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SUMMER TRAINING REPORT ON Financial Statement Analysis of Indian Railway Catering and Tourism Corporation Limited (IRCTC)

Submitted in the Fulfilment for the Requirement of Bachelors of Business Administration (BBA) Guru Govind Singh Indraprastha University

Project Guide INTERNAL: Reena Talwar

Assistant Professor ,JIMS EXTERNAL: Mr. Sanjeeb Kumar GGM-Finance , IRCTC Limited

Submitted by: Vatsal 04724501709 5th semester(2009-12)

Jagannath International Management School Kalkaji, New Delhi


This is to certify that VATSAL student of JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL completed his project report on the topic Financial Statement Analysis of Indian Railway Catering and Tourism Corporation Limited(IRCTC) and has submitted the project report in fulfilment of BBA of the INDRAPRASTHA UNIVERSITY for the academic year 2009 - 20012. He has worked under our guidance and direction.

Reena Talwar Assistant Professor

Declaration Acknowledgement Executive summery Objective of the study Research Methodology Introduction Company Profile Financial Statements Balance Sheet Income statement Financial Statement analysis o Comparative Financial Statement Analysis Comparative Balance Sheet Common size Balance Sheet Trend percent analysis of Balance Sheet Comparative Income statement Common size Income statement Trend percent analysis of Income statement Cash Flow Statement o Ratio Analysis Current Ratio Quick Ratio Earnings per share Earnings Yield Return on share holder's fund Net Profit Margin Return on capital employed o Graphical Analysis Of Ratios Who uses these analyses? Importance Advantages Limitations Conclusion Bibliography

I hereby declare that the project titled FINANCIAL STATEMENT ANALYSIS OF IRCTC Ltd. is an original piece of research work carried out by me under the guidance and supervision of Project Guides: Ms. Reena Talwar , Assistant Professor , JIMS (INTERNAL) and Mr. Sanjeeb Kumar GGM-Finance , IRCTC Limited(EXTERNAL). The information has been collected from genuine & authentic sources. The work has been submitted in partial fulfilment of the requirement of BACHLOR OF BUSINESS ADMINISTRATION (BBA).

Place: Delhi Date:

Signature: VATSAL




Project Title: Financial Statement Analysis Company Name: Indian Railway Catering and Tourism Corporation Limited(IRCTC) The training at IRCTC Limited involved the day to day working at corporate accounts departments with the senior & junior managers in the company. This project helped me to get the deeper understanding of the process of Financial Statement Analysis and how decisions are taken to strengthen the financial position. For this study four years comparative Income Statement & Balance Sheet have been taken for calculating ratio analysis. Main objective in undertaking this project is to supplement academic knowledge with absolute practical exposure to day to day functions of the sector. Financial analysis which is the topic of this project refers to an assessment of the viability, stability and profitability of a business. This important analysis is performed usually by finance professionals in order to prepare financial or annual reports. These financial reports are made with using the information taken from financial statements of the company and it is based on the significant tool of Ratio Analysis. These reports are usually presented to top management as one of their basis in making crucial business decisions. During the summer training period at IRCTC Limited, I had close connection with preparation of financial statements and also their analysis which was made by professionals in the accounting team of the company. This experience was an emphasis on the importance of these Ratios which could be the roots of decisions made by management that can make or break the company. So, I was influenced to allocate the aim of this project to study the details about these ratios and their possible effects on the decisions.


There have been various objectives for this study, the first of which is a detailed analysis of the financial statements that is the balance sheet and the income statement of IRCTC Ltd. The second objective, however the most important one or in other word the principle aim of this project is the understanding and assessment of financial ratios based on the statements of the company. The next aim of the project is to recognize the position of the company through those ratios and data available. This recognition is a leading factor in changes of each and every company and the base and root of lots of management decisions.

Research framework: This study is based on the data about IRCTC LTD for a detailed study of its financial statements, documents and system ratios and finally to recognize and determine the position of the company. Types of data which helped to prepare this report: 1. First type is the primary data which was collected personally to be used and studied to prepare and reach the objectives already mentioned. 2. The secondary data which was already prepared so these data was only used to reach the aims and objectives of this project. These data has been collected from the financial reports of the company. How the data was collected: The sources of collecting the primary data was through interviews, observation and questionnaire, however the secondary one was collected from the financial statements already available to the employees of the company and some of which was published. Personal Interview: Personal Interview method requires a person known as the interviewer asking questions generally in a face to face contact to the other person or persons. Different questions and information I could collect during these two methods are: 1. The beginning and history of the IRCTC Ltd. 2. Numbers of staff working for different departments. 3. The mission & vision of the company. 4. Areas of operations 5. Other company related information. Printed and Digital Sources: The secondary data I collected was through the study of the financial statements already existed in the company in form of printed files or digital files reserved in the company for further references. I had chosen these files because of the reliability and suitability of these information which I was also sure about the accuracy of them. These files consist of: 1. Annual report of the company 2. Financial balance sheets 3. Income statements 4. Financial reports 5. Different reports prepared by Finance Department


FINANCIAL STATEMENTS Financial statements are summaries of the operating, financing, and investment activities of a business. Financial statements should provide information useful to both investors and creditors in making credit, investment, and other business decisions. And this usefulness means that investors and creditors can use these statements to predict, compare, and evaluate the amount, timing, and uncertainty of potential cash flows. In other words, financial statements provide the information needed to assess a companys future earnings and therefore the cash flows expected to result from those earnings. In this chapter, we discuss the four basic financial statements: the balance sheet, the income statement, the statement of cash flows, and the statement of shareholders equity. The analysis of financial statements is provided in Part Six of this book. ACCOUNTING PRINCIPLES AND ASSUMPTIONS Being a MINI RATNA GOVT. OF INDIA ENTERPRISE;IRCTC has to follow DPE(Department of Public Enterprise ) guidelines The accounting data in financial statements are prepared by the firms management according to a set of standards, referred to as generally accepted accounting principles (GAAP). The financial statements of a company whose stock is publicly traded must, by law, be audited at least annually by independent public accountants (i.e., accountants who are not employees of the firm). In such an audit, the accountants examine the financial statements and the data from which these statements are prepared and attestthrough the published auditors opinionthat these statements have been prepared according to GAAP. The auditors opinion focuses on whether the statements conform to GAAP and that there is adequate disclosure of any material change in accounting principles. The financial statements are created using several assumptions that affect how we use and interpret the financial data: statements are not market or replacement values, but rather reflect the original cost (adjusted for depreciation, in the case of depreciable assets). effects of inflation, combined with the practice of recording values at historical cost, may cause problems in using and interpreting these values. are produced to cover a chosen fiscal year or quarter, with the income statement and the statement of cash flows spanning a periods time and the balance sheet and statement of shareholders equity as of the end of the specified period. But because the end of the fiscal year is generally chosen to coincide with the low point of activity in the firms operating cycle, the annual balance sheet and statement of shareholders equity may not be representative of values for the year. Most businesses use accrual accounting, where income and revenues are matched in timing such that income is recorded in the period in which it is earned and expenses are reported in the period in which they are incurred to generate revenues. The result of the use of accrual accounting is that reported income does not necessarily coincide with cash flows. Because the financial analyst is concerned

ultimately with cash flows, he or she often must understand how reported income relates to a companys cash flows. continue as a going concern. The assumption that the business enterprise will continue indefinitely justifies the appropriateness of using historical costs instead of current market values because these assets are expected to be used up over time instead of sold. requirement that there be full disclosure means that, in addition to the accounting numbers for such accounting items as revenues, expenses, and assets, narrative and additional numerical disclosures are provided in notes accompanying the financial statements. An analysis of financial statements is therefore not complete without this additional information. es in which more than one interpretation of an event is possible, statements are prepared using the most conservative interpretation. The financial statements and the auditors findings are published in the firms annual and quarterly reports sent to shareholders and the 10K and 10Q filings with the Securities and Exchange Commission (SEC).Also included in the reports, among other items, is a discussion by management, providing an overview of company events. The annual reports are much more detailed and disclose more financial information than the quarterly reports.


Indian Railway Catering and Tourism Corporation (IRCTC) is a subsidiary of the Indian Railways that handles the catering, tourism and online ticketing operations of the railways. The Corporation has posted impressive operational and financial numbers during the year 2009-10. The total income of the Corporation reached Rs.721.97 Crore registering an increase of 16.68 per cent over previous year and it made a contribution of Rs.82.28 Crore to the Railways revenues, which was an increase of 7.50 % over the previous year. The Corporation earned a net profit of Rs.63.05 Crore, indicating an increase of 35.6 per cent over the previous year. It recommended a dividend of Rs.12.61 Crore, again indicating an increase of 35.5 per cent. The dividend payout is 63.05 per cent on the Equity Share Capital. The Corporation realized 85 % payment of the current bills from its customers indicating sound commercial performance. The total outstanding at the end of the year was Rs. 232 Crore out of which Rs. 144 Crore was to come from the Railways. The Corporation has a nationwide presence spread over 1008 stations of the Indian Railways and 350 pair of trains. It has provided catering in 18 numbers of additional new trains that got introduced during 2009-10 and for the first time there has been a paradigm shift in providing mandatory catering in non-AC sleeper coaches of Duronto Trains as against the earlier provision in the AC coaches of Rajdhani and Shatabdi Trains. During the year 2009-10, 9 new Duronto trains have been introduced. In the premium food segment IRCTC commissioned 13 new Food Plazas / Fast Food units during the year and taking the number to 78 and also commissioned 25 Jan Ahaar outlets for sale of low priced wholesome food and regional cuisines for not so affluent travelling passengers. During the year, the Ministry of Railways started the process of review of Catering Policy and recently, on 21st July, 2010, the Ministry of Railways has issued the New Catering Policy, 2010. The revised policy has laid down that all catering services other than Food Plazas and fast food units would be managed by Zonal Railways. With the new challenges come greater opportunities. IRCTC has a tremendous potential for growth in tourism and it would aim to expand its business to become a major tourism player in the country. Also the premier catering segment on Railways would be expanded apart from the industrial and institutional catering business to enlarge its activities and sustain its revenues. Two Plants of Railneer Packaged Drinking water are being operated by IRCTC at Nangloi (Delhi) and Danapur (Bihar). During the year, the production of Railneer at

Nangloi and Danapur was 3.19 Crore and 2.23 Crore bottles respectively as against installed capacity of 3.34 Crore and 2.45 Crore bottles respectively. During the year, the capacity of Danapur Plant was increased from 5,500 Cartons per day to 8,500 Cartons per day. Two new plants at Palur and Ambernath are in the process of setting up by IRCTC. The construction of Railneer Plant at Palur (Tamil Nadu) is in advance stage and likely to be commissioned soon. The plan for Ambernath plant has been finalized and the tender process is likely to start in a few months. The Corporation continued to provide greater customer focus with improved methods of feedback and customer complaints management and has shown continued improvement in food and safety audit ratings as well as customers satisfaction surveys conducted by independent 3rd parties. The majority ratings have been above 80 %, it has also made progress in ISO certification and HACCP certification. During the year, the Corporations Tourism activities increased manifold. The numbers of tourist have gone up by 35 %. The train / coach charters have gone up by 55 %. The number of Bharat Darshan Trains has been increased by 30 % and Hill charters increased by 44 %. The Corporation has successfully tied up with Kendriya Vidyalaya for undertaking students educational trips under its Travel to learn schemes as well as with Tamil Nadu Government under Sarva Shiksha Abhiyan. At the top end, it has successfully launched its super luxury tourist train The Maharajas Express. The train has also been voted as best Luxury Tourist Train in the country.

The following awards have been conferred on IRCTC :

Rated Excellent for MOU Evaluation for the year 2008-09 by Department of Public Enterprises. CNBC Awaaz-Travel Awards The Special Commendation for Redefining Indian Railways Award 2009 for E-ticketing by Ms. Selja, Honble Minister of Tourism. PC Quest awarded the Excellence Award for Most Innovative Project in 2009 for 139-Rail Sampark. QCI DL Shah National Award on Economics of Quality QCI - D. L. Shah National Award for our initiatives on food safety and Economics of Quality by Quality Council of India by Dr. Masaki Imai , Quality Guru of Japan. The Grand Jury of the M Billionth Award South Asia for the year 2010 Certificate of Recognition SMS 139 Railway Enquiry. ICWAI National Quality Award for Excellence in Cost Management 2009: First Prize under public service sector medium category by Shri Salman Khurshid, Honble Minister of State for Corporate Affairs. CNBC Awaaz Travel Award 2010 for the Maharajas Express-The Best Luxury Train from Honble Union Minister for Tourism, Kumari Selja. The India Pride Award-Gold from Shri Pranab Mukherjee, Honble Union Minister of Finance for Internet Ticketing. The SKOCHs-The World Open Award for Integrated Train Enquiry System (ITES) from the Controller of Certifying Authority, Government of India.The Corporations eticketing website www.irctc.co.in continued to be voted as one of the most popular websites with more than one Crore hits per day. Its internet ticketing in terms number of passengers has grown by more than 60 % and in terms of value of tickets it has grown by more than 50 %. It touched a highof 3 lakh 7 thousand tickets booked in a day and on an average during March, 2010 it sold more than 2 lakh 50 thousands tickets per day. The integrated train enquiry system has won several awards and has handled more than 7 lakh calls per day. It has successfully launched the SMS service for providing the train running and PNR information and handled over one crore SMS in 2009 - 10. The Comptroller and Auditor General of India has conducted the supplementary audit on audited accounts of the Corporation for the year ended 31st March, 2010 under Section 619(4) of Companies Act, 1956 andhas offered NIL Comments on the same. IRCTC has been complying with the requirements of Corporate Governance as stipulated by the Department of Public Enterprises (DPE), Government of India.

Board of Directors

Chairman Shri Vivek Sahai, Chairman Railway Board and Member Traffic Managing Director Shri Rakesh Kumar Tandon, Functional Directors Dr. Nalin Shinghal, Director (Tourism & Marketing) Shri Vinod Asthana, Director(Catering Services) Shri V.R. Gupta, Director(Finance) Government Directors Smt. Mani Anand Executive Director(T&C),Railway Board, Ministry of Railways Shri Naresh Salecha Executive Director(FC),Railway Board, Ministry of Railways Independent Directors Shri Jagdeep S. Chhokar Shri Alok Shivapuri Shri R.N. Bhardwaj Shri R.K. Agrawal

Audit Committee:
Chairman Shri R.N. Bhardwaj, Members Shri Vinod Asthana, Shri Jagdeep S. Chhokar Shri Alok Shivapuri Shri R.K. Agrawal Company Secretary: Shri Rakesh Gogia Statutory Auditors: M/S S.P. Marwaha & Co., Chartered Accountants,New Delhi.


Registered and Corporate Office: 9th Floor, Bank of Baroda Building, 16 Parliament Street, New Delhi-110 001. Part Portion of Corporate Office: 2nd and 5th Floor, STC Building, Jawahar Vyapar Bhawan, 1 Tolstoy Marg, New Delhi - 110001 Internet Ticketing Office: New Operations Centre, Northern Railway Reservation Office, IRCA Complex, Chelmsford Road, New Delhi-110055. Railneer Plant, Nangloi: Northern Railways Wireless Station Area, Opp. Nangloi Bus Depot, Rohtak Road, Nangloi, Delhi-110 041. Railneer Plant, Danapur: Loco Colony, South of R.P.F. Barracks, Khagul, Danapur-801105 (Bihar) North Zone : Ginger Rail Yatri Niwas, Ground Floor, New Delhi Railway Station, Ajmeri Gate Side,New Delhi-110001 East Zone I & II: Old Koilaghat Building, 3, Koilaghat Street,Kolkata-700001. West Zone : 2nd Floor, New Administrative Building, Central Railway, CST,Mumbai-400001. South Zone : 6A, The Rain Tree Place, 9, Mc Nicolas Road, Chetpet,Chennai-600034. South Central Zone : 2nd Floor, Am Sri Classic Complex, Sarojini Devi Road,Secunderabad-500071

Financial Achievements

During the year 2009-10, the Corporation achieved a total income of Rs.721.97 Crore as compared to Rs.618.77 Crore in 2008-09 thereby registering a growth of approx. 17 %. The increase in income was achieved mainly due to quantum jump in internet ticketing (from Rs.74.81 Crore to Rs.112.07 Crore) and tourism activities (from Rs.27.94 Crore to Rs.44.73 Crore). Quantum jump in internet ticketing was witnessed due to excellent level of service and upgraded infrastructure. The growth in tourism business was achieved due to IRCTCs focused approach on developing tourism business segment. A net profit of Rs.63.05 Crore was earned during 2009-10 as compared to Rs 46.50 Crore in 2008-09 due to enhanced revenue and control on expenditure. An amount of Rs.30.00 Crore has been provided towards Haulage Charges as was provided during the previous year. As at 31st March 2010, the Reserves and Surplus of the Corporation stood at Rs.142.76 Crore. The Net Worth went up from Rs.114.46 Crore during the previous year to Rs.162.76 Crore during the year under review.

Profit earned by the Corporation has been appropriated in the following manner:

CONTRIBUTION TO REVENUES OF RAILWAYS: During the year the Corporation contributed a sum of Rs. 82.28 crore to the revenues of Indian Railways as against a sum of Rs. 76.54 Crore during the previous year. Contribution to the Revenues of Railways comprises Haulage Charges, Concession fee, License fee, User Charges and Dividend. The sharing of revenues with the various Zonal Railways has been made in terms of Memorandum of Understanding dated 17th January, 2007. In addition to the above, tickets worth Rs.6011 Crore were booked during the year as against Rs.3889 Crore during the previous year.

Scorecard of Packages from IRCTC

During 2009-10, a total of 43,258 passengers availed of IRCTC tour packages (rail tour packages and land tour packages) as against 31,943 passengers during the previous year. 248 Train / Coach Charters were undertaken by the Corporation as against 159 Charters during the previous year. 57 Bharat Darshan - Village on Wheels trips were operated with a total of 22,621 passengers as against 47 trips with 18,801 passengers during the previous year. 36 Hill Charters were operated on hill railways as against 25 Charters operated during the previous year. Mahaparinirvan Express, Buddhist Circuit Special Train and other Buddhist trains during its Third season, the trains have gained popularity with an increase of almost 110 % in number of passengers. A multi-pronged marketing strategy has been put in place for the forthcoming season. Educational Tours: 7,829 students and teachers have availed the facility of educational tours as against 22,801 students and teachers during the last year to various destinations. The decline was due to shifting of Delhi Govt. Business to various State Tourism Corporations etc. During the year, IRCTC made a tie-up with the Kendriya Vidyalaya Sangathan for operating Educational Trips under its travel and learn scheme. A tie-up was made with Tamil Nadu Government for operating educational tours for children from backward and under privileged classes under the Sarva Shiksha Abhiyan scheme, under which 3,272 children participated. Maharajas Express; IRCTCs top end luxury tourist train the Maharajas Express was completed in the current year. The train made two trial trips from 6th 13th and 14th 20th March, 2010 and was formally flagged of on 20th March, 2010 at Kolkata by Honble Minister for Railways, Ms. Mamta Banerjee Luxury trains Palace on wheels ; fairy queen ; deccan Odyssy have given a 100% performance.


Integrated Train Enquiry System (139-Rail Sampark Call Centre):

IRCTC is managing a Call Centre for passenger enquiry. A customer can dial 139 from anywhere in the country and get all information from Call Centre related to train timing, PNR confirmation, train routes and other relevant information related to Indian Railways. Tourism Portal IRCTC continue to strengthen its national tourism award winning tourism portal www.railtourismindia.com, as a One Stop Travel Shop meeting all the travel & tourism needs of customers. This includes online booking of tour packages, hotels, air tickets and Cab Rental across the country.

Packaged Drinking Water (Railneer): Two Plants of Railneer Packaged Drinking water are operating at Nangloi (Delhi) and Danapur (Bihar).During the year, the production of Railneer at Nangloi and Danapur was 3.19 Crore and 2.23 Crore bottles respectively. During the year, the capacity of Danapur Plant was increased from 5,500 Cartons per day to 8,500 Cartons per day. Two Railneer Plants at Palur (Tamil Nadu and Ambernath (Maharashtra) are being set up.The distribution of the Railneer is being done at various Railway Stations, in addition to, supplies to Parliament House, PMO, Railway Board and Ministry of External Affairs etc. The results of the tests carried out by accredited laboratories on Railneer Packaged Drinking Water indicate that the quality of Railneer, conforms to European Economic Community (EEC) norms for pesticides residue.


DIVIDEND Keeping in view the financial results, the Board of Directors recommended interim dividend of Rs.4.00 Crore. The Board of Directors have now recommended a Total Dividend of Rs.12.61 Crore (Approximately, 20 % of the Net Profit) including interim dividend for the year 2009-10. The total dividend for the year will be Rs. 6.31 per share as against Rs.4.65 per share paid for the previous year.The total dividend pay out for the year would be Rs.12.61crore as against Rs.9.31 crore paid for the previous year. CAPITAL STRUCTURE As on 31st March 2010, paid-up share capital of the Corporation stood at Rs.20.00 Crore. The Government of India holds the entire paid up share capital of the Corporation. During the year, there was no change in the paid-up share capital.

Financial Statements of Indian Railway Catering and Tourism Corporation Limited(IRCTC)

Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities. Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

BALANCE SHEET(as at 31st march2008)

Amt. Total

Sources of Funds: Shareholders Funds Share Capital Reserves and Surplus Deferred Tax Liability (net) TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Add : Capital Work in Progress Rs. Rs. Rs. Rs. 6,137.97 -2,438.02 3,699.95 90.58 Rs. 3,790.53 Rs. 0.20 nil Rs. 0.10 Rs. Rs. Rs. Rs. Rs. 573.19 19,206.69 11,677.32 651.52 8,554.20 Rs. 40663.02 Less: Current Liabilities and provisions: Current Liabilities Provisions Rs. Rs. -32,389.69 -3,920.17 Rs -36,309.86 Rs. 4,353.16 nil Rs. 8,143.89 Rs. Rs. Rs. 2,000.00 5,884.92 258.97 Rs. 8,143.89

Investments Deferred Tax Asset Current Assets, Loans and advances: Interest accrued on Investment Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans & Advances

Net Current Assets /working capital Miscellaneous Expenditure to the extent not written off or adjusted TOTAL

Note: All figures in lakh Rupees BALANCE SHEET(as at 31st march2009)

Amt. Total

Sources of Funds: Shareholders Funds Share Capital Reserves and Surplus Deferred Tax Liability (net) TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Add : Capital Work in Progress Rs. Rs. Rs. Rs. 7,636.09 -3,423.54 4,212.56 995.84 Rs. 5,208.39 Rs. 250.20 nil Rs. 0.12 Rs. Rs. Rs. Rs. Rs. 519.19 23,972.02 13,732.94 448.04 13,348.30 Rs. 52,020.61 Less: Current Liabilities and provisions: Current Liabilities Provisions Net Current Assets /working capital Miscellaneous Expenditure to the extent not written off or adjusted TOTAL Rs. Rs. -38,334.64 -7,512.05 Rs. 6,173.92 nil Rs. 11,632.51 Rs. Rs. Rs. 2,000.00 9,445.80 186.70 Rs. 11,632.51

Investments Deferred Tax Asset Current Assets, Loans and advances: Interest accrued on Investment Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans & Advances


Note:All figures in lakh Rupees BALANCE SHEET(as at 31st march2010)

Amt. Total

Sources of Funds: Shareholders Funds Share Capital Reserves and Surplus Deferred Tax Liability (net) TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Add : Capital Work in Progress Rs. Rs. Rs. Rs. 6,137.97 -2,438.02 3,699.95 90.58 Rs. 3,790.53 Rs. 0.20 nil Rs. 0.10 Rs. Rs. Rs. Rs. Rs. 573.19 19,206.69 11,677.32 651.52 8,554.20 Rs. 40663.02 Less: Current Liabilities and provisions: Current Liabilities Provisions Rs. Rs. -32,389.69 -3,920.17 Rs -36,309.86 Rs. 4,353.16 nil Rs. 8,143.89 Amt. Total Rs. Rs. Rs. 2,000.00 5,884.92 258.97 Rs. 8,143.89

Investments Deferred Tax Asset Current Assets, Loans and advances: Interest accrued on Investment Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans & Advances

Net Current Assets /working capital Miscellaneous Expenditure to the extent not written off or adjusted TOTAL

BALANCE SHEET(as at 31st march2011)

Sources of Funds: Shareholders Funds Share Capital Reserves and Surplus Deferred Tax Liability (net) TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Add : Capital Work in Progress Rs. Rs. Rs. Rs. 13,517.96 -5,953.83 7,564.13 1,636.08 Rs. 9,200.21 Rs. 0.20 nil Rs. 0.12 Rs. Rs. Rs. Rs. Rs. 620.92 26,163.88 24,810.76 841.53 14,698.27 Rs. 66,935.48 Less: Current Liabilities and provisions: Current Liabilities Provisions Rs. Rs. -46,120.34 -8,274.51 Rs.-54,994.85 Rs. Rs. nil Rs. 21,141.04 2,000.00 19,141.04

Investments Deferred Tax Asset Current Assets, Loans and advances: Interest accrued on Investment Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans & Advances

Net Current Assets /working capital Miscellaneous Expenditure to the extent not written off or adjusted

Rs. 11,940.63 nil Rs. 21,141.04

Note:All figures in lakh Rupees

Income statement

Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including writeoffs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. The income statement can be prepared in one of two methods. The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured

Financial Statement analysis

Comparative Financial Statement analysis

Comparative Financial Statement analysis provides information to assess the direction of change in the business. Financial statements are presented as on a particular date for a particular period. The financial statement Balance Sheet indicates 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 business is moving in a favourable or an unfavourable direction. For this purpose, figures of current year have to be compared with those of the previous years. In analyzing this way, comparative financial statements are prepared. Comparative Financial Statement Analysis is also called 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 analysis helps in identifying the major improvements and weaknesses. For example, if net income of a particular year has decreased from its previous year, despite an increase in sales during the year, is a matter of serious concern. Comparative financial statement analysis in such situations helps to find out where costs have increased which has resulted in lower net income than the previous year.

Comparative Balance Sheet

In order to analyze comparative balance sheets and develop Statement of Cash Flows, we first consider any increases or decreases in your current asset and current liability accounts between the two years of balance sheet information. Here's the rule we should always remember when developing your Statement of Cash Flows: Increases in current asset accounts, decrease cash. Decreases in current asset accounts, increase cash. Increases in current liability accounts, increase cash. Decreases in current liability accounts, decrease cash. We must look at the last two years of the firm's balance sheets and compare the differences between the two in order to develop the Statement of Cash Flows. A comparative balance sheet usually has two columns of amounts that appear to the right of the account titles or other descriptions such as Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, etc. The first column of amounts contains the amounts as of a recent moment or point in time, say December 31, 2009. To the right will be a column containing corresponding amounts from an earlier date, such as December 31, 2008. The older amounts appear further from the account titles or descriptions as the older amounts are less important. Providing the amounts from an earlier date gives the reader of the balance sheet a point of reference ;something to which the recent amounts can be compared.

Comparative Income statement

A comparative income statement shows revenue and expenses over the current and previous years, how much revenue and expenses have increased or decreased, and the percentage they have increased or decreased. A comparative income statement is a multi-column income statement, where the results of multiple accounting periods are shown in separate columns. The intent of this format is to allow the reader to compare the results of multiple historical periods, thereby giving a view of how the business is performing over time. The most common presentation format for a comparative income statement is to show the results of the most recent accounting period in the column immediately adjacent to the row titles, while the results of earlier periods are shown progressively further to the right. An example of this format for a multi-month presentation is March | February | January. An alternative presentation format is the reverse, where the results of the most recent period are listed furthest to the right. However, this is a less usable format, since if many columns are used, the reader cannot easily associate the line descriptions on the far left side of the presentation with the most recent financial results listed on the far right side.

Cash Flow Statement

In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standardthat deals with cash flow statements. People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses Potential lenders or creditors, who want a clear picture of a company's ability to repay Potential investors, who need to judge whether the company is financially sound Potential employees or contractors, who need to know whether the company will be able to afford compensation Shareholders of the business.


The cash flow statement was previously known as the flow of Cash statement. The cash flow statement reflects a firm's liquidity. The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few.The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes. The cash flow statement is intended to 1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity 3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods 4. indicate the amount, timing and probability of future cash flows The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

Cash flow activities

The cash flow statement is partitioned into three segments, namely: 1) cash flow resulting from operating activities; 2) cash flow resulting from investing activities ; and 3) cash flow resulting from financing activities. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

Operating activities
Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under IAS 7, operating cash flows include:

Receipts from the sale of goods or services Receipts for the sale of loans, debt or equity instruments in a trading portfolio Interest received on loans Dividends received on equity securities Payments to suppliers for goods and services Payments to employees or on behalf of employees Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include:

Depreciation (loss of tangible asset value over time) Deferred tax Amortization (loss of intangible asset value over time) Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)

Investing activities
Examples of Investing activities are

Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.) Loans made to suppliers or received from customers Payments related to mergers and acquisitions

Financing activities
Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. Under IAS 7,

Proceeds from issuing short-term or long-term debt Payments of dividends Payments for repurchase of company shares Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes

Items under the financing activities section include:

Dividends paid Sale or repurchase of the company's stock Net borrowings Payment of dividend tax

Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include Leasing to purchase an asset

Converting debt to equity Exchanging non-cash assets or liabilities for other non-cash assets or liabilities Issuing shares in exchange for assets

Preparation methods

The direct method of preparing a cash flow statement results in a more easily understood report. The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method.

Direct method
The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities

Indirect method
The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.

Ratio Analysis

Ratio Analysis

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital

Which Ratio for whom: As before mentioned there are varieties of people interested to know and read these information and analyses, however different people for different needs. And it is because each of these groups have different type of questions that could be answered by a specific number and ratio. Therefore we can say there are different ratios for different groups, these groups with the ratio that suits them is listed below: 1. Investors: These are people who already have shares in the business or they are willing to be part of it. So they need to determine whether they should buy shares in the business, hold on to the shares they already have or sell the shares they already own. They also want to assess the ability of the business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this group. 2. Lenders: This group consists of people who have given loans to the company so they want to be sure that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group. 3. Managers: Managers might need segmental and total information to see how they fit into the overall picture of the company which they are ruling. And Profitability Ratios can show them what they need to know. 4. Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore these information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. 5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies.

6. Customers: are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that. 7. Governments and their agencies: are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses. 8. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. 9. Financial analysts: they need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. therefore they are interested in possibly all the ratios. 10. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research.

Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better.


Calculation of current ratio for IRCTC

Year 2008 Ratio 40663.02/32389.69 =1.26 52020.61/3833.64 =1.35 60514.81/47852.94 =1.26 66935.48/48720.34 =1.37




Quick Ratio
The quick ratio or the quick assets ratio or the acid-test ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.



Calculation of quick ratio for IRCTC

Year 2008 Ratio (40663.02-19858.21) 32389.64 =0.63 (5020.61-2320.06) 38334.64 =1.28 (60514.81-23704.35) 47852.94 =0.76 (66935.48-27005.41) 40720.34 =0.98




Earnings per share

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

E.P.S. = Net Income Dividends on Preferred Stock or Profit Available for appropriation
Average Outstanding Shares

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Calculation of EPS for IRCTC (Face Value of Rs.10 per share)

Year 2008 E,P.S Rs. 297825000 /28720000 = Rs. 10.37 2009 Rs. 554333000 /23842000 = Rs. 23.25


Rs. 725933000 /23024000 = Rs. 31.53


Rs. 736259000 /24227000 = Rs. 30.39

Earnings Yield
The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.

Earning Yeild =

E.P.S. Market Price Per Share.

Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may considered undervalued relative to bonds. Economic theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk-free rates (such as Tbills) in their earnings yield to compensate them for the higher risk of owning stocks over bonds and other asset classes.

Calculation of Earnings Yield for IRCTC(Face Value of Rs.10 per share)

Year 2008 Earnings Yield 10.37 /45.60 =0.227 2009 23.25 /70.32 =0.330 2010 31.53 /95.22 =0.331 2011 30.39 /95.65 =0.317

Return on share holder's fund

It is the ratio of net profit to share holder's investment. It is the relationship between net profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the profitability from the share holders' point of view. The ratio is generally calculated in percentage. The two basic components of this ratio are net profits and shareholder's funds. Shareholder's funds include equity share capital, (preference share capital) and all reserves and surplus belonging to shareholders. Net profit means net income after payment of interest and income tax because those will be the only profits available for share holders. Formula: Return on share holder's fund = Net profit (after interest and tax) 100 Share holder's fund This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. As the primary objective of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of businesses being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company. As the ratio reveals how well the resources of the firm are being used, higher the ratio, better are the results.

Calculation of Return on share holder's fund

Year 2008 Return 2074.91 x 100 8143.89 =25.48 4650.11 x 100 11632.51 =39.97 5305.22 x 100 16275.66 =32.59 5078.63 x 100 21141.04 =24.02




Net Profit Margin.

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of Rs.0.20 for each dollar of sales.

Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.

Formula: Net Profit Margin = Net profit (before interest and tax) 100 Sales

Calculation of Net Profit Margin on share holder's fund

Year 2008 Net Profit Margin 3297.52 x 100 50850.85 =6.48 7384.60 x 100 59330.64 =12.46 9475.96 x 100 69202.47 =13.69 12578.96 x 100 73796.09 =17.04




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.

Formula: Gross Profit Margin = (Revenue COGS) OR Gross Profit 100 Sales

Suppose that ABC Corp. earned Rs.20 lakh in revenue from producing widgets and incurred Rs.10 lakh 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 Rs.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. A measure of how well a company controls its costs. It is calculated by dividing a company's profit by its revenues and expressing the result as a percentage. The higher the gross profit margin is, the better the company is thought to control costs. Investors use the gross profit margin to compare companies in the same industry and well as in different industries to determine what are the most profitable. It is also called the profit margin or simply the margin.

A measure calculated by dividing gross profit by net sales. Gross profit margin is an indication of a firm's ability to turn a dollar of sales into profit after the cost of goods sold has been accounted for.

Calculation of Gross Profit Margin

Year 2008 Gross Profit Margin 50850.85 - 4517.17 x 100 50850.85 =44633.68 x 100 50850.85 =87.78%


59330.64 -342418 x 100 59330.64 =21906.46 x 100 59330.64 =37%


69202.47 24563.28 x 100 69202.47 =44639.19 x 100 69202.47 =64.5%


73796.09 -44349.36 x 100 73796.09 =29446.73 x 100 73796.09 =40%

Return on capital employed

A ratio that indicates the efficiency and profitability of a company's capital investments.

Formula: Gross Profit Margin = E.B.I.T 100 Capital Employed Capital Employed = Total assets-current liabilities

ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings. A variation of this ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period. The prime objective of making investments in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between the profit and the capital employed. It indicates the percentage of return on capital employed in the business and it can be used to show the overall profitability and efficiency of the business.

Calculation of Return on capital employed

Year 2008 Net Profit Margin 3297.52 x 100 7884.92 =41.82 7384.60 x 100 11445.81 =64.51 9475.96 x 100 16275.66 =58.22 12578.96 x 100 21141.04 =59.50






2011 2010 2009 2008 0 20 RETURN ON CAPITAL EMPLOYED




Who uses these analyses?

Financial statements are used and analyzed by a different group of parties, these groups consists of people both inside and outside a business. Generally, these users are: A. Internal Users: are owners, managers, employees and other parties who are directly connected with a company: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with more detailed information. These statements are also used as part of management's report to its stockholders, and it form part of the Annual Report of the company. 2. Employees also need these reports in making collective bargaining agreements with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings.

B. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for numbers of reasons. 1. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions. 2. Financial institutions (banks and other lending companies) use them to decide whether to give a company with fresh loans or extend debt securities (such as a long- term bank loan ). 3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and duties paid by a company. 4.Media and the general public are also interested in financial statements of some companies for a variety of reasons.

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. 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. 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. of costs, sales, profits and other important facts. Such trends are useful for planning. el 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. 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.

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 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.

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. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

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.

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.

accounting data relationships, which give the decision-maker insights into the financial performance of a company. nancial 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. evant 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.

for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.


Principles of Management Accounting : Dr S.N. Maheshwari Theory and Problems in Financial Management- M Y Khan P K Jain