WHAT IS FINANCE?

MEANING

Before we begin, first lets understand the origin of word FINANCE.

If we trace the origin of finance, there is evidence to prove that it is as old as human life on earth. The
word finance was originally a French word. In the 18th century, it was adapted by English speaking
communities to mean the management of money. Since then, it has found a permanent place in the
English dictionary. Today, finance is not merely a word else has emerged into an academic discipline of
greater significance. Finance is now organised as a branch of Economics.
Furthermore, the one word which can easily replace finance is EXCHANGE." Finance is nothing but an
exchange of available resources. Finance is not restricted only to the exchange
and/or management of money. A barter trading system is also a type of finance. Thus, we can say,
Finance is an art of managing various available resources like money, assets, investments, securities, etc.
At present, we cannot imagine a world without Finance. In other words, Finance is the soul of our
economic activities. To perform any economic activity, we need certain resources, which are to be pooled
in terms of money (i.e. in the form of currency notes, other valuables, etc.). Finance is a prerequisite for
obtaining physical resources, which are needed to perform productive activities and
carrying business operations such as sales, pay compensations, reserve for contingencies (unascertained
liabilities) and so on.
Hence, Finance has now become an organic function and inseparable part of our day-to-day lives. Today,
it has become a word which we often encounter on our daily basis.

DEFINITION
Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect
definition of Finance following selected statements will help you deduce its broad meaning.
1. In General sense,

"Finance is the management of money and other valuables, which can be easily converted into cash."

2. According to Experts

"Finance is a simple task of providing the necessary funds (money) required by the business of entities
like companies, firms, individuals and others on the terms that are most favourable to achieve their
economic objectives.

3. According to Entrepreneurs,

"Finance is concerned with cash. It is so, since, every business transaction involves cash directly or
indirectly."

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4. According to Academicians,

"Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilisation of funds.
It also deals with profits that adequately compensate for the cost and risks borne by the business."

FEATURES OF FINANCE:

The main characteristics or features of finance are depicted below.

1. Investment Opportunities
In Finance, Investment can be explained as a utilisation of money for profit or returns.
Investment can be done by:-
Creating physical assets with the money (such as development of land, acquiring commercial
assets, etc.),
Carrying on business activities (like manufacturing, trading, etc.), and
Acquiring financial securities (such as shares, bonds, units of mutual funds, etc.

2. Profitable Opportunities
In Finance, Profitable opportunities are considered as an important aspiration (goal).
Profitable opportunities signify that the firm must utilize its available resources most efficiently under the
conditions of cut-throat competitive markets.
Profitable opportunities shall be a vision. It shall not result in short-term profits at the expense of long-
term gains.
For example, business carried on with non-compliance of law, unethical ways of acquiring the business,
etc., usually may result in huge short-term profits but may also hinder the smooth possibility of long-term
gains and survival of business in the future.

3. Optimal
Finance is concerned with the best optimal mix of funds in order to obtain the desired and determined
results respectively.
Primarily, funds are of two types, namely,
Owned funds (Promoter Contribution, Equity shares, etc.), and
Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc).
The composition of funds should be such that it shall not result in loss of profits to the
Entrepreneurs (Promoters) and must recover the cost of business units effectively and efficiently.

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4. System of Internal Controls
Finance is concerned with internal controls maintained in the organisation or workplace.
Internal controls are set of rules and regulations framed at the inception stage of the organisation, and
they are altered as per the requirement of its business.
However, these rules and regulations are monitored at various intervals to accomplished.

5. Future Decision Making

Finance is concerned with the future decision of the organisation.
A "Good Finance is an indicator of growth and good returns. This is possible only with the good
analytical decision of the organisation. However, the decision shall be framed by giving more emphasis
on the present and future perspective (economic conditions) respectively.

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:

The scope of financial management includes three groups. First relating to finance and cash, second
rising of fund and their administration, third along with the activities of rising funds, these are part and
parcel of total management, Isra Salomon felt that in view of funds utilisation third group has wider
scope.
It can be said that all activities done by a finance officer are under the purview of financial management.
But the activities of these officers change from firm to firm, it become difficult to say the scope of
finance. Financial management plays two main roles, one participating in funds utilisation and
controlling productivity, two Identifying the requirements of funds and selecting the sources for those
funds. Liquidity, profitability and management are the functions of financial management. Let us know
very briefly about them.

1. Liquidity:
Liquidity can be ascertained through the three important considerations.
i) Forecasting of cash flow:
Cash inflows and outflows should be equalized for the purpose of liquidity.
ii) Rising of funds:
Finance manager should try to identify the requirements and increase of funds.
iii) Managing the flow of internal funds:
Liquidity at higher degree can be maintained by keeping accounts in many banks. Then there will be no
need to depend on external loans.

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2. Profitability:
While ascertaining the profitability the following aspects should be taken into consideration:
i) Cost of control:
For the purpose of controlling costs, various activities of the firm should be analyzed through proper cost
accounting system,
ii) Pricing:
Pricing policy has great importance in deciding sales level in companys marketing. Pricing policy should
be evolved in such a way that the image of the firm should not be affected.
iii) Forecasting of future profits:
Often estimated profits should be ascertained and assessed to strengthen the firm and to ascertain the
profit levels.
iv) Measuring the cost of capital:
Each fund source has different cost of capital. As the profit of the firm is directly related to cost of capital,
each cost of capital should be measured.

3. Management:
It is the duty of the financial manager to keep the sources of the assets in maintaining the business. Asset
management plays an important role in financial management. Besides, the financial manager should see
that the required sources are available for smooth running of the firm without any interruptions.
A business may fail without financial failures. Financial failures also lead to business failure. Because of
this peculiar condition the responsibility of financial management increased. It can be divided into the
management of long run funds and short run funds.
Long run management of funds relates to the development and extensive plans. Short run management of
funds relates to the total business cycle activities. of. Thus, for the success of any firm or organization
financial management is said to be a must.

ADVANTAGES OF FINANCE:
Investors are not at the mere mercy of economic swings and good luck. It is possible to manage your
finances in such a way as to provide security for the future and growing wealth in the present. Financial
management is one of the keys to living the kind of life you want to live. An entire universe of doorways
is waiting to be opened through the smart and careful management of your savings and investments.
Risk Versus Gain
A very old touchstone of financial management is the concept of risk versus gain. The largest
financial gains are made by taking large risks. There is such a thing as too much risk as well as too
little in any investment portfolio. One of the advantages of skilful financial management is finding

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 where the correct balance is for you depending on where you are in life. High risk strategies make
more sense when you're younger.
Taxes
The income tax system is structured in such a way as to allow many strategies of financial
management to come into play. There are tax loopholes and exceptions that can be taken
advantage of to reduce your tax burden. A notable exemption that can be taken advantage is the
charitable deduction that allows a certain amount of charitable givings to be deducted from your
income tax. Another example is business cost deductions.
Goals
To live a life in which you are not subject to merely reacting to the changes that come along, you
must set goals and order them by priority. This is the definition of rational acting given by many
social scientists. A crucial advantage of financial planning is setting your financial goals and
prioritizing them so that you are able to rationally take the steps to accomplish them. Otherwise
you will always be reacting.

Retirement
The end goal of much financial planning is a successful retirement. A fully realized financial plan
will result in comfort and security for you and your family into your old age. With a good
financial plan, you can leave an inheritance for your family. Retirement is a goal to start working
toward early, making the long-term investments that will be your shelter.

Ratio Analysis
Financial statements aim at providing financial information about a business enterprise to meet the
information needs of the decision-makers. Financial statements prepared by a business enterprise in the
corporate sector are published and are available to the decision-makers. These statements provide
financial data which require analysis, comparison and interpretation for taking decision by the external as
well as internal users of accounting information. This act is termed as financial statement analysis. It is
regarded as an integral and important part of accounting. As indicated in the previous chapter, the most
commonly used techniques of financial statements analysis are comparative statements, common size
statements, trend analysis, accounting ratios and cash flow analysis. The first three have been discussed in
detail in the previous chapter. This chapter covers the technique of accounting ratios for analysing the
information contained in financial statements for assessing the solvency, efficiency and profitability of
the enterprises.

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Meaning of Accounting Ratios
As stated earlier, accounting ratios are an important tool of financial statements analysis. A ratio is a
mathematical number calculated as a reference to relationship of two or more numbers and can be
expressed as a fraction, proportion, percentage and a number of times. When the number is calculated by
referring to two accounting numbers derived fromfinancial statements, it is termed as accounting ratio.
For example, if the gross profit of the business is Rs. 10,000 and the Revenue from Operations are
Rs. 1,00,000, it can be said that the gross profit is 10% 10, 000 100 of the 1, 00, 000
Revenue from Operations . This ratio is termed as gross profit ratio. Similarly, inventory turnover ratio
may be 6 which implies that inventory turns into Revenue from Operations six times in a year.
It needs to be observed that accounting ratios exhibit relationship, if any, between accounting numbers
extracted from financial statements. Ratios are essentially derived numbers and their efficacy depends a
great deal upon the basic numbers from which they are calculated. Hence, if the financial statements
contain some errors, the derived numbers in terms of ratio analysis would also present an erroneous
scenario. Further, a ratio must be calculated using numbers which are meaningfully correlated. A ratio
calculated by using two unrelated numbers would hardly serve any purpose. For example, the furniture of
the business is Rs. 1,00,000 and Purchases are Rs. 3,00,000. The ratio of purchases to furniture is 3
(3,00,000/1,00,000) but it hardly has any relevance. The reason is that there is no relationship between
these two aspects.

Objectives of Ratio Analysis

Ratio analysis is indispensable part of interpretation of results revealed by the financial statements. It
provides users with crucial financial information and points out the areas which require investigation.
Ratio analysis is a technique which involves regrouping of data by application of arithmetical
relationships, though its interpretation is a complex matter. It requires a fine understanding of the way and
the rules used for preparing financial statements. Once done effectively, it provides a lot of information
which helps the analyst:
To know the areas of the business which need more attention;
2. To know about the potential areas which can be improved with the
effort in the desired direction;
3. To provide a deeper analysis of the profitability, liquidity, solvency
and efficiency levels in the business;
4. To provide information for making cross-sectional analysis by
comparing the performance with the best industry standards; and
5. To provide information derived from financial statements useful for
making projections and estimates for the future.

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Advantages of Ratio Analysis
The ratio analysis if properly done improves the users understanding of the efficiency with which the
business is being conducted. The numerical relationships throw light on many latent aspects of the
business. If properly analysed, the ratios make us understand various problem areas as well as thebright
spots of the business. The knowledge of problem areas help management take care of them in future. The
knowledge of areas which are working better helps you improve the situation further. It must be
emphasised that ratios are means to an end rather than the end in themselves. Their role is essentially
indicative and that of a whistle blower. There are many advantages derived from ratio analysis. These are
summarised as follows:
1. Helps to understand efficacy of decisions: The ratio analysis helps you to understand whether the
business firm has taken the right kind of operating, investing and financing decisions. It indicates how far
they have helped in improving the performance.
2. Simplify complex figures and establish relationships: Ratios help in simplifying the complex
accounting figures and bring out their relationships. They help summarise the financial information
effectively and assess the managerial efficiency, firms credit worthiness, earning capacity, etc.
3. Helpful in comparative analysis: The ratios are not be calculated for one year only. When many year
figures are kept side by side, they help a great deal in exploring the trends visible in the business. The
knowledge of trend helps in making projections about the business which is a very useful feature.
4. Identification of problem areas: Ratios help business in identifying the problem areas as well as the
bright areas of the business. Problem areas would need more attention and bright areas will need
polishing to have still better results.
5. Enables SWOT analysis: Ratios help a great deal in explaining the changes occurring in the business.
The information of change helps the management a great deal in understanding the current threats and
opportunities and allows business to do its own SWOT (Strength- Weakness-Opportunity-Threat)
analysis.
6. Various comparisons: Ratios help comparisons with certain bench marks to assess as to whether firms
performance is better or otherwise. For this purpose, the profitability, liquidity, solvency, etc. of a
business, may be compared: (i) over a number of accounting periods with itself (Intra-firm
Comparison/Time Series Analysis), (ii) with other business enterprises (Inter-firm Comparison/Cross-
sectional Analysis) and (iii) with standards set for that firm/industry (comparison with standard (or
industry expectations).

Limitations of Ratio Analysis

Since the ratios are derived from the financial statements, any weakness in the original financial
statements will also creep in the derived analysis in the form ofratio analysis. Thus, the limitations of
financial statements also form the limitations of the ratio analysis. Hence, to interpret the ratios, the user
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should be aware of the rules followed in the preparation of financial statements and also their nature and
limitations. The limitations of ratio analysis which arise primarily from the nature of financial statements
are as under:
1. Limitations of Accounting Data: Accounting data give an unwarranted impression of precision and
finality. In fact, accounting data reflect a combination of recorded facts, accounting conventions and
personal judgements which affect them materially. For example, profit of the business is not a precise and
final figure. It is merely an opinion of the accountant based on application of accounting policies. The
soundness of the judgement necessarily depends on the competence and integrity of those who make them
and on their adherence to Generally Accepted Accounting Principles and Conventions. Thus, the
financial statements may not reveal the true state of affairs of the enterprises and so the ratios will also not
give the true picture.
2. Ignores Price-level Changes: The financial accounting is based on stable money measurement
principle. It implicitly assumes that price level changes are either non-existent or minimal. But the truth is
otherwise. We are normally living in inflationary economies where the power of money declines
constantly. A change in the price-level makes analysis of financial statement of different accounting years
meaningless because accounting records ignore changes in value of money.
3. Ignore Qualitative or Non-monetary Aspects: Accounting provides information about quantitative (or
monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring
completely the non-monetary (qualitative) factors.
4. Variations in Accounting Practices: There are differing accounting policies for valuation of inventory,
calculation of depreciation, treatment of intangibles Assets definition of certain financial variables etc.,
available for various aspects of business transactions. These variations leave a big question mark on the
cross-sectional analysis. As there are variations in accounting practices followed by different business
enterprises, a valid comparison of their financial statements is not possible.
5. Forecasting: Forecasting of future trends based only on historical analysis is not feasible. Proper
forecasting requires consideration of non-financial factors as well.
Now let us talk about the limitations of the ratios. The various limitations are: 1. Means and not the End:
Ratios are means to an end rather than the
end by itself.

Types of Ratios
There is a two way classification of ratios: (1) traditional classification, and
(2) functional classification. The traditional classification has been on the basis of financial statements to
which the determinants of ratios belong. On this basis the ratios are classified as follows:
1. Statement of Profit and Loss Ratios: A ratio of two variables from the statement of profit and loss is

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known as statement of profit and loss ratio. For example, ratio of gross profit to revenue from operations
is known as gross profit ratio. It is calculated using both figures from the statement of profit and loss.
2. Balance Sheet Ratios: In case both variables are from the balance sheet, it is classified as balance sheet
ratios. For example, ratio of current assets to current liabilities known as current ratio. It is calculated
using both figures from balance sheet.
3. Composite Ratios: If a ratio is computed with one variable from the statement of profit and loss and
another variable from the balance sheet, it is called composite ratio. For example, ratio of credit revenue
from operations to trade receivables (known as trade receivables turnover ratio) is calculated using one
figure from the statement of profit and loss (credit revenue from operations) and another figure (trade
receivables) from the balance sheet.
Although accounting ratios are calculated by taking data from financial statements but classification of
ratios on the basis of financial statements is rarely used in practice. It must be recalled that basic purpose
of accounting is to throw light on the financial performance (profitability) and financial position (its
capacity to raise money and invest them wisely) as well as changes occurring in financial position
(possible explanation of changes in the activity level). As such, the alternative classification (functional
classification) based on the purpose for which a ratio is computed, is the most commonly used
classification which is as follows:
1. Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to
pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated
to measure it are known as Liquidity Ratios. These are essentially short-term in nature.
2. Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations
towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure
solvency position are known as Solvency Ratios. These are essentially long-term in nature.
3. Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the efficiency
of operations of business based on effective utilisation of resources. Hence, these are also known as
Efficiency Ratios.
4. Profitability Ratios: It refers to the analysis of profits in relation to revenue from operations or funds
(or assets) employed in the business and the ratios calculated to meet this objective are known as
Profitability Ratios.

Liquidity Ratios
Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firms ability to
meet its current obligations. These are analysed by looking at the amounts of current assets and current
liabilities in the balance sheet. The two ratios included in this category are current ratio and liquidity ratio.

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Current Ratio
Current ratio is the proportion of current assets to current liabilities. It is expressed as follows:
Current Assets Current Ratio = Current Assets : Current Liabilities or Current Liabilities
Current assets include current investments, inventories, trade receivables (debtors and bills receivables),
cash and cash equivalents, short-term loans and advances and other current assets such as prepaid
expenses, advance tax and accrued income, etc. Current liabilities include short-term borrowings, trade
payables (creditors and bills payables), other current liabilities and short-term provisions.
Quick Ratio
It is the ratio of quick (or liquid) asset to current liabilities. It is expressed asQuick ratio = Quick Assets
: Current Liabilities or Current Liabilities
The quick assets are defined as those assets which are quickly convertible into cash. While calculating
quick assets we exclude the inventories at the end and other current assets such as prepaid expenses,
advance tax, etc., from the current assets. Because of exclusion of non-liquid current assets it is
considered better than current ratio as a measure of liquidity position of the business. It is calculated to
serve as a supplementary check on liquidity position of the business and is therefore, also known as
Acid-Test Ratio.

Solvency Ratios
The persons who have advanced money to the business on long-term basis are interested in safety of their
periodic payment of interest as well as the repayment of principal amount at the end of the loan period.
Solvency ratios are calculated to determine the ability of the business to service its debt in the long run.
Debt-Equity Ratio;
Debt to Capital Employed Ratio;
Proprietary Ratio;
Total Assets to Debt Ratio;
Interest Coverage Ratio.

Debt-Equity Ratio
Debt-Equity Ratio measures the relationship between long-term debt and equity. If debt component of the
total long-term funds employed is small, outsiders feel more secure. From security point of view, capital
structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy.
Normally, it is considered to be safe if debt equity ratio is 2 : 1. However, it may vary from industry to
industry. It is computed as follows:
Debt Equity Ratio =Long term Debts Shareholders' Funds
where:
Shareholders Funds (Equity) =Share capital + Reserves and Surplus + Money received against
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share warrants
Share capital = Equity share capital + Preference share capital or
Shareholders Funds (Equity)= Non-current assets + Working capital Non-current liabilities.

Debt to Capital Employed Ratio

The Debt to capital employed ratio refers to the ratio of long-term debt to the total of external and internal
funds (capital employed or net assets). It is computed as follows:
Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets)

Proprietary Ratio
Proprietary ratio expresses relationship of proprietors (shareholders) funds to net assets and is calculated
as follows :
Proprietary Ratio = Shareholders, Funds/Capital employed (or net assets) Based on data of
Illustration 7, it shall be worked out as follows:
Rs. 15,00,000/Rs. 20,00,000 = 0.75 : 1

Total Assets to Debt Ratio

This ratio measures the extent of the coverage of long-term debts by assets. It is calculated as
Total assets to Debt Ratio = Total assets/Long-term debts
Taking the data of Illustration 8, this ratio will be worked out as follows: Rs. 14,00,000/Rs. 1,50,000
= 9.33 : 1
The higher ratio indicates that assets have been mainly financed by owners funds and the long-term loans
is adequately covered by assets.
It is better to take the net assets (capital employed) instead of total assets for computing this ratio also. It
is observed that in that case, the ratio is the reciprocal of the debt to capital employed ratio.
Significance: This ratio primarily indicates the rate of external funds in financing the assets and the extent
of coverage of their debts are covered by assets.

Interest Coverage Ratio

It is a ratio which deals with the servicing of interest on loan. It is a measure of security of interest
payable on long-term debts. It expresses the relationship between profits available for payment of interest
and the amount of interest payable. It is calculated as follows:
Interest Coverage Ratio = Net Profit before Interest and Tax Interest on long-term debts
Significance: It reveals the number of times interest on long-term debts is covered by the profits available
for interest. A higher ratio ensures safety of interest on debts.
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Activity (or Turnover) Ratio
These ratios indicate the speed at which, activities of the business are being performed. The activity ratios
express the number of times assets employed, or, for that matter, any constituent of assets, is turned into
sales during an accounting period. Higher turnover ratio means better utilisation of assets and signifies
improved efficiency and profitability, and as such are known as efficiency ratios. The important activity
ratios calculated under this category are
1. Inventory Turnover;
2. Trade receivable Turnover;
3. Trade payable Turnover;
4. Investment (Net assets) Turnover
5. Fixed assets Turnover; and
6. Working capital Turnover.
5.8.1 Inventory Turnover Ratio
It determines the number of times inventory is converted into revenue from operations during the
accounting period under consideration. It expresses the relationship between the cost of revenue from
operations and average inventory. The formula for its calculation is as follows:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Where average inventory refers to arithmetic average of opening and closing inventory, and the cost of
revenue from operations means revenue from operations less gross profit.
Significance : It studies the frequency of conversion of inventory of finished goods into revenue from
operations. It is also a measure of liquidity. It determines how many times inventory is purchased or
replaced during a year. Low turnover of inventory may be due to bad buying, obsolete inventory, etc., and
is a danger signal. High turnover is good but it must be carefully interpreted as it may be due to buying in
small lots or selling quickly at low margin to realise cash. Thus, it throws light on utilisation of inventory
of goods.

Trade Receivables Turnover Ratio

It expresses the relationship between credit revenue from operations and trade receivable. It is calculated
as follows :
Trade Receivable Turnover ratio = Net Credit Revenue from Operations/Average Trade
Receivable
Where Average Trade Receivable = (Opening Debtors and Bills Receivable + Closing Debtors and
Bills Receivable)/2
It needs to be noted that debtors should be taken before making any provision for doubtful debts.
Significance: The liquidity position of the firm depends upon the speed with which trade receivables are
realised. This ratio indicates the number of times the receivables are turned over and converted into cash
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in an accounting period. Higher turnover means speedy collection from trade receivable. This ratio also
helps in working out the average collection period. The ratio is calculated by dividing the days or months
in a year by trade receivables turnover ratio.

Trade payables turnover ratio indicates the pattern of payment of trade payable. As trade payable arise on
account of credit purchases, it expresses relationship between credit purchases and trade payable. It is
calculated as follows:
Trade Payables Turnover ratio Where Average Trade Payable
= Net Credit purchases/ Average trade payable
= (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2
Average Payment Period =
No. of days/month in a year Trade Payables Turnover Ratio
Trade Payable Turnover Ratio
Significance : It reveals average payment period. Lower ratio means credit allowed by the supplier is for
a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may
affect the reputation of the business. The average period of payment can be worked out by days/months in
a year by the Trade Payable Turnover Ratio.

Net Assets or Capital Employed Turnover Ratio

It reflects relationship between revenue from operations and net assets (capital employed) in the business.
Higher turnover means better activity and profitability. It is calculated as follows
Net Assets or Capital Employed Turnover ratio =
Revenue from Operation Capital Employed
Capital employed turnover ratio which studies turnover of capital employed (or Net Assets) is
analysed further by following two turnover ratios :
(a) Fixed Assets Turnover Ratio : It is computed as follows:
Fixed asset turnover Ratio =
Net Revenue from Operation Net Fixed Assets

(b) Working Capital Turnover Ratio : It is calculated as follows :

Net Revenue from Operation
Working Capital Turnover Ratio =
Working Capital
Significance : High turnover of capital employed, working capital and fixed assets is a good sign and
implies efficient utilisation of resources. Utilisation of capital employed or, for that matter, any of its

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components is revealed by the turnover ratios. Higher turnover reflects efficient utilisation resulting in
higher liquidity and profitability in the business.

Profitability Ratios
The profitability or financial performance is mainly summarised in the statement of profit and loss.
Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of
utilisation of resources employed in the business. There is a close relationship between the profit and the
efficiency with which the resources employed in the business are utilised. The various ratios which are
commonly used to analyse the profitability of the business are:
1. Gross profit ratio
2. Operating ratio
3. Operating profit ratio
4. Net profit ratio
5. Return on Investment (ROI) or Return on Capital Employed (ROCE)
6. Return on Net Worth (RONW)
7. Earnings per share
8. Book value per share
9. Dividend payout ratio
10. Price earning ratio.

Gross Profit Ratio

Gross profit ratio as a percentage of revenue from operations is computed to have an idea about gross
margin. It is computed as follows:
Gross Profit Ratio = Gross Profit/Net Revenue of Operations * 100
Significance: It indicates gross margin on products sold. It also indicates the margin available to cover
operating expenses, non-operating expenses, etc. Change in gross profit ratio may be due to change in
selling price or cost of revenue from operations or a combination of both. A low ratio may indicate
unfavourable purchase and sales policy. Higher gross profit ratio is always a good sign.

Operating Ratio
It is computed to analyse cost of operation in relation to revenue from operations. It is calculated as
follows:
Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/ Net Revenue from
Operations 100
Operating expenses include office expenses, administrative expenses, selling expenses, distribution
expenses, depreciation and employee benefit expenses etc.
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Cost of operation is determined by excluding non-operating incomes and expenses such as loss on sale of
assets, interest paid, dividend received, loss by fire, speculation gain and so on.

Operating Profit Ratio

It is calculated to reveal operating margin. It may be computed directly or as a residual of operating ratio.
Operating Profit Ratio = 100 Operating Ratio
Alternatively, it is calculated as under:
Operating Profit Ratio = Operating Profit/ Revenue from Operations 100 Where Operating Profit
= Revenue from Operations Operating Cost
Significance: Operating ratio is computed to express cost of operations excluding financial charges in
relation to revenue from operations. A corollary of it is Operating Profit Ratio. It helps to analyse the
performance of business and throws light on the operational efficiency of the business. It is very useful
for inter-firm as well as intra-firm comparisons. Lower operating ratio is a very healthy sign.

Net Profit Ratio

Net profit ratio is based on all inclusive concept of profit. It relates revenue from operations to net profit
after operational as well as non-operational expenses and incomes. It is calculated as under:
Net Profit Ratio = Net profit/Revenue from Operations* 100
Generally, net profit refers to profit after tax (PAT).
Significance: It is a measure of net profit margin in relation to revenue from operations. Besides revealing
profitability, it is the main variable in computation of Return on Investment. It reflects the overall
efficiency of the business, assumes great significance from the point of view of investors.

Return on Capital Employed or Investment

It explains the overall utilisation of funds by a business enterprise. Capital employed means the long-term
funds employed in the business and includes shareholders funds, debentures and long-term loans.
Alternatively, capital employed may be taken as the total of non-current assets and working capital. Profit
refers to the Profit Before Interest and Tax (PBIT) for computation of this ratio. Thus, it is computed as
follows:
Return on Investment (or Capital Employed) = Profit before Interest and Tax/ Capital
Employed*100

Significance: It measures return on capital employed in the business. It reveals the efficiency of the
business in utilisation of funds entrusted to it by shareholders,
Accounting Ratios 235
debenture-holders and long-term loans. For inter-firm comparison, return on capital employed funds is
15
considered a good measure of profitability. It also helps in assessing whether the firm is earning a higher
return on capital employed as compared to the interest rate paid.

Return on Shareholders Funds

This ratio is very important from shareholders point of view in assessing whether their investment in the
firm generates a reasonable return or not. It should be higher than the return on investment otherwise it
would imply that companys funds have not been employed profitably.
A better measure of profitability from shareholders point of view is obtained by determining return on
total shareholders funds, it is also termed as Return on Net Worth (RONW) and is calculated as under :
Return on Shareholders Fund =
5.9.7 Earnings per Share
Profit after Tax Shareholders' Funds*100

The ratio is computed as:

EPS = Profit available for equity shareholders/Number of Equity Shares
In this context, earnings refer to profit available for equity shareholders which is worked out as
Profit after Tax Dividend on Preference Shares.
This ratio is very important from equity shareholders point of view and
also for the share price in the stock market. This also helps comparison with other to ascertain its
reasonableness and capacity to pay dividend.

Book Value per Share

This ratio is calculated as :
Book Value per share = Equity shareholders funds/Number of Equity Shares
Equity shareholder fund refers to Shareholders Funds Preference Share Capital. This ratio is again
very important from equity shareholders point of view as it gives an idea about the value of their holding
and affects market price of the shares.

Dividend Payout Ratio

This refers to the proportion of earning that are distributed to the shareholders. It is calculated as
Dividend per share Dividend Payout Ratio = Earnings per share
This reflects companys dividend policy and growth in owners equity.

Price / Earning Ratio

The ratio is computed as P/E Ratio = Market Price of a share/earnings per share
For example, if the EPS of X Ltd. is Rs. 10 and market price is Rs. 100, the price earning ratio will be 10
16
(100/10). It reflects investors expectation about the growth in the firms earnings and reasonableness of
the market price of its shares. P/E Ratio vary from industry to industry and company to company in the
same industry depending upon investors perception of their future.

OBJECTIVES OF STUDY:

The main objectives of analysing the financial statements are summaries below:

(i) The analysis would enable the calculation f not only the present earning capacity of business
enterprise but also the estimation of the future earning capacity as well.
(ii) The analysis would enable the management to find out the overall as well as department-wise
efficiency of the firm on the basis for available financial information. The management can easily
discover the areas of efficiency or inefficiency.
(iii) The solvency of the firm-short and long term-can be determined with the help of financial
statements analysis. Short-term solvency position is useful to trade creditors while debenture holders etc.
benefit from the analysis for long-term solvency.
(iv) Inter-firm comparison, that is, comparison of two or more firms becomes easy.
(v) Analysis of past results in respect of earning and financial position of the enterprise is for greet help
in forecasting the future results. Analysis thus helps in repairing the budgets.

MEANING OF RESEARCH

Research in common parlance refers to a search for knowledge. Once can also define research as a
scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of
scientific investigation. The Advanced Learners Dictionary of Current English lays down the meaning of
research as a careful investigation or inquiry specially through search for new facts in any branch of
knowledge.1 Redman and Mory define research as a systematised effort to gain new knowledge.2
Some people consider research as a movement, a movement from the known to the unknown. It is
actually a voyage of discovery. We all possess the vital instinct of inquisitiveness for, when the unknown
confronts us, we wonder and our inquisitiveness makes us probe and attain full and fuller understanding
of the unknown. This inquisitiveness is the mother of all knowledge and the method, which man employs
for obtaining the knowledge of whatever the unknown, can be termed as research.
Research is an academic activity and as such the term should be used in a technical sense. According to
Clifford Woody research comprises defining and redefining problems, formulating hypothesis or
suggested solutions; collecting, organising and evaluating data; making deductions and reaching
conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating
17
hypothesis. D. Slesinger and M. Stephenson in the Encyclopaedia of Social Sciences define research as
the manipulation of things, concepts or symbols for the purpose of generalising to extend, correct or
verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art.3
Research is, thus, an original contribution to the existing stock of knowledge making for its advancement.
It is the per-suit of truth with the help of study, observation, comparison and experiment. In short, the
search for knowledge through objective and systematic method of finding solution to a problem is
research. The systematic approach concerning generalisation and the formulation of a theory is also
research. As such the term research refers to the systematic method
1 The Advanced Learners Dictionary of Current English, Oxford, 1952, p. 1069. 2 L.V. Redman and
A.V.H. Mory, The Romance of Research, 1923, p.10.
3 The Encyclopaedia of Social Sciences, Vol. IX, MacMillan, 1930.

SIGNIFICANCE OF RESEARCH

All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry, and
inquiry leads to invention is a famous Hudson Maxim in context of which the significance of research
can well be understood. Increased amounts of research make progress possible. Research inculcates
scientific and inductive thinking and it promotes the development of logical habits of thinking and
organisation.
The role of research in several fields of applied economics, whether related to business or to the economy
as a whole, has greatly increased in modern times. The increasingly complex nature of business and
government has focused attention on the use of research in solving operational problems. Research, as an
aid to economic policy, has gained added importance, both for government and business.
Research provides the basis for nearly all government policies in our economic system. For instance,
governments budgets rest in part on an analysis of the needs and desires of the people and on the
availability of revenues to meet these needs. The cost of needs has to be equated to probable revenues and
this is a field where research is most needed. Through research we can devise alternative policies and can
as well examine the consequences of each of these alternatives.
Decision-making may not be a part of research, but research certainly facilitates the decisions of the
policy maker. Government has also to chalk out programmes for dealing with all facets of the countrys
existence and most of these will be related directly or indirectly to economic conditions. The plight of
cultivators, the problems of big and small business and industry, working conditions, trade union
activities, the problems of distribution, even the size and nature of defence services are matters requiring
research. Thus, research is considered necessary with regard to the allocation of nations resources.
Another area in government, where research is necessary, is collecting information on the economic and
social structure of the nation. Such information indicates what is happening in the economy and what
18
changes are taking place. Collecting such statistical information is by no means a routine task, but it
involves a variety of research problems. These day nearly all governments maintain large staff of research
technicians or experts to carry on this work. Thus, in the context of government, research as a tool to
economic policy has three distinct phases of operation, viz., (i) investigation of economic structure
through continual compilation of facts; (ii) diagnosis of events that are taking place and the analysis of the
forces underlying them; and (iii) the prognosis, i.e., the prediction of future developments.
Research has its special significance in solving various operational and planning problems of business
and industry. Operations research and market research, along with motivational research, are considered
crucial and their results assist, in more than one way, in taking business decisions. Market research is the
investigation of the structure and development of a market for the purpose of formulating efficient
policies for purchasing, production and sales. Operations research refers to the application of
mathematical, logical and analytical techniques to the solution of business problems of cost minimisation
or of profit maximisation or what can be termed as optimisation problems. Motivational research of
determining why people behave as they do is mainly concerned with market characteristics. In other
words, it is concerned with the determination of motivations underlying the consumer (market) behaviour.
All these are of great help to people in business and industry who are responsible for taking business
decisions. Research with regard to demand and market factors has great utility in business. Given
knowledge of future demand, it is generally not difficult for a firm, or for an industry to adjust its supply
schedule within the limits of its projected capacity. Market analysis has become an integral tool of
business policy these days. Business budgeting, which ultimately results in a projected profit and loss
account, is based mainly on sales estimates which in turn depends on business research. Once sales
forecasting is done, efficient production and investment programmes can be set up around which are
grouped the purchasing and financing plans. Research, thus, replaces intuitive business decisions by more
logical and scientific decisions.
Research is equally important for social scientists in studying social relationships and in seeking answers
to various social problems. It provides the intellectual satisfaction of knowing a few things just for the
sake of knowledge and also has practical utility for the social scientist to know for the sake of being able
to do something better or in a more efficient manner. Research in social sciences is concerned both with
knowledge for its own sake and with knowledge for what it can contribute to practical concerns. This
double emphasis is perhaps especially appropriate in the case of social science. On the one hand, its
responsibility as a science is to develop a body of principles that make possible the understanding and
prediction of the whole range of human interactions. On the other hand, because of its social orientation,
it is increasingly being looked to for practical guidance in solving immediate problems of human
relations.

19
RESEARCH METHODOLOGY.
Research methodology is a comprehensive approach to solving a research problem very systematically
and scientifically. For a researcher, it is not only important to know the different methods or techniques of
research but also he is supposed to know how and when a particular method or technique is to be used. In
other words, he is to know which method or technique is relevant for solving a given research problem. A
well-planned methodology can help in enriching the research by systematic collection and compilation of
data for meaningful analysis and their proper interpretation to find out the hidden truth underlying the
research problem.7 Considering all the facts, we have developed our research methodology, which we
think, is very appropriate to our research study. The methodology of our study is explained in the
following segments

FORMULATING A RESEARCH PROBLEM

Researchers organise their research by formulating and defining a research problem. This helps them
focus the research process so that they can draw conclusions reflecting the real world in the best possible
way.

HYPOTHESIS

In research, a hypothesis is a suggested explanation of a phenomenon.

A null hypothesis is a hypothesis which a researcher tries to disprove. Normally, the null
hypothesis represents the current view/explanation of an aspect of the world that the researcher
wants to challenge.
Research methodology involves the researcher providing an alternative hypothesis, a research hypothesis,
as an alternate way to explain the phenomenon.
The researcher tests the hypothesis to disprove the null hypothesis, not because he/she loves the research
hypothesis, but because it would mean coming closer to finding an answer to a specific problem. The
research hypothesis is often based on observations that evoke suspicion that the null hypothesis is not
always correct.
In the Stanley Milgram Experiment, the null hypothesis was that the personality determined whether a
person would hurt another person, while the research hypothesis was that the role, instructions and orders
were much more important in determining whether people would hurt others.

20
VARIABLES

A variable is something that changes. It changes according to different factors. Some variables change
easily, like the stock-exchange value, while other variables are almost constant, like the name of
someone. Researchers are often seeking to measure variables.
The variable can be a number, a name, or anything where the value can change. An example of a variable
is temperature. The temperature varies according to other variable and factors. You can measure different
temperature inside and outside. If it is a sunny day, chances are that the temperature will be higher than if
it's cloudy. Another thing that can make the temperature change is whether something has been done to
manipulate the temperature, like lighting a fire in the chimney.
In research, you typically define variables according to what you're measuring. The independent
variable is the variable which the researcher would like to measure (the cause), while the dependent
variable is the effect (or assumed effect), dependent on the independent variable. These variables are
often stated in experimental research, in a hypothesis, e.g. "what is the effect of personality on helping
behavior?"
In explorative research methodology, e.g. in some qualitative research, the independent and the dependent
variables might not be identified beforehand. They might not be stated because the researcher does not
have a clear idea yet on what is really going on.
Confounding variables are variables with a significant effect on the dependent variable that the researcher
failed to control or eliminate - sometimes because the researcher is not aware of the effect of the
confounding variable. The key is to identify possible confounding variables and somehow try to eliminate
or control them.

OPERATIONALISATION

Operationalization is to take a fuzzy concept (conceptual variables), such as 'helping behavior', and try to
measure it by specific observations, e.g. how likely are people to help a stranger with problems.
Choosing the Research Method
The selection of the research method is crucial for what conclusions you can make about a phenomenon.
It affects what you can say about the cause and factors influencing the phenomenon.
It is also important to choose a research method which is within the limits of what the researcher can do.
Time, money, feasibility, ethics and availability to measure the phenomenon correctly are examples of
issues constraining the research.

Choosing the Measurement

21
Choosing the scientific measurements are also crucial for getting the correct conclusion. Some
measurements might not reflect the real world, because they do not measure the phenomenon as it should.

Significance Test
To test a hypothesis, quantitative research uses significance tests to determine which hypothesis is right.
The significance test can show whether the null hypothesis is more likely correct than the research
hypothesis. Research methodology in a number of areas like social sciences depends heavily on
significance tests.
A significance test may even drive the research process in a whole new direction, based on the findings.
The t-test (also called the Student's T-Test) is one of many statistical significance tests, which compares
two supposedly equal sets of data to see if they really are alike or not. The t-test helps the researcher
conclude whether a hypothesis is supported or not.

Drawing a conclusion
Drawing a conclusion is based on several factors of the research process, not just because the researcher
got the expected result. It has to be based on the validity and reliability of the measurement, how good the
measurement was to reflect the real world and what more could have affected the results.
The observations are often referred to as 'empirical evidence' and the logic/thinking leads to the
conclusions. Anyone should be able to check the observation and logic, to see if they also reach the same
conclusions.
Errors of the observations may stem from measurement-problems, misinterpretations, unlikely random
events etc.
A common error is to think that correlation implies a causal relationship. This is not necessarily true.

PRIMARY DATA

Primary data is that which is collected by sociologists themselves during their own research using
research tools such as experiments, survey questionnaires, interviews and observation.
Primary data can take a quantitative or statistical form, e.g. charts, graphs, diagrams and tables. It is
essential to interpret and evaluate this type of data with care. In particular, look at how the data is
organised in terms of scale. Is it organised into percentages, hundreds, thousands, etc.? Is it a snapshot of
a particular year or is it focusing on trends across a number of years?
Primary data can also be qualitative, e.g. extracts from the conversations of those being studied. Some
researchers present their arguments virtually entirely in the words of their subject matter. Consequently
the data speaks for itself and readers are encouraged to make their own judgements. There are many
methods of collecting primary data. The main methods include:
22
 questionnaires
interviews
focus group interviews
observation

SECONDARY DATA

Secondary data refers to data that was collected by someone other than the user.Common sources of
secondary data for social science include censuses, information collected by government departments,
organisational records and data that was originally collected for other research purposes. Primary data, by
contrast, are collected by the investigator conducting the research.
Secondary data analysis can save time that would otherwise be spent collecting data and, particularly in
the case of quantitative data, can provide larger and higher-quality databases that would be unfeasible for
any individual researcher to collect on their own. In addition, analysts of social and economic change
consider secondary data essential, since it is impossible to conduct a new survey that can adequately
capture past change and/or developments. However, secondary data analysis can be less useful in
marketing research, as data may be outdated or inaccurate.
Secondary data can be obtained from different sources:
information collected through censuses or government departments like housing, social security, electoral
statistics, tax records
internet searches or libraries
progress reports

Administrative data and census

Government departments and agencies routinely collect information when registering people or carrying
out transactions, or for record keeping usually when delivering a service. This information is called
administrative data.

It can include:
personal information such as names, dates of birth, addresses
information about schools and educational achievements
information about health
information about criminal convictions or prison sentences
tax records, such as income
A census is the procedure of systematically acquiring and recording information about the members of a
given population. It is a regularly occurring and official count of a particular population. It is a type of
23
 administrative data, but it is collected for the purpose of research at specific intervals. Most administrative
data is collected continuously and for the purpose of delivering a service to the people.

GENERALISATION

Generalisation is to which extent the research and the conclusions of the research apply to the real world.
It is not always so that good research will reflect the real world, since we can only measure a small
portion of the population at a time.

Validity and Reliability

Validity refers to what degree the research reflects the given research problem, while Reliability refers to
how consistent a set of measurements are.
A definition of reliability may be "Yielding the same or compatible results in different clinical
experiments or statistical trials" (the free dictionary). Research methodology lacking reliability cannot be
trusted. Replication studiesare a way to test reliability.

Types of Reliability:
Test-Retest Reliability
Interrater Reliability
Internal Consistency Reliability
Instrument Reliability
Statistical Reliability
Reproducibility
Both validity and reliability are important aspects of the research methodology to get better explanations
of the world.

ERRORS IN RESEARCH

Logically, there are two types of errors when drawing conclusions in research:
Type 1 error is when we accept the research hypothesis when the null hypothesis is in fact correct.
Type 2 error is when we reject the research hypothesis even if the null hypothesis is wrong.

24
REVIEW OF LITERATURE:
A number of National and International research studies have been carried out on different aspects of
financial performance by the researchers, economists and academicians in India. Different authors have
analysed performance in different aspects. Very few research work has been done on analysis of financial
performance of Indian cement industry. Therefore, the present chapter reviews the empirical studies
related with different aspects of financial performance. Literature review was divided in two category
National review and International review.
Some important research works undertaken in recent years which are very closely connected with the
present study are reviewed.
Shinde Govind P. &Dubey Manisha (2011) the study has been conducted considering the
segments such as passenger vehicle, commercial vehicle, utility vehicle, two and three wheeler
vehicle of key players performance and also analyse SWOT analysis and key factors influencing
growth of automobile industry.
Sharma Nishi (2011) studied the financial performance of passenger and commercial vehicle
segment of the automobile industry in the terms of four financial parameters namely liquidity,
profitability, leverage and managerial efficiency analysis for the period of decade from 2001-02 to
2010-11. The study concludes that profitability and managerial efficiency of Tata motors as well
as Mahindra & Mahindra ltd are satisfactory but their liquidity position is not satisfactory. The
liquidity position of commercial vehicle is much better than passenger vehicle segment.
Singh Amarjit & Gupta Vinod (2012) explored an overview of automobile industry. Indian
automobile industry itself as a manufacturing hub and many joint ventures have been setup in
India with foreign collaboration. SWOT analysis done there are some challenges by the virtue of
witch automobile industry faces lot of problems and some innovative key features are keyless
entry, electrically controlled mechanisms enhanced driving control, soft feel interiors and also
need to focus in future on like fuel efficiency, emission reduction safety and durability.
Zafar S.M.Tariq & Khalid S.M (2012) the study explored that ratios are calculated from
financial statements which are prepared as desired policies adopted on depreciation and stock
valuation by the management. Ratio is simple comparison of numerator and a denominator that
cannot produce complete and authentic picture of business. Results are manipulated and also may
not highlight other factors which affect performance of firm by promoter.
Ray (2012) studied the sample of automobile companies to evaluate the performance of industry
through indicators namely sales, production and export trend etc for period of 2003-04 to 2009-10.
The study finds that automobile industry has been passing through disruptive phases by over debt
burden, under utilisation of assets and liquidity instability. The researcher suggested to improving
the labour productivity, labour flexibility and capital efficiency for success of industry in future.

25
 Dawar Varun (2012) Study to analyse e the effect of various fundamental corporate policy
variables like dividend, debit, capital expenditure on stock prices of automobile companies of
India. The study tends that dividend & investment policy are relevant and capital structure
irrelevant to stock prices.
Mistry Dharmendra S. (2012) understood a study to analyse the effect of various determinants
on the profitability of the selected companies. It concluded that debt equity ratio, inventory ratio,
total assets were important determinants which effect positive or negative effect on the
profitability. It suggested ted to improve solvency as to reduce fixed financial burden on the
company profit & give the benefit of trading on equity to the shareholders.
Muralidhar, A. Lok Hande& Rana Vishal S. (2013) the author tries to evaluate the
performance of Hyundai Motors Company with respect to export, Domestic Sales, productions
and profit after tax. For this purpose, the pie chart and bar graph are used to show the performance
of company various years.
Dharmaraj, A.and Kathirvel N. (2013) explored an overview of new industrial policy act 1991,
which allow 100 percent foreign direct investment. An attempt is made to find out the effect of
FDI on financial performance of automobile industry. It is concluded that the liquidity ratios
shows minor changes and profitability shows an increasing trend during post FDI when compared
to pre FDI. Post FDI efficiency ratio shows that companies are efficiently utilising the available
resources.
Raphael Nisha (2013) the author tries to evaluate the financial performance of Indian tyre
industry. The study was conducted for period 2003-04 to 2011-12 to analyse the performance with
financial indicators, sales trend, export trend, production trend etc. The result suggests the key to
success in industry is to improve labour productivity and flexibility and capital efficiency.
Motwani Rakhi (2013) the author examines the profitability position and growth of company in
light of sales and profitability of Tata Motors for past ten years. Data is analysed through rations,
standard deviations and coefficient of variance. The study reveals that there not exists a strong
relationship between sales & profitability of company.
Sharma Rashmi, Pande Neeraj & Singh Avinash (2013) for understanding how social media
monitoring can help diving the consumer decision & also study. The functions of social media i.e.
monitor, responses amplify and lead at Maruthi Suzuki India ltd. The researcher had discussion
with social media team median managers for collecting data & also visited the official social
media sites of MSIL.
Daniel A. Moses Joshunar (2013) the study has been conducted to identify the financial strength
and weakness of the Tata motors Ltd. using past 5 year financial statements. Trend analysis &
ratio analysis used to comment of financial status of company. Financial performance of company

26
 is satisfactory and also suggested to increase the loan levels of company for the better
performance.
Dhole Madhavi (2013) Investing the impact of price movement of share on selected company
performance. It advise due investors consider various factors before choosing the better portfolio.
Sentimental factors do play a role in price movement only in short term but in long run annual
performance is sole factor responsible for price movement.
Shinde Vikram (2014) this research will be helpful for the new entrants and existing car
manufacturing companies in India to find out the customer expectations and their market
offerings. The objective of study is the identification of factors influencing customers performance
for particular segment of cars.
Azhagaiah R. &Gounasegaran (2014) recognised Indias per capita real GDP growth as one of
key drivers of growth for countrys automobile industry. The central government would be set up
various task forces on issue related to taxation, land acquisitions, labour reform and skill
development for auto industry.
Bhuvaneswari .R &Kanimozhip (2014) to study the credit worthiness of selected firms in Indian
car industry, Thiruchy. Professor Edward Altman of New York University developed method Z
score analysis to predict the company failure or bankruptcy. To measure the fiscal fitness of a
company combined a set of five financial ratios.
Idhayajothi, R et al (2014) the main idea behind this study is to analyse the financial
performance of Ashoka Leyland ltd. at Chennai. The result shows that financial performance is
sound and also suggested to improve financial performance by reducing the various expenses.
HulaSalheMeften& Manish Roy Tirkey (2014) have studied the financial analysis of Hindustan
petroleum corporation ltd. The study is based on secondary data. The company has got excellent
gross profit ratio and trend is rising in with is appreciable indicating efficiency in production cost.
The net profit for the year 2010-11 is excellent & it is 8 times past year indicating reduction in
operating reduction in operating expenses and large proportion of net sales available to the
shareholders of company.
Srivastava Anubha (2014) Data analysis has been done using the top down approach ,i.e.
Economic analysis, industry analysis, company and technical analysis to find relationship between
automobile sector index with market index. Mahindra and Mahindra have a great position on the
stock market and will attract investor and this could lead to expansion and growth. Thus Tata
motors and Maruti Suzuki need to take care of their stock and expansion.
Sarangi Pradeepta K et al (2014) undertook a study to forecast the future trend of automobile
industry. The study highlighted the six different experiments have been carried out for period of

27
 12 years data to estimate values for next 3 years. In each experiment graph has been plotted using
spreadsheet and then linear trend has been drawn and expanded to calculate future values.
Kumar Sumesh & Kaur Gurbachan (2014) Automobile sector is the dominant player in
economy of world. After liberalisation Indian automobile industry has emerged as a major
contributor to Indias GDP. The study identified that there is no significant in the means score of
various financial ratios of Maruti Suzuki and Tata motors but in meeting their long term
obligations and efficacy of utilising the assets show the significant difference in the efficiency of
both the firms.
Krishnaveni, M. & Vidya, R. (2015) find that Indian automobile industry is a high flying sector
these days and emerging as an export hub in wake of liberalisation and globalisation. This paper
revises the category wise production, sales and exports of automobile industry in India. Industry
growth can be viewed in term of pre and post liberalisation. As government allows 100 percent
FDI, increase 15% in customs duty on cars and MUVs to encourage local manufacturer and
concessional import duty on specified parts of hybrid vehicles.
SarwateWalmik Kachru (2015) analysed the effects of liberalisation, government de- licensing
and liberal trade policies on the growth of Indian auto mobile industry .The study recommends
that investing four- wheeler is going to be smart potion not only in India but all around the world.
Becker Dieter (2015) the report shows about the current state and future prospects of the
worldwide automobile industry. This survey report the manufacturer, executive and consumer
views about four aspects, mobility culture, technological fit, business model readiness and market
share.
Surekha B. &Krishnalah K.Rama (2015) this study reveals the prosperity of Tata motors
company. It can be concluded that inner strength of company is remarkable. Company can further
improve its profitability by optimum capital gearing, reduction in administration and financial
expenses for the growth of company.
Anu B. (2015) made an attempt to examine the relationship between capital structure indicators,
market price per shares and also to test relationship between debt-equity and market price per
share of selected companies in industry. The study concludes that all three companies support the
hypothesis that there is relation between debt-equity and MPS.
Maheswari, V. (2015) made an attempt to analyse the financial soundness of the Hero Honda
motors limited have identified three factors, namely liquidity position, solvency position and
profitability position based on the study of period 2002 to 2010 using ratio analysis.
Agarwal, Nidhi (2015) the study focus on the comparative financial performance of Maruti
Suzuki and Tata motors ltd. The financial data and information required for the study are drawn
from the various annual reports of companies. The liquidity and leverage analysis of both the

28
 firms are done. To analyse the leverage position four ratios are considered namely, capital gearing,
debt-equity, total debt and proprietary ratio. The result shows that Tata motors ltd has to increase
the portion of proprietors fund in business to improve long term solvency position.
Nandini, M. &Sivasalthi, V.(2015) have studied the impact of both financial leverage as well as
operating language on the profitability of TVS motor company. The result shows that company
suffers from certain weakness & suggested to control fixed cost as well as variable cost to gain
adequate profits.
Jothi, K. &Kalaivani, P. (2015) studied the comparative performance of Honda Motors and
Toyota Motor that both companies have satisfactory short term liquidity position. As for as cash
ratio concerned Honda company has upper hand upper hand in sound cash management practice
during the study period. In case of profitability it is rising from the both of companies but
remained much higher earning potential in Honda motor ltd.
Krishnaveni , M. & Vidya, R (2015) author has selected 87 companies out of 242 companies in
capital line database to discuss the standard current ratio of automobile industry is matched with
tractor and four sectors like engine parts, lamps, gears and ancillaries with standard norms. The
study concludes that current and liquidity ratio of automobile industry is matched with tractor and
the four sectors but other sectors have to improve the repaying capacity to strengthen the financial
aspects.
Taki Ata &NavaprabhaJubiliy (2015) Author has made conceptual model to outline the impact
of capital structure on the financial performance i.e. capital structure is independent variable that
value is measured by using four ratios namely, financial debt, total debt equity, total asset debt and
interest coverage ratio where as financial performance is dependent variable that value is
measured by using four ratios as return on assets, return on equity , operating profit margin and
return on capital employed. Researcher has selected 13 major steel industries and applied various
statistical tools like standard deviation, correlation matrix, anova etc are employed for testing
hypothesis with help of SPSS22.
Kumar Neeraj & Kaur Kuldip (2016) made an attempt to test the size and profitability
relationship in the Indian automobile industry. To analyse the relationship linear regression model
as well as cross-sectional has been employed for the year 1998to 2014. For profitability analysis
two different measures have been used (i) ratio of net profit to total sales turnover (ii) ratio of net
income to net assets plus working capital and for form size two indicators used namely, total sales
turn over and net assets. The time series analysis showed the positive relationship between firm
size and profitability but cross- sectional show no relationship between firm size and profitability.
Ravichandran, M. &Subramanium M Venkata (2016) the main idea behind this study is to
assessment of viability, stability and profitability of Force motors limited. Operating position of
the company can be measured by using various financial tools such as profitability ratio, solvency
29
 ratio, comparative statement & graphs etc. This study finds that company has got enough funds to
meet its debts & liabilities. Company can further improve financial performance by reducing the
administrative, selling & operating expenses.
Mathur Shivam & Agarwal Krati (2016) Ratios are an excellent and scientific way to analyse
the financial performance of any firm. The company has received many awards and achievements
due to its new innovations and technological advancement. These indicators help the investors to
invest the right company for expected profits. The study shows that Maruti Suzuki limited is better
than Tata motors limited.
Jothi, K. &Geethalakshmi, A. (2016) this study tries to evaluate the profitability & financial
position of selected companies of Indian automobile industry using statistical tools like, ratio
analysis, mean, standard deviation, correlation. The study reveals the positive relationship
between profitability, short term and long term capital.
Kumar Mohan M.S, Vasu. V. and Narayana T. (2016) the study has been made through using
different ratios , mean, standard deviation and Altmans Z score approach to study the financial
health of the company. The study reveals there is a positive correlation between liquidity and
profitability ratios except return on total assets as well as Z score value indicate good health of the
company.
Kaur Harpreet (2016) the author tries to examine the qualities & quantities performer of Suzuki
co. & how had both impact on its market share in India, For this study secondary data has been
collected from annual reports, journals, report automobile sites. Result shows that MSL has been
successfully leading automobile sector in India for last few years.

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