Report_financial Statement analysis

8/7/2019 Report_financial Statement analysis

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REPORT ON FINANCIAL STATEMENT ANALYSIS

INTRODUCTION

OBJECTIVE:

To understand the information contained in financial statements with a view

to know the strength or weaknesses of the firm and to make forecast about

the future prospects of the firm and thereby enabling the financial analyst

to take different decisions regarding the operations of the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the general

(qualitative) factors of a company. The other side considers tangible and

measurable factors (quantitative). This means crunching and analyzing

numbers from the financial statements. If used in conjunction with other

methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet,

income statement, and cash flow statement. It's comparing the number against

previous years, other companies, the industry, or even the economy in general.

Ratios look at the relationships between individual values and relate them

to how a company has performed in the past, and might perform in the

future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical

yardstick that measures the relationship two figures, which are related to each

other and mutually interdependent. Ratio is express by dividing one figure

by the other related figure. Thus a ratio is an expression relating one


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number to another. It is simply the quotient of two numbers. It can be

expressed as a fraction or as a decimal or as a pure


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ratio or in absolute figures as so many times. As accounting ratio is an

expression relating two figures or accounts or two sets of account heads or

group contain in the financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items

or group of items in the financial statement are computed, determined and

presented.

Ratio analysis is an attempt to derive quantitative measure or guides

concerning the financial health and profitability of business enterprises. Ratio

analysis can be used both in trend and static analysis. There are several

ratios at the disposal of an annalist but their group of ratio he would prefer

depends on the purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of this

section, we will focus on a technique, which is easy to use. It can provide

you with a valuable investment analysis tool.

This technique is called cross-sectional analysis . Cross-sectional analysis

compares financial ratios of several companies from the same industry. Ratio

analysis can provide valuable information about a company's financial health.

A financial ratio measures a company's performance in a specific area. For

example, you could use a ratio of a company's debt to its equity to

measure a company's leverage. By comparing the leverage ratios of two

companies, you can determine which company uses greater debt in the

conduct of its business. A company whose leverage ratio is higher than a

competitor's has more debt per equity. You can use this information to make

a judgment as to which company is a better investment risk.

However, you must be careful not to place too much importance on one

ratio. You obtain a better indication of the direction in which a company is

moving when several ratios are taken as a group.


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OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A. Solvency-

1)Long term

2)Short term

3)Immediate

B. Stability

C. Profitability

D. Operational efficiency

E. Credit standing

F. Structural analysis

G. Effective utilization of resources

H. Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more

variables / accounting figures, such relationship can be expressed in different

ways as follows

A]As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the

preference share capital is Rs. 5,00,000, the ratio of equity share capital to

preference share capital is 20,00,000: 5,00,000 or simply 4:1.

B]As a rate of times:

In the above case the equity share capital may also be described as 4 timesthat of preference share capital. Similarly, the cash sales of a firm are Rs.

12,00,000 & credit sales are Rs. 30,00,000. sothe ratio of credit sales to cash

sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that

the credit sales are 2.5 times that of cash sales.


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C]As a percentage:

In such a case, one item may be expressed as a percentage of some other

item. For example, net sales of the firm are Rs.50,00,000 & the amount of

the gross profit is Rs . 1 0,00 ,000 , t hen t he gross p ro fi t m ay bede sc ribe d as 20% of sa le s [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1]Calculation of ratio

2]Comparing the ratio with some predetermined standards. The standard

ratio may be the past ratio of the same firm or industrys average ratio or aprojected ratio or the ratio of the most successful firm in the industry. In

interpreting the ratio of a particular firm, the analyst cannot reach any

fruitful conclusion unless the calculated ratio is compared with some

predetermined standard. The importance of a correct standard is oblivious as

the conclusion is going to be based on the standard itself.

TYPES OF COMPARISONS

The ratio can be compared in three different ways

1]Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare

them with the ratio or ratios of some other selected firm in the same

industry at the same point of time. So it involves the comparison of two or

more firms financial ratio at the same point of time. The cross section

analysis helps the analyst to find out as to how a particular firm has performed

in relation to its competitors. The firms performance may be compared with

the performance of the leader in the industry in order to uncover the major

operational inefficiencies. The cross section analysis is easy to be undertaken

as most of the data required for this may be available in financial statement

of the firm.


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2]Time series analysis:

The analysis is called Time series analysis when the performance of a firm is

evaluated over a period of time. By comparing the present performance of a

firm with the performance of the same firm over the last few years, anassessment can be made about the trend in progress of the firm, about the

direction of progress of the firm. Time series analysis helps to the firm to

assess whether the firm is approaching the long-term goals or not. The Time

series analysis looks for (1) important trends in financial performance (2)

shift in trend over the years (3) significant deviation if any from the other

set of data\

3]Combined analysis:

If the cross section & time analysis, both are combined together to study

the behavior & pattern of ratio, then meaningful & comprehensive

evaluation of the performance of the firm can definitely be made. A trend of

ratio of a firm compared with the trend of the ratio of the standard firm can give

good results. For example, the ratio of operating expenses to net sales for

firm may be higher than the industry average however, over the years it

has been declining for the firm, whereas the industry average has not shownany significant changes.

The combined analysis as

depicted in the above

diagram, which clearly

shows that the ratio of the

firm is above the industry

average, but it is

decreasing over the years

& is approaching the

industry average.


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PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions,

there are certain pre-requisites, which must be taken care of. It may be

noted that these prerequisites are not conditions for calculations formeaningful conclusions. The accounting figures are inactive in them & can

be used for any ratio but meaningful & correct interpretation & conclusion can

be arrived at only if the following points are well considered.

1) The dates of different financial statements from where data is taken

must be same.

2) If possible, only audited financial statements should be considered,

otherwise there must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case

of cross section analysis otherwise the results of the ratio analysis

would be distorted.

4) One ratio may not throw light on any performance of the firm.

Therefore, a group of ratios must be preferred. This will be conductive

to counter checks.

5) Last but not least, the analyst must find out that the two figures

being used to calculate a ratio must be related to each other,

otherwise there is no purpose of calculating a ratio.

CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO


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BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET

1] LIQUIDITY RATIO

1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY

RATIOCREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5]

COVERAGE 3]

RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR LONG

TERM CREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet, P& P A/C, or

both. One-way of classification of ratios is based upon the sources from which

are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called

Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio

of debt to equity. While calculating these ratios, there is no need to refer to

the Revenue statement. These ratios study the relationship between the


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assets & the liabilities, of the concern. These ratio help to judge the liquidity,

solvency & capital structure of the concern. Balance sheet ratios are Current

ratio, Liquid ratio, and Proprietory ratio, Capital gearing ratio, Debt equity

ratio, and Stock working capital ratio.

2]Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue

statement ratios. These ratio study the relationship between the profitability

& the sales of the concern. Revenue ratios are Gross profit ratio, Operating

ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover

ratio.

3]Composite ratio:

These ratios indicate the relationship between two items, of which one is

found in the balance sheet & other in revenue statement.

There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits

& the investments of the concern. E.g. return on capital employed,

return on proprietors fund, return on equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover

ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to

liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnoverratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of

the concern e.g. liquid ratios & current ratios.


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2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in financing

the assets of the concern e.g. capital gearing ratios, debt equity ratios, &Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as

Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors

turnover ratios.

4] Profitability ratios:

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

gross profit ratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of

the outsiders to be paid out of such profit e.g. dividend payout ratios & debt

service ratios.

BASED ON USER:

1]Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2]Ratios for the shareholders:

Return on proprietors fund, return on equity capital


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3]Ratios for management:

Return on capital employed, turnover ratios, operating ratios,

expenses ratios

4]Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.


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


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CURRENT RATIO

Meaning:

This ratio compares the current assests with the current liabilities. It is also

known as working capital ratio or solvency ratio. It is expressed in the

form of pure ratio.

E.g. 2:1

Formula :

Current assets

Current ratio =

Current liabilities

The current assests of a firm represents those assets which can be, in the

ordinary course of business, converted into cash within a short period

time, normally not exceeding one year. The current liabilities defined as

liabilities which are short term maturing obligations to be met, as originally

contemplated, with in a year.


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Current ratio (CR) is the ratio of total current assets (CA) to total current

liabilities (CL).

Current assets include cash and bank balances; inventory of raw

materials, semi-

finished and finished goods; marketable securities; debtors (net of provision

for bad and


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Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA

refers to those current assets that can be converted into cash immediately

without any value strength. QA includes cash and bank balances, short-term

marketable securities, and sundry debtors. Inventory and prepaid expenses

are excluded since these cannot be turned into cash as and when required.

QR indicates the extent to which a company can pay its current liabilities

without relying on the sale of inventory. This is a fairly stringent measure of

liquidity because it is based on those current assets, which are highly liquid.

Inventories are excluded from the numerator of this ratio because they are

deemed the least liquid component of current assets. Generally, a quick ratio

of 1:1 is considered good. One drawback of the quick ratio is that it ignores

the timing of receipts and payments.

CASH RATIO Meaning:

This is also called as super quick ratio. This ratio considers only the absolute

liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

Since cash and bank balances and short term marketable securities are the

most liquid assets of a firm, financial analysts look at the cash ratio. If the

super liquid assets are too much in relation to the current liabilities then it

may affect the profitability of the firm.


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INVESTMENT / SHAREHOLDER

EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the

organization. An earnings per Share represents earning of the company

whether or not dividends are declared. If there is only one class of shares, theearning per share are determined by dividing net profit by the number of

equity shares.

EPS measures the profits available to the equity shareholders on each share

held.

Formula:

NPAT

Earning per share =

Number of equity share

The higher EPS will attract more investors to acquire shares in the company


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as it indicates that the business is more profitable enough to pay the dividends in

time. But remember not all profit earned is going to be distributed as dividends

the company also retains some profits for the business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share held.

Formula:

Dividend Paid to Ordinary Shareholders

Dividend per Share =

Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to

equity

shareholders out of the profit available to the equity shareholders.

Formula:

Dividend per share

Dividend Pay out ratio = ___________________ *100

Earning per share

D/P ratio shows the percentage share of net profits after taxes and after

preference


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dividend has been paid to the preference equity holders.

GEARING

CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders return

through the use of debt. Equity shareholders earn more when the rate of the

return on total capital is more than the rate of interest on debts. This is also

known as leverage or trading on equity. The Capital-gearing ratio shows the

relationship between two types of capital viz: - equity capital & preference

capital & long term borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loan

Capital gearing ratio =

Equity capital & reserve & surplus


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Capital gearing ratio indicates the proportion of debt & equity in the

financing of assets of a concern.

PROFITABILITY

These ratios help measure the profitability of a firm. A firm, which

generates a substantial amount of profits per rupee of sales, can

comfortably meet its operating expenses and provide more returns to its

shareholders. The relationship between profit and sales is measured by

profitability ratios. There are two types of profitability ratios: Gross Profit

Margin and Net Profit Margin.

GROSS PROFIT

RATIO:- Meaning:

This ratio measures the relationship between gross profit and sales. It is

defined as the excess of the net sales over cost of goods sold or excess of

revenue over cost. This ratio shows the profit that remains after the

manufacturing costs have been met. It measures the efficiency of production

as well as pricing. This ratio helps to judge how efficient the concern is I

managing its production, purchase, selling & inventory, how good its control

is over the direct cost, how productive the concern , how much amount is


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left to meet other expenses & earn net profit.

Formula:

Gross profit

Gross profit ratio = * 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is

usually expressed in the form of a percentage.

Formula:

NPAT

Net profit ratio = ______ * 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and

preference shareholders) as a percentage of net sales. It measures the

overall efficiency of production, administration, selling, financing, pricing

and tax management. Jointly considered, the gross and net profit margin

ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of the

total funds employed in the firm. The term fund employed or the capital

employed refers to the total long-term source of funds. It means that the


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capital employed comprises of shareholder funds plus long-term debts.

Alternatively it can also be defined as fixed assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors and

the owners of a firm. It is the sum of long-term liabilities and owner's equity.

ROCE indicates the efficiency with which the long-term funds of a firm are

utilized.

Formula:

NPAT

Return on capital employed = *100

Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted

into cash. They are also called efficiency ratios or asset utilization ratios as

they measure the efficiency of a firm in managing assets. These ratios are

based on the relationship between the level of activity represented by sales

or cost of goods sold and levels of investment in various assets. The

important turnover ratios are debtors turnover ratio, average collection

period, inventory/stock turnover ratio, fixed assets turnover ratio, and total

assets turnover ratio. These are described below:


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DEBTORS TURNOVER RATIO

(DTO) Meaning:

DTO is calculated by dividing the net credit sales by average debtors

outstanding during the year. It measures the liquidity of a firm's debts. Net

credit sales are the gross credit sales minus returns, if any, from customers.

Average debtors are the average of debtors at the beginning and at the end

of the year. This ratio shows how rapidly debts are collected. The higher the

DTO, the better it is for the organization.

Formula:

Credit sales

Debtors turnover ratio =

Average debtors

INVENTORY OR STOCK TURNOVER RATIO

(ITR) Meaning:

ITR refers to the number of times the inventory is sold and replaced

during the accounting period.

Formula:
http://debts.net/http://debts.net/


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COGS

Stock Turnover Ratio =

Average stock

ITR reflects the efficiency of inventory management. The higher the ratio,

the more efficient is the management of inventories, and vice versa.

However, a high inventory turnover may also result from a low level of

inventory, which may lead to frequent stock outs and loss of sales and

customer goodwill. For calculating ITR, the average of inventories at the

beginning and the end of the year is taken. In general, averages may be

used when a flow figure (in this case, cost of goods sold) is related to a stock

figure (inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed

assets. Formula:

Net sales

Fixed assets turnover =

Net fixed assets

This ratio measures the efficiency with which fixed assets are employed. A

high ratio indicates a high degree of efficiency in asset utilization while a low

ratio reflects an inefficient use of assets. However, this ratio should be used

with caution because when the fixed assets of a firm are old and substantiallydepreciated, the fixed assets turnover ratio tends to be high (because the

denominator of the ratio is very low).

PROPRIETORS


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RATIO: Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It

relates shareholders fund to total assets. This ratio determines the long

term or ultimate solvency of the company.

In other words, Proprietary ratio determines as to what extent the owners

interest & expectations are fulfilled from the total investment made in the

business operation.

Proprietary ratio compares the proprietor fund with total liabilities. It is

usually expressed in the form of percentage. Total assets also know it as net

worth.

Formula:

Proprietary fund

Proprietary ratio = _________________ OR

Total fund

Shareholders fund

Proprietary ratio =

Fixed assets + current liabilities

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the working

capital. It helps to judge the quantum of inventories in relation to the

working capital of the business. The purpose of this ratio is to show the

extent to which working capital is blocked in inventories. The ratio highlights


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the predominance of stocks in the current financial position of the company.

It is expressed as a percentage.

Formula:

Stock

Stock working capital ratio =

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition &

quality of the working capital. This ratio also helps to study the solvency

of a concern. It is a qualitative test of solvency. It shows the extent of fundsblocked in stock. If investment in stock is higher it means that the amount of

liquid assets is lower.

DEBT EQUITY

RATIO: MEANING:

This ratio compares the long-term debts with shareholders fund. The

relationship between borrowed funds & owners capital is a popularmeasure of the long term financial solvency of a firm. This relationship is

shown by debt equity ratio. Alternatively, this ratio indicates the relative

proportion of debt & equity in financing the assets of the firm. It is usually

expressed as a pure ratio. E.g. 2:1

Formula:

Total long-term debt

Debt equity ratio =

Total shareholders fund


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Debt equity ratio is also called as leverage ratio. Leverage means the process

of the increasing the equity shareholders return through the use of debt.

Leverage is also known as gearing or trading on equity. Debt equity ratio

shows the margin of safety for long-term creditors & the balance between

debt & equity.

RETURN ON PROPRIETOR

FUND: Meaning:

Return on proprietors fund is also known as return on proprietors equity or

return on shareholders investment or investment ratio. This ratio

indicates the relationship between net profit earned & total proprietors

funds. Return on proprietors fund is a profitability ratio, which the

relationship between profit & investment by the proprietors in the concern.

Its purpose is to measure the rate of return on the total fund made

available by the owners. This ratio helps to judge how efficient the

concern is in managing the owners fund at disposal. This ratio is of

practical importance to prospective investors & shareholders.

Formula:

NPAT

Return on proprietors fund = ____________________ * 100

Proprietors fund

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which payments are

made to the supplier for purchase made from them. It is a relation between

net credit purchase and average creditors

Net credit purchase


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Credit turnover ratio =

Average creditors

Months in a year

Average age of accounts payable =

Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher

creditors turnover ratio or a lower credit period enjoyed signifies that the

creditors are being paid promptly. It enhances credit worthiness of the

company. A very low ratio indicates that the company is not taking full

benefit of the credit period allowed by the creditors.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial

significance. The importance of ratio analysis lies in the fact that it presents

facts on a comparative basis & enables the drawing of interference

regarding the performance of a firm. Ratio analysis is relevant in assessing

the performance of a firm in respect of the following aspects:

1]Liquidity position,

2]Long-term solvency,

3]Operating efficiency,

4]Overall profitability,

5] Inter firm comparison


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6]Trend analysis.

1]LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion can be drawn regarding the

liquidity position of a firm. The liquidity position of a firm would be

satisfactory if it is able to meet its current obligation when they become due.

A firm can be said to have the ability to meet its short-term liabilities if it has

sufficient liquid funds to pay the interest on its short maturing debt usually

within a year as well as to repay the principal. This ability is reflected in the

liquidity ratio of a firm. The liquidity ratio are particularly useful in credit

analysis by bank & other suppliers of short term loans.

2]LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial

viability of a firm. This respect of the financial position of a borrower is of

concern to the long-term creditors, security analyst & the present & potential

owners of a business. The long-term solvency is measured by the leverage/

capital structure & profitability ratio Ratio analysis s that focus on earning

power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this

respect. The leverage ratios, for instance, will indicate whether a firm has a

reasonable proportion of various sources of finance or if it is heavily loaded

with debt in which case its solvency is exposed to serious strain. Similarly

the various profitability ratios would reveal whether or not the firm is able

to offer adequate return to its owners consistent with the risk involved.

3]OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the

viewpoint of management, is that it throws light on the degree of


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efficiency in management & utilization of its assets. The various activity ratios

measures this kind of operational efficiency. In fact, the solvency of a firm

is, in the ultimate analysis, dependent upon the sales revenues generated

by the use of its assets- total as well as its components.

4]OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial

position of a firm, the management is constantly concerned about overall

profitability of the enterprise. That is, they are concerned about the ability of

the firm to meets its short term as well as long term obligations to its creditors,

to ensure a reasonable return to its owners & secure optimum utilization of

the assets of the firm. This is possible if an integrated view is taken & all theratios are considered together.

5]INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also

serves as a stepping-stone to remedial measures. This is made possible due

to inter firm comparison & comparison with the industry averages. A single

figure of a particular ratio is meaningless unless it is related to some standard

or norm. one of the popular techniques is to compare the ratios of a firm with

the industry average. It should be reasonably expected that the performance

of a firm should be in broad conformity with that of the industry to which it

belongs. An inter firm comparison would demonstrate the firms position vice-

versa its competitors. If the results are at variance either with the industry

average or with the those of the competitors, the firm can seek to identify the

probable reasons & in light, take remedial measures.

6]TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account.

In other words, whether the financial position of a firm is improving or

deteriorating over the years. This is made possible by the use of trend

analysis. The significance of the trend analysis of ratio lies in the fact that

the analysts can know the direction of movement, that is, whether the


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movement is favorable or unfavorable. For example, the ratio may be low as

compared to the norm but the trend may be upward. On the other

hand, though the present level may be satisfactory but the trend may be a

declining one.

ADVANTAGES OF RATIO ANALYSIS

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 advantages of ratio analysis can be

summarized as follows:

> Ratios facilitate conducting trend analysis, which is important for

decision making and forecasting.

> Ratio analysis helps in the assessment of the liquidity, operating

efficiency, profitability and solvency of a firm.

> Ratio analysis provides a basis for both intra-firm as well as

inter-firm comparisons.

> The comparison of actual ratios with base year ratios or standard

ratios helps the management analyze the financial performance ofthe firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are

described below:

1] Information problems

> Ratios require quantitative information for analysis but it is not decisive

about analytical output .

> The figures in a set of accounts are likely to be at least several months

out of date, and so might not give a proper indication of the companys

current financial position.


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> Where historical cost convention is used, asset valuations in the

balance sheet could be misleading. Ratios based on this information will

not be very useful for decision-making.

> When comparing performance over time, there is need to consider the

changes in price. The movement in performance should be in line with

the changes in price.

> When comparing performance over time, there is need to consider the

changes in technology. The movement in performance should be in line

with the changes in technology.

> Changes in accounting policy may affect the comparison of results

between different accounting years as misleading.

3] Inter-firm comparison

> Companies may have different capital structures and to make

comparison of performance when one is all equity financed and another

is a geared company it may not be a good analysis.

> Selective application of government incentives to various companies

may also distort intercompany comparison. Comparing the performance

of two enterprises may be misleading.

> Inter-firm comparison may not be useful unless the firms compared

are of the same size and age, and employ similar production methods

and accounting practices.

> Even within a company, comparisons can be distorted by changes in

the price level.

> Ratios provide only quantitative information, not qualitative information.

> Ratios are calculated on the basis of past financial statements. They

do not indicate future trends and they do not consider economic

conditions.


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PURPOSE OF RATIO ANLYSIS:

1] To identify aspects of a businesss performance to aid decision making

2] Quantitative process may need to be supplemented by

qualitative Factors to get a complete picture.

3] 5 main areas:-

Liquidity the ability of the firm to pay its way

Investment/shareholders information to enable decisions to be

made on the extent of the risk and the earning potential of a business

investment

Gearing information on the relationship between the exposure of

the business to loans as opposed to share capital

Profitability how effective the firm is at generating profits given sales

and or its capital assets

Financial the rate at which the company sells its stock and the

efficiency with which it uses its assets

ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creative technique in

the sense that it uses the same figure & information, which is already

appearing in the financial statement. At the same time, it is true that whatcan be achieved by the technique of ratio analysis cannot be achieved by

the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability &

efficiency of performance, either individually or in relation to those of other

firms in the same industry. The process of this appraisal is not complete


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until the ratio so computed can be compared with something, as the ratio

all by them do not mean anything. This comparison may be in the form of

intra firm comparison, inter firm comparison or comparison with standard

ratios. Thus proper comparison of ratios may reveal where a firm is placed as

compared with earlier period or in comparison with the other firms in the

same industry.

Ratio analysis is one of the best possible techniques available to the

management to impart the basic functions like planning & control. As the

future is


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closely related to the immediate past, ratio calculated on the basis of historical

financial statements may be of good assistance to predict the future. Ratio

analysis also helps to locate & point out the various areas, which need the

management attention in order to improve the situation.

As the ratio analysis is concerned with all the aspect of a firms financial

analysis i.e. liquidity, solvency, activity, profitability & overall

performance, it enables the interested persons to know the financial &

operational characteristics of an organisation & take the suitable decision.


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EVALUATION OF APLAB LIMITED THROUGH RATIO

COMPANY PROFILE

THE COMPANY

APLAB Limited is a professionally managed Public

Limited company quoted on the Bombay Stock Exchange. Since its inception

in 1962, APLAB has been serving the global market with wide range of

electronic products meeting the international standards for safety and

reliability such as UL, VDE etc. They specialize in Test and Measurement

Equipment, Power Conversion and UPS Systems, Self-Service Terminals for

Banking

Sector and Fuel Dispensers for Petroleum Sector. APLAB enjoys worldwide

recognition for the quality of its products, business integrity and innovative

engineering skills.

ABOUT APLAB:


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Aplab started its operation in October 1962.

It is a professionally managed 40 years old public

limited company. It is quoted on BOMBAY STOCK

EXCHANGE.

It serves customer global customer par excellence.

It specialized in Test & measurement instruments, power

conversion, & UPS & fuel dispensers for petroleum sector.

It enjoys worldwide recognition for the quality of its business

integrity & innovative engineering skills.

MISSION:

To deliver high quality, carefully, engineered products, on time, with

in budget, as per the customer specification in a manner profitable

to both, our customers & so to us.

VISION:

To be a global player, recognized for quality & integrity.

To be the TOP INDIAN COMPANY as conceived by our

customers. + To be THE BEST company to work for, as

rated by our employees.

GOAL:

Goal at Aplab is extract ordinary customer service as we provide our

customer needs in the personal service industry.


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CORPORATE MISSION

1]To achieve healthy and profitable growth of the company in the

interest of our customers & the shareholders.

2]To encourage teamwork, reward innovation and maintain healthy

interpersonal relations within the organization.

3]To expand knowledge and remain at the leading edge in technology to

serve the global market.

4]To understand the customers needs and provide solutions than merely

selling products.

5]To create intellectual capital by investing in hardware and embedded

software development.

VALUES & BELIEFS:

Their values & beliefs required that they -


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Treat employees with respect & give them an opportunity for input

on how to continuously improve their service goals.

Offer opportunities for growth, professional development &

recognition.

Provide most effective & corrective action, to resolve customer

service issues, to ensure customer satisfaction.

Foster an open door policy, which encourages interaction, discussion

& ideas to improve work environment & increase productivity.

Do it right the first time & every time is their team commitment

* our way of doing business, it ensures as growth & prosperity.

THE 21 ST CENTURY SUCCESS

APLAB had planned to enter the 21st Century with a program for a fast and

healthy growth in the global market based on companys high technology

foundation and the reputation of four decades for prompt customer service

and as a reliable solution provider. After completing three years in the new

era, we can say with pride that we have been delivering our promises to our

customers and the shareholders.

APLAB has entered the field of Professional Services starting with the

Banking and the Petroleum Industry. Focus on developing embedded system

software has been also enhanced. We believe that professional services

sector is poised to grow at a very rapid pace.

QUALITY IS OUR WORK CULTURE - ISO 9001:2000

Quality at APLAB is a part of our peoples attitude. Entire organization is

committed to create an environment that encourages individual


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excellence and a personal commitment to quality. In APLAB, Quality is

everybodys responsibility and all strive to do it right the first time. It is

therefore natural that APLAB Limited is certified for quality with ISO

9001:2000 registration.


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QUALITY POLICY:

Aplab will deliver to its customer products & services that

consistently meet or exceed their requirement.

Aplab will achieve this by total commitment & involvement of

every individual.

Aplab will encourage its employees & suppliers to develop

quality products prevent defects & make continual

improvement in all processes.

QUALITY OBJECTIVE:

Aplab is an ISO 9001:2000 certifies company.

100% customer satisfaction.

On time delivery every time reduction is out going PPM to 10,000

[4 sigma]

RESEARCH AND DEVELOPMENT

Developing innovative products with the latest technology is the core

strength of APLAB. The Science & Technology Ministry of the Govt. of

India accredits our R&D Laboratories. We have a large team of dedicated,

highly qualified skilled engineers who excel in the latest state-of-the-

art-technology. APLAB is recognized not only for manufacturing

standard products but also in providing solutions and services as per the

customer specifications. We spend more than 4% of the company

revenue in Research & Development activities.

Specific areas in which the company carries out R&D

1. Development of new product especially hi-tech intelligent product

& electronic transaction control system.


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2. Improvement in the existing products & production

processes, import substitution.

3. Development of products to suit exports markets.

4. Customizing the products to the customers specifications &

adaptation of imported technology.

The company has achieved i ts posit ion of leadership in the

Indian instrumentation industry & continuous to maintain it

through its strong grip of technology. Almost all the products

manufactured by the company are import substitution items, which

are fully developed in house. It has resulted in considerable saving of

foreign exchange. With the company, R&D is an ongoing process.

The ministry of science & technology, Government of India, recognizes

the companys R&D.

Through a continuous interaction with production& Quality

Assurance Department takes up redesign of existing products. This is

done to achieve state of the art in our design & to bring about

improvement to get maximum performance / cost ratio.

FUTURE PLAN OF ACTION

Major R&D activity is concentrated around up gradation of product

design & realignment of production processes to bring about improved

quality at lower cost. This will greatly help the company in facing

competition in local markets from foreign companies.

EXPORT

APLAB currently exports over 25% of its production to Western Europe,

Canada & USA. Over 30 million U.S. Dollars, Sweden, Belgium, Canada,

and USA & Australia.

PRODUCTS OF APLAB:


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a. TEST & MEASUREMENT INSTRUMENTS

b. HIGH POWER AC SYSTEMS (UPS, Frequency Converter,

Inverter, Isolation Transformer)

c. HIGH POWER DC SYSTEMS (DC Power Supply, DC

Uninterruptible Power Supply)

d. ATM INSTACASH

0. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC CONVERTERS,

SMPS, INVERTERS, STABILIZER, LINE CONDITIONER,

ISOLATION TRANSFORMER

ATM INSTACASH

The Banking Automation Division of APLAB was launched in 1993, when we

introduced INSTACASHIndias first indigenously manufactured ATM INSTACASH

demonstrated APLABs skills in design, hardware manufacturing and software

integrations. Our in house R&D group is constantly striving to scan the rapidly

changing technology and offer suitable end to end solutions. We are into Self

Service Delivery Systems, MICR Cheque Processing and Smart Card based

solutions.

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