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INTRODUCTION OF THE STUDY

Financial performance analysis is to identifying the financial strengths and weaknesses of the
firm by properly establishing the relationship between the items of balance sheet and profit and
loss account. It also helps in short-term and long term forecasting and growth can be identified
with the help of financial performance analysis. Financial performance analysis is usually carried
out to study the financial position of the company from the point of view of the shareholders,
debenture holders and financial institutions, statutory financial statement are prepared for
presenting a periodical review or report on progress by management and deal with the status of
investment in the use and results achieved during the period under review. The analysis of
financial statement is to evaluating the relationship between the component parts of financial
statement to obtain a better understanding of the firms position and performance. This analysis
can be undertaken by management of the firm or by parties outside the namely, owners, creditors
and investors.
The basic objective of financial statement is to assist in decision making. Decision making
requires a critical interpretation of published financial statements and comparative balance sheet.
The present study is conducted to assess the strength and weakness of Kerala Feeds Limited
Kalletumkkara, Thrissur by using various tools for analysis.
Organization being deliberate and purposive creations is created for the fulfillment of certain
designated objectives today the society large and complex institution with many people working
together. People have great expectation of their jobs organization structure determine the
efficiency of the individual and hence of the organization. Various positions in the organization
are grouped in various ways horizontally, vertically or both each position holders certain amount
of authority to perform organizational functions in certain way.
Organizational chart is the vital tool for providing information about organization relationship. It
shows the major functions the channel of formal authority etc. Organization is a human group
constituted for certain specified objectives largely depends up on the fact that human beings
effort are properly co-ordinate and integrated.
Human beings are the most precious part of the capacity of human resources depended upon the
management. Every organization success depends on its performance this study was done to
analyze the financial performance of Kerala Feeds Limited.
STATEMENT OF PROBLEM
Financial performance analysis of Kerala Feeds Limited is the problem under the study. A
company financial performance is highlighted by its financial statements like income statement,
balance sheet etc. The profitability, liquidity, solvency and overall efficiency of a company is the
main indicators of financial performance. For the purpose of indicating these kinds of
parameters, the annual financial statement of the company for the five years have been analyzed.
This study mainly covers the analysis of the financial position and operational strengths and
weakness of Kerala Feeds Limited.
OBJECTIVES OF THE STUDY
Primary Objectives
The primary objective of the study is to analyze and evaluate the financial performance of the
company.
Secondary Objectives
To assess the profitability position of the company for the period of five years.
To assess the liquidity position of the company.
To know the operating efficiency of the company.
To get better insight in to the strength and weakness of the company.
SCOPE OF THE STUDY
The study of financial performance conducted in Kerala Feeds Limited to know the financial
operation of the company. The study covers almost the entire area of financial operations
covered in Kerala Feeds Limited. The study has been conducted with the help of data obtained
from audited financial records. The audited financial records are the company annual reports
pertaining to past 5 years from 2006-07 to 20010-2011 and the audited financial records are
obtained from the companys annual report.
THEORETICAL BACKGROUND AND LITERATURE REVIEW
The financial statements are the end products of financial accounting. They are statement
containing financial information of a business enterprise. They are summarized periodical reports
of financial and operative data contained in the books of accounts, known as the General Ledger.
Financial statement may be defined as the statement containing summaries of detailed
information about the financial position and performance of an enterprise. They refer to a
package of statements such as balance sheets, and income statement. The basic purpose of
preparing financial statement is to convey to owners, creditors and the investors about financial
position of the enterprise.
Every organization has a purpose and it is generally stated in the form of mission or vision
statement. To achieve this purpose, organizations need finance, which is raised from the capital
market through debt or equity and such capital is raised either directly from the investors or
through intermediary institutions like Banks. Once capital is raised, the capital is invested in
assets, which can be broadly classified into fixed and current assets. Several factors determine
the choice of assets and proportion of investments in different types of assets. For instance,
banking industry will invest less on real fixed assets whereas automobile manufacturer would
invest substantial part of the capital to buy fixed assets. After raising capital and acquiring assets,
the business unit runs the operations and generates revenue.
Financial statement analysis is the process of examining relationships among financial statement
elements and making comparisons with relevant information. It is a valuable tool used by
investors and creditors, financial analysts, and others in their decision-making processes related
to stocks, bonds, and other financial instruments. The goal in analyzing financial statements is to
assess past performance and current financial position and to make predictions about the future
performance of a company. Investors who buy stock are primarily interested in a companys
profitability and their prospects for earning a return on their investment by receiving dividends
and/or increasing the market value of their stock holdings. Creditors and investors who buy debt
securities, such as bonds, are more interested in liquidity and solvency: the companys short-and
long-run ability to pay debts. Financial analysts, who frequently specialize in following certain
industries, routinely assess the profitability, liquidity, and solvencies of companies in order to
make recommendations about the purchase or sale of securities, such as stock and bonds.
Analysts can obtain useful information by comparing a companys most recent financial
statements with its results in previous years and with the results of other companies in the same
industry. Three primary types of financial statement analysis are commonly known as horizontal
analysis, vertical analysis, and ratio analysis.
FINANCIAL STATEMENTS
A financial statement may be defined as an organized collection of accounting information in a
systematic, logical and consistent manner with the users of accounting information. According to
the Kohler, "Financial statements are those statements which show both the performance and the
financial position. They indicate Balance Sheets, Income statements, Fund statements or any
supporting statements or other presentation of financial data derive from accounting records.
A set of financial statements is a structured representation of the financial performance and
financial position of a business and how its financial position changed over time. It is the
ultimate output of an accounting information system and has three components. They are:-
1. Income Statement
2. Balance Sheet
3. Statement of Cash flow

INCOME STATEMENTS
The income statement is an important component of a set of financial statements. It measures the
performance of a business during an accounting period by calculating one or more of the
following:
1. Gross Profit
2. Operating Income
3. Net Income
4. Earnings per Share (EPS)
There are four basic elements of a typical income statement. These are:
Revenues: Revenues are the earnings from usual business activities. In most cases, revenues are
earned from sales of goods and services.
Gains: Gains are the enhancements in the assets or the reductions in liabilities caused by
activities outside the usual course of business and which are eligible to be recorded according to
acceptable accounting practices.
Expenses: Expenses include consumption of assets or the creation of liability against the
business in the course of normal business activities.
Losses: Losses are the reductions in assets or the enhancements in liabilities caused by activities
other than those in the main course of business.

BALANCE SHEET
A balance sheet also known as the statement of financial position tells about the assets, liabilities
and equity of a business at a specific point of time. It is a snapshot of a business. A balance sheet
is an extended form of the accounting equation. An accounting equation is:
Assets = Liabilities + Equity
Assets are the resources controlled by a business, equity is the obligation of the company to its
owners and liabilities are the obligations of parties other than owners.
A balance sheet is named so because it lists all resources owned by the company and shows that
it is equal to the sum of all liabilities and the equity balance.
A balance sheet has two formats: account form and report form. An account form balance sheet
is just like a T-account listing assets on the debit side and equity and liabilities on the right hand
side. A report form of balance sheet lists assets followed by liabilities and equity in vertical
format.

STATEMENT OF CASH FLOW
A statement of cash flows is a financial statement which summarizes cash transactions of a
business during a given accounting period and classifies them under three heads, namely, cash
flows from operating, investing and financing activities. It shows how cash moved during the
period by indicating whether a particular line item is a cash in-flow or cash out-flow. The term
cash as used in the statement of cash flows refers to both cash and cash equivalents. Cash flow
statement provides relevant information in assessing a company's liquidity, quality of earnings
and solvency.

NATURE OF FINANCIAL STATEMENT

Recorded facts: Financial statements contain the fact relating to the business transaction
already recorded in the book of accounts. The unrecorded facts, whatever important they might
have not included in financial statements.
Accounting principles: In the interpretation of financial statements, certain accounting
principles, concepts, and convention are followed
Personal judgment: Personal judgment will have an impact on the financial statements.
Personal opinion, judgments and estimates are made while preparing the financial statement to
avoid any possibility of over statement of assets and liabilities, income and expenditure, keeping
in mind the convention of conservatism.

OBJECTIVES OF FINANCIAL STATEMENTS

The specific objectives include the following:
To provide information about economic resources and obligations of a business.
To provide information about the earning capacity of the business.
To provide information about cash flows.
To judge effectiveness of the management.
Provide information about activities of business affecting the society.
Disclosing accounting policies.

TYPES OF FINANCIAL ANALYSIS

Horizontal Analysis
When an analyst compares financial information for two or more years for a single company, the
process is referred to as horizontal analysis, since the analyst is reading across the page to
compare any single line item, such as sales revenues. In addition to compare dollar amounts, the
analyst computes percentage changes from year to year for all financial statement balances, such
as cash and inventory. Alternatively, in comparing financial statements for a number of years,
the analyst may prefer to use a variation of horizontal analysis called trend analysis. Trend
analysis involves calculating each years financial statement balances as percentages of the first
year, also known as the base year. When expressed as percentages, the base year figures are
always 100 percent, and percentage changes from the base year can be determined.


Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single financial statement as a
percentage of a total. The term vertical analysis applies because each years figures are listed
vertically on a financial statement. The total used by the analyst on the income statement is net
sales revenue, while on the balance sheet it is total assets. The approach to financial statement
analysis, known as component percentages, produces common-size financial statements.
Common-size balance sheet and income statements can be more easily compared, whether across
the years for a single company or across different companies.

Ratio Analysis

Ratio analysis enables the analysts to compare items on a single financial statement or to
examine the relationships between items on two financial statements. After calculating ratios for
each years financial data, the analysts can then examine trends for the company across years.
Since ratios adjust for size, using this analytical tool facilities intercompany as well as intra
company comparisons. Ratios are often classified using the following terms: profitability ratios
(also known as operating ratios), liquidity ratios, and solvency ratios. Profitability ratios are the
gauges of the companys operating success for a given period of time. Liquidity ratios are
measures of the short term ability of the company to pay its debts when they come due and to
meet unexpected needs for cash. Solvency ratio indicate the ability of the company to meets its
long-term obligations on a continuing basis and thus to survive over a long period of time. In
judging how well on a company is doing, analysts typically compare a companys ratios to
industry statistics as well as to its own past performance.
To have a clear understanding of the profitability and financial position of a business, the
financial statements will have to analyzed and interpreted. Financial analysis will give the
management considerable insight into the levels and areas of strength and weakness.




MEANING OF FINANCIAL ANALYSIS AND INTERPRETATION

The process of critical evaluation of the financial information contained in the financial
statements in order to understand and make decisions regarding the operations of the firm is
called Financial Statement Analysis. It is basically a study of relationship among various
financial facts and figures as given in a set of financial statements and the interpretation thereof
to gain an insight into the profitability and operational efficiency of the firm to assess its
financial health and future prospects.
The term interpretation means explaining the meaning and significance of the data so arranged. It
is the study of relationship between various components of the financial statements. Analysis is
useless without interpretation, and interpretation without analysis is difficult or even impossible.

SIGNIFICANCE OF FINANCIAL ANALYSIS

The demand for financial statement analysis is derived from the improvement in the decision
making by the user of accounts. Various users of accounts are:
1. Finance Manager: Financial analysis is focuses on the facts and relationship related to
managerial performance, corporate efficiency, financial strength, weakness and
creditworthiness of the company. A finance manager must be well equipped with
different tools of analysis to make rational decisions for the firm. The tools for analysis
help in studying accounting data so as to determine the continuity of the operating
policies, investment value of the business credit ratings and testing the efficiency of
operations.
2. Top Management: The importance of financial analysis is not limited to the finance
manager alone. Its scope of importance is quite broad which includes top management in
general and the other functional managers. It helps the management in measuring the
success or otherwise the companys operations, appraising the individuals performance
and evaluating the system of internal control.
3. Trade creditors: A trade creditor through an analysis of financial statements, appraise not
only the urgent ability of the company to meet its obligations but also judges the
probability of its continued ability to meet all its financial obligation in future.
4. Lenders: Suppliers of long term debt are concerned with the firms long term solvency
and survival. They analyze the firms, profitability overtime, its ability to generate cash to
pay interest and repay the principal and the relationship between various sources of
funds.
5. Investors: Investors, who have invested their money in firms shares, are interested about
the firms earnings. As such, they concentrate on the analysis of the firms present and
future profitability. They are also interested in the firm capital structure to ascertain its
influence on firms earning and risk.
6. Labour Unions: Labour Unions analyze the financial statements to assess whether it can
presently afford a wage increase and whether it can be absorb a wage increase through
increased productivity or by raising the prices.
7. Others: The economists, researchers, etc. analyze the financial statements to study the
present business and economic conditions. The government agencies need it for price
regulation, taxation and other similar purpose.

TOOLS OF FINANCIAL ANALYSIS

The most commonly used techniques of financial analysis are as follows:
Comparative Statements: These are the statements showing the profitability and the financial
position of a firm for different periods of time in a comparative form to give an idea about the
position of to two or more periods. It is usually applies to the important financial statements,
namely, Balance Sheet and Income Statement prepared in a comparative form.
The financial data will be comparative only when same accounting principles are used in
preparing statements. If this is not the case, the deviation in the use of accounting principles
should be mentioned as a footnote. Comparative figures indicate the trend and direction of
financial position and operating results. This is also known as horizontal analysis

Common Size Statement: These are the statements which indicate the relationship of different
items of a financial statement with some common item by expressing each item as a percentage
of the common item. The percentage thus calculated can be easily compared with the results
corresponding percentages of the previous year or some other firms, as the numbers are brought
to common base. Such statements also allow an analyst to compare the operating and financing
characteristics of two companies of different sizes in the same industry.
Advantages of the common size financial statement
1. One advantage of having the various amounts expressed in percentage is, the percentage
assets of any company can be compared to another company or to other companies in the
industry.
2. The size of the companies being compared, is not important. The companies being
compared may be small or big. Hence, it is termed as common size. Since size of the
company does not matter, it removes any kind of bias, while comparing companies.
Analyzing the operational activities of comparing companies can also be obtained.
3. Changes in different values pertaining to companys performance can also be ascertained
during a particular period. For example, if one wishes to know how the cost of goods sold
over a span of time has changed, the common size financial statement can be helpful.
4. A common size financial statement is used for predicting future trends and analyzing
prevailing trends in the industry.
Trend Analysis: It is a technique of studying the operational results and financial position over a
series of years. Using the previous years data of a business enterprise, trend analysis can be
done to observe the percentage changes over time in the selected data. The trend percentage is
the percentage relationship, which each item of different years bear to the same item in the base
year. Trend analysis is important because with its long run view it may point to basic changes in
the nature of the business.
Advantages of trend analysis
Reveal potentially fruitful areas of audit investigation
Detect significant variations over time
Be easily understood and communicated
Be readily accepted due to its widespread use

Disadvantages of trend analysis
Provides little insight into the root causes of variations
Fail to indicate what the entitys normal or benchmark position
Be undermined by frequent changes in financial reporting formats
Be heavily influenced by the choice of the base fiscal period.

Ratio Analysis

It describes the significant relationship which exists between various items of a balance sheet and
a profit and loss account of a firm. As a technique of financial analysis, accounting ratio
measures the comparative significance of the individual items of the income and position
statements. It is possible to assess the profitability, solvency and efficiency of an enterprise
through the technique of ratio analysis.
Advantages of Ratio Analysis
Simplifies financial statements: it simplifies the comprehension of financial statements.
Ratios tell the whole story of changes in the financial condition of the business.
Facilitates inter-firm comparison: it provides data for inter-firm comparison. Ratios
highlight the factors associated with successful and unsuccessful firm. They also reveal
strong firms and weak firms, overvalued and undervalued firms.
Helps in Planning: it helps in planning and forecasting. Ratios can assist management, in
its basic functions of forecasting. Planning, co-ordination, control and communications.
Makes inter-firm comparision possible: Ratio analysis also makes possible comparison of
the performance of different divisions of the firm. The ratios ae helpful in deciding about
their efficiency or otherwise in the past and likely performance in the future.
Help in investment decisions: it helps in investment decisions in the case of investors and
lending decisions in the case of bankers etc.


Limitation of Ratios Analysis
I. The ratios analysis is one of the most powerful tools of financial management. Though
ratios are simple to calculate and easy to understand, they suffer from serious limitations.
II. Limitations of financial statements: Ratios are based only on the information which has
been recorded in the financial statements. Financial statements themselves are subject to
several limitations. Thus ratios derived, there form, are also subject to those limitation.
For example, non- financial changes through important for the business are not relevant
by the financial statement. Financial statement are affected to a very great extent by
accounting conventions and concepts. Personal judgement plays a great part in
determining the figures for financial statements.
III. Comparitive study required: Ratios are useful in judging the efficiency of the business
only when they are compared with past results of the business. However, such a
comparison only provide glimpse of the past performance and forecasts for future may
not prove correct since several other factors like market conditions, management
policies, etc may affect the future operations.
IV. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final
regarding good or bad financial position of the business. Other things have also to be
seen.
V. Problems of price level changes: a change in price level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not clearly
indicate the trend in solvency and profitability of the company. The financial statements,
therefore, be adjusted keeping in view the price level changes if a meaningful
comparison is to be made through accounting ratios.
VI. Lack of adequate standard: no fixed standard can be laid down for ideal ratios. There are
no well accepted standards or rule of thump for all ratios which can be accepted as norm.
it renders interpretation of the ratios difficult.
VII. Limited use of single ratios: a single ratio, usually, does not convey much of a sense. To
make a better interpretation, a number of ratios have to be calculated which is likely to
confuse the analyst than help him in making any good decision.
VIII. Personal bias: ratios are only means of financial analysis and not an end in itself. Ratios
have to interpret and different people may interpret the same ratio in different way.
IX. Incomparable: not only industries differ in the nature, but also the firms of the similar
business widely differ in their size and accounting procedures etc. it makes comparison
of ratios difficult and misleading.

Cash flow Analysis: It refers to the analysis of actual movement of cash into and out of an
organization. The flow of cash into the business is cash inflow or positive cash flow and the flow
of cash out of the firm is called as cash outflow or a negative cash flow. The difference between
the inflow and outflow of cash is the net cash flow. Cash flow statement is prepared to project
the manner in which the cash has been received and has been utilized during an accounting year
as it shows the sources of cash receipts and also the purpose for which payment are made. Thus,
it summarizes the cause for the changes in cash position of a business enterprise between dates of
two balance sheet.

(a) Objectives of Cash Flows Analysis
I. To show the causes of changes in cash balance between two balance sheet dates
II. To indicate the factors contributing to reduction of cash balance in spite of increase in
sales and profit and vice versa.
(b) Advantages of Cash Flow Analysis
I. It gives a clear picture of the causes of changes in the cash flow position of a firm. It is
very useful in ascertaining the current cash position.
II. It is an important tool of short term financial planning. The repayment of loans,
replacement of an asset and such other programmes can be planned on its basis.
III. It indicates the reason for the reduction of cash balance in spite of increase in income or
for increase of cash balance in spite of decrease in income.
IV. It helps to control cash expenditure by comparing cash flow statement with cash budget.
V. It helps the management in ascertaining how much cash is needed, from which sources it
will be raised, how much can be raised internally and how much from external source.
VI. The projected cash flow statement helps in planning for the investment of surplus or
meeting the deficit. It is important for capital budgeting decisions.

ROLE OF FINANCIAL ANALYSIS IN FINANCIAL MANAGEMENT
Financial analysis today is performed by various users of financial statements. Investors and
management perform the financial analysis to understand how profitably or productively the
assets of the company are used. Lenders and suppliers of good look for the ability of the firm to
repay the dues on time. For instance, as a deposit holder of a bank, you would be interested I
liquidity of the bank and would expect the bank to pay you the amount when you need.
Customers would like to know the long term solvency of the bank to get continued support. For
example, as a borrower, you would like your bank to be healthy and profitable since you will be
depending on the bank for your future needs. Of course, employees would be interested in
profitability as well as liquidity of the bank. Finance managers not only prepare financial
statements but also analyze the same to get further insight on the performance of the
organization. They need to examine the organization from the perspective of several users so that
they can follow the needs of them and satisfy several stakeholders. Sometimes, profitability
might be affected when the managers try to satisfy the needs of various stakeholders but if you
focus too much on profitability, it might affect the organization in other ways. For instance, we
would expect that our deposit holder need liquidity. If we plan for more liquidity, it might affect
profitability. On the other hand, if we continue to have low liquidity, we may not get funds or we
need to pay more interest to attract funds.
While financial analysis is often used for evaluating current or historical performance,
management uses the input of such analysis for future planning exercise. For instance, in
preparing budgets, the inputs of financial analysis are extensively used. Financial analysis
provides linkage between operating activities and funding activities. Normally, top management
sets the goal and operational managers then determine the level of operation required to achieve
the goal. It would be difficult to increase the level of operation without any investments unless
there is a huge idle capacity. Thus increased activity demands more addition to assets and this in
turn puts a demand for capital. The first step in this process is to know how much of additional
assets we need and how much of capital we need to mobilize from various sources. Financial
analysis, which provides historical linkage between various financial components, is useful.
Suppose the top management fixes a goal to increase the net income by another 20% for the
coming year. Using profit to sales linkage, we can estimate additional turn over required to
achieve the goal. Once we know additional turnover, it is possible for us to assess how much of
additional assets are required (fixed and current assets in the case of manufacturing companies)
and then additional funds that are required to buy the assets. Thus financial analysis is a
prerequisite for financial planning

STEPS INVOLVED IN FINANCIAL STATEMENT ANALYSIS
I. Reorganization and re-arrangement of the financial statement.
II. Establishment of significant relationships between the individual components of profit
and loss account and balance sheet by different tools of analysis like ratio, common size,
trend percentage, etc.
III. Evaluation of the significance of comparative data obtained by applying tools of analysis.