live LTE Networks in over 70 countries by end of 2015. Its crucial to have the VAS product

Industry Classification and segment DescriptionBasic Definition of a M-VAS:Value Added Service (VAS) in telecommunication industry refers to non-coreservices, the core or basic services being standard voice calls and fax transmission including bearer services.The value added services are characterized as under: Not a form of core or basic service but adds value in total service offering. Stands alone in terms of profitability and also stimulates incremental demand for core or basic services. Can sometimes be provided as stand alone. Do not cannibalize core or basic service. Can be add-on to core or basic service and as such can be sold at premium price. May provide operational synergy with core or basic services.Note: A value added service may demonstrate one or more of these characteristics and not necessarily all of them. In some cases, the value added service becomes so closely integrated with the basic offering that neither the user nor the provider acknowledge or realize the difference. A classic example is of P2P SMS.

The current Mobile VAS industry being expected to touch Rs 16520 crore by the end of 2010 from the level of Rs 9700 crore in 2008. (According to Gartner Report). M-VAS industry is currently increasing with 12.5% CAGR in India. platform ready for migration to the next generation network.

MVAS industry is attracting wireless operators, handset manufacturers, content developers, game makers and music, gaming, SMS based contests and streaming audio & video.

Telecom Industry is contributing 2.7% in GDP of India. (According to Financial report 2009).

M-VAS is contributing 13% to the revenue of telecom. ( for FY 2009). Currently SMS & CRBT is contributing 55% & 26% respectively to the total M-VAS revenue.

Currently the revenue sharing between Telco & M-VAS companies is 70:30.

PILLARS OF M-VAS:

Pillars of M-VAS defines the basic structure upon which the M-VAS is depend on. It has four main structures as: Technology. Access Device. Infrastructure. Content

The modes that are available to the end users for the growth of M-VAS. There are basically five types of Access Modes that are: SMS with 49% Market share. IVR with 40% Market share. GPRS / WAP with 8% Market share. USSD with 3% Market share. MMS with < 1% Market share. Note: The above percentages shows the Market share of access modes only

VAS Industry Classification:Broadly the whole Mobile VAS Market is divided into three main segments: Infotainment. Entertainment. M-Commerce or Mobile payment. Infotainment: These services are characterized by the useful information it provides to the end user. The user interest comes in from the personal component and relevance of the content. Apart from mobile, alternate modes are available to access Information VAS like Newspaper, TV, and Internet. E.g. of Info VAS is information on movie tickets, news, banking account etc. They also include user request for information on other product categories like real-estate, education, stock updates, etc.Example of Infotainment: SMS marketing. Short Code. Long Code or Virtual Number.Entertainment: The key differentiating factor of Entertainment VAS is the mass appeal it generates. These provide entertainment for leisure time usage. These not only generate heavy volume (owing to its mass appeal) but also heavy usage. An example of these kinds of services is Jokes, Bollywood Ringtones, CRBT (Caller Ring Back Tone) and games.These services continue to be popular and have been key revenue generators for the Indian mobile VAS market. This is a high value MVAS and will continue to show growth. Other popular Entertainment VAS driving the market are dating and chatting services.The service was first introduced 2 years back and is now being offered by all the operators. This service is not only growing fast but also witnessing less churn as compared to other MVAS. Owing to its sticky nature, it requires comparatively less marketing efforts and cost.Entertainment VAS has the potential to remain a key contributor to Mobile VAS industry. To sustain the MVAS growth, it is the responsibility of the industry to keep discovering/innovating killer applications like CRBT (Caller Ring Back Tone) at regular intervals.

M-Commerce or Mobile payment:These are the services which involve some transaction using the mobile phone.Example: Buying movie tickets using mobile phone or transfer of money from one bank account to the other.These can broadly be classified into 2 types: Mobile banking. Mobile payments. Almost all the operators are conducting pilot exercises for mCommerce services using different access modes like GPRS, USSD, STK, etc. A big boost to mcommerce has come from the RBI which recently came out with some guidelines. M-Commerce penetration continues to be small but awareness is increasing Operators are betting on technologies like USSD to make the service handset agnostic. The current marketing focus is primarily on mobile bill payment and m-banking Industry is betting on tripling number of m-Commerce users within this year.

RATIO ANALYSIS

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account.

Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a companys financial statements. The level and historical trends of these ratios can be used to make inferences about a companys financial condition, its operations and attractiveness as an investment. The information in the statements is used by

Trade creditors, to identify the firms ability to meet their claims i.e. Liquidity position of the company.

Investors, to know about the present and future profitability of the company and its financial structure.

Management, in every aspect of the financial analysis. It is the Responsibility of the management to maintain sound financial condition in the company.

RATIO ANALYSIS

The term Ratio refers to the numerical and quantitative relationship between two items or variables. This relationship can be exposed as

Percentages

Fractions

Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to Interpret the financial statements. So that the strengths and weaknesses of a Firm, as well as its historical performance and current financial condition can Be determined. Ratio reflects a quantitative relationship helps to form a Quantitative judgment.

STEPS IN RATIO ANALYSIS

The first task of the financial analysis is to select the information relevant to the decision under consideration from the statements and calculates appropriate ratios.

To compare the calculated ratios with the ratios of the same firm relating to the pas6t or with the industry ratios. It facilitates in assessing success or failure of the firm.

Third step is to interpretation, drawing of inferences and report writing conclusions are drawn after comparison in the shape of report or recommended courses of action.BASIS OR STANDARDS OF COMPARISONRatios are relative figures reflecting the relation between variables. They enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool of financial analysis involves the comparison with related facts. This is the basis of ratio analysis. The basis of ratio analysis is of four types. Past ratios, calculated from past financial statements of the firm.

Competitors ratio, of the some most progressive and successful competitor firm at the same point of time. Industry ratio, the industry ratios to which the firm belongs to Projected ratios, ratios of the future developed from the projected or pro forma financial statementsNATURE OF RATIO ANALYSISRatio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. It is only a means of understanding of financial strengths and weaknesses of a firm. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios. The following are the four steps involved in the ratio analysis.

Selection of relevant data from the financial statements depending upon the objective of the analysis. Calculation of appropriate ratios from the above data. Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparison with ratios of the industry to which the firm belongs.INTERPRETATION OF THE RATIOSThe interpretation of ratios is an important factor. The inherent limitations of ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes, change in accounting policies, window dressing etc., should also be kept in mind when attempting to interpret ratios. The interpretation of ratios can be made in the following ways. Single absolute ratio Group of ratios Historical comparison Inter-firm comparison Projected ratios

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOSThe calculation of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios are Accuracy of financial statements Objective or purpose of analysis Selection of ratios Use of standards Caliber of the analysisIMPORTANCE OF RATIO ANALYSIS Aid to measure general efficiency Aid to measure financial solvency Aid in forecasting and planning Facilitate decision making Aid in corrective action Aid in intra-firm comparison Act as a good communication Evaluation of efficiency Effective tool

LIMITATIONS OF RATIO ANALYSIS Differences in definitions Limitations of accounting records Lack of proper standards No allowances for price level changes Changes in accounting procedures Quantitative factors are ignored Limited use of single ratio Background is over looked Limited use Personal bias

CLASSIFICATIONS OF RATIOSThe use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. Various accounting ratios can be classified as follows:1. Traditional Classification2. Functional Classification3. Significance ratios

1. Traditional ClassificationIt includes the following: Balance sheet (or) position statement ratio: They deal with the relationship between two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items must, however, pertain to the same balance sheet. Profit & loss account (or) revenue statement ratios: These ratios deal with the relationship between two profit & loss account items, e.g. the ratio of gross profit to sales etc., Composite (or) inter statement ratios: These ratios exhibit the relation between a profit & loss account or income statement item and a balance sheet items, e.g. stock turnover ratio, or the ratio of total assets to sales.

2. Functional Classification

These include liquidity ratios, long term solvency and leverage ratios, activity ratios and profitability ratios.3. Significance ratios

Some ratios are important than others and the firm may classify them as primary and secondary ratios. The primary ratio is one, which is of the prime importance to a concern. The other ratios that support the primary ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratioM.S.RAMAIAH INSTITUTE OF MANAGEMENT,BANGALOREPage 8