A Study On Financial Statement Analysis in Tensile Pro Pipes Manufacturing Inudustry at Trichy
A Study On Financial Statement Analysis in Tensile Pro Pipes Manufacturing Inudustry at Trichy
CHAPTER-I
INTRODUCTION
Financial statements are formal record of the financial activities of a business, person
or other entity and provide an overview of a business or person’s financial condition in both
short and long term. They give an accurate picture of a company’s condition and operating
results in a condensed form. Financial statements are used as a management tool primarily by
company executive and investor’s in assessing the overall position and operating results of
the company.
Industries are capital intensive; hence a lot of money is invested in it. So before
investing in companies one has to carefully study its financial condition and worthiness. An
attempt has been carried out in this project to analyze and interpret the financial statements of
a company.
FINANCIAL STATEMENTS
Financial statements (or financial reports) are formal records of the financial activities
of a business, person, or other entity. Financial statements provide an overview of a business
or person's financial condition in both short and long term. All the relevant financial
information of a business enterprise, presented in a structured manner and in a form easy to
understand is called the financial statements.
1. Balance sheet:
It is also referred to as statement of financial position or condition, reports on a
company's assets, liabilities, and ownership equity as of a given point in time. The
Balance Sheet shows the health of a business from day one to the date on the
balance sheet.
2. Income statement
It is also referred to as Profit and Loss statement (or "P&L"), reports on a
company's income, expenses, and profits over a period of time. Profit & Loss
account provide information on the operation of the enterprise. These include sale
and the various expenses incurred during the processing state.
The income statement shows a presentation of the sales, the main expenses and
the resulting net income over the period. Net income is based on accounting
principles which gives guidance/rules on when to recognize revenues and
expenses, whereas cash from operating activities, obviously is cash based.
3. Statement of Retained Earnings:
It explains the changes in a company's retained earnings over the reporting period.
The statement of retained earnings shows the breakdown of retained earnings. Net
income for the year is added to the beginning of year balance, and dividends are
subtracted. This results in the end of year balance for retained earnings.
4. Cash Flow Statement
It reports on a company's cash flow activities, particularly its operating, investing
and financing activities. The statement of cash flows the ins and outs of cash
during the reporting period. The statement of cash flows takes aspects of the
income statement and balance sheet and kind of crams them together to show cash
sources and uses for the period.
FINANCIAL STATEMENT ANALYSIS:
Globally, publicly listed companies are required by law to file their financial
statements with the relevant authorities. For example, publicly listed firms in America are
required to submit their financial statements to the Securities and Exchange Commission
(SEC). Firms are also obligated to provide their financial statements in the annual report that
they share with their stakeholders. As financial statements are prepared in order to meet
requirements, the second step in the process is to analyze them effectively so that future
profitability and cash flows can be forecasted.
There are different users of financial statement analysis. These can be classified into
internal and external users. Internal users refer to the management of the company who
analyzes financial statements in order to make decisions related to the operations of the
company. On the other hand, external users do not necessarily belong to the company but still
hold some sort of financial interest. These include owners, investors, creditors, government,
employees, customers, and the general public. These users are elaborated on below:
1. Management
The managers of the company use their financial statement analysis to make
intelligent decisions about their Statement. For instance, they may gauge cost per distribution
channel, or how much cash they have left, from their accounting reports and make decisions
from these analysis results.
2. Owners
Small business owners need financial information from their operations to determine
whether the business is profitable. It helps in making decisions like whether to continue
operating the business, whether to improve business strategies or whether to give up on the
business altogether.
3. Investors
People who have purchased stock or shares in a company need financial information
to analyze the way the company is performing. They use financial statement analysis to
determine what to do with their investments in the company. So depending on how the
company is doing, they will hold onto their stock, sell it or buy more.
4. Creditors
Creditors are interested in knowing if a company will be able to honor its payments as
they become due. They use cash flow analysis of the company’s accounting records to
measure the company’s liquidity, or its ability to make short-term payments.
5. Government
Governing and regulating bodies of the state look at financial statement analysis to
determine how the economy is performing in general so they can plan their financial and
industrial policies. Tax authorities also analyze a company’s statements to calculate the tax
burden that the company has to pay.
6. Employees
7. Customers
Customers need to know about the ability of the company to service its clients into the
future. The need to know about the company’s stability of operations is heightened if the
customer (i.e. a distributor or procurer of specialized products) is dependent wholly on the
company for its supplies.
8. General Public
Anyone in the general public, like students, analysts and researchers, may be
interested in using a company’s financial statement analysis. They may wish to evaluate the
effects of the firm on the environment, or the economy or even the local community. For
instance, if the company is running corporate social responsibility programs for improving
the community, the public may want to be aware of the future operations of the company.
There are two main methods of analyzing financial statements: horizontal or trend
analysis, and vertical analysis. These are explained below along with the advantages and
disadvantages of each method.
HORIZONTAL ANALYSIS
This method of analysis is simply grouping together all information, sorting them by
time period: weeks, months or years. The numbers in each period can also be shown as a
percentage of the numbers expressed in the baseline (earliest/starting) year. The amount
given to the baseline year is usually 100%. This analysis is also called dynamic analysis or
trend analysis.
When the analysis is conducted for all financial statements at the same time, the
complete impact of operational activities can be seen on the company’s financial condition
during the period under review. This is a clear advantage of using horizontal analysis as the
company can review its Statement in comparison to the previous periods and gauge how it’s
doing based on past results.
VERTICAL ANALYSIS
Vertical analysis is conducted on financial statements for a single time period only.
Each item in the statement is shown as a base figure of another item in the statement, for a
given time period, usually for year. Typically, this analysis means that every item on an
income and loss statement is expressed as a percentage of gross sales, while every item on a
balance sheet is expressed as a percentage of total assets held by the firm.
Vertical analysis is also called static analysis because it is carried out for a single time
period.
Vertical analysis only requires financial statements for a single reporting period. It is
useful for inter-firm or inter-departmental comparisons of Statement as one can see relative
proportions of account balances, no matter the size of the business or department.
Because basic vertical analysis is constricted by using a single time period, it has the
disadvantage of losing out on comparison across different time periods to gauge Statement.
This can be addressed by using it in conjunction with timeline analysis, which shows what
changes have occurred in the financial accounts over time, such as a comparative analysis
over a three-year period. For instance, if the cost of sales comes out to be only 30 percent of
sales each year in the past, but this year the percentage comes out to be 45 percent, it would
be a cause for concern.
Help in Evaluating the short and long term financial position:- It is necessary to
analyze the financial statement for comparing the current assets and current liabilities to
evaluate the short term and long term financial soundness.
Help in calculating the profitability:- It is necessary to analyze the financial statement
to know the gross profit and net profit.
Forecasting, budgeting and deciding future line of action:-The potential growth of the
business can be predicts by the analysis of financial statement which helps in deciding future
line of action. Comparisons of actual performance with target show all the shortcomings.
RESEARCH DESIGN:
The research approach used for the study is descriptive. The form of the study is on the
financial statement analysis in general and specific to the cash position.
DATA COLLECTION
PRIMARY DATA:
SECONDARY DATA:
The study has been made using secondary data, which are obtained from annual reports and
statements of accounts. The study is period for the annual reports and statements of accounts
extended form the year 2011-12 to 2015-16.
The researcher for the purpose of analysis and interpretation of the following tools have been need
RATIO ANALYSIS
PERIOD OF STUDY:
The study includes 5 years (2011-12 to 2015-16) financial rates of the firms. The study was
conducted for 1 months period.
The scope of the study to find out the financial Statement of the TENSILE PRO PIPES
MANUFACTURING INUDUSTRY AT TRICHY last five years
The sincere attempt has been made to include all the aspect relating to the study
for this purpose of analysis financial Statement of the company has done from the
last four year published financial statement and all the aspects the researcher should
be included in the report
NEED FOR THE STUDY:
CHAPTERIZATION SCHEME
Chapter I deal with the introduction, company profile, and industry profile
Chapter II deals with the review of literature
Chapter III deals with the research methodology
Chapter IV deals with the data analysis and interpretation
Chapter V deals with the finding, suggestion, and conclusion
CHAPTER II
REVIEW OF LITERATURE
FINANCIAL ACCOUNTING:
Financial accounting is the process of systematic recording of the business transactions in the
various books of accounts maintained by the organization with the ultimate intention of
preparing the financial statement there from. These financial statements are basically in two
forms. One, profitability statement which indicates the result of operations carried out by the
organization during a given period of time and second balance sheet which indicates the state
of affairs of the organization at any given point of time in terms of its assets and liabilities.
Financial Statement analysis is the process of identifying the financial strengths and
weaknesses of the firm by properly establishing the relationship between the items of balance
sheet and profit and loss account.
It also helps in short-term and long-term forecasting and growth can be identified
with the help of financial Statement analysis.
The financial statements are prepared with a view to depict the financial position of
the concern. They are based on the recorded facts and are usually expressed in monetary
terms. The financial statement are prepared periodically that is generally for the accounting
period
The term financial statement has been widely used to represent two statements prepared
by accountants at the end of specific period. They are :
The various tools of financial statement are used for decision-making process. The
financial statement becomes a tool for future planning and forecasting. The analysis of these
statements involves their division according to similar groups and arranged in desired form.
The interpretation involves the explanation of financial facts in a simplifier’s manner
The users of financial statement have definite objectives to analysis and interpret
.Therefore; there are variations in the objectives of interpretation by various classes of
people. However, there are certain specific and common objectives which are listed below:
To interpret the profitability and efficiency of various business activities with the help
of profit and loss account;
To measure managerial efficiency of the firm;
To ascertain earning capacity in future period;
To measure short-term and long -term solvency of the business;
To determine future positional of the concern;
To measure utilization of various assets during the period;
To compare operational efficiency of similar concerns engaged in the same industry
Type of Analysis:
Used: analysis:
Financial statement analysis is a very important device but it has Certain limitation which are
to be kept in mind. Following are the limitations of financial statement analysis.
The nature of financial statements is historical. Past cannot be the index of future estimation,
forecasting, budgeting and planning.
Analysis is tools which can be utilized usefully by an expert may lead to erroneous
conclusion by unskilled analysis. Thus the result analysis cannot be considered as judgment
or conclusion
3. Reliability of figures:
The accuracy and reliability of analysis depends on reliability of figures derived from
financial statement.
4. Different interpretation:
Analysis will be effective if the figures taken from financial statements comparable. If there
are frequent change in accounting policies and method, figures of different periods will be
different and comparable.
The ever rising inflation erodes the value of money in the present day economic situation,
which reduces the validity of analysis.
The analysis and interpretation of financial statement is used to determine the financial
position and result of operation as well. The following are the tools that are used for
analyzing the financial position of the company:
Ratio Analysis
Comparative balance sheet
Common size balance sheet
Trend analysis
RATIO ANALYSIS
A ratio is only comparison of the numerator with the denominator .The term ratio
refers to the numerical or quantitative relationship between two figures. Thus, ratio is the
relationship between two figures and obtained by dividing a former by the latter. Ratios are
designed show how one number is related to another.
The data given in the financial statements are in absolute form and are dumb and are
unable to communicate anything. Ratios are relative form of financial data and are very
useful technique to check upon the efficiency of a firm. Some ratios indicate the trend or
progress or downfall of the firm.
In the view of the requirements of the various users of ratio, it is divided in to the
following important categories.
1. Liquidity ratios
2. Activity ratios
3. Profitability ratios
4. Earnings ratios
LIQUIDITY RATIOS:
Liquidity ratios measure the ability of the firm to meet it’s a current obligation. In
fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow
statements; but liquidity ratios, by establishing a relationship between cash and other current
asset to current obligations provide a quick measure of liquidity.
A firm should ensure that it does not suffer From lack or liquidity, and it does not
have excess liquidity .the failure of the company to meet its obligations due to its lack of
liquidity, will result in a poor creditworthiness, loss of creditor’s confidence, or even in legal
tangles resulting in the closure of the company a very high degree of liquidity is also bad idle
assets earn nothing. The firms fund will be unnecessarily tied up in current assets. Therefore
it is necessary to strike a proper balance between high liquidity and lack of liquidity.
Activity Ratio highlights the activity and the operational efficiency of the business
concern. The better managements of asserts the larger the amount of sales. Activity ratio
measures the relationship between the sales and the assets. Turnover ratios are employed to
evaluate the efficiency with which the firm manages and utilize s its assets. Their ratio
indicates the speed with which assets are brought converted as turn over into sales.
PROFITABILITY RATIOS:
Profitability reflects the final result of the business operations. Profit earning is
considered essential for the survival of the business. There are two types of profitability ratios
profit margin ratio and the rate of return ratios. Profit margin ratio shows the relationship
between profit and sales.
Popular profit margin ratios are gross profit margin and net profit margin ratio. Rate
of return ratio reflects between profit and investment. The important rates of return measures
are rate of return on total assets and rate in equity.
EARNINGS RATIOS:
Earnings are income to the shareholders of the share invested by them. Hence the
earnings ratio will be useful to the investors to the value of the shares that is been holding by
them
The comparative balance sheet is helpful in analysing and evaluating the financial
position of the firm over a period of years. The comparative balance sheet analyse is the
study of the trend of the same items, group of items, and computed items in two or more
balance sheet of the same business enterprise on different dates.
The changes in periodic balance sheet items reflect the conduct of a business. The
changes can be observed by comparison of the balance sheet at the beginning and at the end
of the period and these changes can help in forming an opinion about the progress of an
enterprise
Financial statements when read in absolute figure are not easily understandable. They
are even miss leading. Each items of asset is converted in to percentage to total asset and each
item of capital and liabilities is expressed to total liability and capital fund. Thus the whole
balance sheet is converted in to percentage form i.e., every individual item stated as a
percentage of total 100.such converted balance sheet is known as common size balance sheet.
The percentage so calculated can be easily compared with the corresponding percentages in
some other period.
TREND ANALYSIS:
The ‘trend’ signifies a tendency and as such the review and appraisal of tendency in
accounting variables are nothing but the trend analysis. Trend analysis is carried out by
calculating trend ratio. Trend analysis is significant for forecasting and budgeting. Trend
analysis discloses the change in financial and the operating data between specific periods.
CHAPTER IV
DATA ANALYSIS AND INTERPRETATION
They provide some extremely useful information to the extent that balance Sheet mirrors
the financial position on a particular date in terms of the structure of assets, liabilities and
owners equity, and so on and the Profit And Loss account shows the results of operations
during a certain period of time in terms of the revenues obtained and the cost incurred during
the year. Thus the financial statement provides a summarized view of financial positions and
operations of a firm.
The following procedure is adopted for the analysis and interpretation of financial
statements:-
The analyst should acquaint himself with principles and postulated of accounting. He
should know the plans and policies of the management so that he may be able to find
out whether these plans are properly executed or not.
The extent of analysis should be determined so that the sphere of work may be
decided. If the aim is find out. Earning capacity of the enterprise then analysis of
income statement will be undertaken. On the other hand, if financial position is to be
studied then balance sheet analysis will be necessary.
The financial data be given in statement should be recognized and rearranged. It will
involve the grouping similar data under same heads. Breaking down of individual
components of statement according to nature. The data is reduced to a standard form.
A relationship is established among financial statements with the help of tools &
techniques of analysis such as ratios, trends, common size, fund flow etc.
The information is interpreted in a simple and understandable way. The significance
and utility of financial data is explained for help in decision making.
The conclusions drawn from interpretation are presented to the management in the
form of reports.
a) Horizontal Analysis: This is used when the financial statement of a number of years
are to be analyzed. Such analysis indicates the trends and the increase or decrease in
various items not only in absolute figures but also in percentage form. This analysis
indicates the strengths and weaknesses of the firm. This analysis is also called as
dynamic analysis because it also shows the trend of the business.
c) Among these two types of analysis, horizontal analysis is more useful because it
brings out more clearly the trends of working of a firm. This gives us more concrete
bases for future planning.
2. On The Basis Of Information Available
a) Internal Analysis: This analysis is based on the information available to the business
firm only .Hence internal analysis is made by the management. Internal analysis is
more reliable and helpful for financial decisions.
b) Intra -Firm Analysis: intra-firm analysis is concerned with the analysis of financial
performance of different units or departments or segments of the same enterprise or company.
Similarly when financial statements of two or more years of the same firm are analyzed and
compared it is also called as intra-firm analysis.
When financial statements figures for two or mote years are placed side-side to facilitate
comparison, these are called ‘comparative Financial Statements’. Such statements not only
show the absolute figures of various years but also provide for columns to indicate to increase
or decrease in these figures from one year to another. In addition, these statements may also
show the change from one year to another on percentage form. Such cooperative statements
are of great value in forming the opinion regarding the progress of the enterprise.
To simplify data
To make inter period/inter-firm comparison
To indicate the trends
to enable forecasting
To indicate the strengths and weaknesses of the firm
To compare the performance
To analyze expenses
To analyze profits
TOOLS FOR COMPARISON OF FINANCIAL STATEMENTS
Comparison and analysis of financial statements may be carried out using the following tools:
1. Presenting the change in various items in relation to total assets or total liabilities or
net sales.
2. Establishing a relationship.
3. Providing a common base for comparison.
TYPES OF COMMON SIZE STATEMENTS
C. TREND ANALYSIS:
Trend percentage are very useful is making comparative study of the financial
statements for a number of years. These indicate the direction of movement over a long time
and help an analyst of financial statements to form an opinion as to whether favorable or
unfavorable tendencies have developed.
This helps in future forecasts of various items. For calculating trend percentages any
year may be taken as the ‘base year’. Each item of beast year is assumed to be equal to 100
and on that basis the percentage of item of each year calculated.
RATIO ANALYSIS:
MEANING:
TYPES OF RATIOS
CLASSIFICATION OF RATIOS
In view of the financial management or according to the tests satisfied,various ratios have
been classified as below:
Liquidity Ratios:
These are the ratios which measure the short-term solvency or financial position of a firm.
These ratios are calculated to comment upon the short-term paying capacity of a concern or
the firm’s ability to meet its current obligations.
Long –Term Solvency and Leverage Ratios: Long-term solvency ratios convey a firm’s
ability to meet the interest cost and repayment schedules of its long-term obligation e.g. Debit
Equity Ratio and Interest Coverage Ration. Leverage Ratios.
Activity Ratios:
Activity ratios are calculated to measure the efficiency with which the resource of a firm has
been employed. These ratios are also called turnover ratios because they indicate the speed
with which assets are being turned over into sales e.g. debtors turnover ratio.
Profitability Ratios:
These ratios measure the results of business operations or overall performance and effective
of the firm e.g. gross profit ratio, operating ratio or capital employed. Generally, two types of
profitability ratios are calculated.
(a) In relation to Sales, and
(b)In relation in Investment
FUNCTIONAL CLASSIFICATION IN VIEW OF FINANCIAL MANAGEMENT OR
CLASSIFICATION ACCORDING TO TESTS
CASH-FLOW STATEMENT
Cash – flow statement is a statement showing inflows (receipts) and outflows (payments) of
cash during a particular period. In other words, it is summary of sources and applications of
each during a particular span of time.
Assets:
Cash and 6344.90 8934.37 18706.88 29377.53 17536.33
balances with rbi
Balances with 6585.07 8105.85 18414.45 8663.60 12430.23
industry’s
,money at call
Advances 91405.15 146163.11 195865.60 225616.08 218310.85
Investments 50487.35 71547.39 91257.84 111454.34 103058.31
Gross block 5525.65 5968.57 6298.56 7036.00 7443.71
Accumulated 1487.61 1987.85 2375.14 2927.11 3642.09
depreciation
Net fixed assets 4038.04 3980.72 3923.42 4108.89 3801.62
Capital work in 96.30 147.94 189.66 0.00 0.00
progress
Other assets 8702.59 12509.57 16300.26 20574.63 24163.62
Total assets 167659.40 251388.95 344658.11 399795.07 379300.96
Assets:
Three has been a consistent decline in the fixed assets over years. in 2013-2014and
2014-2015 it decreased by 1.4 % ,increased by 5% in 2014-2015 and again decreasing
by 7.5% in 2015-2016 this is mainly due to increase in the rate of depreciation in the
subsequent years.
Expenditure:
INTERPRETATION:-
The net profit shows a fluctuating trend i.e it increased by 27% in 2012-2013 ,22.4%
increase in 2013-2014 ,and increased by 34% in 2014-2015 and finally if falls by
10% in 2015-2016 .this may be due to decline in operating income and increased tax
liability in the year 2015-2016.
The interest expenses from the period 2011-2016 showed an increasing trend but
decreased in 2015-2016 due to repayment of borrowings.
TREND ANALYSIS
TREND PERCENTAGE TENSILE PRO PIPES MANUFACTURING INDUSTRY
FROM 2011-2016
(base year 2011-2016) Percentage(%) figures
Particulars 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
Deposits 100 165 231 245 219
Advances 100 160 214 247 239
Net profit 100 127 155 207 187
Trend graph
300
250
200
percentage(%)
DEPOSITS
150 ADVANCES
NET PROFIT
100
50
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
INTERPRETATION:
There is a continuous increase in the deposits till the year ending 2014-2015 followed
by a downfall in the year ending 2015-2016 due to repayment of deposits in this year.
Similarly advances also shows as increasing trend till the year ending 2014-2015
followed by a slight downfall in the year ending 2015-2016.
There has been a substantial increase in net profit till the year ending 2008.In four
years it has been more than double.The overall performance of the industry is
satisfactory.
RATIO ANALYSIS
CURRENT RATIO:
An indication of a company's ability to meet short-term debt obligations; the higher
the ratio, the more liquid the company is. Current ratio is equal to current assets divided by
current liabilities. If the current assets of a company are more than twice the current
liabilities, then that company is generally considered to have good short-term financial
strength. If current liabilities exceed current assets, then the company may have problems
meeting its short-term obligations.
TABLE 4.1
CURRENT RATIO
Current Ratio
1.6
1.39 1.36
1.4
1.23
1.17
1.2
1.01
1
Ratio
0.8 Current Ratio
0.6
0.4
0.2
0
2011-12 2012-13 2013-14 2014-15 2015-2016
Years
INTERPRETATION:
An ideal solvency ratio is 2. The ratio of 2 is considered as a safe margin of solvency due to
the fact that if current assets are reduced to half (i.e.) 1 instead of 2, then also the creditors
will be able to get their payments in full. But here the current ratio is less than 2 and more
than 1 which shows that the industry has current assets just equal to the current liability
which is not satisfactory as the safety margin is very less or zero. Therefore the industry
should keep more current assets so that it can maintain a satisfactory safety margin.
LIQUID RATIO:
Liquid ratio is also known as ‘Quick’ or ‘Acid Test ‘Ratio. Liquid assets refer to assets which
are quickly convertible into cash. Current Assets other stock and prepaid expenses are
considered as quick assets.
TABLE 4.2
LIQUID RATIO
Liquid Ratio
1.2
1 0.97
0.88
0.8
Ratio 0.67 0.68
0.6
0.6 Liquid Ratio
0.4
0.2
0
2011-12 2012-2013 2013-14 2014-15 2015-16
Years
INTERPRETATION:
A quick ratio of 1:1 is considered favorable because for every rupee of current liability, there
is atheist one rupee of liquid assets. A higher value of ratio is considered favorable. Here this
ratio is less than 1 in 2011-2016 it is close to 1 which is not satisfactory. This means the
industry has not managed its funds properly in this particular period. Therefore industry
should rationally utilize its funds to maintain an ideal liquid ratio.
EARNING PER SHARE:
In order to avoid confusion on account of the varied meanings of the term capital employed,
the overall profitability can also be judged by calculating earnings per share with the help of
the following formula:
Earning Per Equity Share = Net Profit after Tax –Prefrence Dividend
No. of Equity shares
The earnings per share of the company help in determining the market price of the equity
shares of the company. A comparison of earning per share of the company with another will
also help in deciding whether the equity share capital is being effectively used or not. It also
helps in estimating the company’s capacity to pay dividend to its equity shareholders.
TABLE 4.3
EARNING PER SHARE
40
EARNING PER SHARE
35 37.37
34.59 33.78
30
25 28.55
27.22
20
Series1
15
10
0
2011-12 2012-13 2013-14 2014-15 2015-16
Interpretation:
Earnings per Share is the most commonly used data which reflects the performance and
prospects of the company. It affects the market price of shares. Here the Earning Per Share is
shows a persistent increase till the year 2014-15after that in the year2015-16 Earnings Per
share is followed by a downfall due to decline in profits.
It is expressed by dividing dividend paid to equity shareholders by no. of equity shares. this
shows the per share dividend given to equity shareholders. It is very helpful for potential
investors to know the dividend paying capacity of the company. It affects the market value of
the company.
Dividend per Share = Dividend Paid To Equity Shareholders/
No. Of Equity Shares
TABLE 4.4
DIVIDEND PER SHARE
CHART 4.4
DIVIDEND PER SHARE
12 11.03 11
10.02
10
8.59 8.53
8 Dividend Per Share
Ratio
Ratio
6
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
INTERPRETATION:
Here the Dividend Per Share is increasing year after year except a little decline in 2015-16
otherwise the dividend per share ratio of the industry is quite satisfactory which shows the
industry has a good dividend paying capacity.
This ratio indicates the Net margin on a sale of Rs.100. It is calculated as follows:
Net Profit Ratio = Net Profit X 100/ Net Sales
This ratio helps in determining the efficiency with which affairs of the business are being
managed. An increase in the ratio over the previous period indicates improvement in the
operational efficiency of the business. The ratio is thus on effective measure to check the
profitability of business.
TABLE 4.5
NET PROFIT RATIO
Year Net Profit Sales Net Profit Ratio
(Rs. In crores) (Rs. In crores) (in %)
2011-12 2005.2 9409.9 21.3
25
21.3
20 18.42
Ratio(%)
15 13.52 13.5
12.08
Net Profit Ratio
10
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
Although both the sales and net profit have increased during the above period but the Net
Profit Ratio of the industry is declining continuously. This is because of the reason that net
profits have not increased in the same proportion as of the sales.
OPERATING PROFIT RATIO:
The difference between net profit ratio and net operating profit ratio is that net operating
profit is calculated without considering non-operating expenses and non-operating incomes.
If we deduct this ratio from 100, the result will be operating ratio. Higher operating profit
ratio enables the organization to recoup non-operating expenses out of operating profits and
provide reasonable return.
TABLE 4.6
OPERATING PROFIT RATIO:
40
35 34.02
31.41
30 28.7
25.54 25.85
Ratio25
15
10
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
In the year 2011-12 the operating profit is 31.41% & 34.02% respectively. After that it has
been consistently declined from the year 2014-15 and again gaining momentum in 2016. This
may be due to the reason that operating expenses have been increased more as compared to
sales during the above period consequently reducing the operating profits. Therefore the
industry should check on unnecessary operating expenses to correct this situation and to
provide a sufficient return.
RETURN ON NET WORTH:
It measures the profitability of the business in view of the shareholders. It judges the earning
capacity of the company and the adequacy of return on proprietor’s funds. Shareholders and
potential investors are interested in this ratio.
It is calculated as below:
Return on Net Worth = Net Profit after Interest and Tax x 100/ Shareholder’s Funds
TABLE 4.7
RETURN ON NET WORTH:
18
15.54
16
14 12.61
12 11.26
Ratio
10 8.88
7.53 Return on Net Worth
8
6
4
2
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
The net profit after interest and tax have increased slowly till the year 2014-15 followed by a
downfall due to high interest payments, operating expenses and taxation liability.
Consequently the net worth ratio has declined considerably and has reduced to more than half
in the year 2015-16 than it was in 2015-16
RETURN ON CAPITAL EMPLOYED:
It establishes relationship between profit before interest and tax and capital employed. It
indicates the percentage of return on the total capital employed in the business. This ratio is
also known as Return on Investment. It measures the overall efficiency and profitability of
the business in relation to investment made in business. It also shows how efficiently the
resources are used in the business. Comparison of one unit with that of the other or
performance in one year with that of the same unit is possible. It is calculated as below:
TABLE 4.8
RETURN ON CAPITAL EMPLOYED:
9
8.29
7.99
8
7 6.52
6.22
6 5.61
Ratio
5
Return on Capital Employed
4
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
The above table exhibits the return on capital employed ratio of the industry for last five
years. This ratio measures the earning of the net assets of the business. The ratio was 6.22%
in year 2011-12. After that it raised to the tune of 5.61%, 6.52%,7.99% and 8.29% in year
2011-12 to 2015-16 years respectively. It leads to the conclusion industry rising but very
little proportion of return on capital employed.
DEBT- EQUITY RATIO:
The Debt-Equity ratio is calculated to find out the long-term financial position of the firm.
This ratio indicates the relationship between long-term debts and shareholder’s funds. The
soundness of long-term financial policies of a firm can be determined with the help of this
ratio.
It helps to assess the soundness of long-term financial policies of a business. It also helps to
determine the relative stakes of outsiders and shareholders. Long-term creditors can assess
the security of their funds in a business. it indicates to what extent a firm depends upon
lenders to meet its long-term financial requirements. A low Debt-Equity ratio is considered
better from the point of view of creditors.
TABLE 4.9
DEBT- EQUITY RATIO:
14 12.97
11.99
12
10.14
10
Ratio8 7.53
6.6
Debt Equity Ratio
6
4
2
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
The ratio shows the extent to which funds have been provided by long-term creditors as
compared to the funds provided by the owners. Here the Debt-Equity ratio for the above
period is always high. This shows that the industry is more relying on outside funds as
compared to internal sources of capital, in its capital structure. From the long-term lenders
point of view this ratio is not satisfactory.
PROPRIETORY RATIO:
It is also called shareholders equity to total equity ratio or net worth to total assets ratio or
equity ratio. It compares the shareholder’s funds to total assets. It is calculated by dividing
shareholder’s funds by total assets.
It helps to determine the long-term solvency of a company. This ratio measures the protection
available to the creditors. Higher the ratio, lesser is the likelihood of insolvency in future, as
the management has to use lesser debts and vice versa. Thus, this ratio is of great importance
to the creditors.
TABLE 4.10
PROPRIETORY RATIO:
Proprietary Ratio
0.14 0.13
0.12
0.12
0.1
Ratio 0.08
0.08 0.07 0.07
Proprietary Ratio
0.06
0.04
0.02
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
Above table exhibits the proprietary ratio of the industry for last five years . It was 7%
in2011-12, after that was 8% in year 2012-13. Similarly it was once again reduced to 7 % in
the year 2013-14. After 2007 it registered increase and was 12% and 13% in the year 2014-15
and 2015-16 respectively. Hence it leads to the conclusion owners have less than 13% stake
in the total assets of the industry. It is not a good sign as far the long term solvency is
concerned.
FIXED ASSETS TURNOVER RATIO:
It is also called as Sales to Fixed Assets Ratio. It measures the efficient use of fixed assets.
This ratio is a measure of efficient use of fixed assets. it is calculated as:
Fixed Assets Turnover Ratio = Cost of goods sold or Sales/Net Fixed Assets
It measures the efficiency and profit earning capacity of the business. Higher the ratio, greater
is the intensive utilization of fixed assets and a lower ratio shows under utilization of the
fixed assets. This ratio has a special importance for manufacturing concerns where
investment in fixed assets is very high and the profitability is significantly dependent on the
utilization of these assets.
TABLE 4.11
FIXED ASSETS TURNOVER RATIO:
9 8.17
8 7.49
7
5.86
6
Ratio
5 Fixed assets Turnover
4 3.46 Ratio
3 2.33
2
1
0
2011-12 2012-13 2013-14 2014-15 2015-16
Years
Interpretation:
Here the fixed assets employed in the business shows a decreasing trend except in the year
2015-16 where fixed assets have again increased. This may be due to increase in rate of
depreciation in subsequent years. Nevertheless, the fixed assets turnover ratio has been
consistently increasing. It indicates that fixed assets have been effectively used in the
business without much additional investment in the period of study and also the capital is not
blocked in fixed assets.
CREDIT-DEPOSIT RATIO:
This ratio is very important to assess the credit performance of the industry. The ratio shows
the relationship between the amounts of deposit generated by the industry has well as their
deployment towards disbursement of loan and advances. Higher credit deposit ratio shows
overall good efficiency and performance of any industrying institution.
Credits
Credit Deposit Ratio 100
Deposits
Credit means disbursement of advances, Deposit mean sum of fixed deposit, Saving deposit
and current deposit.
TABLE 4.12
CREDIT-DEPOSIT RATIO:
1.05
0.99
1
0.95 0.92
Ratio 0.91
0.9 0.88 Credit Deposit ratio
0.85 0.84
0.8
0.75
2011-12 2012-13 2013-14 2014-15 2015-16
Years
INTERPRETATION:
Above table exhibits credit deposit ratio of the industry during last 5 years. In the year 2005
ratio was 91% and it declined to 88% and 84%in the year 2013-14 and 2014-15 respectively.
In the year 2014-15 and 2015-16 ratio was increased to 92% and 99% respectively. it leads to
conclusion that credit performance of the industry is very good.
CASH FLOW STATEMENT OF INDUSTRY
2011-2012 2012-13 2013-14 2014-15 2015-16
Profit before tax 2,527.20 3,096.61 3,648.04 5,056.10 5,116.97
Net cash flow-
9,131.72 4,652.93 23,061.95 -11,631.15 -14,188.149
operating activity
Net cash used in
-3,445.24 -7,893.98 -18,362.67 -17,561.11 3,857.88
investing activity
Net cash used in fin.
-1,227.13 7,350.90 15,414.58 29,964.82 1,625.36
activity
Net inc/dec in cash and
4,459.34 4,110.25 20,081.10 683.55 -8,074.57
equivalent
Cash and equivalent
8,470.63 12,929.97 17,040.22 37,357.58 38,041.13
begin of year
Cash and equivalent
12,929.97 17,040.22 37,121.32 38,041.13 29,966.56
end of year
CHAPTER V
CONCLUSION
On the basis of various techniques applied for the financial analysis of industry we can arrive
at a conclusion that the financial position and overall performance of the industry is
satisfactory. Though the income of the industry has increased over the period but not in the
same pace as of expenses. But the industry has succeeded in maintaining a reasonable
profitability position.
The industry has succeeded in increasing its share capital also which has increased around
50% in the last 5 years. Individuals are the major shareholders. The major achievement of the
industry has been a tremendous increase in its deposits, which has always been its main
objective. Fixed and current deposits have also shown an increasing trend.
Equity shareholders are also enjoying an increasing trend in the return on their capital.
Though current assets and liabilities (current liquidity) of the industry is not so satisfactory
but industry has succeeded in maintaining a stable solvency position over the years. As far as
the ratio of external and internal equity is concerned, it is clear that industry has been using
more amount of external equity in the form of loans and borrowings than owner’s equity.
Industry’s investments are also showing an increasing trend. Due to increase in advances, the
interest received by the industry from such advances is proving to be the major source of
income for the industry
SUGGESTIONS
Although the short term liquidity position is quite satisfactory as per revealed by
liquid ratio but the current ratio is below the ideal ratio of 2:1.So the industry should
make efforts to increase its current assets to maintain a safety margin and to maintain
a better liquidity position.
The profitability of the industry for the period under study is not satisfactory. Profits
are increasing but not with same pace as of the expenditure due to higher reliance on
debt capital in the form of borrowings and loans for financing capital structure.
So in order to improve profitability, the industry should reduce its dependence on
external equities for meeting capital requirements. Consequently, the interest
expenses will decline and profits will increase which is good for the industry.
Similarly non productive expenses should be curtailed to improve profitability.
Higher trend of credit deposit ratio reveals that the industry has performed
satisfactorily as regard to granting loans and advances to generate income. It suggests
that the credit performance of industry is good and it is performing its business well
by fulfilling the major objective of granting credit and accepting deposit. So in order
to have more creditability in the market the industry should maintain its credit deposit
ratio.
Though the industry has been successful in increasing it’s deposits but to further
improve upon such situation it can introduce some new and attractive schemes for
public. Such schemes can be in the form of higher rate of interest and shorter maturity
period for FD’s etc.
Industry should try to finance more and more projects. Financing will help it to earn
higher amount of profits.
The industry is having a greater reliance on debt capital. The increasing reliance on
external equities may prove hazardous in the long run. So in order to remedy this
situation industry should increase its focus on internal equities and other sources of
internal financing.
Industry can also think for improving its day-to -day service to its clients. Such
service can be improved by providing prompt service and showing an attitude of co-
operation to its clients. It will help to give a kind of confidence to the public and build
a better public image.
To achieve the objective of rural development it should open more and more branches
in different rural areas of the country. It will facilitate in providing help to rural poor
farmers and other living below the poverty line. Industry can appoint commission
agents for different area who can encourage general public to invest in the capital of
the industry and make more deposits in industry .
The industry should simplify the procedure of advances for quick
disbursement.
To achieve organizational success a proper independent working atmosphere
should be developed to achieve desired objective more effectively.
Last but not least, industry should adopt branch automation experiment to
control the operational cost
BIBILOGRAPHY
BOOKS REFERRED:
Accountancy. R.K. Mittal,A.K.Jain. Financial Management- Theory and Practice.
Shashi.K.Gupta , R.K. Sharma.
Essentials of Corporate Finance 2nd edition ,Irwin /McGraw-Hill.Ross, S.A.,R.W.
Westerfield and B.D. Jordan.
Basic Financial Management ,8th edition ,Prentice -Hall,Inc. Scott, D.F., J.D Martin,
J.W. Petty and A.Keown.
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