FINANCIAL PERFORMANCE ANALYSIS
Financial performance analysis is the process of identifying
the financial strengths and weaknesses of the firm by properly establishing the
relationship between the items of balance sheet and profit and loss account. It
also helps in short-term and long term forecasting and growth can be identified
with the help of financial performance analysis.The dictionary
meaning of ‘analysis’ is to resolve or separate a thing in to its element or
components parts for tracing their relation to the things as whole and to eachother.The analysis
of financial statement is a process of evaluating the relationship between the
component parts of financial statement to obtain a better understanding of the
firm’s position and performace.This analysis can be undertaken by
management of the firm or by parties outside the namely,
owners,creditors,investors.
The analysis of financial statement represents three
major steps:
Ø
The first step involves the re-organization of
the entire financial data contained the financial statements. Therefore
the financial statements are broke down into individual components and
re-grouped into few principle elements according to their resemblances and
affinities. Thus the balance sheet and profit and loss accounts are completely
re-casted and presented in the condensed form entirely different from their
original shapeThe second step is the establishment of significant relationships
between the individual components of balance sheet and profit and loss account.
This is done through the application tools of financial analysis like Ratio
analysis, Trend analysis, Common size balance sheet and comparative Balance
sheet.
Ø
Finally, the result obtained by means of
application of financial tools is evaluated.
Ø
In brief financial analysis is the process of
selection, relation and evaluation of financial statements. The tools of
analysis are used for determining the investment value of the business, credit rating
and for testing efficiency of operation.
Thus financial analysis helps to highlight the facts and
relationships concerning managerial performance, corporate efficiency,
financial strength and weakness and credit worthiness of the company.
OBJECTIVES:
Ø
To study the financial performance analysis of
“Times Financials”.
Ø
To analyze the financial changes over a period
of five years.
Ø
To analyze the financial statements of the
company by using financial tools.
Ø
To evaluate the financial position of the company
in terms of solvency, profitability, activity and earning ratios.
Ø
To suggest effective measures in the existing
system of the company.
RESEARCH METHODOLOGY: Research means “know about new things”. Sometimes, it may refer to scientific and systematic search pertinent information on specific topic. In fact research is an art of scientific investigation.
According to Clifford Woody research comprises of. “define and redefining problem, formulating hypothesis or suggested solution, collecting, organizing and evaluating data; making deduction and reaching conclusion; and at last carefully testing the conclusion to determine whether they fit the formulating hypothesis”. Redman and Moray define research as a “systematic effort to gain new knowledge”.Research can be defined as the search of knowledge or any systematic investigation to establish fact. The primary purpose for applied research (as opposed to basic research) is discovering, interpreting, and thedevelopment of methods and systems for the advancement of humanknowledge on a wide variety of scientific matters of our world and the universe. Research can use the scientific method, but need not do so.Research can also be said as a process that is followed by a person to answer either his/her own queries or somebody else queries about a particular object, person, subject etc.Data collection: The data collections classified into two types are
v Primary
data
v Secondary
data
Secondary data
The secondary data are data are collected from information
which is used by other. It is not direct information. This information is
already collected and analysis by other and that information is used by others.
The secondary data are collected from following:-
v Company’s
annual report
v Company’s
website
v Manual
Data analysis:
v
The data’s analyzed using the following tools:-
v
Comparative Balance sheet
v
Common size balance sheet
v
Ratio analysis
v
Trend Analysis
NEED FOR THE STUDY:Financial statement analysis is an
important tool for measuring the financial performance of any company. The
main aspect of financial management is working capital management and it
should be done on day-to-day basis. Hence the company permits me to do in
the area of finance. This study helps to review the financial performance of
the company.
LIMITATIONS OF THE STUDY:
v The
study is restricted for a period of five years
v Assumed
that 5 years are a responsible period to get fault accurate picture
policies and practices of management of the company.
v Due
to the inadequate time it is not possible to analyze all respects relevant to
the study.
v The
analysis is based on annual reports of the company.
v Authorities
were reluctant to reveal full information about the working of the Company.
REVIEW OF LITERATURE
FINANCIAL ACCOUNTING:
Financial accounting is the process of systematic recording
of the business transactions in the various books of accounts maintained by the
organization with the ultimate intention of preparing the financial statement
there from. These financial statements are basically in two forms. One,
profitability statement which indicates the result of operations carried out by
the organization during a given period of time and second balance sheet which
indicates the state of affairs of the organization at any given point of time
in terms of its assets and liabilities.
Main purpose of financial accounting is to ascertain profit
or loss and to indicate financial position of an enterprise. Two fundamental
statements of financial accounting are income and expenditure statement and
balance sheet. The profit and loss account or income and expenditure account is
prepared for a particular period to find out the profitability of the firm and
balance sheet is prepared on a particular date to determine the financial
position of the firm.
Financial accounting summaries transactions taking place
during a period with the objective of preparing the financial statement.
FINANCIAL PERFORMANCE ANALYSIS
Financial performance analysis is the process of identifying
the financial strengths and weaknesses of the firm by properly establishing the
relationship between the items of balance sheet and profit and loss account. It
also helps in short-term and long-term forecasting and growth can be identified
with the help of financial performance analysis.
The dictionary meaning of ‘analysis’ is to resolve or
separate a thing in to its element or components parts for tracing their
relation to the things as whole and to each other.
FINANCIAL STATEMENTS
‘FINANCIAL STATEMENT’ refers to formal ad original
statements prepared by a business concern to disclose its financial information
According to John.N.Meyer, “The financial statement provides
summary of accounts of a business enterprise, the balance sheet reflecting
assets, liabilities and capital as on a certain date and the income statement
showing the result of operation during a certain period”
The financial statements are prepared with a view to depict
the financial position of the concern. They are based on the recorded facts and
are usually expressed in monetary terms. The financial statement are prepared
periodically that is generally for the accounting period
The term financial statement has been widely used to
represent two statements prepared by accountants at the end of specific period.
They are :
v Profit
and loss a/c or income statement
v Balance
sheet or statement of financial position
Limitation of Financial Statement:
v Information
shown in financial statement is not precise since it is based on practical
experience and the conventions and rules developed therefore
v Financial
statements do not always disclose the correct financial position of the
business concern as they are influenced by the personal
opinions,judgement,subjective view and whims of accountant of each concern
v Balance
sheet of a concern is a statics document it disclose the financial position of
a concern on a particular date.
v Information
disclosed by profit& loss a/c may not be the real profit as many items
shown in the profit & loss a/c may not the real
v Financial
statements are dumb, because they speak themselves. The statements require
further detailed analysis and interpretation.
v Financial
statement of the one period may not be comparable.
v Financial
statement do not disclose the contribution of man towards the efficiency of the
business.
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT
The various tools of financial statement are used for
decision-making process. The financial statement becomes a tool for future
planning and forecasting. The analysis of these statements involves their
division according to similar groups and arranged in desired form. The
interpretation involves the explanation of financial facts in a simplifiers
manner.
Objectives of Analysis and Interpretation:
The users of financial statement have definite objectives to
analysis and interpret .Therefore; there are variations in the objectives of
interpretation by various classes of people. However, there are certain
specific and common objectives which are listed below:
v To
interpret the profitability and efficiency of various business activities with
the help of profit and loss account;
v To
measure managerial efficiency of the firm;
v To
ascertain earning capacity in future period;
v To
measure short-term and long -term solvency of the business;
v To
determine future positional of the concern;
v To
measure utilization of various assets during the period;
v To
compare operational efficiency of similar concerns engaged in the same industry
Type of Analysis:
The process of financial statement analysis is of different
types. The process of analysis is classified on the basis of information used
and ‘modus operandi’ of analysis. The classification is as under:
Financial statement analysis
On the basis of information on basis of ‘modus operandi’
of
Used: analysis:
(a) External analysis (a) Horizontal analysis
(b) Internal analysis (b) Vertical analysis
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS
Financial statement analysis is a very important device but
it has Certain limitation which are to be kept in mind. Following are the
limitations of financial statement analysis.
1.
Based on past data:
The nature of financial statements is historical. Past cannot
be the index of future estimation, forecasting, budgeting and planning.
2
Financial statement analysis cannot be a
substitute for judgment :
Analysis is a tools which can be utilized usefully by an
expert may lead to erroneous conclusion by unskilled analysis. Thus the result
analysis cannot be considered as judgment or conclusion.
- Reliability
of figures:
The accuracy and reliability of analysis depends on
reliability of figures derived from financial statement.
- Different
interpretation:
Result of the analysis may be interpreted differently by
different user
- Change
in accounting methods:
Analysis will be effective if the figures taken from financial
statements comparable. If there are frequent change in accounting policies and
method, figures of different periods will be different and comparable.
- Price
level change:
The ever rising inflation erodes the value of money in the
present day economic situation, which reduces the validity of analysis.
- Limitations
of the tools of analysis:
Different techniques of analysis are used by an analyst.
These tools are suitable for different type of analysis. Application of a
particular tool or technique depends on the skill and expertise of the analyst.
If an unsuitable technique is used, it give misleading result. It may lead to
wrong conclusions and prove harmful to the business concern.
METHODS OF ANALYSIS AND INTERPRETATION
The analysis and interpretation of financial statement is
used to determine the financial position and result of operation as well. The
following are the tools that are used for analyzing the financial position of
the company:
v Ratio
Analysis
v Comparative
balance sheet
v Common
size balance sheet
v Trend
analysis
RATIO ANALYSIS
Ratio analysis is an important and age-old technique. It is
a powerful tool of financial Analysis. It is defined as “The indicated quotient
of two mathematical expressions” and as “the relationship between two or more
things” .Systematic use of ratio is to interpret the financial statement so
that the strength and weakness of a firm as well as its historical performance
and current financial condition can be determined.
A ratio is only comparison of the numerator with the
denominator .The term ratio refers to the numerical or quantitative
relationship between two figures. Thus, ratio is the relationship between two
figures and obtained by dividing a former by the latter. Ratios are designed
show how one number is related to another.
The data given in the financial statements are in absolute
form and are dumb and are unable to communicate anything. Ratios are relative
form of financial data and are very useful technique to check upon the
efficiency of a firm. Some ratios indicate the trend or progress or downfall of
the firm.
In the view of the requirements of the various users of
ratio, it is divided in to the following important categories.
- 1.
Liquidity ratios
- 2.
Activity ratios
- 3.
Profitability ratios
- 4.
Earning ratios
LIQUIDITY RATIOS:
Liquidity ratios measure the ability of the firm to meet
it’s a current obligation. In fact, analysis of liquidity needs the preparation
of cash budgets and cash and fund flow statements; but liquidity ratios, by
establishing a relationship between cash and other current asset to current
obligations provide a quick measure of liquidity.
A firm should ensure that it does not suffer From lack or
liquidity, and it does not have excess liquidity .the failure of the company to
meet its obligations due to its lack of liquidity, will result in a poor
creditworthiness, loss of creditor’s confidence, or even in legal tangles
resulting in the closure of the company a very high degree of liquidity is also
bad idle assets earn nothing. The firms fund will be unnecessarily tied up in
current assets. Therefore it is necessary to strike a proper balance between
high liquidity and lack of liquidity.
ACTIVITY RATIO OR TURNOVER RATIO:
Activity Ratio highlights the activity and the operational
efficiency of the business concern . The better managements of asserts the
larger the amount of sales. Activity ratio measures the relationship between
the sales and the assets. Turnover ratios are employed to evaluate the
efficiency with which the firm manages and utilize s its assets. Their ratio
indicates the speed with which assets are brought converted as turn over into
sales.
PROFITABILITY RATIOS:
Profitability reflects the final result of the business
operations. Profit earning is considered essential for the survival of the
business. There are two types of profitability ratios profit margin ratio and
the rate of return ratios. Profit margin ratio shows the relationship between
profit and sales.
Popular profit margin ratios are gross profit margin and net
profit margin ratio. Rate of return ratio reflects between profit and
investment. The important rates of return measures are rate of return on total
assets and rate in equity.
EARNINGS RATIOS:
Earnings are income to the shareholders of the share
invested by them. Hence the earning ratio will be useful to the investors to
the value of the shares that is been holding by them
COMPARATIVE BALANCE SHEET:
The comparative balance sheet is helpful in analyzing and
evaluating the financial position of the firm over a period of years. The
comparative balance sheet analyse is the study of the trend of the same items,
group of items, and computed items in two or more balance sheet 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 the balance
sheet at the beginning and at the end of the period and these changes can help
in forming an opinion about the progress of an enterprise
COMMON SIZE BALANCE SHEET:
Financial statements when read in absolute figure are not
easily understandable. They are even miss leading. Each items of asset is
converted in to percentage to total asset and each item of capital and
liabilities is expressed to total liability and capital fund. Thus the whole
balance sheet is converted in to percentage form i.e., every individual item
stated as a percentage of total 100.such converted balance sheet is known as
common size balance sheet. The percentage so calculated can be easily compared
with the corresponding percentages in some other period.
TREND ANALYSIS:
The ‘trend’ signifies a tendency and as such the review and
appraisal of tendency in accounting variables are nothing but the trend
analysis. Trend analysis is carried out by calculating trend ratio. Trend
analysis is significant for forecasting and budgeting. Trend analysis discloses
the change in financial and the operating data between specific periods.
Great information sir.
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