Chapter 3

A STUDY OF FINANCIAL ANALYSIS
WITH REFERENCE TO TITAN (2021 -2022)
1. INTRODUCTION:
Finance is the life blood of business. Finance is required for establishing, developing and
operating the business efficiently. Finance means money or theacts of providing the means
of payments. It may deal with the ways in which businessmen, investors, governments,
financial institutions and individuals handle their money. Thus finance is the study of
money management. Every business activity requires financial support, hence finance is
related to different specialized areas. The main objective of financial performance analysis
to judge the financial health the undertaking and to judge the earning performance of the
organization and to provide the company with appraise for investment opportunity or
potentiality. This analysis is carried over about five years. This project deals with the
financial performance analysisin the organization. The ratio analysis, comparative analysis
and trend analysis are the tools to analyze the financial performance of the company. The
study reveals that the financial performance of the organization has been better. But the
company's profit over the last two years has been decreasing when compared to previous
years. So the management should take necessary steps to improve their financial position.
As a manager, you may want to reward employees based on their performance. How do
you know how well they have done? How can you determine what departments or
divisions have performed well? As a lender, how do decide the borrower will be able to
pay back as promised? As a manager of a corporation how do you know when existing
capacity will be exceeded and enlarged capacity will be needed? As an investor, how do
you predict how well the securities of one company will perform relative to that of
another? How can you tell whether one security is riskier than another? We can address all
of these questions through financial analysis.
Financial analysis is the selection, evaluation, and interpretation of financial data, along
with other pertinent information, to assist in investment and financial decision-making.
Financial analysis may be used internally to evaluate issues such as employee performance,
the efficiency of operations, and credit policies, and externally to evaluate potential
investments and the credit-worthiness of borrowers, among other things. The analyst draws
the financial data needed in financial analysis from many sources. The primary source is
the data provided by the company itself in its annual report and required disclosures. The
annual report comprises the income statement, the balance sheet, and the statement of cash
flows, as well as footnotes to these statements. Certain businesses are required by securities
SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 1

laws to disclose additional information. Besides information that companies are required to
disclose through financial statements, other information is readily available for financial
analysis. For example, information such as the market prices of securities of publicly-
traded corporations can be found in the financial press and the electronic media daily.
Similarly, information on stock price indices for industries and for the market as a whole is
available in the financial press. Another source of information is economic data, such as
the Gross Domestic Product and Consumer Price Index, which may be useful in assessing
the recent performance or future prospects of a company or industry. Suppose you are
evaluating a company that owns a chain of retail outlets. What information do you need to
judge the company's performance and financial condition? You need financial data, but it
doesn't tell the whole story. You also need information on consumer Financial ratios, a
reading prepared by Pamela Peterson Drake 2 spending, producer prices, consumer prices,
and the competition. This is economic data that is readily available from government and
private sources. Besides financial statement data, market data, and economic data, in
financial analysis you also need to examine events that may help explain the company's
present condition and may have a bearing on its future prospects. For example, did the
company recently incur some extraordinary losses? Is the company developing a new
product? Or acquiring another company? Is the company regulated? Current events can
provide information that may be incorporated in financial analysis. The financial analyst
must select the pertinent information, analyze it, and interpret the analysis, enabling
judgments on the current and future financial condition and operating performance of the
company. In this reading, we introduce you to financial ratios -- the tool of financial
analysis. In financial ratio analysis we select the relevant information -- primarily the
financial statement data -- and evaluate it. We show how to incorporate market data and
economic data in the analysis and interpretation of financial ratios. And we show how to
interpret financial ratio analysis, warning you of the pitfalls that occur when it's not used
properly. We use Microsoft Corporation's 2004 financial statements for illustration
purposes throughout this reading. You can obtain the 2004 and any other year's statements
directly from Microsoft. Be sure to save these statements for future reference.

2. HISTORY OF FINANCE
Finance as a study of theory and practice distinct from the field of economics arose in the
1940s and 1950s with the works of Markowitz, Tobin, Sharpe, Treynor, Black, and
Scholes, to name just a few. But particular realms of finance—such as banking, lending,
and investing, of course, money itself—have been around since the dawn of civilization in
some form or another.
Around 3000 BC, banking seems to have originated in the Babylonian/Sumerian empire,
where temples and palaces were used as safe places for the storage of financial assets—
grain, cattle, and silver or copper ingots. Grain was the currency of choice in the country,
while silver was preferred in the city.
The financial transactions of the early Sumerians were formalized in the Babylonian Code
of Hammurabi (circa 1800 BC). This set of rules regulated ownership or rental of land,
employment of agricultural labor, and credit. Yes, there were loans back then, and yes,
interest was charged on them—rates varied depending on whether you were borrowing
grain or silver.
By 1200 BC, cowrie shells were used as a form of money in China. Coined money was
introduced in the first millennium BC. King Croesus of Lydia (now Turkey) was one of
the first to strike and circulate gold coins around 564 BC—hence the expression, “rich as
Croesus.
2.1 Definitions of Finance:
“Financial may be defined as that administrative area or the set of administrative functions
in an organization which relates with the arrangementof cash and credit so that
organization may have the means to carry out its objective as satisfactorily as possible.”
3. FUNCTIONS OF FINANCE
1. Investment Decision
One of the most important finance functions is to intelligently allocate capital to long term
assets. This activity is also known as capital budgeting. It is important to allocate capital in

those long term assets so as to get maximum yield in future. Following are the two aspects
of investment decision
a. Evaluation of new investment in terms of profitability

b. Comparison of cut off rate against new investment and prevailing investment.
Investment decision not only involves allocating capital to long term assets but also
involves decisions of using funds which are obtained by selling those assets which become
less profitable and less productive. It wise decisions to decompose depreciated assets
which are not adding value and utilize those funds in securing other beneficial assets. An
opportunity cost of capital needs to be calculating while dissolving such assets. The correct
cut off rate is calculated by using this opportunity cost of the required rate of return (RRR)
2. Financial Decision
Financial decision is yet another important function which a financial manger must
perform. It is important to make wise decisions about when, where and how should a
business acquire funds. Funds can be acquired through many ways and channels. Broadly
speaking a correct ratio of an equity and debt has to be maintained. This mix of equity
capital and debt is known as a firm’s capital structure.
A sound financial structure is said to be one which aims at maximizing shareholders return
with minimum risk. In such a scenario the market value of the firm will maximize and
hence an optimum capital structure would be achieved. Other than equity and debt there
are several other tools which are used in deciding a firm capital structure.
3. Dividend Decision
It’s the financial manager’s responsibility to decide a optimum dividend policy which
maximizes the market value of the firm. Hence an optimum dividend payout ratio is
calculated. It is a common practice to pay regular dividends in case of profitability Another
way is to issue bonus shares to existing shareholders.
4. Liquidity Decision
It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s

profitability, liquidity and risk all are associated with the investment in current assets. In
order to maintain a trade off between profitability and liquidity it is important to invest

sufficient funds in current assets. But since current assets do not earn anything for business
therefore a proper calculation must be done before investing in current assets.
Current assets should properly be valued and disposed of from time to time once they
become non profitable. Currents assets must be used in times of liquidity problems and
times of insolvency
TYPES OF FINANCE
Because individuals, businesses, and government entities all need funding to operate, the
finance field includes three main subcategories:
 Personal finance
 Corporate finance
 Public (government) finance
1. Personal Finance
Financial planning involves analyzing the current financial position of individuals to
formulate strategies for future needs within financial constraints. Personal finance is
specific to an individual’s situation and activity. Therefore, financial strategies depend
largely on the person’s earnings, living requirements, goals, and desires.
Personal finance includes a range of activities, from purchasing financial products such
as credit cards, insurance, mortgages, to various types of investments. Banking is also
considered a component of personal finance because individuals use checking and savings
accounts as well as online or mobile payment services such as PayPal and Venmo.
2. Corporate Finance
Corporate finance refers to the financial activities related to running a corporation, usually
with a division or department set up to oversee those financial activities.
Start ups may receive capital from angel investors or venture capitalists in exchange for a

percentage of ownership. If a company thrives and decides to go public, it will issue
shares on a stock exchange through an initial public offering (IPO) to raise cash.

In other cases, a company might be trying to budget its capital and decide which projects
to finance and which to put on hold in order to grow the company. All these types of
decisions fall under corporate finance.
3. Public Finance
Public finance includes taxing, spending, budgeting, and debt-issuance policies that affect
how a government pays for the services it provides to the public. It is a part of fiscal
policy.
The federal and state governments help prevent market failure by overseeing the
allocation of resources, the distribution of income, and economic stability. Regular
funding is secured mostly through taxation. Borrowing from banks, insurance companies,
and other nations also helps finance government spending.
In addition to managing money in day-to-day operations, a government body also has

social and fiscal responsibilities. A government is expected to ensure adequate social
programs for its taxpaying citizens and to maintain a stable economy so that people can
save and their money will be safe.
MEANING OF FINANCIAL MANAGEMENT
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
OBJECTIVES OF FINANCIAL MANAGEMENT
The financial management is generally concerned with procurement, allocation and control
of financial resources of a concern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.

3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e. funds should be invested in safe ventures so
that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.
6. Maximizing profits by providing insights on, for example, rising costs of raw
materials that might trigger an increase in the cost of goods sold.
7. Tracking liquidity and cash flow to ensure the company has enough money on hand
to meet its obligations.
8. Ensuring compliance with state, federal and industry-specific regulations.
9. Developing financial scenarios based on the business’ current state and forecasts
that assume a wide range of outcomes based on possible market conditions.
10. Dealing effectively with investors and the boards of directors.
11. Ultimately, it’s about applying effective management principles to the company’s
financial structure.
COMPONENTS OF FINANCIAL MANAGEMENT:
1. Investment decisions:
It is settled resources (called as capital planning). The process will help in the additional
output for the savings with certain plans and taking risk in the flow.
2. Financial decisions:
The decision will helps to calculate the certain assumptions of our savings with all the
needed steps and helps to get profit in the future.
3. Dividend decision:
These steps will be taken care by the managers for to bring additional returns for their
investors by their techniques. Net benefits are by partitioned into two: Dividend for

shareholders: Dividend and the rate of it must be chosen.
Retained benefits: Amount of held benefit must be concluded which will depend on
development enhancement arrangements to the endeavour
FUNCTIONS OF FINANCIAL MANAGEMENT
1. Estimation of capital requirements:
A finance manager has to make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and future programmes and
policies of a concern. Estimations have to be made in an adequate manner which
increases earning capacity of enterprise.
2. Determination of capital composition:
Once the estimation have been made, the capital structure have to be decided. This
involves short- term and long- term debt equity analysis. This will depend upon the
proportion of equity capital a company is possessing and additional funds which have
to be raised from outside parties.
3. Choice of sources of funds:
For additional funds to be procured, a company has many choices like-
a. Issue of shares and debentures

b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and
period of financing.
4. Investment of funds:
The finance manager has to decide to allocate funds into profitable ventures so that
there is safety on investment and regular returns is possible.

5. Disposal of surplus:
The net profits decision have to be made by the finance manager. This can be done in
two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other

benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash:
Finance manager has to make decisions with regards to cash management. Cash is
required for many purposes like payment of wages and salaries, payment of electricity
and water bills, payment to creditors, meeting current liabilities, maintainance of
enough stock, purchase of raw materials, etc.
7. Financial controls:
The finance manager has not only to plan, procure and utilize the funds but he also has
to exercise control over finances. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.
IMPORTANCE OF FINANCIAL MANAGEMENT
Solid financial management provides the foundation for three pillars of sound fiscal
governance:
1. Strategizing
Identifying what needs to happen financially for the company to achieve its short- and
long-term goals. Leaders need insights into current performance for scenario planning, for
example.
2. Decision-making

Helping business leaders decide the best way to execute on plans by providing up-to-date
financial reports and data on relevant KPIs.
3. Controlling
Ensuring each department is contributing to the vision and operating within budget and in
alignment with strategy.
With effective financial management, all employees know where the company is headed,
and they have visibility into progress.
4. INTRODUCTION TO FINANCIAL STATEMENT:
Financial statements are prepared using facts relating to events, which are recorded
chronologically. We have to first record all these facts in monetary terms. Then, we have to
process them using all applicable rules and procedures. Finally, we can now use all this
data to generate financial statements.
4.1 Financial statement:
A financial statement is an organized collection of data according to logical and consistent

accounting procedures. Its purpose is to convey an understanding of some financial aspects
of a business firm. It may show a position at a moment of time as in the case of a balance
sheet, or may reveal a series of activities over a given period of time, as in the case of an
income statement.
Financial statements refer to such statements which contains financial information about an
enterprise. They report profitability and the financial position of the business at the end of
accounting period. The team financial statement includes at 5 statements which the
accountant prepares at the end of an accounting period. The statements are:
1. The Balance Sheet:
In financial accounting, a balance sheet or statement of financial position is a summary of

the financial balances of a sole proprietorship, a business partnership or a company. Assets,
liabilities and ownership equity are listed as of a specific date, such as the end of its
financial year. A balance sheet is often described as a "snapshot of a company's financial
condition". Of the four basic financial statements, the balance sheet is the only statement

which applies to a single point in time of a business' calendar year. A standard company
balance sheet has three parts: assets, liabilities and ownership equity.
2. Profit And Loss Account:
Based on this understanding, the nature of financial statements depends on the following
points:
a. Recorded facts:
We need to first record facts in monetary form to create financial statements. For this, we
need to account for figures of accounts like fixed assets, cash, trade receivables, etc.
b. Accounting conventions:
Accounting Standards prescribe certain conventions applicable in the process of

accounting. We have to apply these conventions while preparing financial statements. For
example, valuation of inventory at cost price or market price, depending on whichever is
lower.
c. Postulates;
Apart from conventions, even postulates play a big role in the preparation of financial
statements. Postulates are basically presumptions that we must make in accounting. For
example, the going concern postulate presumes a business will exist for a long time.
Hence, we have to treat assets on a historical cost basis.
d. Personal judgments:
Even personal opinions and judgments play a big role in the preparation of financial
statements. Thus, we have to rely on our own estimates while calculating things like
depreciation.
3. Income Statement:
Income statement also referred as profit and loss statement (P&L), earnings statement,
operating statement or statement of operations is a company's financial statement that
indicates how the revenue is transformed into the net income. It displays the revenues
recognized for a specific period, and the cost and expenses charged against these revenues,
including write-offs (e.g., depreciation and amortization of various assets) and taxes. The

purpose of the income statement is to show managers and investors whether the company
made or lost money during the period being reported.
4. Cash Flow Statement:
In financial accounting, a cash flow statement, also known as statement of cash flows, is a
financial statement that shows how changes in balance sheet accounts and income affect
cash and cash equivalents, and breaks the analysis down to operating, investing and
financing activities. Essentially, the cash flow statement is concerned with the flow of cash
in and out of the business. The statement captures both the current operating results and the
accompanying changes in the balance sheet. As an analytical tool, the statement of cash
flows is useful in determining the short-term viability of a company, particularly its ability
to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting
Standard that deals with cash flow statements.
5. Owners’ Equity:
In accounting, equity (or owner's equity) is the difference between the value of the assets
and the cost of the liabilities of something owned. For example, if someone owns a car
worth TK. 12,00,000 but owes TK. 4,00,000 on a loan against that car, the car represents
TK. 8,00,000 equity. Equity can be negative if liability exceeds assets. Shareholders' equity
(or stockholders' equity, shareholders' funds, shareholders' capital or similar terms)
represents the equity of a company as divided among shareholders of common or
preferred stock. Negative shareholders' equity is often referred to as a shareholders' deficit.
Alternatively, equity can also refer to the capital stock of a corporation. The value of the
stock depends on the corporation's future economic prospects. For a company
Alternatively, equity can also refer to the capital stock of a corporation. The value of the
stock depends on the corporation's future economic prospects.
4.2 Objective of Financial Statements:

Financial statements are very useful as they serve varied affected groups having an
economic interest in the activities of a business entity. Let us analyses the purposes served
by financial statements.
i. The basic purpose of financial statements is to communicate to their interested

users, quantitive and objective information. This information is useful in making
economic decisions.

ii. Secondary, financial statements are intended to meet thespecialised needs of

conscious creditors and investors.
iii. Thirdly, financial statements are prepared to provide reliable information about the
earnings of a business enterprise and its ability to operate at a profit in future. The
users who are interested in this information are generally the investor, creditors,
suppliers and employees.
iv. Fourthly, financial statements are interested to provide the base for tax assessments.
v.Fifthly, financial statements are prepared in a way to provide information that is
useful in predicting the future earnings power of the enterprise.
vi. Sixthly, financial statements are prepared to provide reliable information about the
changes in economic resources.
vii. Seventhly, financial statements are prepared to provide information about the
changes in net resources of the organisation that result from profit directed
activities.
4.3 Characteristics of Financial Statements:
Financial statements are regarded as indices of an enterprise's performance and position.

As such extreme care and caution should be exercised while preparing these statements.
Financial statements generally reflected the following observable characteristics :
1. Internal Audience :
Financial statements are intended for those who have an interest in a given business
enterprise. They have to be prepared on the assumption that the user is generally familiar
with business practices as well as the meaning and implication of the terms used in that
business.
2. Articulation :
The basic financial statements are interrelated and therefore are said to be 'articulated'.
Example : Profit and loss account shows the financial results of operations and represents
an increase or decrease in resources that is reflected in the various balance in the Balance
Sheet

3. Historical Nature :
Financial statements generally report what has happened in the past. Though they are used
increasingly as the basis for the future by prospective investors and creditors, they are not
intended to provide estimate of future economic activities and their effects on income and
equity.
4. Legal and Economic Consequences :
Financial Statements reflect elements of both economics and law. They are conceptually
oriented towards economics, but of the concepts and conventions have their origin in law.
Example : Conventions of disclosure and maternity.
5. Technical Terminology :
Since financial statements are products of a technical process called " accounting " , they
involved the use of technical terms. It is therefore, important that the users of these
statements should be familiar with the different terms used therein and conversant with
their interpretations and meanings.
6. Summarization and Classification :
The volume of business transactions affecting the business operations are so vast that
summarization and classification of business events and items alone will enable the reader
to draw out useful conclusions.
7. Money Terms :
All business transactions are quantified, measured, and related in monetary terms. In the
absence of this monetary unit of measurement, financial statements will be meaningless.
8. Various Valuation Method :
The valuation method are not uniform for all items found in a Balance Sheet.
Example : Cash is started at current exchange value; Accounts receivable at net realizable
value; inventories at cost or market price whichever is lower; fixed assets at cost less
depreciated.
9. Accrual Basis :

Most financial statements are prepared on accrual basis rather than on cash basis i.e.,
taking into account all incomes due but not received, and all expenses due but not paid.
10. Need for Estimates and Judgments :
Under more than one circumstance, the facts and figures to be presented through financial
statements are to be based on estimates, personal opinions and judgments.
5. FINANCIAL PERFORMANCE ANALYSIS:
Financial Performance is a subjective measure of how well a firm can use assets from its
primary mode of business and generate revenues. This term is also used as a general
measure of a firm's overall financial health over a given period of time, and can be used to
compare similar firms across the same industry or to compare industries or sectors
in aggregation.
Financial performance 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 reports are usually presented to top management as one of their
bases in making business decisions.
Financial performance analysis is a vital to get a financial overview about a company. It

generally consists of the interpretation of balance sheet and income statement. Ratio
analysis, common size statement analysis and trend analysis can be done by using these
two statements. These analyses are the major tools for analyzing the company‟s financial
performance. An Analyst can compare a present condition with the past for the company to
determine whether there is an improvement or deterioration or no change.
5.1 Meaning Of Financial Analysis:
The term financial analysisis also known as „analysis and interpretation of financial
statements‟ refers to the process of determining financial strength and weakness of the firm
by establishing strategic relationship between the items of the Balance Sheet, Profit and
Loss account and other operative data.
The term „financial analysis‟, also known as analysis and interpretation of financial
statements‟, refers to the process of determining financial strengths and weaknesses of the
firm by establishing strategic relationship between the items of the balance sheet, profit and
loss account and other operative data.

“Analyzing financial statements,” according to Metcalf and Tigard, “is a process of

evaluating the relationship between component parts of a financial statement to obtain a
better understanding of a firm‟s position and performance.”
In the words of Myers, “Financial statement analysis is largely a study of relationship

among the various financial factors in a business as disclosed by a single set-of statements
and a study of the trend of these factors as shown in a series of statements.”
The purpose of financial analysis is to diagnose the information contained in financial

statements so as to judge the profitability and financial soundness of the firm. Just like a
doctor examines his patient by recording his body temperature, blood pressure, etc.
before making his conclusion regarding the illness and before giving his treatment, a
financial analyst analysis the financial statements with various tools of analysis before
commenting upon the financial health or weaknesses of an enterprise.
The analysis and interpretation of financial statements is essential to bring out the mystery
behind the figures in financial statements. Financial statements analysis is an attempt to
determine the significance and meaning of the financial statement data so that forecast may
be made of the future earnings, ability to pay interest and debt maturities (both current and
long- term) and profitability of a sound dividend policy.
The term „financial statement analysis‟ includes both „analysis‟, and „interpretation‟. A
distinction should, therefore, be made between the two terms. While the term „analysis‟ is
used to mean the simplification of financial data by methodical classification of the data
given in the financial statements, „interpretation‟ means, „explaining the meaning and
significance of the data so simplified.‟
However, both‟ analysis and interpretation‟ are interlinked and complimentary to each
other Analysis is useless without interpretation and interpretation without analysis is
difficult or even impossible.
Most of the authors have used the term „analysis‟ only to cover the meanings of both
analysis and interpretation as the objective of analysis is to study the relationship between
various items of financial statements by interpretation. We have also used the term
„Financial statement Analysis or simply „Financial Analysis‟ to cover the meaning of both
analysis and interpretation.

It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statement. The analysis is done by properly
establishing the relationship between the items of balance sheet and profit and loss account
the first task of financial analyst is to determine the information relevant to the decision
under consideration from the total information contained in the financial statement. The
second step is to arrange information in a way to highlight significant relationship. The
final step is interpretation and drawing of inferences and conclusion. Thus financial
analysis is the process of selection relating and evaluation of the accounting
data/information.
The first task of financial analysis is to select the information relevant to the decision under
consideration to the total information contained in the financial statement. The second step
is to arrange the information in a way to highlight significant relationship. The final step is
interpretation and drawing of inference and conclusions. Financial statement is the process
of selection, relation and evaluation.
Financial analysis is the process of identifying the financial strengths and weaknesses of
the firm and establishing relationship between the items of the balance sheet and profit &
loss account. Financial ratio analysis is the calculation and comparison of ratios, which are
derived from the information in a company‟s financial statements. The level and historical
trends of these ratios can be used to make inferences about a company‟s financial
condition, its operations and attractiveness as an investment. The information in the
statements is used by-
 Trade creditors, to identify the firm‟s ability to meet their claims i.e. liquidity
position of the company.
 Investors, to know about the present and future profitability of the company and its
financial structure.
 Management, in every aspect of the financial analysis. It is the responsibility of the

management to maintain sound financial condition in the company.
5.2 Purpose of Analysis of financial:
 To know the earning capacity or profitability.

 To know the solvency.
 To know the financial strengths.

 To know the capability of payment of interest & dividends.
 To make comparative study with other firms.
 To know the trend of business.
 To know the efficiency of mgt.
 To provide useful information to mgt.
5.3 Features of Financial Analysis
 To present a complex data contained in the financial statement in simple and

understandable form.
 To classify the items contained in the financial statement in convenient and rational
groups.
 To make comparison between various groups to draw various conclusions.
5.4 Importance of Financial Analysis and Interpretation
Financial statements contain a wealth of information, which if properly read, analyzed or

interpreted can provide valuable insights into a firm‟s performance and position. Also it is
the starting point for making plan, before using any sophisticated forecasting and planning
procedure. By analyzing these statements, firm can evaluate its past, present, projected
performance etc.
Usually management would be particularly interested in knowing the financial strength of

firm to make their best use and to be able to spot out the financial weakness of the firm to
take suitable corrective action. The future plan of the firm should be laid down in view of
the firm‟s financial strength and weakness. In short, through financial analysis and
interpretation it helps effectively the user for decision-making process
5.5 Procedure of Financial Statement Analysis:
The following procedure is adopted for the analysis and interpretation of financial
statements:
 The analyst should acquaint himself with principles and postulated of accounting.
He should know the plans and policies of the management so that he may be able to
find out whether these plans are properly executed or not.

 The extent of analysis should be determined so that the sphere of work may be
decided. If the aim is find out. Earning capacity of the enterprise then analysis of
income statement will be undertaken. On the other hand, if financial position is to
be studied then balance sheet analysis will be necessary.
 The financial data be given in statement should be recognized and rearranged. It
will involve the grouping similar data under same heads. Breaking down of
individual components of statement according to nature. The data is reduced to a
standard form.
 A relationship is established among financial statements with the help of tools &
techniques of analysis such as ratios, trends, common size, fund flow etc.
 The information is interpreted in a simple and understandable way. The

significance and utility of financial data is explained for help in decision making.
 The conclusions drawn from interpretation are presented to the management in the
form of reports.
5.6 Types of Financial Analysis:
There are different ways of analysis the financial statements:
On The Basis of Process of Analysis
1. Horizontal Analysis:
This is used when the financial statement of a number of years are to be analyzed. Such
analysis indicates the trends and the increase or decrease in various items not only in
absolute figures but also in percentage form. This analysis indicates the strengths and
weaknesses of the firm. This analysis is also called as dynamic analysis because it also
shows the trend of the business.
2.Vertical Analysis:
This is used when financial statements of a particular year or on a particular date are
analyzed. For this type of analysis we generally use common size statements and the ratio
analysis. It involves a study of quantitative relationship among various items of balance
sheet and profit and loss account. This type of analysis is static analysis because this is
based on the financial results of one year. Vertical analysis is useful when we have to
compare the performance of different departments of the same company.

Among these two types of analysis, horizontal analysis is more useful because it brings out
more clearly the trends of working of a firm. This gives us more concrete bases for future
planning.
Available On the Basis of Information
1. Internal Analysis:
This analysis is based on the information available to the business firm only .Hence
internal analysis is made by the management. Internal analysis is more reliable and helpful
for financial decisions.
2.External Analysis:
This analysis is made on the basis of published statements, reports and information‟s. This
analysis is made by external parties such as creditors, investors, banks, financial analysis
etc. external analysis is less reliable in comparison to internal analysis because of limited
and often incomplete information.
On The Basis Of Number Of Firms
1. Inter-Firm Analysis :
When financial analysis of two or more companies or firms are analyzed and compared
over a number of accounting period, it is called inter-firm analysis.
2. Intra -Firm Analysis :
Intra-firm analysis is concerned with the analysis of financial performance of different

units or departments or segments of the same enterprise or company. Similarly when
financial statements of two or more years of the same firm are analyzed and compared it is
also called as intra-firm analysis.
On The Basis Of Objectives
1. Accounting Analysis:
Accounting analysis is analysis of past financial performance and involves examining how
generally accepted accounting principles and conventions have been applied in arriving at
the values of assets, liabilities, revenues and expenses.
2. Prospective Analysis :

Prospective analysis involves developing forecasted financial statements keeping in view

the changes that are likely to shape and affect the business given the assumptions about
these changes and the limitation of the forecasting technique used. This is quite
complicated analysis.
5.7 Which are the aspects that are taken into consideration for comparing?
There are 4 aspects which are considered while evaluating the financial performance
analysis of the business, for better understanding of the financial position of the business
different type of aspect are considered which are as follows:
1. Liquidity:
liquidity exhibits the capacity of the business to meet short term requirements of the
business
2. Efficiency:
Efficiency showcases, how efficient is the business inutilizing available resource

3. Solvency
Solvency gives the clear picture of the capacity of the business to meet long term
requirement of the business.

4. Profitability:
Profitability reveals the ability to generate the profit and distribute the profit to the
shareholders.
The financial analysis mainly concentrated on key areas of financial statement for
evaluating the relationship between the various components of financial statement of the
business which would be further helped for analyzing the firm‟s financial position and
performance.
5.8 Methods/Tools Of Financial Analysis
A number of methods can be used for the purpose of analysis of financial statements.
These are also termed as techniques or tools of financial analysis. Out of these, and
enterprise can choose those techniques which are suitable to its requirements. The principal
techniques of financial analysis are:
1. Comparative financial statements

2. Common-size statements
3. Trend analysis
4. Ratio analysis
5. Funds flow analysis
6.Cash flow analysis
7. Break even point analysis
1. Comparative Financial Statements:
When financial statements figures for two or more years are placed side-side to facilitate
comparison, these are called „comparative Financial Statements‟. Such statements not only
show the absolute figures of various years but also provide for columns to indicate to
increase or decrease in these figures from one year to another. In addition, these statements
may also show the change from one year to another on percentage form. Such cooperative
statements are of great value in forming the opinion regarding the progress of the
enterprise.
 To simplify data
 To make inter period/inter-firm comparison

 To indicate the trends
 To enable forecasting
To indicate the strengths and weaknesses of the firm

 To compare the performance
 To analyses expenses
 To analyses profits
Tools for comparison of financial statements
Comparative financial statement is a tool of financial analysis that depicts change in each
item of the financial statement in both absolute amount and percentage term, taking the
item in preceding accounting period as base.
Comparison and analysis of financial statements may be carried out using the following
tools:
A. Comparative Balance Sheet:
The comparative balance sheet shows increase and decrease in absolute terms as well as
percentages ,in various assets ,liabilities and capital. A comparative analysis of balance
sheets of two periods provides information regarding progress of the business firm. The
main purpose of comparative balance sheet is to measure the short- term and long- term
solvency position of the business.
B. Comparative Income Statement:
Comparative income statement is prepared by taking figures of two or more than two
accounting periods, to enable the analyst to have definite knowledge about the progress of
the business. Compartative income statements facilitate the horizontal analysis since each
accounting variable is analyzed horizontally.
2.Common- Size Statements:
Common size statements are such statements in which the items of financial statements are
covered into percentage of common base. In common-size income statement, by assuming
net sales as 100(i.e %)and other individual items are converted as percentage of this.
Similarly, in common –size balance sheet ,total assets are assumed to be 100 (i.e %) and
individual assets are expressed as percentage.

Objectives of common size statements
A. Presenting the change in various items in relation to total assets or total liabilities or
net sales.
B. Establishing a relationship.
C. Providing a common base for comparison.
Types of common size statements:
A. Common-Size Balance Sheet :
A common –size balance sheet is a statement in which total of assets or liabilities is

assumed to be equal to 100 and all the figures. are expressed as percentage of the total.
That is why it is known as percentage balance sheet.
Common-size balance sheet facilitate the vertical analysis since each item of the Balance
Sheet is analyzed vertically.
B. Common-Size Income Statement:
Common-size income statement is a statement in which the figures of net sales is assumed
to be equal to 100 and all other figures of “profit and loss A/c” are expressed as percentage
of net sales. This statement facilitate the vertical analysis since each accounting variable is
analyzed vertically. One can draw conclusion, regarding the behavior of expenses over
period of time by examining these percentages.
3. Trend Analysis:
Trend percentage are very useful is making comparative study of the financial statements
for a number of years. These indicate the direction of movement over a long time and help
an analyst of financial statements to form an opinion as to whether favorable or
unfavorable tendencies have developed. This helps in future forecasts of various items.
For calculating trend percentages any year may be taken as the „base year‟. Each item of
base year is assumed to be equal to 100 and on that basis the percentage of item of each
year calculated. 4. Ratio Analysis:
a. Meaning:

Absolute figures expressed in financial statements by themselves are meaningfulness.

These figures often do not convey much meaning unless expressed in relation to other
figures. Thus, it can be say that the relationship between two figures, expressed in
arithmetical terms is called a ratio.
“According to R.N. Anthony.”
“A ratio is simply one number expressed in terms of another. It is found by dividing one
number into the other.”
b. Types of Ratios:
 Proportion or Pure Ratio or Simple ratio.
 Rate or so many Times.
 Percentage Fraction.
c. Objects and Advantages or Uses of Ratio Analysis:
Helpful in analysis of financial statements.

 Simplification of accounting data.
 Helpful in comparative study.
 Helpful in locating the weak spots of the business.
 Helpful in forecasting
 Estimate about the trend of the business
 Fixation of ideal standards
 Effective control
 Study of financial soundness.
d. Limitation of Ratio Analysis:
 False accounting data gives false ratios
 Comparisons not possible of different firms adopt different accounting policies.
 Ratio analysis becomes less effective due to price level change Ratios may be
misleading in the absence of absolute data.
 Limited use of a single Ratio.

 Window-Dressing
 Lack of proper standards.
 Ratio alone are not adequate for proper conclusions Effect of personal ability and
bias of the analyst.
e. Use and Significance of Ratio Analysis:
The ratio is one of the most powerful tools of financial analysis. It is used as a device to
analyze and interpret the financial health of enterprise. Ratio analysis stands for the process
of determining and presenting the relationship of items and groups of items in the financial
statements. It is an important technique of the financial analysis. It is the way by which
financial stability and health of the concern can be judged. Thus ratios have wide
applications and are of immense use today. The following are the main points of
importance of ratio analysis:

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A STUDY OF FINANCIAL ANALYSIS

WITH REFERENCE TO TITAN (2021 -2022)

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 1

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2.1 Definitions of Finance:

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a. Evaluation of new investment in terms of profitability

It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 4

Start ups may receive capital from angel investors or venture capitalists in exchange for a

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 5

In addition to managing money in day-to-day operations, a government body also has

MEANING OF FINANCIAL MANAGEMENT

OBJECTIVES OF FINANCIAL MANAGEMENT

1. To ensure regular and adequate supply of funds to the concern.

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 6

COMPONENTS OF FINANCIAL MANAGEMENT:

needed steps and helps to get profit in the future.

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 7

shareholders: Dividend and the rate of it must be chosen.

development enhancement arrangements to the endeavour

FUNCTIONS OF FINANCIAL MANAGEMENT

1. Estimation of capital requirements:

2. Determination of capital composition:

3. Choice of sources of funds:

For additional funds to be procured, a company has many choices like-

a. Issue of shares and debentures

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 8

a. Dividend declaration - It includes identifying the rate of dividends and other

IMPORTANCE OF FINANCIAL MANAGEMENT

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4. INTRODUCTION TO FINANCIAL STATEMENT:

4.1 Financial statement:

A financial statement is an organized collection of data according to logical and consistent

1. The Balance Sheet:

In financial accounting, a balance sheet or statement of financial position is a summary of

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 10

2. Profit And Loss Account:

Accounting Standards prescribe certain conventions applicable in the process of

Hence, we have to treat assets on a historical cost basis.

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4. Cash Flow Statement:

4.2 Objective of Financial Statements:

i. The basic purpose of financial statements is to communicate to their interested

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ii. Secondary, financial statements are intended to meet thespecialised needs of

4.3 Characteristics of Financial Statements:

Financial statements are regarded as indices of an enterprise's performance and position.

Financial statements generally reflected the following observable characteristics :

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 13

4. Legal and Economic Consequences :

Example : Conventions of disclosure and maternity.

6. Summarization and Classification :

8. Various Valuation Method :

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 14

10. Need for Estimates and Judgments :

5. FINANCIAL PERFORMANCE ANALYSIS:

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

Financial performance analysis is a vital to get a financial overview about a company. It

SANT RAWWOL MAHARAJ MAHAVIDYALAYA , KUDAL Page 15

“Analyzing financial statements,” according to Metcalf and Tigard, “is a process of

In the words of Myers, “Financial statement analysis is largely a study of relationship

The purpose of financial analysis is to diagnose the information contained in financial