A project report on financial statement analysis

SUMMER TRAINING REPORT On AU FINANCIERS (INDIA) PVT.LTD. FINANCIAL STATEMENT ANALYSIS Submitted in partial fulfillment of the requirements of the two year Master of Business Administrative (MBA). Submitted by Batch: 2009-2011 ACKNOWLEDGEMENT The satisfaction and euphoria that accompanies the successful completion of any task would be incomplete without mentioning the names of the people who made it possible, whose constant guidance and encouragement crown all the efforts with success. I am deeply indebted to all people who have guided, inspired and helped us in the successful completion of this project. I owe a debt of gratitude to all of them, who were so generous with their time and expertise. I am highly intended and extremely thankful to …………….. (Company Mentor) & …………………. (College Mentor) who as my external guide was a constant source of inspiration and encouragement to me. The strong interest evinced by them has helped me in dealing with the problem; I faced during the course of project work. I express my profound sense of gratitude to them for timely help and co-operation in completing the project. Also I would like to thanks to …………………… for his continuous guidance and support. Last but not the least, I thank everybody of accounts & HR team, who helped directly or indirectly in completing the project that will go a long way in my career, the project is really knowledgeable & memorable one. CONTENTS Serial. No.TITLEPAGE NO. Chapter-1PROFILE OF COMPANY ,[object Object]

NBFCs are different from Banks

Target Customer of the Company

Financial profile of the company

Other relative information’s

Social ResponsibilityChapter-2INTRODUCTION ,[object Object]

LimitationChapter-3PROJEC OVERVIEW ,[object Object]

Meaning and Concept of Financial Analysis

Procedure of Financial Statement Analysis

Methods and Devices of Financial Analysis

Limitation of financial Analysis

Overview of Ratio AnalysisChapter-4ANALYSIS AND INNTERPRETATION ,[object Object]

Ratio AnalysisChapter-5FINDINGS AND SUGGESTIONS ,[object Object]

Suggestions Executive Summary AU Financiers (India) Private Limited is registered with Reserve Bank of India (RBI) as Non-Banking Finance Company (NBFCs). AU Financiers is fast growing company with roots in Rajasthan, and branches spread in Maharashtra and Gujarat and planning to increase our presence to pan India. This company provides financial solution to our customer like Vehicle finance, Small secured loan, life insurance & General Insurance. This company comes under Assets Finance Company (AFC) & Companies extensive network in semi-urban and rural areas of Rajasthan, Maharashtra and Gujarat has brought the benefit of growth to people outside the usual scope of organized finance and allowed us to propagate the motto of inclusive growth. AU Financiers biggest area of operation is commercial vehicle financing where Company serve the requirements of various categories of the market right from three wheelers to multi-axle trucks. From first time buyers of new vehicles to refinancing of running vehicles and this extensive product portfolio allows this company to cater to a broad cross section of the market. Company has more than 85 Branches across Rajasthan, Maharashtra & Gujrat. And No. of customers is increasing very fast as on May 2010 Company has 45,721 Customer across these locations and No. of Employers is 685 as on May 2010. Company is performing well because in 2007-08 company’s Net Worth was 24.75 and in 2009-10 were 115.55. This Project will focus on Managing of Fund. It will include Management of net funds available for investment and external funds purchased from banks. (Owner’s Capital + funds purchased from banks.) This Project will help us to understand the shortage of the fund, means by doing this we can know that when fund will short and accordingly we can manage fund for further investment activities. By making month wise fund flow statement we can know shortage and excess of the fund. This project gives the importance of fund management tools and principles. Industry study Non-Banking Financial Companies (NBFCs) Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system. It is a heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase etc. They raise fund from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognized as complementary to the banking sector due to customer-oriented services, simplified procedures, and attractive rates of return on deposits, flexibility and timeliness in meeting the credit needs of specified sectors. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) with in the framework of the Reserve Bank of India (RBI) Act, 1934. As per the RBI Act, a 'non-banking financial company' (NBFCs) is defined as:- ,[object Object]

A non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner.

Such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.The types of NBFCs registered with the RBI are:- Equipment leasing company: - is any financial institution whose principal business is that of leasing equipments or financing of such an activity. Hire-purchase Company: - is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. Loan company: - means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity). Investment Company: - is any financial intermediary whose principal business is that of buying and selling of securities. Now, these NBFCs have been reclassified into three categories:- ,[object Object],AFC are financial institutions whose principal business is of financing physical assets such as automobiles, tractors, construction equipments material handling equipments and other machines. E.g.: Bajaj Auto Finance corp., Fullerton India etc ,[object Object],ICs generally are involved in the business of shares, stocks, bonds, debentures issued by government or local authority that are marketable in nature. E.g.: Stock Broking Companies, Gilt firms ,[object Object],LCs is loan giving companies which operate in the business of providing loans. These can be housing loans, gold loans etc E.g.: Mannapuram Gold Finance, HDFC NBFCs are different from Banks ,[object Object]

A NBFC cannot issue cheques, to their customers and is not a part of the payment and settlement system

Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC) is not available for NBFC depositors

They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. (Currently the ceiling rate is 12.5%)

They cannot offer gifts/incentives or any other additional benefit to the depositors.

They should have minimum investment grade credit rating, from the credit rating agenciesCompany Overview AU financiers (India) Pvt. Ltd. AU Financiers (India) Private Limited, registered with Reserve Bank of India as a Non Banking Finance Company (NBFC) and this company was promoted by Mr. Sanjay Agarwal in the year 1996. Originally the Company was incorporated as ‘L.N. Finco Gems Private Limited’ but in 2005 Company has changed its named into ‘AU Financiers (India) Pvt. Ltd’. The objective was to align the Company name with business line of the Company. AU Financiers is a fast growing financing company with our roots in Rajasthan, and branches spread in Maharashtra and Gujarat and planning to increase our presence to pan India. Company facilitates access too easy, affordable financing options for small road transport operators and fleet owners. Company extensive network in semi-urban and rural areas of Rajasthan, Maharashtra and Gujarat has brought the benefit of growth to people outside the usual scope of organized finance and allowed us to propagate the motto of inclusive growth. Its biggest area of operation is commercial vehicle financing where we serve the requirements of various categories of the market right from three wheelers to multi-axle trucks. From first time buyers of new vehicles to refinancing of running vehicles, our extensive product portfolio allows us to cater to a broad cross section of the market. It also engaged in small secured business loan products for personal and business needs. Our excellent track record of high quality lead generation, high collection ratio and low delinquencies has attracted the attention of high quality stakeholders and today, besides the promoters, our principal investor is Motilal Oswal Private Equity Advisors Private Limited. The support of our investors and our enhanced management bandwidth has given us the impetus to forge ahead in new geographies and expand our product portfolio. Milestones ,[object Object],Chapter-2INTRODUCTION Introduction of the study Purpose of study Scope of study Objective of the study Methodology Date collection Tools Limitation Introduction of study Finance is defined as the provision of money when it is required. Every enterprise needs finance to start and carry out its operation. Finance is the life blood of an organization. So finance should be managed effectively. Financial statements are prepared primarily for decision making. Financial statement analysis refers to the process of determining financial strength and weakness of the firm by properly establishing strategic relationship between the items of the balance sheet and profit and loss account. There are various methods and techniques used in analyzing financial statements, such as comparative statements, trend analysis, common size statement, schedule of changes in working capital, fund flow and cash flow analysis, cost volume profit analysis and ratio analysis and other operative data the analysis of financial statement is used for decision making by various parties. First task is to analyze and select the information which is requiring taking decision. Second task is to arrange the information in a way to highlight significant relationship. Final task is the interpretation and drawing of inferences and conclusions. Purpose of study The present study is made as a part of the MBA Programme for training in the form of on the job training with the following activities. To know the financial position of the Au- financier’s (India) Pvt. Ltd. The company has the strength to fulfill its obligation or not Find out strength and weakness of Au-Financier’s (India) Pvt. Ltd. Performance of Au- financier’s (India) Pvt. Ltd. For granting credit providing loan and making investment. Growth rate of Au- financier’s (India) Pvt. Ltd. Know the liquidity position of Au-Financier’s (India) Pvt. Ltd. Know the long term solvency of Au-Financier’s (India) Pvt. Ltd. Know the operation efficiency of Au-Financier’s (India) Pvt. Ltd. Know the overall profitability of Au-Financier’s (India) Pvt. Ltd. Place of Study All the activities are carried out in the Au-Financier’s (India) Pvt. Ltd. Scope of Study The data and information were gathered during training. The scope is limited to the secondary data only. The scope is delimited to the year from 1998 Objective of the Study The role objective of the project is to help the management of the organization in decision making regarding the subject matter. Calculation of financial statement and ration is only the clerical task whereas the interpretation of its needs immense skill intelligence and foresightedness. One of the easiest and most popular ways of evaluating performance of the organization is to compare its present ratios with the past ones called comparison and through development action plan. It gives an indication of the direction of change and reflects whether the organization’s financial position and predominance has improved deteriorated or remained constant over period of time. Here much emphasis is given to historical comparison and on forecasting the immediate future trends Methodology The research involved extensive and intensive studies of Au- financier’s (India) Pvt. Ltd. in this project report a sincere effort has been made to study the financier statements analysis of the company. During this study, I study the financial position and performance of the company. At last, I have given interpretation and conclusion of the study. Data collection The whole of my study is based on secondary data of Au- financier’s (India) Pvt. Ltd. I have not taken any primary data for my study because primary data would not have been helpful to my study. During the tenure of my study I have taken help of the following secondary data. Annual report of Au-Financier’s (India) Pvt. Ltd. Annual audit report of Au-Financiers (India) Pvt. Ltd.. Balance sheet of Au-Financiers (India) Pvt. Ltd. Development action plan of Au-Financiers (India) Pvt. Ltd. Profit and loss account of Au-Financiers (India) Pvt. Ltd. Tools There are some of the tools, which are relevant for the study of ration analysis and performance of Au-Financiers (India) Pvt. Ltd. Comparative Statements. Trend Analysis Common size statements Funds flow analysis. Cash flow Analysis Cost volume profit Analysis Ratio analysis. Limitation It is only based on mathematical interpretation of the figures and ignores the factors such as management style, motivation of workers leadership etc. It is affected by the price level changes It does not give any clue for future. Chapter No. 3 PROJEC OVERVIEW Introduction of Financial Statement Meaning and Concept of Financial Analysis Types of Financial Analysis Procedure of Financial Statement Analysis Methods and Devices of Financial Analysis Limitation of financial Analysis Overview of Ratio Analysis 3.1 –Introduction of Financial Statement: - Finance is defined as the provision of money when it is required. Every enterprise needs finance to start and carry out its operation. Finance is the lifeblood of an organization. So, finance should be managed effectively. Financial statements are prepared primarily for decision making. Financial Statement Analysis refers to the process of determining financial strength and weakness of the firm by properly establishing strategic relationship between the items of the balance sheet and profit and loss account. There are various methods and techniques used in analyzing financial statements, such as comparative statements, trend analysis, common size statements, schedule of changes in working capital, funds flow and cash flow analysis, cost volume profit analysis and ratio analysis and other operative data. The analysis of financial statement is used for decision making by various parties 3.2 Meaning and Concept of Financial Analysis:- The term ‘financial analysis’ , also known as analysis and interpretation of financial statements’, refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and opposite data.”Analysing financial statements,” according to Metcalf and Titard, “is a process of evaluating the relationship between component parts of a financial statements 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 statement, 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 in terlinked and complimentary to each other aAnalysis is useless without interpretation and interpretation without analysis is fifficult or even impossible most of the authors have used the term analysis only to cover the meaning both analysis and interpredation as the objective of analysis is ti sutudy the relationship between various items of financial statements by interpretation. We have also used the terms Financial statement Analysis or simply Financial Analysis to cover the meaninng of both analys is and interpretation. 3.3 - Objective and Importance of Financial Statament Analysis:- The primary objective of financial statements analysis is to understatd and diagnoe theimformation contained in financial statement with a view to judge the profitability financial soundness of the firm and to make forecast about future prospects of the firm. The purposed of analysis depencds upon the person interested in such analysis and his object. However the following purposed or objecti es of finandiaol statements analysis may be stated to bring out signifiance of such analysis. To assess the earning capacity or profitability of the firm. To assess the operational efficiency and managerial effectiveness. To assess the short term as wesll as log term solvency of the firm. To identify the reasons for change in profitability and financial position of the form. To make inter firem comparisons. To make forecasts about future prospects of the firm To assess the progress of the firm over a perid of time. To help in decision making and control. To guide or determine the dividecnd action To proved important information for granting credit. Types of Financial Analysis On the basis of material used On the basis of modus operandi, On the bases of entities used, On the basis of time horizon. On the basis of Material Used. According to material used, financial analysis can be two types. (a)External Analysis (b)Internal Analysis External Analysis: This analysis is done by outsiders who do not have access to the detailed internal accounting records of the business firm. There outsiders include investors, potential investors, creditors, potential creditors, credit agencies, government agencies and general public. For financial analysis thus save only a limited purpose, however the recent changes in the government regulations requiring business firms to make available more detailed information to the public though audited published accounts have considerably improved the position of the external analysis. Internal Analysis:- This analysis is done by persons who have access who have across to the detailed internal accounting records of the business firm is known as internal analysis such an analysis can therefore be performed by executives and employees of the employee of the organization as well as government agencies which have statutory powers vested in them financial analysis for managerial purposed is the internal type of analysis that can be effected de[ending upon the purpose to be achieved On the basis of modus operandic According to the method of operation followed in the analysis can be two types Horizontal Analysis Vertical Analysis Horizontal Analysis:- If refers to the comparison of financial data of a company for several years. The figures of this type analysis are presented horizontally over a number of columns. The figures of the variously years are compared with standard or base year. A base year is a year chosen as beginning point. It is also called ‘Dynamic Analysis’. This analysis makes it possible to focus attention on items that have changed significantly during the period under review. Comparative statements and trend percentages are two tools employed in horizontal analysis. Vertical Analysis:- It refers to the study of relationship of the various items in the financial statements of one accounting period. In this type of analysis the figures from financial statements of a year are compared with a base year selected from the same year’s statement. It is also called ‘Static Analysis’. Common size financial statements and financial ratios are the two tools employed in vertical analysis. Since vertical analysis considers data for one time period only, it is not vary conducive to a proper analysis financial statements. However, it may be used along with horizontal analysis to make it more effective and meaningful. On the basis of entities involved: According to the method of operation followed in the analysis can be two types Inter –firm or Cross Sectional Analysis Intra-firm or Time Series Analysis Inter-Firm or Cross Sectional Analysis:- Cross sectional analysis involves comparison of financial data of a firm with other firms (competitors) or industry averages for the same time period Intra-firm or Time Series Analysis:- Time series analysis involves the study of performance of the same firm over a period of time. On the basis of time horizon. According to the method of operation followed in the analysis can be two types s Short term Analysis Long term Analysis. Short term Analysis:- Short term analysis measures the liquidity position of a firm, i. e. short term paying capacity of a firm or the firm’s ability to meet the current obligations. Long term Analysis:- Long term analysis involves the of the firm’s ability to meet the interest costs and repayment schedules of its long term obligations. The solvency, stability and profitability are measured under this type of analysis. Procedure of Financial Statements Analysis Broadly speaking there are three steps involved in the analysis of financial statements. These are Selection Classification Interpretation The first step involves selection of information (data) relevant to the purpose of analysis of financial statements. The second step involved is the methodical classification of the data and the third step includes drawing of inferences and conclusions. The following procedure is adopted for the analysis and interpretation of financial statements. The analyst should acquaint himself with principles and postulates 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 to find out the earning capacity of the enterprise then analysis of income statement will be undertaken. On the other hand, if the financial position is to be studied then balance sheet analysis will be necessary. The financial data given in the statements should be re-organized and re-arranged. It will involve the grouping of similar data under same heads, breaking down of individual components of statements according to nature. The data is reduced to a standard form. A relationship is established among financial statements with the help of tools and techniques of analysis such as ratios, trends, common size, finds flow etc. The information is interpreted in a simple and understandable way. The significance and utility of financial data is explained for helping decision-taking. The conclusions drawn from interpretation are presented to the management in the form of reports Methods or Devices of Financial Analysis A Number of methods or devices are used to study the relationship between different statements. The following methods of analysis are generally used: Comparative statement Trend analysis Common size statements Funds flow analysis Cash flow analysis Ratio analysis Cost-volume-profit analysis In this project the Comparative statement and Ratio Analysis is used to study the financial statements of Au-Financiers (India) Pvt. Ltd. Comparative Statement:- The comparative financial statements are statements of the financial position at different periods of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in a comparative form will be covered in comparative statements. From practical point of view generally two financial statements. Balance Sheet Income Statement Comparative balance sheet:- The comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of th balance she at the beginning and at the end of a period and these changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheet. A third column is used to show this increase in figures. The fourth column may be added for giving percentage of increases and decreases. Guidelines for Interpretation of Comparative Balance Sheet While interpreting comparative balance sheet the interpreter is expected to study the following aspects. Current Financial Position and Liquidity Position Long term Financial Position Profitability of the Concern For studying the Financial Position and short term Financial Position of a concern, one sees the working capital in both the years. The excess of current assets over current liabilities will give the figure of working capital. The increase in working capital means improvement in the current financial position of the business. An increase in current assets accompanied by the increase in current liabilities of the same amount will not show any improvement in short term financial position. One should study the increase or decrease in current assts and current liabilities and this will enable him to analyze the current financial position. The second aspect which should be studies in current financial position is the liquidity position of the concern. If liquid assets like cash in hand, cash at bank, bills receivable, debtors, etc. Show an increase in the second year over the first year, this will improve the liquidity position of the concern, the increase in inventory can be on account of accumulation of stocks for want customers, decrease in demand or inadequate sales promotion efforts. An increase in inventory may increase working capital of the business but it will not be good for business. The long term financial position of the concern can be analyzed by studying the changes in fixed assets, long term liabilities and capital. The proper financial policy of concern will be to finance fixed assets by the issue of either long term securities such as debentures, bonds, loans from financial institutions or issue of fresh share capital, an increase in fixed assets should be compared to the increase in long term loans and capital if the increase in fixed assets is more than the long term securities then parts of fixed assets have not only been financed from long term sources. A wise policy will be to fiancé fixed assets by raising long term funds. The new aspects to be studied in a comparative balance sheet questions is the profitability of the concern. The study of increase or decrease in retained earning, various resources and surpluses, etc will enable the interpreter to see whether the profitability has improved or not. An increase in the balance of profit and loss account and he other resources created from profits will mean an increase in profitability to the concern. The decrease in such accounts may mean issue divided, issue dividend, issue of bonus share or deterioration in profitability of the concern. After studying various assets and liabilities and opinion should be formed about the financial position of the concern. One cannot say if short term financial position is good the n long term financial position will also be good or vice versa. A concluding word about the overall financial position must be given at the end. Comparative Income Statement:- The income statement gives the results of the operation of a business. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentages can be determined it analyze the profitability of the business. .like comparative balance sheet income statement also has four columns. First two columns give figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amounts and percentages respectively. Guidelines for Interpretation of Comparative Income Statement The analysis and interpretation of income statement will involve are following steps. The increase or decrease in sales should be compared with the increase ore decrease in costs of goods sold. An increase in sales will not always mean an increase in profit. The profitability will improve if increase in sales is more than increase in costs of goods sold. The amount of gross profit should be studied in the first step. The second step of analysis should be the operational profits. The operating expenses such as office and administrative expenses, selling and distribution expenses should be deducted from gross profit to find out operating profits. An increase in operating profit will result from the increase in sales position and control of operating expenses. A decrease in operating profit may be due to an increase in operating expenses or decease in sales. The change in individual expenses should also be studied. Some expenses may increase due to the expansion of business activities while others may go u due to managerial inefficiency. The increase or decrease in net profit will give an idea about the overall profitability of the concern. Non operating expenses such as interest paid, losses from sales of assets, writing off deferred expenses, payment of tax, etc. Decrease the figure of operational profit, we get a figure of net profit. Some non operating incomes may also be there which will increase net profit. An increase in net profit will gave us an idea about the progress of the concern. An opinion should be formed about profitability of the concern and it should be given at the end. It should be mentioned whether the overall profitability of the concern is good or not. Focus on Financial statement Analysis: Financial statement analysis involves evaluating different aspects of a business enterprise, which are of great importance to different users such as management, investors, creditors, bankers, analyst, investment advisers, etc. generally, the following analyses are made while making Financial Statement Analysis. Liquidity or short term solvency analysis. Profitability analysis Capital structure or gearing analysis Market strength or investor analysis Growth and stability analysis Application of Financial Analysis Following are the application of financial analysis: Assessing Corporate Excellence Judging credit worthiness Forecasting bankruptcy Valuing equity shares Predicting bonds ratings Estimating market risk Limitations of Financial Statement Analysis Financial analysis is a powerful mechanism of determining financial strengths and weakness of a firm. But, the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitations of financial statements. The financial analysis has also be careful about the impact of price level changes, windows dressing of financial statements, changes in the accounting policies of a firm, accounting concepts and conventions, and personal judgment, etc. the readers are advised to relate the limitations of financial statements as given in the previous chapter and also the limitations of ratios as a tool of financial analysis as discussed in Ratio Analysis. Some of the important limitations of financial analysis are, however, summed up as below. It is only a study of interim reports. Financial analysis is based upon only monetary information and non-monetary factors are ignored. It does not consider changes in price levels. As the financial statements are prepared on the basis of a going concern, it does not give exact position. Thus accounting concepts and conventions cause a serious limitation to financial analysis. Changes in accounting procedure by a firm may often make financial analysis misleading. Analysis is only a means and not an end in it self. The analyst has to make interpretation and drawn his own conclusions. Different people may interpret the same analysis in different ways. Overview of Ratio Analysis Introduction:- Ratio analysis is one of the techniques used to analyze the financial statement. It is one of the most powerful tools of financial analysis. It is the process of establishing and interpreting various ratios (quantitative relationship between figures and group of figures). Through ratio analysis financial statement can analyze more clearly and decision made from such analysis. According to Accountant’s Handbook by Wizon Kell and Bedford, a ratio’is an expression, of the quantitative relationship between the numbers’. Nature of Ratio Analysis:- Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decision. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strength and weaknesses of affirm. Calculation of mere ratios does not serve any purpose, unless several appropriate ratio are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of analysis. The ratios may be used as a symptom like blood pressure, the pulse rate or the body temperature and their interpretation depends upon the caliber and competence of the analyst. The following are the four steps involved in the ratio analysis: Selection of relevant data from the financial statements depending upon the objective of the analysis. Calculation of appropriate ratios from the above data. Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratio of some other firms or the comparison with ratios of the industry to which the firm belongs. Interpretation of the ratios. Use and significance of Ratio Analysis Helpful in decision making. Helpful in financial forecasting and planning. Helpful in communication. Helpful in co-ordination. Helpful in Control. Helpful in efficiency appraisal Helpful in evaluation of financial position. Helpful to investors, financial institution, employee Limitations of Ratio Analysis:- The ratio analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from some serious limitations. Limited Use of Single Ratio:- A single ratio, usually, does not convey much of a sense. To make a better interpretation a number of ratios have to be calculated which is likely to confuse the analyst than help him on making any meaningful conclusion. Lack of Adequate Standards:- There are no well adapted standards or rules of thumb for all ratios which can be accepted as norms it renders interpretation of the ratios difficult. Inherent Limitation of Accounting:- Like financial statements, ratio also suffer from the inherent weakness of accounting records such as their historical nature. Ratios of the past are not necessarily true indicators of the future. Change of Accounting Procedure:- Change in accounting procedure by a firm often makes ratio analysis misleading. E.g.a change in the valuation of methods of inventories, from FIFO to LIFO increases the cost of sales and reduces considerably the value of closing stocks which makes stock turnover ratio to be lucrative and an unfavorable gross profit ratio. Window Dressing:- Financial statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios calculated from such financial statements. But it may be very difficult for an outsider to know about the window dressing made by a firm. Personal Bias:- Ratio are only means of financial analysis and not an end in itself. Ratios have to e interpreted and different people may interpret the same ratio in different ways. Incomparable:- Not only industries differ in their nature but also the firms of the similar business widely differ in their size and accounting procedures, etc. it makes comparison of difficult and misleading. Moreover comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis. Absolute Figures Distortive:- Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a qualitative analysis. Price Level Changes:- While making ratio analysis, no consideration is made to the changes in price levels and this makes the interpretation of ratio invalid. Ratios no Substitutes:- Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if separated from the statements form which they are computed. Clues not Conclusions:- Ratios provide only clue s to analysts and not final conclusion. These ratios have to be interpreted by these experts and there are no standard rules for interpretation. Classification of Ratios: The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various users of ratios, there are many types of ratios which can be calculated from the information given in the financial statements. The particular purpose of the user determines the ratios that might be used for financial analysis. Various accounting ratios can be classified as followed Secondary Ratio Balance Sheet RatioLiquidity RatiosProfitability RatioPrimary RatioProfit & Loss Account RatioComposite RatioLeverage RatiosActivity Ratios Functional Classification in View of Financial Management or Classification According to Tests. Liquidity Ratio: (A) 1. Current Ratio 2. Liquid Ratio 3. Cash Ratio 4. Interval Measure (B) 1. Debtors Turnover Ratio 2. Creditors Turnover Ratio 3. Inventory Turnover Ratio Long-term solvency and Leverage Ratios: Debt/Equity Ratio Debt to total capital Ratio Invest Coverage Cash Flow/Debt Capital Gearing Activity Ratios or Asset Management Ratio: Inventory Turnover Ratio Debtors Turnover Fixed Assets Turnover Ratio Total Assets Turnover Ratio Working Capital Turnover Ratio Payables Turnover Ratio Capital Employed Turnover Profitability Ratio; In relation to Sales Gross Profit Ratio Operating Ratio Operating Profit Ratio Net Profit Ratio Expense Ratio In relation to investments Return on investments Return on capital Return on Equity capital Return on Total Resources Earnings per share Price-Earning Ratio Chapter -4 Analysis and Interpretation Comparative Balance Sheet Comparative Income Statement Ratio Analysis Analysis and Interpretation I have studied the financial statement of Au-Financier (India) Pvt. Ltd. by using comparative statements device. It shows as under. Interpretation of Comparative balance sheet: Assets.31th March 200931th March 2010Increase/Decrease/ Rs.Increase/DecreasePersentageCurrent Assets.Debtors Less than 6 Months201.03131.81(69.23)(34.44)Debtors More than 6 Months45.446.00(39.44)(86.80)Loans & Advances4,000.0315,144.8011,144.76278.62Accrued Interest on Loans31.62113.1081.48257.71Trade Advances450.88566.53115.6525.65Term Deposits1,850.694,201.332,350.63127.01Cash and other bank balances3,745.052,845.12(899.93)(24.03)Advances recoverable in cash/kind38.83337.53298.71769.33Other current assets51.86102.0850.2296.83Current Assets Total10,415.4323,448.2913,032.86125.13Fixed Assets.Owen Assets.191.32764.46573.14299.57Depreciation89.44112.0422.6025.27Net Block = Owen Assets. – DepreciationNet Block101.88652.42550.54540.38Investments317.69342.3724.687.77Net Block + Investments 419.57994.79575.22548.15Total Assets = Total Current Assets. + Total Fixed AssetsTotal Assets10,835.0024,443.0813,608.08125.59Current LiabilitiesSundry Creditors114.37211.5697.1984.98Other current liabilities/provisions375.82612.75236.9363.04EMI Payable Against Securitisation / Assignments182.771,001.67818.90448.05Provisions151.16339.67188.51124.71Provisions for NPA44.9241.02(3.91)(8.70)Provision for Estimated Loss for Securitisation / Assignments52.50183.34130.84249.23Other Provisions53.74115.3161.57114.58Current Liabilities Total824.122,165.651,341.53162.78Net Current Assets. = Current Assets – Current LiabilitiesNet Current Assets.9,591.3121,282.6411,691.33121.89Total Capital Employed = Net Block + Investments + Net Current AssetsTotal Capital Employed10,010.8822,277.4312,266.55122.53Represented ByEquity Share Capital1,000.021,393.29393.2739.33Share Application Money146.00-(146.00)(100.00)Compulsory Convertible Preference Shares2,000.007,549.995,549.99277.50Reserves and Surplus891.502,612.231,720.73193.02Less : intangibles---#DIV/0!DTA37.8684.2946.43122.63Tangible Net worth3,999.6611,471.227,471.56186.80Secured LoansTerm Loan4,740.066,337.531,597.4733.70Cash Credit1,267.034,468.673,201.64252.69Total6,007.0910,806.214,799.1279.89Unsecured LoansFrom Banks4.13-(4.13)(100.00)Others---#DIV/0!Total4.13-(4.13)(100.00)Deferred Tax Liability----Total Liabilities10,835.0024,443.0813,608.08125.59Channel Business15,417.0013,630.00(1,787.00)(11.59)Assigned Portfolio5,348.0019,839.8714,491.87270.98Off Balance Sheet Assets20,765.033,469.912,704.8761.18Assets Under Management24,765.0348,614.6723,849.6396.30 The comparative balance sheet reveals that during 2010 there has been an increase in current assets of Rs. 13,032.86 Lacs i. e. 125.13% in the current liabilities have increased by Rs.1,341.53 Lacs i. e. 162.78% so the current financial position has increased. The liquid Assets that is case in hand, cash in bank shows an decrease in 2010 over 2009 this will not improve the liquidity position of the concern. The other assets loans & advances have increase by Rs. 11,144.76 Lacs it’s show that company business improved. and long term liabilities increase in form of secured loan then it show that company have good relationship with the banks in India and mostly it shows that the company depends on banks Reserve and surplus have increased from Rs.891.50/- Lacs to Rs.2,612.23/- Lacs and the profit has increased from Rs.608.82/- Lacs to Rs.1,338.93/- Lacs. i.e. 119.92 %. It shows that the profitability of the Company has improved. The overall financial position of the Company is satisfactory. Comparison of income statement 31th March 200931th March 2010Increase/DecreaseRs.Increase/DecreasePercentageExpenditureSalaries and staff expenses 451.38803.18351.8077.94Admn. and Misc. expenses (incl. raw material) 681.181,498.53817.34119.99Operating Expenses 1,132.562,301.711,169.15103.23Provision for NPAs 1.37(3.91)(5.28)(385.53)Provision for Credit Loss on Securitisation 52.50130.8478.34149.23Provision for Overdue Debtors 8.21(5.21)(13.41)(163.44)Loan Written Off 39.4066.6827.2869.23Debtors Off -52.2752.275227Total Provision / Write offs 101.47240.67139.20137.18Total Expenditure = Operating Expenses + Total Provision/Write offsTotal Expenditure1234.032542.381308.35106.02IncomeInterest on own books 546.821,556.141,009.32184.6Income under Channel Business 912.67972.8660.196.595Income from securitisation 537.842,082.891,545.05287.3Interest on FDR 105.59191.8486.2581.68Income from Operations 2,102.924,803.732,700.81128.4Other Income 181.54623.26441.72243.3Total Income 2,284.465,426.993,142.53137.6PBIDT = Total Income – Total ExpenditurePBIDT 1,050.432,884.611,834.18174.61Less:- Depreciation and Impairment of Fixed Assets 30.5345.8115.2850.04PBIT 1,019.902,838.801,818.90178.34Less:- Interest 185.10914.06728.95393.81Less:- Prior Period Adjustmenst (2.15)0.402.55(118.60)Less:- Misc. expn. written off 12.75-(12.75)(100.00)PBT 824.191,924.351,100.15133.48Less:- Tax 258.66631.22372.56144.03PAT 565.531,293.12727.59128.66Total Expenses = Total Income – Profit After Tax (PAT)Total Exp.1,718.934,133.872,414.94140.49Add : Depreciation 30.5345.8115.2850.04Gross cash accruals = Profit After Tax + DepreciationGross cash accruals 608.821,338.93730.12119.92Less : Dividends - Pref. (Rs.) ---- - Equity (Rs.) ----Net cash accruals 608.821,338.93730.12119.92Net cash accruals/Total Income(%)26.6524.67(1.98)(7.42) The comparative income statement reveals that there has been increase in Operating Expenses 103.23% Provision for Credit Loss on Securitisation 149.23%, Loan Written Off 69.23% and debtors off 52.27 Lacs but the other expenditure decrease Provision for NPAs 385.53% and Provision for Overdue Debtors 163.44%. so the total expenditure is increased by Rs. 106.02% The total income of the bank has increased by 137.6% and the company earn the profit of Rs 1,338.93/- Lacs which is 119.92% more than the previous year. There is a sufficient progress in the Company and the overall profitability of the bank is good. Ratio Analysis Profitability Ratio The primary objective of business undertaking is to earn profit is the words of lord Keynes :profit is the engine that drives the Business enterprise”. Profit is not only needed for its existence but also for its expansion and diversification. The investors want an adequate return on their investment, workers want higher wages, creditor want high security for their interest and loan soon. Following are the important overall profitability ratios, which relevant to the Business Concerns are: Return on Assets Return on Capital Employed Return on Equity Capital Earning per Share (EPS) Return on Assets: It states the relationship between net profit and total asses. Return on assets = Net Profit*100/Total asset YearNet ProfitTotal AssetPercentage2008294.742,894.7110.182009608.8210,835.005.6220101,338.9324,443.085.48 Relation of Net Profit and Total Asset By Diagram Interpretation : The return on assets of Au. Financier’s (India) Pvt. Ltd. is not satisfactory. The assets are not utilized properly. Return on Capital Employed It is widely used to measure the overall profitability and the efficiency of the business. Return on Capital Employed = Net Profit*100/Total capital employed Capital Employed: Share Capital Reserve fund & other reserves YearNet ProfitCapital EmployedPercentage2008294.742,613.1111.282009608.8210,010.886.0820101,338.9322,277.436.01 Relation of Net Profit & Capital Employed by Diagram Interpretation: The return on capital employed of Au. Financier’s (India) Pvt. Ltd. is in good trend. Return on Equity Capital The equity share holders are the real owner of the company. They assume high risk in the company. Return on Equity Capital = Net Profit * 100/Equity capital YearNet ProfitEquity CapitalPercentage2008294.741,000.0229.472009608.821,000.0260.8820101,338.931,393.2996.10 Relation of Net Profit & Equity Capital Diagram Interpretation: The return on equity share capital of Au Financiers (India) Pvt. Ltd.. Provides a higher rate of dividend to its equity share holders. Earning per Share (EPS): It is samall variation of return on equity capital. It shows the profit available to each share holder. Earning per Share = Net Profit / Equity Share Holders YearNet ProfitNo. of Equity Percentage Diagram Interpretation: The EPS of Au fin. Is satisfactory to the equity share holders. Chapter 5. Findings Suggestions Findings The current assets have increased in 2010 by Rs. 13,608.08/- lacs i. e. 125.59 % The case and bank balance decreased by Rs. 899.93/- lacs i.e. 24% The company provide loan and advances to its customers more than 2009 in 2010 Rs. 11,144.76/- lacs. The other assets loans & advances have increase by Rs. 11,144.76 Lacs Term deposits are increased in the year 2010 by Rs. 2350.63 lacs. Current liabilities are increased in the year 2010 than previous year Rs. 1,341.53437 lacs i.e. 162.78% Total capital employed increased by Rs 12,266.55/- lacs in the year 2010 Net income of the company increase in the year than previous year 119.92% The company have good relationship with the banks. Suggestions From all the studies we can suggest some point to improve the profitability of the organization. It should be increase advertisement mostly in rural areas because more population of the Rajasthan does not know about the company in urban area. The company should focus more on advancing loans and money to customers. It should reduce the cost of management. It should recover its money from defaulters in a limited time. It should control the non operation expenses and other expenditure. It should ready for the coming competitive as all financier’s Companies are going to be privatized. To increase the net profit at higher rate, carefully designed risk management systems and increasingly higher aspiration levels of customer services should be taken. Chapter – 6 Conclusion If properly analyzed and interpreted, financial statements can provide valuable insight into a firm’s performance. Analysis of financial statements is of interest to lenders (short term as well as long term) investors, security analysts, managers and others. Financial statement analysis may be done for a variety of purpose, which may range from a simple analysis of the short term liquidity position of the firm to a comprehensive assessment of the strength and weakness of the firm in various areas. It is helpful in assessing corporate excellence, judging credit worthiness, forecasting bond ratings, predicting bankruptcy and assessing market risk. I have studied the attached balance sheet and Profit and Loss Account of Au Financiers (India) Pvt. Ltd. At 31st March 2010 The financial Statements are the responsibility of the company’s management the analysis and interpretation of financial statements is essential to bring out the mystery behind the figure in financial statements. The transactions of Company, which have come to my notice, have been within the powers of Company. Proper books of account s require by law have been kept by the Company in so far as it appears from my observation of those books. Proper returns have been received from the Company’s branches. The balance sheet and profit and loss account are in agreement with the books of account. Reference Reference from Journal, Magazine, Newspaper, Annual Report: Annual Report of Au. Fin. Jaipur Website www.Au.fin.com. www.managementparadise.com

A project report on financial statement analysis

A project report on financial statement analysis

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (20)

Similar a A project report on financial statement analysis

Similar a A project report on financial statement analysis (20)

Más de Projects Kart

Más de Projects Kart (20)

Último

Último (20)

A project report on financial statement analysis