You are on page 1of 6

ABSTRACT A Study on Financial Performance analysis special reference to Introduction: Finance is the life blood and nerve center

of any business. It has become so much important for every business undertaking that all managerial activities are connected with it. In our present day economy, finance is defined as the provision of money at the time when it is required. Every enterprise whether it is big, medium, or small needs finance to carry on its operations and to achieve the targets. Almost all kind of business activities directly or indirectly involve in acquisition and use of funds. In fact, finance is so indispensable today that it is rightly said to be the life blood of the enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives. Everybody associated with the business like employees, bankers, creditors, government, shareholders,

management and society want to know what is the companys liability, where they have invested, what is their sales, profit, cost of value added and thousands of question like this. The word Performance is derived from the word parfourmen, which means to do, to carry out or to render. It refers the act of performing; execution, accomplishment, fulfillment, etc. In border s ense, performance refers to the accomplishment of a given task measured against preset standards of accuracy, completeness, cost, and speed. In other words, it refers to the degree to which an achievement is being or has been accomplished. In the words of Frich Kohlar The performance is a general term applied to a part or to all the conducts of activities of an organization over a period of time often with reference to past or projected cost efficiency, management responsibility or accountability or the like. Thus, not just the presentation, but the quality of results achieved refers to the performance. Performance is used to indicate firms success, conditions, and compliance.

Financial performance refers to the act of performing financial activity. In broader sense, financial performance refers to the degree to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm's policies and operations in monetary terms. It is used to measure firm's overall financial health over a given period of time and can also be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. Types of Financial Performance Analysis: Financial performance analysis can be classified into different categories on the basis of material used and modes operandi as under:

Material used: On the basis of material used financial performance can be analyzed in following two ways: External analysis: This analysis is undertaken by the outsiders of the business namely investors, credit agencies, government agencies, and other creditors who have no access to the internal records of the company. They mainly use published financial statements for the analysis and as it serves limited purposes. Internal analysis: This analysis is undertaken by the persons namely executives and employees of the organization or by the officers appointed by government or court who have access to the books of account and other information related to the business.

Modus operandi: On the basis of modus operandi financial performance can be analyze in the following two ways: Horizontal Analysis:In this type of analysis financial statements for a number of years are reviewed and analyzed. The current years figures are compared with the standard or base year and changes are shown usually in the form of percentage. This analysis helps the management to have an insight into levels and areas of strength and weaknesses. This analysis is also called Dynamic Analysis as it based on data from various years. Vertical Analysis: In this type of Analysis study is made of quantitative relationship of the various items of financial statements on a particular date. This analysis is useful in comparing the performance of several companies in the same group, or divisions or departments in the same company. This analysis is not much helpful in proper analysis of firms financial position because it depends on the data for one period. This analysis is also called Static Analysis as it based on data from one date or for one accounting period. Ratio Analysis: Ratio analysis is a well established tool to evaluate an organisations profitability, liquidity and financial stability (Glynn et al, 2003). As such it can be used to answer a variety of questions. Those proposed by Turk et al (1995) are shown in Figure 1 Herzlinger and Nitterhouse (1994, p. 133) use ratio analysis to answer a different set of four questions: Are the goals of the organisation consistent with the financial resources it needs to finance those goals? Is the organisation maintaining intergenerational equity? Is there an appropriate matching between the sources from which resources are derived, and the uses to which they are put? Are present resources sustainable? This series of four does not mention mission per se, but there is the underlying idea of goals and focus for the organisation, which affect and are affected by the

way in which resources are handled. Another alternative is to combine a number of the questions and ask: Is the organisation balancing its resources against the current and future needs of its members while providing for the long-term health of the organisation? This difference is also highlighted in the very features that characterise NPOs. In particular, there is "no direct relationship between resources provided and goods or services received from the organization" and "operating goals and purposes ... are not profit-based" (Martin and West, 2003, p. 185). Whatever questions are asked, financial ratio analysis formalises and quantifies financial data to facilitate comparison within an organisation. Ratio analysis provides an efficient means by which financial data can be reduced to a more understandable basis for evaluation of financial conditions and operating performance, by which a decision-maker can identify important relationships, and by which forecasts can be made of an organisations ability to pay its debts when due and to operate in a manner consistent with its mission and without leaving a deficit to be covered by future generations. Each ratio is designed to detect a certain type of symptom in relation to the underlying state of health of the organisation, with a collection of symptoms suggesting an appropriate treatment plan. The roles of five of the more commonly used ratios, display a degree of overlap between the financial vulnerability measures and financial performance measures. Limitations of Financial Ratio Analysis Crunching numbers to calculate financial ratios means that one is focussing on individual trees. One also needs to take a step back and see the whole panorama of the financial analysis forest. Doing this means recognising the limitations which should be considered when interpreting the results of financial ratio analysis. The ratios and percentages that are calculated in financial analysis focus on certain

areas in isolation to rest of the organisation. It is important to interpret these figures in the correct perspective, bringing into the examination qualitative factors such as general economic conditions, the unique characteristics of the nonprofit sector and the position of the organisation being investigated within the sector and in relation to its own historical and cultural evolution. There are also inherent limitations in the financial statement data which is used for the calculation of these ratios. Since many NPOs are not subject to accounting regulation (Sievers, 1996), the way in which its reports have been presented is entirely at the discretion of those preparing them. This means that there may be difficulties with uniformity in reporting. Even the words may be taken to mean different things. Alternatively, a term used in a financial report, may not be given the same meaning by the reader as was intended by the preparer. Furthermore, the focus of operations changes over time, making comparisons difficult. It is not just the preparation of the reports which may be different over time, but also the accounting practices used by the organisation. A further limitation is that of historical cost accounting. There are a number of levels of dollars in the balance sheet, with assets such as accounts receivable being stated in current dollars and non-current assets such as land being stated at historic cost. This makes comparative analysis across years difficult, particularly with the varying inflation rates of the past eighty years. In the 1920s, inflation rates were not even considered; in the 1970s, inflation was in double digit figures; today, it is between one and three percent. Given these limitations, it is important that the interpretation of financial ratios be tempered with consideration of the underlying data quality, the effects of flexibility in accounting, and the limitations o f historical cost accounting (Herzlinger and Nitterhouse, 1994, p. 170). In order to operationalise this model, these ratios must be calculated and analysed for the individual organisation. Ideally, historical data, possibly for up to ten years, should be considered in developing trend analysis for

the NPO. This would enhance the measurement of organisational strengths and weaknesses, and identification of planning activities on which it is necessary that the organisation focus in order to revive its financial profile in relation to its mission. Statement of the Problem Cement industry represents an important segment of the Indian economy. This industry has been caught in a vicious down cycle that has rendered operations unviable. Some of the Cement producing companies has recently reported reduction in profits and in some cases even losses. The India Cements Ltd incurred losses in 2002. One possible reason for such down cycle might be poor financial health. Since the cement producing companies face threats to their viability, this study bears a relevance to the present day problems. Objectives: a) To examine the overall financial performance of India Cements Ltd, and b) To predict the financial health and viability of the India Cements Ltd. Conclusion The financial health plays a significant role in the successful functioning of a firm. Poor financial health threatens very survival and leads to business failure. Most of the cement producing companies in India has been caught in a vicious down cycle facing a threat to their viability. Therefore, financial health of cement companies has been subject to empirical investigation. In this study an attempt has been made to determine the combined effect of various financial ratios with the help of MDA. The estimated discriminate function could be of great use for the management in ascertaining the financial health. This study would also be useful to all companies, policy makers and researchers for appraising financial health of corporate sector in general and cement companies in particular.