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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
Taking 2006 as the base year
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
Taking 2006 as the base year
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