A SUMMER TRAINING REPORT ON

CREATIVE ANALYSIS OF FINANCIAL REPORT

SUBMITTED TO N.R.INSTITUTE OF BUSINESS MANAGEMENT GUJARAT UNIVERSITY AHMEDABAD SUBMITTED BY PRANAY SHAH

Preface
During my training at PUNYAM MANAGEMENT PVT.LTD., I observed that the practical training has a great importance to get familiar with the industrial environment because it is very essential to import a practical knowledge along with a theoretical knowledge provide in the four wall of the class room. In objective behind the industrial training in the summer vacation is gain in depth knowledge about the specialized functional area of management i. e. Financial Management. During the training period at PUNYAM MANAGEMENT PVT. LTD. I learn many things which one are necessary for being a student of Financial Management. Training provided me a comprehensive & analytical study of industrial environment of the organisation. My heartly but wishes are always with the company for its bright future.

Acknowledgement
I would like to take the opportunity to express my profound thanks to and gratitude to my guide respected Mr. Devang Jhaveri (MD, PUNYAM MANAGEMENT PVT. LTD.) For his unceasing effort,

encouragement, help and valuable guidance at every step which has contributed the most towards the success of this project. I am also thankful to staff of PUNYAM MANAGEMENT to for giving their full support and providing me necessary direction for the various topics related to the project.

Project student Pranay Shah

Executive Summary
Today in the global market reputation and recognition of the business is must, because competition of the business not only in country but also internationally. The prime objective of this CREATIVE ANALYSIS is to improve the creativity of the organization. Doing this project I am getting the knowledge of the banking system. For this creative analysis there are different types of analysis like internal analysis, external analysis, trend analysis, ratio analysis and cash flow analysis. I am using the ratio analysis for my project because it is used for both internal and external users can understand that how the company performs for the year. So I can conclude that proper education and direction with benefits of analysis can be helpful for improve the performance of the organization.

TABLE OF CONTENT
ORGANAIZATION OVERVIEW............................................................................................................6 PUNYAM IS COMMITTED FOR........................................................................................................7 WHY MANY UNITS HAD TAKEN PUNYAM CONSULTANCY...................................................7 MANAGEMENT...................................................................................................................................7 TYPES OF FINANCIAL ANALYSIS ...................................................................................................10 Internal analysis...................................................................................................................................10 External analysis..................................................................................................................................10 TOOLS OF FINANCIAL ANALYSIS...................................................................................................11 Trend Analysis.....................................................................................................................................11 Ratio Analysis......................................................................................................................................11 1.Debt Equity Ratio..............................................................................................................................12 2.Shareholders Equity Ratio................................................................................................................13 3.Fixed Asset To Long Term Fund......................................................................................................14 4.Dividend Cover Ratio.......................................................................................................................15 5.Current Ratio.....................................................................................................................................15 6.Return On Capital Employed (ROCE) or Return on Investment (ROI)...........................................16 7.Earnings Per Share............................................................................................................................18 8.Cash Earnings Per Share...................................................................................................................18 9.Net Profit Margin..............................................................................................................................19 10.Net Profit Margin............................................................................................................................20 11.Return On Asset..............................................................................................................................21 12.Asset Turnover Ratio......................................................................................................................22 13.Bad Debt Turnover..........................................................................................................................23 14.Profit Per Employee........................................................................................................................24 15.Expenses Per Employee..................................................................................................................24 LIMITATION OF THE RATIO ANALYSIS.........................................................................................24

ORGANAIZATION OVERVIEW
PUNYAM (PMSPL) was born in November'1995 in the field of consultancy for ISO: 9000, other international standard, and Management areas and is growing and having total 250 clients for various types of certification and very rich experience in ISO and management consultancy. Group of 12 qualified engineers and management graduates (M.B.A) having experience of different type of industry and done ISO: 9001, 2000 and other international certifications for many clients. PUNYAM is having its office in Vapi for clients located near Vapi areas as well as Mumbai. At present Punyam is taking 9 new clients per month and completing their work within 3 months. After every 3 days average 1 client of Punyam is getting ISO: 9001, ISO: 14001, HACCP, CE Mark or any other certificate. All the Punyam clients have got ISO: 9000 series certificate from the leading certifying body like KPMG, BVQI, SGS, LLOYDS, DNV, TUV, U.L. LAB. Etc. Punyam is also working for vendor Developments & Auditing of companies in India on behalf of leading international customers. Their clients include capacity-wise No. 1 companies in Asia as well leading group of India like Reliance Industries Limited. Modern Terry Towels Limited. (Modern Group) Gujarat Telephone Cables Limited. (GTCL Group) Meghmani Group Of Companies Metrochem Industries Limited Shri Digvijay Cement Co. Ltd. Binani Cements Limited.

INDEXTb (Industrial Extension Bureau., Govt. of Gujarat Organization) Pay back of their consultancy is less than 2 months because of quantification of measurable goals and providing continual improvement platform.

PUNYAM IS COMMITTED FOR

Personal involvement & Commitment from first day. Optimum charges. To complete project in minimum period (Within three months). Professional approach To depute dedicated persons to suit client requirements. Hard work and get work done from others Strengthening clients by system establishment to make their house in proper manner Establishing system in finance and other departments for fund flow management. To establish strong internal control with the help of system.

WHY MANY UNITS HAD TAKEN PUNYAM CONSULTANCY

Practical suggestions recommended and having vast experience in the bigger as well as small companies. Experience in all kinds of industry like Engineering, Textile, Chemical, Machine manufacturer, Electronics, Electrical, Pharmaceuticals, etc. Professional approach and more than 12 highly qualified persons comprise Engineers / MBA from various disciplines with extensive experience are involved in their team.

MANAGEMENT
They are providing help to the clients in management areas listed below in four main ways.

 Arranging in-house training programs. Establishing system on project base. Profit sharing based on improvement achieved. They do total management activity. a) SYSTEM CERTIFICATION Reliance Industries Limited. ISO: 9001(Quality System) ISO: 14001 (Environment) HACCP (Food Safety) CE mark WHO GMP OHSAS:18001 BS 7799 ( Information Security Mgt. System) SA 8000 ( Social Accountability) NABL Accreditation (ISO/IEC 17025) b) STRATEGIC MANAGEMENT Competitive strategy Organizational leadership for 21st century Business Process Improvement (BPI) Six sigma c) MARKETING International marketing Market research Managing retailing Institutional marketing Product policy & new product management Franchisees management Customer based business strategies SWOT analysis and marketing plans

d) PURCHASE Sharpening negotiation skills Vendor development and evaluation Supply chain management System audit for vendors e) PRODUCTION AND QUALITY CONTROL Project management Process refinement Excellence in manufacturing Quality assurance establishment f) FINANCE Creative solutions to finance problems Advanced data analysis for financial decisions Strategic finance management Finance and costing for non financial staff g) HRD Human resource management Leadership & change management Key performance appraisal system (KPA) Creative solutions to HR problems Goal setting & performance management Bench marking

TYPES OF FINANCIAL ANALYSIS

The classification of analysis can be made on the basis of material used or according to the modern operational of the analysis. On the basis of material used financial analysis can be of two types.

Internal analysis
This analysis is done by those who have accessed the books of accounts and other information relating to the business concern. This type of analysis is meant for management purpose. This is conducted by executive employee of the firm as well as government agencies which have statutory control over such firm.

External analysis
This type of analysis is done by those who are outsider to the business. The outsiders are investors, creditors, government, etc. these persons mainly depends upon the published financial statements.

TOOLS OF FINANCIAL ANALYSIS

A no. of technique or devices is used to undertake financial analysis. The fundamental objectives of any analytical method are to simplify the data to more understandable terms. The following are the important tools of financial analysis: Comparative Financial Statements Trend Analysis Ratio Analysis Fund Flow Analysis Cash Flow Analysis

Trend Analysis
In trend analysis, trends of various financial parameters are observed and discussed.

Ratio Analysis
Ratio analysis is a very powerful analytical tool useful for measuring performance of an organization. The ratio analysis concentrates on the inter-relationship among the figures appearing in the aforementioned four financial statements. The ratio analysis helps the management to analyse the past performance of the firm and to make further projections. Ratio analysis allow interested parties like shareholders, investors, creditors, Government and analysis to make an evaluation of certain aspects of a firms performance. Ratio analysis is a process of comparison of one figure against another, which makes a ratio and the appraisal of the ratios to make proper analysis about the strengths and weaknesses of the firms operations. Ratio analysis is extremely helpful in providing valuable insight into a companys financial picture.

1. Debt Equity Ratio

Ratio Debt Equity BOI 2.4559 BOM 3.0174 UB 1.5538 VB 1.2882 AVG 2.0788 Better when Balanced Type Solvency

This ratio indicates the relationship between loan funds and net worth of the company which is known as gearing. If the proportion of debt to equity is low, a company is said to be a low geared, and vice a versa. A debt equity ratio of 2:1 is the norm accepted by financial institution. The higher the gearing, the more explosive the return to the shareholders. Higher debt has lower cost as it provide tax shield. But as the present scenario of many banks are now days reduce their debt component and then we considering the debt equity proportion.

Debt Equity Ratio

1.2882 2.4559

BOI
1.5538

BOM UB VB
3.0174

Interpretation:The relationship between borrowed funds and owners capital is a popular measure of long-term financial solvency of the firm. The ratio reflects the share holders against the assets of the firm. As debt-equity ratio is the safety margin for creditors. In Bank of Maharastra (BOM) the debt-equity ratio is high. It means the bank has more long term liabilities towards its creditors. This is the warning for the long term creditors of the bank. In future it is uncertain for company to meet is long term obligation for improving the condition the firm has to reduce long term debt or increase shareholders fund.

In Bank of India (BOI) and Uco Bank (UB) the debt-equity ratio is near to the average bank sectors debt-equity ratio. So the condition of these banks are better then BOM. According to Earnings per Share BOI's position is strong because it is highest amongst other banks.

2. Shareholders Equity Ratio

Ratio Shareholders Equity BOI 0.0473 BOM 0.0446 UB 0.0407 VB 0.0555 AVG 0.0470 Better when Higher Type Solvency

This ratio will supplement the debt-equity ratio. In this ratio the relationship is established between the shareholders fund and total assets. A reduction in shareholders equity signaling the over dependence on outside sources for long-term financial needs and this carries the risk of higher levels of gearing. This ratio indicates the degree to which unsecured creditors are protected against loss in the event of liquidation.

Shareholders Equity Ratio

0.0555 0.0473

BOI BOM UB VB
0.0407 0.0446

Interpretation:This ratio is higher when ROCE, EPS, Cash EPS is good for the organization. Here the position of the BOI is very strong because the EPS is higher then others and Cash EPS is for BOI is also higher. This ratio of all the banks is good with the comparison of the average. To interpret with ROCE the Bank of Maharastra is very good because its return on capital employed is the higher then other. But to interpret with EPS the Bank of India has the

highest EPS as compare to the Shareholders equity. So we infer from this ratio that other banks EPS is not enough as compare to the Shareholders equity ratio.

3. Fixed Asset To Long Term Fund

Ratios Fixed Asset to Long Term Fund BOI 0.0100 BOM 0.0060 UB 0.0093 VB 0.0084 AVG 0.0084 Better when Balanced Type Solvency

This ratio indicates the proportion of long-term funds deployed in fixed assets. Fixed assets represent the gross fixed assets minus depreciation provided on this till the date of calculation. Long term funds include share capital, reverse and surplus and long term loans. The higher the ratio indicates the safer the funds available in case of liquidation. It also indicates the proportion of long-term funds that is invested in working capital.

Fixed Asset to Long Term Fund

0.0084

0.0100

BOI BOM UB VB
0.0093 0.0060

Interpretation:For all the banks this ratio is good for all the banks. It means the ratio for all the banks is near the average of all the banks. As this ratio says all the banks are safer the funds in the liquidation. Belongs to this ratio the fixed assets turnover ratio for the Bank of India is good and also near the average ratio of all the banks. And the position of other banks is also good with compare to this ratio. The Asset turnover is slightly depending on this ratio.

To interpret with the current ratio the position of all the banks are well but in the case of the UCO Bank the liquidity is very good as it requires in the banks requires generally. The total fixed assets with compare to net worth are also the strong in the case of UCO Bank.

4. Dividend Cover Ratio

Ratio Dividend Cover BOI 0.0061 BOM 4.4212 UB 5.4471 VB 3.3641 AVG 4.4108 Better when Higher Type Profitability

This ratio indicates the number of times the dividends are covered by net profit. This highlights the amount retained by a company for financing of future operations.

Dividend Cover Ratio

0.0061 3.3641 4.4212

BOI BOM UB VB

5.4471

Interpretation:As this ratio says the UCO Bank covers dividend highest number of time by the profit. And then after the Bank of Maharastra covers dividend highest number of time by net profit. For this the Bank of India is very poor performance because its dividend cover ratio is near to the zero. So to improve the image of the organization the bank has to cover dividend maximum possible number of times. Other banks have average for dividend cover ratio.

5. Current Ratio
Ratio Current BOI 1.6067 BOM 1.4541 UB 1.7565 VB 0.8083 AVG 1.4064 Better when Higher Type Liquidity

This ratio measures the solvency of the company in the short term. A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by bank

as the minim\um acceptable level for providing working capital finance. The constituents of the current assets are as important as the current assets themselves for evaluation of a companys solvency position. A very high current ratio will have adverse impact on the profitability of the organization. A high current ratio may be due to the piling up of inventory, inefficiency in collection of debtors, high balances in cash and bank accounts without proper investments. It is a measure of short term financial strength of the business and shows whether the business will be able to meet its current liability.

Current Ratio
0.8083 1.6067

BOI BOM
1.7565

UB VB
1.4541

Interpretation:The current ratio indicates the working capital position. It is generally believed that 2:1 ratio shows a comfortable working capital position. In Bank of Maharastra (BOM) the working capital position is much comfortable. In Vijya Bank (VB) the working capital is about 0.8083 but the Net Profit Margin it has the best position amongst other banks. So it can infer that the high profit margin of the Vijya Bank is on the account of scarification of liquidity.

6. Return On Capital Employed (ROCE) or Return on Investment (ROI)

Ratio Return On Capital Employed (ROCE) BOI 0.0128 BOM 0.0218 UB 0.0105 VB 0.0191 AVG 0.0161 Better when Higher Type Profitability

Return on investment analysis provides a strong incentive for optimal utilization of the assets of the company. This encourages managers to obtain assets that will provide a satisfactory return on investment and to dispose of assets that are not providing an acceptable return. In selecting amongst alternative long term investment proposals, ROI provides a suitable measure for assessment of profitability of each proposal. This ratio measures the relationship between net profit before interest and tax & capital employed. This ratio estimates how efficiently long term debts and shareholders fund has been used.

Return On Capital Employed (ROCE)

0.0128 0.0191

BOI BOM UB VB

0.0105

0.0218

Interpretation:This ratio measures the ability of the firm to generate profit per rupee of capital employed. Higher will be the ratio, higher will be efficiency of the firm. Interpreting from the graph, it can be infer that Bank of Maharastra (BOM) has the highest return because of the profitability. In UCO Bank the return is reduced due to the low profitability. And other banks have around average return. To interpret with Debt-equity Ratio the ROCE is highest for the BOM so the organization has to reduce debt for improving the high profitability. Reducing the expenses on debt by reducing debt-equity ratio can increase the profitability. So for improve the productivity of the organizations have to reduce the expenses for getting high productivity.

7. Earnings Per Share

Ratio Earning Per Share BOI 0.0206 BOM 0.0071 UB 0.0054 VB 0.0095 AVG 0.0073 Better when Higher Type Profitability

The EPS is one of the important measures of economic performance of organization. The flow o capital to the companies under the present imperfect capital market conditions would be made on the evaluation of EPS. Investors lacking inside and detailed information would look upon EPS as the best to take their investment decisions. Higher the EPS means better capital productivity.
Earning Per Share 0.0250 0.0200 0.0150 0.0100 0.0050 0.0000 0.0206 0.0095

Ratio

0.0071

0.0054

BOI

BOM Banks

UB

VB

Earning Per Share

Interpretation:Among all these banks in Bank of India has highest Earnings per Share. And it is very good for Bank of India. Other banks are very poor with the comparison Bank of India. In this ratio the position of BOI is good to interpret with Debt Equity & Shareholder's equity ratio among others but it is not good also because Bad debt turnover ratio is very high which is not good and other banks are in the strong position in this case because there is no bad debt of very less.

8. Cash Earnings Per Share

Ratio Cash Earning Per Share BOI 0.0224 BOM 0.0081 UB 0.0058 VB 0.0101 AVG 0.0116 Better when Higher Type Profitability, Liquidity

This is more reliable yardstick for measurement of performance of companies, especially for highly capital intensive industries where provision for depreciation is substantial. This measures the cash earnings per share and is also a relevant factor for determining the price for the companys shares. This method is not as poplar as EPS and is used as a supplementary measure of performance.

Cash Earning Per Share

0.0101
BOI

0.0058 0.0081

0.0224

BOM UB VB

Interpretation:This ratio is very important for the external parties who are wanted to buy or invest in the organization. As we show that as EPS the Cash EPS is high for Bank of India. So it is clear that BOIs position is very strong. As EPS and Cash EPS is increases debt-equity and shareholders equity is also increases. So that share capital is also increases for the organization.

9. Net Profit Margin

Ratio Net Profit Margin BOI 0.1329 BOM 0.1141 UB 0.1170 VB 0.1668 AVG 0.1327 Better when Higher Type Profitability

The ratio is designed to focus attention on the net profit margin arising from business operations before interest and tax is deducted. This ratio reflects net profit margin on the total sales after deducting all expenses but before deducting interest and taxation. This ratio measures the efficiency of operation of the company.

Net Profit Margin

0.1329

0.1668

BOI BOM UB
0.1141

VB

0.1170

Interpretation:The net profit margin of the Vijya Bank is the highest. The net profit margin, higher is better for any industry. It suggests that Vijya Bank management is more efficient to lend or/and borrow at most efficient way than that of the other banks. Performance of the BOM, BOI and UB are equal and there is a scope of improvements.

10.
Ratio Net Profit Margin

Net Profit Margin

BOI 0.1329 BOM 0.1141 UB 0.1170 VB 0.1668 AVG 0.1327 Better when Higher Type Profitability

Te ratio is designed to focus attention on the net profit margin arising form business operations before interest and tax is deducted. This ratio reflects net profit margin on the total sales after deducting all expenses but before deducting interest and taxation. This ratio measures the efficiency o operation of the company. The net profit is arrived at from gross profit after deducting administration, selling and distribution expenses. The nonoperating incomes and expenses are ignored in computation of net profit before tax, depreciation and interest. This ratio could be compared with that of the previous years and with that of competitors to determine the trend in net profit margins of the company and its performance in the industry. This measure will depict the correct trend of performance where there are erratic fluctuations in the tax provisions from year to year.

Net Profit Margin

0.1329 0.1668

BOI BOM UB VB
0.1141

0.1170

Interpretation:This is the most important ratio for the organization. Amongst all these banks Vijya Banks profit is highest. But to interpret with the current ratio the liquidity of the Vijya bank is not much good as compare with the other banks. So for improve the performance of the organization the bank has to maintain the liquidity with reference to the net profit margin.

11.
Ratio Return on Asset

Return On Asset
BOI 0.0119 BOM 0.0095 UB 0.0099 VB 0.0171 AVG 0.0121 Better when Higher Type Profitability

The profitability of the firm is measured by establishing relation of net profit with the total assets of the organisation. This ratio indicates the efficiency of utilization of assets in generating revenue.
Return on Asset
0.0119 0.0171

BOI BOM UB
0.0095 0.0099

VB

Interpretation:Return on Assets is better as it is higher. The Vijya bank is the highest return on the assets. It means the bank has the highest utilization of the assets during the year. Other banks have average return on the assets. So for getting the higher return they have to use maximum assets and this is the based on the net profit. Now to interpret this ratio with the asset turnover ratio we can also know from with this two ratio that the profitability of the organization. And again in this case also the Vijya Bank has the strong position. Other banks profitability is near about the average.

12.
Ratio Asset Turnover

Asset Turnover Ratio

BOI 0.0894 BOM 0.0828 UB 0.0850 VB 0.1024 AVG 0.0899 Better when Lower Type Activity

This measures the companys ability to generate sales revenue in relation to the size of the asset investment. A low asset turnover may be remedied by increasing sales or by disposing of certain assets or both. To assist in establishing which part of the asset structure I not being used efficiently, the asset turnover ratio should be sub-analyzed. The higher the ratio indicates overtrading of total assets while a low ratio indicates idle capacity.

Asset Turnover Ratio

0.1024 0.0894

BOI BOM UB
0.0828 0.0850

VB

Interpretation:As this ratio is lower the better then the Bank of Maharastras position is very good but to interpret with the return on assets the Bank of Maharastra is very week and the profitability of the organization is also lower then other banks. Now to interpret both the return on assets and asset turnover ratio with the net profit margin ratio the Vijya bank is the most efficient bank amongst all the four banks. So recommendation to each bank regarding assets turnover and the profitability with reference to present market position.

13.
Ratio Bad Debt Turnover

Bad Debt Turnover

BOI 83.5120 BOM UB 0.0900 VB AVG Better when Lower Type Activity

This ratio indicates the efficiency of the credit control procedures of the company. Its level will depend on the type of business. The actual ratio is compared with the target or norm to decide whether or not it is acceptable.

Bad Debt Turnover Ratio

0.0900

BOI

UB

83.5120

Interpretation:This ratio is as lower as better. Here only two banks have bad debts but the Bank of India has the highest bad debt which is not good for the organization. So for increasing the profitability as well as performance of the organization the organization have to decrease the bad debt with reference to the Sales or Income. Other banks have no bad-debt so their profitability and the performance is good and the business of the organization is running very well.

14. 15.
Ratios Profit Per Employee Expense Per Employee

Profit Per Employee Expenses Per Employee

BOI 234.6193 1530.9519 BOM 214.8937 1668.1305 UB 560.2391 4228.1776 VB 353.8457 1767.4388 AVG 267.7862 1655.5071 Better when Higher Lower Type Profitability Profitability

Profit per Employee is measured that how much the organization getting from the employee.

600.00 500.00 400.00 300.00 200.00 100.00 0.00

Profit Per Employee 560.24

Expense Per Employee 5000.00 Expenses

353.85

4228.18

4000.00 3000.00 2000.00 1000.00 0.00 BOI BOM Banks Expense Per Employee UB VB 1530.95 1668.13 1767.44

Profit

234.62

214.89

BOI

BOM Banks

UB

VB

Profit Per Employee

Interpretation:From the above both graph we can interpret that the expanse per employee is higher then the profit per employee. So for improve the performance of the organization there are two ways one is to decreases the expenses on the employee. And the another way is to decrease the staff of the organization. And this is for all the four banks.

LIMITATION OF THE RATIO ANALYSIS

- Single years ratio has limited utility - Other factors must be considered - Use of one ratio is misleading - Investigation Necessary - Rigidity harmful

UTILITY OF RATIO ANALYSIS

1. PROFITABILITY:
Useful information about the trend of profitability is available from profitability ratios. The gross profit ratio, net profit ratio and ratio of return on investment give a good idea of the profitability of business. On the basis of these ratios investors can get an idea about the overall efficiency of managers and bank as well as other creditors draw useful conclusion about repaying capacity of the borrowers.

2. LIQUIDITY:
In fact, the use of ratios mode initially does ascertain the liquidity of business. The current ratio, liquid ratio and acid test ratio will tell whether the business will be able to meet its current liabilities and when they matter. Banks and other lenders will be able to conclude from these ratio whether the firm will be able to pay regularly the interest and loan installments.

3. EFFICIENCY:
The turnover ratios are excellent guide to measure the efficiency of Manager For example, the stock turnover will indicate how efficiency is being made the debtors turnover will indicate the efficiency of collection department and assets turnover shows the the efficiency with which the assets are used in business. Such ratios related to present a good picture of the success or otherwise of the business.

4. INTER FIRM COMPARISION:

The absolute ratios of a firm are not of much use, unless they are compared with similar ratios of other firms belonging to the same industry. This is inter firm comparison, which shows the strength and weaknesses of the firm as compared to other firms and will indicate correctives measures.

5. INDICATE TREND:
The ratios of the last three to five years will indicate the trend in the respective fields. For Example, the current ratio of a firm is lower than the industry average, but is the ratio of last five years shows an improving trend, it is an encouraging trend reverse may also be true. A particular ratio of a company for one year may compare favorably with industry average but, if its trend shows a deteriorating position. It is not desirable. Only ratio analysis will provide this information.

6. USEFUL FOR BUDGETARY CONTROL:

Regular budgetary reports in a business whether the system of a budgetary control is in use. It various ratios are presented in these reports, it will give a fairly good idea about various aspects of financial position.

7. USEFUL FOR DECISION-MAKING:

Ratios guide the management in making some of the important decisions. Suppose, the liquidity ratio shows an unsatisfactory position, the management may decide to get addition liquid funds. Even for capital expenditure decisions, the ratio of return on investment will guide the management. The efficiency of various departments can be judge on the basis of their profitability ratios and efficiency of each department can thus be determined.

LIMITATIONS OF RATIO ANALYSIS

ERICH HILBERT points out that it is essentials for a person analyzing business performance to have a clear awareness of the tests he should apply them. Temptation arises in financial ratio analysis to run all the numbers. Yet selected only a few relationships, when would provide clues for judgment. There is clearly some latitude for window dressing. Within limits, a company may be able to arrange its current assets and liabilities so as to have the desired ratios at the time; the balance sheet is presented to stockholders.

 The valuation contained in the final statement does not represent the actual position because it is based on the assumption that the financial statement presents a seasonable picture of what is happening in the business. The information relates to only a particular period and cannot be relied upon excessively. Financial standard data are not exact. Statements are only like interim reports. Moreover many management ratios are based on data, some or all of which are known and factual and therefore, to be related with great caution. Financial statements are generally based on historical or original cost. The current economic conditions are ignored. V.V.Desai points and that the advancing artisting of the technique of the ratio analysis has miserly failed to accomplish the expected impeccability or immaculacy. More over it has made the technique more complicated and complex for beyond the understanding of ordinary businessman. Not all ratios and percentage are significant and useful. One should beware of the temptation to calculate them for their own shake. R.H Prker is of the opinion that the limitation of conventional accounting should always be kept in mind out that accounting figures should not be treated as more precise they really are. A ratio is of little value in isolation. It is necessary to have some standards with which to compare it. The standard may be budgeted one. It may be based on the past performance of the company. It may be based on industry comparison. In using ratio computed by others, one should realize that the computation of a particular ratio ha not necessary been standardized. A frequent comparison of ratios between companies is questionable particularly when there are important differences between companies. Such as industry the nature of comparisons etc. Most ratios represent average and, therefore, may tend to obscure large variations in the underlying causative factors above and below the average. Ratios are based on financial statement suffer from the limitation in he rent in this statement. Changes in many ratios are closely associated and connected with one another. Ratios are likely to misused. There are some situations in which they may appear to this misleading.

 West wick observes that ratios need the upper and lower war things lines because in most case they have an optimum level.
While comparing the ratio of a particular firm with those of similar firms, the difference between the firms should be recognized. For example, methods of accounting operations and financing.

SELECTING FINBANCIAL RATIOS:There are three relationship: - Safely, Structure and efficiency. Each is present in a business regardless of the nature of the activity and all are friend in most financial statement analysis. Safely relationship can be assessed by relative liquidity. The structure relationship is a measure of the composition of the asset liability and equally structure of a company. This would indicate companys ability to with stand business adverse condition over the long run. Efficiency relationship indicates effectiveness with which the earning potential of the firm is utilized. It depends on both the assets at the disposal of management to use the efficiently. The classification of variables is an important step towards financial analysis. The principal of deviant ratios must not guide the analysis, but they must instead consider the nature of the favorable ratios, to determine as to what extent they offset the effect of those, which are negative. The analyst must learn to recognize compensating advantages. It may happen that in spite of variant ratios, the financial manager may permit the company to prosper by maintaining an unorthodox financial structure, analyst must be fully aware that deficiencies in one area can be offset straight in other areas and that as a collorary, no company can or should be average in all aspects of financial balance. Ratio analysis involves a study of the total financial picture. By passing his conclusion upon a through understanding of the importance of each ratio, the analyst can recommend and indicate positive action with confidence. 1) The manager should be provided with a single key ratio that indicates unequivocally the

2) Degree of his success. 3) Ratio should be logically interred related. 4) Manager should not be given ratios which cannot be given virtuous which cannot lead action by them. 5) A ratio must measure a material factor of the business. 6) The cost of obtaining information should be borne in mind. 7) The manager should be providing with the minimum number of ratios. 8) Different ratios are required for different industries and even for different firms within an industry.