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Course: MBA-2ND -A
Batch: 2011-2013
Question: What do you understand by financial soundness of the company? Prepare a report after studying the annual report of state bank of India for the year 2010-2011 indicating its financial health in terms of the following parameters: cash flows, dividend payout ratio, capital structure and growth prospectus? Answer: Financial soundness
In order to ascertain the financial soundness of the business every enterprise prepares certain statements known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately help in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements are required. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements: i. ii. Profit and loss account or Income statement Balance sheet or Position statement
These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of the an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes:
1. Measuring the profitability: The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. 2. Indicating the trend of achievements: Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged. 3. Assessing the growth potential of the business: The trend and other analysis of the business provides sufficient information indicating the growth potential of the business. 4. Comparative position in relation to other firms: The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilizing capital, etc. 5. Assess overall financial strength: The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not. 6. Assess solvency of the firm: The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not.
b. Comparative income statement: Comparative income statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be known. 2. Common size statement: Common size financial statements are the statements in which accounts of individual items of balance sheet and profit and loss account for two or more years are written. These amounts are further converted into percentages to some common base. It can be net sales in the case of profit and loss account and total of balance sheet for the balance sheet. 3. Trend analysis: The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as base year. 4. Ratio analysis: Ratio analysis is a study of relationship among various financial factors in a business. The objective of ratio analysis is to judge the earning capacity, financial soundness and operating efficiency of a business organization. The use of ratios in accounting and financial management analysis helps the management to know the profitability, financial position and operating efficiency of an enterprise. 5. Cash flow: Cash flows are inflows and outflows i.e. the movement of cash and cash equivalents. All transactions that lead to increase in cash and cash equivalents are classified as inflows of cash and all those transactions that lead to decrease in cash and cash equivalents are classified as outflows of cash.
Cash flow
Mar ' 11
Mar ' 10
Profit before tax Net cash flow-operating activity Net cash used in investing activity Net cash used in fin. activity Net increase/decrease in cash and equivalent Cash and equivalent begin of year Cash and equivalent end of year
Capital structure
Paid From Year To Year Class Of Authorized Share Equity 2010 2011 Share Equity 2009 2008 2010 2009 Share Equity 1,000.00 1,000.00 634.97 634.97 634882644 634880222 10 10 5,000.00 635.08 634998991 10 Capital Issued Capital Paid Up Face Value
Up Paid Capital Up
Shares (No.s)
635.00
634.88 634.88
Paid From Year To Year Class Of Authorized Share Share Equity 2007 2008 Share Equity 2006 2007 Share Equity 2005 2006 Share Equity 2004 2005 Share Equity 2003 2004 Share Equity 2002 2003 Share Equity 2001 2002 Share 1,000.00 526.30 526298878 10 1,000.00 526.30 526298878 10 1,000.00 526.30 526298878 10 1,000.00 526.30 526298878 10 1,000.00 526.30 526298878 10 1,000.00 526.30 526298878 10 1,000.00 631.56 631470376 10 Capital Issued Capital Paid Up Face Value
Up Paid Capital Up
Shares (No.s)
631.47
526.30
526.30
526.30
526.30
526.30
526.30
Payout ratios
Dividend payout ratio (net profit) Dividend payout ratio (cash profit)
26.03 23.24
23.36 21.20
74.03 76.80
76.67 78.82
Balance sheet
Mar ' 11 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total 9,33,932.81 9,98,918.86 635.00 64,351.04
Mar ' 10
634.88 65,314.32
8,04,116.23 8,70,065.43
Mar ' 11 Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments 43,777.85 1,05,248.39 -61,470.54 2,38,894.22 13,189.28 8,757.33 4,431.96 332.23 2,95,600.57
Mar ' 10
Mar ' 11 Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lac) 7,90,386.79 6349.99
Mar ' 11 Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Expenses capitalized 14,480.17 257.88 15,702.33 95,525.58
Mar ' 10
85,909.36
Mar ' 11 Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non-recurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend 30,440.38 16,217.24 1,065.14 17,282.39 48,867.96 990.50 -32,576.07 5,709.54 8,283.03 -912.68 7,370.35 7,370.69 1,905.00
Mar ' 10 24,008.35 14,578.54 1,051.15 15,629.69 47,322.48 932.66 -32,625.45 6,166.62 9,176.51 -10.46 9,166.05 9,166.39 1,904.65
Mar ' 11 Preference dividend Dividend tax Retained earnings 246.52 5,219.17
Question: What do you understand by financial soundness of the company? Prepare a report after studying the annual report of state bank of India for the year 20102011 indicating its financial health in terms of the following parameters: cash flows, dividend payout ratio, capital structure and growth prospectus? Answer: Financial soundness In order to ascertain the financial soundness of the business every enterprise prepares certain statements known as financial statements. Financial statements are mainly Students Paper: are mainly prepared for decision making purposes. But the information as is provided http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction statements aremainly prepared for decision making purposes. But the information as isprovided in is provided in the financial statements is not adequately help in drawing a
Students Paper: drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction in drawinga meaningful conclusion. Thus, an effective analysis and interpretation offinancial statements of financial statements are required. Analysis means establishing a meaningful relationship between various items Students Paper: various items of the two financial statements with each other in such a way that a http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction between variousitems of the two financial statements with each other in such a way thata conclusion that a Students Paper: that a conclusion is drawn. By financial statements we mean two statements: Profit and http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction way thata conclusion is drawn. By financial statements we mean two statements :(i)Profit : Profit and loss account or Income statement Balance sheet or Position statement These
Students Paper: statement These are prepared at the end of a given period of time. They are the indicators of http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction Position StatementThese are prepared at the end of a given period of time. They are theindicators of indicators Students Paper: the indicators of profitability and financial soundness of the business concern. The http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction are theindicators of profitability and financial soundness of the business concern.The term concern. The Students Paper: concern. The term financial analysis is also known as analysis and interpretation of financial http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction business concern.The term financial analysis is also known as analysis and interpretation offinancial statements of financial statements. It refers to the establishing meaningful relationship between Students Paper: relationship between various items of the two financial statements i.e. Income statement and position http://www.scribd.com/doc/36574535/Interpretation-of-Financial-Statements-
Introduction meaningful relationshipbetween various items of the two financial statements i.e. Income statementand position Students Paper: i.e. Income statement and position statement. It determines financial strength and weakness of the http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction Income statementand position statement. It determines financial strength and weaknesses ofthe firm.Analysis of the firm. Analysis Students Paper: firm. Analysis of financial statements is an attempt to assess the efficiency and performance http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction ofthe firm.Analysis of financial statements is an attempt to assess the efficiency andperformance of and performance Students Paper: and performance of the an enterprise. Thus, the analysis and interpretation of financial statements http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction efficiency andperformance of an enterprise. Thus, the analysis and interpretation offinancial statements
Students Paper: and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction interpretation offinancial statements is very essential to measure the efficiency, profitability,financial soundness and future prospects of the business units. Financialanalysis serves analysis Students Paper: Financial analysis serves the following purposes: Measuring the profitability: The main objective of a business is to earn a satisfactory return on the funds invested http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction units. Financialanalysis serves the following purposes : ? Measuring the profitability The main objective of a business is to earn a satisfactory return on thefunds invested funds Students Paper: the funds invested in it. Financial analysis helps in ascertaining whether adequate http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction on thefunds invested in it. Financial analysis helps in ascertaining whetheradequate profits whether adequate
Students Paper: whether adequate profits are being earned on the capital invested in the business or http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction ascertaining whetheradequate profits are being earned on the capital invested in the businessor not business or Students Paper: business or not. It also helps in knowing the capacity to pay the interest and dividend http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction the businessor not. It also helps in knowing the capacity to pay the interest anddividend. ? Indicating and dividend. Students Paper: and dividend. Indicating the trend of achievements: Financial statements of the previous years can be compared and the trend regarding various http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction interest anddividend. ? Indicating the trend of Achievements Financial statements of the previous years can be compared and thetrend regarding Students Paper: the trend regarding various expenses, purchases, sales, gross profits and net profit
http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction and thetrend regarding various expenses, purchases, sales, gross profits and netprofit etc net profit Students Paper: net profit etc. can be ascertained. Value of assets and liabilities can be compared and http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction and netprofit etc. can be ascertained. Value of assets and liabilities can becompared and compared Students Paper: be compared and the future prospects of the business can be envisaged. Assessing the growth potential of the business: The trend and other analysis of the business provides sufficient information http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction can becompared and the future prospects of the business can be envisaged. ? Assessing the growth potential of the business The trend and other analysis of the business provides sufficientinformation indicating sufficient information Students Paper: sufficient information indicating the growth potential of the business. Comparative position in relation to other firms: The purpose of financial statements analysis is to help the management to http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction provides sufficientinformation indicating the growth potential of the business. ?
Comparative position in relation to other firms The purpose of financial statements analysis is to help the managementto make management to Students Paper: management to make a comparative study of the profitability of various firms engaged in http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction the managementto make a comparative study of the profitability of various firms MODULE Students Paper: various firms engaged in similar businesses. Such comparison also helps the management http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction Introduction ACCOUNTANCY engaged in similar businesses. Such comparison also helps themanagement to the management Students Paper: the management to study the position of their firm in respect of sales, expenses, profitability and utilizing capital, etc. Assess overall financial strength: The purpose of financial analysis is to assess the financial strength of the business. Analysis http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction helps themanagement to study the position of their firm in respect of sales,expenses, profitability and utilising capital, etc. ? Assess overall financial strength The purpose of financial analysis is to assess the financial strength ofthe business
Students Paper: of the business. Analysis also helps in taking decisions, whether funds required http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction strength ofthe business. Analysis also helps in taking decisions, whether fundsrequired for funds required Students Paper: funds required for the purchase of new machines and equipments are provided from http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction whether fundsrequired for the purchase of new machines and equipments are providedfrom internal provided from internal sources of the business or not. Students Paper: or not. Assess solvency of the firm: The different tools of an analysis tell us whether the firm has sufficient funds http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction external sources. ? Assess solvency of the firm The different tools of an analysis tell us whether the firm has sufficientfunds to sufficient funds Students Paper: sufficient funds to meet its short term and long term liabilities or not.
Tools of http://www.scribd.com/doc/36574535/Interpretation-of-Financial-StatementsIntroduction has sufficientfunds to meet its short term and long term liabilities or not. PARTIES INTERESTED . Tools of financial statement analysis A number of tools are used to study the relationship between financial statements. However, the following are the important tools which are commonly used for analyzing and interpreting financial statements: Comparative financial statement: It is divided into two categories which are as follows: Comparative balance sheet: Comparative balance sheet analysis is the study of the trend of the same items and computed items in two or more balance sheets of the same business enterprise on different dates. Comparative income statement: Comparative income statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be known. Common size statement: Common size financial statements are the statements in which accounts of individual items of balance sheet and profit and loss account for two or more years are written. These amounts are further converted into percentages to some common base. It can be net sales in the case of profit and loss account and total of balance sheet for the balance sheet. Trend analysis: The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as base year. Ratio analysis: Ratio analysis is a study Students Paper: a study of relationship among various financial factors in a business. The objective of
http://www.scribd.com/doc/61689933/Write-Up-on-Financial-Statement-Analysis largely astudy of relationships among the various financial factors in a business, asdisclosed by objective of ratio analysis is to judge the earning capacity, financial soundness and operating efficiency of a business organization. The use of ratios in accounting and financial management analysis helps the management to know the profitability, financial position and operating efficiency of an enterprise. Cash flow: Cash flows are inflows and outflows i.e. the movement of cash and cash equivalents. All transactions that lead to increase in cash and cash equivalents are classified as inflows of cash and all those transactions that lead to decrease in cash and cash equivalents are classified as outflows of cash. Financial status of State bank of India (SBI) Cash flow Mar ' 11 Mar ' 10 Profit before tax 14,954.23 13,926.10 Net cash flow-operating activity 34,282.52 -1,804.99 Net cash used in investing activity -1,245.53 -1,761.52 Net cash used in fin. activity 2,057.11 -3,359.67 Net increase/decrease in cash and equivalent 35,094.10 -6,926.18 Cash and equivalent begin of year 87,780.05
1,03,110.02 Cash and equivalent end of year 1,22,874.15 96,183.84 Capital structure From Year To Year Class Of Share Authorized Capital Issued Capital Paid Up Shares (No.s) Paid Up Face Value Paid Up Capital 2010 2011 Equity Share 5,000.00 635.08 634998991 10 635.00 2009 2010 Equity Share 1,000.00 634.97 634882644 10 634.88 2008 2009 Equity Share 1,000.00 634.97
634880222 10 634.88 2007 2008 Equity Share 1,000.00 631.56 631470376 10 631.47 2006 2007 Equity Share 1,000.00 526.30 526298878 10 526.30 2005 2006 Equity Share 1,000.00 526.30 526298878 10 526.30 2004 2005 Equity Share 1,000.00 526.30 526298878 10
526.30 2003 2004 Equity Share 1,000.00 526.30 526298878 10 526.30 2002 2003 Equity Share 1,000.00 526.30 526298878 10 526.30 2001 2002 Equity Share 1,000.00 526.30 526298878 10 526.30 Payout ratios Dividend payout ratio (net profit) 26.03 23.36 Dividend payout ratio (cash profit) 23.24 21.20 Earning retention ratio 74.03
76.67 Cash earnings retention ratio 76.80 78.82 Balance sheet Mar ' 11 Mar ' 10 Students Paper: Mar ' 10 Sources of funds Owner's fund Equity share capital 635.00 634.88 Share application money http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 08Mar ' 07 Sources of funds Owner's fund Equity share capital 635.00 634.88 634.88 631.47 526.30 Students Paper: 635.00 634.88 Share application money Preference share capital Reserves & surplus 64,351.04 65,314.32 Loan funds
http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 631.47 526.30 Share application money----- Preference share capital----- Reserves & surplus 64,351.04 65,314.32 57,312.82 48,401.19 Students Paper: 64,351.04 65,314.32 Loan funds Secured loans Unsecured loans 9,33,932.81 8,04,116.23 Total 9,98,918.86 http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 48,401.19 30,772.26 Loan funds Secured loans----- Unsecured loans 9,33,932.81 8,04,116.23 7,42,073.13 5,37,403.94 Total 9,98,918.86 8,70,065.43 Students Paper: 9,98,918.86 8,70,065.43 Uses of funds Fixed assets Gross block 13,189.28 11,831.63
Less : revaluation http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 5,86,436.60 4,66,819.65 Uses of funds Fixed assets Gross block 13,189.28 11,831.63 10,403.06 8,988.35 Students Paper: 13,189.28 11,831.63 Less : revaluation reserve Less : accumulated depreciation 8,757.33 7,713.90 Net block http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 8,988.35 8,061.92 Less : revaluation reserve----- Less : accumulated depreciation 8,757.33 7,713.90 6,828.65 5,849.13 Net block 4,431.96 4,117.72 Capital work-in-progress 332.23 295.18 Investments 2,95,600.57 2,85,790.07
Students Paper: 2,95,600.57 2,85,790.07 Net current assets Current assets, loans & advances 43,777.85 35,112.76 Less : current http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 1,89,501.27 1,49,148.88 Net current assets Current assets, loans & advances 43,777.85 35,112.76 37,733.27 44,417.03 Less : current liabilities & provisions 1,05,248.39 80,336.70 Total net current assets -61,470.54 -45,223.94 Miscellaneous expenses not written Total 2,38,894.22 2,44,979.03 Students Paper: 2,38,894.22 2,44,979.03 Notes: Book value of unquoted investments Market value of quoted investments -
Contingent liabilities 7,90,386.79 5,96,366.41 Number of http://money.rediff.com/companies/state-bank-of-india/14030001/balance-sheet 1,53,929.48 1,17,217.80 Notes: Book value of unquoted investments----- Market value of quoted investments----- Contingent liabilities 7,90,386.79 5,96,366.41 7,67,567.52 8,29,740.48 Number of equity shares outstanding (Lac) 6349.99 6348.83 Profit loss account Mar ' 11 Mar ' 10 Income Operating income 95,525.58 85,909.36 Students Paper: 95,525.58 85,909.36 Expenses Material consumed Manufacturing expenses Personnel expenses 14,480.17 12,754.65
Selling expenses http://money.rediff.com/companies/state-bank-of-india/14030001/profit-and-loss 56,821.55 43,860.57 Expenses Material consumed----- Manufacturing expenses---- Personnel expenses 14,480.17 12,754.65 9,747.31 7,785.87 Selling expenses 257.88 224.05 Administrative expenses 15,702.33 11,029.66 Expenses capitalized Cost of sales 30,440.38 24,008.35 Operating profit 16,217.24 14,578.54 Other recurring income 1,065.14 1,051.15 Adjusted PBDIT 17,282.39 15,629.69 Financial expenses 48,867.96 47,322.48 Depreciation 990.50 932.66 Other write offs
Adjusted PBT -32,576.07 -32,625.45 Tax charges 5,709.54 6,166.62 Adjusted PAT 8,283.03 9,176.51 Non-recurring items -912.68 -10.46 Students Paper: 912.68 -10.46 Other non cash adjustments Reported net profit 7,370.35 9,166.05 Earnings before http://money.rediff.com/companies/state-bank-of-india/14030001/profit-and-loss 11.04 12.13 Other non cash adjustments----- Reported net profit 7,370.35 9,166.05 9,121.23 6,729.12 Earnings before appropriation 7,370.69 9,166.39 Equity dividend
1,905.00 1,904.65 Preference dividend Dividend tax 246.52 236.76 Retained earnings 5,219.17 7,024.99 Annual report of SBI SBIs five associate banks had a market share of 5.88% in deposits and 6% in advances on the last Friday of March 2011. (Rs. in Crs) As on As onChange 31.03.2010 31.03.2011 (%) Total Assets 3,18,580 3,68,283 15.60 Agg. Deposits 2,72,790 3,11,645 14.24 Total Advances 2,04,573 2,40,423 17.52 Operating Profit 5,841.90 7,568.68 29.56 Net Profit 2,958.80 3,598.43 21.62 Credit Deposit Ratio 74.15% 77.29% 4.23 Capital Adequacy Ratio 13.66 13.25 -0.41 Gross NPA 3,504.68 5,066.50 44.56
Net NPA 1,692.96 2,443.69 44.34 Return on Equity 18.97% 19.08% 0.11
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Question: What do you understand by financial soundness of the company? Prepare a report after studying the annual report of state bank of India for the year 20102011 indicating its financial health in terms of the following parameters: cash flows, dividend Answer: payout ratio, capital structure and growth prospectus?
Financial
soundness
In order to ascertain the financial soundness of the business every enterprise prepares certain statements known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately help in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements are required. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial Profit Balance statements and loss sheet we account or mean or two Income Position statements: statement statement
These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weakness of the firm.
Analysis of financial statements is an attempt to assess the efficiency and performance of the an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes:
Measuring the profitability: The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in thebusiness or not. It also helps in knowing the capacity to pay the interest and dividend.
Indicating the trend of achievements: Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged. Assessing the growth potential of the business: The trend and other analysis of the business provides sufficient information indicating the growth potential of the business. Comparative position in relation to other firms: The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilizing capital, etc.
Assess overall financial strength: The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not.
Assess solvency of the firm: The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not. Tools of financial statement analysis
A number of tools are used to study the relationship between financial statements. However, the following are the important tools which are commonly used for analyzing and interpreting financial statements:
Comparative financial statement: It is divided into two categories which are as follows: Comparative balance sheet: Comparative balance sheet analysis is the study of the trend of the same items and computed items in two or more balance sheets of the
same
business
enterprise
on
different
dates.
Comparative income statement: Comparative income statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be known. Common size statement: Common size financial statements are the statements in which accounts of individual items of balance sheet and profit and loss account for two or more years are written. These amounts are further converted into percentages to some common base. It can be net sales in the case of profit and loss account Trend and analysis: total of balance analysis is sheet a for the of balance studying sheet. several
The trend
technique
financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as base year.
Ratio analysis: Ratio analysis is a study of relationship among various financial factors in a business. The objective of ratio analysis is to judge the earning capacity, financial soundness and operating efficiency of a business organization. The use of ratios in accounting and financial management analysis helps the management to know the profitability, financial position and operating efficiency of an enterprise. Cash flow: Cash flows are inflows and outflows i.e. the movement of cash and cash equivalents. All transactions that lead to increase in cash and cash equivalents are classified as inflows of cash and all those transactions that lead to decrease in cash and cash equivalents status of are classified State bank as outflows of of cash. (SBI) flow
India
'
11
Mar Profit 14,954.23 13,926.10 Net 34,282.52 -1,804.99 Net -1,245.53 -1,761.52 Net 2,057.11 -3,359.67 Net 35,094.10 -6,926.18 Cash 87,780.05 1,03,110.02 Cash 1,22,874.15 96,183.84 Capital From To Class and equivalent and equivalent increase/decrease in cash used cash used cash
' before
10 tax
flow-operating
activity
in
investing
activity
in
fin.
activity
cash
and
equivalent
begin
of
year
end
of
year
Authorized Issued Paid Paid Paid 2010 2011 Equity 5,000.00 635.08 634998991 10 635.00 2009 2010 Equity 1,000.00 634.97 634882644 10 634.88 2008 2009 Equity 1,000.00 634.97 Up Up Up Shares Face
Share
Share
Share
634880222 10 634.88 2007 2008 Equity 1,000.00 631.56 631470376 10 631.47 2006 2007 Equity 1,000.00 526.30 526298878 10 526.30 2005 2006 Equity 1,000.00 526.30 526298878 10 Share Share Share
526.30 2004 2005 Equity 1,000.00 526.30 526298878 10 526.30 2003 2004 Equity 1,000.00 526.30 526298878 10 526.30 2002 2003 Equity 1,000.00 526.30 526298878 10 526.30 2001 Share Share Share
2002 Equity 1,000.00 526.30 526298878 10 526.30 Payout Dividend 26.03 23.36 Dividend 23.24 21.20 Earning 74.03 76.67 Cash 76.80 78.82 Balance Mar Mar Sources Owner's ' ' of 11 10 funds fund sheet earnings retention ratio retention ratio payout ratio (cash profit) payout ratio (net ratios profit) Share
Equity 635.00 634.88 Share Preference Reserves 64,351.04 65,314.32 Loan Secured Unsecured 9,33,932.81 8,04,116.23 Total 9,98,918.86 8,70,065.43 Uses Fixed Gross 13,189.28
share
capital
application
money
share
capital
&
surplus
funds loans
loans
of
11,831.63 Less Less 8,757.33 7,713.90 Net 4,431.96 4,117.72 Capital 332.23 295.18 Investments 2,95,600.57 2,85,790.07 Net Current 43,777.85 35,112.76 Less 1,05,248.39 80,336.70 Total -61,470.54 -45,223.94 net current assets : current liabilities & provisions assets, current loans & assets advances work-in-progress block : accumulated depreciation : revaluation reserve
Miscellaneous Total 2,38,894.22 2,44,979.03 Notes: Book Market Contingent 7,90,386.79 5,96,366.41 Number 6349.99 6348.83 Profit Mar Mar Income Operating 95,525.58 of value value
expenses
not
written
of
unquoted
investments
of
quoted
investments
liabilities
equity
shares
outstanding
(Lac)
loss
account
' '
11 10
income
85,909.36 Expenses Material Manufacturing Personnel 14,480.17 12,754.65 Selling 257.88 224.05 Administrative 15,702.33 11,029.66 Expenses Cost 30,440.38 24,008.35 Operating 16,217.24 14,578.54 profit of sales capitalized expenses expenses expenses expenses consumed
Other 1,065.14 1,051.15 Adjusted 17,282.39 15,629.69 Financial 48,867.96 47,322.48 Depreciation 990.50 932.66 Other Adjusted -32,576.07 -32,625.45 Tax 5,709.54 6,166.62 Adjusted 8,283.03 9,176.51 Non-recurring -912.68
recurring
income
PBDIT
expenses
write
offs
PBT
charges
PAT
items
-10.46 Other Reported 7,370.35 9,166.05 Earnings 7,370.69 9,166.39 Equity 1,905.00 1,904.65 Preference Dividend 246.52 236.76 Retained 5,219.17 7,024.99 Annual report of SBI earnings tax dividend dividend before appropriation net profit non cash adjustments
SBIs five associate banks had a market share of 5.88% in deposits and 6% in advances on (Rs. the last Friday in of March 2011. Crs)
As 31.03.2010
on
As 31.03.2011
onChange (%)
Total
Assets
3,18,580
3,68,283
15.60
Agg.
Deposits
2,72,790
3,11,645
14.24
Total
Advances
2,04,573
2,40,423
17.52
Operating
Profit
5,841.90
7,568.68
29.56
Net
Profit
2,958.80
3,598.43
21.62
Credit
Deposit
Ratio
74.15%
77.29%
4.23
Capital
Adequacy
Ratio
13.66
13.25
-0.41
Gross
NPA
3,504.68
5,066.50
44.56
Net
NPA
1,692.96
2,443.69
44.34