Description
mahindra and mahindra
EXECUTIVE SUMMARY
Project Title: Financial Statement Analysis
Company Name: MAHINDRA & MAHINDRA
This project helped me to get the deeper understanding of the process of Financial Statement Analysis and how decisions are taken to strengthen the financial position. For this study five years Income Statement & Balance Sheet have been taken for calculating ratio analysis Financial analysis which is the topic of this project refers to an assessment of the viability, stability and profitability of a business. This important analysis is performed usually by finance professionals in order to prepare financial or annual reports. These financial reports are made with using the information taken from financial statements of the company and it is based on the significant tool of Ratio Analysis. These reports are usually presented to top management as one of their basis in making crucial business decisions. The importance of these Ratios which could be the roots of decisions made by management that can make or break the company. So, I was influenced to allocate the aim of this project to study the details about these ratios and their possible effects on the decisions made by not only people inside the company but also the outsiders such as investors.
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PRESENT SCENARIO OF AUTOMOBILE SECTOR
Ending the year on a gloomy note, the Indian automotive industry is looking towards a brighter time in the upcoming year. The past few years has seen a rapid rise in the Indian Automotive Sector. Economic reforms and deregulation have helped it to become one of the fastest growing industries globally. With an annual production of more than 3.7 million units in 2010, India’s passenger car and commercial vehicle is the seventh largest manufacturing industry in the world. It is said that one cannot predict the future by looking into the past. This adage holds true for the automotive sector in India. According to data available with the Society of Indian Automobile Manufacturers (SIAM), domestic passenger car sales stood at 1, 38,521 units in October 2011 compared to the 1, 81,704 units sold in the same month last year (October 2010). Even the festive cheer did nothing to help the cause this season. The year 2011 has been gloomy for the industry as it has shown the steepest decline in sales since 2000. The carmakers have cited increased fuel prices and bank interest rates as the key reasons for the collapse. Fuel prices have been revised more than 11 times in the past one year and Reserve Bank of India (RBI) has increased lending rates by 13 times since March 2010 to cool inflation. This has made the shoppers think twice before buying a car. Moreover, a car is the second biggest investment for many households, with the first being purchasing a home, and people are not taking car loans as they already have home loans to repay. Despite the dismal performance this year the Indian automotive companies are not hitting the panic button as many expected the slowdown and have made plans to counter the same. Many automotive companies converted the adversity into an opportunity by coming up with new launches which have an option of diesel engines. With the hike in the petrol prices, the differential price between petrol and diesel is currently more than 40 percent, which lead to an increase in demand for vehicles with a diesel engine. Analysts expect 2012 to be a bright year for the industry as statistics show that the Auto Expo 2011 has all its stalls booked which reflects the many customer friendly deals companies have to offer. Companies have realised that trimming down the cost of vehicles and providing vehicles to customers at a relatively low price is the key to increase their sales. Several large companies have geared up to this new reality and are in the process of investing down south to set up manufacturing units, R&D facilities and design capabilities. Considering the challenges that the industry has been facing since the past one year and the way it has countered most of the threats that it faced, one can be sure that the future of auto industry is promising. This is proved by the recent announcement made by SIAM, that the car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, India is expected to top the world in car volumes with approximately 611 million vehicles on the nation’s roads
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REVIEW OF LITERATURE
Financial statements and ratios: Part 2 Frederick, David. Credit Management (Jul 2001): 40-41. David Frederick continues his examination of financial ratios, focusing on working capital and profitability. This article examines the usefulness of the profitability and management of working capital ratios, for credit managers, students and third parties.. The rationale here is that profit is an end of period occurrence and cash is the oxygen of any business. A business may survive the absence of profit but no business is able to survive the absence or lack of cash flowing through its veins. Key financial statement ratios
Schwei, Thomas. Small Business Forum 14. 2 (Fall 1996): 54.
This article is for non-accountants who want to have a working knowledge of finance. This article, identify the key ratios which affect your business-and why they deserve your ongoing attention. So it helps to understand how to read the basic financial statements of the company. The balance sheet indicates company's financial position at a point in time while the income statement reports the net earnings of your organization for a period of time. Now, how do you analyze the financial statements and begin to understand whether things are going well or not so well compared to what you planned or previous periods? The answer lies in using financial statement ratios to help to analyze the situation. By identifying key ratios which affect the business and reviewing them regularly, we can identify and deal with problems arising in your business before they get out of hand. Unlocking the secrets of financial statements
Montes Di Vittorio, Martha. Database 18. 5 (Oct 1995): 24.
It is no longer enough for information professionals to simply know where to get information, they now have a responsibility to be familiar with what they hand out and understand some of the issues concerning the accuracy of the information. The building blocks of financial statements as well as the basic vocabulary used in them are discussed. Financial statements, which are filed by public companies, have some main components: 1. balance sheet, 2. income statement, 3. cash flow, and 4. adjuncts. Analysts often calculate rations that help them make sense of a single financial statement or understand the relationships between financial statements. Some ratios commonly used are: 1. current ratio, 2. quick ratio, 3. inventory turnover, 4. debt to equity, and 5. return on equity.
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[1] Kristy, James E. "Conquering Financial Ratios: the Good, the Bad, and the Who Cares?" Business Credit 96, No. 2 (February 1994): pp. 14-19. [2] Institutional Brokers Estimate System (I/B/E/S). "Summary Data Highlights: G-7 Nations." Summary Data, Europe Edition, January 19, 1995. Many information professionals deal with financial statements every day and have a clear understanding of their contents. There is also another group, to which I belonged until recently; who cheerfully hand out financial statements without ever lifting the front cover for fear that, like Pandora's Box, evil things will fly out of it. It is important to have some level of understanding of the components of financial statements for a variety of reasons, the most important of which is that it puts us on even ground with our clients. It is no longer enough simply to know where to get information; we have a responsibility to be familiar with what we hand out and understand some of the issues concerning the accuracy of the information. This article will cover the building blocks of financial statements as well as the basic vocabulary used in them. The ultimate goal, however, is not to dissect financial statements line by line, but to give readers enough information to be able to evaluate the sources they provide for clients and to understand what goes into creating the data within them. Ratio(nal) analysis
Anonymous. Management Accounting 72. 7 (Jul/Aug 1994): 40.
The financial record of Glynwed International PLC. is analyzed. The pages of the company's annual report are taken up with a list of subsidiary companies, grouped under headings like foundry products, metal services, plastics, steels, and engineering. Business has become more complex in recent years, and the vagueness of accounting for acquisitions and divestments in consolidated accounts has confused matters even more. The climax of Glynwed's financial review concerns the return on equity, defined - by Glynwed - as profit before tax as a percentage of shareholders' funds at the end of the year. There are obvious weaknesses in this definition. The more shareholders seek to distil the complex accounting numbers into simple ratios, the greater the need to standardize the definition of those ratios. Minding your ratios - Annual Statement Studies / Industry No
Posner, Bruce G. Inc 15. 11 (Nov 1993): 136.
To know why two companies in the same market can have vastly different experiences with lenders? Nowadays much of the answer can be found in how the business compares numerically with its peers. That's why it pays to know the industry norms and to take steps to nudge financial ratios in the right direction. For years we've been recommending Annual Statement Studies, published by Robert Morris Associates (215-851-0585, $105), to business owners who want to anticipate lenders' questions and put the best spin on their companies' performance.
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Tools of the Trade: Financial Statements: the National Magazine of Business Fundamentals C&FM
Pressel, Jerry R. Business Credit 93. 2 (Feb 1991): 12.
The evaluation of a new customer for the extension of credit involves character, capacity, capital, and conditions. Of these, only capital can be evaluated on a quantitative level by analyzing financial statements. The first step is to calculate financial ratios and compare them to an industry average that can be obtained from credit groups and credit agencies. Financial ratios can be grouped into 4 areas: 1. liquidity ratios that evaluate the company's ability to meet current obligations with assets presently available, 2. activity ratios that estimate how efficient the company is in collecting receivables, turning inventory, and paying bills, 3. leverage ratios that provide a measure of how much debt is used to finance the operation, and 4. profitability ratios that measure the margins at both the gross and net income levels. Information is extracted from the results of the ratios by comparing them to industry averages and comparing year-to-year statements to determine trends. Jerry R. Pressel is a general credit manager for Dayco Products, Inc., Dayton, OH. Quick and Easy Guide to Financial Statements: the National Magazine of Business Fundamentals C&FM
Wey, Frank W. Business Credit 93. 2 (Feb 1991): 8.
Financial statement analysis is simply a comparison with a standard. To compare companies of different sizes, it is necessary to reduce raw dollars to percentages and ratios. The first step is to calculate each balance sheet item as a percent of total assets. The 2nd step is to make 9 ratio calculations, including current ratio (current assets to current debt) and quick ratio (cash plus marketable securities plus accounts receivable to current debt). Here, the standard with which financial analysis is compared is a universal standard for manufacturers and wholesalers. This standard considers only 4 ratios - 2 liquidity ratios and 2 capital structure or leverage ratios. The purpose of this standard is to divide the universe of manufacturers and wholesalers into quartiles or risk classes. A company's risk class is determined by the lowest ranking of the 4 ratios: 1. current ratio, 2. quick ratio, 3. current debt to net worth, and 4. total debt to net worth. The credit line calculation is also related to the customer's risk class. Financial Statement Analysis: The 1920s and the 1980s
Senatra, Phillip T; Frishkoff, Patricia A. The Journal of Commercial Bank Lending 66. 10 (Jun 1984): 40.
A comparison of financial statement analysis in the 1920s with current methods focuses on changes: 1. in methods of financial statement analysis, and 2. in the financial statements themselves. Examination of 2 financial statement analysis textbooks published in 1925 and one published in 1983 reveals that: 1. The same users of financial reports were identified in 1925 and 1983.
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2. Basically, the same ratios were suggested for use in fundamental analysis. 3. The ability to compute ratios and to make appropriate types of comparisons were limited by inadequacies in the financial data and supporting disclosure. In comparing the 1925 and 1983 annual reports of 12 major industrial firms, it was found that theoretically financial statement analysis methods in 1925 were advanced, able to handle any type of information provided, and encouraged thorough disclosure. However, in practice, the financial statement analyst of 1925 was impeded by lack of published information. The current methodology of financial analysis is wellequipped to handle complex and expanded reporting. Understanding Financial Statements
Schwan, Edward S. Business 34. 2 (Apr/May/Jun 1984): 37.
Financial statement analysis can involve calculating numerous technical ratios. Simple pictures of the interrelationships among balance sheet items and income measures can be developed to improve understanding of the purposes of such calculations. Both owners of small businesses and private investors can use such devices to prepare their own financial statement analyses and so prepare themselves to discuss financial statements with financial professionals. Conversely, financial professionals can translate accounting ratios to simple diagrams as a way of explaining the importance of financial condition measures to persons without financial backgrounds. Simplified drawings can be used to help explain such concepts as: 1. the accounting equation, 2. the interdependent functions of assets and claimholders, 3. the optimum balance among assets, and 4. return on investment ratios. Financial Statement Analysis - A Two-Minute Drill
Stone, William L. The Journal of Commercial Bank Lending 66. 3 (Nov 1983): 11.
Commercial loan officers often need to make a quick appraisal of a financial statement, focus on key factors, and develop pertinent questions about a company's problem areas. A 2-minute drill is presented which can give a clear picture of a firm's financial strengths and weaknesses; it is based on 3 ratios - current, debt to worth, and net profit margin - and 3 turnovers - receivables, inventory, and payables. The generally accepted standards for the ratios are 2.0 for the current ratio and the debt to worth ratio and 5% for the net profit margin. For accounts receivable, inventory, and accounts payable turnovers, the standard is 36 days, which actually is a very favorable turnover. The 2-minute drill is not intended to be a substitute for a thorough analysis of a credit, but it can serve as a basis for inquiries in the early stages of the application process.
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Financial Analysis with Ratios: Profitability, Liquidity, Leverage, and Solvency: the National Magazine of Business Fundamentals C&FM
Strischek, Dev. Credit and Financial Management 85. 8 (Sep 1983): 14.
Before extending credit, competent lenders assess a borrower's financial condition by evaluating the borrower's profitability, liquidity, leverage, and solvency. These interrelated factors and how they change during a firm's life cycle are an important part of financial analysis. A firm's profitability is the ratio of its profits before tax to stockholders' equity. Its liquidity is measured by dividing total assets by total liabilities. Leverage is expressed as the ratio of debt to equity and a borrower's solvency is determined by adding interest expense to profits before tax, then dividing the total by interest expense. Creditors find it more appealing to determine a borrower's profitability ratio as the dependent variable of the liquidity, leverage, and solvency ratios. By considering the interrelationships between the 4 ratios, lenders can more accurately evaluate changes in one ratio that affect the other 3. Financial Ratios in Annual Reports: Certified Public Accountant
Gibson, Charles. The CPA Journal 52. 9 (Sep 1982): 18.
Financial ratios are often used to interpret financial statements, and when used correctly, they can be an effective tool in evaluating the liquidity, debt position, and profitability of a company. Generally, a company will use either the debt/capital ratio or the debt/equity ratio to indicate the extent of debt in relation to other sources of funds. However, the method used to compute the debt ratios often varies greatly. This lack of standardization allows companies to compute ratios in a manner that is most favorable to their position if they care to do so. Furthermore, the ratios that are disclosed cannot be assumed to be comparable with ratios disclosed by competitors and industry averages. How Industry Perceives Financial Ratios
Gibson, Charles H. Management Accounting 63. 10 (Apr 1982): 13.
Currently, no regulatory agency provides guidance in the area of comprehensive financial ratio analysis, except for the computation of earnings per share. There is some agreement on which ratios are important, but there is a lack of consensus on the computational methodology of these ratios. A questionnaire was sent to the controllers of the companies listed in Fortune's 500 Largest Industrials for 1979. There were 103 usable responses. Ninety-three respondents said their firms used financial ratios as part of their corporate objectives. The profitability ratios, which survey respondents rated with the highest significance, were the same ratios used most frequently as corporate objectives. A couple of debt ratios were second in frequency of use. There does not appear to be much use made of inflation data in ratio analysis. The survey also indicated that a selected ratio is apt to be reported to the board of directors and key employees but is less likely to be reported to stockholders.
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OBJECTIVE OF THE STUDY
There have been various objectives for this study, the first of which is a detailed analysis of the financial statements that is the balance sheet and the income statement of Mahindra & Mahindra ltd. The second objective, however the most important one or in other word the principle aim of this project is the understanding and assessment of financial ratios based on the statements of the company. The next aim of the project is to recognize the position of the company through those ratios and data available. To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.
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RESEARCH METHODOLOGY
Research framework: This study is based on the data about Mahindra & Mahindra Types of data which helped to prepare this report: Secondary data: The secondary data which was already prepared so these data was only used to reach the aims and objectives of this project. These data has been collected from the financial reports of the company. ? Digital Sources: The secondary data I collected was through the study of the financial statements already existed on the company website in form of digital files reserved in the company for further references. I had chosen these files because of the reliability and suitability of these information which I was also sure about the accuracy of them. These files consist of: 1. Annual report of the company 2. Financial balance sheets 3. Income statements
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COMPANY PROFILE
Overview Founded in 1945 as a steel trading company, they entered automotive manufacturing in 1947 to bring the iconic Willys Jeep onto Indian roads. Over the years, they’ve diversified into many new businesses in order to better meet the needs of the customers. They follow a unique business model of creating empowered companies that enjoy the best of entrepreneurial independence and Group-wide synergies. This principle has led in growth of a US Rs15.9 billion multinational group with more than 155,000 employees in over 100 countries across the globe. Today, their operations span 18 key industries that form the foundation of every modern economy: aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consulting services, defense, energy, farm equipment, finance and insurance, industrial equipment, information technology, leisure and hospitality, logistics, real estate, retail, and two wheelers. History Mahindra & Mahindra Limited is part of the Mahindra Group, an automotive, farm equipment, financial services, trade and logistics, automotive components, aftermarket, IT and infrastructure conglomerate. The company was set up in 1945 as Mahindra &Mohammed. Later, after the partition of India, Ghulam Muhammad returned to Pakistan and became that nation's first finance minister. Hence, the name was changed from Mahindra &Mohammed to Mahindra & Mahindra in 1948.Initially set up to manufacture general-purpose utility vehicles, Mahindra & Mahindra(M&M) was first known for assembly under license of the iconic Willys Jeep in India. The company later branched out into manufacture of light commercial vehicles (LCVs) and agricultural tractors, rapidly growing from being a manufacturer of army vehicles and tractors to an automobile major with a growing global market. Business Mahindra & Mahindra grew from being a maker of army vehicles to a major automobile and tractor manufacturer. M&M has partnerships with international companies like Renault SA, France and International Truck and Engine Corporation, USA.M&M has a global presence and its products are exported to several countries.
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BRAND Mahindra builds three things: products, services, and possibilities. Since 1945, they’ve built the company around the core idea that people will succeed if they are just given the opportunity. Employees across the Group constantly challenge conventional thinking to create solutions that make a significant difference in the lives of the customers. That’s why everything they build be it a tractor, financial service, solar-powered lamp, or software is designed to empower to reach the potential. Internally, they follow three basic tenets accepting no limits, thinking alternatively, and driving positive change in everything they do. These brand pillars guide all their actions and business decisions from deciding whether or not to enter a new field or planning a portfolio of services. PURPOSE & VALUES “We are many companies driven by one purpose”. Their motivation to give their best every day comes from their core purpose: they will challenge conventional thinking and innovatively use all our resources to drive positive change in the lives of their stakeholders and communities across the world, to enable them to Rise. Their products and services support their customers’ ambitions to improve their living standards; their responsible business practices positively engage the communities they join through employment, education, and outreach; and our commitment to sustainable business is bringing green technology and awareness into the mainstream through products, services, and light-footprint manufacturing processes. This commitment to sustainability social, economic, and environmental rests upon a set of core values. They are an amalgamation of what they have been, what they are, and what they want to be. These values are the compass that guides their actions, both personal and corporate. They are: Good corporate citizenship: We will continue to seek long term success in alignment with the needs of the communities we serve. We will do this without compromising on ethical business standards. Professionalism: We have always sought the best people for the job and given them the freedom and the opportunity to grow. We will continue to do so. We will support innovation and well reasoned risk taking, but will demand performance. Customer first: We exist and prosper only because of the customer. We will respond to the changing needs and expectations of our customers speedily, courteously and effectively. Quality focus: Quality is the key to delivering value for money to our customers. We will make quality a driving value in our work, in our products and in our interactions with others. We will do it 'First Time Right.
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KESHUB MAHINDRA Chairman Emeritus – Mahindra & Mahindra
ANAND MAHINDRA Chairman & Managing Director – Mahindra & Mahindra
The Group Executive Board (GEB) displays the breadth and depth of the talented human capital. Made up of people from all segments of industry, the GEB works together, they create value while staying true to our common purpose and values. The people whose extraordinary efforts enable Mahindra to Rise.
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MAHINDRA AROUND THE WORLD
Thinking global is part of their identity. From their founding in 1945, they’ve been connected internationally by business partnerships, a multinational workforce, and the boundless ambition to integrate them with global communities and bring opportunity to customers across the world.
HOW THEY GOT HERE
From humble beginnings to a global presence, journey has been more than 65 years in the making .Mahindra and an independent India began their rise together. Now, after 65 years, Mahindra has grown from a humble local outfit to a US Rs15.9 billion corporation employing more than 155,000 people around the world. It’s been quite an adventure so far, and they are proud of the global leadership in utility vehicles, tractors, and information technology, as well as our significant presence in financial services, leisure and hospitality, engineering, trade, and logistics. As we accelerate into the 21st century, they’ll continue to pursue innovative ideas that enable people to rise. They’ve come a long way, but the journey has just begun.
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IN NUTSHELL
MAHINDRA &MAHINDRA Parent company Category Sector Tagline/Slogan USP Mahindra Sedans, SUV’s, two- wheelers Automobiles Rise; Every two minutes a Mahindra is born Mahindra SUV’s have a stronghold in the Indian commercial taxi market which have good performance o tough terrains
PRODUCT PORTFOLIO Brands 1. Mahindra Bolero 2. Mahindra Renault Logan 3. Mahindra Scorpio 4. Mahindra Verito 5. Mahindra Xylo
STP Segment Target Group Positioning Complete automobile segment including sedans & SUV’s Young executives from the upper-middle income bracket A brand which promotes new thinking, accepts no limits and drives positive change
COMPETITION Competitors 1.Honda 2.Toyota 3.Nissan 4.Hyundai 5.Fiat 6.Mitsubishi 7.MarutiUdyog 8.TataMotors 9.Skoda 10.Toyota 11.Volkswagen
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SWOT Analysis
Strength
Weakness
Opportunity
Threats
1. Mahindra has been one of the strongest brands in the Indian automobile market 2. Mahindra group give employment to over 110,000 employees 3. Excellent branding and advertising, and low after sales service cost 4. Sturdy SUV’s good for Indian roads and off-road terrain 1. Mahindra’s partnership with Renault did not live up to international quality standards through their brand Logan 1. Developing hybrid cars and fuel efficient cars for the future 2.Tapping emerging markets across the world and building a global brand 3.Fast growing automobile market 4.Growing in the market through electric car Reva (controlling stake) and entry into two-wheeler segments 1. Government policies for the automobile sector across the world 2. Ever increasing fuel prices 3. Intense competition from global automobile brands 4. Substitute modes of public transport like buses, metro trains etc
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INTRODUCTION
FINANCIAL STATEMENTS Financial statements are summaries of the operating, financing, and investment activities of a business. Financial statements should provide information useful to both investors and creditors in making credit, investment, and other business decisions. And this usefulness means that investors and creditors can use these statements to predict, compare, and evaluate the amount, timing, and uncertainty of potential cash flows. In other words, financial statements provide the information needed to assess a company‘s future earnings and therefore the cash flows expected to result from those earnings. ACCOUNTING PRINCIPLES AND ASSUMPTIONS The accounting data in financial statements are prepared by the firm‘s management according to a set of standards, referred to as generally accepted accounting principles (GAAP). The financial statements of a company whose stock is publicly traded must, by law, be audited at least annually by independent public accountants (i.e., accountants who are not employees of the firm). In such an audit, the accountants examine the financial statements and the data from which these statements are prepared and attest—through the published auditor‘s opinion that these statements have been prepared according to GAAP. The auditor‘s opinion focuses on whether the statements conform to GAAP and that there is adequate disclosure of any material change in accounting principles. The financial statements are created using several assumptions that affect how we use and interpret the financial data: ? Transactions are recorded at historical cost. Therefore, the values shown in the statements are not market or replacement values, but rather reflect the original cost (adjusted for depreciation, in the case of depreciable assets). ? The appropriate unit of measurement is the dollar. While this seems logical, the effects of inflation, combined with the practice of recording values at historical cost, may cause problems in using and interpreting these values. ? The statements are recorded for predefined periods of time. Generally, statements are produced to cover a chosen fiscal year or quarter, with the income statement and the statement of cash flows spanning a period‘s time and the balance sheet and statement of shareholders‘ equity as of the end of the specified period. But because the end of the fiscal year is generally chosen to coincide with the low point of activity in the firm‘s operating cycle, the annual balance sheet and statement of shareholders‘ equity may not be representative of values for the year.
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? Statements are prepared using accrual accounting and the matching principle. Most businesses use accrual accounting, where income and revenues are matched in timing such that income is recorded in the period in which it is earned and expenses are reported in the period in which they are incurred to generate revenues. The result of the use of accrual accounting is that reported income does not necessarily coincide with cash flows. Because the financial analyst is concerned ultimately with cash flows, he or she often must understand how reported income relates to a company‘s cash flows. ? It is assumed that the business will continue as a going concern. The assumption that the business enterprise will continue indefinitely justifies the appropriateness of using historical costs instead of current market values because these assets are expected to be used up over time instead of sold. ? Full disclosure requires providing information beyond the financial statements. The requirement that there be full disclosure means that, in addition to the accounting numbers for such accounting items as revenues, expenses, and assets, narrative and additional numerical disclosures are provided in notes accompanying the financial statements. An analysis of financial statements is therefore not complete without this additional information. ? Statements are prepared assuming conservatism. In cases in which more than one interpretation of an event is possible, statements are prepared using the most conservative interpretation. The financial statements and the auditors‘ findings are published in the firm‘s annual and quarterly reports sent to shareholders and the 10K and 10Q filings with the Securities and Exchange Commission (SEC).Also included in the reports, among other items, is a discussion by management, providing an overview of company events. The annual reports are much more detailed and disclose more financial information than the quarterly reports. There are three basic financial statements: ? Balance sheet ? Income statement ? Cash Flow statement
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THE BALANCE SHEET The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in time—usually the end of the firm‘s fiscal year. The balance sheet is also known as the statement of financial condition or the statement of financial position. The values shown for the different accounts on the balance sheet are not purported to reflect current market values; rather, they reflect historical costs. Assets are the resources of the business enterprise, such as plant and equipment that are used to generate future benefits. If a company owns plant and equipment that will be used to produce goods for sale in the future, the company can expect these assets (the plant and equipment) to generate cash inflows in the future. Liabilities are obligations of the business. They represent commitments to creditors in the form of future cash outflows. When a firm borrows, say, by issuing a long-term bond, it becomes obligated to pay interest and principal on this bond as promised. Equity, also called shareholders‘ equity or stockholders‘ equity, reflects ownership. The equity of a firm represents the part of its value that is not owed to creditors and therefore is left over for the owners. In the most basic accounting terms, equity is the difference between what the firm owns its assets and what it owes its creditors its liabilities. ? ASSETS There are two major categories of assets: current assets and noncurrent assets, where noncurrent assets include plant assets, intangibles, and investments. Assets that do not fit neatly into these categories may be recorded as either other assets, deferred charges, or other noncurrent assets. ? Current assets
Current assets (also referred to as circulating capital and working assets) are assets that could reasonably be converted into cash within one operating cycle or one year, whichever takes longer. An operating cycle begins when the firm invests cash in the raw materials used to produce its goods or services and ends with the collection of cash for the sale of those same goods or services. For example, if Fictitious manufactures and sells candy products, its operating cycle begins when it purchases the raw materials for the products (e.g., sugar) and ends when it receives cash for selling the candy to retailers. Because the operating cycle of most businesses is less than one year, we tend to think of current assets as those assets that can be converted into cash in one year. Current assets consist of cash, marketable securities, accounts receivable, and inventories. Cash comprises both currency—bills and coins—and assets that are immediately transformable into cash, such as deposits in bank accounts. Marketable securities are securities that can be readily sold when cash is needed.
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Every company needs to have a certain amount of cash to fulfill immediate needs, and any cash in excess of immediate needs is usually invested temporarily in marketable securities. Investments in marketable securities are simply viewed as a short term place to store funds; marketable securities do not include those investments in other companies’ stock that are intended to be long term. Some financial reports combine cash and marketable securities into one account referred to as cash and cash equivalents or cash and marketable securities. Accounts receivable are amounts due from customers who have purchased the firm‘s goods or services but haven‘t yet paid for them. To encourage sales, many firms allow their customers to buy now and pay later, perhaps at the end of the month or within 30 days of the sale. Accounts receivable therefore represents money that the firm expects to collect soon. Because not all accounts are ultimately collected, the gross amount of accounts receivable is adjusted by an estimate of the uncollectible accounts, the allowance for doubtful accounts, resulting in a net accounts receivable figure. Inventories represent the total value of the firm‘s raw materials, work-in-process, and finished (but as yet unsold) goods. A manufacturer of toy trucks would likely have plastic and steel on hand as raw materials, work-in-process consisting of truck parts and partly completed trucks, and finished goods consisting of trucks packaged and ready for shipping. There are three basic methods of accounting for inventory, including: ? FIFO (first in, first out), which assumes that the first items purchased are the first items sold, ? LIFO (last in, first out), which assumes that the last items purchased are the first items sold, and ? Average cost, which assumes that the cost of items sold, is the average of the cost of all items purchased. The choice of inventory accounting method is significant because it affects values recorded on the balance sheet and the income statement, as well as tax payments and cash flows. Another current asset account that a company may have is prepaid expenses. Prepaid expenses are amounts that have been paid but not as yet consumed. A common example is the case of a company paying insurance premiums for an extended period of time (say, a year), but for which only a portion (say, three months) is applicable to the insurance coverage for the current fiscal year; the remaining insurance that is prepaid as of the end of the year is considered an asset. Prepaid expenses may be reported as part of other current liabilities. Companies‘ investment in current assets depends, in large part, on the industry in which they operate.
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Noncurrent Assets
Noncurrent assets are assets that are not current assets; that is, it is not expected that noncurrent assets can be converted into cash within an operating cycle. Noncurrent assets include physical assets, such as plant and equipment, and nonphysical assets, such as intangibles. Plant assets are the physical assets, such as the equipment, machinery, and buildings, which are used in the operation of the business. We describe a firm‘s current investment in plant assets by using three values: gross plant assets, accumulated depreciation, and net plant assets. Gross plant and equipment, or gross plant assets, is the sum of the original costs of all equipment, buildings, and machinery the firm uses to produce its goods and services. Depreciation, as you will see in the next chapter, is a charge that accounts for the using up of an asset over the length of an accounting period; it is a means for allocating the asset‘s cost over its useful life. Accumulated depreciation is the sum of all the depreciation charges taken so far for all the company‘s assets. Net plant and equipment, or net plant assets, is the difference between gross plant assets and accumulated depreciation. The net plant and equipment amount is hence the value of the assets historical cost less any depreciation- according to the accounting books and is therefore often referred to as the book value of the assets. Intangible assets are the current value of nonphysical assets that represent long-term investments of the company. Such intangible assets include patents, copyrights, and goodwill. The cost of some intangible assets is amortized (spread out) over the life of the asset. Amortization is akin to depreciation: The asset‘s cost is allocated over the life of the asset; the reported value is the original cost of the asset, less whatever has been amortized. The number of years over which an intangible asset is amortized depends on the particular asset and its perceived useful life. For example, a patent is the exclusive right to produce and sell a particular, uniquely defined good and has a legal life of 17 years, though the useful life of a patent the period in which it adds value to the company-may be much less than 17 years. Therefore the company may choose to amortize a patent‘s cost over a period less than 17 years. As another example, a copyright is the exclusive right to publish and sell a literary, artistic, or musical composition, and is granted for 50 years beyond the author‘s life, though its useful life in terms of generating income for the company may be much less than 50 years. More challenging is determining the appropriate amortization period for goodwill. Goodwill was created when one company buys another company at a price that exceeds the acquired company‘s fair market value of its assets. A company may have additional noncurrent assets, depending on their particular circumstances. A company may have a noncurrent asset referred to as investments, which are assets that are purchased with the intention of holding them for a long term, but which do not generate revenue or are not used to manufacture a product.
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Examples of investments include equity securities of another company and real estate that is held for speculative purposes. Other noncurrent assets include long term prepaid expenses, arising from prepayment for which a benefit is received over an extended period of time, and deferred tax assets, arising from timing differences between reported income and tax income, whereby reported income exceeds taxable income. Long-term investment in securities of other companies may be recorded at cost or market value, depending on the type of investment; investments held to maturity are recorded at cost, whereas investments held as trading securities or available for sale are recorded at market value. Whether the unrealized gains or losses affect earnings on the income statement depend on whether the securities are deemed trading securities or available for sale.
? LIABILITIES Liabilities, a firm‘s obligations to its creditors, are made up of current liabilities, longterm liabilities, and deferred taxes. ? Current Liabilities
Current liabilities are obligations that must be paid within one operating cycle or one year, whichever is longer. Current liabilities include: ? Accounts payable, which are obligations to pay suppliers. They arise from goods and services that have been purchased but not yet paid. ? Accrued expenses, which are obligations such as wages and salaries payable to the employees of the business, rent, and insurance. ? Current portion of long-term debt or the current portion of capital leases. Any portion of long-term indebtedness—obligations extending beyond one year— due within the year. ? Short-term loans from a bank or notes payable within a year. The reliance on short-term liabilities and the type of current liabilities depends, in part, on the industry in which the firm operates.
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Long term liabilities
Long-term liabilities are obligations that must be paid over a period beyond one year. They include notes, bonds, capital lease obligations, and pension obligations. Notes and bonds both represent loans on which the borrower promises to pay interest periodically and to repay the principal amount of the loan. A lease obligates the lessee the one leasing and using the leased asset to pay specified rental payments for a period of time. Whether the lease obligation is recorded as a liability or is expensed as lease payments made depends on whether the lease is a capital lease or an operating lease. A company‘s pension and post-retirement benefit obligations may give rise to longterm liabilities. The pension benefits are commitments by the company to pay specific retirement benefits, whereas post-retirement benefits include any other retirement benefit besides pensions, such as health care. Basically, if the fair value of the pension plan‘s assets exceeds the projected benefit obligation (the estimated present value of projected pension costs), the difference is recorded as a long-term asset. If, on the other hand, the plan‘s assets are less than the projected benefit obligation, the difference is recorded as a long-term liability. In a similar manner, the company may have an asset or a liability corresponding to post-retirement benefits. ? Deferred taxes
Along with long-term liabilities, the analyst may encounter another account, deferred taxes. Deferred taxes are taxes that will have to be paid to the federal and state governments based on accounting income, but are not due yet. Deferred taxes arise when different methods of accounting are used for financial statements and for tax purposes. These differences are temporary and are the result of different timing of revenue or expense recognition for financial statement reporting and tax purposes. The deferred tax liability arises when the actual tax liability is less than the tax liability shown for financial reporting purposes (meaning that the firm will be paying the difference in the future), whereas the deferred tax asset, mentioned earlier, arises when the actual tax liability is greater than the tax liability shown for reporting purposes. ? Equity
Equity is the owner‘s interest in the company. For a corporation, ownership is represented by common stock and preferred stock. Shareholders‘ equity is also referred to as the book value of equity, since this is the value of equity according to the records in the accounting books. The value of the ownership interest of preferred stock is represented in financial statements as its par value, which is also the dollar value on which dividends are figured. For example, if you own a share of preferred stock that has a Rs100 par value and a 9% dividend rate, you receive Rs9 in dividends each year. Further, your ownership share of the company is Rs100.
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Preferred shareholders‘ equity is the product of the number of preferred shares outstanding and the par value of the stock; it is shown that way on the balance sheet. The remainder of the equity belongs to the common shareholders. It consists of three parts: common stock outstanding (listed at par or at stated value), additional paid-in capital, and retained earnings. The par value of common stock is an arbitrary figure; it has no relation to market value or to dividends paid on common stock. Some stock has no par value, but may have an arbitrary value, or stated value, per share. Nonetheless, the total par value or stated value of all outstanding common shares is usually entitled capital stock or common stock. Then, to inject reality into the equity part of the balance sheet, an entry called additional paid-in capital is added; this is the amount received by the corporation for its common stock in excess of the par or stated value. There are actually four different labels that can be applied to the number of shares of a corporation on a balance sheet: ? ? ? The number of shares authorized by the shareholders. The number of shares issued and sold by the corporation, which can be less than the number of shares authorized. The number of shares currently outstanding, which can be less than the number of shares issued if the corporation has bought back (repurchased) some of its issued stock. The number of shares of treasury stock, which is stock that the company has repurchased.
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The outstanding stock is reported in the stock accounts, and adjustments must be made for any treasury stock. The bulk of the equity interest in a company is in its retained earnings. A retained- earnings is the accumulated net income of the company, less any dividends that have not been paid, over the life of the corporation. Retained earnings are not strictly cash and any correspondence to cash is coincidental. Any cash generated by the firm that has not been paid out in dividends has been reinvested in the firm‘s assets to finance accounts receivable, inventories, equipment, and so forth.
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THE INCOME STATEMENT An income statement is a summary of the revenues and expenses of a business over a period of time, usually one month, three months, or one year. This statement is also referred to as the profit and loss statement. It shows the results of the firm ‘s operating and financing decisions during that time. The operating decisions of the company those that apply to production and marketing generate sales or revenues and incur the cost of goods sold (also referred to as the cost of sales or the cost of products sold). The difference between sales and cost of goods sold is gross profit. Operating decisions also result in administrative and general expenses, such as advertising fees and office salaries. Deducting these expenses from gross profit leaves operating profit, which is also referred to as earnings before interest and taxes (EBIT), operating income, or operating earnings. Operating decisions take the firm from sales to EBIT on the income statement. The results of financing decisions are reflected in the remainder of the income statement. When interest expenses and taxes, which are both influenced by financing decisions, are subtracted from EBIT, the result is net income. Net income is, in a sense, the amount available to owners of the firm. If the firm has preferred stock, the preferred stock dividends are deducted from net income to arrive at earnings available to common shareholders. If the firm does not have preferred stock (as is the case with Fictitious and most non fictitious corporations), net income is equivalent to earnings available for common shareholders. The board of directors may then distribute all or part of this as common stock dividends, retaining the remainder to help finance the firm. Companies must report comprehensive income prominently within their financial statements. Comprehensive income is a net income amount that includes all revenues, expenses, gains, and losses items and is based on the idea that all results of the firm whether operating or non operating should be reflected in the earnings of the company. This is referred to as the all-inclusive income concept. The all-inclusive income concept requires that these items be recognized in the financial statements as part of comprehensive income. It is important to note that net income does not represent the actual cash flow from operations and financing. Rather, it is a summary of operating performance measured over a given time period, using specific accounting procedures. Depending on these accounting procedures, net income may or may not correspond to cash flow. CASH FLOW STATEMENT It is a statement, which measures inflows and outflows of cash on account of any type of business activity. The cash flow statement also explains reasons for such inflows and outflows of cash so it is a report on a company's cash flow activities, particularly its operating, investing and financing activities.
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FINANCIAL STATEMENT ANALYSIS
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition and operating performance of a business firm, an industry, or even the economy, and the forecasting of its future condition and performance. It is, in other words, a means for examining risk and expected return. Data for financial analysis may come from other areas within the firm, such as marketing and production departments, from the firm‘s own accounting data, or from financial information vendors such as Bloomberg Financial Markets, Moody‘s Investors Service, Standard & Poor‘s Corporation, Fitch Ratings, and Value Line, as well as from government publications, such as the Federal Reserve Bulletin. Financial publications such as Business Week, Forbes, Fortune, and the Wall Street Journal also publish financial data (concerning individual firms) and economic data (concerning industries, markets, and economies), much of which is now also available on the Internet. Within the firm, financial analysis may be used not only to evaluate the performance of the firm, but also its divisions or departments and its product lines. Analyses may be performed both periodically and as needed, not only to ensure informed investing and financing decisions, but also as an aid in implementing personnel policies and rewards systems. Outside the firm, financial analysis may be used to determine the creditworthiness of a new customer, to evaluate the ability of a supplier to hold to the conditions of a long-term contract, and to evaluate the market performance of competitors.
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Firms and investors that do not have the expertise, the time, or the resources to perform financial analysis on their own may purchase analyses from companies that specialize in providing this service. Such companies can provide reports ranging from detailed written analyses to simple creditworthiness ratings for businesses. As an example, Dun & Bradstreet, a financial services firm, evaluates the creditworthiness of many firms, from small local businesses to major corporations. As another example, three companies Moody‘s Investors Service, Standard & Poor‘s, and Fitch evaluate the credit quality of debt obligations issued by corporations and express these views in the form of a rating that is published in the reports available from these three organizations. Who uses these analyses? Financial statements are used and analyzed by a different group of parties, these groups consists of people both inside and outside a business. A. Internal Users: are owners, managers, employees and other parties who are directly connected with a company: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with more detailed information. These statements are also used as part of management's report to its stockholders, and it form part of the Annual Report of the company. 2. Employees also need these reports in making collective bargaining agreements with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings. B. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for numbers of reasons. 1. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions. 2. Financial institutions (banks and other lending companies) use them to decide whether to give a company with fresh loans or extend debt securities (such as a longterm bank loan ). 3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and duties paid by a company. 4. Media and the general public are also interested in financial statements of some companies for a variety of reasons.
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FINANCIAL RATIO ANALYSIS
Ratio analysis: Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future. Meaning of ratio: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements. Meaning of ratio analysis: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By
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comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk. However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group. OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing
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FORMS OF RATIO: Since a ratio is a mathematical relationship between two or more variables / accounting figures, such relationship can be expressed in different ways as follows – A] As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit sales to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or simply by saying that the credit sales are 2.5 times that of cash sales. C] As a percentage: In such a case, one item may be expressed as a percentage of some other items. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]
STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.
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TYPES OF COMPARISONS The ratio can be compared in three different ways – 1] Cross section analysis: One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. So it involves the comparison of two or more firm’s Financial ratio at the same point of time. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. The firm’s performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. 2] Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. By comparing the present performance of a firm with the performance of the same firm over the last few years, an assessment can be made about the trend in progress of the firm, about the direction of progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data 3] Combined analysis: If the cross section & time analysis, both are combined together to study the behavior & pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. For example, the ratio of operating expenses to net sales for firm may be higher than the industry average however, over the years it has been declining for the firm, whereas the industry average has not shown any significant changes. The combined analysis as depicted in the above diagram, which clearly shows that the ratio of the firm is above the industry average, but it is decreasing over the years & is approaching the industry average.
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PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. 1) The dates of different financial statements from where data is taken must be same. 2) If possible, only audited financial statements should be considered, otherwise there must be sufficient evidence that the data is correct. 3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. 4) One ratio may not throw light on any performance of the firm. Therefore, a group of ratios must be preferred. This will be conductive to counter checks. 5) Last but not least, the analyst must find out that the two figures being used to calculate a ratio must be related to each other, otherwise there is no purpose of calculating a ratio. Ratio analysis is such a significant technique for financial analysis. It indicates relation of two mathematical expressions and the relationship between two or more things. Financial ratio is a ratio of selected values on an enterprise's financial statement. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential stockholders of a firm, and by a firm‘s creditor. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. Values used in calculating financial ratios are taken from balance sheet, income statement and the cash flow of company, besides Ratios are always expressed as a decimal values, such as 0.10, or the equivalent percent value, such as 10%.
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ESSENCE OF RATIO ANALYSIS: Financial ratio analysis helps us to understand how profitable a business is, if it has enough money to pay debts and we can even tell whether its shareholders could be happy or not. Financial ratios allow for comparisons: 1. between companies 2. between industries 3. between different time periods for one company 4. between a single company and its industry average To evaluate the performance of one firm, its current ratios will be compared with its past ratios. When financial ratios over a period of time are compared, it is called time series or trend analysis. It gives an indication of changes and reflects whether the firm‘s financial performance has improved or deteriorated or remained the same over that period of time. It is not the simply changes that has to be determined, but more importantly it must be recognized that why those ratios have changed. Because those changes might be result of changes in the accounting polices without material change in the firm‘s performances. Another method is to compare ratios of one firm with another firm in the same industry at the same point in time. This comparison is known as the cross sectional analysis. It might be more useful to select some competitors which have similar operations and compare their ratios with the firm‘s. This comparison shows the relative financial position and performance of the firm. Since it is so easy to find the financial statements of similar firms through publications or Medias this type of analysis can be performed so easily. To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of the industry to which the firm belongs. This method is known as the industry analysis that helps to ascertain the financial standing and capability of the firm in the industry to which it belongs. Industry ratios are important standards in view of the fact that each industry has its own characteristics, which influence the financial and operating relationships. But there are certain practical difficulties for this method. First finding average ratios for the industries is such a headache and difficult. Second, industries include companies of weak and strong so the averages include them also. Sometimes spread may be so wide that the average may be little utility. Third, the average may be meaningless and the comparison not possible if the firms with in the same industry widely differ in their accounting policies and practices.
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WHAT DOES RATIO ANALYSIS TELL US? These ratios are one of the most important tools that is used in finance and that almost every business does and calculate these ratios, it is logical to express that how come these calculations are of so importance. What are the points that those ratios put light on them? And how can these numbers help us in performing the task of management? The answer to these questions is: We can use ratio analysis to tell us whether the business 1. Is profitable 2. Has enough money to pay its bills and debts 3. Could be paying its employees higher wages, remuneration or so on 4. Is able to pay its taxes 5. Is using its assets efficiently or not 6. Has a gearing problem or everything is fine 7. Is a candidate for being bought by another company or investor But as it is obvious there are many different aspects that these ratios can demonstrate. So for using them first we have to decide what we want to know, then we can decide which ratios we need and then we must begin to calculate them.
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WHICH RATIO FOR WHOM: As before mentioned there are varieties of people interested to know and read these information and analyses, however different people for different needs. And it is because each of these groups have different type of questions that could be answered by a specific number and ratio. Therefore we can say there are different ratios for different groups, these groups with the ratio that suits them is listed below: 1. Investors: These are people who already have shares in the business or they are willing to be part of it. So they need to determine whether they should buy shares in the business, hold on to the shares they already have or sell the shares they already own. They also want to assess the ability of the business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this group. 2. Lenders: This group consists of people who have given loans to the company so they want to be sure that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group. 3. Managers: Managers might need segmental and total information to see how they fit into the overall picture of the company which they are ruling. And Profitability Ratios can show them what they need to know. 4. Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore these information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. 5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies. 6. Customers: are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that. 7. Governments and their agencies: are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses.
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8. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. 9. Financial analysts: they need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. therefore they are interested in possibly all the ratios. 10. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research.
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CLASSIFICATION OF RATIOS In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. A ratio gains utility by comparison to other data and standards. Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Although these categories are not fixed in all over the world however there are almost the same, just with different names: 1. Profitability ratios which use margin analysis and show the return on sales and capital employed. 2. Rate of Return Ratio (ROR) or Overall Profitability Ratio: The rate of return ratios are thought to be the most important ratios by some accountants and analysts. One reason why the rate of return ratios is so important is that they are the ratios that we use to tell if the managing director is doing their job properly. 3. Liquidity ratios measure the availability of cash to pay debt, which give a picture of a company's short term financial situation. 4. Solvency or Gearing ratios measures the percentage of capital employed that is financed by debt and long term finance. The higher the gearing, the higher the dependence on borrowing and long term financing. The lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increase volatility of profits. It should be noted that the term ?Leverage? is used in some texts. 5. Turn over Ratios or activity group ratios indicate efficiency of organization to various kinds of assets by converting them to the form of sales. 6. Investors ratios usually interested by investors.
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BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet, P& P A/C, or both. One-way of classification of ratios is based upon the sources from which are taken. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating these ratios, there is no need to refer to the Revenue statement. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock working capital ratio. 2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratios study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio. 3] Composite ratio: These ratios indicate the relationship between two items, of which one is found in the balance sheet & other in revenue statement. There are two types of composite ratiosa) Some composite ratios study the relationship between the profits & the investments of the concern. E.g. return on capital employed, return on proprietors fund, return on equity capital etc. b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend payout ratios, & debt service ratios
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BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios. 1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios. 2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary ratios. 3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtor?s turnover ratios. 4] Profitability ratios: a) It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios b) It shows the relationship between profit & investment e.g. return on investment, return on equity capital. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.
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BASED ON USER: 1] Ratios for short-term creditors: Current ratios, liquid ratios, stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund, return on equity capital 3] Ratios for management: Return on capital employed, turnover ratios, operating ratios, expenses ratios 4] Ratios for long-term creditors: Debt equity ratios, return on capital employed, proprietor ratios.
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LIQUIDITY RATIO: -
Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations. The ratios, which indicate the liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below
? CURRENT RATIO Meaning: This ratio compares the current assets with the current liabilities. It is also known as „working capital ratio? or „solvency ratio?. It is expressed in the form of pure ratio. E.g. 2:1
Formula:
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The current assets of a firm represents those assets which can be, in the ordinary course of business, converted into cash within a short period time, normally not exceeding one year. The current liabilities defined as liabilities which are short term maturing obligations to be met, as originally contemplated, within a year. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL). Current assets include cash and bank balances; inventory of raw materials, semi-finished and finished goods; marketable securities; debtors (net of provision for bad and doubtful debts); bills receivable; and prepaid expenses. Current liabilities consist of trade creditors, bills payable, bank credit, and provision for taxation, dividends payable and outstanding expenses. This ratio measures the liquidity of the current assets and the ability of a company to meet its short-term debt obligation. CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL. The higher the current ratio, the greater the short-term solvency. This compares assets, which will become liquid within approximately twelve months with liabilities, which will be due for payment in the same period and is intended to indicate whether there are sufficient short-term assets to meet the short- term liabilities. Recommended current ratio is 2: 1. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading, that is the entity is under utilizing its current assets.
? LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares the quick assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1. The term quick assets refer to current assets, which can be converted into, cash immediately or at a short notice without diminution of value.
Formula:
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Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those current assets that can be converted into cash immediately without any value strength. QA includes cash and bank balances, short-term marketable securities, and sundry debtors. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. QR indicates the extent to which a company can pay its current liabilities without relying on the sale of inventory. This is a fairly stringent measure of liquidity because it is based on those current assets, which are highly liquid. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the timing of receipts and payments.
? CASH RATIO Meaning: This is also called as super quick ratio. This ratio considers only the absolute liquidity available with the firm.
Formula:
Since cash and bank balances and short term marketable securities are the most liquid assets of a firm, financial analysts look at the cash ratio. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm.
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INVESTMENT / SHAREHOLDER
? EARNING PER SAHRE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization. Earnings per Share represent earning of the company whether or not dividends are declared. If there is only one class of shares, the earning per share are determined by dividing net profit by the number of equity shares. EPS measures the profits available to the equity shareholders on each share held.
Formula:
The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business
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? DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held.
Formula:
? DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship between the dividends paid to equity shareholders out of the profit available to the equity shareholders.
Formula:
D/P ratio shows the percentage share of net profits after taxes and after preference dividend has been paid to the preference equity holders.
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GEARING
? CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt. Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts. This is also known as leverage or trading on equity. The Capital-gearing ratio shows the relationship between two types of capital viz: - equity capital & preference capital & long term borrowings. It is expressed as a pure ratio.
Formula:
Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a concern.
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PROFITABILITY
These ratios help measure the profitability of a firm. A firm, which generates a substantial amount of profits per rupee of sales, can comfortably meet its operating expenses and provide more returns to its shareholders. The relationship between profit and sales is measured by profitability ratios. There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin.
Meaning: This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. It measures the efficiency of production as well as pricing. This ratio helps to judge how efficient the concern is I managing its production, purchase, selling & inventory, how good its control is over the direct cost, how productive the concern , how much amount is left to meet other expenses & earn net profit.
Formula:
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? NET PROFIT RATIO:Meaning: Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage.
Formula:
This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Jointly considered, the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm.
? RETURN ON CAPITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The term fund employed or the capital employed refers to the total long-term source of funds. It means that the capital employed comprises of shareholder funds plus long-term debts. Alternatively it can also be defined as fixed assets plus net working capital. Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the efficiency with which the long-term funds of a firm are utilized. Formula:
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FINANCIAL
These ratios determine how quickly certain current assets can be converted into cash. They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of investment in various assets. The important turnover ratios are debtors turnover ratio, average collection period, inventory/stock turnover ratio, fixed assturnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These are described below:
? DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales minus returns, if any, from customers. Average debtors are the average of debtors at the beginning and at the end of the year. This ratio shows how rapidly debts are collected. The higher the DTO, the better it is for the organization. Formula:
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? INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period. Formula:
ITR reflects the efficiency of inventory management. The higher the ratio, the more efficient is the management of inventories, and vice versa. However, a high inventory turnover may also result from a low level of inventory, which may lead to frequent stock outs and loss of sales and customer goodwill. For calculating ITR, the average of inventories at the beginning and the end of the year is taken. In general, averages may be used when a flow figure (in this case, cost of goods sold) is related to a stock figure (inventories). ? FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. Formula:
This ratio measures the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. However, this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low). ? PROPRIETORS RATIO: Meaning: Proprietary ratio is a test of financial & credit strength of the business. It relates shareholders fund to total assets. This ratio determines the long term or ultimate solvency of the company. In other words, Proprietary ratio determines as to what extent the owner?s interest & expectations are fulfilled from the total investment made in the business operation.
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Proprietary ratio compares the proprietor fund with total liabilities. It is usually expressed in the form of percentage. Total assets also know it as net worth. Formula:
OR
? STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital. It helps to judge the quantum of inventories in relation to the working capital of the business. The purpose of this ratio is to show the extent to which working capital is blocked in inventories. The ratio highlights the predominance of stocks in the current financial position of the company. It is expressed as a percentage. Formula:
Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the working capital. This ratio also helps to study the solvency of a concern. It is a qualitative test of solvency. It shows the extent of funds blocked in stock. If investment in stock is higher it means that the amount of liquid assets is lower.
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? DEBT EQUITY RATIO: Meaning: This ratio compares the long-term debts with shareholders fund. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It is usually expressed as a pure ratio. E.g. 2:1 Formula:
Debt equity ratio is also called as leverage ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. Leverage is also known as „gearing? or „trading on equity?. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity.
? RETURN ON PROPRIETOR FUND: Meaning: Return on proprietors fund is also known as „return on proprietor?s equity? or „return on shareholders? investment? or „investment ratio?. This ratio indicates the relationship between net profits earned & total proprietor?s funds. Return on proprietors fund is a profitability ratio, which the relationship between profit & investment by the proprietors in the concern. Its purpose is to measure the rate of return on the total fund made available by the owners. This ratio helps to judge how efficient the concern is in managing the owner?s fund at disposal. This ratio is of practical importance to prospective investors & shareholders. Formula:
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? CREDITORS TURNOVER RATIO: Meaning: It is same as debtor’s turnover ratio. It shows the speed at which payments are made to the supplier for purchase made from them. It is a relation between net credit purchase and average creditors Formula
Both the ratios indicate promptness in payment of creditor purchases. Higher creditors turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid promptly. It enhances credit worthiness of the company. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditors.
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FINANCIAL OVERVIEW OF MAHINDRA & MAHINDRA
BALANCESHEET
As On 31-3-08 Rs mn 31-3-09 Rs mn 31-3-10 Rs mn 31-3-11 Rs mn 31-3-12 Rs mn
I.SOURCES OF THE FUNDS: (A)SHAREHOLDER’S FUND Capital Reserves and surplus Total(A) (B)LOAN FUND: Secured loans Unsecured loans (C)DEFERRED TAX LIABILITY Total (A+B+C) II.APPLICATION OF FUND: (A)FIXED ASSETS: Gross block Less: depreciation Net block Capital WIP (B) INVESTMENTS (C )CURRENT ASSETS,LOANS,ADVANCES: 1.Inventories 2.sundry debtors 3.cash &bank balances 4.loans & advances 5.others Total(C ) (D)CURRENT LIABILITIES & PROVISIONS: 1. Sundry creditors 2.Current liabilities 3.Provisions Total (D) (E)NET CURRENT ASSET(C-D) (F) MICSELLANEOUS EXPENDITURE TOTAL(A+B+E+F)
2,431 41,070 43,501 22,819 3,052 567 69,939
2,726 49,714 52,440 36,028 4,500 -183 92,785
2,830 75,473 78,302 25,242 3,560 2,403 109,507
2,936 100,198 103,134 20,053 4,000 3,544 130,731
3,008 119,322 122,329 52,411 4,570 3,544 155,854
36,561 18,417 18,145 5,465 42,151
48,939 23,263 25,676 6,467 57,864
52,763 25,378 27,385 9,642 63,980
62,277 28,417 33,860 9,859 93,253
74,636 33,312 41,324 10,000 92,272
10,841 10,049 8,612 6,919 133 36,554
10,607 10,437 15,744 13,826 16 50,629
11,888 12,581 17,432 18,014 509 60,424
16,942 13,547 6,146 23,732 1,067 61,435
19,866 18,869 21,628 27,926 1,067 89,410
21,613 1,463 9,435 32,510 4,044 135 69,939
33,368 1,834 12,776 47,978 2,652 126 92,785
32,601 1,399 17,965 51,965 8,458 41 109,507
45,940 1,677 20,059 67,676 -6,241 0 130,731
52,832 1,677 22,642 77,152 12,258 0 155,854
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PROFIT &LOSS STATEMENT
As On
31-3-08 Rs mn
31-3-09 Rs mn 142,684 16,194 126,491 4,446 130,937 120,011 10,926 453 10,473 2,915 3,936 4,888 3,759 10,365 1,997 8,368 9,297 0.00 278.83 30.69
31-3-10 Rs mn 198,321 18,073 180,248 5,641 185,888 156,336 29,552 278 29,274 3,708 1,994 0 908 28,468 7,590 20,878 20,451 0.00 578.42 36.89
31-3-11 Rs mn 248,502 20,920 227,582 7,362 234,944 200,382 34,562 -503 35,065 4,139 3,095 0 1,175 35,196 8,575 26,621 25,732 0.00 706.08 45.33
31-3-12 Rs mn 296,928 24,945 271,983 3,500 275,483 238,670 36,813 117 36,696 4,895 3,487 0 0 35,288 8,646 26,643 26,643 0.00 767.48 48.88
Gross sales Less: excise duty Net sales Operating other income total income Total expenditure EBITDA Less: interest EBDT Less: depreciation Other income Non-recurring expenses Non-recurring income Profit before tax Less: tax Profit after tax Adj. Profit after tax Preference dividend Equity dividend Earnings per share
129,770 15,664 114,106 0 114,106 101,672 12,434 242 12,192 2,387 1,682 75 2,656 14,068 3,034 11,034 10,332 0.00 282.61 46.15
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CALCULATION & INTERPRETATION OF THE RATIOS
1) CURRENT RATIO
Formula: current ratio =
Year Current asset Current liabilities Current ratio
2008 36,554 32,510 1.1244
2009 50,629 47,978 1.0552
2010 60,424 51,965 1.1627
2011 61,435 67,676 0.9078
2012 89,410 77,152 1.1589
current ratio
1.4 1.2 1 0.8 0.6 0.4 0.2 0 2008 2009 2010 2011 2012 current ratio
Comments: The ratio is mainly used to give an idea of the company’s ability to pay its short-term liabilities (debt & payables) with its short-term assets(cash, inventories, receivables).the higher the current ratio the more capable the company is of paying its obligations. The current ratio is 1.1589:1 in year 2012.it means that the current assets are 1.1589 times the current liabilities. Almost 4 years current ratio is same, expect in the year 2011 which means that company would be able to pay off its obligations if they come due at that point .low current ratio does not mean that the firm will go bankrupt, but it is definitely not a good sign. Short term creditors prefer a high current ratio since it reduce the risk.
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2) LIQUID RATIO/ QUICK RATIO
Formula: liquid ratio =
Year Quick assets Quick liabilities Liquid ratio
2008 25,713 32,510 0.7909
2009 40,022 47,978 0.8341
2010 48,536 51,965 0.9340
2011 44,493 67,676 0.6574
2012 69,544 77,152 0.9013
quick ratio
1
0.8
0.6 0.4 0.2 0 2008 2009 2010 2011 2012 quick ratio
Comments: The liquid ratio indicates the liquid position of an enterprise. Almost in all the liquid ratio is same, which is better for the company to meet the urgency. The liquid ratio of the company has increased from 0.7909 to 0.9.13.the quick ratio is far more forceful than that the current ratio, primarily because the current ratio includes inventory assets which might not be able to turn cash immediately. If the quick ratio is much more less than current ratio, it means that current assets are highly depended on inventory.
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3) CASH RATIO Formula: cash ratio =
Year Cash +bank +marketable securities Total current liabilities Cash ratio
2008 8,612
2009 15,744
2010 17,432
2011 6,146
2012 21,628
32,510 0.2649
47,978 0.3282
51,965 0.3355
67,676 0.0908
77,152 0.2803
cash ratio
0.4
0.35
0.3 0.25 0.2 0.15 0.1 0.05 0 2008 2009 2010 2011 2012 cash ratio
Comment: The ratio is called super quick ratio or absolute liquid ratio. In the year 2008 the cash ratio is 0.2649 and then it increased till 0.3355 in the year 2010.and then it decreased till 0.0908 in the year 2011 and again it increased in 2012. This shows that the company has sufficient cash, bank balance, & marketable securities to meet any contingency
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4) PROPRIETORY RATIO
Formula: proprietary ratio =
Year Shareholders fund Total fund Proprietary ratio
2008 43,501 56,120 77.5142
2009 52,440 80,121 65.4510
2010 78,302 88,992 87.9876
2011 103,134 111,395 92.5840
2012 122,329 128,476 95.2154
proprietary ratio
100 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5
proprietary ratio
Comments: The proprietary ratio of the company is 95.2154% in the year 2012. It means that the every one rupee of total assets contribution of 95 paise has come from owners fund & remaining 5 paise is contributed by the outside creditors. A high ratio indicates high financial strength but very high ratio will indicate that the firm is not using external funds adequately.
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5) STOCK WORKING CAPITAL RATIO Formula: stock working capital ratio = Year Stock Working capital Stock working capital ratio 2008 10,841 4,044 2.6808 2009 10,607 2,652 3.9996 2010 11,888 8,458 1.4055 2011 16,942 -6,241 -2.7146 2012 19,866 12,258 1.6206
stock working capital ratio
5 4 3 2 1 0 -1 -2 -3 -4 2008 2009 2010 2011 2012
stock working capital ratio
Comments: The ratio shows that the extent of the fund blocked in stocks. The amount of stock is increasing in the 5 years. however in the year 2009 amount has decreased . In the year 2009 the sale might have increased which would have lead to increase in then working capital, and also the stock working capital ratio is high in the same year. It shows that the solvency position is sound.
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6) CAPITAL GEARING RATIO
Formula: capital gearing ratio =
Year Preference share capital & secured loans Eq capital & reserves & surplus Capital gearing ratio
2008 22,819
2009 36,028
2010 25,242
2011 20,053
2012 52,411
43,501
52,440
78,302
103,134
122,329
52.4562
68.7032
32.2367
19.4436
42.8442
capital gearing ratio
80
70
60
50
40
30 20 10 0 2008 2009 2010 2011 2012
capital gearing ratio
Comments: Gearing means the process of increasing the equity shareholders return through the use of debt. Capital gearing ratio is a leverage ratio, which indicates the proportion of debt & equity in financing of assets of a company. For the first two years the ratio was high and it decreased in the year 2010 & 2011.and again it increased in the year 2012 which means that the company has borrowed more secured loans for the company’s expansion.
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7) DEBT EQUITY RATIO Formula: debt equity ratio =
Year Total long term debt Total share holders fund Debt equity ratio
2008 25,874 43,501 0.5948
2009 40,528 52,440 0.7728
2010 28,802 78,302 0.3678
2011 24,053 103,134 0.2332
2012 98,121 122,329 0.8021
debt equity ratio
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 debt equity ratio
0
1 2 3 4 5
Comments: The debt equity ratio is important tool of financial analysis to appraise the financial structure of the company. It expresses the relation between the external equities & internal equities. The ratio is very important from the point of view of creditors & owners. The rate of debt equity ratio has increased from 0.5948 to 0.8021. this shows that the increase in debt, the shareholders fund also increased. This shows long term capital structure. The lower ratio viewed as favorable from long term creditors point of view.
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8) GROSS PROFIT RATIO Formula: gross profit ratio =
Year Gross profit Net sales Gross profit ratio
2008 12,192 114,106 10.6848
2009 10,473 130,937 7.9985
2010 29,274 185,888 15.7482
2011 35,065 234,944 14.9248
2012 36,696 275,483 13.3206
gross profit ratio
18
16 14
12
10 8 6 4 2 0 2008 2009 2010 2011 2012 gross profit ratio
Comments: This ratio indicates the relation between production cost and sales and efficiency with which goods are produced or purchased. If it is high gross profit it may indicate that the organization is able to produce or purchase at a relatively lower cost. Grosss profit we take off any administration cost, selling cost and so on. Here company has achieved very good efficiency in the year 2010. The gross profit is the profit made on the sale of the goods. It is the profit on the turnover. In the year the gross profit is 10.684 which has increased to 13.3206 in the year 2012
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9) FIXED ASSET TURN OVER RATIO
Formula: fixed asset turn over ratio =
Year Net sales Fixed assets Fixed asset turnover ratio
2008 114,106 18,145 6.2886
2009 126,491 25,676 4.9264
2010 180,248 27,385 6.5819
2011 227,582 33,860 6.7212
2012 271,983 41,324 6.5817
fixed asset turn over ratio
8 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 fixed asset turn over ratio
Comments: High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the minimum investing in fixed assets. So it shows that the company is using its assets more efficiently. in the chart it is clear that the company is using its fixed assets more efficiently each year although it had a light decrease in efficiency in 2009.
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10) EPS FORMULA: EPS =
*100
Year 2008 NPAT 10,332 Number of 245741813 equity shares EPS 4.2
2009 2010 9,297 20,451 278821265 578434478 3.334 3.535
2011 25,732 587247117 4.328
2012 26,643 589029645 4.523
EPS
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
2008 2009 2010 2011 2012
EPS
Comments: EPS is one of the important criteria for measuring the performance of the company. If EPS increases, the possibility of higher dividend per share also increases. However the dividend payment depends on the policy of the company. Market price of the company may also show an upward trend if EPS is showing a rising trend.EPS of different company may vary from company to company due to following different practices by different companies regarding stock in trade, depreciation, source of raising finance, tax- planning measure ets.
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11) RETURN ON EQUITY
Formula: return on equity =
Year 2008 NPAT 10,332 No.of equity 245741813 shares Return on 4.2044 equity
2009 2010 9,297 20,451 278821265 578434478 3.334 3.5355
2011 25,732 587247117 4.382
2012 26,643 5890296445 4.523
return on equity
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1 2 3 4 5
return on equity
Comments:
This ratio shows the relationship between profit & equity shareholders fund in the company. It is used by the present/ prospective investor for deciding whether to purchase, keep or sell the equity shares. The rate of return on equity share capital is increased from 4.2044 to 4.523 during the year 2008 to 2009. This shows that the company has a very large returns available to take care of high equity dividend, large transfers to reserve, & also company has a great scope to attract large amount to fresh funds by issue of equity share & also company has a very good price for equity shares in the BSE.
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12) RETURN ON PROPRIETOR’S FUND Formula: return on proprietor’s fund =
Year NPAT Proprietors fund Return on proprietor’s fund
2008 10,332 43,501 23.7512
2009 9,297 52,440 17.7288
2010 20,451 78,302 26.1181
2011 25,732 103,134 24.9500
2012 26,643 122,329 20.7798
return on proprietor's fund
30 25 20
15 10 5 0 1 2 3 4 5 return on proprietor's fund
Comments: Return on proprietors fund shows the relationship between profits & investments by proprietors in the company. In the year 2008 the return on proprietors fund is 23.75% it means the net return of Rs. 23 approximately is earned on the each Rs. 100 of funds contributed by the owners.
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13) STOCK TURNOVER RATIO Formula: stock turnover ratio =
Year COGS Average stock Stock turnover ratio
2008 114,106 10,049 11.3549
2009 126,491 10,607 11.9252
2010 180,248 11,888 15.1622
2011 227,582 16,942 13.4330
2012 271,983 19,866 13.6909
stock turnover ratio
16 14
12
10
8
6
stock turnover ratio
4
2 0 1 2 3 4 5
Comments: Stock turnover ratio shows the relationship between the sales & stock it means how stock is being turned over into sales. The stock turnover ratio is 2008 was 11.3549 times which indicate that the stock is being turned into sales 11 times during the year. The inventory cycle makes 11 round during the year For the years 2008 stock turnover ratio is lower than the other year but it is in increasing order. In the year 2008 to 2012 the stock turnover ratio has improved from 11.354 to 13.6909 times, it means with lower inventory the company has achieved greater sales. Thus, the stock of the company is moving fast in the market.
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14) DEBTORS TURNOVER RATIO
Formula: debtors turnover ratio =
Year Credit sales Average debtors Debtors turnover ratio
2008 129,770 10,049 12.9137
2009 142,684 10,437 13.6710
2010 198,321 12,581 15.7635
2011 248,502 13,547 18.3437
2012 296,928 18,869 23.1948
debtors turnover ratio
20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5
debtors turnover ratio
Comments: Debtor’s turnover ratio is alternative known as “ Accounts Receivable Turnover Ratio”. This ratio measures the collectability of debtors & other accounts receivable, it means the rate at which the trade debts are being collected. The Debtors turnover ratio of 23.1948 indicates that the debtors are being turned over 23 times during the year. It means that the credit cycle of debtors makes 23 rounds during the year.
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15) ROCE Formula: ROCE =
Year NOPAT Capital employed ROCE
2008 11,034 69,372 15.9056
2009 8,368 92,968 9.0009
2010 20,878 107,104 19.4932
2011 26,621 127,187 20.9306
2012 26,643 152,310 17.4926
ROCE
25 20 15 10 5 0 1 2 3 4 5 ROCE
Comments: A measure of the return that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Of course the higher the ratio, the better will be the profitability of the company The return on capital employed of Rs 17.1926 indicate that net return of Rs.17 is earned on a capital employed of Rs.100. this amount of Rs.17 is available to take care of interest, tax,& appropriation. This indicates a very high profitability on each rupee of investment & has a great scope to attract large amount of fresh fund.
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16) NET PROFIT RATIO Formula: net profit ratio =
Year PAT Net sales Net profit ratio
2008 10,332 114,106 9.0547
2009 9,297 126,491 7.3499
2010 20,451 180,248 11.3460
2011 25,732 227,582 11.3066
2012 26,643 271,983 9.7958
net profit ratio
12 10 8 6 4 2 0 1 2 3 4 5 net profit ratio
Comments: It has been observe that the from 2008 to 2011 the net profit is increased i.e from 9.0547 to 11.3066. Profitability ratio of company shows considerable increase. Company’ s sales have increased in all 4 years & at the same time company has been successful in controlling the expenses i.e. manufacturing & other expenses. It is a clear index of cost control, managerial efficiency & sales promotion
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17) DIVIDEND PAYOUT RATIO Formula: dividend payout ratio =
Year DPS EPS Dividend payout ratio
2008 1.15 4.2 27.3810
2009 1 3.334 29.9940
2010 9 3.535 254.5969
2011 1.202 4.328 27.7726
2012 1.303 4.523 28.8083
dividend payout ratio
300 250 200 150 100 50 0 2008 2009 2010 2011 2012 dividend payout ratio
Comments:
EPS described above indicates the amount of profit available for equity share shareholders. Dividend Payout Ratio indicates the percentage of profit distributed as dividends to the shareholders. It measures the relationship between the earning belonging to the equity shareholders and the amount finally paid to them. the company has paid highest dividend in the year 2010 where as in the year 2008 it has paid the least of 27.3810. A higher ratio indicates that the organization is following the liberal dividend policy regarding the dividend while a lower ratio indicates a conservative approach of the management towards the dividend.
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Table of financial ratio of Mahindra & Mahindra for the last five years
2008 Current ratio Liquid ratio Cash ratio Proprietary ratio Stock working capital ratio Capital gearing ratio Debt equity ratio Gross profit ratio Fixed asset turnover ratio EPS Return on equity Return on proprietor’s fund Stock turnover ratio Debtors turnover ratio ROCE Net profit ratio Dividend payout ratio 1.1244 0.7909 0.2649 77.5142 2.6808
2009 1.0552 0.8341 0.3282 65.4510 3.9996
2010 1.1627 0.9340 0.3355 87.9876 1.4055
2011 0.9078 0.6574 0.0908 92.5840 -2.7146
2012 1.1589 0.9013 0.2803 95.2154 1.6206
52.4562 0.5948 10.6848 6.2886
68.7032 0.7728 7.9985 4.9264
32.2367 0.3678 15.7482 6.5819
19.4436 0.2332 14.9248 6.7212
42.8442 0.8021 13.3206 6.5817
4.2 4.2044 23.7512
3.334 3.334 17.7288
3.535 3.5355 26.1181
4.328 4.382 24.9500
4.523 4.523 20.7798
11.3549 12.9137 15.9056 9.0547 27.3810
11.9252 13.6710 9.0009 7.3499 29.9940
15.1622 15.7635 19.4932 11.3460 254.5969
13.4330 18.3437 20.9306 11.3066 27.7726
13.6909 23.1948 17.4926 9.7958 28.8083
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Observation and findings
Based on the ratios and calculations made on my project I can analyze Mahindra & Mahindra as follows: ? The year 2010 could called the peak on the business during last five year which almost divides the ratio into two parts, before 2010 and after that. ? Liquidity ratios shows that the firm has been facing some problems regarding paying short term liabilities, but it is trying to improve the situation.
? The overall efficiency of the company to use its assets, capital or the working capital is good. ? The company fails to increase its profitability in the last year. Though it should be mentioned that we see a noticeable net profit point in 2010. ? It also fails to give satisfactory rate of return in two years compared to 2010.
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IMPORTANCE OF RATIO ANALYSIS
As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] Liquidity position, 2] Long-term solvency, 3] Operating efficiency, 4] Overall profitability, 5] Inter firm comparison 6] Trend analysis.
1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio is particularly useful in credit analysis by bank & other suppliers of short term loans. 2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the longterm creditors, security analyst & the present & potential owners of a business. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved.
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3] OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets- total as well as its components. 4] OVERALL PROFITABILITY: Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together. 5] INTER – FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An inter firm comparison would demonstrate the firms position vice-versa its competitors. If the results are at variance either with the industry average or with the those of the competitors, the firm can seek to identify the probable reasons & in light, take remedial measures. 6] TREND ANALYSIS: Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.
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ADVANTAGES OF RATIO ANALYSIS
Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: ? ? ? ? Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm.
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LIMITATIONS OF RATIO ANALYSIS
Ratio analysis has its limitations. These limitations are described below: 1] Information problems ? ? Ratios require quantitative information for analysis but it is not decisive about analytical output. The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the company?s current financial position. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision-making.
?
2] Comparison of performance over time ? When comparing performance over time, there is need to consider the changes in price. The movement in performance should be in line with the changes in price. When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. Changes in accounting policy may affect the comparison of results between different accounting years as misleading.
?
?
3] Inter-firm comparison ? Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis. Selective application of government incentives to various companies may also distort intercompany comparison. Comparing the performance of two enterprises may be misleading. Inter-firm comparison may not be useful unless the firms compared are of the same size and age, and employ similar production methods and accounting practices. Even within a company, comparisons can be distorted by changes in the price level. Ratios provide only quantitative information, not qualitative information. Ratios are calculated on the basis of past financial statements. They do not indicate future trends and they do not consider economic conditions.
?
?
? ? ?
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CONCLUSION
? Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use. ? Ratio analysis has a major significance in analysing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company. ? Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. ? The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm‘s position and performance. ? The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. ? Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.
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Bibliography
? REFERENCE BOOKS – ? FINANCIAL MANAGEMENT Theory, Concepts & problems R.P.RUSTAGI ? FINANCIAL MANAGEMENT Text and problems M.Y. KHAN AND P. K. JAIN ? MANAGEMENT ACCOUNTING AINAPURE ? FINANCIAL MANAGEMENT L.N. CHOPDE D.N. CHOUDHARI S.L. CHOPDE ? ANAUAL REPORTS OF MAHINDRA & MAHINDRA ? ? ? ? 2007-2008 2008-2009 2009-2010 2010-2011
? WEBSITES – www.bizd.ac.uk/compfact/ratio www.cecunc.org.com/business/financial www.zeromillion.com.business/financial www.mahindra.com search.proquest.com/business
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doc_903306544.pdf
mahindra and mahindra
EXECUTIVE SUMMARY
Project Title: Financial Statement Analysis
Company Name: MAHINDRA & MAHINDRA
This project helped me to get the deeper understanding of the process of Financial Statement Analysis and how decisions are taken to strengthen the financial position. For this study five years Income Statement & Balance Sheet have been taken for calculating ratio analysis Financial analysis which is the topic of this project refers to an assessment of the viability, stability and profitability of a business. This important analysis is performed usually by finance professionals in order to prepare financial or annual reports. These financial reports are made with using the information taken from financial statements of the company and it is based on the significant tool of Ratio Analysis. These reports are usually presented to top management as one of their basis in making crucial business decisions. The importance of these Ratios which could be the roots of decisions made by management that can make or break the company. So, I was influenced to allocate the aim of this project to study the details about these ratios and their possible effects on the decisions made by not only people inside the company but also the outsiders such as investors.
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PRESENT SCENARIO OF AUTOMOBILE SECTOR
Ending the year on a gloomy note, the Indian automotive industry is looking towards a brighter time in the upcoming year. The past few years has seen a rapid rise in the Indian Automotive Sector. Economic reforms and deregulation have helped it to become one of the fastest growing industries globally. With an annual production of more than 3.7 million units in 2010, India’s passenger car and commercial vehicle is the seventh largest manufacturing industry in the world. It is said that one cannot predict the future by looking into the past. This adage holds true for the automotive sector in India. According to data available with the Society of Indian Automobile Manufacturers (SIAM), domestic passenger car sales stood at 1, 38,521 units in October 2011 compared to the 1, 81,704 units sold in the same month last year (October 2010). Even the festive cheer did nothing to help the cause this season. The year 2011 has been gloomy for the industry as it has shown the steepest decline in sales since 2000. The carmakers have cited increased fuel prices and bank interest rates as the key reasons for the collapse. Fuel prices have been revised more than 11 times in the past one year and Reserve Bank of India (RBI) has increased lending rates by 13 times since March 2010 to cool inflation. This has made the shoppers think twice before buying a car. Moreover, a car is the second biggest investment for many households, with the first being purchasing a home, and people are not taking car loans as they already have home loans to repay. Despite the dismal performance this year the Indian automotive companies are not hitting the panic button as many expected the slowdown and have made plans to counter the same. Many automotive companies converted the adversity into an opportunity by coming up with new launches which have an option of diesel engines. With the hike in the petrol prices, the differential price between petrol and diesel is currently more than 40 percent, which lead to an increase in demand for vehicles with a diesel engine. Analysts expect 2012 to be a bright year for the industry as statistics show that the Auto Expo 2011 has all its stalls booked which reflects the many customer friendly deals companies have to offer. Companies have realised that trimming down the cost of vehicles and providing vehicles to customers at a relatively low price is the key to increase their sales. Several large companies have geared up to this new reality and are in the process of investing down south to set up manufacturing units, R&D facilities and design capabilities. Considering the challenges that the industry has been facing since the past one year and the way it has countered most of the threats that it faced, one can be sure that the future of auto industry is promising. This is proved by the recent announcement made by SIAM, that the car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, India is expected to top the world in car volumes with approximately 611 million vehicles on the nation’s roads
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REVIEW OF LITERATURE
Financial statements and ratios: Part 2 Frederick, David. Credit Management (Jul 2001): 40-41. David Frederick continues his examination of financial ratios, focusing on working capital and profitability. This article examines the usefulness of the profitability and management of working capital ratios, for credit managers, students and third parties.. The rationale here is that profit is an end of period occurrence and cash is the oxygen of any business. A business may survive the absence of profit but no business is able to survive the absence or lack of cash flowing through its veins. Key financial statement ratios
Schwei, Thomas. Small Business Forum 14. 2 (Fall 1996): 54.
This article is for non-accountants who want to have a working knowledge of finance. This article, identify the key ratios which affect your business-and why they deserve your ongoing attention. So it helps to understand how to read the basic financial statements of the company. The balance sheet indicates company's financial position at a point in time while the income statement reports the net earnings of your organization for a period of time. Now, how do you analyze the financial statements and begin to understand whether things are going well or not so well compared to what you planned or previous periods? The answer lies in using financial statement ratios to help to analyze the situation. By identifying key ratios which affect the business and reviewing them regularly, we can identify and deal with problems arising in your business before they get out of hand. Unlocking the secrets of financial statements
Montes Di Vittorio, Martha. Database 18. 5 (Oct 1995): 24.
It is no longer enough for information professionals to simply know where to get information, they now have a responsibility to be familiar with what they hand out and understand some of the issues concerning the accuracy of the information. The building blocks of financial statements as well as the basic vocabulary used in them are discussed. Financial statements, which are filed by public companies, have some main components: 1. balance sheet, 2. income statement, 3. cash flow, and 4. adjuncts. Analysts often calculate rations that help them make sense of a single financial statement or understand the relationships between financial statements. Some ratios commonly used are: 1. current ratio, 2. quick ratio, 3. inventory turnover, 4. debt to equity, and 5. return on equity.
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[1] Kristy, James E. "Conquering Financial Ratios: the Good, the Bad, and the Who Cares?" Business Credit 96, No. 2 (February 1994): pp. 14-19. [2] Institutional Brokers Estimate System (I/B/E/S). "Summary Data Highlights: G-7 Nations." Summary Data, Europe Edition, January 19, 1995. Many information professionals deal with financial statements every day and have a clear understanding of their contents. There is also another group, to which I belonged until recently; who cheerfully hand out financial statements without ever lifting the front cover for fear that, like Pandora's Box, evil things will fly out of it. It is important to have some level of understanding of the components of financial statements for a variety of reasons, the most important of which is that it puts us on even ground with our clients. It is no longer enough simply to know where to get information; we have a responsibility to be familiar with what we hand out and understand some of the issues concerning the accuracy of the information. This article will cover the building blocks of financial statements as well as the basic vocabulary used in them. The ultimate goal, however, is not to dissect financial statements line by line, but to give readers enough information to be able to evaluate the sources they provide for clients and to understand what goes into creating the data within them. Ratio(nal) analysis
Anonymous. Management Accounting 72. 7 (Jul/Aug 1994): 40.
The financial record of Glynwed International PLC. is analyzed. The pages of the company's annual report are taken up with a list of subsidiary companies, grouped under headings like foundry products, metal services, plastics, steels, and engineering. Business has become more complex in recent years, and the vagueness of accounting for acquisitions and divestments in consolidated accounts has confused matters even more. The climax of Glynwed's financial review concerns the return on equity, defined - by Glynwed - as profit before tax as a percentage of shareholders' funds at the end of the year. There are obvious weaknesses in this definition. The more shareholders seek to distil the complex accounting numbers into simple ratios, the greater the need to standardize the definition of those ratios. Minding your ratios - Annual Statement Studies / Industry No
Posner, Bruce G. Inc 15. 11 (Nov 1993): 136.
To know why two companies in the same market can have vastly different experiences with lenders? Nowadays much of the answer can be found in how the business compares numerically with its peers. That's why it pays to know the industry norms and to take steps to nudge financial ratios in the right direction. For years we've been recommending Annual Statement Studies, published by Robert Morris Associates (215-851-0585, $105), to business owners who want to anticipate lenders' questions and put the best spin on their companies' performance.
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Tools of the Trade: Financial Statements: the National Magazine of Business Fundamentals C&FM
Pressel, Jerry R. Business Credit 93. 2 (Feb 1991): 12.
The evaluation of a new customer for the extension of credit involves character, capacity, capital, and conditions. Of these, only capital can be evaluated on a quantitative level by analyzing financial statements. The first step is to calculate financial ratios and compare them to an industry average that can be obtained from credit groups and credit agencies. Financial ratios can be grouped into 4 areas: 1. liquidity ratios that evaluate the company's ability to meet current obligations with assets presently available, 2. activity ratios that estimate how efficient the company is in collecting receivables, turning inventory, and paying bills, 3. leverage ratios that provide a measure of how much debt is used to finance the operation, and 4. profitability ratios that measure the margins at both the gross and net income levels. Information is extracted from the results of the ratios by comparing them to industry averages and comparing year-to-year statements to determine trends. Jerry R. Pressel is a general credit manager for Dayco Products, Inc., Dayton, OH. Quick and Easy Guide to Financial Statements: the National Magazine of Business Fundamentals C&FM
Wey, Frank W. Business Credit 93. 2 (Feb 1991): 8.
Financial statement analysis is simply a comparison with a standard. To compare companies of different sizes, it is necessary to reduce raw dollars to percentages and ratios. The first step is to calculate each balance sheet item as a percent of total assets. The 2nd step is to make 9 ratio calculations, including current ratio (current assets to current debt) and quick ratio (cash plus marketable securities plus accounts receivable to current debt). Here, the standard with which financial analysis is compared is a universal standard for manufacturers and wholesalers. This standard considers only 4 ratios - 2 liquidity ratios and 2 capital structure or leverage ratios. The purpose of this standard is to divide the universe of manufacturers and wholesalers into quartiles or risk classes. A company's risk class is determined by the lowest ranking of the 4 ratios: 1. current ratio, 2. quick ratio, 3. current debt to net worth, and 4. total debt to net worth. The credit line calculation is also related to the customer's risk class. Financial Statement Analysis: The 1920s and the 1980s
Senatra, Phillip T; Frishkoff, Patricia A. The Journal of Commercial Bank Lending 66. 10 (Jun 1984): 40.
A comparison of financial statement analysis in the 1920s with current methods focuses on changes: 1. in methods of financial statement analysis, and 2. in the financial statements themselves. Examination of 2 financial statement analysis textbooks published in 1925 and one published in 1983 reveals that: 1. The same users of financial reports were identified in 1925 and 1983.
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2. Basically, the same ratios were suggested for use in fundamental analysis. 3. The ability to compute ratios and to make appropriate types of comparisons were limited by inadequacies in the financial data and supporting disclosure. In comparing the 1925 and 1983 annual reports of 12 major industrial firms, it was found that theoretically financial statement analysis methods in 1925 were advanced, able to handle any type of information provided, and encouraged thorough disclosure. However, in practice, the financial statement analyst of 1925 was impeded by lack of published information. The current methodology of financial analysis is wellequipped to handle complex and expanded reporting. Understanding Financial Statements
Schwan, Edward S. Business 34. 2 (Apr/May/Jun 1984): 37.
Financial statement analysis can involve calculating numerous technical ratios. Simple pictures of the interrelationships among balance sheet items and income measures can be developed to improve understanding of the purposes of such calculations. Both owners of small businesses and private investors can use such devices to prepare their own financial statement analyses and so prepare themselves to discuss financial statements with financial professionals. Conversely, financial professionals can translate accounting ratios to simple diagrams as a way of explaining the importance of financial condition measures to persons without financial backgrounds. Simplified drawings can be used to help explain such concepts as: 1. the accounting equation, 2. the interdependent functions of assets and claimholders, 3. the optimum balance among assets, and 4. return on investment ratios. Financial Statement Analysis - A Two-Minute Drill
Stone, William L. The Journal of Commercial Bank Lending 66. 3 (Nov 1983): 11.
Commercial loan officers often need to make a quick appraisal of a financial statement, focus on key factors, and develop pertinent questions about a company's problem areas. A 2-minute drill is presented which can give a clear picture of a firm's financial strengths and weaknesses; it is based on 3 ratios - current, debt to worth, and net profit margin - and 3 turnovers - receivables, inventory, and payables. The generally accepted standards for the ratios are 2.0 for the current ratio and the debt to worth ratio and 5% for the net profit margin. For accounts receivable, inventory, and accounts payable turnovers, the standard is 36 days, which actually is a very favorable turnover. The 2-minute drill is not intended to be a substitute for a thorough analysis of a credit, but it can serve as a basis for inquiries in the early stages of the application process.
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Financial Analysis with Ratios: Profitability, Liquidity, Leverage, and Solvency: the National Magazine of Business Fundamentals C&FM
Strischek, Dev. Credit and Financial Management 85. 8 (Sep 1983): 14.
Before extending credit, competent lenders assess a borrower's financial condition by evaluating the borrower's profitability, liquidity, leverage, and solvency. These interrelated factors and how they change during a firm's life cycle are an important part of financial analysis. A firm's profitability is the ratio of its profits before tax to stockholders' equity. Its liquidity is measured by dividing total assets by total liabilities. Leverage is expressed as the ratio of debt to equity and a borrower's solvency is determined by adding interest expense to profits before tax, then dividing the total by interest expense. Creditors find it more appealing to determine a borrower's profitability ratio as the dependent variable of the liquidity, leverage, and solvency ratios. By considering the interrelationships between the 4 ratios, lenders can more accurately evaluate changes in one ratio that affect the other 3. Financial Ratios in Annual Reports: Certified Public Accountant
Gibson, Charles. The CPA Journal 52. 9 (Sep 1982): 18.
Financial ratios are often used to interpret financial statements, and when used correctly, they can be an effective tool in evaluating the liquidity, debt position, and profitability of a company. Generally, a company will use either the debt/capital ratio or the debt/equity ratio to indicate the extent of debt in relation to other sources of funds. However, the method used to compute the debt ratios often varies greatly. This lack of standardization allows companies to compute ratios in a manner that is most favorable to their position if they care to do so. Furthermore, the ratios that are disclosed cannot be assumed to be comparable with ratios disclosed by competitors and industry averages. How Industry Perceives Financial Ratios
Gibson, Charles H. Management Accounting 63. 10 (Apr 1982): 13.
Currently, no regulatory agency provides guidance in the area of comprehensive financial ratio analysis, except for the computation of earnings per share. There is some agreement on which ratios are important, but there is a lack of consensus on the computational methodology of these ratios. A questionnaire was sent to the controllers of the companies listed in Fortune's 500 Largest Industrials for 1979. There were 103 usable responses. Ninety-three respondents said their firms used financial ratios as part of their corporate objectives. The profitability ratios, which survey respondents rated with the highest significance, were the same ratios used most frequently as corporate objectives. A couple of debt ratios were second in frequency of use. There does not appear to be much use made of inflation data in ratio analysis. The survey also indicated that a selected ratio is apt to be reported to the board of directors and key employees but is less likely to be reported to stockholders.
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OBJECTIVE OF THE STUDY
There have been various objectives for this study, the first of which is a detailed analysis of the financial statements that is the balance sheet and the income statement of Mahindra & Mahindra ltd. The second objective, however the most important one or in other word the principle aim of this project is the understanding and assessment of financial ratios based on the statements of the company. The next aim of the project is to recognize the position of the company through those ratios and data available. To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.
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RESEARCH METHODOLOGY
Research framework: This study is based on the data about Mahindra & Mahindra Types of data which helped to prepare this report: Secondary data: The secondary data which was already prepared so these data was only used to reach the aims and objectives of this project. These data has been collected from the financial reports of the company. ? Digital Sources: The secondary data I collected was through the study of the financial statements already existed on the company website in form of digital files reserved in the company for further references. I had chosen these files because of the reliability and suitability of these information which I was also sure about the accuracy of them. These files consist of: 1. Annual report of the company 2. Financial balance sheets 3. Income statements
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COMPANY PROFILE
Overview Founded in 1945 as a steel trading company, they entered automotive manufacturing in 1947 to bring the iconic Willys Jeep onto Indian roads. Over the years, they’ve diversified into many new businesses in order to better meet the needs of the customers. They follow a unique business model of creating empowered companies that enjoy the best of entrepreneurial independence and Group-wide synergies. This principle has led in growth of a US Rs15.9 billion multinational group with more than 155,000 employees in over 100 countries across the globe. Today, their operations span 18 key industries that form the foundation of every modern economy: aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consulting services, defense, energy, farm equipment, finance and insurance, industrial equipment, information technology, leisure and hospitality, logistics, real estate, retail, and two wheelers. History Mahindra & Mahindra Limited is part of the Mahindra Group, an automotive, farm equipment, financial services, trade and logistics, automotive components, aftermarket, IT and infrastructure conglomerate. The company was set up in 1945 as Mahindra &Mohammed. Later, after the partition of India, Ghulam Muhammad returned to Pakistan and became that nation's first finance minister. Hence, the name was changed from Mahindra &Mohammed to Mahindra & Mahindra in 1948.Initially set up to manufacture general-purpose utility vehicles, Mahindra & Mahindra(M&M) was first known for assembly under license of the iconic Willys Jeep in India. The company later branched out into manufacture of light commercial vehicles (LCVs) and agricultural tractors, rapidly growing from being a manufacturer of army vehicles and tractors to an automobile major with a growing global market. Business Mahindra & Mahindra grew from being a maker of army vehicles to a major automobile and tractor manufacturer. M&M has partnerships with international companies like Renault SA, France and International Truck and Engine Corporation, USA.M&M has a global presence and its products are exported to several countries.
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BRAND Mahindra builds three things: products, services, and possibilities. Since 1945, they’ve built the company around the core idea that people will succeed if they are just given the opportunity. Employees across the Group constantly challenge conventional thinking to create solutions that make a significant difference in the lives of the customers. That’s why everything they build be it a tractor, financial service, solar-powered lamp, or software is designed to empower to reach the potential. Internally, they follow three basic tenets accepting no limits, thinking alternatively, and driving positive change in everything they do. These brand pillars guide all their actions and business decisions from deciding whether or not to enter a new field or planning a portfolio of services. PURPOSE & VALUES “We are many companies driven by one purpose”. Their motivation to give their best every day comes from their core purpose: they will challenge conventional thinking and innovatively use all our resources to drive positive change in the lives of their stakeholders and communities across the world, to enable them to Rise. Their products and services support their customers’ ambitions to improve their living standards; their responsible business practices positively engage the communities they join through employment, education, and outreach; and our commitment to sustainable business is bringing green technology and awareness into the mainstream through products, services, and light-footprint manufacturing processes. This commitment to sustainability social, economic, and environmental rests upon a set of core values. They are an amalgamation of what they have been, what they are, and what they want to be. These values are the compass that guides their actions, both personal and corporate. They are: Good corporate citizenship: We will continue to seek long term success in alignment with the needs of the communities we serve. We will do this without compromising on ethical business standards. Professionalism: We have always sought the best people for the job and given them the freedom and the opportunity to grow. We will continue to do so. We will support innovation and well reasoned risk taking, but will demand performance. Customer first: We exist and prosper only because of the customer. We will respond to the changing needs and expectations of our customers speedily, courteously and effectively. Quality focus: Quality is the key to delivering value for money to our customers. We will make quality a driving value in our work, in our products and in our interactions with others. We will do it 'First Time Right.
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KESHUB MAHINDRA Chairman Emeritus – Mahindra & Mahindra
ANAND MAHINDRA Chairman & Managing Director – Mahindra & Mahindra
The Group Executive Board (GEB) displays the breadth and depth of the talented human capital. Made up of people from all segments of industry, the GEB works together, they create value while staying true to our common purpose and values. The people whose extraordinary efforts enable Mahindra to Rise.
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MAHINDRA AROUND THE WORLD
Thinking global is part of their identity. From their founding in 1945, they’ve been connected internationally by business partnerships, a multinational workforce, and the boundless ambition to integrate them with global communities and bring opportunity to customers across the world.
HOW THEY GOT HERE
From humble beginnings to a global presence, journey has been more than 65 years in the making .Mahindra and an independent India began their rise together. Now, after 65 years, Mahindra has grown from a humble local outfit to a US Rs15.9 billion corporation employing more than 155,000 people around the world. It’s been quite an adventure so far, and they are proud of the global leadership in utility vehicles, tractors, and information technology, as well as our significant presence in financial services, leisure and hospitality, engineering, trade, and logistics. As we accelerate into the 21st century, they’ll continue to pursue innovative ideas that enable people to rise. They’ve come a long way, but the journey has just begun.
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IN NUTSHELL
MAHINDRA &MAHINDRA Parent company Category Sector Tagline/Slogan USP Mahindra Sedans, SUV’s, two- wheelers Automobiles Rise; Every two minutes a Mahindra is born Mahindra SUV’s have a stronghold in the Indian commercial taxi market which have good performance o tough terrains
PRODUCT PORTFOLIO Brands 1. Mahindra Bolero 2. Mahindra Renault Logan 3. Mahindra Scorpio 4. Mahindra Verito 5. Mahindra Xylo
STP Segment Target Group Positioning Complete automobile segment including sedans & SUV’s Young executives from the upper-middle income bracket A brand which promotes new thinking, accepts no limits and drives positive change
COMPETITION Competitors 1.Honda 2.Toyota 3.Nissan 4.Hyundai 5.Fiat 6.Mitsubishi 7.MarutiUdyog 8.TataMotors 9.Skoda 10.Toyota 11.Volkswagen
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SWOT Analysis
Strength
Weakness
Opportunity
Threats
1. Mahindra has been one of the strongest brands in the Indian automobile market 2. Mahindra group give employment to over 110,000 employees 3. Excellent branding and advertising, and low after sales service cost 4. Sturdy SUV’s good for Indian roads and off-road terrain 1. Mahindra’s partnership with Renault did not live up to international quality standards through their brand Logan 1. Developing hybrid cars and fuel efficient cars for the future 2.Tapping emerging markets across the world and building a global brand 3.Fast growing automobile market 4.Growing in the market through electric car Reva (controlling stake) and entry into two-wheeler segments 1. Government policies for the automobile sector across the world 2. Ever increasing fuel prices 3. Intense competition from global automobile brands 4. Substitute modes of public transport like buses, metro trains etc
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INTRODUCTION
FINANCIAL STATEMENTS Financial statements are summaries of the operating, financing, and investment activities of a business. Financial statements should provide information useful to both investors and creditors in making credit, investment, and other business decisions. And this usefulness means that investors and creditors can use these statements to predict, compare, and evaluate the amount, timing, and uncertainty of potential cash flows. In other words, financial statements provide the information needed to assess a company‘s future earnings and therefore the cash flows expected to result from those earnings. ACCOUNTING PRINCIPLES AND ASSUMPTIONS The accounting data in financial statements are prepared by the firm‘s management according to a set of standards, referred to as generally accepted accounting principles (GAAP). The financial statements of a company whose stock is publicly traded must, by law, be audited at least annually by independent public accountants (i.e., accountants who are not employees of the firm). In such an audit, the accountants examine the financial statements and the data from which these statements are prepared and attest—through the published auditor‘s opinion that these statements have been prepared according to GAAP. The auditor‘s opinion focuses on whether the statements conform to GAAP and that there is adequate disclosure of any material change in accounting principles. The financial statements are created using several assumptions that affect how we use and interpret the financial data: ? Transactions are recorded at historical cost. Therefore, the values shown in the statements are not market or replacement values, but rather reflect the original cost (adjusted for depreciation, in the case of depreciable assets). ? The appropriate unit of measurement is the dollar. While this seems logical, the effects of inflation, combined with the practice of recording values at historical cost, may cause problems in using and interpreting these values. ? The statements are recorded for predefined periods of time. Generally, statements are produced to cover a chosen fiscal year or quarter, with the income statement and the statement of cash flows spanning a period‘s time and the balance sheet and statement of shareholders‘ equity as of the end of the specified period. But because the end of the fiscal year is generally chosen to coincide with the low point of activity in the firm‘s operating cycle, the annual balance sheet and statement of shareholders‘ equity may not be representative of values for the year.
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? Statements are prepared using accrual accounting and the matching principle. Most businesses use accrual accounting, where income and revenues are matched in timing such that income is recorded in the period in which it is earned and expenses are reported in the period in which they are incurred to generate revenues. The result of the use of accrual accounting is that reported income does not necessarily coincide with cash flows. Because the financial analyst is concerned ultimately with cash flows, he or she often must understand how reported income relates to a company‘s cash flows. ? It is assumed that the business will continue as a going concern. The assumption that the business enterprise will continue indefinitely justifies the appropriateness of using historical costs instead of current market values because these assets are expected to be used up over time instead of sold. ? Full disclosure requires providing information beyond the financial statements. The requirement that there be full disclosure means that, in addition to the accounting numbers for such accounting items as revenues, expenses, and assets, narrative and additional numerical disclosures are provided in notes accompanying the financial statements. An analysis of financial statements is therefore not complete without this additional information. ? Statements are prepared assuming conservatism. In cases in which more than one interpretation of an event is possible, statements are prepared using the most conservative interpretation. The financial statements and the auditors‘ findings are published in the firm‘s annual and quarterly reports sent to shareholders and the 10K and 10Q filings with the Securities and Exchange Commission (SEC).Also included in the reports, among other items, is a discussion by management, providing an overview of company events. The annual reports are much more detailed and disclose more financial information than the quarterly reports. There are three basic financial statements: ? Balance sheet ? Income statement ? Cash Flow statement
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THE BALANCE SHEET The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in time—usually the end of the firm‘s fiscal year. The balance sheet is also known as the statement of financial condition or the statement of financial position. The values shown for the different accounts on the balance sheet are not purported to reflect current market values; rather, they reflect historical costs. Assets are the resources of the business enterprise, such as plant and equipment that are used to generate future benefits. If a company owns plant and equipment that will be used to produce goods for sale in the future, the company can expect these assets (the plant and equipment) to generate cash inflows in the future. Liabilities are obligations of the business. They represent commitments to creditors in the form of future cash outflows. When a firm borrows, say, by issuing a long-term bond, it becomes obligated to pay interest and principal on this bond as promised. Equity, also called shareholders‘ equity or stockholders‘ equity, reflects ownership. The equity of a firm represents the part of its value that is not owed to creditors and therefore is left over for the owners. In the most basic accounting terms, equity is the difference between what the firm owns its assets and what it owes its creditors its liabilities. ? ASSETS There are two major categories of assets: current assets and noncurrent assets, where noncurrent assets include plant assets, intangibles, and investments. Assets that do not fit neatly into these categories may be recorded as either other assets, deferred charges, or other noncurrent assets. ? Current assets
Current assets (also referred to as circulating capital and working assets) are assets that could reasonably be converted into cash within one operating cycle or one year, whichever takes longer. An operating cycle begins when the firm invests cash in the raw materials used to produce its goods or services and ends with the collection of cash for the sale of those same goods or services. For example, if Fictitious manufactures and sells candy products, its operating cycle begins when it purchases the raw materials for the products (e.g., sugar) and ends when it receives cash for selling the candy to retailers. Because the operating cycle of most businesses is less than one year, we tend to think of current assets as those assets that can be converted into cash in one year. Current assets consist of cash, marketable securities, accounts receivable, and inventories. Cash comprises both currency—bills and coins—and assets that are immediately transformable into cash, such as deposits in bank accounts. Marketable securities are securities that can be readily sold when cash is needed.
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Every company needs to have a certain amount of cash to fulfill immediate needs, and any cash in excess of immediate needs is usually invested temporarily in marketable securities. Investments in marketable securities are simply viewed as a short term place to store funds; marketable securities do not include those investments in other companies’ stock that are intended to be long term. Some financial reports combine cash and marketable securities into one account referred to as cash and cash equivalents or cash and marketable securities. Accounts receivable are amounts due from customers who have purchased the firm‘s goods or services but haven‘t yet paid for them. To encourage sales, many firms allow their customers to buy now and pay later, perhaps at the end of the month or within 30 days of the sale. Accounts receivable therefore represents money that the firm expects to collect soon. Because not all accounts are ultimately collected, the gross amount of accounts receivable is adjusted by an estimate of the uncollectible accounts, the allowance for doubtful accounts, resulting in a net accounts receivable figure. Inventories represent the total value of the firm‘s raw materials, work-in-process, and finished (but as yet unsold) goods. A manufacturer of toy trucks would likely have plastic and steel on hand as raw materials, work-in-process consisting of truck parts and partly completed trucks, and finished goods consisting of trucks packaged and ready for shipping. There are three basic methods of accounting for inventory, including: ? FIFO (first in, first out), which assumes that the first items purchased are the first items sold, ? LIFO (last in, first out), which assumes that the last items purchased are the first items sold, and ? Average cost, which assumes that the cost of items sold, is the average of the cost of all items purchased. The choice of inventory accounting method is significant because it affects values recorded on the balance sheet and the income statement, as well as tax payments and cash flows. Another current asset account that a company may have is prepaid expenses. Prepaid expenses are amounts that have been paid but not as yet consumed. A common example is the case of a company paying insurance premiums for an extended period of time (say, a year), but for which only a portion (say, three months) is applicable to the insurance coverage for the current fiscal year; the remaining insurance that is prepaid as of the end of the year is considered an asset. Prepaid expenses may be reported as part of other current liabilities. Companies‘ investment in current assets depends, in large part, on the industry in which they operate.
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Noncurrent Assets
Noncurrent assets are assets that are not current assets; that is, it is not expected that noncurrent assets can be converted into cash within an operating cycle. Noncurrent assets include physical assets, such as plant and equipment, and nonphysical assets, such as intangibles. Plant assets are the physical assets, such as the equipment, machinery, and buildings, which are used in the operation of the business. We describe a firm‘s current investment in plant assets by using three values: gross plant assets, accumulated depreciation, and net plant assets. Gross plant and equipment, or gross plant assets, is the sum of the original costs of all equipment, buildings, and machinery the firm uses to produce its goods and services. Depreciation, as you will see in the next chapter, is a charge that accounts for the using up of an asset over the length of an accounting period; it is a means for allocating the asset‘s cost over its useful life. Accumulated depreciation is the sum of all the depreciation charges taken so far for all the company‘s assets. Net plant and equipment, or net plant assets, is the difference between gross plant assets and accumulated depreciation. The net plant and equipment amount is hence the value of the assets historical cost less any depreciation- according to the accounting books and is therefore often referred to as the book value of the assets. Intangible assets are the current value of nonphysical assets that represent long-term investments of the company. Such intangible assets include patents, copyrights, and goodwill. The cost of some intangible assets is amortized (spread out) over the life of the asset. Amortization is akin to depreciation: The asset‘s cost is allocated over the life of the asset; the reported value is the original cost of the asset, less whatever has been amortized. The number of years over which an intangible asset is amortized depends on the particular asset and its perceived useful life. For example, a patent is the exclusive right to produce and sell a particular, uniquely defined good and has a legal life of 17 years, though the useful life of a patent the period in which it adds value to the company-may be much less than 17 years. Therefore the company may choose to amortize a patent‘s cost over a period less than 17 years. As another example, a copyright is the exclusive right to publish and sell a literary, artistic, or musical composition, and is granted for 50 years beyond the author‘s life, though its useful life in terms of generating income for the company may be much less than 50 years. More challenging is determining the appropriate amortization period for goodwill. Goodwill was created when one company buys another company at a price that exceeds the acquired company‘s fair market value of its assets. A company may have additional noncurrent assets, depending on their particular circumstances. A company may have a noncurrent asset referred to as investments, which are assets that are purchased with the intention of holding them for a long term, but which do not generate revenue or are not used to manufacture a product.
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Examples of investments include equity securities of another company and real estate that is held for speculative purposes. Other noncurrent assets include long term prepaid expenses, arising from prepayment for which a benefit is received over an extended period of time, and deferred tax assets, arising from timing differences between reported income and tax income, whereby reported income exceeds taxable income. Long-term investment in securities of other companies may be recorded at cost or market value, depending on the type of investment; investments held to maturity are recorded at cost, whereas investments held as trading securities or available for sale are recorded at market value. Whether the unrealized gains or losses affect earnings on the income statement depend on whether the securities are deemed trading securities or available for sale.
? LIABILITIES Liabilities, a firm‘s obligations to its creditors, are made up of current liabilities, longterm liabilities, and deferred taxes. ? Current Liabilities
Current liabilities are obligations that must be paid within one operating cycle or one year, whichever is longer. Current liabilities include: ? Accounts payable, which are obligations to pay suppliers. They arise from goods and services that have been purchased but not yet paid. ? Accrued expenses, which are obligations such as wages and salaries payable to the employees of the business, rent, and insurance. ? Current portion of long-term debt or the current portion of capital leases. Any portion of long-term indebtedness—obligations extending beyond one year— due within the year. ? Short-term loans from a bank or notes payable within a year. The reliance on short-term liabilities and the type of current liabilities depends, in part, on the industry in which the firm operates.
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?
Long term liabilities
Long-term liabilities are obligations that must be paid over a period beyond one year. They include notes, bonds, capital lease obligations, and pension obligations. Notes and bonds both represent loans on which the borrower promises to pay interest periodically and to repay the principal amount of the loan. A lease obligates the lessee the one leasing and using the leased asset to pay specified rental payments for a period of time. Whether the lease obligation is recorded as a liability or is expensed as lease payments made depends on whether the lease is a capital lease or an operating lease. A company‘s pension and post-retirement benefit obligations may give rise to longterm liabilities. The pension benefits are commitments by the company to pay specific retirement benefits, whereas post-retirement benefits include any other retirement benefit besides pensions, such as health care. Basically, if the fair value of the pension plan‘s assets exceeds the projected benefit obligation (the estimated present value of projected pension costs), the difference is recorded as a long-term asset. If, on the other hand, the plan‘s assets are less than the projected benefit obligation, the difference is recorded as a long-term liability. In a similar manner, the company may have an asset or a liability corresponding to post-retirement benefits. ? Deferred taxes
Along with long-term liabilities, the analyst may encounter another account, deferred taxes. Deferred taxes are taxes that will have to be paid to the federal and state governments based on accounting income, but are not due yet. Deferred taxes arise when different methods of accounting are used for financial statements and for tax purposes. These differences are temporary and are the result of different timing of revenue or expense recognition for financial statement reporting and tax purposes. The deferred tax liability arises when the actual tax liability is less than the tax liability shown for financial reporting purposes (meaning that the firm will be paying the difference in the future), whereas the deferred tax asset, mentioned earlier, arises when the actual tax liability is greater than the tax liability shown for reporting purposes. ? Equity
Equity is the owner‘s interest in the company. For a corporation, ownership is represented by common stock and preferred stock. Shareholders‘ equity is also referred to as the book value of equity, since this is the value of equity according to the records in the accounting books. The value of the ownership interest of preferred stock is represented in financial statements as its par value, which is also the dollar value on which dividends are figured. For example, if you own a share of preferred stock that has a Rs100 par value and a 9% dividend rate, you receive Rs9 in dividends each year. Further, your ownership share of the company is Rs100.
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Preferred shareholders‘ equity is the product of the number of preferred shares outstanding and the par value of the stock; it is shown that way on the balance sheet. The remainder of the equity belongs to the common shareholders. It consists of three parts: common stock outstanding (listed at par or at stated value), additional paid-in capital, and retained earnings. The par value of common stock is an arbitrary figure; it has no relation to market value or to dividends paid on common stock. Some stock has no par value, but may have an arbitrary value, or stated value, per share. Nonetheless, the total par value or stated value of all outstanding common shares is usually entitled capital stock or common stock. Then, to inject reality into the equity part of the balance sheet, an entry called additional paid-in capital is added; this is the amount received by the corporation for its common stock in excess of the par or stated value. There are actually four different labels that can be applied to the number of shares of a corporation on a balance sheet: ? ? ? The number of shares authorized by the shareholders. The number of shares issued and sold by the corporation, which can be less than the number of shares authorized. The number of shares currently outstanding, which can be less than the number of shares issued if the corporation has bought back (repurchased) some of its issued stock. The number of shares of treasury stock, which is stock that the company has repurchased.
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The outstanding stock is reported in the stock accounts, and adjustments must be made for any treasury stock. The bulk of the equity interest in a company is in its retained earnings. A retained- earnings is the accumulated net income of the company, less any dividends that have not been paid, over the life of the corporation. Retained earnings are not strictly cash and any correspondence to cash is coincidental. Any cash generated by the firm that has not been paid out in dividends has been reinvested in the firm‘s assets to finance accounts receivable, inventories, equipment, and so forth.
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THE INCOME STATEMENT An income statement is a summary of the revenues and expenses of a business over a period of time, usually one month, three months, or one year. This statement is also referred to as the profit and loss statement. It shows the results of the firm ‘s operating and financing decisions during that time. The operating decisions of the company those that apply to production and marketing generate sales or revenues and incur the cost of goods sold (also referred to as the cost of sales or the cost of products sold). The difference between sales and cost of goods sold is gross profit. Operating decisions also result in administrative and general expenses, such as advertising fees and office salaries. Deducting these expenses from gross profit leaves operating profit, which is also referred to as earnings before interest and taxes (EBIT), operating income, or operating earnings. Operating decisions take the firm from sales to EBIT on the income statement. The results of financing decisions are reflected in the remainder of the income statement. When interest expenses and taxes, which are both influenced by financing decisions, are subtracted from EBIT, the result is net income. Net income is, in a sense, the amount available to owners of the firm. If the firm has preferred stock, the preferred stock dividends are deducted from net income to arrive at earnings available to common shareholders. If the firm does not have preferred stock (as is the case with Fictitious and most non fictitious corporations), net income is equivalent to earnings available for common shareholders. The board of directors may then distribute all or part of this as common stock dividends, retaining the remainder to help finance the firm. Companies must report comprehensive income prominently within their financial statements. Comprehensive income is a net income amount that includes all revenues, expenses, gains, and losses items and is based on the idea that all results of the firm whether operating or non operating should be reflected in the earnings of the company. This is referred to as the all-inclusive income concept. The all-inclusive income concept requires that these items be recognized in the financial statements as part of comprehensive income. It is important to note that net income does not represent the actual cash flow from operations and financing. Rather, it is a summary of operating performance measured over a given time period, using specific accounting procedures. Depending on these accounting procedures, net income may or may not correspond to cash flow. CASH FLOW STATEMENT It is a statement, which measures inflows and outflows of cash on account of any type of business activity. The cash flow statement also explains reasons for such inflows and outflows of cash so it is a report on a company's cash flow activities, particularly its operating, investing and financing activities.
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FINANCIAL STATEMENT ANALYSIS
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition and operating performance of a business firm, an industry, or even the economy, and the forecasting of its future condition and performance. It is, in other words, a means for examining risk and expected return. Data for financial analysis may come from other areas within the firm, such as marketing and production departments, from the firm‘s own accounting data, or from financial information vendors such as Bloomberg Financial Markets, Moody‘s Investors Service, Standard & Poor‘s Corporation, Fitch Ratings, and Value Line, as well as from government publications, such as the Federal Reserve Bulletin. Financial publications such as Business Week, Forbes, Fortune, and the Wall Street Journal also publish financial data (concerning individual firms) and economic data (concerning industries, markets, and economies), much of which is now also available on the Internet. Within the firm, financial analysis may be used not only to evaluate the performance of the firm, but also its divisions or departments and its product lines. Analyses may be performed both periodically and as needed, not only to ensure informed investing and financing decisions, but also as an aid in implementing personnel policies and rewards systems. Outside the firm, financial analysis may be used to determine the creditworthiness of a new customer, to evaluate the ability of a supplier to hold to the conditions of a long-term contract, and to evaluate the market performance of competitors.
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Firms and investors that do not have the expertise, the time, or the resources to perform financial analysis on their own may purchase analyses from companies that specialize in providing this service. Such companies can provide reports ranging from detailed written analyses to simple creditworthiness ratings for businesses. As an example, Dun & Bradstreet, a financial services firm, evaluates the creditworthiness of many firms, from small local businesses to major corporations. As another example, three companies Moody‘s Investors Service, Standard & Poor‘s, and Fitch evaluate the credit quality of debt obligations issued by corporations and express these views in the form of a rating that is published in the reports available from these three organizations. Who uses these analyses? Financial statements are used and analyzed by a different group of parties, these groups consists of people both inside and outside a business. A. Internal Users: are owners, managers, employees and other parties who are directly connected with a company: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with more detailed information. These statements are also used as part of management's report to its stockholders, and it form part of the Annual Report of the company. 2. Employees also need these reports in making collective bargaining agreements with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings. B. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for numbers of reasons. 1. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions. 2. Financial institutions (banks and other lending companies) use them to decide whether to give a company with fresh loans or extend debt securities (such as a longterm bank loan ). 3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and duties paid by a company. 4. Media and the general public are also interested in financial statements of some companies for a variety of reasons.
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FINANCIAL RATIO ANALYSIS
Ratio analysis: Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future. Meaning of ratio: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements. Meaning of ratio analysis: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By
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comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk. However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group. OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing
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FORMS OF RATIO: Since a ratio is a mathematical relationship between two or more variables / accounting figures, such relationship can be expressed in different ways as follows – A] As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit sales to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or simply by saying that the credit sales are 2.5 times that of cash sales. C] As a percentage: In such a case, one item may be expressed as a percentage of some other items. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]
STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.
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TYPES OF COMPARISONS The ratio can be compared in three different ways – 1] Cross section analysis: One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. So it involves the comparison of two or more firm’s Financial ratio at the same point of time. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. The firm’s performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. 2] Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. By comparing the present performance of a firm with the performance of the same firm over the last few years, an assessment can be made about the trend in progress of the firm, about the direction of progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data 3] Combined analysis: If the cross section & time analysis, both are combined together to study the behavior & pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. For example, the ratio of operating expenses to net sales for firm may be higher than the industry average however, over the years it has been declining for the firm, whereas the industry average has not shown any significant changes. The combined analysis as depicted in the above diagram, which clearly shows that the ratio of the firm is above the industry average, but it is decreasing over the years & is approaching the industry average.
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PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. 1) The dates of different financial statements from where data is taken must be same. 2) If possible, only audited financial statements should be considered, otherwise there must be sufficient evidence that the data is correct. 3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. 4) One ratio may not throw light on any performance of the firm. Therefore, a group of ratios must be preferred. This will be conductive to counter checks. 5) Last but not least, the analyst must find out that the two figures being used to calculate a ratio must be related to each other, otherwise there is no purpose of calculating a ratio. Ratio analysis is such a significant technique for financial analysis. It indicates relation of two mathematical expressions and the relationship between two or more things. Financial ratio is a ratio of selected values on an enterprise's financial statement. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential stockholders of a firm, and by a firm‘s creditor. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. Values used in calculating financial ratios are taken from balance sheet, income statement and the cash flow of company, besides Ratios are always expressed as a decimal values, such as 0.10, or the equivalent percent value, such as 10%.
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ESSENCE OF RATIO ANALYSIS: Financial ratio analysis helps us to understand how profitable a business is, if it has enough money to pay debts and we can even tell whether its shareholders could be happy or not. Financial ratios allow for comparisons: 1. between companies 2. between industries 3. between different time periods for one company 4. between a single company and its industry average To evaluate the performance of one firm, its current ratios will be compared with its past ratios. When financial ratios over a period of time are compared, it is called time series or trend analysis. It gives an indication of changes and reflects whether the firm‘s financial performance has improved or deteriorated or remained the same over that period of time. It is not the simply changes that has to be determined, but more importantly it must be recognized that why those ratios have changed. Because those changes might be result of changes in the accounting polices without material change in the firm‘s performances. Another method is to compare ratios of one firm with another firm in the same industry at the same point in time. This comparison is known as the cross sectional analysis. It might be more useful to select some competitors which have similar operations and compare their ratios with the firm‘s. This comparison shows the relative financial position and performance of the firm. Since it is so easy to find the financial statements of similar firms through publications or Medias this type of analysis can be performed so easily. To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of the industry to which the firm belongs. This method is known as the industry analysis that helps to ascertain the financial standing and capability of the firm in the industry to which it belongs. Industry ratios are important standards in view of the fact that each industry has its own characteristics, which influence the financial and operating relationships. But there are certain practical difficulties for this method. First finding average ratios for the industries is such a headache and difficult. Second, industries include companies of weak and strong so the averages include them also. Sometimes spread may be so wide that the average may be little utility. Third, the average may be meaningless and the comparison not possible if the firms with in the same industry widely differ in their accounting policies and practices.
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WHAT DOES RATIO ANALYSIS TELL US? These ratios are one of the most important tools that is used in finance and that almost every business does and calculate these ratios, it is logical to express that how come these calculations are of so importance. What are the points that those ratios put light on them? And how can these numbers help us in performing the task of management? The answer to these questions is: We can use ratio analysis to tell us whether the business 1. Is profitable 2. Has enough money to pay its bills and debts 3. Could be paying its employees higher wages, remuneration or so on 4. Is able to pay its taxes 5. Is using its assets efficiently or not 6. Has a gearing problem or everything is fine 7. Is a candidate for being bought by another company or investor But as it is obvious there are many different aspects that these ratios can demonstrate. So for using them first we have to decide what we want to know, then we can decide which ratios we need and then we must begin to calculate them.
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WHICH RATIO FOR WHOM: As before mentioned there are varieties of people interested to know and read these information and analyses, however different people for different needs. And it is because each of these groups have different type of questions that could be answered by a specific number and ratio. Therefore we can say there are different ratios for different groups, these groups with the ratio that suits them is listed below: 1. Investors: These are people who already have shares in the business or they are willing to be part of it. So they need to determine whether they should buy shares in the business, hold on to the shares they already have or sell the shares they already own. They also want to assess the ability of the business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this group. 2. Lenders: This group consists of people who have given loans to the company so they want to be sure that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group. 3. Managers: Managers might need segmental and total information to see how they fit into the overall picture of the company which they are ruling. And Profitability Ratios can show them what they need to know. 4. Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore these information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. 5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies. 6. Customers: are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that. 7. Governments and their agencies: are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses.
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8. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. 9. Financial analysts: they need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. therefore they are interested in possibly all the ratios. 10. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research.
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CLASSIFICATION OF RATIOS In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. A ratio gains utility by comparison to other data and standards. Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Although these categories are not fixed in all over the world however there are almost the same, just with different names: 1. Profitability ratios which use margin analysis and show the return on sales and capital employed. 2. Rate of Return Ratio (ROR) or Overall Profitability Ratio: The rate of return ratios are thought to be the most important ratios by some accountants and analysts. One reason why the rate of return ratios is so important is that they are the ratios that we use to tell if the managing director is doing their job properly. 3. Liquidity ratios measure the availability of cash to pay debt, which give a picture of a company's short term financial situation. 4. Solvency or Gearing ratios measures the percentage of capital employed that is financed by debt and long term finance. The higher the gearing, the higher the dependence on borrowing and long term financing. The lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increase volatility of profits. It should be noted that the term ?Leverage? is used in some texts. 5. Turn over Ratios or activity group ratios indicate efficiency of organization to various kinds of assets by converting them to the form of sales. 6. Investors ratios usually interested by investors.
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BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet, P& P A/C, or both. One-way of classification of ratios is based upon the sources from which are taken. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating these ratios, there is no need to refer to the Revenue statement. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock working capital ratio. 2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratios study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio. 3] Composite ratio: These ratios indicate the relationship between two items, of which one is found in the balance sheet & other in revenue statement. There are two types of composite ratiosa) Some composite ratios study the relationship between the profits & the investments of the concern. E.g. return on capital employed, return on proprietors fund, return on equity capital etc. b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend payout ratios, & debt service ratios
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BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios. 1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios. 2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary ratios. 3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtor?s turnover ratios. 4] Profitability ratios: a) It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios b) It shows the relationship between profit & investment e.g. return on investment, return on equity capital. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.
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BASED ON USER: 1] Ratios for short-term creditors: Current ratios, liquid ratios, stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund, return on equity capital 3] Ratios for management: Return on capital employed, turnover ratios, operating ratios, expenses ratios 4] Ratios for long-term creditors: Debt equity ratios, return on capital employed, proprietor ratios.
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LIQUIDITY RATIO: -
Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations. The ratios, which indicate the liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below
? CURRENT RATIO Meaning: This ratio compares the current assets with the current liabilities. It is also known as „working capital ratio? or „solvency ratio?. It is expressed in the form of pure ratio. E.g. 2:1
Formula:
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The current assets of a firm represents those assets which can be, in the ordinary course of business, converted into cash within a short period time, normally not exceeding one year. The current liabilities defined as liabilities which are short term maturing obligations to be met, as originally contemplated, within a year. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL). Current assets include cash and bank balances; inventory of raw materials, semi-finished and finished goods; marketable securities; debtors (net of provision for bad and doubtful debts); bills receivable; and prepaid expenses. Current liabilities consist of trade creditors, bills payable, bank credit, and provision for taxation, dividends payable and outstanding expenses. This ratio measures the liquidity of the current assets and the ability of a company to meet its short-term debt obligation. CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL. The higher the current ratio, the greater the short-term solvency. This compares assets, which will become liquid within approximately twelve months with liabilities, which will be due for payment in the same period and is intended to indicate whether there are sufficient short-term assets to meet the short- term liabilities. Recommended current ratio is 2: 1. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading, that is the entity is under utilizing its current assets.
? LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares the quick assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1. The term quick assets refer to current assets, which can be converted into, cash immediately or at a short notice without diminution of value.
Formula:
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Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those current assets that can be converted into cash immediately without any value strength. QA includes cash and bank balances, short-term marketable securities, and sundry debtors. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. QR indicates the extent to which a company can pay its current liabilities without relying on the sale of inventory. This is a fairly stringent measure of liquidity because it is based on those current assets, which are highly liquid. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the timing of receipts and payments.
? CASH RATIO Meaning: This is also called as super quick ratio. This ratio considers only the absolute liquidity available with the firm.
Formula:
Since cash and bank balances and short term marketable securities are the most liquid assets of a firm, financial analysts look at the cash ratio. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm.
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INVESTMENT / SHAREHOLDER
? EARNING PER SAHRE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization. Earnings per Share represent earning of the company whether or not dividends are declared. If there is only one class of shares, the earning per share are determined by dividing net profit by the number of equity shares. EPS measures the profits available to the equity shareholders on each share held.
Formula:
The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business
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? DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held.
Formula:
? DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship between the dividends paid to equity shareholders out of the profit available to the equity shareholders.
Formula:
D/P ratio shows the percentage share of net profits after taxes and after preference dividend has been paid to the preference equity holders.
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GEARING
? CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt. Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts. This is also known as leverage or trading on equity. The Capital-gearing ratio shows the relationship between two types of capital viz: - equity capital & preference capital & long term borrowings. It is expressed as a pure ratio.
Formula:
Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a concern.
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PROFITABILITY
These ratios help measure the profitability of a firm. A firm, which generates a substantial amount of profits per rupee of sales, can comfortably meet its operating expenses and provide more returns to its shareholders. The relationship between profit and sales is measured by profitability ratios. There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin.
Meaning: This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. It measures the efficiency of production as well as pricing. This ratio helps to judge how efficient the concern is I managing its production, purchase, selling & inventory, how good its control is over the direct cost, how productive the concern , how much amount is left to meet other expenses & earn net profit.
Formula:
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? NET PROFIT RATIO:Meaning: Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage.
Formula:
This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Jointly considered, the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm.
? RETURN ON CAPITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The term fund employed or the capital employed refers to the total long-term source of funds. It means that the capital employed comprises of shareholder funds plus long-term debts. Alternatively it can also be defined as fixed assets plus net working capital. Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the efficiency with which the long-term funds of a firm are utilized. Formula:
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FINANCIAL
These ratios determine how quickly certain current assets can be converted into cash. They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of investment in various assets. The important turnover ratios are debtors turnover ratio, average collection period, inventory/stock turnover ratio, fixed assturnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These are described below:
? DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales minus returns, if any, from customers. Average debtors are the average of debtors at the beginning and at the end of the year. This ratio shows how rapidly debts are collected. The higher the DTO, the better it is for the organization. Formula:
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? INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period. Formula:
ITR reflects the efficiency of inventory management. The higher the ratio, the more efficient is the management of inventories, and vice versa. However, a high inventory turnover may also result from a low level of inventory, which may lead to frequent stock outs and loss of sales and customer goodwill. For calculating ITR, the average of inventories at the beginning and the end of the year is taken. In general, averages may be used when a flow figure (in this case, cost of goods sold) is related to a stock figure (inventories). ? FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. Formula:
This ratio measures the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. However, this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low). ? PROPRIETORS RATIO: Meaning: Proprietary ratio is a test of financial & credit strength of the business. It relates shareholders fund to total assets. This ratio determines the long term or ultimate solvency of the company. In other words, Proprietary ratio determines as to what extent the owner?s interest & expectations are fulfilled from the total investment made in the business operation.
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Proprietary ratio compares the proprietor fund with total liabilities. It is usually expressed in the form of percentage. Total assets also know it as net worth. Formula:
OR
? STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital. It helps to judge the quantum of inventories in relation to the working capital of the business. The purpose of this ratio is to show the extent to which working capital is blocked in inventories. The ratio highlights the predominance of stocks in the current financial position of the company. It is expressed as a percentage. Formula:
Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the working capital. This ratio also helps to study the solvency of a concern. It is a qualitative test of solvency. It shows the extent of funds blocked in stock. If investment in stock is higher it means that the amount of liquid assets is lower.
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? DEBT EQUITY RATIO: Meaning: This ratio compares the long-term debts with shareholders fund. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It is usually expressed as a pure ratio. E.g. 2:1 Formula:
Debt equity ratio is also called as leverage ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. Leverage is also known as „gearing? or „trading on equity?. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity.
? RETURN ON PROPRIETOR FUND: Meaning: Return on proprietors fund is also known as „return on proprietor?s equity? or „return on shareholders? investment? or „investment ratio?. This ratio indicates the relationship between net profits earned & total proprietor?s funds. Return on proprietors fund is a profitability ratio, which the relationship between profit & investment by the proprietors in the concern. Its purpose is to measure the rate of return on the total fund made available by the owners. This ratio helps to judge how efficient the concern is in managing the owner?s fund at disposal. This ratio is of practical importance to prospective investors & shareholders. Formula:
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? CREDITORS TURNOVER RATIO: Meaning: It is same as debtor’s turnover ratio. It shows the speed at which payments are made to the supplier for purchase made from them. It is a relation between net credit purchase and average creditors Formula
Both the ratios indicate promptness in payment of creditor purchases. Higher creditors turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid promptly. It enhances credit worthiness of the company. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditors.
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FINANCIAL OVERVIEW OF MAHINDRA & MAHINDRA
BALANCESHEET
As On 31-3-08 Rs mn 31-3-09 Rs mn 31-3-10 Rs mn 31-3-11 Rs mn 31-3-12 Rs mn
I.SOURCES OF THE FUNDS: (A)SHAREHOLDER’S FUND Capital Reserves and surplus Total(A) (B)LOAN FUND: Secured loans Unsecured loans (C)DEFERRED TAX LIABILITY Total (A+B+C) II.APPLICATION OF FUND: (A)FIXED ASSETS: Gross block Less: depreciation Net block Capital WIP (B) INVESTMENTS (C )CURRENT ASSETS,LOANS,ADVANCES: 1.Inventories 2.sundry debtors 3.cash &bank balances 4.loans & advances 5.others Total(C ) (D)CURRENT LIABILITIES & PROVISIONS: 1. Sundry creditors 2.Current liabilities 3.Provisions Total (D) (E)NET CURRENT ASSET(C-D) (F) MICSELLANEOUS EXPENDITURE TOTAL(A+B+E+F)
2,431 41,070 43,501 22,819 3,052 567 69,939
2,726 49,714 52,440 36,028 4,500 -183 92,785
2,830 75,473 78,302 25,242 3,560 2,403 109,507
2,936 100,198 103,134 20,053 4,000 3,544 130,731
3,008 119,322 122,329 52,411 4,570 3,544 155,854
36,561 18,417 18,145 5,465 42,151
48,939 23,263 25,676 6,467 57,864
52,763 25,378 27,385 9,642 63,980
62,277 28,417 33,860 9,859 93,253
74,636 33,312 41,324 10,000 92,272
10,841 10,049 8,612 6,919 133 36,554
10,607 10,437 15,744 13,826 16 50,629
11,888 12,581 17,432 18,014 509 60,424
16,942 13,547 6,146 23,732 1,067 61,435
19,866 18,869 21,628 27,926 1,067 89,410
21,613 1,463 9,435 32,510 4,044 135 69,939
33,368 1,834 12,776 47,978 2,652 126 92,785
32,601 1,399 17,965 51,965 8,458 41 109,507
45,940 1,677 20,059 67,676 -6,241 0 130,731
52,832 1,677 22,642 77,152 12,258 0 155,854
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PROFIT &LOSS STATEMENT
As On
31-3-08 Rs mn
31-3-09 Rs mn 142,684 16,194 126,491 4,446 130,937 120,011 10,926 453 10,473 2,915 3,936 4,888 3,759 10,365 1,997 8,368 9,297 0.00 278.83 30.69
31-3-10 Rs mn 198,321 18,073 180,248 5,641 185,888 156,336 29,552 278 29,274 3,708 1,994 0 908 28,468 7,590 20,878 20,451 0.00 578.42 36.89
31-3-11 Rs mn 248,502 20,920 227,582 7,362 234,944 200,382 34,562 -503 35,065 4,139 3,095 0 1,175 35,196 8,575 26,621 25,732 0.00 706.08 45.33
31-3-12 Rs mn 296,928 24,945 271,983 3,500 275,483 238,670 36,813 117 36,696 4,895 3,487 0 0 35,288 8,646 26,643 26,643 0.00 767.48 48.88
Gross sales Less: excise duty Net sales Operating other income total income Total expenditure EBITDA Less: interest EBDT Less: depreciation Other income Non-recurring expenses Non-recurring income Profit before tax Less: tax Profit after tax Adj. Profit after tax Preference dividend Equity dividend Earnings per share
129,770 15,664 114,106 0 114,106 101,672 12,434 242 12,192 2,387 1,682 75 2,656 14,068 3,034 11,034 10,332 0.00 282.61 46.15
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CALCULATION & INTERPRETATION OF THE RATIOS
1) CURRENT RATIO
Formula: current ratio =
Year Current asset Current liabilities Current ratio
2008 36,554 32,510 1.1244
2009 50,629 47,978 1.0552
2010 60,424 51,965 1.1627
2011 61,435 67,676 0.9078
2012 89,410 77,152 1.1589
current ratio
1.4 1.2 1 0.8 0.6 0.4 0.2 0 2008 2009 2010 2011 2012 current ratio
Comments: The ratio is mainly used to give an idea of the company’s ability to pay its short-term liabilities (debt & payables) with its short-term assets(cash, inventories, receivables).the higher the current ratio the more capable the company is of paying its obligations. The current ratio is 1.1589:1 in year 2012.it means that the current assets are 1.1589 times the current liabilities. Almost 4 years current ratio is same, expect in the year 2011 which means that company would be able to pay off its obligations if they come due at that point .low current ratio does not mean that the firm will go bankrupt, but it is definitely not a good sign. Short term creditors prefer a high current ratio since it reduce the risk.
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2) LIQUID RATIO/ QUICK RATIO
Formula: liquid ratio =
Year Quick assets Quick liabilities Liquid ratio
2008 25,713 32,510 0.7909
2009 40,022 47,978 0.8341
2010 48,536 51,965 0.9340
2011 44,493 67,676 0.6574
2012 69,544 77,152 0.9013
quick ratio
1
0.8
0.6 0.4 0.2 0 2008 2009 2010 2011 2012 quick ratio
Comments: The liquid ratio indicates the liquid position of an enterprise. Almost in all the liquid ratio is same, which is better for the company to meet the urgency. The liquid ratio of the company has increased from 0.7909 to 0.9.13.the quick ratio is far more forceful than that the current ratio, primarily because the current ratio includes inventory assets which might not be able to turn cash immediately. If the quick ratio is much more less than current ratio, it means that current assets are highly depended on inventory.
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3) CASH RATIO Formula: cash ratio =
Year Cash +bank +marketable securities Total current liabilities Cash ratio
2008 8,612
2009 15,744
2010 17,432
2011 6,146
2012 21,628
32,510 0.2649
47,978 0.3282
51,965 0.3355
67,676 0.0908
77,152 0.2803
cash ratio
0.4
0.35
0.3 0.25 0.2 0.15 0.1 0.05 0 2008 2009 2010 2011 2012 cash ratio
Comment: The ratio is called super quick ratio or absolute liquid ratio. In the year 2008 the cash ratio is 0.2649 and then it increased till 0.3355 in the year 2010.and then it decreased till 0.0908 in the year 2011 and again it increased in 2012. This shows that the company has sufficient cash, bank balance, & marketable securities to meet any contingency
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4) PROPRIETORY RATIO
Formula: proprietary ratio =
Year Shareholders fund Total fund Proprietary ratio
2008 43,501 56,120 77.5142
2009 52,440 80,121 65.4510
2010 78,302 88,992 87.9876
2011 103,134 111,395 92.5840
2012 122,329 128,476 95.2154
proprietary ratio
100 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5
proprietary ratio
Comments: The proprietary ratio of the company is 95.2154% in the year 2012. It means that the every one rupee of total assets contribution of 95 paise has come from owners fund & remaining 5 paise is contributed by the outside creditors. A high ratio indicates high financial strength but very high ratio will indicate that the firm is not using external funds adequately.
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5) STOCK WORKING CAPITAL RATIO Formula: stock working capital ratio = Year Stock Working capital Stock working capital ratio 2008 10,841 4,044 2.6808 2009 10,607 2,652 3.9996 2010 11,888 8,458 1.4055 2011 16,942 -6,241 -2.7146 2012 19,866 12,258 1.6206
stock working capital ratio
5 4 3 2 1 0 -1 -2 -3 -4 2008 2009 2010 2011 2012
stock working capital ratio
Comments: The ratio shows that the extent of the fund blocked in stocks. The amount of stock is increasing in the 5 years. however in the year 2009 amount has decreased . In the year 2009 the sale might have increased which would have lead to increase in then working capital, and also the stock working capital ratio is high in the same year. It shows that the solvency position is sound.
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6) CAPITAL GEARING RATIO
Formula: capital gearing ratio =
Year Preference share capital & secured loans Eq capital & reserves & surplus Capital gearing ratio
2008 22,819
2009 36,028
2010 25,242
2011 20,053
2012 52,411
43,501
52,440
78,302
103,134
122,329
52.4562
68.7032
32.2367
19.4436
42.8442
capital gearing ratio
80
70
60
50
40
30 20 10 0 2008 2009 2010 2011 2012
capital gearing ratio
Comments: Gearing means the process of increasing the equity shareholders return through the use of debt. Capital gearing ratio is a leverage ratio, which indicates the proportion of debt & equity in financing of assets of a company. For the first two years the ratio was high and it decreased in the year 2010 & 2011.and again it increased in the year 2012 which means that the company has borrowed more secured loans for the company’s expansion.
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7) DEBT EQUITY RATIO Formula: debt equity ratio =
Year Total long term debt Total share holders fund Debt equity ratio
2008 25,874 43,501 0.5948
2009 40,528 52,440 0.7728
2010 28,802 78,302 0.3678
2011 24,053 103,134 0.2332
2012 98,121 122,329 0.8021
debt equity ratio
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 debt equity ratio
0
1 2 3 4 5
Comments: The debt equity ratio is important tool of financial analysis to appraise the financial structure of the company. It expresses the relation between the external equities & internal equities. The ratio is very important from the point of view of creditors & owners. The rate of debt equity ratio has increased from 0.5948 to 0.8021. this shows that the increase in debt, the shareholders fund also increased. This shows long term capital structure. The lower ratio viewed as favorable from long term creditors point of view.
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8) GROSS PROFIT RATIO Formula: gross profit ratio =
Year Gross profit Net sales Gross profit ratio
2008 12,192 114,106 10.6848
2009 10,473 130,937 7.9985
2010 29,274 185,888 15.7482
2011 35,065 234,944 14.9248
2012 36,696 275,483 13.3206
gross profit ratio
18
16 14
12
10 8 6 4 2 0 2008 2009 2010 2011 2012 gross profit ratio
Comments: This ratio indicates the relation between production cost and sales and efficiency with which goods are produced or purchased. If it is high gross profit it may indicate that the organization is able to produce or purchase at a relatively lower cost. Grosss profit we take off any administration cost, selling cost and so on. Here company has achieved very good efficiency in the year 2010. The gross profit is the profit made on the sale of the goods. It is the profit on the turnover. In the year the gross profit is 10.684 which has increased to 13.3206 in the year 2012
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9) FIXED ASSET TURN OVER RATIO
Formula: fixed asset turn over ratio =
Year Net sales Fixed assets Fixed asset turnover ratio
2008 114,106 18,145 6.2886
2009 126,491 25,676 4.9264
2010 180,248 27,385 6.5819
2011 227,582 33,860 6.7212
2012 271,983 41,324 6.5817
fixed asset turn over ratio
8 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 fixed asset turn over ratio
Comments: High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the minimum investing in fixed assets. So it shows that the company is using its assets more efficiently. in the chart it is clear that the company is using its fixed assets more efficiently each year although it had a light decrease in efficiency in 2009.
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10) EPS FORMULA: EPS =
*100
Year 2008 NPAT 10,332 Number of 245741813 equity shares EPS 4.2
2009 2010 9,297 20,451 278821265 578434478 3.334 3.535
2011 25,732 587247117 4.328
2012 26,643 589029645 4.523
EPS
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
2008 2009 2010 2011 2012
EPS
Comments: EPS is one of the important criteria for measuring the performance of the company. If EPS increases, the possibility of higher dividend per share also increases. However the dividend payment depends on the policy of the company. Market price of the company may also show an upward trend if EPS is showing a rising trend.EPS of different company may vary from company to company due to following different practices by different companies regarding stock in trade, depreciation, source of raising finance, tax- planning measure ets.
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11) RETURN ON EQUITY
Formula: return on equity =
Year 2008 NPAT 10,332 No.of equity 245741813 shares Return on 4.2044 equity
2009 2010 9,297 20,451 278821265 578434478 3.334 3.5355
2011 25,732 587247117 4.382
2012 26,643 5890296445 4.523
return on equity
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1 2 3 4 5
return on equity
Comments:
This ratio shows the relationship between profit & equity shareholders fund in the company. It is used by the present/ prospective investor for deciding whether to purchase, keep or sell the equity shares. The rate of return on equity share capital is increased from 4.2044 to 4.523 during the year 2008 to 2009. This shows that the company has a very large returns available to take care of high equity dividend, large transfers to reserve, & also company has a great scope to attract large amount to fresh funds by issue of equity share & also company has a very good price for equity shares in the BSE.
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12) RETURN ON PROPRIETOR’S FUND Formula: return on proprietor’s fund =
Year NPAT Proprietors fund Return on proprietor’s fund
2008 10,332 43,501 23.7512
2009 9,297 52,440 17.7288
2010 20,451 78,302 26.1181
2011 25,732 103,134 24.9500
2012 26,643 122,329 20.7798
return on proprietor's fund
30 25 20
15 10 5 0 1 2 3 4 5 return on proprietor's fund
Comments: Return on proprietors fund shows the relationship between profits & investments by proprietors in the company. In the year 2008 the return on proprietors fund is 23.75% it means the net return of Rs. 23 approximately is earned on the each Rs. 100 of funds contributed by the owners.
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13) STOCK TURNOVER RATIO Formula: stock turnover ratio =
Year COGS Average stock Stock turnover ratio
2008 114,106 10,049 11.3549
2009 126,491 10,607 11.9252
2010 180,248 11,888 15.1622
2011 227,582 16,942 13.4330
2012 271,983 19,866 13.6909
stock turnover ratio
16 14
12
10
8
6
stock turnover ratio
4
2 0 1 2 3 4 5
Comments: Stock turnover ratio shows the relationship between the sales & stock it means how stock is being turned over into sales. The stock turnover ratio is 2008 was 11.3549 times which indicate that the stock is being turned into sales 11 times during the year. The inventory cycle makes 11 round during the year For the years 2008 stock turnover ratio is lower than the other year but it is in increasing order. In the year 2008 to 2012 the stock turnover ratio has improved from 11.354 to 13.6909 times, it means with lower inventory the company has achieved greater sales. Thus, the stock of the company is moving fast in the market.
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14) DEBTORS TURNOVER RATIO
Formula: debtors turnover ratio =
Year Credit sales Average debtors Debtors turnover ratio
2008 129,770 10,049 12.9137
2009 142,684 10,437 13.6710
2010 198,321 12,581 15.7635
2011 248,502 13,547 18.3437
2012 296,928 18,869 23.1948
debtors turnover ratio
20 18 16 14 12 10 8 6 4 2 0 1 2 3 4 5
debtors turnover ratio
Comments: Debtor’s turnover ratio is alternative known as “ Accounts Receivable Turnover Ratio”. This ratio measures the collectability of debtors & other accounts receivable, it means the rate at which the trade debts are being collected. The Debtors turnover ratio of 23.1948 indicates that the debtors are being turned over 23 times during the year. It means that the credit cycle of debtors makes 23 rounds during the year.
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15) ROCE Formula: ROCE =
Year NOPAT Capital employed ROCE
2008 11,034 69,372 15.9056
2009 8,368 92,968 9.0009
2010 20,878 107,104 19.4932
2011 26,621 127,187 20.9306
2012 26,643 152,310 17.4926
ROCE
25 20 15 10 5 0 1 2 3 4 5 ROCE
Comments: A measure of the return that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Of course the higher the ratio, the better will be the profitability of the company The return on capital employed of Rs 17.1926 indicate that net return of Rs.17 is earned on a capital employed of Rs.100. this amount of Rs.17 is available to take care of interest, tax,& appropriation. This indicates a very high profitability on each rupee of investment & has a great scope to attract large amount of fresh fund.
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16) NET PROFIT RATIO Formula: net profit ratio =
Year PAT Net sales Net profit ratio
2008 10,332 114,106 9.0547
2009 9,297 126,491 7.3499
2010 20,451 180,248 11.3460
2011 25,732 227,582 11.3066
2012 26,643 271,983 9.7958
net profit ratio
12 10 8 6 4 2 0 1 2 3 4 5 net profit ratio
Comments: It has been observe that the from 2008 to 2011 the net profit is increased i.e from 9.0547 to 11.3066. Profitability ratio of company shows considerable increase. Company’ s sales have increased in all 4 years & at the same time company has been successful in controlling the expenses i.e. manufacturing & other expenses. It is a clear index of cost control, managerial efficiency & sales promotion
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17) DIVIDEND PAYOUT RATIO Formula: dividend payout ratio =
Year DPS EPS Dividend payout ratio
2008 1.15 4.2 27.3810
2009 1 3.334 29.9940
2010 9 3.535 254.5969
2011 1.202 4.328 27.7726
2012 1.303 4.523 28.8083
dividend payout ratio
300 250 200 150 100 50 0 2008 2009 2010 2011 2012 dividend payout ratio
Comments:
EPS described above indicates the amount of profit available for equity share shareholders. Dividend Payout Ratio indicates the percentage of profit distributed as dividends to the shareholders. It measures the relationship between the earning belonging to the equity shareholders and the amount finally paid to them. the company has paid highest dividend in the year 2010 where as in the year 2008 it has paid the least of 27.3810. A higher ratio indicates that the organization is following the liberal dividend policy regarding the dividend while a lower ratio indicates a conservative approach of the management towards the dividend.
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Table of financial ratio of Mahindra & Mahindra for the last five years
2008 Current ratio Liquid ratio Cash ratio Proprietary ratio Stock working capital ratio Capital gearing ratio Debt equity ratio Gross profit ratio Fixed asset turnover ratio EPS Return on equity Return on proprietor’s fund Stock turnover ratio Debtors turnover ratio ROCE Net profit ratio Dividend payout ratio 1.1244 0.7909 0.2649 77.5142 2.6808
2009 1.0552 0.8341 0.3282 65.4510 3.9996
2010 1.1627 0.9340 0.3355 87.9876 1.4055
2011 0.9078 0.6574 0.0908 92.5840 -2.7146
2012 1.1589 0.9013 0.2803 95.2154 1.6206
52.4562 0.5948 10.6848 6.2886
68.7032 0.7728 7.9985 4.9264
32.2367 0.3678 15.7482 6.5819
19.4436 0.2332 14.9248 6.7212
42.8442 0.8021 13.3206 6.5817
4.2 4.2044 23.7512
3.334 3.334 17.7288
3.535 3.5355 26.1181
4.328 4.382 24.9500
4.523 4.523 20.7798
11.3549 12.9137 15.9056 9.0547 27.3810
11.9252 13.6710 9.0009 7.3499 29.9940
15.1622 15.7635 19.4932 11.3460 254.5969
13.4330 18.3437 20.9306 11.3066 27.7726
13.6909 23.1948 17.4926 9.7958 28.8083
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Observation and findings
Based on the ratios and calculations made on my project I can analyze Mahindra & Mahindra as follows: ? The year 2010 could called the peak on the business during last five year which almost divides the ratio into two parts, before 2010 and after that. ? Liquidity ratios shows that the firm has been facing some problems regarding paying short term liabilities, but it is trying to improve the situation.
? The overall efficiency of the company to use its assets, capital or the working capital is good. ? The company fails to increase its profitability in the last year. Though it should be mentioned that we see a noticeable net profit point in 2010. ? It also fails to give satisfactory rate of return in two years compared to 2010.
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IMPORTANCE OF RATIO ANALYSIS
As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] Liquidity position, 2] Long-term solvency, 3] Operating efficiency, 4] Overall profitability, 5] Inter firm comparison 6] Trend analysis.
1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio is particularly useful in credit analysis by bank & other suppliers of short term loans. 2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the longterm creditors, security analyst & the present & potential owners of a business. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved.
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3] OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets- total as well as its components. 4] OVERALL PROFITABILITY: Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together. 5] INTER – FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An inter firm comparison would demonstrate the firms position vice-versa its competitors. If the results are at variance either with the industry average or with the those of the competitors, the firm can seek to identify the probable reasons & in light, take remedial measures. 6] TREND ANALYSIS: Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.
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ADVANTAGES OF RATIO ANALYSIS
Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: ? ? ? ? Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm.
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LIMITATIONS OF RATIO ANALYSIS
Ratio analysis has its limitations. These limitations are described below: 1] Information problems ? ? Ratios require quantitative information for analysis but it is not decisive about analytical output. The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the company?s current financial position. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision-making.
?
2] Comparison of performance over time ? When comparing performance over time, there is need to consider the changes in price. The movement in performance should be in line with the changes in price. When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. Changes in accounting policy may affect the comparison of results between different accounting years as misleading.
?
?
3] Inter-firm comparison ? Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis. Selective application of government incentives to various companies may also distort intercompany comparison. Comparing the performance of two enterprises may be misleading. Inter-firm comparison may not be useful unless the firms compared are of the same size and age, and employ similar production methods and accounting practices. Even within a company, comparisons can be distorted by changes in the price level. Ratios provide only quantitative information, not qualitative information. Ratios are calculated on the basis of past financial statements. They do not indicate future trends and they do not consider economic conditions.
?
?
? ? ?
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CONCLUSION
? Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use. ? Ratio analysis has a major significance in analysing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company. ? Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. ? The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm‘s position and performance. ? The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. ? Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.
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Bibliography
? REFERENCE BOOKS – ? FINANCIAL MANAGEMENT Theory, Concepts & problems R.P.RUSTAGI ? FINANCIAL MANAGEMENT Text and problems M.Y. KHAN AND P. K. JAIN ? MANAGEMENT ACCOUNTING AINAPURE ? FINANCIAL MANAGEMENT L.N. CHOPDE D.N. CHOUDHARI S.L. CHOPDE ? ANAUAL REPORTS OF MAHINDRA & MAHINDRA ? ? ? ? 2007-2008 2008-2009 2009-2010 2010-2011
? WEBSITES – www.bizd.ac.uk/compfact/ratio www.cecunc.org.com/business/financial www.zeromillion.com.business/financial www.mahindra.com search.proquest.com/business
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