FINANCIAL STATEMENT ANALYSIS

INTRODUCTION

Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decisions by users of information. It involves
recording, classifying and summarizing various business transactions. The end product of
business transactions are the financial statements comprising primarily the position
statement or the balance sheet and the income statement or profit and loss account. These
statements are outcome of summarizing process of accounting and are ; therefore, the
sources of information on the basis of which conclusions are drawn about the profitability
and the financial position of a concern. Financial statements are the basis of decision making
by the management as well as outsiders who are interested in the affairs of the firm such as
investors, creditors, customers, suppliers, financial institution, employees, potential
investors, government and general public. The analysis and interpretation of financial
statements depend upon the nature and type of information available in these statements.
MEANING OF FINANCIAL STATEMENTS

A financial statement is the collection of data organized accounding to logical and consistent
accounting procedures. Its purpose is to convey an understanding of some financial aspects
of a business firm. It may show a position at a moment in time, as in the case of a balance
sheet, or may reveral a series of activities over a given period of time, as in an income
statement. Thus the term financial statement generally refer to two statements:-

1. The position statement or the balance sheet
2. The income statement or the profit and loss account.

These statements are used to convey to the management and other interested outsides the
profitability and financial position of firm.
Financial statements are the outcome of summarizing process of accounting. In the words of John N
Myer, the financial statements provide a summary of the accounts of a business enterprise. The
balance sheet reflecting the assets, liabilities and capital as on a certain period. Financial
statements are prepared as an end result of financial accounting and are major sources of financial
information of an enterprise. Smith and Asburne define financial statements as , the end product of
financial accounting in a set of financial statement prepared by the accountant of a business
enterprise- that purport to reveal the financial position of an enterprise, the result activities and an
analysis of what has been done with earning.


Financial Statements are also called financial reports. In the words of Anthony, Financial
Statements, essentially, are interim reports, presented annually and reflect a division of the life of an
enterprise into more or less arbitrary accounting period- more frequently a year












DEFINITIONS.

In the words of Myers, Financial statement analysis is largely a study of relationship among
the various financial factore in a business as discovered by a single set of statements and a
study of the trend of these factors as shown in series of statement.

In the words of Metcalf and Titard, Ananlyzing financial statements is a process of
evaluating the relationship between component parts of a financial statement to obtain a
better understanding of a firms position and performance.







METHODS, TOOLS & TECHNIQUES OF FINANCIAL ANALYSIS

The following techniques can be used in connection with analysis and interpretation of
financial statements.
1. Comparative Financial Statement (or Analysis)
2. Common Measurement Statements (or Analysis)
3. Trend Percentages Analysis
4. Fund Flow Statement (or Analysis)
Cash Flow Statement (or Analysis)
5. Networking Capital Analysis
6. Cost- Volume Profit Analysis
7. Ratio Analysis


Comparative Financial Statement:
These statements are prepared in a way so as to provide time
perspective to the consideration of various elements of financial position embodied
in such statements. This is done to make the financial data more meaningful. The
statements of two or more years are prepared to show absolute data two or more
years increase or decrease in absolute data in value and in terms of percentages.
Comparative Statements can be prepared for Income Statement as well as Position
Statement or Balance Sheet.


Common Measurement Statement :
This statement indicates the relationship of various item with some
common items expressed as percentage of the common. In the income statement the sale
figure is taken as base, all other figures are expressed as percentages of sales. Similarly in
Balance Sheet the total of assets and liabilities is taken as base, all other figures are
expressed as a percentage of the total percentage so calculated can be easily compared
with the correspond percentages in other periods and meaningful conclusions can be made.

Trend Percentages Analysis:
This analysis is an important tool of horizontal financial analysis. The
method is immensely helpful in making a comparative study of the financial statements of
several years. Under this method trend percentages are calculated for each item of the
financial statements taking the figure of base year as in the starting year is usually taken as
the base year. The trend percentages show the relationship of each item with its preceding
years percentages. These percentages can also be presented in the form of index. Numbers
show relative change in the financial facts of certain period. This will exhibit the direction,
(i.e., upward or downward trend) to which the concern is proceeding. These trend nations
may be comparared with industry in order to know the strong or weak points of the
concern. These calculations are only for major items instead of calculating for all items in
the financial statements.

Funds Flow Statements:

This statements is prepared in order to reveal clearly the various sources
where from the funds procure to fianace the activities of a business concern during
the during the said period.


Cash Flow Statement:

This statement is prepared to know clearly the various items of inflow
and outflow of cash. It is an essential tool for short-term financial analysis and is very helpful
in the evaluation of current liquidity of a business concern. It helps the business executives
of a business in the efficient cash management and internal management.

Statement of changes in working capital:
This statement is prepared to know the net change in working capital of
the business between two specified dates. It is prepared from current assets and current
liabilities of the said dates to show the net increase or decrease in working capital.


Cost- volume Profit Analysis:
It is an important tool of profit planning. It studies the relationship between cost
volume of production, sales and profit of course. It is not strictly a technique used for analysis of
financial statements.

Ration Analysis:
It is done to develop meaningful relationship between individual items or
group of items usually shown in the periodic financial statements published by the concern.
Accounting rate showns the relationship between the two inter-related accounting figures
as gross profit to sales, current assets to current liabilities loaned capital to owned capital
etc. ration should not be calculated between the two unrelated figures as sales land
discount on issue of shares, operating cost and equity capital etc. as it will not serve any
useful purpose.

Meaning and definition of ratio
A ratio is a simple arithmetic expression of the relationship of one
number. It may be defined as the indicates quotient of two mathematics expression.

Accounting to Kohler,
a ratio is the relation of the amount a to another, b expressed as the
ratio of a a,b ;b(a is b ) or a simple fraction, inter, derimal fraction or percentage.

In simple language ratio is one number expressed in term of another and can be worked out
by dividing one number into the other.

One of the important financial tools which has come to be used very
Frequently for analyzing the financial strength and weakness of the enterprise is ratio
analysis. Ratio analysis is a technique of analysis and interpretation of financial statement. It
is the process of establishing and interpreting various ratio for helping in marking certain
decisions.

ACCORDING TO MYERS
Ratio analysis is a study of relationship among the various Financial fators in a
business.
Thus, Ratio analysis measures the profitability, and financial soundness of the
business.
Ratio analysis is to present the figure of financial statement in simple and
intangible for. Ratio analysis in this way in the process of establishing meaningful
relationship between two figures and set of financial statement.










RATIO ANALYSIS

A. LIQUIDITY RATIOS
1 CURRENT RATIO:
Meaning:
Current Ratio may be defined as the relationship between Current Assets and
Current Liabilities. This ratio is also known as Working Capital Ratio. This ratio is most widely
used to make the analysis of a short term financial position or liquidity of a firm. It is
calculated by dividing the total Current Assets by Current Liabilities.

Formula:

Current Ratio = Current Assets
Current Liabilities
Ideal Ratio:- 2:1

particulars 2009 2010 2011
Current Assets 126267556.60 704527660.80 4202358836
Current
Liabilities
7876953 21975285.74 87381593
Current Ratio 16.03 % 32.06 % 48.09 %



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2. QUICK RATIO

Meaning:
This is a real index of the financial liquidity of the concern. It calculates the
companys liquid assets in the relation to its liabilities. It is also called as acid test ration or
liquid ratio. It includes the extent to which the concern can pay its current liabilities without
relying on the sale of inventory.

Fourmula
Quick Ratio = Liquid Assets
Liquid Liabilities



Ideal Ratio: 1:1

particulars 2009 2010 2011
Liquid Assets 24182245.71 45049335.77 89566132
Liquid
Liabilities
7876953 219725285.74 87381593
Quick Ratio 3.07 % 2.05 % 1.025 %


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3. ABSOLUTE LIQUID RATIO
Meaning;

It is a variation of quick ratio. When liquidity is highly restricted in terms of cash
and cash equivalents, this ratio should be calculated. Liquidity ratio measures the
relationship between cash and near cash items on the one hand and immediately maturing
obligations on the other. The inventory and debtors are excluded from current assets, to
calculate this ratio.

Formula

Absolute Liquid Ratio = Cash + Short term Marketable
Securities
Current Liabilities

Ideal Ratio: 0.75:1

Particulars 2009 2010 2011
Cash + Short term
Marketable
Securities
323033842 606022929 13357004
Current Liabilities 7876953 21975285.74 87381593
Absolute Liquid Ratio

41.01 % 27.34 % 0.16 %












4. INVENTORY TO WORKING CAPITAL RATIO

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Meaning:
It represents the relationship between inventories or stocks a working capital
of the firm. Inventory or stocks refers to closing stock of braw material, work in progress
and finished goods. Working capital is the excess of current assets over current liabilities. It
is usually expressed as percentage.

Formula:

Inventory to Working Capital Ratio = Inventory
Working Capital
Ideal Ratio: 1:1





Particulars 2009 2010 2011
Inventory 39068899 365755350 168714067
Working Capital 118390603.60 682552375 4114977243
Inventory to
Working Capital
Ratio
0.33 % 0.53 % 0.41 %

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B. LONG TERM SOLVENCY RATIO:

5. FIXED ASSETS RATIO
Meaning:
Various ratio of fixed asset to net worth is the ratio of fixed asset to total long
term funds. The long term funds consist of shareholders funds plus long term borrowings.
The ratio indicates the extent to which the total of fixed assets is financed by long term
funds of the firm.
Formula:

Fixed Assets Ratio = Fixed Assets
Capital Employed

Ideal Ratio: 0.67:1

Particulars 2009 2010 2011
Fixed Assets 61931615.2 1238632304,2 110450282
Capital Employed 619316152 6182565927 9204190.60
Fixed Assets
Ratio
0.10 % 0.20 % 0.12 %






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6. CURRENT ASSETS TO ASSETS RATIO
Meaning:
The ratio will differ from industry to industry and therefore, no standard can be laid
down. A decrease in the ratio may mean that trading is slack or more mechanization has
been put through. An increase in the ratio as in this company may reveal that inventories
and debtors have unduly increased or fixed assets have been intensively used. An increase
in the ratio shows increase in profit, indicating the business expanding.


Formula:
Current Assets to Fixed Assets Ratio = Current Assets
Fixed Assets


Particulars 2009 2010 2011
Current Assets 126267556.60 704527660 4202358836
Fixed Assets 619316150 1238632300 11045028200
Current Assets
to Fixed Assets
Ratio
0.20 % 0.56 % 0.38 %



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DEBT EQUITY RATIO:
Meaning:
It illustrates the ratio between capital invested by the owners and funds provided by
the lenders. The ratio compares the quantity of the business financed through debt and
equity. It ascertains the soundness of long term financial policies of the company. It
indicates the extent to which a company has to depend upon outsiders for its financial
requirements.

Formula:
Debt Equity Ratio = Long Term Debts
Equity or Shareholders Funds

Ideal Ratio: 1:1

Particulars 2009 2010 2011
Long Term Debt 55723962 17235444.60 51418839
Shareholders Funds 43877136 16373682 81400185
Debt Equity Ratio 1.27 % 1.05 % 0.63 %



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PROPRIETARY RATIO
Meaning:
It shows the relationship between shareholders funds and total assets. The ratio
indicates the proportion of the assets financed by the proprietors. It is also known as equity
ratio. It highlights the proportion between owned capital and loaned capital. It also points
out the extent to which the assets of the company can be lost without affecting the interest
of the creditors of the company.


Proprietary Ratio = Shareholders Funds
Total Assets


Ideal Ratio: 1:3 (i.e, 0.33)

Particulars 2009 2010 2011
Shareholders
Funds
438771360 16373682 814001850
Total Assets 745583706 19431599600 1524738704
Proprietary Ratio 0.58 % 0.84 % 0.50 %






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9. INTEREST COVERAGE RATIO
Meaning:
It shows the relationship between net profit before interest and tax and the
interest charges. It measures that ability of the concern to service debts. It is also known as
debt service ratio. This ratio is very important from the lenders point of view and indicates
whether the business would earn sufficient profits to to pay periodically the interest charge.

Formula:
Interest Coverage Ratio = Net Profit before Interest and Tax
Interest Charges



Particulars 2009 2010 2011
Net Profit before
Interest and Tax
20388514 4061433 25961191
Interest Charges 312320 4176102 24244.8
Interest Coverage Ratio 0.65 % 0.97 % 1.07 %




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C. ACTIVITY RATIOS OR TURNOVER RATIOS
10. FIXED ASSETS TURNOVER RATIO:

Meaning:
This ratio conveys the relationship between Fixed Assets to Sales. That is to what
extent Fixed Assets of concern contributed to Sales. In other words, it indicates as to what
Fixed Assets have been utilized. Higher the ratio implies better utilization of Fixed Assets
and lower the ratio indicates othervwise.

Formula:
Fixed Assets Turnover Ratio = Net Annual Sales
Net Fixed Assets


Particulars 2009 2010 2011
Net Annual Sales 108380326.30 257836142 625671146
Net Fixed Assets 61931615 123863230 42 110450282
Fixed Assets
Turnover Ratio
1.75 % 2.08 % 5.66 %




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11. WORKING CAPITAL TURNOVER RATIO:

Meaning:
The ratio stated the no. of times the working capital is being turned over in a
stated period. It indicates the velocity of the utilization of the Net Working Capital.


Formula:
Working Capital Turnover Ratio = Net Sales
Working Capital


Particulars 2009 2010 2011
Net Sales 108380326.30 257836142 625671146
Working Capital 118390603.60 68255232375 4114977243
Working Capital
Turnover Ratio
0.37 % 0.37 % 0.15 %






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12. TOTAL ASSESTS TURNOVER RATIO:

Meaning:
This is the ratio between Sales and Total Assets and it shows whether or not the
Total Assets has been properly utilized and measures the effective use of capital. The higher
the ratio, the greater will be the return but too high the ratio means overtrading.

Formula:
Total Assets Turnover Ratio = Net Sales
Total Assets



Particulars 2009 2010 2011
Net Sales 108380326.30 257836142 625671146
Total Assets 745583706 194315996 1524738704
Total Assets
Turnover Ratio
1.45 % 0.13 0.41 %






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13. DEBTORS TURNOVER RATIO:

Meaning:
It is a ratio which indicates the relationship between the Average Debtors and
Sales. It discloses the number of times the debts are collected in a year. This ratio measures
collectively the accounts receivable and tells about how the credit policy of the company is
enforced.

Formula:

Debtors Turnover Ratio = Net Sales
Average Debtors


Particulars 2009 2010 2011
Net Sales 10838032630 257836142 625671146
Average Debtors 55723962 17235455 51418839
Debtors Turnover
Ratio
19.45 % 14.95 % 12.16 %





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14. AVERAGE COLLECTION PERIOD:

Meaning:
The ratio represents the average number of days, for which a firm has to want
before is receivables are converted into cash. It is also known as Day Sales Outstanding or
Debtors Collection Period. It measures the quality and also indicates the credit policy
followed by the firm.

Formula:
Average Collection Period = 365
Debtors Turnover
Ratio


Particulars 2009 2010 2011
Day in the Year 365 365 365
Debtors Turnover
Ratio
19.45 % 14.95 % 12.16 %
Average Collection
Period
18 Days 24 Days 30 Days





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D. PROFITABILITY RATIOS

15. NET PROFIT RATIO:

Meaning:
This ratio expresses per rupee profit generating or sales. It is the difference between
what business taken in and what it spends in the process of doing business. It establishes
relationship between Net Profit after Taxes and Net Sales. It is an overall measure of a firms
profitability and reveals sales efficiency. It indicates a firms capacity to face adverse
economic conditions.

Formula:
Net Profit Ratio = Net Profit after Tax *
100
Net Sales


Particulars 2009 2010 2011
Net Profit after Tax 20388514 4061433 25961191
Net Sales 108380326.30 257836143 625671146
Net Profit Ratio 1,88 % 1.58 % 0.42 %



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16. RETURN ON CAPITAL EMPIOYED:

Meaning:
It shows the relationship between Net Profit and Capital Employed. It is also termed
as overall profitability ratio. It is the primary ratio and most widely used to measure the
overall profitability and efficiency of a business. It is the indicator of the earning capacity of
the Capital Employed in the business. It is a helpful tool in making capital budgeting
decisions.


Formula;
Return On Capital Employed = Profit before Interest and Tax *
100
Capital Employed


Particulars 2009 2010 2011
Profit before
Interest and Tax
259611210 4033833 20388514
Capital Employed 69316152 6182565927 9204190
Return On Capital
Employed
3.74 % 6.52 % 2.2 %






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