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Report_financial Statement analysis

# Report_financial Statement analysis

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07/03/2014

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# REPORT ON FINANCIAL STATEMENT ANALYSIS INTRODUCTION

OBJECTIVE: To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.

RATIO ANALYSIS: Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future. MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one

number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure

ratio or in absolute figures as “ so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements. MEANING OF RATIO ANALYSIS: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an annalist but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis . Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk. However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group.

OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA. Solvency1)Long term 2)Short term 3)Immediate B. Stability C. Profitability D. Operational efficiency E. Credit standing F. Structural analysis G. Effective utilization of resources H. Leverage or external financing FORMS OF RATIO: Since a ratio is a mathematical relationship between to or more variables / accounting figures, such relationship can be expressed in different ways as follows – A]As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B]As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12,00,000 & credit sales are Rs. 30,00,000. sothe ratio of credit sales to cash sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times that of cash sales.

The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. . TYPES OF COMPARISONS The ratio can be compared in three different ways – 1]Cross section analysis: One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. The standard ratio may be the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most successful firm in the industry. t h e n t h e g r o s s p r o f i t m a y b e d e s c r i b e d a s 2 0 % o f s a l e s [ 10. one item may be expressed as a percentage of some other item.000 & the amount of the gross profit is R s . 0 0 0 .000/50.000] STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1]Calculation of ratio 2]Comparing the ratio with some predetermined standards. net sales of the firm are Rs. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. The firms performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies.00.50.C]As a percentage: In such a case. 1 0 .00. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself. For example. So it involves the comparison of two or more firm’s financial ratio at the same point of time. 0 0 .00. the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. In interpreting the ratio of a particular firm.

whereas the industry average has not shown any significant changes. an assessment can be made about the trend in progress of the firm. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data\ 3]Combined analysis: If the cross section & time analysis. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The combined analysis as depicted diagram. . For example. over the years it has been declining for the firm. & is but it is the decreasing over the years approaching industry average. about the direction of progress of the firm. both are combined together to study the behavior & pattern of ratio.2]Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. By comparing the present performance of a firm with the performance of the same firm over the last few years. then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. in the above clearly which shows that the ratio of the firm is above the industry average. the ratio of operating expenses to net sales for firm may be higher than the industry average however.

The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. 2) If possible. 1) The dates of different financial statements from where data is taken must be same. 5) Last but not least. a group of ratios must be preferred. Therefore. otherwise there must be sufficient evidence that the data is correct. This will be conductive to counter checks. the analyst must find out that the two figures being used to calculate a ratio must be related to each other. otherwise there is no purpose of CLASSIFICATION OF RATIO CLASSIFICATION OF RATIO .PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions. 3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. 4) One ratio may not throw light on any performance of the firm. which must be taken care of. only audited financial statements should be considered. calculating a ratio. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. there are certain pre-requisites.

ratio of current assets to current liabilities or ratio of debt to equity. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet. Figures may be taken from Balance Sheet. E. there is no need to refer to the Revenue statement.BASED ON FINANCIAL STATEMENT BASED ON FUNCTION BASED ON USER 1] BALANCE 1] LIQUIDITY 1] RATIOS FOR RATIO 2] LEVERAGE RATIO SHORT TERM SHEET RATIO 2] REVENUE 3] ACTIVITY RATIOCREDITORS STATEMENT RATIO 3] 4] PROFITABILITY RATIO 2] RATIO FOR SHAREHOLDER COMPOSITE COVERAGE RATIOS FOR 5] 3] RATIO 4] RATIO FOR LONG TERM CREDITORS RATIO MANAGEMENT BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. P& P A/C. One-way of classification of ratios is based upon the sources from which are taken. While calculating these ratios. These ratios study the relationship between the . they are called Balance Sheet Ratios. or both.g.

of which one is found in the balance sheet & other in revenue statement.g. These ratio study the relationship between the profitability & the sales of the concern. These ratio help to judge the liquidity. of the concern. creditors turnover ratios. return on capital employed. Capital gearing ratio. 1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e. Expense ratio. profitability ratios & turnover ratios. Liquid ratio. & debt service ratios BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios. liquid ratios & current ratios. E. Revenue ratios are Gross profit ratio. 3]Composite ratio: These ratios indicate the relationship between two items. 2]Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. and Stock working capital ratio. . b) Other composite ratios e. There are two types of composite ratiosa) Some composite ratios study the relationship between the profits & the investments of the concern. Debt equity ratio. dividend payout ratios.g. Net operating profit ratio. Stock turnover ratio. Operating ratio.g. return on equity capital etc. return on proprietors fund. Net profit ratio. leverage ratios. activity ratios.assets & the liabilities. Balance sheet ratios are Current ratio. debtors turnover ratios. solvency & capital structure of the concern. and Proprietory ratio.

2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e. debt equity ratios. operating ratios. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e. dividend payout ratios & debt service ratios. return on investment. expenses ratios b) It shows the relationship between profit & investment e. & Proprietory ratios. BASED ON USER: 1]Ratios for short-term creditors: Current ratios. return on equity capital . stock turnover ratios.g.g. gross profit ratios. liquid ratios. 3] Activity ratios: It shows relationship between the sales & the assets.g. return on equity capital. It is also known as Turnover ratios & productivity ratios e. 4] Profitability ratios: a) It shows the relationship between profits & sales e. operating net profit ratios. capital gearing ratios. stock working capital ratios 2]Ratios for the shareholders: Return on proprietors fund.g. debtors turnover ratios.g.

proprietor ratios. turnover ratios. expenses ratios 4]Ratios for long-term creditors: Debt equity ratios. . operating ratios.3]Ratios for management: Return on capital employed. return on capital employed.

Quick/Acid-Test ratio. and Cash ratio. which indicate the liquidity of a company. These ratios are discussed below . are Current ratio. The ratios.LIQUIDITY RATIO: -Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations.

with in a year. It is expressed in the form of pure ratio. 2:1 Formula : Current assets Current ratio = Current liabilities The current assests of a firm represents those assets which can be. as originally contemplated. converted into cash within a short period time.g. The current liabilities defined as liabilities which are short term maturing obligations to be met. E. normally not exceeding one year. It is also known as ‘working capital ratio’ or ‘ solvency ratio’. . in the ordinary course of business.CURRENT RATIO Meaning: This ratio compares the current assests with the current liabilities.

marketable securities. semiCurrent assets include cash and bank balances. for bad and (CL).Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities materials. debtors (net of provision . inventory of raw finished and finished goods.

which will become liquid within approximately twelve months with liabilities. which will be due for payment in the same period and is intended to indicate whether there are sufficient short-term assets to meet the short. and prepaid expenses. The higher the current ratio. cash immediately or at a short notice without diminution of value. the greater the short-term solvency.term liabilities. This compares assets. that is the entity is under utilizing its current assets.e. LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. This ratio measures the liquidity of the current assets and the ability of a company to meet its shortterm debt obligation.g. Formula: Quick assets Liquid ratio = Quick liabilities . bills payable. bank credit. Current liabilities consist of trade creditors. bills receivable. It is expressed in the form of pure ratio. CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading. dividends payable and outstanding expenses. i.. CR measures the ability of the company to meet its CL. Recommended current ratio is 2: 1. provision for taxation. which can be converted into. Liquid ratio compare the quick assets with the quick liabilities. E. The term quick assets refer to current assets. 1:1.doubtful debts).

CASH RATIO Meaning: This is also called as super quick ratio. which are highly liquid. This ratio considers only the absolute liquidity available with the firm. a quick ratio of 1:1 is considered good. This is a fairly stringent measure of liquidity because it is based on those current assets. Formula: Cash + Bank + Marketable securities Cash ratio = Total current liabilities Since cash and bank balances and short term marketable securities are the most liquid assets of a firm. short-term marketable securities. QR indicates the extent to which a company can pay its current liabilities without relying on the sale of inventory. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets.Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those current assets that can be converted into cash immediately without any value strength. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. Generally. One drawback of the quick ratio is that it ignores the timing of receipts and payments. QA includes cash and bank balances. financial analysts look at the cash ratio. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm. and sundry debtors. .

Formula: NPAT Earning per share = Number of equity share The higher EPS will attract more investors to acquire shares in the company . the earning per share are determined by dividing net profit by the number of equity shares. If there is only one class of shares. EPS measures the profits available to the equity shareholders on each share held. An earnings per Share represents earning of the company whether or not dividends are declared.INVESTMENT / SHAREHOLDER EARNING PER SAHRE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization.

as it indicates that the business is more profitable enough to pay the dividends in time. Formula: Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Ordinary Shares DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship between the dividend paid to equity shareholders out of the profit available to the equity shareholders. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held. Formula: Dividend per share Dividend Pay out ratio = ___________________ *100 Earning per share D/P ratio shows the percentage share of net profits after taxes and after preference .

It is expressed as a pure ratio. The Capital-gearing ratio shows the relationship between two types of capital viz: . Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts.dividend has been paid to the preference equity holders. Formula: Preference capital+ secured loan Capital gearing ratio = Equity capital & reserve & surplus .equity capital & preference capital & long term borrowings. This is also known as leverage or trading on equity. GEARING CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt.

can comfortably meet its operating expenses and provide more returns to its shareholders. how much amount is . It measures the efficiency of production as well as pricing. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost.Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a concern. The relationship between profit and sales is measured by profitability ratios.Meaning: This ratio measures the relationship between gross profit and sales. selling & inventory. This ratio shows the profit that remains after the manufacturing costs have been met. GROSS PROFIT RATIO:. purchase. which generates a substantial amount of profits per rupee of sales. There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin. A firm. This ratio helps to judge how efficient the concern is I managing its production. how productive the concern . PROFITABILITY These ratios help measure the profitability of a firm. how good its control is over the direct cost.

pricing and tax management. It means that the * 100 . the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm. Jointly considered. administration. financing. RETURN ON CAPITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. Formula: NPAT Net profit ratio = ______ * 100 Net sales This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. The term fund employed or the capital employed refers to the total long-term source of funds.left to meet other expenses & earn net profit. Formula: Gross profit Gross profit ratio = Net sales NET PROFIT RATIO:Meaning: Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage. selling. It measures the overall efficiency of production.

Formula: NPAT Return on capital employed = Capital employed *100 FINANCIAL These ratios determine how quickly certain current assets can be converted into cash. inventory/stock turnover ratio. fixed assets turnover ratio. Alternatively it can also be defined as fixed assets plus net working capital. ROCE indicates the efficiency with which the long-term funds of a firm are utilized.capital employed comprises of shareholder funds plus long-term debts. and total assets turnover ratio. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of investment in various assets. They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. average collection period. It is the sum of long-term liabilities and owner's equity. These are described below: . Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. The important turnover ratios are debtors turnover ratio.

Formula: . at the beginning and at the end collected.DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. from customers. It measures the liquidity of a firm's credit sales are the gross credit Average debtors are the average of debtors DTO. Net sales minus returns. The higher the of the year. This ratio shows how rapidly debts are INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period. if any. the better it is for the organization. Formula: Credit sales Debtors turnover ratio = Average debtors debts.

turnover may also result from a low level of outs and loss of sales and inventories at the be However. this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated. which may lead to frequent stock customer goodwill.COGS Stock Turnover Ratio = Average stock ITR reflects the efficiency of inventory management. averages may used when a flow figure (in this case. However. In general. FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. PROPRIETORS . cost of goods sold) is related to a stock figure (inventories). The higher the ratio. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low). a high inventory inventory. For calculating ITR. the more efficient is the management of inventories. and vice versa. the average of beginning and the end of the year is taken. Formula: Net sales Fixed assets turnover = Net fixed assets This ratio measures the efficiency with which fixed assets are employed.

Total assets also know it as net worth. It relates shareholders fund to total assets. It is usually expressed in the form of percentage. This ratio determines the long term or ultimate solvency of the company.RATIO: Meaning: Proprietary ratio is a test of financial & credit strength of the business. In other words. The ratio highlights . It helps to judge the quantum of inventories in relation to the working capital of the business. Formula: Proprietary fund Proprietary ratio = _________________ OR Total fund Shareholders fund Proprietary ratio = Fixed assets + current liabilities STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital. The purpose of this ratio is to show the extent to which working capital is blocked in inventories. Proprietary ratio determines as to what extent the owner’s interest & expectations are fulfilled from the total investment made in the business operation. Proprietary ratio compares the proprietor fund with total liabilities.

Alternatively. It shows the extent of funds blocked in stock.the predominance of stocks in the current financial position of the company. this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It indicates the composition & quality of the working capital. It is usually expressed as a pure ratio. This ratio also helps to study the solvency of a concern.g. It is expressed as a percentage. 2:1 Formula: Total long-term debt Debt equity ratio = Total shareholders fund . The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by debt equity ratio. E. DEBT EQUITY RATIO: MEANING: This ratio compares the long-term debts with shareholders fund. Formula: Stock Stock working capital ratio = Working Capital Stock working capital ratio is a liquidity ratio. It is a qualitative test of solvency. If investment in stock is higher it means that the amount of liquid assets is lower.

which the relationship between profit & investment by the proprietors in the concern. RETURN ON PROPRIETOR FUND: Meaning: Return on proprietors fund is also known as ‘return on proprietors equity’ or ‘return on shareholders investment’ or ‘ investment ratio’. It shows the speed at which payments are made to the supplier for purchase made from them. Return on proprietors fund is a profitability ratio. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity. Its purpose is to measure the rate of return on the total fund made available by the owners. It is a relation between net credit purchase and average creditors Net credit purchase .Debt equity ratio is also called as leverage ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. Formula: NPAT Return on proprietors fund = ____________________ * 100 Proprietor’s fund CREDITORS TURNOVER RATIO: It is same as debtors turnover ratio. Leverage is also known as ‘gearing’ or ‘trading on equity’. This ratio is of practical importance to prospective investors & shareholders. This ratio helps to judge how efficient the concern is in managing the owner’s fund at disposal. This ratio indicates the relationship between net profit earned & total proprietors funds.

IMPORTANCE OF RATIO ANALYSIS: As a tool of financial management. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. 4]Overall profitability. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1]Liquidity position.Credit turnover ratio = Average creditors Months in a year Average age of accounts payable = Credit turnover ratio Both the ratios indicate promptness in payment of creditor purchases. 5]Inter firm comparison . ratios are of crucial significance. It enhances credit worthiness of the company. Higher creditors turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid promptly. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditors. 3]Operating efficiency. 2]Long-term solvency.

The leverage ratios. will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. This ability is reflected in the liquidity ratio of a firm.6]Trend analysis. 3]OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. 1]LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. Ratio analysis reveals the strength & weaknesses of a firm in this respect. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. 2]LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors. is that it throws light on the degree of . relevant from the viewpoint of management. security analyst & the present & potential owners of a business. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of short term loans. for instance.

efficiency in management & utilization of its assets. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. In other words. that is. This is made possible by the use of trend analysis. one of the popular techniques is to compare the ratios of a firm with the industry average. If the results are at variance either with the industry average or with the those of the competitors. whether the . The various activity ratios measures this kind of operational efficiency. to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. 6]TREND ANALYSIS: Finally. ratio analysis enables a firm to take the time dimension into account. That is. dependent upon the sales revenues generated by the use of its assets. An inter firm comparison would demonstrate the firms position viceversa its competitors. take remedial measures. they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors. the solvency of a firm is. This is made possible due to inter firm comparison & comparison with the industry averages. 5]INTER – FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. the management is constantly concerned about overall profitability of the enterprise. in the ultimate analysis.total as well as its components. which are interested in one aspect of the financial position of a firm. This is possible if an integrated view is taken & all the ratios are considered together. whether the financial position of a firm is improving or deteriorating over the years. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. the firm can seek to identify the probable reasons & in light. In fact. 4]OVERALL PROFITABILITY: Unlike the outsides parties.

These limitations are described below: 1] Information problems > Ratios require quantitative information for analysis but it is not decisive about analytical output . For example. > The figures in a set of accounts are likely to be at least several months out of date. which give the decision-maker insights into the financial performance of a company. On the other hand. and so might not give a proper indication of the company’s current financial position. operating efficiency. LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations. the ratio may be low as compared to the norm but the trend may be upward.movement is favorable or unfavorable. which is important for decision making and forecasting. though the present level may be satisfactory but the trend may be a declining one. > Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. profitability and solvency of a firm. . ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant accounting data relationships. > The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. The advantages of ratio analysis can be summarized as follows: > Ratios facilitate conducting trend analysis. > Ratio analysis helps in the assessment of the liquidity.

> Even within a company. > Ratios are calculated on the basis of past financial statements. comparisons can be distorted by changes in the price level. They do not indicate future trends and they do not consider economic conditions.> Where historical cost convention is used. and employ similar production methods and accounting practices. 3] Inter-firm comparison > Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis. The movement in performance should be in line with the changes in price. The movement in performance should be in line with the changes in technology. > When comparing performance over time. > Selective application of government incentives to various companies may also distort intercompany comparison. asset valuations in the balance sheet could be misleading. not qualitative information. > When comparing performance over time. > Inter-firm comparison may not be useful unless the firms compared are of the same size and age. . Ratios based on this information will not be very useful for decision-making. there is need to consider the changes in technology. Comparing the performance of two enterprises may be misleading. > Ratios provide only quantitative information. > Changes in accounting policy may affect the comparison of results between different accounting years as misleading. there is need to consider the changes in price.

which is already appearing in the financial statement. The process of this appraisal is not complete . 3] 5 main areas:Ø Liquidity – the ability of the firm to pay its way Ø Investment/shareholders investment Ø Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital Ø Profitability – how effective the firm is at generating profits given sales and or its capital assets Ø Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets – information to enable decisions to be made on the extent of the risk and the earning potential of a business ROLE OF RATIO ANALYSIS: It is true that the technique of ratio analysis is not a creative technique in the sense that it uses the same figure & information.PURPOSE OF RATIO ANLYSIS: 1] To identify aspects of a business’s performance to aid decision making 2] Quantitative process – may need to be supplemented by qualitative Factors to get a complete picture. either individually or in relation to those of other firms in the same industry. Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of performance. At the same time. it is true that what can be achieved by the technique of ratio analysis cannot be achieved by the mere preparation of financial statement.

Thus proper comparison of ratios may reveal where a firm is placed as compared with earlier period or in comparison with the other firms in the same industry. This comparison may be in the form of intra firm comparison.until the ratio so computed can be compared with something. as the ratio all by them do not mean anything. inter firm comparison or comparison with standard ratios. Ratio analysis is one of the best possible techniques available to the management to impart the basic functions like planning & control. As the future is .

liquidity. it enables the interested persons to know the financial & operational characteristics of an organisation & take the suitable decision. which need the management attention in order to improve the situation. ratio calculated on the basis of historical financial statements may be of good assistance to predict the future.closely related to the immediate past. solvency. . profitability & overall performance. Ratio analysis also helps to locate & point out the various areas. activity.e. As the ratio analysis is concerned with all the aspect of a firms financial analysis i.

EVALUATION OF APLAB LIMITED THROUGH RATIO COMPANY PROFILE THE COMPANY – APLAB Limited is a professionally managed Public Limited company quoted on the Bombay Stock Exchange. VDE etc. Since its inception in 1962. APLAB enjoys worldwide recognition for the quality of its products. APLAB has been serving the global market with wide range of electronic products meeting the international standards for safety and reliability such as UL. Self-Service Terminals for Banking Sector and Fuel Dispensers for Petroleum Sector. business integrity and innovative engineering skills. They specialize in Test and Measurement Equipment. ABOUT APLAB: . Power Conversion and UPS Systems.

on time. as rated by our employees. + To be “ THE BEST ” company to work for. • It enjoys worldwide recognition for the quality of its business integrity & innovative engineering skills. To be the TOP INDIAN COMPANY as conceived by our customers. with in budget. VISION: • • To be a global player. MISSION: • To deliver high quality. It is a professionally managed 40 years old public limited company. engineered products. our customers & so to us. as per the customer specification in a manner profitable to both. . power conversion. It is quoted on BOMBAY STOCK EXCHANGE. recognized for quality & integrity. carefully. & UPS & fuel dispensers for petroleum sector. It specialized in Test & measurement instruments.• • Aplab started its operation in October 1962. • • It serves customer global customer par excellence. GOAL: • Goal at Aplab is extract ordinary customer service as we provide our customer needs in the personal service industry.

5]To create intellectual capital by investing in hardware and embedded software development. 3]To expand knowledge and remain at the leading edge in technology to serve the global market. VALUES & BELIEFS: Their values & beliefs required that they - . reward innovation and maintain healthy interpersonal relations within the organization. 4]To understand the customer’s needs and provide solutions than merely selling products.CORPORATE MISSION – 1]To achieve healthy and profitable growth of the company in the interest of our customers & the shareholders. 2]To encourage teamwork.

Focus on developing embedded system software has been also enhanced.ISO 9001:2000 Quality at APLAB is a part of our people’s attitude. THE 21 ST CENTURY SUCCESS – APLAB had planned to enter the 21st Century with a program for a fast and healthy growth in the global market based on company’s high technology foundation and the reputation of four decades for prompt customer service and as a reliable solution provider. which encourages interaction. After completing three years in the new era. We believe that professional services sector is poised to grow at a very rapid pace. discussion & ideas to improve work environment & increase productivity.• Treat employees with respect & give them an opportunity for input on how to continuously improve their service goals. professional development & recognition. • Foster an open door policy. to resolve customer service issues. we can say with pride that we have been delivering our promises to our customers and the shareholders. QUALITY IS OUR WORK CULTURE . Entire organization is committed to create an environment that encourages individual . • “Do it right the first time & every time” is their team commitment * our way of doing business. APLAB has entered the field of Professional Services starting with the Banking and the Petroleum Industry. it ensures as growth & prosperity. to ensure customer satisfaction. • Provide most effective & corrective action. • Offer opportunities for growth.

excellence and a personal commitment to quality. “Quality is everybody’s responsibility” and all strive to “do it right the first time”. In APLAB. It is therefore natural that APLAB Limited is certified for quality with ISO 9001:2000 registration. .

• Aplab will encourage its employees & suppliers to develop quality products prevent defects & make continual improvement in all processes. We have a large team of dedicated.QUALITY POLICY: • Aplab will deliver to its customer products & services that consistently meet or exceed their requirement. 100% customer satisfaction. On time delivery every time reduction is out going PPM to 10. QUALITY OBJECTIVE: • • • Aplab is an ISO 9001:2000 certifies company. The Science & Technology Ministry of the Govt.000 [4 sigma] RESEARCH AND DEVELOPMENT Developing innovative products with the latest technology is the core strength of APLAB. We spend more than 4% of the company revenue in Research & Development activities. Development of new product especially hi-tech intelligent product & electronic transaction control system. Specific areas in which the company carries out R&D 1. of India accredits our R&D Laboratories. . • Aplab will achieve this by total commitment & involvement of every individual. APLAB is recognized not only for manufacturing standard products but also in providing solutions and services as per the customer specifications. highly qualified skilled engineers who excel in the latest state-of-theart-technology.

Over 30 million U. Canada. import substitution. This will greatly help the company in facing competition in local markets from foreign companies.2. This is done to achieve state of the art in our design & to bring about improvement to get maximum performance / cost ratio. Improvement in the existing products & production processes. Through a continuous interaction with production& Quality Assurance Department takes up redesign of existing products. The ministry of science & technology. R&D is an ongoing process. Almost all the products manufactured by the company are import substitution items. Canada & USA. With the company. FUTURE PLAN OF ACTION Major R&D activity is concentrated around up gradation of product design & realignment of production processes to bring about improved quality at lower cost. Belgium. It has resulted in considerable saving of foreign exchange. Customizing the products to the customer’s specifications & adaptation of imported technology. Government of India. Dollars. EXPORT APLAB currently exports over 25% of its production to Western Europe. 4. and USA & Australia. Sweden. 3. which are fully developed in house. Development of products to suit exports markets. PRODUCTS OF APLAB: . recognizes the company’s R&D. The company has achieved its position of leadership in the Indian instrumentation industry & continuous to maintain it through its strong grip of technology.S.

Inverter. Our in house R&D group is constantly striving to scan the rapidly changing technology and offer suitable end to end solutions. DC Uninterruptible Power Supply) d. Isolation Transformer) c. MICR Cheque Processing and Smart Card based solutions. when we introduced INSTACASHIndia’s first indigenously manufactured ATM INSTACASH demonstrated APLAB’s skills in design. STABILIZER.a. LINE CONDITIONER. TEST & MEASUREMENT INSTRUMENTS b. DC/DC CONVERTERS. . HIGH POWER AC SYSTEMS (UPS. HIGH POWER DC SYSTEMS (DC Power Supply. POWER SUPPLIES. hardware manufacturing and software integrations. ATM INSTACASH 0. SMPS. We are into Self Service Delivery Systems. AC-DC POWER SUPPLY. Frequency Converter. ISOLATION TRANSFORMER ATM INSTACASH The Banking Automation Division of APLAB was launched in 1993. INVERTERS.

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