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FINANCIAL ANALYSIS ASSIGNMENT ROY

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Useful to the outsiders: Ratio analysis is indeed a well-widely accepted and widely used tool of supplying necessary information method to gauge the management. In addition it is also considered as an important technique even to the outside parties associated with any business or nonbusiness institution. The performance of a company. Quantitative analysis of companys financial statements using the information provided and comparing the same with the previous years data is an important activity for any company. Evaluation of such relationships by comparing the financial statements is further presented to the outsiders like potential investors depend a lotwho rely on the analyzed information available through ratio analysis for setting up business relation, maintaining the link with the firm, taking important decisions on different issues, etc. Even at present the researchers on accounting and management fields take the help of ratiosuch data for their analysis for the purpose of evaluation of performance, measurement of trends and projection of and future potentialsdecision making. Such ratios help identify the trend and compare with other companies which reveal trivial data to make certain important financial decisions for current financial year and also future projections.

From the foregoing discussion it is apparent that ratios have wide use not only in making Ratio Analysis of financial analysis but also for different other purposes. In fact the utility or effectiveness of ratio analysis is dependent to a great extentstatements mainly focuses on the purpose3 aspects of usea company- profitability, solvency and the analytical aptitudeliquidity. Profitability Ratios help measure the operating efficiency of thea company. Solvency Ratios help measure a companys potential long term risks. Liquidity Ratios as the name suggests measures the companys ability to repay short term debts and its unexpected or immediate cash requirements.

It is of remarkable importance of recruit a financial analyst. At present the use of ratios is common almost who is very proficient in working with financial data of current year and

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previous years in alldepth to provide timely and valuable information. Ratio Analysis has become a day to day activity today for any company at a managerial activities.level as financial decisions are made and changed almost everyday due to the frequently changing market conditions. J. Batty has rightly stated that the ratios can help in executing the basic functions of management like forecasting, planning, coordination, control and communication.

Return on Capital Employed:

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(i) This ratio is a real test of the profitability and managerial efficiency. The higher the A satisfactory return on any capital being invested is perhaps the prime motive of an Investment. Return on Capital employed (ROCE) helps establish the relationship between the higher is two important factors of an investment- Profit and the profitability and the sound is the managerial ability. From the viewpoint of shareholders and the management a high return on capital employed is always favorable. (ii) A low. From the companys point of view, calculating this ratio is one of the best ways to assess its overall performance as it helps indicate the efficiency of the management to manage the investments made by the owners and also helps gauge its decisions. From a shareholders point of view, this ratio informs them about their return on capitalinvestments. High Return on Capital employed in comparison to the industry standard reveals that the firm has not been able to earn a reasonable profit. It also explains thatindicates high managerial efficiency implying better profits of the managerial skill is not sound enough to increasecompany. This ratio also shows the profitability. A low return on capital employed is against the interest of the shareholders and management. (iii) If the cost of long-term borrowing is lower than the return on capital employed, return to shareholders would increase. (iv)companys trend in making profits over a period. A high return on capital employed achieved for a few consecutive years indicates that the firm has a stable financial positionstability and has good future prospectprospects.
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Net Profit or Net Margin Ratio

(i) The net profit ratio shows the net contributions made by sales of rupee 1 to the owners fund. (ii) A higher net profit ratio indicates better overall profitability and managerial efficiency. It expresses how much the total revenue earned is more than the total expenses incurred. (iii) A low net profit ratio reveals that the net earning is insufficient and the profitability and managerial efficiency are not up to the mark. (iv) If a firm has a low net profit ratio in spite of having a high gross profit ratio, it seems that it has excessive indirect expenses on which it has not been able to enforce control.

Another important tool and one of the profitability ratios that provides the final output. It is a ratio between net profits after taxes to net sales. Higher Net Profit Ratio denotes high profits to the company. The Net Margin shows the money a company is left with for its equity and preference shareholders who are the real owners. Any company will strive to keep a good Net Profit Ratio to make sure it never defaults. This can be achieved when activities like pricing, selling, financing, administration, production, taxation and likewise are carried on effectively and efficiently as these factors have direct influence on Net Profit Ratio. It is always advisable for a company to maintain a good balance between Gross Profits and Net Profits for that signifies that both direct and indirect expenses are under control.

Dividend Yield Ratio

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(i) It makes an analysis ofThis ratio measures the cash flow a company gets to investment made in an equity position. It helps the investors secure their cash flow from their investment portfolio. They can decide on investing in stocks whose dividends are relatively high and stable. It is the ratio of Annual dividends per share over Price per share. It helps analyse the return on equity shares not on the basis of the face value of the shares but on their market value. So it which reflects on the true rate of return available to the equity shareholders. Higher dividend yield ratio signifies more returns to the equity shareholders. It indicates high/low rate of profit earned by the company. (ii) The higher Price - Earnings Ratio As the dividend yield rationame suggests, the more is the return for equity shareholders. It indicates the high ratecomparison of profit earned by the company. (iii) If this ratio is low it indicates a low return on equityMarket value per share capital and a low profitability. (iv) If the market price of the equity shares is too high the dividend yield ratio may be considerably low. In such case, of course, the return of the equity shareholders may not be too low. So a low dividend yield ratio in a situation of very high market price of equityto Earnings per share is not against the interest of the equity shareholders.
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gives Price Earnings Ratio

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(i). It helps compare the earnings growth between two companies. A high price earnings ratio indicates either a fall in earning per share or an increase in market price per share. A high price earningsHigh Price - Earnings ratio resultingresults from increased market price per share and is beneficial to the shareholders. It indicates high managerial efficiency, high profitability and good market reputation. P/E Ratio is a great indicator of any problem or even an opportunity. (ii) A low price earnings ratio not caused by an increased earning indicates reduced market price per share. It also reveals a low level of managerial efficiency and profitability. It is against the interest of the shareholders. (iii) If the low price earnings ratio is caused by increased earnings per share it does not indicate an unfavorable situation for the shareholders.

Dividend Payout Ratio

(i) A highThis ratio helps conclude how well the company can support its dividend payout ratio indicatespayouts through its earnings. It is the percentage of companys earnings that the greater portion of profit availablehas been paid out to the equity shareholders has been distributed while a smaller portion has been retained.in the form of dividends. The shareholders like to get more cash dividend, so a high dividend payout ratio is favorable to them. (ii) A low dividend payout ratio reveals that the smaller portion of profit due to the equity shareholders has been paid in cash, while is the greater portion has been retained.comparison of dividends to Net Income of the company. The shareholders, keen to get cash dividend, do not like this position. (iii) From the viewpoint of the financial health of the company a high dividend payout ratio is never desirable because in such case retentionpart of profit becomes less. A low dividend payout ratio that indicates less distribution and more retentionearnings left after paying these dividends is helpfulused for the sustainedfuture growth of the company. Paying up higher dividends is a good option for companies with little room for growth whereas companies who need to allocate funds for growth and expansion pay up lesser dividends as per the indication of the Dividend Payout Ratio.

Equity Dividend Coverage Ratio

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(i) The higher the equity dividend coverage ratio the more is the security of the equity shareholders to get dividend. It also indicates good financial stability of the firm because the firm is in a position to pay equity dividend after meeting all fixed burdens and tax liability. (ii) A low equity- dividend coverage ratio is against the interest of the equity shareholders as it reduces the security of getting dividend by them. This situation does not indicate sound financial base of the firm.

This ratio helps decide the capacity of a company to pay the dividend to its shareholders. Equity and Preference share holders have the first right over the companys dividends and hence, this calculation becomes important for them. It is the comparison between Net Earnings and Dividend. High Dividend coverage ratio signifies better security for equity and preference share holders which in turn shows how stable a company is financially. Dividend payouts are compulsory but can be postponed as per the discretion of the management. While Dividend Payout Ratio is just a percentage shown by the management, Dividend Coverage Ratio is the absolute value that is calculated.

Interest Coverage Ratio

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(i) The earnings before interest and tax and the operating profit are same. So the interest coverage ratio measures as to how many times the interest burden of the firm is covered by the operating profit of the firm. (ii) A The ratio of higher interest coverage ratio indicates betterpoint towards capacity of superior debt servicing capacity. It. So it is beneficial from the viewpoints of bothfor the firm and as well as the lenders. From the viewpoint of prospective of firm it will be more helpful while in the situations of low profit, as they will be having more absorbing power and it also supports the firm it is beneficial because it indicates more shock absorbing capacity in case of lower profit andwhile repaying the reduced risk of default in interest payment. Fromamount.

(iii) The ratio of low interest coverage shows that the lenders viewpoint it is welcome because it indicates steady returnlenders which has low safety on their returns of investment., even this condition is not favorable for the firms. (iii)

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A low interest coverage ratio reveals that the lenders have a low safety of return on their investment, it is also unfavorable to the firm because in such case the firms profitability in relation to its interest payment commitment is low and it is not in a position to take recourse to further debt financing in case of any need.

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Capital Gearing Ratio

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(i)

(i) The tern: gear Gear term is generally used to control the in controlling motor speed of a motorwhich will be fitted to a car. The word speed has a close relationship with the term risk. In accounting ratio the term gear is used to measure the financial risk involved in the capital structure of a company. In case of a motor car using high gear means increasing the speed and using the risk term have a shut relationship and everyone aware about the problems associated with it. In the field of accounting the term gear is referred while measuring the financial risk associated with companys capital structure. As the word high gear means speed increasing and so as low gear means bringing downout the speed. Similarly at low level. Same time a highly geared company (a company having awith high capital gearing ratio) runs with will have more risk and a lowlythen geared company (a company having a low capital gearing ratio)will have slow impact as it has to bears a low risk, it means that a high gear Is rum- risky and vice versa.

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(ii) The state of high gearing state is favorable for while taking advantage of trading on equity.equity trading. In inflationary situation condition high gearing is effective because at this time the increased useful as the improvement in income helps to bear the in bearing burden of fixed interest burden.. (iii) In a deflationary market Low gearing situation low gearing is more effective because the low income earned during favorable in the market as it helps at the time of deflationary period is not sufficient to bear hugewhile it will easy in handling interest burden. (iv) The management must try to draw up a perfectTo create a well balance in the use ofwhile using risky capital and non-risky capital. the management plays vital role. A balanced capital structureorganization is reflecteddazzling upon a modest capital gearing ratio. This situation is moderate capital gearing ratio. It is that situation which is neither where the risk will not too risky nor much or too conservative.less. (v) InThe highly geared companies the provide high return of equity shareholders becomes high in the years ofon investment during their high profit years, but it becomes low inwhen the scenario get disturbs then the shareholders will have to bear the yearloss on the value of their

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return on investment. So during the period of low profit. In a year of high profit it is possible for the company to companies will declare a high rate of dividend even after paying off high cost of debt. On the other hand in a year of low profit the major portion of profit earned is used up in meeting loss and shareholder will get the amount which will be excluding the amount paid in form of interest burden and only a small portion is left for equity shareholders.

Current Ratio

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1. (i) A comparatively higherHigh current ratio indicates a good indicated better liquidity and it also indicates firms satisfactory debt repayment capacity. So at this moment of the firm. It is also an indicator of safety of investment made bytime creditors. can take advantage of the situation and go for safety investment. (ii) A low2. Low current ratio than the is a standard indicates a indication of bad liquidity, the debt repayment capacity of the firm will be poor, over-trading, less and working capital and unsatisfactory debt repayment capacity of the firm. The investment of creditors in a firm having a low current ratio may not be too safe. 2. (iii) Current ratio expressed in terms of percentage is known as working capital ratio. This ratiowill also indicates the margin of safety or margin of caution of the creditors.be less. So this type of situation will be good for creditors investment. 3. (iv) APercentage of current ratio is known as ratio of working capital. This ratio will help creditors to know the line of safety while investing into the firms. 4. While the high current ratio always indicates a soundstrong debt repayment capacity and athe low current ratio interprets this indicates the poor position in an adverse manner this proposition may not be universally trueof the firm in terms of their debt repayment capacity, but it is not same in all cases. If the current assets do not have a goodcircumstances, the quality, like they consist of more obsolete of stock, slow paying debtors, etc. the good also matters while judging the liquidity position as indicated by a high current ratio may not be so good in reality. On the other hand. Concurrently, if the current assets consist of high quality stock and well-paying debtors even a stocks will be the part of current asset then indication of current ratio lower than the standard may speak of does play great role while indicating the sound solvencydebt repayment capacity of the firm. 5. (v) InAt the time of measuring the short- term liquidity or solvency current ratio should not be takenconsidered as the sole parameter. Other however other liquidity ratios are

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also to be calculated for this purpose.should be considered to understand the proper position of the firm. 6. (vi) If there is a recession in a Recession in particular industry, all the firms belonging to that industryindustries may have largeimpact on their unsold inventory andwhich in turn affects long outstanding debtors. These would increase This will add in current assets and resultasset which helps in aboosting high current ratio. But in this case the trend indicated by the high current ratio may not stand favorable for the firms.

Liquid or Quick or Acid Test Ratio

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(e) 1. (i) A High current ratio along with high quick ratio along with is a high current ratio indicates a good short-term solvency or debtmere indication of better situation of the firms repayment capacity of the firm.and also better short term solvency. 2. (ii) Even ifAt the time of high current ratio is high, a, low quick ratio doeswill not indicate ahave any kind of impact on firms good debt repayment capacity of the firm.. 3. (iii) The authenticity of decision takenconclusion drawn on the basis of current ratio canwill be verified through with the help of quick ratio. 4. (iv) A The safety of creditors investment can be ensured with the help of high quick ratio ensures the safety of the investment of creditors.. 5. (v) The While testing the better liquidity of the firm quick ratio is considered to be a better test of liquidity more authentic than the current ratio. But However it is difficult to come to the conclusion as the position of debtors mentioned by liquid asset or quick ratio itselfasset may not be takenin good practice, as a conclusive test of liquidity. If the firm which have shown quick asset or liquid assets consist of slow paying or defaulting debtors the good liquidity position as indicated by a high quick ratioasset may not be so good in practice. Again if the inventories which are not included in quick assets are not
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so illiquid and have very good turnover the firm may enjoy aenjoying better liquidity position. 6. So more rigorous or precise test should come in the practice rather than what is indicateddepending on the indication of current ratio maintained by a low quick ratio. (vi) For verifying the trend indicated by the current ratio and supported by the quick ratio it is required to adopt a more rigorous test of liquidity through the Absolute Liquid Ratio.
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Fixed Assets Turnover

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1. (i) A high fixed assets turnover ratio is an indicator of efficient indicates fixed asset proficient utilization at the time of fixed assets in generating sales. It revealsis disclosed that use of less fixed assets made possible at the time of higher generation of sales.sales less fixed asset can be made possible. 2. (ii) A The ratio of low fixed assets turnover ratio indicates inefficient managerialasset is the indication of ineffective marginal ability in utilization ofwhile utilizing the fixed assets because it reveals that use of as more fixed assets resulted inasset turn up in generating lower generation of sales. 3. (iii) If the value of major portion of a firms fixed assets have been depreciatedasset of the firm get depreciates its turnover ratio of fixed assets turnover ratio may be more than another firm which has recently purchased asset compare to the other firms with huge fixed assets. In such case, and then it cannot be saidis considered that the formers managerial efficiency is more than the latter. So a careful consideration is necessary for measuring efficiency by using the fixed assets turnover ratio.will be more efficient in future. (iv) The While evaluating the activity level of any firm the comparison between ratios of a firms fixed assetsasset turnover ratio with that of the compare to past years and also with the that of industry standard maystandards will be a helpful tool to evaluate the activity level.

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Current Assets Turnover

(i) If this ratio is high it indicates an efficient utilization of current assets in generating sales. It reveals that use of less fixed assets has generated more sales. (ii) If this ratio is low it is indicative of inefficiency in working capital management. It reveals that use of more current assets resulted in lower generation of sales.

(iii) A too high or too low current assets turnover is not a welcoming feature of a firms management. If this ratio is nearer to the average or standard followed in the industry it is considered as an indicator of an efficient activity level of the firm.

Return on shareholders funds (Same as return on capital employed) Total shareholders return (Same as return on capital employed) Eps Dps

2. NEW FILE Stock or Inventory Turnover or Velocity Significance and Importance of Interpretation: 1. (i) It showsrepresents the rapidityspeed with which the inventory transformstransformation takes place into receivables throughby sales. 2. (ii) A highHigher inventory turnover ratio implies corresponds to low level of inventory level and & quick inventory conversion of inventory into sales. It isshows the signefficiency of efficient inventory management. 3. (iii)AHigh level inventory maintenance means low inventory turnover ratio indicates maintenance of a high level of inventory and slow rotationwhich shows poor management of inventory in the operating cycle process. It is suggestive of poor Excessive inventory management. (iv)A too low inventor: turnover (even much lower than the industry standard) implies holding of excessive inventory. Holding of unnecessary inventory indicates unproductive blocking of funds which increases cost and reduces profit. 4. (v) If the inventory turnover is too high it is an indication of holding a holdings are indicative of very low level of inventory. Holding of a very turnover. Increase in costs and reduction in profit happens when unnecessary inventory holdings take place. 5. Very low level of inventory bearsholdings results in too high inventory turnover which also results in the risk of frequent shortage of stock which may adversely affect the stocks. Due to this production process is affected. 6. (vi)It isA firm should always desirable for a firm to maintain a balanced level ofbalance in the inventory. So a firm must fix up an optimum inventory turnover level and try to maintain that. level.
[Important Point to Note : The Inventory Turnover Ratio may be used to To find out the number of inventory holdings in days of, the inventory holding turnover ratio formula is used as follows:NumberInventory holding in no. of days of Inventory Holding = =365 (No. of days in a of an year) / (/ Inventory Turnover Ratio)turnover ratio

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Comparative Financial Statement Analysisfinancial statement analysis Comparative Financial Statement analysis providesIt gives information in order to assessaccess the change direction of change in thea business. Financial statements are presented as onprepared for a particular date for a particular period. The financial statement duration of time and presented on a fixed day. Balance Sheet indicates sheet is indicative of the financial position as at the end of an accounting period and the financial statement Income Statement shows the operating and non-operating results for a period. But financial managers and top management are also interested in knowing whether the of a business is moving in a favorable or an unfavorable direction. For this purpose, figures of current year have to during a particular period of time and the Income statement shows the operation and the non-operating parameters for a given period of time. However, the finance managers and the top management of a firm is very eager to know if the business is heading in a right direction of success. In order to understand this, the results and statistics of this year should be compared with thosethat of the last or previous years. In analyzingyear. For this waypurpose, comparative financial statements are prepared.
Comparative Financial Statement Analysis which is also calledknown as Horizontal analysis. The Comparative Financial Statement provides information about two or more years' figures as well as any increase or decrease from the previous year's figure and it's percentage of increase or decrease. This kind of analysisstatement provided the data or figures of two or more

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years and also let us knows the differences in the form of increases or decreases which eventually helps in identifyingfinding or discovering the major business weaknesses or improvements and weaknesses.that may be needed. For exampleinstance, if the net income of a particularthis year has decreased from its previousas compared to last year, despite an increase in sales duringthroughout the year, is a matterit becomes an issue of seriousgreat concern. for the business. Comparative financial statement analysis in such situations helpsstatements will certainly help to find outdiscover where the costs havefactor increased due to which has resulted in lower low net income than the previous year.situation was faced by the business. Accountancy holds the roots of any business and financial statements like the Balance sheet, Income statements and Profit and Loss accounts are an indispensible part of accountancy and business.