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Finance is considered to be the lifeblood of each and every organization .whether it is large (or) small firm it should make a point to procure its funds in the most favorable and convenient terms . Further, the funds so acquired should be properly allocated and utilized in an effective manner.

There are various reasons to formulate financial statements, the management is keen on finding out the performance of the business and for the purpose of evaluating polices and plans for future course of action.

The financial performance, in short can be described as the firms decision for future financial improvement and allocation of funds .It helps in monitoring the effective development of funds. It helps in monit oring the effective development of funds in fixed assets and current assets.

The study is conducted in BHEL and it is purely based on the financial statements of the company.

The process of financial analysis is widely employed to evaluate the past and current performance of the organization and also to identify the financial strengths and weakness of the company by properly establishing relationships between the items of the balance sheet and profit /loss account.

Bharat Heavy Electrical Ltd., (BHEL) is the largest engineering and manufacturing enterprise of its kind in India and is one of the leading international companies in the field of power equipment manufacture. The first plant of BHEL was set up at Bhopal in 1956, which signaled the dawn of the Heavy Electrical Industry in India. In the early sixties, three more major plants were set up at Haridwar, Hyderabad and Tiruchirappalli, which form the core of the diversified range, systems and service the BHEL offers today.

BHEL range of services extends from project feasibility studies to after-sales-service successfully meeting diverse needs through turnkey capability. The company has 14 manufacturing units, 4 power sector regional centers, 8 service centers and 18 regional offices besides project sites spread all over India and abroad. The company has formed a Strategic Business Unit for Ceramics at Bangalore.

BHEL is today the largest engineering and manufacturing enterprise of its kind in India, with a well recognized track record of performance, making profits continuously since 1971 72 and paying dividends since 1976-77. BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian economy viz., Power Generation and Transmission Industry, Transportation,

Telecommunication, Renewable Energy, etc.

The quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R & D centers. BHEL has acquired certifications to both ISO 9000 & ISO 14000 standards for its operations and has also adopted the concepts of Total Quality Management.

BHEL has adopted Occupational health and safety standards as per OHSAS 18001. Two of its divisions have acquired certification to

OHSAS 18001 standard and the other units are in the process of acquiring the same.

BHELs operations are organized around three business sectors, namely power industry including Transmission, Transportation,

Telecommunication & Renewable Energy and International Operations. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market.




To ensure a steady growth by enhancing the competitive edge of BHEL in existing business, new areas and international operations so as to fulfill national expectations from BHEL.



To provide a reasonable and adequate returns on Capital Employed, primarily through improvement in operational efficiency capacity utilization and productivity and generate adequate internal resources to finance the companys growth.



To build a high degree of customer confidence by providing increased value for his money through in international standards of product quality, performance and superior customer service.



To enable each employee to achieve his potential, improve his capabilities, perceive his role and responsibilities and participate and contribute positively to the growth and success of the company. To invest in human resources continuously and be alive their needs.



To achieve technological excellence in operations by development of indigenous technologies and efficient absorption and adaptation of imported technologies to suit business needs and priorities and provide a competitive advantage to the company.



To fulfill the expectations, which stake holders like Government as owner, employees, customers and the country at large have from BHEL.

BHEL has supplied : y Equipment for over 90,000 MW of power generation for utilities,

captive and industrial uses.

y Over 25,000 Motors with Drive Control Systems to Power Projects,

Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement Plants etc.

y Over one million Valves to Power Plants and other industries.


BHELs vision is to make a world class-engineering enterprise

committed to enhancing shareholder value.


BHEL mission is to be an Indian multinational engineering

enterprise providing total business solutions through quality products, system and service in the fields of energy, transport, infrastructure and other potential areas.


The greatest strength of BHEL is its highly skilled and committed people. Every employee is given an equal opportunity to develop himself and improve his position. Continuous training and retraining, career

planning, a positive work culture and participative style of management have engendered development of a committed and motivated work force leading to enhanced productivity and higher levels of quality.


y Zeal to excel and zest for change. y Integrity and fairness in all matters. y Respect for dignity and potential of individuals. y Strict adherence to commitments. y Ensure speed of response. y Foster learning, creativity and teamwork. y Loyalty and pride in the company. OTHER UNITS OF BHEL:

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12)

Steam less Steel Tube Plant - Trichy High Pressure Boiler Plant Trichy Heavy Electrical Plant Bhopal Industrial Valves Plant Govindaval Heavy Electrical Equipment Plant Haridwar Central Foundry Forge Plant Haridwar Heavy Equipment Plant Haridwar Electronic Division Bangalore Industrial Insulted Plant Jagdishpur Component Fabrication Plant Rudhrapur Silicon Solar Cell Plant Gurgon Heavy Equipment Repair Plant Varanasi



a) AB Sand irk, Sweden. b) Hyundai, South Korea. c) Reiner Brach, Germany. d) Ferromex, Belgium. e) Metal one, Japan. f) Ducon technologies, USA.


a) Steel Authority of India b) The Indian Iron Steel Co. Ltd c) Tube Investment of India d) Dynalog (India) Ltd e) Controls & Switch Gear Co. f) Delton Cables g) Tata Iron & Steel Co. Ltd h) Super Forgings & Steels Ltd i) Bhushan Steel & Strips j) Jindal Steel & Steels k) Uttam Galva Steels Ltd


a) State Electricity Board b) Tata Iron & Steel Co. Ltd c) Jindal Steel & Steels d) Hindustan Zinc e) Bhushan Steel & Strips f) Saint Gobain g) National Thermal Power Corporation h) Walchand

Board of Directors of BHEL:

1. 2. 3. 4. 5.

K. Ravikumar, Chairman & Managing Director (Including Power) B.P. Rao, Director (IS&P) C.S. Verma, Director (finance) C.P. Singh, Director (E, R&D) Anil Sachdev, Director (Personnel)



Fans for steam generators and various industrial applications: Axial reaction fans of single stage and double stage type for clean air application Axial impulse fans for clean air and flue gas applications Single and double suction type radial fans clean air dust laden hot gas applications up to 400oC

Air Heaters

Air heaters for steam generators and various industrial applications: Regenerative air heaters in s broad range of sized and capacities Tubular air heaters for steam generators and process industries, for various duty conditions

Electrostatic Precipitators

Dust collectors for steam generators and various industrial applications Electrostatic Precipitators in a broad range of sizes and capacities. Maximum gas flow per precipitator up to 250 m3/sec and collection efficiency up to 99.99% Electrostatic precipitators for recovery boilers to recover black particulate for recycling.

Mechanical Separators

 Cyclone type mechanical separators for steam generators and industrial applications.  Coal / Ash Handling Equipment, Desalination Plants and Wind Electric Generators.



The boiler Auxiliaries Plant, a unit of BHEL located at B HEL about 120 KMs from the city of Chennai is one of the manufacturing divisions of BHELs. The plant has recorded a turnover of around

Rs.30807 lakhs during the financial year 2001 -02. The product profile of the unit caters to both power and industrial secto rs.


BHEL, BHEL had technical collaboration for boiler auxiliaries form leading international players like erstwhile M/s. CE APCo, USA, M/s. KKK, Germany and M/s. Flakt industry, Sweden. Recently the company has extended its business portfolio to non-conventional energy by supplying Wind Electric Generators with the backup of M/s. Nordex A/S, Denmark. Another ongoing partnership of the company is with M/s. Hamon Rothemuhle, Germany in the field of Bag Filters.


In the power sector, BHEL, BHEL was actively associated with the enhancement of the installed capacity in the country, since the beginning of the plant in 1982. The unit has established itself as a reliable single source for air pollution control equipments; fans air preheaters and other accessories like gates, dampers, and louvers for power plants.

BHEL, BHEL has supplied ESPs for eighteen 500MW units, 148 units in the range of 200 MW to 250 MW, 65 units of 100 MW to 130 MW and 64 units of 12 MW to 80 MW.

In addition, BAP has supplied ESPs for 71 industrial boilers and around 100 ESPs for other industrial applications. The air preheaters and fans supplied for various 500 MW, 250 MW 200/210 MW and low rated units located at various sites in the country are also performing to the utmost satisfaction of the customers.

Boiler auxiliaries have also been exported, for e.g. to Alarish in Egypt. The unit is actively participating in few global renders and will be a strong contender for boiler auxiliaries required for IPPs coming Up in India. In desalination business BHEL, BHEL has presence in India with eleven plants of capacities ranging from 20 cubic meters per day to1 MGD at Ramanathapuram district in Tamilnadu. The compan y is keen to expand its business in this area of business.

Equipment for over 90,000 MW of power generation for utilities, captive and industrial uses. Over 25,000 Motors with Drive Control Systems to Power Projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement Plants etc. Over one million Valves to Power Plants and other industries.

The unit a shop floor area of around 93000 Sq.m. and has the state of the art manufacturing facilities along with necessary inspection and testing facilities. The manufacturing facilities include sophisticated CNC turning and machining centers, vertical borers, metal forming machines like press brakes, rolling machining centers, vertical borers, metal forming machines like press brakes, rol ling machines, sectional rolling machines, presses etc.


The plant has modern welding facilities, heat treatment facilities and has the capability to meet stringent quality in fabrication and machining. The inspection and testing like ultrasonic scanning,

radiography and a modern metrology.




Engineering and capital goods industry in India faced a bullish trend in the year 2000. It was expected that the industry would look up after being battered by the years of recession. In Financial year 1999, engineering and capital goods sector went up by nearly 11.5%.

This reaffirmed the performance in the sector. However, the euphoria didnt last long and FY2000 witnessed a sharp fall in the growth in the sector. In FY2000 the index went up by just 5.4% (As per CMIE reported figures). Engineering performance of power sector. sector is inextricably linked to the

Investments in power generation, distribution and transmission have almost dried up, which is eventually reflected in the

performance of engineering companies. Engineering goods derived from the demand

demand is

in consumer products. Falling import

barriers on consumer goods has resulted in a sharp decline in the demand of capital goods.

Apart from this the government has curtailed capital expenditure so as to control the fiscal deficit. Nearly 70% of the revenues of most of the listed and unlisted engineering companies come from the power sector. The demand may take the form of other direct demand or a derived demand. In FY2000, the capacity addition in the production capacity of power sector was 3433 MW.


According to the industry estimates we need almost 7.8% growth in the installed capacity to cater to the needs of the economy growing at almost 6% p.a. This translates into a capacity addition of 6768 MW with a base of installed capacity as on March 31, 1999 and growth rate considered at 7%. We can easily make out that the addition to the capacity is nearly 50% of the increase in projected demand.

Showdown in capacity additions is reflected in the overall power shortage, which stood at nearly 7% in the month of November 2000. The most recent exit from India is that of UK power Major Power Gen. However, we see this stage as a transition phase of the power industry.

Major reforms have been initiated at all levels in India. Uniform regulatory framework, Electricity Bill 2000, is in place and would soon be placed in the parliament for discussion. We expect that there is a realization of the power crises and the bill would not face much difficulty in arriving at the consensus.

The bill propounds more prominent role of the private sector in the developing power infrastructure and removes most of the redundant bureaucratic hurdles. This also allows a level playing field to the private power producer vis--vis the public sector and also provides a room for better returns on capital employed.

We feel that the bill would be passed in the next session of the Parliament. This would result in a large-scale activity in the power sector. In a short term we feel that the scenario may go from bad to worse but in medium to long term we foresee a major activity in the sector. Some of

the major beneficiaries would be companies like BHEL, ABB, Siemens, Larsen & Turbo and also the companies in the business of generation, distribution and transmission of power like TEC, BSES, Ahmadabad Electricity and CESC.



The present study is to examine the Financial Performance of BHEL.


 To analyze the financial Performance of BHEL., for the period of 5 years from 2005 2006 to 2009 2010


 Based on this main objective, the following are the secondary objectives of the present study.  To study the efficiency and effectiveness of companys performance by use of profitability ratios.  To assess the actual position of functional performance in BHEL. From the year 2005 2006 to 2009 2010.  To analyze the reasons for the variations in profits for 5 years from 2005 2006 to 2009 - 2010



1. BHEL BAP Corporation Limited a public sector enterprise is making profits continuously since 1976 -1977.

2. There is a heavy investment by the company in BAP and power projects. 3. It is to identify the financial aspects of BHEL. 4. The accounting has been developed to provide financial information to the management. The basis for financial planning, analysis and decision making is the financial information. This information is needed to predict, compa re and evaluate the firms earning capacity. Hence, the accounting is the most important field which is very useful to management. 5. Every company should know the financial strength of its operations. It points out the problems faced or likely to be faced by the companies. The financial information of a company is available in the financial statements or accounting reports. 6. A firms size either in terms of its assets or sales affects its needed for working capital. Bigger firms with many sources to funds may need less working capital as compared to their total assets or sales. 7. BHEL BAP Corporation Limited a public sector enterprise is making profits continuously since 1976 -1977.


8. From that year, there has been no looking back

9. There is a heavy investment by the company in BAP and power projects. 10. The accounting has been developed to provide financial information to the management. The basis for financial planning, analysis and decision making is the financial information. This information is needed to predict , compare and evaluate the firms earning capacity. Hence, the accounting is the most important field which is very useful to management. 11. Every company should know the financial strength of its operations. It points out the problems faced or likely to be f aced by the companies. The financial information of a company is available in the financial statements or accounting reports. 12. A firms size either in terms of its assets or sales affects its needed for working capital. Bigger firms with many sources to funds may need less working capital as compared to their total assets or sales.



In this study, an attempt has been made to know about the companys financial performance. The study has been conducted with special reference to get a clear picture of liquidity, Leverage, Activity and Profitability to assess efficiency level.

1. This study helps to calculate the value of different ratios to be carried out for Ratio Analysis and also to calculate the value of different Assets and Liabilities to be carried out for Comparative balance Sheets of the different years.

2. This study helps to find out the resources for further development of the company. 3. An attempt can be made during this study to understand the efficiency of the company in other a spects of Financial Management. 4. This study will be useful for the Comparison of Financial Position of BHEL., with any other Public Sector Organization. 5. This study can be utilized to find out the current financial positions of BHEL. 6. The study concentrates on all the ratios, which are related to the assessment of Financial Aspects.



1. This study is limited to Secondary data available from various records of Annual Reports of BHEL Corporation Limited.

2. The study discloses only monetary facts.

3. The study has been made only for five years from 2005 2006 to 2009 - 2010

4. The study does not cover other areas of financial managements such as  Capital Budgeting  Inventory Control 5. The study is based on past Financial Statements, but exact forecast of future could not be done on this study for want of time.



Financial performance Meaning:

A subjective Measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firms over all financial health over a given period of time, and can be used to compare similar firms across the same industry (or) to compare industries (or) sectors in aggregation.

Investopedia explains financial performance:

There are many different ways to measures financial performance, but all measures should be taken in aggregation. Line items such as revenue from operations, operating income (or) cash flow from operations can be used as well as total unit sales, furthermore, the analyst or investor may wish to look despair into financial statement and seek out Margin growth rates (or) any declining debt.


Finance and accounts:

Financial PERFORMANCE OF an organization is analyzed by different accounting statements and tools. Hence it is clear that there is an inter relationship between finance and accounts, which is called as Financial Accounting.

Financial accounts are the records of the financial dealing of the business, their everyday transactions Role of financial accounting:

Record financial transaction:

One of the main role of financial accounting is to record the day to day financial transaction taken place in the organization for example it helps in recording the money collection paying suppliers, salaries & wages etc.

Help the managers to manage the business:

It helps the managers to manage the business more efficiently by preparing regular financial information. Monthly management acc ounts showing sales, costs & profits against budgets, forecasting cash flows, cost inlostigatious, profit / Loss accounts helps the managers to manage the organization.


Sales Ledger:

Shows how much is owned by customers who have bought on credit.

Purchase ledger:

Shows how much is owned by the business to suppliers who have provided goods and services on credit.

Cash book and bank statements:

Shows all to customers providing cash such as receipts from customers, payments to suppliers, employee wages.




Financial Statements refer to formal and original statements prepared by a business concern to disclose its financial information.

American Institute of Certified Public Accountants (AICPA) says Financial Statements are prepared for the purpose of presenting a periodical review or report on the progress by the management to deal with i) the status of investments in the business and ii) the results achieved during the period under review.

According to J.J Hampton, The statement disclosing status of investments is known as balance sheet and the statement showing the result is known as profit and loss account. Hence the term financial statement has been widely used to represent two statements prepared by accountants at the end of specific period. They are:

i) ii)

Profit & Loss account (or) Income statement Balance sheet (or) Statement of Financial Position.

Now a day the statement of retained earnings and schedules are also prepared to supplement the data contained in the Income statement and the Balance sheet.


Functions of Financial statements:

Financial statements provide meaningful, useful and valuable information periodically regarding the financial position and future prospects of the business organization. Such statements are not only useful to the managements but also to outsider like creditors, bankers, moneylenders, investors, shareholders, stock exchange, trade associatio ns and Government.

These statements are useful to them to study the liquidity, profitability and solvency position of the organization. They can also obtain the financial information as and when required for decision making and control.

The effective utilization of capital employed, efficient use of assets and improvement in financial position can be better analyzed and understood from the financial statements.

The outsiders can probe into information like earning capacity, growth potential, efficiency of the operation etc, by analyzing such statements. Such statements are also useful to tax authorities for bringing tax and for the Govt. authorities for analyzing the trend of the industry and to formulate tax policies and prepare budget.


Types of Financial Statements:

The basic financial statements for the purpose of external reporting to owners, investors and creditors are: I. II. The Balance Sheet or statement of Financial Position Profit and Loss Account or Income Statement.

Balance Sheet

Balance Sheet is the most significant Financial Statement. Balance Sheet is a statement containing the assets and liabilities of a business on particular date.

It indicates the financial condition or the state of affairs of a business at a particular moment of time.


Profit and Loss Account

The profit and Loss Account is a statement prepared to determine the operational position of the concern. The establishment and other expenses are changes to the Profit and Loss Account.

Profit and Loss Account is a statement of revenue earned and the expenses incurred. If there is excess of revenues over expenditure it will show Profit and if the expenditures are more than the income then, there will be a Loss.

It helps the businessman to know the Net Profit Earned or Net Los s Suffered by the business during a particular period. The profit shown by the Profit and Loss Account for a particularly period can be compared with that of the other period so that it helps to determine whether the business is being run efficiently or not.

Thus Profit and Loss Account provides the overall Profit Made of Loss suffered by the business concern during a particular period.


Limitations of Financial Statements:

Financial Statements provide useful information regarding the financial health of the organization.

The Financial Statements suffer from the following limitations:

a) Financial Statements are Essentially Interim Reports:

The Financial Statements can be considered only as interim reports. They are not final because the exact financial position can be known only when the business is closed.

b) Influence of Personal Judgment:

Generally, most of the financial statements are based in personal judgments of the accountant. (For ex, the period for writing off preliminary expenses, Method of depreciation etc,)

c) Accounting Concepts and Conventions:

Financial Statements are prepared on the basis of certain accounting concepts and conventions. So any change in the method or procedure of accounting will restrict the utility of financial statements.


d) Do not Consider Price Level Changes:

Financial Statements do not consider the changes in price level. Hence their use is limited during Inflationary periods.

Review of literature consists of theoretical study of the following sub topics

y Ratio Analysis y Trend Analysis y Changes in working capital y Comparative Balance Sheet Analysis


The term Research refers to the systematic method consisting of enunciating the problem, formulating a hypothesis, collecting the data, analyzing the facts and reaching certain conclusions either in the form of solutions towards the concerned problem or in certain generalized form of some theoretical formulation.

According to Redman and Mory, the term Research was a Systematized Effort to Gain New Knowledge.


Research design is the blue print for doing the research. It is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure.

This is an empirical study based on the financial information contained in the annual reports of BHEL. The study adopts descriptive methodology for evaluating the performance of the organization.

A study on financial performance of BHEL Corpo ration Limited has been made by calculating various ratios. The data for such analysis have been extracted from the financial statements. These ratios have been interpreted and conclusions have been drawn. Based on which,


suggestions have been made to impr ove the financial performance of BHEL Corporation Limited.


 The data for the analysis are collected and gathered from the printed company reports of BHEL, official files, records, ledgers and other available related materials.


 With a purpose to strengthen and validate the study, personal contacts were made with the executives and officials of the finance division of BHEL in the form of personal discussion, data collection, analysis of reports and MIS formats etc.,


 The secondary data are collected from Company reports, institute magazines, department manuals, brochures mainly from the balance sheet, income and expenditure and periodicals etc.,



 The study period covers the financial performance of BHEL during the five year period commencing 2005 2006 to 2009 2010


Data collected from the secondary sources in the form of annual report was analyzed using:

y Ratio Analysis y Trend Analysis y Changes in working capital y Comparative Balance Sheet Analysis



Ratio Analysis is a powerful tool of Financial Analysis. Ratio Analysis of business enterprises centers on efforts to drive quantitative measure or guides concerning the expected capacity of the firm to meet its future financial obligations or expectations. The ratio analysis facilitates a firm to consider the time dimensions into account i.e., whether the financial position of a firm showing any improvement or deteriorating over years. Ratio is known as one number expressed in terms of another, it is an expression of relationship spelt out by dividing one figures into the other.

Significance or Importance of ratio analysis:

It helps in evaluating the firms performance: With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has u tilized the firms assets correctly, to increase the investors wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets
It helps in inter-firm comparison:

Ratio analysis helps in inter-firm comparison by providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible

reasons of variations may be identified and if results are negative, the action may be initiated immediately to bring them in line.
It simplifies financial statement:

The information given in the basic financial statements serves no useful Purpose unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the hands of those who want to know something more from the financial statements in the simplified manner.

It helps in determining the financial position of the concern:

Ratio analysis facilitates the management to know whether the firms financial position is improving or deteriorating or is constant over the years by setting a trend with the help of ratios The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio may help the management in the ta sk of planning, forecasting and controlling.
It is helpful in budgeting and forecasting:

Accounting ratios provide a reliable data, which can be compared, studied and analyzed. These ratios provide sound footing for future prospectus. The ratios can also serve as a basis for preparing budgeting future line of action.


Liquidity position:

With help of ratio analysis conclusions 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. The ability to met short term liabilities is reflected in the liquidity ratio of a firm.
Long term solvency:

Ratio analysis is equally for assessing the long term financial ability of the Firm. The long term solvency s measured by the leverage or capital structure and profitability ratio which shows the earning power and operating efficiency, Solvency ratio shows relationship between total liability and total assets.
Operating efficiency:

Yet another dimension of usefulness or ratio analysis, relevant from the View point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency.


Advantages of Ratios Analysis:

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


Limitations of Ratios Analysis:

The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. 2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Ratios alone are not adequate: Ratios are only indicators; they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen. 4. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial

statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interp retation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 7. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 8. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.



1. Liquidity ratios. 2. Leverage ratios. 3. Activity ratios. 4. Profitability ratios.


Liquidity ratios derive a picture of the capacity of a firm to meet its short term obligations out of its short term resources. These ratios constitute ratio analysis of the short term financial position. Liquidity ratios, by establishing a relationship between cash and other current assets to current obligations, provide a quick measure of liquidity.

The most common ratios which indicate the Liquidity are:  Current ratio  Quick ratio  Cash ratio

Current Ratio is the relationship between the total current assets and current liabilities. It is the ratio of the current assets and current liabilities and is found out by dividing the current assets by the current liabilities. As the ratio is connected with the working capital (Current Assets Current Liabilities) and it is also called working capital ratio.

Current ratio is the indicator of short term liquidity position of a firm. Current Assets
Current Ratio =

Current Liability


It is also a tool of testing the liquidity of an organization. This ratio is also called as Liquid Ratio (or) Acid test ratio or Liquid Rat io is concerned with the relationship between Liquid Assets and Current Liabilities.

Quick Ratio is an Indicator of Short term Solvency of the company.

Quick Assets Quick Ratio = . Current liabilities


Cash position measures the relationship between cash and near cash items on one hand and immediately maturing obligations on the other. This test is rigorous measure of a firms liquidity position. It is also called as absolute liquid ratio. Cash position Ratio = Cash + Marketable Securities Current liabilities


Leverage Ratios measure the contribution of financing by owners compared with financing provided by the outsiders. Leverage Ratios also provide some measure of the risk of debt financing by the calculation of the coverage of fixed charges. Leverage has a much more important bearing on profitability than does Liquidity.

The most common Ratios used are:  Debt- Equity Ratio  Interest Coverage Ratio

Debt Equity Ratio is determined to ascertain the soundness of the long term financial position of the company. The investor may take Debt Equity ratio as satisfactory if shareholders funds are equal to Outsiders Funds. This ratio indicates the extent to which the firm depends upon the outsiders for its existence. Outsiders Fund
Debt Equity Ratio =

Shareholders Fund



Interest Coverage Ratio is also known as Fixed charges cover. This ratio established the relationship between EBIT and fixed interest charges. It also highlights the ability of the firm to raise additional funds in future. Higher the ratio better is the position of long- term creditors and the companys risk is lesser.
Earnings before Depreciation, Interest and Tax

Interest Coverage Ratio = .



An activity ratio measures the effectiveness of the employment of resources. These ratios not only analyze the use of total resources of the firm but also the use of the components of the total assets. Activity Ratios involve in relationship between assets and sales. Several Activity Ratios involve a relationship between assets and sales. Several Activity Ratios can be calculated to judge the effectiveness of asset utilization.

Some of these ratios are:

 Debtors turnover ratio.  Debt collection period.  Fixed assets turnover ratio. .



Debtors constitute an important of current assets and therefore the quality of debtors to a great extent determines a firms liquidity. This ratio indicates the efficiency of the staff entrusted with the collection of book debts. The higher the ratio, the better it is.

Net Sales
Debtors Turnover Ratio = ..



Fixed Asset Turnover Ratio indicated the extent to which the investment in fixed assets contributes towards sales. A highest ratio is an indication of greater efficiency in the utilization of fixed a ssets. Fixed assets of the company are land and building, plant and machinery etc,

Cost of Goods Sold

Fixed Asset Turnover Ratio = ..

Fixed Assets



Profitability ratios are calculated to measure the operating efficiency of the company. Profitability Ratios are designed to highlight the end-result of business activities.

The important ratios are:

a) Net profit ratio. b) Gross profit ratio


Net Profit Ratio is the ratio of Net Income or Profit after Taxes to Net sales. It indicates with portion of sales is left to proprietors after all costs, charges and expenses; have been deducted. It is extremely useful to the firm being an indication of cost control and sales promotion. Net profit ratio is widely used as a measure of over -all profitability and is very useful to the proprietors. Higher the ratio better is the operational efficiency of the company. Net Profit
Net Profit Ratio = ..




Gross profit ratio is the ratio to net sales expressed as a percentage representing the percentage of gross profits earned on sales. An increase in gross earned on sales. An increase in gross profit ratio may reflect an increase in the sale price of goods sold without any corresponding increase in costs, a decrease in cost without its impact on the sale price of goods. Low gross profit ratio may indicate un-favorable purchasing and mark-up policies.

Gross Profit
Gross Profit Ratio = ..


Comparative balance sheet

Comparative balance sheet as on two or more different dates can be used for comparing assets and liabilities and finding out any increase or decrease in those items. Thus, while in a single balance sheet the emphasis is on present position, it is on change in the comparative balance sheet. Such a balance sheet is very useful in studying the trends in an enterprise.


Trend signifies a tendency and such the review and appraisal of tendency in accounting variables are nothing but trend analysis. Trend analysis is carried out by calculating trend ratios (percentage) and/ or by plotting the accounting data on graph pape r or chart. Trend analysis is significant for forecasting and budgeting. Trend analysis discloses the changes in financial and operating data between specific periods


Under the working capital changes it determines the current assets and current liabilities changes and the short term solvency position of the manufacturing company. The main aim is to show efficiency in the management.

The statement of changes in working capital is concerned with the current assets and current liabilities alone, as they are shown in the balance sheet of the current year and the previous year. All non -current assets and non-current liabilities, profits and losses, additional information available or completely ignored.

Each current asset and current liability in the periods balance sheet is compared with those shown in the previous periods balance sheet. Increase or decrease in each of the assets and liabilities is noted. The effect of such increase or decrease during the period in each item


individually on the working capital is recorded. Finally the overall changes in the working capital is calculated.

It is possible that working capital might have increased during a period or it might have decreased. The working capital statement shows such increase or decrease in the working capital as a final result. Principle for the preparation for working capital statement:

Increase in current asset Decrease in current asset Increase in current liability Decrease in current liability

increases working capital decreases working capital decreases working capital increases working capital




The Analysis and Interpretation of Financial Statements provide a systematic classification of the data given in the Financial Statements. The financial statements show a static position of an organization. Hence they must be re-arranged and interpreted to study the sufficiency as well as the growth of a business.


Financial Analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationship between the items of the balance sheet and profit and loss account.

The analysis provides an idea about the profitability and financial position of a company, and the financial statements have to be analyzed and interpreted.


The term analysis means a critical examination of financial transactions effected during definite period of time. The analysis and interpretation of financial statements is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and probability of a sound dividend policy.