Académique Documents
Professionnel Documents
Culture Documents
2018
Submitted By:
Puja Makwana
I further declare that the material obtained from other sources has been duly acknowledged in the
project report.
I would like to express my sincere gratitude toMiss Namita Malla giving me the opportunity to
work in this esteemed organization, and helping me complete the project in a successful manner.
I am really thankful to our HOD Dr. Srinibash Dash for making all kinds of arrangements to
carry out the project successfully and for providing their constant guidance and help to solve all
kinds of queries regarding the project work. Their systematic way of working and incomparable
guidance has inspired the pace of the project to a great extent.
I would also like to thank all the others teachers for their moral support and help in all respects for
the completion of my work.Last, but not the least, I would also like to thank to my esteemed
Faculty Dr. Srinibash Dash (Head of the Department of Professional Courses), their constant
support continued and invaluable guidance at each step of this Dissertation project.
Above all in my heart I am quite thankful to my teachers, close friend & parents whose support
directly or indirectly went into the successful completion of the project.
CONTENTS
Chapter Title Page
No. No.
1. Introduction
1.1 Summary of the Dissertation 8
1.2 Scope of the study 9
1.3 Objectives of the study 9-10
1.4 Limitations of the Study 10
3. Theories of Study
3.1 Theoretical Background 18
3.2 Standards of comparison 18-20
3.3 Nature of ratio analysis 20-21
3.4 Interpretation of the ratios 21
3.5 Guidelines or precautions for use of ratios 21
3.6 Use and significance of Ratio Analysis 21-23
3.7 Limitations 23-25
3.8 Classification of ratios 25-33
4. Research Methodology
4.1 Research Objective
4.2 Research Hypothesis 35
4.3 Sample Design 35
4.4 Data Collection 35
4.5 Statistical tool used 35
5. Data Analysis& Interpretation
5.1 Liquidity Ratio 37-38
5.2 Leverage Ratio 38-40
5.3 Profitability Ratio 40-42
6. Conclusion
6.1 Conclusion 44
References / Bibliography
CHAPTER-1
INTRODUCTION
Chapter – 1: Introduction
1.1 Summary of the Dissertation-:
The importance of financial statement analysis lies in the fact that it presents facts on a comparative
basis and enables the drawing of inference regarding the performance of a firm. Analysis is
relevant in assessing the performance of a firm in respect of the following aspects:
Liquidity position
Profitability position
Solvency position
Shareholder’s ratio
Overall profitability
Financial statements contain a wealth of information, which if properly analyzed and interpreted,
can provide valuable insights into a firm’s performance and position; analysis of financial
statements is of interest to several groups for variety of purposes. The principal tool of financial
statement analysis is financial ratio analysis, which essentially involves a study of analysis
between various items or group of terms in financial statements.
Annual report
o Annual account
o Balance sheet
o Profit & loss account
Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So
that the strengths and weaknesses of a firm, as well as its historical performance and current
financial condition can be determined. Ratio reflects a quantitative relationship helps to form a
quantitative judgment.
A Complete set of Financial Statements (Decision Tool), the income statement, the cash flow
statement, the statement of owner equity and the financial performance measures is available to
do a comprehensive financial analysis of Aluminium Companies.
The scope of this report includes its financial performance. To analyse this, ratio analysis is
applied. In this report, various ratios are calculated and interpreted which have significant impact
on the performance of the company. This findings is very useful in understanding the performance
and taking required actions to strengthen financial hold in the country.
Therefore, the prime objective of this study is to thoroughly investigate and analyse various
financial ratios and their effect on financial performance of Aluminium Companies.
This study is divided into various chapters for ease of access. The first chapter gives a brief
introduction, objectives and limitations of the study whereas the second chapter provides a basic
profile of the company followed by the theoretical explanation of ratio analysis in the third chapter.
The fourth part deals with the study of previous works carried out on ratio analysis whereas the
fifth part entails the implementation of the research methodology followed by the observations &
findings and analysis & interpretation of data along with various opportunities & threats for the
organisation in the sixth part.
The seventh part entails the summary and lists necessary recommendations for the improvement
of the same along with the conclusion.
Gupta and Heffner (1972)-: examined the differences in financial ratio averages between
industries. The Conclusion of both the studies was that differences do exist in mean profitability,
Activity, leverage and liquidity ratios amongst industry groups.
Pinches et al. (1973)-: used factor analysis to develop seven classifications of ratios, and found
that the classifications were stable over the 1951-1969 time periods.
Chuetal. (1991)-:analyzed the hospital sectors to observe the differences of financial ratios groups
between hospital sectors and industrial firms sectors. Their study concluded that financial ratios
groups were significantly different from those of industrial firms’ ratios as well these ratios were
relatively stable over the five years period. A significance relationship for about half of industries
studied indicated that results might vary from industry to industry.
(Khan, Jain, 1993)-: involves a study of the relationships between income statement and balance
sheet accounts, how these relationships change over time (Trend Analysis), and how a particular
firm compares with other firms in industry (Comparative Ratio Analysis).
Lamberson (1995)-: who studied how small firms respond to changes in economic activities by
changing their working capital positions and level of current assets and liabilities. Current ratio,
current assets to total assets ratio and inventory to total assets ratio were used as measure of
working capital while index of annual average coincident economic indicator was used as a
measure of economic activity. Contrary to the expectations, the study found that there is very small
relationship between charges in economic conditions and changes in working capital.
Phillips, Michael D., Volker, John X. & Anderson, Steven J.(2001)-:conducted an analysis to
evaluate the cross-sectional variations of financial ratios among different size private companies.
The study examines four ratio categories for the retail and service sectors over the period 1998 to
2000. The ratio categories include: (1) liquidity, (2) activity, (3) leverage, and (4) profitability.
Results provide strong evidence that small retail firms perform differently than larger retail firms
in all categories and time periods. Service firms had the strongest and most consistent differences
in activity and profitability ratios. Separate comparisons of the retail and service sectors also
showed significant performance differences in every ratio category.Their findings demonstrate that
size, as measured by total sales, is a critical factor in the behavior of the financial performance of
small, privately-held service and retail companies. Specifically, the largest and smallest firms
exhibit significant differences in their respective liquidity, activity, leverage, and profitability
ratios for firms in the retail sector. Service firms exhibited the strongest differences in their
respective activity, debt and profitability ratios. Furthermore, an examination of the behavior of
the metrics between retail and service firms of similar size showed significant differences. An
important implication of these results is that size and sector need to be considered when using this
data as a benchmarking tool. In a life-cycle context, these findings suggest a behavioral view of
the growth path for small retail operations. Liquidity is highest during the early phase when the
capital structure is first put in place. Since small firms do not have easy access to long-term
financing after the initial financing is in place, growth occurs from existing liquidity, liquidity
generated from ongoing operations, and from increases in the use of short-term financing. Total
debt capacity is relatively stable as the companies grow; only the relative mix between short and
long term debt changes over the size categories. The findings also suggest that competition is
increasing with the sales gains since profitability is falling. Additionally, as firms grow in sales,
the relative proportions of current assets to total assets remains stable. As such, asset structures
tend to be set in the initial phase of the life-cycle for both retail and service firms.
Erich P. Helfert (2001) classifies and discusses financial ratios in accordance with three major
viewpoints: management’s viewpoint, owners’ or investors’ viewpoint and lenders’ viewpoint. A
certain ratio becomes useful when it best serves the objectives of the analysis and relates to the
viewpoint defined by the analyst. Managers are more interested in margin ratios, return on assets,
EBIT, EBITDA, turnover ratios, and free cash flow whereas investors pay close attention to
measures such as return on equity, earnings per share, dividends per share, total shareholder return,
price to earnings ratio, and lenders assess a company’s solvency and liquidity based on the current
ratio, quick ratio, debt ratios and coverage ratios.
Kieso, Jerry(2001)-: the common equity section of the balance sheet is divided into three
accounts, common stock, paid-in capital, and retained earnings. Common stock and paid-in capital
accounts arise from the issuance of stock which is main source of capital to corporations. The
difference between the selling price and the nominal value of stock is called paid-in capital.
Retained earnings are built up over time as the firm reinvests a part of its earnings rather than
paying all earnings out as dividends. The breakdown of the common equity shows whether the
company actually earned the funds reported in its equity accounts or whether the firm’s earnings
came mainly from selling stock.
Dr. Nabil M. Al-Nasser (2002)-: conducted a study on “The Impact of Financial Analysis in
Maximizing the Firm’s Value "A Case Study on the Jordanian Industrial Companies". Financial
statement analysis involves a study of the relationships between income statement and financial
position statement accounts, how these relationships change over time, and how a particular firm
compares with other firms in the same industry. His study aims to point out the impact of financial
analysis in maximizing the firm's value. Financial analysis outcomes can be used to help both
managers and external parties in making financial and investment decisions to maximize the
wealth and benefits of each stakeholder. For achieving this purpose, number of 100 questionnaires
has been designed, circulated by hand to a selected sample of employees working in different
Jordanian industrial companies. Resolution data were analyzed using the statistical program SSPS.
Finally, the study concluded that, financial analysis has a significant positive effect on helping
managers in taking effective decisions that can increase the profitability and the value of the firm.
According to data analysis, and hypothesis testing the study had concluded that financial analysis
has a significant positive effect on helping managers in taking effective decisions that can increase
the profitability and the value of the firm and proper preparation and analysis of financial
statements minimizes risk of business failure, and reveals the strength, weaknesses, and
opportunities of a business enterprise. According to the study conclusions the researcher
recommends that managers depend on financial statements while taking decisions, so there should
be a continuous controlling process over accounts; as accounts reflects the real activities of the
firm, there should be; management should take into consideration other tools than financial ratios
as it has a significant effect on decision making and financial analysis will not say why something
is going wrong and what to do about a particular situation; they only pinpoint where the problem
is.
Sathyamoorthi (2002)-: focused on good corporate governance and in turn effective management
of business assets. He observed that more emphasis is given to investment in fixed assets both in
management area and research. However, effective management working capital has been
receiving little attention and yielding more significant results. He analyzed selected Co-operatives
in Botswana for a period of 1993-1997 and concluded that an aggressive approach has been
followed by these firms during all the four years of study.
Abuzar (2004)-: empirically investigated the relationship between profitability and liquidity for
sample firms in Saudi Arabia. Correlation and regression were used and the researcher took cash
gap and current ratio as a measure of liquidity and it was observed that size had a significant effect
on profitability.
Filbeck and Krueger (2005)-: highlighted the importance of efficient working capital
management by analyzing the working capital management policies of 32 non-financial industries
in USA. According to their findings significant differences exist between industries in working
capital practices over time.
Charles Horngren et al. (2006)-: state that the most important part in ratio analysis is the
interpretation and evaluation of financial ratios computed that require making three types of
comparisons to determine whether they indicate good, average or bad performance. These
comparisons include time-series analysis which implies that the set of financial ratios calculated
for a certain year are compared with the entity’s historical financial ratios, benchmark analysis
when computed financial ratios are compared with general rules of thumb and cross-sectional
comparisons that imply an analysis of a company’s financial ratios in relation to those of peers or
industry averages.
(Harness, Chatterjee, Finke, (2008)-:.A problem with using ratios as tools is that the extant
literature testing their value is limited. For example, there is little evidence that a capital
accumulation ratio of 0.7 is better than one of 0.3, or that the protection provided by holding 6
months of assets in liquid investments is worth the tradeoff in expected return
(Boundless, 2014) -: Financial ratios allow for comparisons and, therefore, are intertwined with
the process of benchmarking, comparing one's business to that of others or of the same company
at a different point in time. In many cases, benchmarking involves comparisons of one company
to the best companies in a comparable peer group or the average in that peer group or industry. In
the process of benchmarking, investor identifies the best firms in their industry, or in another
industry where similar processes exist, and compares the results and processes of those studied to
one's own results and processes on a specific indicator or series of indicators.
CHAPTER-3
THEORIES OF STUDY
Chapter – 3: Theories of study
3.1 Theoretical Background –
The term “Ratio” refers to the numerical and quantitative relationship between two items or
variables. This relationship can be exposed as:
o Percentages
o Fractions
o Proportion of numbers
Financial ratios are the most common and widespread tools used to analyze a business’ financial
standing. Ratios are easy to understand and simple to compute. They can also be used to compare
different companies in different industries. Since a ratio is simply a mathematically comparison
based on proportions, big and small companies can be use ratios to compare their financial
information. In a sense, financial ratios don’t take into consideration the size of a company or the
industry. Ratios are just a raw computation of financial position and performance.
Ratios allow us to compare companies across industries, big and small, to identify their strengths
and weaknesses. For example, consider current ratio. It is calculated by dividing current assets by
current liabilities; the ratio indicates a relationship- a quantified relationship between current assets
and current liabilities. This relationship is an index or yardstick, which permits a quantitative
judgment to be formed about the firm’s liquidity and vice versa. The point to note is that a ratio
reflecting a quantitative relationship helps to form a qualitative judgment. Such is the nature of
all financial ratios.
Standards are creatures of experiences, which are modified from time to time to meet changing
conditions; they are an ideal or an average or normal results to be attained under certain conditions.
Because of the changing nature of standards, constant acquaintance with the conditions under
which they are set up is essential so that causes of variations from the standard can be intelligently
appreciated. Standard ratios provide a bench – mark against which actual ratios can be compared.
The significance of a ratio calculated can be grasped only after it is compared with the ratio. For
this purpose four types of standards are employed:-
Absolute standards –
These ratios are determined by the rule of thumb. For example, in the case of current ratio
2:1 is considered to be desirable. This type of standards are those which become generally
recognised as being desirable regardless of the company, its type, the time, stage of the
business cycles, or the objectives of the analyst. “The absolute standard is the weakest of
all, for it suggests the existence of some inherent trait common to all business, which is
generally far from the case”.
Historical standards –
These are the past ratios of the company. Present performance can be judged on the basis
of past performance and the persons concerned can draw inferences about the improvement
or otherwise of the particular aspect. Comparison with historical standards is also known
as “Trend Analysis”. For this purpose, the trends rather than the actual ratios are important.
Hence the behaviour of the ratios over a period is observed. By presenting a picture of
operations over an extended time, trend – analysis of ratios becomes a valuable tool for the
financial manager. The trend of the ratios indicates whether the concern has been moving
in the direction in which it is tending to go, e. g., for measuring the rate of turnover, the
ratio may be computed weekly or monthly and the points plotted on a graph to show the
trend of the rate of turnover. However, it is not satisfactory from the standard point of view.
It can merely compare the present efficiency with the efficiency of the past.
Horizontal standards –
These are the average ratios calculated for the entire industry or the ratios of some other
firm engaged in the same line, i. e., Inter–Firm Comparison “Comparison can also be made
against the achievements of other business where available. It is difficult to be sure that
such comparison are on a like for like basis, even if operating in a similar market or
industry, partly as to the comparison of profit, but more particularly concerning the scope
of the business under comparison.” However, the difficulty in using such ratios is that no
two firms are similar in size, accounting policies and corporate objectives. So, naturally
there will be significant difference between the standard opted and the actual ratio. The
ratios calculated for the industry as a whole provide a satisfactory standard to judge and
interpret the ratios of the individual firm.
Budgeted standards –
These standards are based on budgeted figures. The actual ratios are compared with
budgeted ratios and are, therefore, useful for the internal management as a tool of
performance and evaluation and control. The utility even for the internal analyst depends
much upon the care with which budgets are drawn up. Sometimes the assumptions made
at the time of preparing the budget may go wrong because of abnormal developments.
External analysts usually look to historical and / or horizontal standards.
It can be concluded that ratios themselves do not directly answer the important questions
about the firm. Instead they simply are relationship that, when compared to a standard of
performance, identify difference or variations. Such difference can lead to understanding
that brings forth changed performance. “Again as a matter of perspective, remember that
the manager uses financial statements mainly to locate problems and issues that need
managerial attention. And the alert manager is interested in developing and establishing
valuable and realistic standards against which ratios can be measured”.
Selection of relevant data from the financial statements depending upon the objective of
the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios
developed from projected financial statements or the ratios of some other firms or the
comparison with ratios of the industry to which the firm belongs.
Financial statements are prepared primarily for decision-making. Ratio analysis helps in making
decision from the information provided in these financial Statements.
Ratio analysis is of much help in financial forecasting and planning. Planning is looking ahead and
the ratios calculated for a number of years a work as a guide for the future. Thus, ratio analysis
helps in forecasting and planning.
3. Helps in communicating –
The financial strength and weakness of a firm are communicated in a more easy and
understandable manner by the use of ratios. Thus, ratios help in communication and enhance the
value of the financial statements.
4. Helps in co-ordination –
5. Helps in control –
Ratio analysis even helps in making effective control of business. The weaknesses are otherwise,
if any, come to the knowledge of the managerial, which helps, in effective control of the business.
a) Utility to shareholders/investors –
An investor in the company will like to assess the financial position of the concern where he is
going to invest. Ratio analysis will be useful to the investor in making up his mind whether present
financial position of the concern warrants further investment or not.
b) Utility to creditors –
The creditors or suppliers extent short-term credit to the concern. They are interested to know
whether financial position of the concern warrants their payments at a specified time or not.
c) Utility to employees –
The employees are also interested in the financial position of the concern especially profitability.
Their wage increase and amount of fringe benefits are related to the volume of profits earned by
the concern.
d) Utility to government –
Government is interested to know overall strength of the industry. Various financial statement
published by industrial units are used to calculate ratios for determining short term, long-term and
overall financial position of the concerns.
However, there are a number of limitations of ratio analysis that you should be aware of. They are:
a. Historical –
All of the information used in ratio analysis is derived from actual historical results. This does not
mean that the same results will carry forward into the future. However, you can use ratio analysis
on pro forma information and compare it to historical results for consistency.
The information on the income statement is stated in current costs (or close to it), whereas some
elements of the balance sheet may be stated at historical cost (which could vary substantially from
current costs). This disparity can result in unusual ratio results.
c. Inflation –
If the rate of inflation has changed in any of the periods under review, this can mean that the
numbers are not comparable across periods. For example, if the inflation rate was 100% in one
year, sales would appear to have doubled over the preceding year, when in fact sales did not change
at all.
d. Aggregation –
The information in a financial statement line item that you are using for a ratio analysis may have
been aggregated differently in the past, so that running the ratio analysis on a trend line does not
compare the same information through the entire trend period.
e. Operational changes –
A company may change its underlying operational structure to such an extent that a ratio calculated
several years ago and compared to the same ratio today would yield a misleading conclusion. For
example, if you implemented a constraint analysis system, this might lead to a reduced investment
in fixed assets, whereas a ratio analysis might conclude that the company is letting its fixed asset
base become too old.
f. Accounting policies –
Different companies may have different policies for recording the same accounting transaction.
This means that comparing the ratio results of different companies may be like comparing apples
and oranges. For example, one company might use accelerated depreciation while another
company uses straight-line depreciation, or one company records a sale at gross while the other
company does so at net.
g. Business conditions –
You need to place ratio analysis in the context of the general business environment. For example,
60 days of sales outstanding might be considered poor in a period of rapidly growing sales, but
might be excellent during an economic contraction when customers are in severe financial
condition and unable to pay their bills.
h. Interpretation –
It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio
of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of
its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio
will only temporarily be at that level, and will probably decline in the near future.
i. Company strategy –
It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing
different strategies. For example, one company may be following a low-cost strategy, and so is
willing to accept a lower gross margin in exchange for more market share. Conversely, a company
in the same industry is focusing on a high customer service strategy where its prices are higher and
gross margins are higher, but it will never attain the revenue levels of the first company.
Point in time – Some ratios extract information from the balance sheet. Be aware that the
information on the balance sheet is only as of the last day of the reporting period. If there was an
unusual spike or decline in the account balance on the last day of the reporting period, this can
impact the outcome of the ratio analysis.
Here we only deal with those ratios which can be applicable in this firm or relevant for our study.
1. Liquidity ratios –
Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they
become due as well as their long-term liabilities as they become current. In other words, these ratios
show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities
and other current obligations.
The following are the most common ratios which indicate the extent of liquidity of the
MCL –
a. Current ratio –
Current ratio measures a firm’s ability to pay off its short-term liabilities with its current
assets. The current ratio is an important measure of liquidity because short term
liabilities are due within the next year.
This means that a company has a limited amount of time in order to raise the funds to
pay for these liabilities. Current assets like cash, cash equivalents and marketable
securities can easily be converted into cash in the short term. It indicates the availability
of current assets in rupees for every one rupee of current liability.
Formula –
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
b. Quick ratio –The quick ratio or acid test ratio is a liquidity ratio that measures the
ability of a company to pay its current liabilities when they come due with only quick
assets. Quick assets are current assets that can be converted to cash within 90 days or
in the short-term. Cash, cash equivalents, short-term investments or marketable
securities, and current accounts receivable are considered quick assets.
The quick ratio is often called the acid test ratio in reference to the historical use of acid
to test metals for gold by the early miners. If the metal passed the acid test, it was pure
gold. If metal failed the acid test by corroding from the acid, it was a base metal and of
no value.
The acid test of finance shows how well a company can quickly convert its assets into
cash in order to pay off its current liabilities. It also shows the level of quick assets to
current liabilities.
Formula –
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜
𝑐𝑎𝑠ℎ + 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 + 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
2. Solvency ratio –
Solvency ratios, also called leverage ratios, measure a company’s ability to sustain operations
indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency
ratios identify going concern issues and a firm’s ability to pay its bills in the long term. Many
people confuse solvency ratios with liquidity ratios. Although they both measure the ability of a
company to pay off its obligations, solvency ratios focus more on the long-term sustainability of a
company instead of the current liability payments.
Solvency ratios show a company’s ability to make payments and pay off its long-term obligations
to creditors, bondholders, and banks. Better solvency ratios indicate a more creditworthy and
financially sound company in the long-term.
The following are the most common ratios which indicate the extent of solvency of the
MCL –
a. Debt to equity ratio –
The debt to equity ratio is a financial, liquidity ratio that compares a company’s total
debt to total equity. The debt to equity ratio shows the percentage of company financing
that comes from creditors and investors. A higher debt to equity ratio indicates that
more creditor financing (bank loans) is used than investor financing (shareholders).
b. Equity ratio –
The equity ratio highlights two important financial concepts of a solvent and
sustainable business. The first component shows how much of the total company assets
are owned outright by the investors. In other words, after all of the liabilities are paid
off, the investors will end up with the remaining assets.
The second component inversely shows how leveraged the company is with debt. The
equity ratio measures how much of a firm’s assets were financed by investors. In other
words, this is the investors’ stake in the company. This is what they are on the hook
for. The inverse of this calculation shows the amount of assets that were financed by
debt. Companies with higher equity ratios show new investors and creditors that
investors believe in the company and are willing to finance it with their investments.
b. Debt ratio –Debt ratio is a solvency ratio that measures a firm’s total liabilities as a
percentage of its total assets. In a sense, the debt ratio shows a company’s ability to pay
off its liabilities with its assets. In other words, this shows how many assets the
company must sell in order to pay off all of its liabilities.
This ratio measures the financial leverage of a company. Companies with higher levels
of liabilities compared with assets are considered highly leveraged and more risky for
lenders.
Formula –
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑑𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
3. Profitability ratio –
Profitability ratios compare income statement accounts and categories to show a
company’s ability to generate profits from its operations. Profitability ratios focus on a
company’s return on investment in inventory and other assets. These ratios basically show
how well companies can achieve profits from their operations.
Investors and creditors can use profitability ratios to judge a company’s return on
investment based on its relative level of resources and assets. In this sense, profitability
ratios relate to efficiency ratios because they show how well companies are using their
assets to generate profits. Profitability is also important to the concept of solvency and
going concern.
Gross margin ratio –
Gross margin ratio is a profitability ratio that compares the gross margin of a business to
the net sales. This ratio measures how profitable a company sells its inventory or
merchandise.
Gross margin ratio is often confused with the profit margin ratio, but the two ratios are
completely different. Gross margin ratio only considers the cost of goods sold in its
calculation because it measures the profitability of selling inventory. Profit margin ratio on
the other hand considers other expenses.
Formula –
𝑔𝑟𝑜𝑠𝑠 𝑚𝑎𝑟𝑔𝑖𝑛
𝑔𝑟𝑜𝑠𝑠 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑎𝑡𝑖𝑜 =
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability
ratio that measures the amount of net income earned with each rupee of sales generated by
comparing the net income and net sales of a company. In other words, the profit margin ratio shows
what percentage of sales are left over after all expenses are paid by the business.
Creditors and investors use this ratio to measure how effectively a company can convert sales into
net income. Investors want to make sure profits are high enough to distribute dividends while
creditors want to make sure the company has enough profits to pay back its loans. The return on
sales ratio is often used by internal management to set performance goals for the future.
Formula –
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 𝑟𝑎𝑡𝑖𝑜 =
𝑛𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
5. Efficiency ratio –
Efficiency ratios also called activity ratios measure how well companies utilize their assets
to generate income. Efficiency ratios often look at the time it takes companies to collect
cash from customer or the time it takes companies to convert inventory into cash—in other
words, make sales. These ratios are used by management to help improve the company as
well as outside investors and creditors.
Here are the most common efficiency ratios include:
a. Accounts receivable turnover –
It’s an efficiency ratio or activity ratio that measures how many times a business can
turn its accounts receivable into cash during a period. In other words, the accounts
receivable turnover ratio measures how many times a business can collect its average
accounts receivable during the year.
A turn refers to each time a company collects its average receivables. If a company had
$20,000 of average receivables during the year and collected $40,000 of receivables
during the year, the company would have turned its accounts receivable twice because
it collected twice the amount of average receivables.
This ratio shows how efficient a company is at collecting its credit sales from
customers. Some companies collect their receivables from customers in 90 days while
other take up to 6 months to collect from customers.
Formula –
𝑛𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
Ho2-: There is no significant difference between in profitable ratio of the selected companies.
Ho3-: There is no significant difference between in leverage ratio of the selected company.
Here we only deal with those ratios which can be applicable in this firm or relevant for our study.
1. Liquidity ratios–
Current ratio –
SUMMARY
Groups Count Sum Average Variance
Column 1 4 3.5 0.875 0.251367
Column 2 4 6.48 1.62 0.048333
Column 3 4 9.21 2.3025 0.497692
ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 4.078117 2 2.039058 7.671481 0.011361 4.256495
Within Groups 2.392175 9 0.265797
Total 6.470292 11
ANOVA RESULT-: From the above Anova table it can be analyzed that the tabulated value
of F is 4.25 and the calculated value of F is 7.67.Here the calculated value is greater than the
tabulated value, so that the null hypothesis may be rejected. It means there is no significant
difference in current ratio of selected company during the study period.
b. Quick ratio –
SUMMARY
Groups Count Sum Average Variance
Column 1 4 2.33 0.5825 0.097092
Column 2 4 3.33 0.8325 0.012425
Column 3 4 5.21 1.3025 0.249025
ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 1.069067 2 0.534533 4.472562 0.044806 4.256495
Within Groups 1.075625 9 0.119514
Total 2.144692 11
ANOVA RESULT-: From the above Anova table it can be analyzed that the tabulated value of F
is 4.25 and the calculated value of F is 4.47.Here the calculated value is greater than the
tabulated value, so that the null hypothesis may be rejected. It means there is no significant
difference in quick ratio of selected company during the study period.
2. Leverage ratios–
The leverage or solvency ratio refers to the ability of a concern to meet its long term
obligations. Accordingly, long term solvency ratios indicate firm’s ability to meet the fixed
interest and costs and repayment schedules associated with its long term borrowings.
The following ratio serves the purpose of determining the solvency of the concern:
a. Debt to Equity ratio –
SUMMARY
Groups Count Sum Average Variance
Column 1 4 1.82 0.455 0.0387
Column 2 4 2.18 0.545 0.0111
Column 3 4 0.61 0.1525 0.055692
ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 0.338217 2 0.169108 4.809148 0.037963 4.256495
Within Groups 0.316475 9 0.035164
Total 0.654692 11
ANOVA RESULT-: From the above Anova table it can be analyzed that the tabulated value
of F is 4.25 and the calculated value of F is 4.80.Here the calculated value is greater than the
tabulated value, so that the null hypothesis may be rejected. It means there is no significant
difference in debt to equity ratio of selected company during the study period.
SUMMARY
Groups Count Sum Average Variance
1.8
Column 1 4 5 0.4625 0.023492
2.0
Column 2 4 3 0.5075 0.001292
1.8
Column 3 4 3 0.4575 0.066425
ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 0.006067 2 0.003033 0.099772 0.906031 4.256495
Within Groups 0.273625 9 0.030403
Total 0.279692 11
1321.85 3 2084.68 694.8933 18540.47
8055.45 3 21919.33 7306.443 19582.36
0.16 3 0.29 0.096667 0.000433
ANOVA RESULTS-From the above Anova table it can be analyzed that the tabulated
value of F is 4.25 and the calculated value of F is 0.09.Here the calculated value is less than
the tabulated value, so that the null hypothesis may be accepted. It means there is significant
difference in debt to equity ratio of selected company during the study period.
3. Profitability ratio–
Operating Margin –
SUMMARY
Groups Count Sum Average Variance
Column 1 4 57.46 14.365 20.11823
Column 2 4 41.62 10.405 3.239367
Column 3 4 37.06 9.265 1.040367
ANOVA
Source of
Variation SS Df MS F P-value F crit
Between Groups 57.3216 2 28.6608 3.524163 0.074073 4.256495
Within Groups 73.1939 9 8.132656
Total 130.5155 11
ANOVA RESULTS-: From the above Anova table it can be analyzed that the tabulated value
of F is 4.25 and the calculated value of F is 4.80.Here the calculated value is greater than the
tabulated value, so that the null hypothesis may be rejected. It means there is no significant
difference in debt to equity ratio of selected company during the study period.
SUMMARY
Groups Count Sum Average Variance
Column 1 4 122.61 30.6525 646.6765
Column 2 4 46.07 11.5175 3.460892
Column 3 4 39.86 9.965 0.7295
ANOVA
Source of
Variation SS df MS F P-value F crit
Between Groups 1062.042 2 531.0208 2.447601 0.141644 4.256495
Within Groups 1952.601 9 216.9556
Total 3014.642 11
ANOVA RESULTS-:From the above Anova table it can be analyzed that the tabulated value
of F is 4.25 and the calculated value of F is 2.44.Here the calculated value is not greater than the
tabulated value, so that the null hypothesis may be accepted. It means there is no significant
difference in debt to equity ratio of selected company during the study period.
SUMMARY
Groups Count Sum Average Variance
Column 1 4 247.48 61.87 4414.178
Column 2 4 505.55 126.3875 6674.621
Column 3 4 56.16 14.04 3.874467
ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 25429.57 2 12714.78 3.438698 0.077729 4.256495
Within Groups 33278.02 9 3697.558
Total 58707.59 11
ANOVA RESULTS-:From the above Anova table it can be analyzed that the tabulated value
of F is 4.25 and the calculated value of F is 3.43.Here the calculated value is not greater than the
tabulated value, so that the null hypothesis may be rejected. It means there is significant difference
in debt to equity ratio of selected company during the study period.
CHAPTER-6
CONCLUSIONS
Chapter – 6: Conclusion
6.1 CONCLUSION
The “financial statement analysis” plays a vital role in helping the financial manager and top
management of company to plan and control their financial structural operations. An efficient
analysis would therefore highlight the pitfalls in management in terms of financial matters such as
income, expenditure, export and domestic sales, profitability, fund availability, liquidity, etc. this
give an idea about controllable and uncontrollable variables. These can be re-examined and
integrated to evolve idea, which can give efficient financial decision. A sound financial decision
gives the way for higher profitability and performance. It is nothing but a fine-tuning of control
systems in financial structure.
Reference / bibliography
Websites–
www.google.com
www.nalcoindia.com
www.aluminium-india.org
www.bseindia.com
www.moneycontrol.com
www.yahoofinance.com
www.myaccountingcourse.com
Annual Reports –
2014 – 2015
2015 – 2016
2016 – 2017
Referred Books–
Financial Management - I. M. Pandey
Financial Analysis Tools & Techniques – Erich A. Helfert
Interpreting & Analyzing Financial Statements – Karen P. Shoepack
Research Methodology – C. R. Kothari