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equity.
The Income Statement
The income statement, which reports on how much a firm earned in the period
of analysis.
The Statement of cash Flows
The statement of cash flows, which reports on cash inflows and outflows the
firm during the period of analysis
The term financial analysis , also known as analysis and interpretation of financial
statements, refers to the process of determining financial strengths and weakness of
the firm by establishing strategic relationship between the items of the balance sheet,
profit and loss account and opposite data.
The purpose of financial analysis is to diagnose the information contained in financial
statements so as to judge the profitability and financial soundness of the firm. Just like
a doctor examines 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 analysis the financial statements with various tools of analysis before
commenting upon the financial health or weaknesses of an enterprise. The analysis
and interpretation of financial statements is essential to bring out the mystery behind
the figures in financial statements. Financial statements analysis is an attempt to
determine the significance and meaning of the financial statement data so that forecast
may be made of the future earnings, ability to pay interest and debt maturities (both
current and long-term) and profitability of a sound dividend policy.
The term financial statement analysis includes both analysis, and interpretation.
A distinction should, therefore, be made between the two terms. While the term
analysis is used to mean the simplification of financial data by methodical
classification of the data given in the financial statements, interpretation means,
explaining the meaning and significance of the data so simplified however, both
analysis and interpretation are interlinked and complimentary to each other Analysis
is useless without interpretation and interpretation without analysis is difficult or even
impossible most of the authors have used the term analysis only to cover the meaning
both analysis and interpretation as the objective of analysis is to study the relationship
between various items of financial statements by interpretation. We have also used the
terms Financial statement Analysis or simply Financial Analysis to cover the meaning
of both analysis is and interpretation.
form
To make inter-firm comparisons
To make forecasts about future prospects of the firm
To assess the progress of the firm over a period of time
If refers to the comparison of financial data of a company for several years. The
figures of this type analysis are presented horizontally over a number of columns. The
figures of the variously years are compared with standard or base year. A base year is
a year chosen as beginning point. It is also called Dynamic Analysis. This analysis
makes it possible to focus attention on items that have changed significantly during
the period under review. Comparative statements and trend percentages are two tools
employed in horizontal analysis.
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b. Vertical analysis-
It refers to the study of relationship of the various items in the financial statements of
one accounting period. In this type of analysis the figures from financial statements of
a year are compared with a base year selected from the same years statement. It is
also called Static Analysis. Common size financial statements and financial ratios
are the two tools employed in vertical analysis.
1.4.1.5 Methods or Devices of Financial AnalysisThe following methods of analysis are generally used:
Comparative statement
Trend analysis
Common size statements
Funds flow analysis
Cash flow analysis
Ratio analysis
Cost-volume-profit analysis
In this project the Ratio Analysis is used to study the financial statements of Britannia
industries.
Comparative Statement:-
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The comparative balance sheet analysis is the study of the trend of the same items,
group of items and computed items, group of items and computed items in two or
more balance sheets of the same business enterprise on different dates. The changes in
periodic balance sheet items reflect the conduct of a business. The changes can be
observed by comparison of the balance she at the beginning and at the end of a period
and these changes can help in forming an opinion about the progress of an enterprise.
The comparative balance sheet has two columns for the data of original balance sheet.
A third column is used to show this increase in figures. The fourth column may be
added for giving percentage of increases and decreases.
The income statement gives the results of the operation of a business. The
comparative income statement gives an idea of the progress of a business over a
period of time. The changes in absolute data in money values and percentages can be
determined it analyze the profitability of the business. .like comparative balance sheet
income statement also has four columns. First two columns give figures of various
items for two years. Third and fourth columns are used to show increase or decrease
in figures in absolute amounts and percentages respectively.
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company.
Another advantage of financial statement analysis is that regulatory authorities
like IASB can ensure the company following the required accounting
standards.
Financial statement analysis is helpful to the government agencies in
In spite of financial statement analysis being a highly useful tool, it also features some
limitations, including comparability of financial data and the need to look beyond
ratios. Although comparisons between two companies can provide valuable clues
about a companys financial health, alas, the differences between companies
accounting methods make it, sometimes, difficult to compare the data of the two.
Besides, many a times, sufficient data are on hand in the form of foot notes to the
financial statements so as to restate data to a comparable basis. Or else, the analyst
should remember the lack of data comparability before reaching any clear-cut
conclusion. However, even with this limitation, comparisons between the key ratios of
two companies along with industry averages often propose avenues for further
investigation.
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The Ratio Analysis involves comparison for useful interpretation of the Financial
Statement. A single Ration in itself can not indicate favourable or unfavourable
condition. It should be compared with some standard. Standards of comparison are
of four types. They are
Trend Analysis: When ratios over a period of time are compared it is known as the
Time Series or Trend Analysis.
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Cross-Sectional Analysis: when ratios of one firm are compared with some selected
firms in the same industry at the same point in time, it is called as Cross Sectional
Analysis.
Industry Analysis: The ratios are compared with average ratios of the industry to
which the firm belongs; this sort of analysis is known as the Industry Analysis.
Pro Forma Analysis:
which are developed from the projected or pro forma financial statements is called as
Pro Forma Analysis.
Significance to management
The management can measure the effectiveness of the own polices and decisions,
determine the advisability of adopting new policies, procedures and document to
owners, the result of their managerial efforts.
Significance to investors
With the help of financial analysis investors and share holders of the business can
know about the earning capacity and the safety to their investments in the business.
Significance to employees
Analysis of financial statements helps the employees in determining the true profit of
the business enterprise.
2.
To work out the solvency: With the help of solvency ratios, solvency of
the company can be measured. These ratios show the relationship between the
liabilities and assets. In case external liabilities are more than that of the assets
of the company, it shows the unsound position of the business. In this case the
business has to make it possible to repay its loans.
3.
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4.
5.
6.
2.
False Results: Accounting ratios are based on data drawn from accounting
records. In case that data is correct, then only the ratios will be correct. For
example, valuation of stock is based on very high price, the profits of the
concern will be inflated and it will indicate a wrong financial position. The
data therefore must be absolutely correct.
3.
Effect of Price Level Changes: Price level changes often make the
comparison of figures difficult over a period of time. Changes in price affect
the cost of production, sales and also the value of assets. Therefore, it is
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4.
5.
position some companies resort to window dressing. They may record the
accounting data according to the convenience to show the financial position of
the company in a better way.
6.
misleading. For example, the gross profit of two firms is 25%. Whereas the
profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit
earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the
profitability of the two firms is same but the magnitude of their business is
quite different.
Liquidity Ratios
Turnover Ratios or Activity Ratios
Profitability Ratios
Liquidity Ratios measure the firms ability to meet current obligations; Leverage
Ratios measure the proportions of debt and equity in financing the firms assets;
Turnover Ratios reflect the firms efficiency in utilizing its assets, and Profitability
Ratios measure the overall performance and efficiency of the firm.
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I.
LIQUIDITY RATIOS
Liquidity Ratios measure the ability of the firm to meet its current obligations.
Liquidity Ratios establish relationship between cash and other current assets to
current obligations and provide a quick measure of liquidity position to the
management of the firm. Thus a firm should ensure that it does not suffer from lack
of liquidity and also at the same time see that it does not have excess liquidity.
A. CURRENT RATIO
The Current Ratio is a measure of the firms short term solvency. It indicates the
availability of current assets in rupees for every one rupee of current liability. A ratio
of greater than one means that the firm has more current assets than current liabilities
of the firm.
Current Assets include cash and those assets which can be converted into cash within
a year, such as marketable securities, debtors and inventories. Prepaid expenses are
also included in current assets as they represent the payments that will not be made by
the firm in the future.
Current Liabilities include creditors, bills payable, accrued expenses, short term bank
loan, income tax liability and long term debt maturing in the current year.
The Current Ratio is calculated by dividing the current assets by current liabilities:
Current Assets
Current Ratio =
Current Liabilities
B. QUICK RATIO
Quick Ratio establishes the relationship between quick or liquid assets and liabilities.
An asset is liquid if it can be converted into cash immediately or reasonably soon
without a loss of value.
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Cash is the most liquid asset. Other assets which are considered to be relatively liquid
and included in the quick assets are debtors and bills receivable and marketable
securities (temporary quoted investments).
liquid.
Current Assets Inventories
Quick Ratio
=
Current Liabilities
------------------------------Net Assets
Net Assets include Net Fixed Assets and Net Current Assets. Since Net Assets equal
Capital Employed, Net Assets Turnover Ratio is also called as Capital Employed
Turnover Ratio.
B. TOTAL ASSETS TURNOVER RATIO
The Total Assets Turnover Ratio shows the companys ability in generating sales from
all financial resources committed to total assets. Total Assets include Net Fixed
Assets and Current Assets.
Income from Services
Total Assets Turnover =
-------------------------------Total Assets
gross profit margin ratio and net profit margin ratio. Rate of return ratios select the
relationship between profit and investment the important rate of return measures are: return
on total assets, earning power, and return on equity.
Generally, there are two types of profitability ratios.
Gross Profit
Gross Profit Ratio =
X 100
Sales
A firm should have reasonable gross margin to ensure adequate coverage for
operating expenses of the firm and sufficient return to the owners of business, which
is reflected in the net profit margin.
administering and selling the products. This ratio is the overall measure of the firms
ability to turn each rupee into net profit.
X 100
Sales
This ratio provides a good opportunity to compare a companys return on sales with
the performance of other companies. Thats why it is calculated after income tax
because tax and tax liabilities varying from company to company
Operating Profit
Operating Profit Ratio
100
Sales
D. Return on investment
It measures the overall performance of the company that is utilization of total
resources and funds available with the company. Higher the ratio better utilization of
funds. It indicates earning capacity of the business. It measures the management
performance.
EBT But AT
Return on Investment:
X 100
Total Assets/ Liability
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Debt
Debt Equity Ratio:
Equity
V. DIVIDEND RATIOS
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Equity Dividend
Dividend per Share:
No. Of Equity Shares
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BIBLIOGRAPHY
1) Khan and jain, Financial Management, Tata McGraw-Hill Education, 5th edition,
2)
3)
4)
5)
2007.
http://www.readyratios.com/reference/analysis/financial_statement_analysis.html
http://www.slideshare.net/hemanthcrpatna/financial-statement-analysis
www.heterodrugs.com
www.wikipedia.org
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