INRTODUCTION

After preparation of the financial statements, one may be interested in knowing the position of an enterprise from different points of view. This can be done by analyzing the financial statement with the help of different tools of analysis such as ratio analysis, funds flow analysis, cash flow analysis, comparative statement analysis, etc. Here I have done financial analysis by ratios. In this process, a meaningful relationship is established between two or more accounting figures for comparison. Financial ratios are widely used for modeling purposes both by practitioners and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to forecast the future success of companies, while the researchers' main interest has been to develop models exploiting these ratios. Many distinct areas of research involving financial ratios can be discerned. Historically one can observe several major themes in the financial analysis literature. There is overlapping in the observable themes, and they do not necessarily coincide with what theoretically might be the best founded areas. Financial statements are those statements which provide information about profitability and financial position of a business. It includes two statements, i.e., profit & loss a/c or income statement and balance sheet or position statement. The income statement presents the summary of the income earned and the expenses incurred during a financial year. Position statement presents the financial position of the business at the end of the year. 7

 Before understanding the meaning of analysis of financial statements, it is necessary to understand the meaning of analysis and financial statements. 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- (1) profit & loss a/c (2) balance sheet. These are prepared at the end of a given period of time. They are indicators of profitability and financial soundness of the business concern. Thus, analysis of financial statements means establishing meaningful relationship between various items of the two financial statements, i.e., income statement and position statement Parties interested in analysis of financial statements Analysis of financial statement has become very significant due to widespread interest of various parties in the financial result of a business unit. The various persons interested in the analysis of financial statements are: Short- term creditors They are interested in knowing whether the amounts owing to them will be paid as and when fall due for payment or not. Long term creditors They are interested in knowing whether the principal amount and interest thereon will be paid on time or not. Shareholders They are interested in profitability, return and capital appreciation. Management The management is interested in the financial position and performance of the enterprise as a whole and of its various divisions. Trade unions They are interested in financial statements for negotiating the wages or salaries or bonus agreement with management. 8

 Taxation authorities These authorities are interested in financial statements for determining the tax liability. Researchers They are interested in the financial statements in undertaking research in business affairs and practices.

Employees They are interested as it enables them to justify their demands for bonus and increase in remuneration. You have seen that different parties are interested in the results reported in the financial statements. These results are reported by analyzing financial statements through the use of ratio analysis.

STATE BANK OF INDIA

Type-

Public (BSE, NSE:SBI) & (LSE:SBID)

Founded-

Calcutta, 1806 (as Bank of Calcutta) Corporate Centre,

Headquarters- Madam Cama Road, Mumbai 400 021 India Key peopleOm Prakash Bhatt, Chairman

State Bank of India (SBI) (LSE: SBID) is the largest bank in India. It is also, measured by the number of branch offices and employees, the second largest bank in the world. The bank traces its ancestry back through the Imperial Bank of India to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network in India and overseas, including products aimed at NRIs. With an asset base of $126 billion and its reach, it is a regional banking behemoth. SBI has laid emphasis on reducing the huge manpower through Golden handshake schemes and computerizing its operations.

The State Bank Group, with over 16000 branches, has the largest branch network in India. It has a market share among Indian commercial banks of about 20% in deposits and advances.

12

International presence

Regional office of the State Bank of India (SBI), India's largest bank, in Mumbai. The government of India is the largest shareholder in SBI.

The bank has 52 branches, agencies or offices in 32 countries. It has branches of the parent in Colombo, Dhakka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape Town.

SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank, State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India (California), and State Bank of India (Canada). In 1982, the bank established its California subsidiary, which now has seven branches. The Canadian subsidiary was also established in 1982 and also has seven branches, four in the greater Toronto area, and three in British Columbia. In Nigeria, it operates as INMB Bank. This bank was established in 1981 as the Indo-Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria. In Nepal SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo Monex. State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin.

13

BOARD OF DIRECTORS

1 2 3 4 5 6 7 8 9 10 11

Shri O.P. Bhatt(Chairman) Shri S.K. Bhattacharyya(MD & CC&RO) Shri Suman Kumar Bery Dr. Ashok Jhunjhunwala Shri Dileep C. Choksi Shri S. Venkatachalam Dr. Deva Nand Balodhi Prof. Mohd. Salahuddin Ansari Dr.(Mrs.) Vasantha Bharucha Shri Arun Ramanathan Smt. Shyamala Gopinath

PRODUCTS & SERVICES

SBI BANKING
23

 Personal Banking Agricultural & Rural Banking NRI Services International Banking Corporate Banking Services Govt. Business SME

Personal Banking Deposit Schemes Personal Finance Corp Salary Package Services International Trade Finance Merchant Banking Correspondent Banking

Agricultural Agricultural Banking Micro Credit Regional Rural Banks

NRI Services Type of Accounts

Corporate Banking Corporate Accounts Mid Corporate Group Project Finance Products & Services

Services Internet Banking Mobile Banking ATM Services

Govt. Business Govt. Accounts.

SME

24

Demat Services

Public Provident Fund.

PERSONALBANKING
SBI Term Deposits SBI Loan For Pensioners

SBI Recurring Deposits Loan Against Mortgage Of Property SBI Housing Loan SBI Car Loan SBI Educational Loan SBI Personal Loan Loan Against Shares & Debentures Rent Plus Scheme Medi-Plus Scheme Rates Of Interest

AGRICULTURA

State Bank of India Caters to the needs of agriculturists and landless agricultural labourers through a network of 6600 rural and semi-urban branches. There are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment .These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hi tech commercial agricultural projects. Our branches have covered a whole gamut of agricultural activities like crop production , horticulture , plantation crops, farm mechanization, land development and reclamation, digging of wells, tube wells and irrigation projects, forestry, construction of cold storages and godowns, processing of agri-products, finance to agri-input dealers, allied activities like dairy , fisheries, poultry, sheep-goat, piggery and rearing of silk worms. The branch also has farmer's meet in villages to explain to farmers about various schemes offered by the bank. To give special focus to agriculture lending Bank has set up agri business unit. Bank has also agri specialists in various disciplines to handle projects/ guide farmers in their agri 25

ventures. Advances are given for very small activity covering poorest of the poor to hi-tech activities involving large fund outlays. We are the leaders in agri finance in the country with a portfolio of Rs. 18,000 cars in agri advances to around 50 lac farmers.

NRI SERVICES
World Class Services from a Bank you can Trust Indians everywhere should become

enlightened International citizens. Wherever you are, whichever country you live, enrich that nation, not only in financial terms, but also with your sweat knowledge and dignity since that is the tradition of the country from where you came. At the same time, remember we have a common umbilical connectivity to our motherland, India.

INTERNATIONAL BANKING
International banking services of State Bank of India are delivered for the benefit of its Indian customers, non-resident Indians, foreign entities and banks through a network of 84 offices/branches in 32 countries as on 31 March 2008, spread over all time zones. The network is augmented by a cluster of Overseas and NRI branches within India and correspondent links with over 522 banks, the world over. Bank's Joint Ventures and Subsidiaries abroad further underline the Bank's international presence. The services include corporate lending, loan syndications, merchant banking, handling Letters of Credit and Guarantees, short-term financing, collection of clean and documentary credits and remittances. The Bank has carved a niche for itself in the Euro land with branches located in Antwerp, Paris and Frankfurt. Indian banks and corporates are able to avail single-window Euro services from the Bank's Frankfurt branch.

CORPORATE BANKING
SBI is a one shop providing financial products / services of a wide range for large, medium and small customers both domestic and international.

26

Working Capital Financing Assistance extended both as Fund based and Non-Fund based facilities to Corporate, Partnership firms, Proprietary concerns

Working Capital finance extended to all segments of industries and services sector such as IT Term Loans to support capital expenditures for setting up new ventures as also for expansion, renovation etc. Deferred Payment Guarantees to support purchase of capital equipments. Corporate Loans For a variety of business related purposes to corporate. Export Credit To Corporate / Non Corporate Strategic Business Units (i) Corporate Accounts Group (CAG) (ii)Project Finance (iii) Lease Finance

An exclusive unit providing one s shopping to Corporate A dedicated set up specialised in financing of infrastructure and other large projects Exclusive set up for handling large ticket leases. Pricing SBI's Prime Lending Rates (PLR) is among the lowest Presently Bank has two PLR's SBAR for loans payable on demand and up to one year for loans payable beyond one year.

SERVICES
Listed on the left are Services, SBI offers to its customers.

DOMESTIC TREASURY SBI VISHWA YATRA FOREIGN TRAVEL CARD BROKING SERVICES REVISED SERVICE CHARGES ATM SERVICES 26

INTERNET BANKING E-PAY E-RAIL RBIEFT SAFE DEPOSIT LOCKER GIFT CHEQUES

GOVERNMENT BUSINESS
State Bank of India's linkage with Government business is widespread. No wonder that out of 9315 branches in India, about 7000 branches are conducting Government Business. The large network of our branches provides easy access to the common man to deposit the following

Government dues and pension payments.

SME (small scale industries)

State Bank of India has been playing a vital role in the development of small scale industries since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialised SSI branches, 99 branches in industrial estates and more than 400 branches with SIB divisions. The Bank finances for Small Business activities which are of special significance to a large number of people as many of these activities can be started with relatively lower investment and with no special skills on the part of the entrepreneurs.

BALANCE SHEET
STATE BANK OF INDIA
BALANCE SHEET AS ON 31-MARCH-2008 Assets
Net Own Assets Net Lease Assets(After Lease Adj A/c) Investment Advances Cash & Money at call Other Current Assets Balance Sheet Total(BT) Rs(mn) 33291.42 443.39 1895012.71 4167681.96 674663.35 443749.84 7215263.12 Rs(mn) 6314.70 484011.91 5374039.41 517274.11 833622.98 7215263.12 1.87 13.47 %BT 0.46 0.01 26.26 57.76 9.35 6.15 100.00 %BT 0.09 6.71 74.48 7.17 11.55 100.00 -

Liabilities
Equity Share Capital Reserves Deposits Borrowings Other Cash liab/prov. Balance Sheet Total(BT) Non Performing Assets(NPA) % Capital Adequacy Ratio(CAR) %

 PROFITABILITY RATIO
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.

For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative.

OPERATING MARGIN
A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. It Is Also known as "operating profit margin."

Calculated as:

41

Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.

For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit settlement, are excluded from the operating margin calculation because they don't represent a company's true operating performance.

RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

22.69 %

ICICI

14.45 %

PNB

21.47 %

42

BAR-GRAPH

INTERPRETATION It shows that operating efficiency of SBI is better than PNB and ICICI. While operating efficiency of ICICI is lower than PNB and SBI. So rank of operating efficiency of banks can be given as SBI, PNB and ICICI.

GROSS PROFIT MARGIN

A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. It is also known as "gross margin".

Calculated as:

43

For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%. This means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of the day.

This metric can be used to compare a company with its competitors. More efficient companies will usually see higher profit margins.

RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

21.49 %

ICICI

12.99 %

PNB

20.67%

44

BAR-GRAPH

INTERPRETATION This ratio shows financial position of company. Here, financial position of SBI is better than PNB and ICICI. So SBI is at first rank by its financial position than PNB and ICICI.

NET PROFIT MARGIN

For a business to survive in the long term it must generate profit. Therefore the net profit margin ratio is one of the key performance indicators for your business. The net profit margin ratio indicates profit levels of a business after all costs have been taken into account. It is worth analysing the ratio over time. A variation in the ratio from year to year may be due to abnormal conditions or expenses. Variations may also indicate cost blowouts which need to be addressed. A decline in the ratio over time may indicate a margin squeeze suggesting that productivity improvements may need to be initiated. In some cases, the costs of such improvements may lead to a further drop in the ratio or even losses before increased profitability is achieved.

45

The calculation used to obtain the ratio is: Net Profit Margin = Net Profit Sales x 100

RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

11.67 %

ICICI

10.51 %

PNB

12.68 %

46

BAR-GRAPH

INTERPRETATION This ratio is key performance indicators for business. Key performance means the profit level of company; from above graph we can say that performance of PNB is better than SBI and ICICI. So profit level of PNB is at first rank than comes SBI and ICICI.

RETURN ON NETWORTH
Return on Net worth (RONW) is used in finance as a measure of a companys profitability. It reveals how much profit a company generates with the money that the equity shareholders have invested. Therefore, it is also called Return on Equity (ROE) It is expressed as:Net Income RONW = ------------------------------------------Shareholders Equity The numerator is equal to a fiscal years net income (after payment of preference share dividends but before payment of equity share dividends).The denominator excludes preference X 100

47

shares and considers only the equity shareholding. So, RONW measures how much return the company management can generate for its equity shareholders. RONW is a measure for judging the returns that a shareholder gets on his investment as a shareholder, equity represents your money and so it makes good sense to know how well management is doing with it. RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

13.72 %

ICICI

8.94 %

PNB

19.00 %

BAR-GRAPH

48

 INTERPRETATION This ratio is useful for comparing the profitability of a company to that of other firms in the same industry. Here, profitability of PNB is more than SBI and PNB. So we can say that PNB is at first rank by its profitability than comes SBI and ICICI.

LEVERAGE RATIO
Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.

The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5 ($10M/$20M). Companies with high fixed costs, after reaching the breakeven point, see a greater increase in operating revenue when output is increased compared to companies with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating income. On the other hand, a high variable cost company sees little increase in operating income with additional output, because costs continue to be imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income.

DEBT-EQUITY RATIO
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.

49

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. It is also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as companies'.

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

10.96 %

ICICI

5.27 %

PNB

15.44 % 50

BAR-GRAPH

INTERPRETATION This ratio indicates what proportion of equity and debt the company is using to finance its assets. From above diagram we can say that PNB has a high debt-equity ratio means it is aggressive in financing its growth with debt. Than after SBI has a low debt-equity ratio as comparison with PNB and ICICI comes at third rank in debt-equity ratio.

FIXED ASSETS TURNOVER RATIO

Measure of the productivity of a firm, it indicates the amount of sales generated by each dollar spent on fixed assets, and the amount of fixed assets required to generate a specific level of revenue. Changes in the ratio over time reflect whether or not the firm is becoming more efficient in the use of its fixed assets. Formula: Sales revenue average fixed assets.

51

RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

6.31 %

ICICI

5.61 %

PNB

4.35 %

BAR-GRAPH

52

 INTERPRETATION

This ratio shows specific level of revenue by the amount of fixed assets. SBI has a high level of revenue in comparison with ICICI and PNB. After SBI, ICICI has a high level of revenue and than comes PNB at last.

LIQUIDITY RATIO
A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

CURRENT RATIO
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the higher the current ratio, the greater the "cushion" between current obligations and your Company's ability to pay them. The composition and quality of current assets is a critical factor in the analysis of your Company's liquidity. It is calculated as Total current assets divided by total current liabilities. 53

RATIO AT 31-MARCH 2008

Sr.No.

Name of Bank

Percentage

SBI

0.07 %

ICICI

0.10 %

PNB

0.02 %

BAR-GRAPH

54

OBJECTIVES
Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. For that there are some objectives which are described as under.

1. EARNING CAPACITY OR PROFITABILITY

The overall 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. 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 business. Such 63

comparison also helps the management to study the position of their firm in respect of sales expenses, profitability and using capital.etc.

3. EFFICIENCY OF MANAGEMENT
The purpose of financial statement analysis is to know that the financial policies adopted by the management are efficient or not. Analysis also helps the management in preparing budgets by forecasting next years profit on the basis of past earnings. It also helps the management to find out shortcomings of the business so that remedial measures can be taken to remove these shortcomings.

4. FINANCIAL STRENGTH
The purpose of financial analysis is to assess the financial potential of business. Analysis also helps in taking decisions;

(a) Whether funds required for the purchase of new machinery and equipments are provided from internal resources of business or not.

(b) How much funds have been raised from external sources.

5.SOLVECNY OF THE FIRM

The different tools of analysis tells us whether the firm has suffucient funds to meet its shortterm and long-term liabilities or not.

IMPORTANCE
Ratio analysis is an important technique of financial analysis. It is a means for judging the financial health of a business enterprise. It determines and interprets the

liquidity,solvency,profitability,etc. of a business enterprise.

 It becomes simple to understand various figures in the financial statements through the use of different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures presented in financial statements. With the help of raito analysis, comparision of profitability and financial soundness can be made between one industry and another. Similarly comparision of current year figures can also be made with those of previous years with the help of ratio analysis and if some weak points are located, remidial masures are taken to correct them. If accounting ratios are calculated for a number of years, they will reveal the trend of costs, sales, profits and other important facts. Such trends are useful for planning. Financial ratios, based on a desired level of activities, can be set as standards for judging actual performance of a business. For example, if owners of a business aim at earning profit @ 25% on the capital which is the prevailing rate of return in the industry then this rate of 25% becomes the standard. The rate of profit of each year is compared with this standard and the actual performance of the business can be judged easily. Ratio analysis discloses the position of business with different viewpoint. It discloses the position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. with the help of such a study, we can draw conclusion regardings the financial health of business enterprise.

ADVANTAGES
Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages of ratio analysis: 1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business. 2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. 3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications. 4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

68

LIMITATION
The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. 2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.

CONCLUSION
Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use.

Ratio

analysis

has

major

significance

in

analysing

the

financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company.

Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company.

The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firms position and performance.

The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.