Financial Analysis

1. Techniques of Financial Analysis
By: Prof. Mohasin A. Tamboli
Email: mohasinat@gmail.com
Mob: 97660105601
Prof. M.A.Tamboli

2. Financial Analysis
• Accountability, Transparency and Reliability are the
pillars of a good corporate governance.
• Corporate governance means sound and efficient
management of corporate enterprise.
• All stakeholders have right to get full and fair information
of the affairs of the company
• Financial statement analysis is a tool to achieve good
corporate governance.
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3. Financial Statement?
• A financial statement (or financial report) is a formal
record of the financial activities of a business,
person, or other entity.
• For a business enterprise, all the relevant financial
information, presented in a structured manner and
in a form easy to understand, are called the financial
statements.
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4. Types of Financial Statement
1.Balance sheet: also referred to as statement of financial position,
reports on a company’s assets, liabilities at a given point in time.
2.Income statement: also referred to as Profit and Loss statement,
reports on a company’s income, expenses, and profits over a period
of time.
3.Statement of retained earnings: explains the changes in a company’s
retained earnings over the reporting period.
4.Statement of cash flows: reports on a company’s cash flow activities
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5. What is Financial Analysis?
• Financial analysis refers to an assessment of
the viability, stability and profitability of a
business
• When looking at a specific company, the
financial analyst will often focus on the income
statement, balance sheet, and cash flow
statement.
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6. Objectives of Financial Analysis
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Financial statements may be used by users for different purposes:
•Owners and managers require financial statements to make important
business decisions that affect its continued operations.
•Employees also need these reports in making collective bargaining
agreements (CBA) with the management.
•Prospective investors make use of financial statements to assess the
viability of investing in a business for making investment decisions.
•Financial institutions use them to decide whether to grant a long-term
bank loan or debentures
•Government entities (tax authorities) need financial statements to
ascertain the taxes and other duties declared and paid by a company.
•Vendors to assess the creditworthiness of the business.

7. Limitations of Financial Analysis
1. Mislead the user: The accuracy of financial
information largely depends on how accurately financial
statements are prepared. If their preparation is wrong, the
information obtained from their analysis will also be wrong
which may mislead the user in making decisions.
2. Not useful for planning: Since financial statements are
prepared by using historical financial data, therefore, the
information derived from such statements may not be
effective in corporate planning, if the previous situation
does not prevail.
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8. Limitations
3. Qualitative aspects : Financial statement analysis
provides only quantitative information about the
company's financial affairs. However, it fails to provide
qualitative information such as management labor
relation, customer's satisfaction, management's skills
and so on which are also equally important for decision
making.
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9. Limitations
4 . Wrong Judgement: The skills used in the analysis
without adequate knowledge of the subject matter
may lead to negative direction
5 Based on Historical Data: Accurate Forecasting is not
possible because financial statements are based on
historical data. Only Past trend can be analyze.
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10. Tools of Financial Analysis
• Cash Flow Analysis
• Fund Flow Analysis
• Ratio Analysis
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11. CASH FLOW
• Cash is the lubricant which keeps the wheels of any
business enterprise running smoothly.
• Cash plays vital role in day to day business activities like
purchase, pay creditors, meet operating expenses,
acquire assets, pay tax, interest etc.
• Hence there is need to manage cash inflow and outflow
strategically
• CASH FLOW SIMPLY MEANS NET INCOME BEFORE
DEDUCTION
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12. CASH FLOW STATEMENT
• A Cash Flow Statement is a Statement designed to
indicate changes in financial position of an enterprise on
cash basis.
• It summarizes the changes in cash positions of a
business enterprise between two balance sheet dates.
• It shows the movement of cash into and out of business
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13. FUND FLOW
• FUND :
The general public views the term ‘Funds’ as
Cash.
From business point of view ‘Funds’ is closely
related to decision – making process of business
(Value embedded in assets)
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14. FUND FLOW STATEMENT
• The statement prepared based on the concept of
‘Fund’ i.e. Working Capital is called ‘Fund Flow
Statement’
• It means the movement of funds, may be inflow or
outflow. It is said that there is:
I. Inflow of Fund : When the business transaction
results in increase in working capital
II. Out Flow of Fund: When the business transaction
results in decrease in working capital
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15. RATIO ANALYSIS
• RATIO ANALYSIS is one of the powerful tools of financial
analysis.
• It indicate a quantitative relationship between groups
which are used for evaluation and decision making.
RATIO:
Ratio is a simple mathematical expression of relationship
between two related items in quantitative form
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16. TYPES OF RATIOS
1. Balance Sheet Ratios: are those ratios which are
calculated to establish relationship between two
balance sheet items.
2. Income Statement Ratios: are those ratios calculated to
establish relationship between two P& L a/c items.
3. Composite or Mixed Ratios: are those ratios calculated
to establish relationship between a P&L a/c items and a
Balance Sheet items.
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17. THANK YOU !!!
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