This document is a summer training report submitted by Pranay Shah to the N.R. Institute of Business Management, Gujarat University. It details Pranay's training at Punyam Management Pvt. Ltd., where he learned about financial analysis techniques. These include internal and external analysis, trend analysis, ratio analysis involving various financial ratios, and cash flow analysis. The report provides an overview of Punyam Management and the types of services it offers related to management consulting, systems certification, and training programs. It also describes the various ratio analysis techniques used in the creative analysis of Punyam's financial reports.
HỌC TỐT TIẾNG ANH 11 THEO CHƯƠNG TRÌNH GLOBAL SUCCESS ĐÁP ÁN CHI TIẾT - CẢ NĂ...
Financial Report Analysis
1. A
SUMMER TRAINING REPORT
ON
CREATIVE ANALYSIS
OF FINANCIAL
REPORT
SUBMITTED TO
N.R.INSTITUTE OF BUSINESS
MANAGEMENT
GUJARAT UNIVERSITY
AHMEDABAD
SUBMITTED BY
PRANAY SHAH
2. Preface
During my training at PUNYAM MANAGEMENT PVT.LTD.,
I observed that the practical training has a great importance to
get familiar with the industrial environment because it is very
essential to import a practical knowledge along with a
theoretical knowledge provide in the four wall of the class room.
In objective behind the industrial training in the summer
vacation is gain in depth knowledge about the specialized
functional area of management i. e. Financial Management.
During the training period at PUNYAM MANAGEMENT PVT.
LTD. I learn many things which one are necessary for being a
student of Financial Management. Training provided me a
comprehensive & analytical study of industrial environment of
the organisation.
My heartly but wishes are always with the company for its
bright future.
3. Acknowledgement
I would like to take the opportunity to express my profound
thanks to and gratitude to my guide respected Mr. Devang Jhaveri (MD,
PUNYAM MANAGEMENT PVT. LTD.) For his unceasing effort,
encouragement, help and valuable guidance at every step which has
contributed the most towards the success of this project.
I am also thankful to staff of PUNYAM MANAGEMENT to
for giving their full support and providing me necessary direction for the
various topics related to the project.
Project student
Pranay Shah
4. Executive Summary
Today in the global market reputation and recognition of the
business is must, because competition of the business not only in country
but also internationally. The prime objective of this CREATIVE
ANALYSIS is to improve the creativity of the organization.
Doing this project I am getting the knowledge of the banking
system. For this creative analysis there are different types of analysis like
internal analysis, external analysis, trend analysis, ratio analysis and cash
flow analysis. I am using the ratio analysis for my project because it is
used for both internal and external users can understand that how the
company performs for the year.
So I can conclude that proper education and direction with benefits
of analysis can be helpful for improve the performance of the
organization.
5. TABLE OF CONTENT
ORGANAIZATION OVERVIEW............................................................................................................6
PUNYAM IS COMMITTED FOR........................................................................................................7
WHY MANY UNITS HAD TAKEN PUNYAM CONSULTANCY...................................................7
MANAGEMENT...................................................................................................................................7
TYPES OF FINANCIAL ANALYSIS ...................................................................................................10
Internal analysis...................................................................................................................................10
External analysis..................................................................................................................................10
TOOLS OF FINANCIAL ANALYSIS...................................................................................................11
Trend Analysis.....................................................................................................................................11
Ratio Analysis......................................................................................................................................11
1.Debt Equity Ratio..............................................................................................................................12
2.Shareholders Equity Ratio................................................................................................................13
3.Fixed Asset To Long Term Fund......................................................................................................14
4.Dividend Cover Ratio.......................................................................................................................15
5.Current Ratio.....................................................................................................................................15
6.Return On Capital Employed (ROCE) or Return on Investment (ROI)...........................................16
7.Earnings Per Share............................................................................................................................18
8.Cash Earnings Per Share...................................................................................................................18
9.Net Profit Margin..............................................................................................................................19
10.Net Profit Margin............................................................................................................................20
11.Return On Asset..............................................................................................................................21
12.Asset Turnover Ratio......................................................................................................................22
13.Bad Debt Turnover..........................................................................................................................23
14.Profit Per Employee........................................................................................................................24
15.Expenses Per Employee..................................................................................................................24
LIMITATION OF THE RATIO ANALYSIS.........................................................................................24
6. ORGANAIZATION OVERVIEW
PUNYAM (PMSPL) was born in November'1995 in the field of consultancy for ISO:
9000, other international standard, and Management areas and is growing and having
total 250 clients for various types of certification and very rich experience in ISO and
management consultancy.
Group of 12 qualified engineers and management graduates (M.B.A) having
experience of different type of industry and done ISO: 9001, 2000 and other
international certifications for many clients.
PUNYAM is having its office in Vapi for clients located near Vapi areas as well as
Mumbai.
At present Punyam is taking 9 new clients per month and completing their work
within 3 months. After every 3 days average 1 client of Punyam is getting ISO: 9001,
ISO: 14001, HACCP, CE Mark or any other certificate.
All the Punyam clients have got ISO: 9000 series certificate from the leading
certifying body like KPMG, BVQI, SGS, LLOYDS, DNV, TUV, U.L. LAB. Etc.
Punyam is also working for vendor Developments & Auditing of companies in India
on behalf of leading international customers.
Their clients include capacity-wise No. 1 companies in Asia as well leading group of
India like
Reliance Industries Limited.
Modern Terry Towels Limited. (Modern Group)
Gujarat Telephone Cables Limited. (GTCL Group)
Meghmani Group Of Companies
Metrochem Industries Limited
Shri Digvijay Cement Co. Ltd.
Binani Cements Limited.
7. INDEXTb (Industrial Extension Bureau., Govt. of Gujarat Organization)
Pay back of their consultancy is less than 2 months because of quantification
of measurable goals and providing continual improvement platform.
PUNYAM IS COMMITTED FOR
Personal involvement & Commitment from first day.
Optimum charges.
To complete project in minimum period (Within three months).
Professional approach
To depute dedicated persons to suit client requirements.
Hard work and get work done from others
Strengthening clients by system establishment to make their house in proper
manner
Establishing system in finance and other departments for fund flow
management.
To establish strong internal control with the help of system.
WHY MANY UNITS HAD TAKEN PUNYAM CONSULTANCY
Practical suggestions recommended and having vast experience in the bigger as
well as small companies.
Experience in all kinds of industry like Engineering, Textile, Chemical, Machine
manufacturer, Electronics, Electrical, Pharmaceuticals, etc.
Professional approach and more than 12 highly qualified persons comprise
Engineers / MBA from various disciplines with extensive experience are involved
in their team.
MANAGEMENT
They are providing help to the clients in management areas listed below in four
main ways.
8. Arranging in-house training programs.
Establishing system on project base.
Profit sharing based on improvement achieved.
They do total management activity.
a) SYSTEM CERTIFICATION
Reliance Industries Limited. ISO: 9001(Quality System)
ISO: 14001 (Environment)
HACCP (Food Safety)
CE mark
WHO GMP
OHSAS:18001
BS 7799 ( Information Security Mgt. System)
SA 8000 ( Social Accountability)
NABL Accreditation (ISO/IEC 17025)
b) STRATEGIC MANAGEMENT
Competitive strategy
Organizational leadership for 21st century
Business Process Improvement (BPI)
Six sigma
c) MARKETING
International marketing
Market research
Managing retailing
Institutional marketing
Product policy & new product management
Franchisees management
Customer based business strategies
SWOT analysis and marketing plans
9. d) PURCHASE
Sharpening negotiation skills
Vendor development and evaluation
Supply chain management
System audit for vendors
e) PRODUCTION AND QUALITY CONTROL
Project management
Process refinement
Excellence in manufacturing
Quality assurance establishment
f) FINANCE
Creative solutions to finance problems
Advanced data analysis for financial decisions
Strategic finance management
Finance and costing for non financial staff
g) HRD
Human resource management
Leadership & change management
Key performance appraisal system (KPA)
Creative solutions to HR problems
Goal setting & performance management
Bench marking
10. TYPES OF FINANCIAL ANALYSIS
The classification of analysis can be made on the basis of material used or according
to the modern operational of the analysis. On the basis of material used financial
analysis can be of two types.
Internal analysis
This analysis is done by those who have accessed the books of accounts and other
information relating to the business concern. This type of analysis is meant for
management purpose. This is conducted by executive employee of the firm as well as
government agencies which have statutory control over such firm.
External analysis
This type of analysis is done by those who are outsider to the business. The outsiders
are investors, creditors, government, etc. these persons mainly depends upon the
published financial statements.
11. TOOLS OF FINANCIAL ANALYSIS
A no. of technique or devices is used to undertake financial analysis. The fundamental
objectives of any analytical method are to simplify the data to more understandable
terms. The following are the important tools of financial analysis:
Comparative Financial Statements
Trend Analysis
Ratio Analysis
Fund Flow Analysis
Cash Flow Analysis
Trend Analysis
In trend analysis, trends of various financial parameters are observed and discussed.
Ratio Analysis
Ratio analysis is a very powerful analytical tool useful for measuring performance of
an organization. The ratio analysis concentrates on the inter-relationship among the
figures appearing in the aforementioned four financial statements. The ratio analysis
helps the management to analyse the past performance of the firm and to make further
projections. Ratio analysis allow interested parties like shareholders, investors,
creditors, Government and analysis to make an evaluation of certain aspects of a
firm’s performance.
Ratio analysis is a process of comparison of one figure against another, which makes
a ratio and the appraisal of the ratios to make proper analysis about the strengths and
weaknesses of the firm’s operations. Ratio analysis is extremely helpful in providing
valuable insight into a company’s financial picture.
12. 1. Debt Equity Ratio
Ratio BOI BOM UB VB AVG Better when Type
Debt Equity 2.4559 3.0174 1.5538 1.2882 2.0788 Balanced Solvency
This ratio indicates the relationship between loan funds and net worth of the company
which is known as gearing. If the proportion of debt to equity is low, a company is
said to be a low geared, and vice a versa. A debt equity ratio of 2:1 is the norm
accepted by financial institution. The higher the gearing, the more explosive the return
to the shareholders.
Higher debt has lower cost as it provide tax shield. But as the present scenario of
many banks are now days reduce their debt component and then we considering the
debt equity proportion.
Debt Equity Ratio
2.4559
3.0174
1.5538
1.2882
BOI
BOM
UB
VB
Interpretation:-
The relationship between borrowed funds and owner’s capital is a popular measure of
long-term financial solvency of the firm. The ratio reflects the share holders against
the assets of the firm. As debt-equity ratio is the safety margin for creditors.
In Bank of Maharastra (BOM) the debt-equity ratio is high. It means the bank has
more long term liabilities towards its creditors. This is the warning for the long term
creditors of the bank. In future it is uncertain for company to meet is long term
obligation for improving the condition the firm has to reduce long term debt or
increase shareholders fund.
13. In Bank of India (BOI) and Uco Bank (UB) the debt-equity ratio is near to the average
bank sector’s debt-equity ratio. So the condition of these banks are better then BOM.
According to Earnings per Share BOI's position is strong because it is highest
amongst other banks.
2. Shareholders Equity Ratio
Ratio BOI BOM UB VB AVG Better when Type
Shareholders Equity 0.0473 0.0446 0.0407 0.0555 0.0470 Higher Solvency
This ratio will supplement the debt-equity ratio. In this ratio the relationship is
established between the shareholders’ fund and total assets. A reduction in
shareholder’s equity signaling the over dependence on outside sources for long-term
financial needs and this carries the risk of higher levels of gearing. This ratio indicates
the degree to which unsecured creditors are protected against loss in the event of
liquidation.
Shareholders Equity Ratio
0.0473
0.0446
0.0555
0.0407
BOI
BOM
UB
VB
Interpretation:-
This ratio is higher when ROCE, EPS, Cash EPS is good for the organization. Here
the position of the BOI is very strong because the EPS is higher then others and Cash
EPS is for BOI is also higher.
This ratio of all the banks is good with the comparison of the average. To interpret
with ROCE the Bank of Maharastra is very good because its return on capital
employed is the higher then other. But to interpret with EPS the Bank of India has the
14. highest EPS as compare to the Shareholders equity. So we infer from this ratio that
other banks EPS is not enough as compare to the Shareholders equity ratio.
3. Fixed Asset To Long Term Fund
Ratios BOI BOM UB VB AVG Better when Type
Fixed Asset to Long Term Fund 0.0100 0.0060 0.0093 0.0084 0.0084 Balanced Solvency
This ratio indicates the proportion of long-term funds deployed in fixed assets. Fixed
assets represent the gross fixed assets minus depreciation provided on this till the date
of calculation. Long term funds include share capital, reverse and surplus and long
term loans. The higher the ratio indicates the safer the funds available in case of
liquidation. It also indicates the proportion of long-term funds that is invested in
working capital.
Fixed Asset to Long Term Fund
0.0100
0.0084
0.0093 0.0060
BOI
BOM
UB
VB
Interpretation:-
For all the banks this ratio is good for all the banks. It means the ratio for all the banks
is near the average of all the banks. As this ratio says all the banks are safer the funds
in the liquidation.
Belongs to this ratio the fixed assets turnover ratio for the Bank of India is good and
also near the average ratio of all the banks. And the position of other banks is also
good with compare to this ratio. The Asset turnover is slightly depending on this ratio.
15. To interpret with the current ratio the position of all the banks are well but in the case
of the UCO Bank the liquidity is very good as it requires in the banks requires
generally. The total fixed assets with compare to net worth are also the strong in the
case of UCO Bank.
4. Dividend Cover Ratio
Ratio BOI BOM UB VB AVG Better when Type
Dividend Cover 0.0061 4.4212 5.4471 3.3641 4.4108 Higher Profitability
This ratio indicates the number of times the dividends are covered by net profit. This
highlights the amount retained by a company for financing of future operations.
Dividend Cover Ratio
0.0061
4.4212
5.4471
3.3641
BOI
BOM
UB
VB
Interpretation:-
As this ratio says the UCO Bank covers dividend highest number of time by the
profit. And then after the Bank of Maharastra covers dividend highest number of time
by net profit. For this the Bank of India is very poor performance because its dividend
cover ratio is near to the zero. So to improve the image of the organization the bank
has to cover dividend maximum possible number of times. Other banks have average
for dividend cover ratio.
5. Current Ratio
Ratio BOI BOM UB VB AVG Better when Type
Current 1.6067 1.4541 1.7565 0.8083 1.4064 Higher Liquidity
This ratio measures the solvency of the company in the short term. A current ratio of
2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by bank
16. as the minimum acceptable level for providing working capital finance. The
constituents of the current assets are as important as the current assets themselves for
evaluation of a company’s solvency position.
A very high current ratio will have adverse impact on the profitability of the
organization. A high current ratio may be due to the piling up of inventory,
inefficiency in collection of debtors, high balances in cash and bank accounts without
proper investments.
It is a measure of short term financial strength of the business and shows whether the
business will be able to meet its current liability.
Current Ratio
1.6067
1.4541
1.7565
0.8083
BOI
BOM
UB
VB
Interpretation:-
The current ratio indicates the working capital position. It is generally believed that
2:1 ratio shows a comfortable working capital position. In Bank of Maharastra
(BOM) the working capital position is much comfortable. In Vijya Bank (VB) the
working capital is about 0.8083 but the Net Profit Margin it has the best position
amongst other banks. So it can infer that the high profit margin of the Vijya Bank is
on the account of scarification of liquidity.
6. Return On Capital Employed (ROCE) or Return on
Investment (ROI)
Ratio BOI BOM UB VB AVG Better when Type
Return On Capital Employed (ROCE) 0.0128 0.0218 0.0105 0.0191 0.0161 Higher Profitability
17. Return on investment analysis provides a strong incentive for optimal utilization of
the assets of the company. This encourages managers to obtain assets that will provide
a satisfactory return on investment and to dispose of assets that are not providing an
acceptable return. In selecting amongst alternative long term investment proposals,
ROI provides a suitable measure for assessment of profitability of each proposal.
This ratio measures the relationship between net profit before interest and tax &
capital employed. This ratio estimates how efficiently long term debts and
shareholders fund has been used.
Return On Capital Employed (ROCE)
0.0128
0.0191
0.0105 0.0218
BOI
BOM
UB
VB
Interpretation:-
This ratio measures the ability of the firm to generate profit per rupee of capital
employed. Higher will be the ratio, higher will be efficiency of the firm.
Interpreting from the graph, it can be infer that Bank of Maharastra (BOM) has the
highest return because of the profitability. In UCO Bank the return is reduced due to
the low profitability. And other banks have around average return. To interpret with
Debt-equity Ratio the ROCE is highest for the BOM so the organization has to reduce
debt for improving the high profitability. Reducing the expenses on debt by reducing
debt-equity ratio can increase the profitability.
So for improve the productivity of the organizations have to reduce the expenses for
getting high productivity.
18. 7. Earnings Per Share
Ratio BOI BOM UB VB AVG Better when Type
Earning Per Share 0.0206 0.0071 0.0054 0.0095 0.0073 Higher Profitability
The EPS is one of the important measures of economic performance of organization.
The flow o capital to the companies under the present imperfect capital market
conditions would be made on the evaluation of EPS. Investors lacking inside and
detailed information would look upon EPS as the best to take their investment
decisions. Higher the EPS means better capital productivity.
Earning Per Share
0.0206
0.0071 0.0054
0.0095
0.0250
0.0200
0.0150
0.0100
0.0050
0.0000
BOI BOM UB VB
Banks
Ratio
Earning Per Share
Interpretation:-
Among all these banks in Bank of India has highest Earnings per Share. And it is very
good for Bank of India. Other banks are very poor with the comparison Bank of India.
In this ratio the position of BOI is good to interpret with Debt Equity & Shareholder's
equity ratio among others but it is not good also because Bad debt turnover ratio is
very high which is not good and other banks are in the strong position in this case
because there is no bad debt of very less.
8. Cash Earnings Per Share
Ratio BOI BOM UB VB AVG Better when Type
Cash Earning Per Share 0.0224 0.0081 0.0058 0.0101 0.0116 Higher Profitability,
Liquidity
19. This is more reliable yardstick for measurement of performance of companies,
especially for highly capital intensive industries where provision for depreciation is
substantial. This measures the cash earnings per share and is also a relevant factor for
determining the price for the company’s shares. This method is not as poplar as EPS
and is used as a supplementary measure of performance.
Cash Earning Per Share
0.0224
0.0101
0.0058
0.0081
BOI
BOM
UB
VB
Interpretation:-
This ratio is very important for the external parties who are wanted to buy or invest in
the organization. As we show that as EPS the Cash EPS is high for Bank of India. So
it is clear that BOI’s position is very strong.
As EPS and Cash EPS is increases debt-equity and shareholders equity is also
increases. So that share capital is also increases for the organization.
9. Net Profit Margin
Ratio BOI BOM UB VB AVG Better when Type
Net Profit Margin 0.1329 0.1141 0.1170 0.1668 0.1327 Higher Profitability
The ratio is designed to focus attention on the net profit margin arising from business
operations before interest and tax is deducted. This ratio reflects net profit margin on
the total sales after deducting all expenses but before deducting interest and taxation.
This ratio measures the efficiency of operation of the company.
20. Net Profit Margin
0.1329
0.1668 BOI
0.1141
0.1170
BOM
UB
VB
Interpretation:-
The net profit margin of the Vijya Bank is the highest. The net profit margin, higher is
better for any industry. It suggests that Vijya Bank management is more efficient to
lend or/and borrow at most efficient way than that of the other banks. Performance of
the BOM, BOI and UB are equal and there is a scope of improvements.
10. Net Profit Margin
Ratio BOI BOM UB VB AVG Better when Type
Net Profit Margin 0.1329 0.1141 0.1170 0.1668 0.1327 Higher Profitability
Te ratio is designed to focus attention on the net profit margin arising form business
operations before interest and tax is deducted. This ratio reflects net profit margin on
the total sales after deducting all expenses but before deducting interest and taxation.
This ratio measures the efficiency o operation of the company. The net profit is
arrived at from gross profit after deducting administration, selling and distribution
expenses. The nonoperating incomes and expenses are ignored in computation of net
profit before tax, depreciation and interest.
This ratio could be compared with that of the previous years and with that of
competitors to determine the trend in net profit margins of the company and its
performance in the industry. This measure will depict the correct trend of
performance where there are erratic fluctuations in the tax provisions from year to
year.
21. Net Profit Margin
0.1329
0.1141
0.1668
0.1170
BOI
BOM
UB
VB
Interpretation:-
This is the most important ratio for the organization. Amongst all these banks Vijya
Banks profit is highest. But to interpret with the current ratio the liquidity of the Vijya
bank is not much good as compare with the other banks. So for improve the
performance of the organization the bank has to maintain the liquidity with reference
to the net profit margin.
11. Return On Asset
Ratio BOI BOM UB VB AVG Better when Type
Return on Asset 0.0119 0.0095 0.0099 0.0171 0.0121 Higher Profitability
The profitability of the firm is measured by establishing relation of net profit with the
total assets of the organisation. This ratio indicates the efficiency of utilization of
assets in generating revenue.
Return on Asset
0.0119
0.0171 BOI
0.0095
0.0099
BOM
UB
VB
22. Interpretation:-
Return on Assets is better as it is higher. The Vijya bank is the highest return on the
assets. It means the bank has the highest utilization of the assets during the year.
Other banks have average return on the assets. So for getting the higher return they
have to use maximum assets and this is the based on the net profit.
Now to interpret this ratio with the asset turnover ratio we can also know from with
this two ratio that the profitability of the organization. And again in this case also the
Vijya Bank has the strong position. Other bank’s profitability is near about the
average.
12. Asset Turnover Ratio
Ratio BOI BOM UB VB AVG Better when Type
Asset Turnover 0.0894 0.0828 0.0850 0.1024 0.0899 Lower Activity
This measures the company’s ability to generate sales revenue in relation to the size
of the asset investment. A low asset turnover may be remedied by increasing sales or
by disposing of certain assets or both. To assist in establishing which part of the asset
structure I not being used efficiently, the asset turnover ratio should be sub-analyzed.
The higher the ratio indicates overtrading of total assets while a low ratio indicates
idle capacity.
Asset Turnover Ratio
0.0894
0.0828
0.1024
0.0850
BOI
BOM
UB
VB
23. Interpretation:-
As this ratio is lower the better then the Bank of Maharastra’s position is very good
but to interpret with the return on assets the Bank of Maharastra is very week and the
profitability of the organization is also lower then other banks.
Now to interpret both the return on assets and asset turnover ratio with the net profit
margin ratio the Vijya bank is the most efficient bank amongst all the four banks.
So recommendation to each bank regarding assets turnover and the profitability with
reference to present market position.
13. Bad Debt Turnover
Ratio BOI BOM UB VB AVG Better when Type
Bad Debt Turnover 83.5120 - 0.0900 - Lower Activity
This ratio indicates the efficiency of the credit control procedures of the company. Its
level will depend on the type of business. The actual ratio is compared with the target
or norm to decide whether or not it is acceptable.
Bad Debt Turnover Ratio
0.0900
83.5120
BOI UB
Interpretation:-
This ratio is as lower as better. Here only two banks have bad debts but the Bank of
India has the highest bad debt which is not good for the organization. So for
increasing the profitability as well as performance of the organization the organization
have to decrease the bad debt with reference to the Sales or Income. Other banks have
no bad-debt so their profitability and the performance is good and the business of the
organization is running very well.
24. Ratios BOI BOM UB VB AVG Better when Type
Profit Per Employee 234.6193 214.8937 560.2391 353.8457 267.7862 Higher Profitability
Expense Per Employee 1530.9519 1668.1305 4228.1776 1767.4388 1655.5071 Lower Profitability
Profit Per Employee
234.62 214.89
560.24
353.85
600.00
500.00
400.00
300.00
200.00
100.00
0.00
BOI BOM UB VB
Banks
Profit
Profit Per Employee
Expense Per Employee
1530.95 1668.13
4228.18
1767.44
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
BOI BOM UB VB
Banks
Expenses
Expense Per Employee
14. Profit Per Employee
15. Expenses Per Employee
Profit per Employee is measured that how much the organization getting from the
employee.
Interpretation:-
From the above both graph we can interpret that the expanse per employee is higher
then the profit per employee. So for improve the performance of the organization
there are two ways one is to decreases the expenses on the employee. And the another
way is to decrease the staff of the organization. And this is for all the four banks.
LIMITATION OF THE RATIO ANALYSIS
- Single year’s ratio has limited utility
- Other factors must be considered
- Use of one ratio is misleading
- Investigation Necessary
- Rigidity harmful
25.
26.
27. UTILITY OF RATIO ANALYSIS
1. PROFITABILITY:
Useful information about the trend of profitability is available from profitability ratios. The gross profit
ratio, net profit ratio and ratio of return on investment give a good idea of the profitability of business. On
the basis of these ratios investors can get an idea about the overall efficiency of managers and bank as
well as other creditors draw useful conclusion about repaying capacity of the borrowers.
2. LIQUIDITY:
In fact, the use of ratios mode initially does ascertain the liquidity of business. The current ratio, liquid
ratio and acid test ratio will tell whether the business will be able to meet its current liabilities and when
they matter. Banks and other lenders will be able to conclude from these ratio whether the firm will be
able to pay regularly the interest and loan installments.
3. EFFICIENCY:
The turnover ratios are excellent guide to measure the efficiency of Manager For example, the stock
turnover will indicate how efficiency is being made the debtors turnover will indicate the efficiency of
collection department and assets turnover shows the the efficiency with which the assets are used in
business. Such ratios related to present a good picture of the success or otherwise of the business.
4. INTER FIRM COMPARISION:
The absolute ratios of a firm are not of much use, unless they are compared with similar ratios of other
firms belonging to the same industry. This is inter firm comparison, which shows the strength and
weaknesses of the firm as compared to other firms and will indicate correctives measures.
28. 5. INDICATE TREND:
The ratios of the last three to five years will indicate the trend in the respective fields. For Example, the
current ratio of a firm is lower than the industry average, but is the ratio of last five years shows an
improving trend, it is an encouraging trend reverse may also be true. A particular ratio of a company for one
year may compare favorably with industry average but, if its trend shows a deteriorating position. It is not
desirable. Only ratio analysis will provide this information.
6. USEFUL FOR BUDGETARY CONTROL:
Regular budgetary reports in a business whether the system of a budgetary control is in use. It various ratios
are presented in these reports, it will give a fairly good idea about various aspects of financial position.
7. USEFUL FOR DECISION-MAKING:
Ratios guide the management in making some of the important decisions. Suppose, the liquidity ratio shows
an unsatisfactory position, the management may decide to get addition liquid funds. Even for capital
expenditure decisions, the ratio of return on investment will guide the management. The efficiency of
various departments can be judge on the basis of their profitability ratios and efficiency of each department
can thus be determined.
LIMITATIONS OF RATIO ANALYSIS
ERICH HILBERT points out that it is essentials for a person analyzing
business performance to have a clear awareness of the tests he should apply
them. Temptation arises in financial ratio analysis to run all the numbers.
Yet selected only a few relationships, when would provide clues for
judgment.
There is clearly some latitude for window dressing. Within limits, a
company may be able to arrange its current assets and liabilities so as to
have the desired ratios at the time; the balance sheet is presented to
stockholders.
29. The valuation contained in the final statement does not represent the actual
position because it is based on the assumption that the financial statement
presents a seasonable picture of what is happening in the business. The
information relates to only a particular period and cannot be relied upon
excessively.
Financial standard data are not exact. Statements are only like interim
reports. Moreover many management ratios are based on data, some or all of
which are known and factual and therefore, to be related with great caution.
Financial statements are generally based on historical or original cost. The
current economic conditions are ignored.
V.V.Desai points and that the advancing artisting of the technique of the
ratio analysis has miserly failed to accomplish the expected impeccability or
immaculacy. More over it has made the technique more complicated and
complex for beyond the understanding of ordinary businessman.
Not all ratios and percentage are significant and useful. One should beware
of the temptation to calculate them for their own shake.
R.H Prker is of the opinion that the limitation of conventional accounting
should always be kept in mind out that accounting figures should not be
treated as more precise they really are.
A ratio is of little value in isolation. It is necessary to have some standards
with which to compare it. The standard may be budgeted one. It may be
based on the past performance of the company. It may be based on industry
comparison.
In using ratio computed by others, one should realize that the computation of
a particular ratio ha not necessary been standardized.
A frequent comparison of ratios between companies is questionable
particularly when there are important differences between companies. Such
as industry the nature of comparisons etc.
Most ratios represent average and, therefore, may tend to obscure large
variations in the underlying causative factors above and below the average.
Ratios are based on financial statement suffer from the limitation in he rent
in this statement.
Changes in many ratios are closely associated and connected with one
another.
Ratios are likely to misused. There are some situations in which they may
appear to this misleading.
30. West wick observes that ratios need the upper and lower war things lines
because in most case they have an optimum level.
While comparing the ratio of a particular firm with those of similar firms, the difference between
the firms should be recognized. For example, methods of accounting operations and financing.
SELECTING FINBANCIAL RATIOS:-
There are three relationship: - Safely, Structure and efficiency. Each is present in
a business regardless of the nature of the activity and all are friend in most financial
statement analysis. Safely relationship can be assessed by relative liquidity. The structure
relationship is a measure of the composition of the asset liability and equally structure of
a company. This would indicate company’s ability to with stand business adverse
condition over the long run. Efficiency relationship indicates effectiveness with which the
earning potential of the firm is utilized. It depends on both the assets at the disposal of
management to use the efficiently. The classification of variables is an important step
towards financial analysis.
The principal of deviant ratios must not guide the analysis, but they must instead
consider the nature of the favorable ratios, to determine as to what extent they offset the
effect of those, which are negative. The analyst must learn to recognize compensating
advantages. It may happen that in spite of variant ratios, the financial manager may
permit the company to prosper by maintaining an unorthodox financial structure, analyst
must be fully aware that deficiencies in one area can be offset straight in other areas and
that as a collorary, no company can or should be average in all aspects of financial
balance. “ Ratio analysis involves a study of the total financial picture. By passing his
conclusion upon a through understanding of the importance of each ratio, the analyst can
recommend and indicate positive action with confidence.”
1) The manager should be provided with a single key ratio that indicates
unequivocally the
31. 2) Degree of his success.
3) Ratio should be logically interred related.
4) Manager should not be given ratios which cannot be given virtuous which
cannot lead action by them.
5) A ratio must measure a material factor of the business.
6) The cost of obtaining information should be borne in mind.
7) The manager should be providing with the minimum number of ratios.
8) Different ratios are required for different industries and even for different
firms within an industry.