Subject: Financial Management

Financial Statement Analysis of

Carborundum Universal Ltd.

Submitted to;

Dr. P. R. Wilson
SMS, CUSAT

Submitted by,
Yuben Joseph
Roll No: 30
MBA – IB
SMS, CUSAT
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. They typically include four basic financial statements:

 Balance sheet
 Income statement
 Statement of retained earnings
 Statement of cash flows

1. Balance sheet: also referred to as statement of financial position or condition, reports

on a company's assets, liabilities, and Ownership equity at a given point in time.
2. Income statement: also referred to as Profit and Loss statement (or a "P&L"), reports
on a company's income, expenses, and profits over a period of time. Profit & Loss account
provide information on the operation of the enterprise. These include sale and the various
expenses incurred during the processing state.
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, particularly its
operating, investing and financing activities.
For large corporations, these statements are often complex and may include an extensive
set of notes to the financial statements and management discussion and analysis. The
notes typically describe each item on the balance sheet, income statement and cash flow
statement in further detail. Notes to financial statements are considered an integral part
of the financial statements.

Financial analysis refers to an assessment of the viability, stability and profitability of a

business, sub-business or project. It is performed by professionals who prepare reports
using ratios that make use of information taken from financial statements and other
reports. These figures just give the position of asset or the profit or loss of that company
in a particular year. It does not specify whether the company is growing or not, how much
profitable the company is now as compared to the previous years etc. To know about the
comparative analysis of these financial statements are to be done. These reports are
usually presented to top management as one of their bases in making business decisions.
Based on these reports, management may:
• Continue or discontinue its main operation or part of its business;
• Make or purchase certain materials in the manufacture of its product;
• Acquire or rent/lease certain machineries and equipment in the production of its goods;
• Issue stocks or negotiate for a bank loan to increase its working capital;
• Make decisions regarding investing or lending capital;
• Other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.

There are various methods to understand and interpret the financial statements. They
are:
I. Ratio Analysis
II. Break Even Analysis
III. Calculation of Leverage
IV. EBIT – EPS Analysis
Ratio

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical
values taken from an enterprise's financial statements. Often used in accounting, there
are many standard ratios used to try to evaluate the overall financial condition of a
corporation or other organization. Financial ratios may be used by managers within a firm,
by current and potential shareholders (owners) of a firm, and by a firm's creditors.
Security analysts use financial ratios to compare the strengths and weaknesses in various
companies. If shares in a company are traded in a financial market, the market price of
the shares is used in certain financial ratios.
Financial ratios quantify many aspects of a business and are an integral part of financial
statement analysis. Financial ratios are categorized according to the financial aspect of the
business which the ratio measures. Liquidity ratios measure the availability of cash to pay
debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios measure
the firm's use of its assets and control of its expenses to generate an acceptable rate of
return. Market ratios measure investor response to owning a company's stock and also
the cost of issuing stock.
Financial ratios allow for comparisons
• Between companies
• Between industries
• Between different time periods for one company
• Between a single company and its industry average
Ratios generally hold no meaning unless they are benchmarked against something else,
like past performance or another company. Thus, the ratios of firms in different
industries, which face different risks, capital requirements, and competition, are usually
hard to compare.

Various types of Ratios are;

Liquidity Ratios
They measure the liquidity of the form and its ability to meet the short team obligations;
also Liquidity ratios measure the availability of cash to pay debt.

Current Ratio:
Current Assests+ Loans∧ Advances
Current Liabilites + Provisions

The ideal value is 2:1

Quick Ratio
Current Assests−( Inventories∧Prepayments)
Current Liabilites−Bank Overdraft

Ideal Ratio is 1:1

Solvency Ratios
Long term financial stability if the firm is considered to be dependent on its ability to meet all
its liabilities.
Debt Equity Ratios=
LongTerm Debts
Shareholdrers funds

Ideal Value is 2:1

Activity Ratio (Efficiency Ratios):

They measure how effectively the firm employs its resources. It involves comparison between
levels of sales and investments in various accounts,

Inventory turnover ratio=

Cost of Goods sold
Average Inventory

Fixed assets turnover ratio=

Sales
¿ Assets

Total assets turnover ratio=

Sales
Total Assets

Working capital turnover ratio=

Net Sales
WorkingCapital

Debtors turnover ratio=

Net Sales
Debtors

Profitability Ratios
This ratio is used to assess the profit earned by a company and whether the profitability is
increasing or decreasing.

Return on Investment=
Net Profit
Investment

Gross profit Margin=

Gross Profit
×100
Sales
Net profit Margin=
Net Profit
× 100
Sales
EPS=
Net Profit after tax∧Pref ÷(Net Earnings )
No of Equity Shares

Break Even Analysis

It is a specific way of presenting and studying the inter relationship between cost, volume
and profit. Break even analysis establishes a relationship between revenues and costs with
respect to volume. It indicates the level of sales at which costs and revenue are in
equilibrium. The equilibrium point is known as breakeven point. This point is a no profit, no
loss point.

Calculation of Leverage

The use of long term fixed interest bearing debt and preference share capital along with
equity share capital is called financial leverage.

Operating Leverage
Contribution
Earningsbefore Interest ∧Tax
Financial Leverage
Earningsbefore Interest ∧Tax
Earnings before Tax
Combined Leverage
Contribution
Earningsbefore Tax
Thus, leverage is used to describe the firm’s ability to use fixed cost assets or funds to
increase the return to its owners i.e., equity shareholders.