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.

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 :- The analyst 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.

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.

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 has sufficient 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?

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 by the 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.

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 and decisions, 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.

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

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.

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

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.

(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

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

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 abovementioned aspects. (3) The next aspect to be studied in a comparative balance sheet question is the profitability of the concern. The study of increase or decrease 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 shortterm financial position is good then long-term financial position will also be

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) (2) (3) Current financial position and liquidity position. Long-term financial position. 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 reasons for 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'

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 statement prepared 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

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

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.

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 be helpful 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;

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 for resources 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);

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; and ii) 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;

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 under cash 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

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

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 cash equivalent at the end of the period

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

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 1986 1987 1988 1989 1990 100 120 110 125 135 140

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

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: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 equivalent increase 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. '

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

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, then it 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:

Rs Cash in hand and at bank 5,000 Sundry debtors 20,000 Stock 25,000 Land and Buildings 50,000 Plant and Machinery 1,00,000 Total Assets 2,00,000 The total figure of assets Rs. 2,00,000 is taken as

Percentage 2.50 10.00 12.50 25.00 50.00 100.00 100 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 useful because 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

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

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

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 to which 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

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 any meaningful 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

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 accounting methods 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:

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-

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 guide and 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

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 or deteriorating. 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

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 communication of 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:

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 shortterm 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

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 ANALYSIS The 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

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.

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 1. 2. 3. Cash in Hand Cash at Bank Marketable Securities 11. 10. Current Liabilities Outstanding Expenses/Accrued expenses Bills payble

(Short-term) 4. 5. 6. 7. 8. 9. Short-term investments 12. Bills receivable Sundry Debtors Inventory(Stock) work-in-Process Prepaid Expenses 13. 14. 15. 16. Sundry Creditors Short-term Advances Income-Tax Payble. Dividents Payble Bank-overdraft (if not a permanent arrangement)

A high current ratio may not be favorable due to the following reasons: (i) (ii) (iii) There may be slow moving stocks. The stocks will pile up due to poor sale. The figures of debtors may go up because debt collection may not satisfactory. 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) (ii) There may not be sufficient funds to payoff liabilities. 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

(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

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 shortterm 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

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

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 = Interest expanded ---------------------------------------- x 100 Total Expenditure

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.

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

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.

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

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 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: = Net Profit- Divided on Preference

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

 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.

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.

RATIO ANALYSIS & INTERPRETATION: 1. Current Assets Current Liabilities

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

Cash balances with RBI + Balances with other banks + Government Securities Current Ratio = --------------------------------------------------------------------B/P + Interest accrued + Unsecured Bonds + Deferred tax 4059568+123492+11019159 2011 = ----------------------------------------------932977+276723 + 1370000+208500 3227164+1768259 + 11389850 2012 = ----------------------------------------------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 = 5.16:1 = 5.8:1

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 = ----------------------------------------------1050000 + 1095814 41368784 + 619610 2012 = ----------------------------------------------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 = 17.2:1 = 17.3:1

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

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 2118154 2012 = ------------------ = 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:

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 %

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

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.

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 or term deposits or deposits can be from branches in India or abroad. Deposits Year 2006 2007 2008 2009 2010 2011 2012 Taking 2006 as base tear Year 2006 2007 2008 2009 2010 2011 2012 Deposits 100 133.725 197.453 230.605 253.926 271.80 313.26 Deposits 132.6881 17661011 26077392 30455732 33535707 35896017 41368784

350 300 250 Deposits 200 150 100 50 0 1 2006 2 2007 3 2008 4 2009 Years 5 2010 6 2011 7 2012

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 there has been a rose in saving bank deposits and term deposits considerably over the year.

NET PROFIT :- These are the most important criteria because it is though this we measure the overall profitability of an undertaking Year 2006 2007 2008 2009 2010 2011 2012 Net profit (in 000s) 323527 324175 331143 348212 357194 318402 370021

Taking 2006 as the base year Year 2006 2007 2008 2009 2010 2011 2012 net profit (in 100s) 100 100.250 102.354 107.63 110.406 98.41 114.37

120 115 Net Profit 110 105 100 95 90 1 2006 2 2007 3 2008 4 2009 Years 5 2010 6 2011 7 2012

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.

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 2006 2007 2008 2009 2010 2011 2012 Total assets (in 100s) 15490297 21178404 31948344 37349327 38828789 42394598 48394598

Taking 2006 as the base year Year 2006 2007 2008 2009 2010 2011 2012 Total assets 100 136.720 206.247 241.114 250.665 276.74 312.41

350 300 Total Assets 250 200 150 100 50 0 1 2006 2 2007 3 2008 4 2009 Years 5 2010 6 2011 7 2012

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.

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 2006 2007 2008 2009 2010 2011 2012 Taking 2006 as base. Year 2006 2007 2008 2009 2010 2011 2012

Advances 5187828 8423030 13014039 15064453 16114830 17971250 23534639

Advances 100 162.362 250.858 290.381 310.628 346.41 453.65

500 450 400 350 300 250 200 150 100 50 0

Advances

2006

2007

2008

2009

2010

2011

2012

Years

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..

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 2006 2007 2008 2009 2010 2011 2012 Taking 2006 as the base year Year 2006 2007 2008 2009 2010 2011 2012 Investment 100 121.169 191.090 215.628 201.995 218.73 231.53 Investment (in 100s) 6788659 8225726 12972450 14638283 13712741 14849124 15718412

250 200 Investments 150 100 50 0

2006 1 2007 2 2008 3 2009 4 2010 5 2011 6 2012 7

Years

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.

COMMON SIZE BALANCE SHEET Particulars Fixed assets Premises Other fixed assets Capital Advances Other assets Installments Total fixed assets Current Assets Cash & Bank balance with RBI Balances with Bank Government securities Total Current Assets (RBI) Total Assets (A+B) Liabilities & Capital Owners equity Reserve & Surplus Total (C) Long Term debts Borrowing Deposits Total (D) Current Liabilities Provisions (E) Total (C+D+E) 2011 85114 1519299 304470 17971250 2841961 3829965 26552059 4059568 1236492 11019159 16315219 42867278 1050000 1095814 2145814 1422824 35896017 37318841 & 34032623 42867278 % .198 3.54 .71 41.92 6.63 8.93 61.94 9.47 2.88 25.71 38.06 100 2.44 2.56 5.00 3.32 83.74 87.06 7.94 100 2012 89936 1716641 69805 23534639 2270039 4698956 32380016 3227164 1768259 11019159 16014582 48394598 1050000 1387336 2437336 619610 41368784 41988394 3968868 48394598 Percentages .185 3.54 .144 48.63 4.69 9.70 66.88 6.66 3.65 22.76 33.07 100 2.16 2.86 5.02 1.28 85.48 86.76 8.20 100

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 3399370 1324219 4723589 2118154 1576147 659267 4353568 370021 Increase/ Decrease -134546 -24177 -158723 -427649 326327 108720 -210342 51619 % Increase / Decrease -3.80 -1.79 -3.25 -16.80 26.10 14.15 -4.60 16.21

1. Income Interest earned 3533916 Other income 1348396

Total (A) 4882312 2. Expenditure Interest expended expenses Operating 2546103 Provision & 1249820 767987 4563910 318402

contingencies Total (B) Net profit for the year (A-B)

INTERPRETATION This indicates there is a decrease in income due the increase in the operating expenses. But the profitability is increased by 16.21%.

CASH FLOW STATEMENT ANALYSIS & INTERPRETATION (2011-2012)

HDFC BANK LTD. CASH FLOW STATEMENT FOR THE YEAR ENDED 31st MARCH, 2012 (Rs in 000s) Year ended 31.03.2012 A. Cash flow from operating activities Net profit after tax Provisions for Taxes Depreciation on fixed Assets Net Depreciation on investments Provision for non-performing assets Provision on Standard assets Provision on Lease Assets Provision for frauds Loss/(Profit) on sale of fixed Assets 14369 3880 398 9267 2599 12127 ---4472 28818 35698 370021 90450 321917 75053 318402 73967 276249 6565 Year ended 31.03.2011

Operating profit before working capital changes 856537 645553

Adjustments for:

Provision for inter branch (net) Dr. from -B/F Deferred exp. Written off from B/F Provision for inter branch Dr. written back (Increases)/Decrease in Advances (Increase)/Decrease in deposits (Increase)/Decrease in investment (Increase)/Decrease in borrowing Increase)/Decrease in other assets Increase)/Decrease in other liabilities Cash generated from operations Direct Taxes paid (net of refunds) Net cash flow Operating Activities B. Cash flow from investing Purchase of fixed Assets Purchase from sale of Fixed Assets Net cash used in investing Activities C. Cash flow from financing activity Proceeds from issue of subordinate debt Payments of divinded (76995) Net cash Generated from financing (76995) activity Net increases in cash & cash equivalents Cash & cash Equivalents-as at 1st April Cash & cash Equivalents-as at 1st March 300637 5296060 4995423 (19805) 18301 (5548940) (944340) 5472766 (803214) 586929 589276 207510 (13566) 71849 (297954) 2463 (295491)

(8965) ----(18207) (1129819) 2360310 842965 (588543) 147557 448336 (129659) 318677 (356501) 2009 (354492) 500000 136500 363500 327685 4968375 5296060

Interpretation: The above statement clearly brings out that cash and bank balances of Bank as on 31st March 2012 has risen, which shows an improvement in cash position of the firm.

Financial Performance of HDFC Bank Particulars Gross income Operating profit Net profit Profit brought forward Transfer to Statutory Reserves Transfer Reserves to 31.03.2012 472.36 102.93 31.84 10.00 9.26 31.03.2011 488.23 108.64 35.72 13.02 8.00 19.01

other 27.46