CHAPTER 1 INTRODUCTION OF FINANCIAL ANALYSIS

(ii) INTRODUCTION TO RATIO ANALYSIS

RATIO ANALYSIS
Meaning of Ratio:A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountants Handbook by Wixom, Kell and Bedford, a ratio is an expression of the quantitative relationship between Two numbers. For example if there are 40teachers in a college of 1000 students, we can say that teachers-students ratio in the college is 40:1000i.e. 1:25. Ratio Analysis:Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgment, otherwise complex situations.

IMPORTANCE OF RATIO ANALYSIS

Aid to measure general efficiency Aid to measure financial solvency Aid in forecasting and planning Facilitate decision making Aid in corrective action Aid in intra-firm comparison Act as a good communication Evaluation of efficiency Effective tool

REVIEW OF LITERATURE REPORTS Ratio Analysis

DATE 27/11/10 This report will provide a financial comparison of two Home Retail companies listed on the London Stock Exchange; Kingfisher Plc and Home Retail Group Plc. This comparison will be done using a selection of accounting ratios and looking at other relevant data to evaluate the companys performance. Any factors whether it being financial or not that affected the companys performance during the periods under review will be discussed.

Financial Statement of Ratio Analysis of Prime Bank

DATE 03/03/10 This report consist of the results of the 2010 study on time series ratio analysis of a listed private commercial bank in Bangladesh and one of its direct competitor banks. The two banks were randomly selected from the listed local banks that are operating in the banking industry in Bangladesh. The chosen banks for this purpose were Prime Bank Limited and Eastern bank Limited (competitor). Both the banks are enlisted in the Dhaka Stock Exchange (DSE). Origin of the Report On March3rd, 2010, Mr. M. Morshed, course instructor of the Bank Management course at North South University, authorized to prepare a report on

the ratio analysis of Prime Bank Limited and Eastern Bank Limited.

Objective of the Report The objective is to find out the performance of the management and the bank as a whole, and suggest steps to improve the condition. The financial ratios were used as the main tool for evaluating the performance. The financial ratios concerning liquidity, leverage, efficiency, profitability and market position are useful in evaluating the financial performance and management quality of the two banks. The ratio findings help to identify the current position and future growth potential of a bank in the industry.

Financial Ratio Analysis, Using Annual Statement Studies

DATE 06/09/2005 Accounting ratios are probably the most widely used indictors in bankruptcy studies and therefore in supplier solvency risk assessments. In identifying which contractors pose the greatest potential risk of non-performance, published financial statements provide readily available information. Ratio analysis of nonpublic companies may be suspect since it is based on self-disclosure. The Securities and Exchange Commission (SEC) has identified critical information that they believe a potential equity holder should have of firms. Since there is a high likelihood that a potentially insolvent firm can also become a nonperforming supplier, we may use the financial statements to gain crucial business information. A brief review of the literature suggests that there may be over a hundred ratios that can be calculated from accounting numbers included in financial statements. Many of these, however, will reflect similar attributes. Some means is generally used to reduce the number of ratios to manageable proportions and avoid duplication. Another concern relates to the statistical

properties of ratios. Empirical research suggests that ratios are not normally distributed so analysis must not be done with a methodology, which requires normality.

Financial Ratio Analysis Report

DATE 02/03/2006 In assessing the significance of various industry financial data, experts engage in financial ratio analysis, which is the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about an industry's activities, such as the ratio between the industry's current assets and current liabilities or between its accounts receivable and its annual sales. The basic sources for these ratios are the company financial statements within the industry that contain figures on assets, liabilities, profits, and losses. Industry ratios are only meaningful when compared with other information. Since individual companies are most often compared with industry data, ratios help an individual understand a company's performance relative to that of competitors and are often used to trace performance over time. This report will evaluate the financial performance of Edison Schools, Inc., and evaluate the company's worthiness as an investment. As one of the first and the largest private operators of public K-12 schools, Edison Schools, Inc. is on a mission to prove that it can outperform traditional public schools while earning profits in the process. Christopher Whittle, a Wall Street darling who has previous experience in several other education ventures, leads Edison Schools, Inc. The company has undergone a rapid growth strategy since opening its first four schools in the 1999 school year. In the 2001 school year, Edison operates 136 schools with approximately 75,000 students. From a business standpoint,
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Edison has staked its success on its ability to gain economies of scale in school operation.

The first section of this report, which is the main body, will use financial statements from 1999, 2000 and 2001, along with standard financial ratio analysis to develop a clear picture of Edison Company's financial performance.

Ratio Analysis (Ups Vs Fdx)

DATE 17/10/2006 This analysis investigates the management policies of the two primary competitors of the Air Delivery & Freight Services industry. I use ratio analysis to peek under the covers of profitability to understand how management, investment and financial management activities impact the overall performance of FedEx and UPS and study how the ratios change over time for FedEx. Ratio Analysis Two competitors, FedEx and UPS, dominate the Air Delivery & Freight Services industry in the United States. FedEx is the smaller of the two with a market cap almost a third of the frontrunner UPS. UPS enjoys a higher Price to Earnings while providing lower Earnings per Share than FedEx. How does a firm with higher earnings per share trade at a lower price per earnings than their primary competitor? It must have something to do with risk. Compound Annual Growth Looking at Table: Compound Annual Growth gives us a warm and fuzzy feeling about faster, their net income is growing more than twice as fast as UPS both raw and adjusted and their dividend payment compound annual growth is through the roof. There are a couple caveats to this glowing review though. First,

FedEx has negative Free Cash Flows available for equity because of their aggressive debt repayment in 2005. If we remove this one time anomaly of negative free cash flows by only looking through 2004, their free cash flow for equity looks quite nice with a CAGR of 292.79% compared to UPS's 13.37% CAGR in free cash flows available for equity. This is one of the downsides to using compound annual growth rates. Because it only compares the beginning and ending balances and assumes stable trends, it does not take volatility between the two balances into account. Furthermore, the dividend payments cannot be used in CAGR because FedEx did not issue dividends until 2002. To account for this, I used $1 for the dividend payments in 2001.

Financial Ratio Analysis Report

DATE 03/08/2006 The fiscal year 2004 was a relatively soft year for Barnes & Noble, Incorporated (B&N). Blockbuster nonfiction books that came out during the year may not have come from the company, but business remained strong. This is due to the million of books already in the market, including phenomenal fiction hits "The Da Vinci Code," "The Five People You Meet in Heaven," and "The Rule of Four," and thousands of new releases during the year. This claim was supported by the stable and strong figures embodied in the financial statements. The current ratio shows the company's ability to meet its currently maturing obligations, and serves as the primary test to measure one's liquidity position. B&N achieved a relatively strong liquidity position for the year 2004 at 1.48:1. Comparing it to the previous 2 years' figure of 1.52:1 and 1.53:1, the reduction is immaterial as the company still has enough ready resources to meet the current liabilities. Moreover, the current assets of discontinued operations increased the ratio of 2003 but were evened out by 2004. As a more stringent measure, the acid-test ratio of the company increased from .23:1 in 2003 to .46:1 in 2004.
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This vast improvement was attributable to the increased cash and receivables figures of US$253M and US$23M, respectively. The company not only improved its liquidity position but also in efficient utilization of fast-moving assets. This can be measured by using Activity Analysis ratios. One of these is the Accounts Receivable Turnover rate, which measures the average number of sale-collection cycles completed by the firm during the year. From the 2002 rate of 32.07 times, B&N enhanced their salescollection efforts as proven by the rates 50.52 times and 77.60 times for the years 2003 and 2004 respectively. This development would find their ultimate effect in the increased sales figure of 11.47% and cash balance of 89.75%.

Ratio Analysis Report

DATE 17/06/2008 The purpose of the following report is to aid Over the Hill Pty Ltd in planning the direction that the company may want to go over the next few years. The report entails a financial analysis and summaries, which give the executive will board an understanding of how well the current managing director is performing, and whether his contract should be renewed. Figures were obtained from comparative balance sheets and profit and loss statements from the relevant years as well as additional information that was forwarded by the board. This information enabled the development of percentage and ratio analysis (see appendices), which was then used to create the report. The investigation revealed that the company had improved its position compared to previous years. The profitability of the company was significantly better whilst the liquidity had remained reasonably steady. The solvency of the

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company had declined however, which affected the long-term obligations of the business.

Overall, the company is in a much sounder position than it had been a few years earlier. The management style of Mr. Vinloony has improved the direction of the business and the forthcoming results have come reasonably promptly. It is therefore recommended that Mr. Vinloonys contract is extended for a further period as designated by the board to enable the company to continue its growth.

THESIS Performance Evaluation and Ratio Analysis of Pharmaceutical Company in Bangladesh

From - Faruk Hossan Md Ahsan Habib
2010 The thesis applies performance evaluation of pharmaceutical company in Bangladesh. It means evaluate how well the company performs. The main aim is achieved through ratio analysis of two pharmaceutical (Beximco and Square pharmaceutical) companies in Bangladesh. The main data collection from the annual financial reports on Beximco and square pharmaceutical companies in 2007 to 2008.Different financial ratio are evaluated such liquidity ratios, asset management ratios, profitability ratios, market value ratios, debt management ratios and finally measure the best performance between two companies. The mathematical calculation was establish for ratio analysis between two companies from 2007-2008.It is most important factors for performance evaluation. The
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Date -05/4/

graphical analysis and comparisons are applies between two companies for measurement of all types of financial ratio analysis. Liquidity ratio is conveying the ability to repay short-term creditors and it total cash. It determines perform of short term creditor of both pharmaceutical companies under the three categories such as current ratio, quick ratio and cash ratio. Asset management ratio is measurement how to effectively a company to use and controls its assets. Its also quantify into seven categories for both pharmaceutical companies such as account receivable turnover, average collection period, inventory turnover, account payable turnover ,account payable turnover in days ,fixed asset turnover ,total asset turnover. Profitability ratio is evaluate how well a company is performing by analyzing and how profit was earned relative to sales, total assets and net worth for both pharmaceutical companies....

ARTICLE
DATE:

- 1-1-2005

Ratio Analysis for the Hospitality Industry: A cross Sector Comparison of Financial Trends in the Lodging, Restaurant, Airline and Amusement Sectors Woo Gon Kim and Baker Ayoun Abstract. This study uses ratio analysis to examine salient financial trends within four major sectors of the hospitality industry for the 1997-2001 period namely lodging, restaurants, airlines and the amusement sectors. Cross-sectional analysis results indicate that at least for the test period, eight out of thirteen financial ratios were statistically different across the four hospitality segments. As such, financial trends and cross sectional anomalies within the examined hospitality industry segments are better understood.

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METHODOLOGY

The project has been performed with the help and the references as stated below: The theoretical part required for the working and the analysis of the

different ratios were referred from the text book, FINANCIAL MANAGEMENT by Prof, I.M.PANDEY.
Undergone through the balance sheets of the organization for last 4 years. Sorting of the required data for the calculation of the respective ratios Different ratios were calculated and represented in tabular form.

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OBJECTIVES OF RATIO ANALYSIS

1. With help of various ratios, one can get the information about the ability of the firm to meet its current as well as future obligations. 2. Ratio Analysis helps the Management and other interested parties information about long term solvency against the funds borrowed. 3. It helps to know the revenue generated from the utilization of funds. 4. Basically, ratio analysis is useful in judging the overall operating efficiency and performance of the firm. to get the

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BIBLIOGRAPHY

I. M PANDEY

Financial Management Vikas publishing house pvt ltd inithed Edition 2006

M. Y KHAN AND P.K JAIN

Financial Management Vikas Publishing house Pvt ltd. New Delhi

K .V SMITH

Management of Working Capital Mc_ GROWHILL, NEW YORK.

SATISH INQMDER

Principal of Financial Management, Everest Publishing House

WEBSITES REFERENCES
http://www.sportking.co.in http://www.google.com http://www.investopedia.com http://www.economictimes.com

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