REVIEW OF LITERATURE

CHAPTER 5

REVIEW OF LITERATURE

Literature review was done through by referring previous studies, articles and
books to know the areas of study and analyze the gap or study not done so far. There
are various studies were conducted relating to operational performance of the
company from which most relevant literatures were reviewed.

Kennedy and Muller (1999), has explained that “The analysis and
interpretation of financial statements are an attempt to determine the significance and
meaning of financial statements data so that the forecast may be made of the prospects
for future earnings, ability to pay interest and debt mat urines(both current and long
term)and profitability and sound dividend policy”.

T.S.Reddy and Y.Hari Prasad reedy (2009), have stated that “The statement
disclosing status of investments is known as balance sheet and the statement showing
the result is known as profit and loss account”.

Peeler J.Pastula(2006),he defined that a sound business analysis tells others

a lot about good sense and understanding of the difficulties that a company will face.
We have to make sure that people know exactly how we arrived to the final financial
positions. We have to show the calculation but we have to avoid anything that is too
mathematical. A business performance analysis indicates the further growth and the
expansion .It gives a physiological advantage to the employees and also a planning
advantage.

I.M.Pandey (2007) ,had started that the financial statements contain

information about the financial consequences and sources and uses of financial
resources ,one should be able to say whether the financial condition of a firm is good
or bad: whether it is improving or deteriorating. One can relate the financial variables
given in financial statements in a meaningful way which will suggest the actions
which one may have to initiate to improve the firm’s financial condition.

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Chidambaram Rameshkumar & Dr.N.Anbumani (2006), he argue that

Ratio analysis enables the business owner/manager to spot trends in a business and to
compare its performance and condition with the average performance of similar
businesses in the same industry. To do this compare your own ratios for several
successive years, watching especially for any unfavorable trends that may be starting.
Ratio analysis may provide then all-important early warning indicators that allow you
to solve your business problems before your business is destroyed by them.

Jae K.Shim & Joel G.Siegel (1999), had explained that the financial
statements of an enterprise present the raw data of its assests, liabilities and equities in
the balance sheet and revenue and expenses in the income statement. Without
subjecting these to data analysis, many fallacious conclusions might be drawn
concerning the financial condition of the enterprise. Financial statement analysis is
undertaken by creditors, investors and other financial statement users in order to
determine the credit worthiness and earring potential of an entity.

Susan Ward (2008), emphasis that financial using ratios between key help
investors cope with the massive amount of numbers in company financial statements.
For example, they can compute the percentage of net profit a company is generating
on the funds it has deployed. All other things remaining the same, a company that
earns a higher percentage of profit compared to other companies is a better investment
option.

M Y Khan & P K Jain (2011), have explained that the financial position and
operations of the firm. Therefore, much can be learnt about a firm from a careful
examination of its financial statements as invaluable documents /performance reports.
The analysis of financial statements is, thus an important aid to financial analysis.

Elizabeth Duncan and Elliott (2004) had stated that the paper in the title of
efficiency, customer service and financial performance among Australian financial
institutions showed that all financial performance measures as interest margin, return
on assets, and capital adequacy are positively correlated with customer service quality
scores.

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Jonas Elmerraji (2005) tries to say that ratios can be invaluable tool for
making an investments decision. Even so, many new investors would rather leave
their decisions to fate than try to deal with the intimidation of financial ratios. The
truth is that ratios aren’t that initimidating, even if you don’t have a degree in business
or finance. Using ratios to make informed decisions about an investment makes a lot
sense, once you know how use them.

Carlos Cornelia (2007) had explained that any analysis of the firm, whether
by management, investors, or other interested parties, must include an examination of
the company’s financial data. The most obvious and readily available source of this
information is the firm’s annual report. The financial statement shall, in conformity
with generally accounting practice, fairly present the state of the affairs of the
company and the results of operation for the financial year.

Greninger et al. (1996), identified and the refined ratios using a Delphi study
in the areas of liquidity, savings, asset allocation, inflation protection, tax burden,
housing expenses and, insolvency .Based on the Delphi findings, they proposed a
profile of financial well-being for the typical family and individual.

Rachchh Minaxi A (2011),have suggested that the financial statement

analysis involves analyzing the financial statement to extract information that can
facilitate decision making .It is the process of evaluating the relationship between
component parts of the financial statements to obtain a better understanding of an
entity’s position and performance.

Salmi, T .and T. Martikainen (1994), in his “A review of the theoretical and

empirical basis of financial ratio analuysis”, has suggested that a systematic
framework of financial statement analysis along with the observed separate research
trends might be useful for furthering the development of research .If the research
results in financial ratio analysis are to be useful for the decision makers, the results
must be theoretically consistent and empirically generalizable.

John J.Wild, K.R.Subramanyam & Robert F.Hasley (2006), have said that
the financial statement analysis is the application of analytical tools and techniques to
general-purpose financial statements and related data to derive estimates and
inferences useful, in business analysis. Financial statement analysis reduces reliance

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on hunches, guesses, and intuition for business decisions. It decreases the uncertainty
of business analysis.

Bollen (1999) conducted a study on Ratio Variables on which he

found three different uses of ratio variables in aggregate data analysis: (1) as
measures of theoretical concepts, (2) as a means to control an extraneous factor, and
(3) as a correction for heteroscedasticity. In the use of ratios as indices of
concepts, a problem can arise if it is regressed on other indices or
variables that contain a common component. For example, the relationship
between two per capita measures may be confounded with the common
population component in each variable. Regarding the second use of ratios,
only under exceptional conditions will ratio variables be a suitable means
of controlling an extraneous factor.

Kristi Reale, CPA, CVA, published on 03/14/2011 in Business West

Performance management is an important component of running a business, and there
are many tools available to help a company identify, measure, and manage its
performance. The use of financial ratios is a time-tested, quantitative method of
analyzing a company’s financial statements and provides a detailed, clear picture of
the company’s financial performance. Financial ratios are also utilized by bankers and
other lenders to learn about a company’s health and determine its credit worthiness.
This article will provide an overview of the standard financial ratios most often used
by business owners, management teams and lenders.

On the April edition of the magazine I decided to write an article which was
complimentary to my January contribution which did a somewhat in-depth study of
classic indicator rules on the four majors through an edge ratio analysis. On this
article we discussed the possible inefficiencies related to classic indicator rules on the
daily charts but there was no precise system designed from these observations or any
hint as to how this would be done. In order to give traders a better idea of how to use
an edge ratio analysis to derive successful trading tactics I decided to write an article
pertaining exclusively to trading system design from an edge ratio analysis.

My latest article takes a piece of the January issue observations related with
the MACD indicator and uses them to generate a system which has profitable

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simulation results on the daily EUR/USD charts for the past 10 years of trading. The
article explains the criteria used to decide on a classic MACD tactic for this pair and
then goes into detail as how this leads to a fully functional trading system. Through
this article you can see how the edge ratio analysis gives me the initial information to
build a system and how I choose a particular exit tactic against another in order to
avoid any over-fitting of the strategy.

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