CHAPTER – 1

INTRODUCTION
 CHAPTER – 1

ANALYSING FINANCIAL STATEMENT

The financial statements of a company record important financial data on every

aspect of abusiness‟s activities. As such, they can be evaluated on the basis of past,
current, and projected performance.

In general, financial statements are centered on generally accepted accounting

principles (GAAP) in the U.S. These principles require a company to create and
maintain three main financial statements: the balance sheet, the income statement, and
the cash flow statement. Public companies have stricter standards for financial
statement reporting. Public companies must follow GAAP which requires accrual
accounting.

Private companies have greater flexibility in their financial statement preparation and
also have the option to use either accrual or cash accounting.
WHAT IS FINACIAL PERFORMANCE

Financial performance is a subjective concept, which explains how well a

company can use its assets and grow revenues while managing its debts. It is a general
measure to evaluate a company's overall financial health.

An all-encompassing assessment of a company's entire position in areas such as assets,

equity, costs, liabilities, revenue, and overall profitability.

It is calculated using a variety of business-related formulae that allow users to

determine data about a company's prospective effectiveness.

DEFINITION OF FINANCIAL PERFORMANCE

According to ”Metcalf and Titard,” Analysis financial statements is a process

of evaluating the relationship between component parts of financial statements to
obtain a better understanding of firm's position and performance”

Financial Performance: Definition Financial performance is defined as a

process of calculating the monetary value of the outcomes of a company's policies and
activities. It is used to assess a company's overall financial health over time and can
also be used to compare competition either in the same industry or other industries or
sectors in aggregate.

IMPORTANCE OF FINANCIAL PERFORMANCE

A company’s financial performance is crucial for the interests of a varied group of

people related to the company.
For instance, investors, with the help of financial performance, take an insight
about whether the scope of Earnings is there or not? Whether the company will grow?
And so on.

For management, the appraisal gives insight into internal control, future
opportunities, higher returns and so on. Trade creditors are interested in getting insight
into the liquidity of firms to ensure less Financial Risk.

Bondholders and shareholders, interested in the projection of future profitability.

INDICATORS OF FINANCIAL PERFORMANCE

Financial performance indicators are measurable indicators used to determine,

track, and forecast a company's financial health. Another term used for it is Key
Performance Indicators (KPIs). These KPIs cover a wide Range of topics, including
liquidity, profitability, Efficiency, solvency, and value. Listed below are important
metrics often considered by both investors and managers.

Gross Profit Margin - It is also known as the profitability ratio. The percentage
of revenue received after lowering the cost of products sold equals gross profit margin.

Net Profit Margin - It is the profitability ratio that calculates the proportion of
Income that remains after deducting all company expenses.

Operating Cash Flow - It is the revenue generated by the operations of a

business. Better the operating cash flow, better the financial performance of the
business

Working Capital - It is the amount of Capital accessible to a company that is

used to enable day-to-day operations.

Current Ratio - Short-term liabilities are those that are due within a year, and the
current ratio can help you determine if a company can eliminate its short-term debts.

Debt to Equity Ratio - It is known as the solvency ratio, and it measures a

company's capacity to fund itself through stock rather than debt. This ratio contributes
to an understanding of the business's solvency.

Liquid Ratio - When a company wishes to assess its capacity to Handle short-
term obligations, it uses what is known as the liquid ratio.

Inventory Turnover - It calculates how many times the company's inventory can
be sold throughout the Accounting period. It is useful in determining whether a firm
has an excessive amount of inventory in relation to its sales levels.

Return on Equity - It denotes how well a company can use its capital to generate
profits for its investors.

Return on Assets - It assists a company in determining how well its assets are
being utilised in order to become more lucrative.
FINACIAL STATEMENT ANALYSIS

To assess a company's financial performance, a financial statement analysis is

done. It is the process of comprehending and analysing financial statements in order to
have a better knowledge of the company's performance. In a nutshell, it is the process
of examining and evaluating a company's financial statements
.
A financial performance analysis looks at the firm over a certain time period,
generally the most recent fiscal quarter or year. Three of the most important financial
statements used in performance analysis are the Balance Sheet, income statement, and
Cash Flow Statement.

1. Balance Sheet

The balance sheet is a statement that lists the organization's assets and
liabilities. It is a primary yet reliable measure of a company's financial health. It is used
to determine the operational efficiency of the company.

2. Income Statement

It is also known as a Profit and Loss (P/L) statement. It provides a summary of

the company's revenue, earnings, and costs over time. An income statement
summarises a company's financial performance in terms of sales and revenue earned
over a given time period.

3. Cash Flow Statement

A cash flow statement is a statement that illustrates the activities of cash and its
flow across the company. Typically, cash statements are divided into three categories:
investment, operating, and financing.

4. The Bottom Line

It can be concluded that financial analysis is a crucial part for every

organisation to understand its present financial situation and future financial objectives.
Financial performance will be good if all things and strategies are operating well in the
organisation and negative if things are not working in the company's favour. In short, it
is a summary of a company's
 
NEED OF THE STUDY

 Financial statement analysis is used to identify the trends and relationships between
financial statement items.
 It helps us to know the reasons for relative changes either in profitability or in the financial
position as a whole.
 It also highlights the operating efficiency and the present profit-earning capacity of the
firm as a whole.
 This method includes calculations and comparison of the results to historical company
data, competitors, or industry averages to determine the relative strength and performance
of the company being analyzed.

SCOPE OF THE STUDY

1. Financial statement analysis is the process of reviewing and analyzing a company‟s

Financial statements to make better economic decision.
2. The purpose of financial statement analysis is to evaluate the past, current and future
performance
3. Financial position of the company for the purpose of making investment.
4. To understand and analyze the factors that influence the profitability of the company.
The data & information were gathered during Training.
5. To find the financial soundness of the company with reference to the profitability .

PRIMARY OBJECTIVES:

To Perform Comparative Analysis Of Financial Statement using various tools of

Ratio analysis.

SECONDARY OBJECTIVES:

To assess the profitability of the firm.

To assess the operational efficiency of the firm and managerial effectiveness of the
firm.

To know the short term and long term solvency position of the firm.
Research Methodology

The goal of financial health analysis is to determine the efficiency and

performance of firm’s management, as reflected in the financial records and reports.

The study has been an secondary data undertaken for the period of four years from
2017 & 2O20 and the data have been obtained from the company balance sheet
database.

To analyze financial statement of PIPDIC liquidity, solvency, profitability,

activity, and financial stability various accounting ratio have been used.

Various statistical measures i.e., Ratio Analysis and Trend Analysis have been
computed and analyzed.

LIMITATIONS

The study suffers from certain limitations.

Study exclusively depends on the published financial data, so it is subject to all

limitations that are inherent in the condensed published financial statements.

The study covers a period of only four years from 2017 to 2020.
 CHAPTER – 2

REVIEW OF LITERATURE
RIVIEW LITERATURE

Financial performance analysis is vital for the triumph of an enterprise. Financial

performance analysis is an appraisal of the feasibility, solidity and fertility of a business, sub-
business or mission.

1. Altman and Eberhart (1994)

reported the use of neural network in identification of distressed business by the

Italian central bank. Using over 1,000 sampled firms with 10 financial ratios as
independent variables, they found that the classification of neural networks was very
close to that achieved by discriminant analysis. They concluded that the neural
network is not a clearly dominant mathematical technique compared to traditional
statistical techniques.

2. Gepp and Kumar (2008)

Incorporated the time “bias” factor into the classic business failure prediction model.
Using Altman (1968) and Ohlson’s (1980) models to a matched sample of failed and
non- failed firms from 1980’s, they found that the predictive accuracy of Altman’s
model declined when applied against the 1980’s data. The findings explained the
importance of incorporating the time factor in the traditional failure prediction
models.

3. Campbell (2008)

Constructed a multivariate prediction model that estimates the probability of

bankruptcy reorganization for closely held firms. Six variables were used in
developing the hypotheses and five were significant in distinguishing closely held
firms that reorganize from those that liquidate. The five factors were firm size, asset
profitability, the number of secured creditors, the presence of free assets, and the
number of under-secured secured creditors. The prediction model correctly classified
78.5% of the sampled firms. This model is used as a decision aid when forming an
expert opinion regarding a debtor’s likelihood of rehabilitation. No study has
incorporated the financial performance analysis of the central public sector
enterprises in Indian drug & pharmaceutical Industry. Nor has any previous research
examined the solvency position, liquidity position, profitability
analysis, operating efficiency and the prediction of financial health and viability of
public sector drug & pharmaceutical enterprises in India.

4. Gary W.selnow(2003)

Examined various approaches to promote retirement investment .His study found

that automatic enrolment has a good chance of overcoming the natural impediments
to wise decisions about retirement investments.

5. Douglas A.Hersahey and Hendrik p. Van Dalen(2006)

In the study explored the Psychological mechanisms that underlie the retirement
planning and saving tendencies of Dutch and American Workers the research
suggests that policy analysts should take into account both individual and cultural
differences in the psychological predispositions of workers when considering
Pension reforms that stress individual responsibility for planning and saving.

6. M.Kabir Hassan and Dr.Shari Lawrance (2007)

Conducted a survey on “An Analysis of Financial preparation for Retirement ''. In

this study, the researcher analyzes the financial preparation for retirement. Regarding
retirement plan contributions, the findings indicate significant positive effects
regarding income and womanhood .Education is significant and positive as a
predictor for the decision to contribute to a pension plan for women in their their
thirties, Thus supporting the hypothesis of a significant positive relationship between
education and pension plan Contributions.

7. Venkata Ramana and Ramakrishna (2014)

Evaluate the profitability and financial position of selected cement companies in

India through various financial ratio and applied correlation, mean, variance and
variance. The study uses liquidity and profitability ratios for assessment of impact of
liquidity ratios on profitability performance of selected cement companies.
 8. Sahu (2012)

In his article titled “A Simplified Model for Liquidity Analysis of Paper Industry”
has examined the liquidity of paper industry. The model developed by him has been
supported the belief that the liquidity management of a corporation during a
particular year is effective if its earnings before depreciation are positive and not
effective if its earnings before depreciation are negative. The findings have revealed
a awfully high predictive ability of the estimated discriminate function.

9. Adolphus (2012)

Showed that there was a statistically significant relationship between measure of

liquidity and selected measures of profitability, efficiency and indebtedness in
Nigerian quoted manufacturing companies. The impact of 1 per cent increase in
average liquidity measures produces a more significant increase in average
profitability (21.9 per cent), efficiency (16.1 per cent) and indebtedness (16.6 per
cent).

10. Singaravel (2005)

He focuses on the interdependency among capital, liquidity and profitability, of

which sufficiency of liquidity comes within the first preference followed by
sufficiency of assets and profitability. The article is an in-depth analysis of liquidity
and its interrelationship with capital and profitability. because the capital, liquidity
and profitability are in triangular position, none is dispensable at the satisfaction of
the opposite. more than stock-in-trade over bank over-draft and way over assets over
current liabilities aside from bank over-draft generate assets for the business.
Alternatively assets requirements are made for long-term funds which affect the.

11. Chalam, Manohar Babu (1999)

Observe that liquidity performance is incredibly low as compared to the perfect

norms. it's suggested that for managing capital effectively the operating and other
required budgets should be prepared by the respective levels of the management on
shortterm likewise as long-term basis. it's further suggested that these are the people
concerned who can really influence the method of production activity to such an
extent that there should be optimum utilization of the investment in assets
WAY TO IMPROVE THE FINANCIAL PERFORMANCE

1. Get advice from a professional:

If you haven't already, talk to an accountant or business adviser about your finances.
They may be able to help you find other ways to improve your cash flow. Or they may
suggest options for getting funding internally.
2. Recover outstanding debt:
Chase up as many outstanding payments as you can. If you don't have the
time,consider using a reputable debt collection agency.
Always have a condition of sale agreement before you make a sale. This gives the
buyer your terms and conditions, including:

How long they have to pay the debt

Any percentages you’ll apply to overdue payments.

3. Reduce or rearrange expenses:

Work out which of your expenses you could reduce or rearrange. You might be able

to: Arrange a deferred or periodic payment plan for larger expenses

 Switch insurance companies, banks or suppliers to get a better deal

 Change how much stock to buy and buy when you have higher cash flow
 Switch to cheaper options for consumables like energy.
4. Sell Assets

Selling unwanted assets can be a good way to get some cash and reduce your storage
costs. Consider leasing your main assets. This helps to spread the cost over a longer
period.

Consider registering a security intrest on the Personal Property Securities Register

(PPSR) if you’re:

 selling on terms, such as retention of title

 leasing out valuable goods.
 Registering a security interest can help you recover the debt if a
buyer doesn’t pay or becomes insolvent.
5. Offer markdowns or increase prices:
Apply markdowns to full-price products or services to:

 Attract sales
 Move surplus stock or discontinued products.

Increasing your prices is an option if your business faces rising costs.

Whether you offer markdowns or increase prices, make sure you
comply with pricing legislation.
6. Consolidate debt:

Look at your current debts and see if you can combine them into
a low interest, low fee product. When refinancing your current debt,
make sure you shop around to see if you can you get a better deal
elsewhere.
7. Use new marketing techniques:

Putting more effort into marketing doesn't necessarily require

spending more money. For example, using the internet and social
media can be a cheaper and smarter way of getting your message
across.

7. Offer additional payment options:

Offering additional payment options can open up different

markets and improve your bottom line. Consider:
 Credit
 E-commerce
 Payment systems like BPAY, Bill Pay or PayPal, Google pay.

10. Invest your own money:

Investing your own money or money from family or friends can be an
easier way to get finance. Lenders generally want you to have some equity
invested in your business (self- funding) before they’ll lend you money.