Chapter 4

Introduction of
Financial statement &
Its analysis

4.1 INTRODUCTION
The position of finance in business can be match with the position of blood in the human
Body. Finance is the life blood of the business. Finance, today is not only limited up to
Function that circulate business but also extended its boundaries. Today success or failure of
Any business concerned heavily depends upon how effective finance management a firm has.
It is the portfolio that gives maximum return at minimum cost. Further different parties, both
Inside and outside of the firm are interested in financial position of firm and fixed interval
They often evaluate financial position by assessing financial statement of firm.
To understand the financial performance & condition of a firm, its stakeholders look at three
Financial statement, viz the Balance sheet, Profit & Loss A/c & the sources & uses of funds
Statement. The Balance sheet showed the financial position of the business at a given point of
Time. The p & L A/C reflects the financial performance of the firm over a period of time. For
The purpose of taking decision by shareholders, creditors, & other persons regarding their
Individual matters it is necessary for them to analyze various financial statements.
The financial Analysis is a process of evaluating the relationship between component parts of
financial statement to obtain a better understanding of the firms position & performance. The
First step is to select the information relevant to the decision under consideration from the
Total information contained in financial statement. The second step is to arrange the
Information in a way to highlight significant relationship. The final step is interpretation &
Drawing of conclusion. The basic limitation of the Traditional financial statement comprises
The Balance sheet & P& L A/C is that they do not give all the information related to financial
Operation of the firm.
There are total 16 companies in Watch industry. Performing financial analysis with all is
Difficult. Hence, we have done financial analysis of some of the companies based on selected
Criteria. To scrutinize the companies, we have gone for filteration through Capitaline
Software,
The results of this filteration is presented in the following table
Stage of Filteration filteration Base Result
Stage 0 Watch Company 16
Stage 1 Sales > 11 Cr. 6

Stage 2 Net Profit>30 Lakh 5

Stage 3 EPS> Rs. 0.40 4
Financial analysis has done on the basis of certain criteria. I have selected three companies in
Indian market that is IST, Opal luxury and KDDL Ltd. This 3 company is selected on3
criteria that are Sales, Net profit and Earning per share.
This chapter deals with the following issues related to research study
Objectives of Financial Analysis
The aim of the project is to study working procedure and financial analysis of WATCH
INDUSTRY. The Study will highlight the following objective.
Study the ratio analysis of Watch industry.
Study the cash flow statement
Common size statement
4.2 FINANCIAL ANALYSIS & TECHNIQUES.
As stated earlier success or failure of any firm heavily depends on its financial management.
The function of financial management is to manage the inflow and outflow of firm in such a
way so that firm can carry out its objective easily. For earning out the objective management
also have to be familiar with the financial position of firm time by time. So for knowing of
financial position management has to go for financial analysis. Management can analyze
firms financial position by evaluating and analyzing financial statement of the firm. Here we
define some techniques of analyzing financial statements are as follows.
Ratio analysis
Common size statement
Trend Analysis

4.2.1 Ratio Analysis

Introduction:
Ratio, broadly speaking, is the numerical relationship between to numbers, and hence
Ratio analysis of statement stands for the process of determining and presenting the
Relationship of items and groups of items in the statement
The ratio analysis is one of the most powerful tools of the financial analysis. It is used as
a device to analysis and interpret the financial statements can be analyze more clearly
and decision made from such analysis. A ratio can be expressed in three different ways.
The use of ratio is not confined to financial manager only. There are different parties in
Ratio analysis for knowing the financial position of the firm for different purposes. The
Supplier of goods on credit, banks, financial institution, investors, shareholders and
Management make use of ratio analysis as a tool in evaluating the financial position and
Performance of a firm for granting credit, providing loans for making investments in the
Firm. Thus, ratios have wide applications and are of immergence use today.
Summary of Ratio:1. Liquidity Ratio
2. Profitability Ratio
3. Turnover Ratio
4. Coverage Ratio
4.2.2 Advantages of Ratio Analysis:1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company
by just looking at few numbers instead of reading the whole financial statements.

4.2.3 Limitations of Ratio Analysis:

Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of
financial ratio analysis are:
1. Different companies operate in different industries each having different environmental
conditions such as regulation, market structure, etc. Such factors are so significant that a
comparison of two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence
ratio analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are more
concerned about current and future information.

Liquidity ratio:4.2.1.1 Current ratio:It establishes the relationship between Current Assets & Current Liabilities. It attempts to
Measure the ability of a firm to meet its current obligations
Current Assets
Current Ratio = -----------------------Current Liabilities

Year
2015
2014
2013
2012
2011

IST
3.63
4.25
8.67
9.13
14.57

KDDL
0.91
0.85
0.83
0.88
0.96

TIMEX
0.82
0.97
1.35
1.65
1.72

TITAN
1.62
1.41
1.33
1.28
1.29

AVERAGE
1.75
1.87
3
3.24
4.64

Current Ratio

AVERAGE

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

4.64

3.24

2011

2012

2013

1.87

1.75

2014

2015

Axis Title
Year

Interpretation:
According to accounting principle, a current ratio is supported to be an ideal ratio.
It means that current assets of a business should, at twice of its current liabilities. The higher
ratio indicates the better liquidity position; the firm will be able to pay its current liabilities more
easily.Year 2011 to 2015 Current Ratio is Decreased.In Year 2011 Current Ration id greater than
the year of 2015.
4.2.1.2 Quick ratio:It is also termed as acid test ratio. It is supplementary to current ratio. It establishes the
Relationship between the quick assets & the current liabilities.
Quick assets
Quick Ratio = --------------------Current Liability

YEAR
IST
2015
0
2014
Debt-equity
ratio =0
2013
0
2012
0
2011
0
term debt
Shareholders fund

KDDL
1.11
1.18
1.05
0.86
0.89

TIMEX
0
0.98
0.18
0.06
0

TITAN
0.16
0.18
0
0.03
0.08

AVERAGE
0.64
0.78
0.62
0.32
0.49

4.2.1.3
DebtEquity
Ratio:
Long

Interpretation:
This ratio
YEAR
2015
2014
2013
2012
2011

IST
0.48
0.57
0.66
0.75
0.85

KDDL
1.13
1.04
1
1.23
1.08

TIMEX
4.17
3.34
3.13
4.93
4.94

TITAN
10.13
10.88
12
12.27
10.14

AVERAGE
3.98
3.96
4.20
4.80
4.26

shows the
ratio

of

borrowed
to owned
funds

of

the company.The Higher Debt Equity ratio is 0.78 in the year of 2014. This indicates that the
amount of debt is decreasing as compared to the owners equity in the company.2015 is Lower in
Compare to 2014. A high D/E ratio has equally serious implication from the firms point of view.
Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders. The ratio
indicates fluctuating trend in debt/equity ratio. It can say company has to reduce its debt and it is
favorable for industry
4.2.1.4 Fixed Asset Turnover Ratio:
Sales
Net fixed Assets

fixed Assets turnover ratio =

Interpretation :-

The higher the fixed assets turnover ratio, more effective the company investment in net
YEAR
2015
2014
2013
2012
2011

IST
3.05
2.96
3.14
4.29
5.29

KDDL
6.12
5.42
4.94
6.4
6.13

TIMEX
5.83
4.11
3.16
4.96
5.32

TITAN AVERAGE
4.5
3.02
3.85
2.9
3.59
3.11
4.83
3.68
5.17
3.94

property,
plant,

and

equipment
has become
from above

graph we can say that in the year 2012 the ratio is 4.8 and it was increase become 3.96 times in
2014.
It indicate that company turnover its fixed assets faster and maximum utilization of its fixed
assets.

Stock Turnover ratio =

4.2.1.5. Inventory Turnover Ratio:

Cost of good sold
Average inventory

Inventory Turnover Ratio

6
5.17
5

4.83

4.5

AVERAGE

3.59

3.85

Series 3

2
1
0

2011

2012

2013

2014

2015

Axis Title

Interpretation :In previous year the ratio will lower that is 5.17 and 3.59 time , but it is Decrease from year
2011 to 2013 it is indicate that high movement of inventory. But year 2014 to 2015 ratio will be
low that 3.85 and 4.5 times in a past year, so it represent sound efficiency of the company buying
and selling its product.

4.2.1.6 Debtor turnover Ratio:

Debtors turnover ratio =

Credit sales

Debtors

YEAR
2015
2014
2013
2012
2011

IST
5.92
6.35
7.65
5.08
6.3

KDDL
7.27
6.59
5.6
5.92
5.84

TIMEX
2.1
1.87
1.5
2.13
2.55

TITAN
70.35
69.38
62.44
64.82
63.4

AVERAGE
21.41
21.04
19.30
19.49
19.52

Interpretation :This ratio is decreasing. It is lower in 2011 & 2013 i.e. 19.52 to 19.30 times. This ratio indicates
the speed with which debtors amount receivable are being collected. In year 2015 the ratio more
effective in company. In current year the ratio will be 21.41 times. So, we can say that company
is able to turnover its debtors 19.3 times in a year which is prompt. There are a more efforts for
the same previous year. So, finally good for company.
The reason behind this is following a strict collection or credit policy because to increase in sales
and the increase in debtors is low.

4.2.1.7. Interest Cover Ratio:

Interest Cover ratio =
YEAR
IST
2015
109.33
2014
239.5
2013
217.5
2012
111.86
2011
93

EBIT
KDDL
2.29
1.82
1.05
3.95
2.86

TIMEX
-3.86
-25.81
-38.21
6
126.57

TITAN AVERAGE
30.46
14.09
57.04
12.66
50.30
20.87
35.50
20.18
60.20
18.35

Interest
Expenses

Interest Cover Ratio

70
60

60.2

57.4
50.3

50
40

AVERAGE

35.5

30.46

30
20
10
0

2011

2012

2013

2014

2015

Axis Title
YEAR

Interpretation:
This Interest Coverage Ratio indicates how many times the interest charges are covered by the
profits available to pay interest charges. This ratio measures the margin of safety for long-term

lenders. This higher the ratio, more secure the lenders is in respect of payment of interest
regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the
company also, as nothing will be left for shareholders. The above graph shows that in the year of
2011 has highest interest coverage ratio compare other years. Industry has very low debt. But
current year path very Increase interest ratio for year 2012 to year 2014.