MBA project report on financial analysis

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PROJECT REPORT ON FINANCIAL ANAL ANALYSIS YSIS WITH RESPECT TO VARIOUS RATIOS BROUGHT TO YOU BY MBAHOTSPOT.C MBAHOTSPOT.COM OM

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INTRODUCTION OBJECTIVE: To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.

RATIO ANALYSIS: Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods,

quantitative

analysis

can

produce

excellent

results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.

MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing




















many times”. As accounting ratio is an expression relating two figures or

accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis . Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk.




















OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational Operational efficiency efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing

FORMS OF RATIO: Since a ratio is a mathematical relationship between two or more variables / accounting figures, such relationship can be expressed in different ways as follows – A] As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times: In the above case the equity share capital may also be described as 4




















Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit sales to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or simply by saying that the credit sales are 2.5 times that of cash sales. C] As a percentage: In such a case, one item may be expressed as a percentage of some other items. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industry‟s average ratio or a projected

ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.

TYPES OF COMPARISONS COMPARISONS The ratio can be compared in three different ways – 1] Cross section analysis:






















financial ratio at the same point of time. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. The firm‟s performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. 2] Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. By comparing the present performance of a firm with the performance of the same firm over the last few years, an assessment can be made about the trend in progress of the firm, about the direction of progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data\ 3] Combined analysis: If the cross section & time analysis, both are combined together to study the behavior & pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. A trend of ratio of a firm




















The combined analysis as depicted in the above diagram, which clearly shows that the ratio of the firm is above the industry average, but it is decreasing over the years & is approaching the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for




















3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. 4) One ratio may not throw light on any performance of the firm. Therefore, a group of ratios must be preferred. This will be conductive to counter checks. 5) Last but not least, the analyst must find out that the two figures being used to calculate a ratio must be related to each other, otherwise there is no purpose of calculating a ratio.

CLASSIFICATION OF RATIO CLASSIFICATION OF RATIO

BASED ON FINANCIAL

BASED ON FUNCTION

BASED ON

USER STATEMENT

1] BALANCE SHEET RATIO

1] LIQUIDITY RATIO 2] LEVERAGE RATIO

1] RATIOS FOR SHORT TERM




















BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet, P& P A/C, or both. One-way of classification of ratios is based upon the sources from which are taken. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating these ratios, there is no need to refer to the Revenue statement. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratios study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio.




















BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios.

2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary ratios.

3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtor‟s turnover ratios.

4] Profitability ratios: a) It shows the relationship between profits & sales e.g. operating ratios,






















BASED ON USER: 1] Ratios for short-term creditors: Current ratios, liquid ratios, stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund, return on equity capital

3] Ratios for management: Return on capital employed, turnover ratios, operating ratios, expenses ratios 4] Ratios for long-term creditors: Debt equity ratios, return on capital employed, proprietor ratios.




















LIQUIDITY RATIO: Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations. The ratios, which indicate the liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below




















The current assets of a firm represents those assets which can be, in the ordinary course of business, converted into cash within a short period time, normally not exceeding one year. The current liabilities defined as liabilities which are short term maturing obligations to be met, as originally contemplated, within a year. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL). Current assets include cash and bank balances; inventory of raw materials, semi-finished and finished goods; marketable securities; debtors (net of provision for bad and doubtful debts); bills receivable; and prepaid expenses. Current liabilities consist of trade creditors, bills payable, bank credit, and provision for taxation, dividends payable and outstanding expenses. This ratio measures the liquidity of the current assets and the ability of a company to meet its short-term debt obligation. CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in the operating cycle of the firm and provides the funds needed to




















LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares the quick assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1. The term quick assets refer to current assets, which can be converted into, cash immediately or at a short notice without diminution of value. Formula: Quick assets Liquid ratio =




















CASH RATIO Meaning: This is also called as super quick ratio. This ratio considers only the absolute liquidity available with the firm. Formula: Cash + Bank + Marketable securities Cash ratio

= Total current liabilities

Since cash and bank balances and short term marketable securities are the most liquid assets of a firm, financial analysts look at the cash ratio. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm.

INVESTMENT / SHAREHOLDER






















Meaning: Earnings per Share are calculated to find out overall profitability of the organization. Earnings per Share represent earning of the company whether or not dividends are declared. If there is only one class of shares, the earning per share are determined by dividing net profit by the number of equity shares. EPS measures the profits available to the equity shareholders on each share held.

Formula:






















Meaning: Dividend Pay-out Ratio shows the relationship between the dividends paid to equity shareholders out of the profit available to the equity shareholders.

Formula:






















CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt. Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts. This is also known as leverage or trading on equity. The Capital-gearing ratio shows the relationship between two types of capital viz: - equity capital & preference capital & long term borrowings. It is expressed as a pure ratio.






















Meaning: This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. It measures the efficiency of production as well as pricing. This ratio helps to judge how efficient the concern is I managing its production, purchase, selling & inventory, how good its control is over the direct cost, how productive the concern , how much amount is left to meet other expenses & earn net profit.






















management. Jointly considered, the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL C APITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The term fund employed or the capital
























FINANCIAL These ratios determine how quickly certain current assets can be converted into
























DEBTORS TURNOVER RATIO (DTO) Meaning:
























FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets.
























Shareholders fund Proprietary ratio = Fixed assets + current liabilities
























Formula: Total long-term debt


























































































































































































































































































































































































































































































































































COMMENTS: Earnings per share are calculated to find out overall profitability of the company. Earning per share represents the earning of the company whether or not dividends are declared. The Earning per share is 5.52 means shareholder gets Rs. 5.52 for each share of Rs. 10/-. In other words the shareholder earned Rs. 5.52 per share. The net profit after tax of the company is increasing in all years. Therefore the shareholders earning per share is increased continuously from 2001-2002 to 2004-2005 2004-2005 by 0.41 to 05.52. 05.52. This shows it is continuous capital appreciation per unit share by 0.41 to 05.52.

The above diagram shows the Earning per share and Dividend per share is increasing rapidly. It is beneficial to the shareholders and prospective investor to invest the money in this company.




















14] DIVIDEND PAYOUT RATIO: Formula: Dividend per share

Dividend Pay out ratio =

* 100 Earning per share

YEAR Dividend per share Earning per share Dividend payout ratio

2001-2002 -

2002-2003 1

2003-2004 1.50

2004 -2005 1.80

0.41 -

1.66 60.24

3.46 43.35

5.52 32.60

COMMENTS: In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is 60.24 and 43.35 respectively. In the year 2002-2003 the company has declared the dividend 60.24 and the balance 39.76 is retained with them for the expansion. The company has not earned more profit in the year 2001-2002 hence the company has not declared dividend in the year 2001-2002.

However the

company has declared more dividends in the year 2002-2003 as the company has sufficient profit. In the year 2004 the company has declared 1.50 dividends per share hence the earning per share has doubled. From this one can say that the company is more conservative for expansion.




















15] COST OF GOODS SOLD: Formula: COGS Cost of goods sold Ratio =

* 100 Net sales

YEAR COGS Net sales Cost of goods sold ratio

2001-2002 18,90,98 43,45,46 43.51

2002-2003 21,96,32 51,02,37 43.04

2003-2004 28,33,02 68,76,89 41.19

2004 -2005 25,72,26 68,09,78 37.77

COMMENTS: This ratio shows the rate of consumption of raw material in the process of production. In the year 2001-2002 the cost of goods sold ratio is 43.51% so the gross profit is 56.49%. it indicates that in 2001-2002, the 43% of raw material is consumed in the process of production. During the last 4 years the rate of cost of goods sold ratio is continuously decreasing however the gross profit & sales is increased during the same period.

16] CASH RATIO: Formula: Cash + Bank + Marketable securities Cash ratio

= Total current liabilities




















YEAR Cash + Bank + Marketable securities Total current liabilities Cash ratio

2001-2002 3,31,32

2002-2003 3,95,25

2003-2004 4,49,74

2004 -2005 6,04,64

15,93,66

21,62,32

21,28,19

21,36,02

0.20

0.18

0.21

0.28

COMMENTS: This ratio is called as super quick ratio or absolute liquidity ratio. In the year 2001-2002 the cash ratio is 0.20 & then it is decreased to 0.18 in the year 2002-2003. Then again it is increased to 0.21 in the year 2003-2004 & 0.28 in the year 2004-2005. This shows that the company has sufficient cash, bank balance, & marketable securities to meet any contingency.

17] RETURN ON PROPRIETORS FUND: Formula: NPAT Return on proprietors fund =

* 100 Proprietors fund

YEAR NPAT Proprietors fund Return on proprietors fund

2001-2002 20,68 21,29,69 0.97

2002-2003 82,94 21,55,19 3.84

2003-2004 1,72,94 22,42,59 7.71

2004 -2005 2,75,78 24,14,91 11.41

COMMENTS: Return on proprietors fund shows the relationship between profits & investments by proprietors in the company. In the year 2002-2003 the return on




















During the last 4 years the rate of return on proprietors fund is in increasing order. The return on proprietors fund during the year 2001-2002 to 2004-2005 is increased from 0.97% to 11.41%. It shows that the company has a very large returns available to take care of high dividends, large transfers to reserve etc. & has a great scope to attract large amount of fresh fund from owners.

18] RETURN ON EQUITY: Formula: NPAT Return on equity share capital =

* 100 No. of equity share

YEAR NPAT No. of equity share Return on equity share capital

2001-2002 20,68

2002-2003 82,94

2003-2004 1,72,94

2004 -2005 2,75,78

50,000

50,000

50,000

50,000

4.13

16.5

34.58

55

COMMENTS: This ratio shows the relationship between profit & equity shareholders fund in the company. It is used by the present / prospective investor for deciding whether to purchase, keep or sell the equity shares. In the year 2002-2003 the return on proprietors fund is 16.5%, which means the net return of Rs. 16, is earned on the each Rs.100 of the funds contributed by the equity shareholders. The rate of return on equity share capital is increased from4.13% to 55% during the year 2001-2002 to 2004-2005. This shows that the company has a very large returns available to take care of high equity dividend, large transfers to reserve, & also company has a great scope to attract large amount to fresh funds by issue of equity share & also company has a very good price for equity






















19] OPERATING PROFIT RATIO: Formula: Operating profit Operating profit ratio =

*100 Net sales

COMMENTS: Operating profit ratio shows the relationship between operating profit & the sales. The operating profit is equal to gross profit minus all operating expenses or sales less cost of goods sold and operating expenses. The operating profit ratio of 7.11% indicates that average operating margin of Rs.7 is earned on sale of Rs. 100. this amount of Rs. 7 is available for meeting non operating expenses. In the other words operating profit ratio 7.11% means that 7.11% of net sales remains as operating profit after meeting all operating expenses. During the last 4 years the operating profit ratio is increased from 7.11% to 9.38%. It indicates that the company has great efficiency in managing all its operations of production, purchase, inventory, selling and distribution and also has control over the direct and indirect costs. Thus, company has a large margin is available to meet non-operating expenses and earn net profit.




















20] CREDITORS TURNOVER RATIO: Formula: Net credit purchase Credit turnover ratio = Average creditors

Months in a year Average age of accounts payable = Credit turnover ratio

YEAR Net credit purchase Average creditors Credit turnover ratio Average age of accounts payable

2001-2002 21,21,43

2002-2003 22,71,80

2003-2004 29,08,61

2004 -2005 25,29,04

5,88,42 3.6 times

7,91,21 3.6 times

6,96,86 4 times

7,80,39 3 times

3.3 months

3.3 months

3 months

4 months

COMMENTS: The creditors turnover ratio shows the relationship between the credit purchase and average trade creditors. It shows the speed with which the payments are made to the suppliers for the purchase made from them. The credit turnover ratio of 4, indicate that the creditors are being turned




















DEBTORS TURNOVER RATIO: Formula: Credit sales Debtors turnover ratio = Average debtors

Days in a year Debt collection period = Debtor’s turnover

YEAR Credit sales Average debtors Debtors turnover ratio Debt collection period

2001-2002 47,77,48 18,49,35 2.5 times

2002-2003 55,21,33 19,05,76 2.8 times

2003-2004 74,87,36 19,51,56 3.8 times

2004 -2005 68,09,78 23,06,67 2.9 times

146 days

130 days

96 days

125 days

COMMENTS: Debtor‟s turnover ratio is alternative known as “ Accounts Receivable Turnover Ratio”. This ratio measures the collectibility of debtors & other

accounts receivable, it means the rate at which the trade debts are being collected.




















The Debtors turnover ratio is almost same during the year 2001-2002 to 2004-2005, which indicates that the debts are being collected at a fast speed during the year? The operating cycle of the debtors is short. In other words the debts collection period is short which result into less chance of bad debts.




















SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED After going through the various ratios, I would like to state that: 

The short-term solvency of the company is quite satisfactory.



Immediate solvency position of the company is also quite satisfactory. The company can meet its urgent obligations immediately.



Credit policies are effective.



Over all profitability position of the company is quite satisfactory.



Stock turnover rate is satisfactory. Stock of the company is moving fast in the market.



The company is paying promptly to the suppliers.



The return on capital employed is satisfactory.

The management should take care of inventory management and speed up the movement of stock. Effective selling technique or product modification may be adopted to face the competitors and to improve the financial position of the company by taking appropriate decisions.






















CONCLUSION: The focus of financial analysis is on key figures contained in the financial statements and the significant relationship that exits. The reliability and significance attach to the ratios will largely on hinge upon the quality of data on which they are best. They are as good for as bad as the data it self. Financial ratios are a useful by product of financial statement and provide standardized measures of firms financial position, profitability and riskiness. It is an important and powerful tool in the hands of financial analyst. By calculating one or other ratio or group of ratios he can analyze the performance of a firm from the different point of view. The ratio analysis can help in understanding the liquidity and short-term solvency of the firm, particularly for the trade creditors and banks. Long-term solvency position as measured by different debt ratios can help a debt investor or financial institutions to evaluate the degree of financial risk. The operational efficiency of the firm in utilizing its assets to generate profits can be assessed on the basis of different turnover ratios. The profitability of the firm can be




















BIBLIOGRAPHY

REFERENCE BOOKS – 

FINANCIAL MANAGEMENT Theory, Concepts & problems R.P.RUSTAGI



FINANCIAL MANAGEMENT Text and problems M.Y. KHAN AND P. K. JAIN



MANAGEMENT ACCOUNTING AINAPURE



FINANCIAL MANAGEMENT

MBA project report on financial analysis

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