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COMPANY ANALYSIS The stock price has been found to depend on the intrinsic value of the company’s share to the extent of about 50% as per many research studies. Some of the shares of companies may be blue chip stock or growth stocks, which are expanding and diversifying and their growth rates are higher than the market averages. Many investors, who are particularly averse to risk, prefer income stocks. These stocks are expected to give consistent dividends and with a good record of income distribution. It is important to analyze the financial data of the company to assess its functioning and credibility. Elements of Financial Analysis Financial analysis is analysis of financial statements of a company to assess its financial health and soundness of its management. “financial Statement Analysis” involves a study of the financial statements of a company to ascertain its prevailing state of affairs and the reasons therefore. Such a study would enable the public and investors to ascertain whether one company is more profitable than the other and also to state the causes and factors that are probably responsible for this. Analysis and Interpretation: the analysis of financial statements includes: a. b. c. d. Comparison of the financial statements Ratio analysis of two to five years. Fund flow analysis Trend analysis

Ratio Analysis Ratio is a statistical yardstick that provides a measure of relationship between any two variables. It can be effectively used as a toll of management along with fund flow statements and trend analysis for interpretation of the financial statements. Ratios may be classified as: a. Revenue statement ratios: gross profit ratio, operating ratio, expense ratio, net profit ratio. b. Balance sheet ratios: current ratio, debt equity ratio, asset equity ratio, liquidity ratio. Use and Limitations of Financial Ratios Attention should be given to the following issues when using financial ratios: • A reference point is needed. To to be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms. • Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to paint a picture of the firm's situation. • Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available. • Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values. Fund Flow Analysis

therefore. (iii) Useful to internal Financial Management. Addition to investments. in planning replacement of plant facilities or in formulating dividend policies. The changes representing the sources of funds in the business may be issue of debentures. the Cash Flow Statement prepared on an estimated basis for the next accounting period will enable the management to plan and co-ordinate the financial operations probably. c. etc. The statement showing sources and uses of funds is properly kn own as Fund Flow Statements. Shorter the period. reserves and surplus. Since it gives a clear picture of cash inflow from operations (and not income flow of operation). Its main advantages are as follows: (i) Planning and Co-ordination of Financial Operations. Cash Flow Statements Cash Flow statement is an essential tool for short term financial analysis an planning. very useful to internal financial management in considering the possibility of retiring ling-term debts. It enables the management to account for situation when business has earned huge profits yet run without money or when it has suffered a loss and still has plenty of money at the bank. addition to funds. . Decrease in liabilities by paying off loans and creditors. Decrease in net worth by incurring losses. Additions to assets b. (iv) Profit and Cash Positions. The management comes to know how much cash is needed in the future and at what time and how can it be arranged-how much internally and how much from outside. Thus a comparison of original forecast with actual results may highlights trends of movement that might otherwise go undetected. (v) Short-term Financial Decisions. it is possible only from Cash Flow analysis and not from Fund Flow Statement. increase in net worth. Cash Flow Statement helps the management in taking short-term financial decisions. A comparison of cash flow statement of previous year with the budget for that year would indicate to what extent the resources of the enterprise were raised an applied according to the plan. The operation of business involves the conversion of cash into non-cash assets which are recovered back into cash form. Suppose. greater is the importance of Cash Flow Statement.2 The balance sheet of a company reveals its financial ststus at a point of time. withdrawal of funds from business. Cash Flow statement is also a control device for the management. Cash Flow Statement is useful is evaluating Financial policies and current cash position. if firm wants to know its state of solvency after one month from to date. (ii) A Control Device. Since cash is the basis for carrying on operations. d. Changes showing the uses of funds include a. It is especially useful in preparing cash budgets. it is. retention of earnings.