a writers Copied Report August 25

7/28/2019 a writers Copied Report August 25

1/21

1. FINANCIAL ANALYSIS ASSIGNMENT ROY

Article Body:

Useful to the outsiders:

Ratio analysis is indeed a well-widely accepted and widely used tool of supplying necessary

information method to gauge the management. In addition it is also considered as an important

technique even to the outside parties associated with any business or nonbusiness institution. The

performance of a company. Quantitative analysis of companys financial statements using the

information provided and comparing the same with the previous years data is an important

activity for any company. Evaluation of such relationships by comparing the financial statements

is further presented to the outsiders like potential investors depend a lotwho rely on the analyzed

information available through ratio analysis for setting up business relation, maintaining the link

with the firm, taking important decisions on different issues, etc. Even at present the researchers

on accounting and management fields take the help of ratiosuch data for theiranalysis for the

purpose of evaluation of performance, measurement of trends and projection ofand future

potentialsdecision making. Such ratios help identify the trend and compare with other companies

which reveal trivial data to make certain important financial decisions for current financial year

and also future projections.

From the foregoing discussion it is apparent that ratios have wide use not only in making Ratio

Analysis offinancial analysis but also for different other purposes. In fact the utility or

effectiveness of ratio analysis is dependent to a great extentstatements mainly focuses on the

purpose3 aspects ofusea company- profitability, solvency and the analytical aptitudeliquidity.

Profitability Ratios help measure the operating efficiency ofthea company.

Solvency Ratioshelp measure a companys potential long term risks.

Liquidity Ratiosas the name suggests measures the companys ability to repay short term debts

and its unexpected or immediate cash requirements.

It is of remarkable importance of recruit a financial analyst. At present the use of ratios is

common almost who is very proficient in working with financial data of current year and

Style Definition: Subtitle: Font: (DeArial, Not Italic, Font color: Black, Notby / Condensed by , Centered, Spacept, Line spacing: single

Style Definition: Title: Font: (Defau16 pt, Bold, Font color: Black, Centere

Before: 12 pt, After: 3 pt

Style Definition: Heading 6: Font: TRoman, Space Before: 12 pt, After: spacing: single, Don't keep with next

Style Definition: Heading 5: Font: TRoman, 13 pt, Italic, Left, Space BefoAfter: 3 pt, Line spacing: single, Donwith next

Style Definition: Heading 4: Font: TRoman, 14 pt, Left, Space Before: 123 pt, Line spacing: single, Don't keepTab stops: Not at 3.71"

Style Definition: Heading 2: Font: (Arial, Font color: Black, Don't keep w

Style Definition: Heading 1: Font: (Arial, Font color: Black, Don't keep w

Style Definition: Normal: Font color

Formatted: Header distance from ed0.49", Footer distance from edge: 0.4

Formatted: Adjust space between LaAsian text, Adjust space between Asianumbers



2/21

previous years in alldepth to provide timely and valuable information. Ratio Analysis has

become a day to day activity today for any company at a managerial activities.level as financial

decisions are made and changed almost everyday due to the frequently changing market

conditions. J.Batty has rightly stated that the ratios can help in executing the basic functions of

management like forecasting, planning, coordination, control and communication.

Return on Capital Employed:

(i) This ratio is a real test of the profitability and managerial efficiency. The higher the A

satisfactory return on any capitalbeing invested is perhaps the prime motive of an Investment.

Return on Capital employed (ROCE) helps establish the relationship between the higher is two

important factors of an investment- Profit and theprofitability and the sound is the managerial

ability. From the viewpoint of shareholders and the management a high return on capital

employed is always favorable.

(ii) A low. From the companys point of view, calculating this ratio is one ofthe best ways to

assess its overall performance as it helps indicate the efficiency of the management to manage

the investments made by the owners and also helps gauge its decisions. From a shareholders

point of view, this ratio informs them about theirreturn on capitalinvestments. High Return on

Capital employed in comparison to the industry standard reveals that the firm has not been able

to earn a reasonable profit. It also explains thatindicates high managerial efficiency implying

better profits ofthe managerial skill is not sound enough to increasecompany. This ratio also

shows theprofitability. A low return on capital employed is against the interest of the

shareholders and management.

(iii) If the cost of long-term borrowing is lower than the return on capital employed, return to

shareholders would increase.

(iv)companys trend in making profits over a period. A high return on capital employed achieved

for a few consecutive years indicates that the firm has a stable financialpositionstability and has

good futureprospectprospects.




3/21

Net Profit or Net Margin Ratio

(i) The net profit ratio shows the net contributions made by sales of rupee 1 to the owners fund.

(ii) A higher net profit ratio indicates better overall profitability and managerial efficiency. It

expresses how much the total revenue earned is more than the total expenses incurred.

(iii) A low net profit ratio reveals that the net earning is insufficient and the profitability and

managerial efficiency are not up to the mark.

(iv) If a firm has a low net profit ratio in spite of having a high gross profit ratio, it seems that it

has excessive indirect expenses on which it has not been able to enforce control.


4/21

Another important tool and one of the profitability ratios that provides the final output. It is a

ratio between net profits after taxes to net sales. Higher Net Profit Ratio denotes high profits to

the company. The Net Margin shows the money a company is left with for its equity and

preference shareholders who are the real owners. Any company will strive to keep a good Net

Profit Ratio to make sure it never defaults. This can be achieved when activities like pricing,

selling, financing, administration, production, taxation and likewise are carried on effectively

and efficiently as these factors have direct influence on Net Profit Ratio. It is always advisable

for a company to maintain a good balance between Gross Profits and Net Profits for that signifies

that both direct and indirect expenses are under control.

Dividend Yield Ratio

(i) It makes an analysis ofThis ratio measures the cash flow a company gets to investment made

in an equity position. It helps the investors secure their cash flow from their investment portfolio.

They can decide on investing in stocks whose dividends are relatively high and stable.It is the

ratio of Annual dividends per share over Price per share.

It helps analyse the return on equity shares not on the basis of the face value of the shares but on

their market value. So it which reflects on the true rate of return available to the equity

shareholders. Higher dividend yield ratio signifies more returns to the equity shareholders. It

indicates high/low rate of profit earned by the company.

(ii) The higher

Price - Earnings Ratio

As the dividend yield rationame suggests, the more is the return for equity shareholders. It

indicates the high ratecomparison ofprofit earned by the company.

(iii) If this ratio is low it indicates a low return on equityMarket value pershare capital and a low

profitability.

(iv) If the market price of the equity shares is too high the dividend yield ratio may be

considerably low. In such case, of course, the return of the equity shareholders may not be toolow. So a low dividend yield ratio in a situation of very high market price of equityto Earnings

pershare is not against the interest of the equity shareholders.




5/21


6/21

gives Price Earnings Ratio

(i). It helps compare the earnings growth between two companies. A high price earnings ratio

indicates either a fall in earning per share or an increase in market price per share. A high price

earningsHigh Price - Earnings ratio resultingresults from increased market price per share and is

beneficial to the shareholders. It indicates high managerial efficiency, high profitability and good

market reputation. P/E Ratio is a great indicator of any problem or even an opportunity.

(ii) A low price earnings ratio not caused by an increased earning indicates reduced market price

per share. It also reveals a low level of managerial efficiency and profitability. It is against the

interest of the shareholders.

(iii) If the low price earnings ratio is caused by increased earnings per share it does not indicate

an unfavorable situation for the shareholders.

Formatted: Font: Not Bold


7/21

Dividend Payout Ratio

(i) A highThis ratio helps conclude how well the company can support its dividendpayout ratio

indicatespayouts through its earnings. It is the percentage of companys earnings that the greater

portion of profit availablehas been paid out to the equity shareholders has been distributed while

a smaller portion has been retained.in the form of dividends. The shareholders like to get more

cash dividend, so a high dividend payout ratio is favorable to them.

(ii) A low dividend payout ratio reveals that the smaller portion of profit due to the equity

shareholders has been paid in cash, while is the greater portion has been retained.comparison of

dividends to Net Income of the company. The shareholders, keen to get cash dividend, do not

like this position.

(iii) From the viewpoint of the financial health of the company a high dividend payout ratio is

never desirable because in such case retentionpart ofprofit becomes less. A low dividend payout

ratio that indicates less distribution and more retentionearnings left after paying these dividends

is helpfulused for the sustainedfuture growth of the company. Paying up higher dividends is a

good option for companies with little room for growth whereas companies who need to allocate

funds for growth and expansion pay up lesser dividends as per the indication of the Dividend

Payout Ratio.


8/21

Equity Dividend Coverage Ratio

(i) The higher the equity dividend coverage ratio the more is the security of the equity

shareholders to get dividend. It also indicates good financial stability of the firm because the firm

is in a position to pay equity dividend after meeting all fixed burdens and tax liability.

(ii) A low equity- dividend coverage ratio is against the interest of the equity shareholders as it

reduces the security of getting dividend by them. This situation does not indicate sound financial

base of the firm.

Formatted: Adjust space between LaAsian text, Adjust space between Asia

numbers


9/21

This ratio helps decide the capacity of a company to pay the dividend to its shareholders. Equity

and Preference share holders have the first right over the companys dividends and hence, this

calculation becomes important for them. It is the comparison between Net Earnings and

Dividend. High Dividend coverage ratio signifies better security for equity and preference share

holders which in turn shows how stable a company is financially. Dividend payouts are

compulsory but can be postponed as per the discretion of the management. While Dividend

Payout Ratio is just a percentage shown by the management, Dividend Coverage Ratio is the

absolute value that is calculated.

Interest Coverage Ratio

(i) The earnings before interest and tax and the operating profit are same. So the interest

coverage ratio measures as to how many times the interest burden of the firm is covered by the

operating profit of the firm.

(ii) A The ratio ofhigher interest coverage ratio indicates betterpoint towards capacity of

superiordebt servicing capacity. It. So it is beneficial from the viewpoints of bothforthe firm

and as well as the lenders. From the viewpoint of prospective of firm it will be more helpful

while in the situations of low profit, as they will be having more absorbing power and it also

supports the firm it is beneficial because it indicates more shock absorbing capacity in case of

lower profit andwhile repaying the reduced risk of default in interestpayment. Fromamount.




10/21

(iii) The ratio of low interest coverage shows that the lenders viewpoint it is welcome because it

indicates steady returnlenders which has low safety on their returns ofinvestment., even this

condition is not favorable for the firms.

(iii)

A low interest coverage ratio reveals that the lenders have a low safety of return on their

investment, it is also unfavorable to the firm because in such case the firms profitability in

relation to its interest payment commitment is low and it is not in a position to take recourse to

further debt financing in case of any need.

Formatted: Adjust space between LaAsian text, Adjust space between Asia

numbers



11/21

Capital Gearing Ratio

(i) (i) The tern: gear Gear term is generally used to control the in controlling motorspeed of a motorwhich will be fitted to a car. The word speed has a close

relationship with the term risk. In accounting ratio theterm gear is used to

measure the financial risk involved in the capital structure of a company. In case of a

motor car using high gear means increasing the speed and using the risk term have a

shut relationship and everyone aware about the problems associated with it. In the

field of accounting the term gear is referred while measuring the financial risk

associated with companys capital structure. As the word high gear means speed

increasing and so as low gear means bringing downout the speed. Similarly at low

level. Same time a highly geared company (a company having awith high capital

gearing ratio) runs with will have more risk and a lowlythen geared company (a

company having a low capital gearing ratio)will have slow impact as it has to bears a

low risk, it means that a high gear Is rum- risky and vice versa.

(ii) The state ofhigh gearing state is favorable for while taking advantage of trading on

equity.equity trading. In inflationary situation condition high gearing is effective because at

this time the increased useful as the improvement in income helps to bear the in bearing

burden offixed interest burden..

(iii) In a deflationary market Low gearing situation low gearing is more effective because the

low income earned during favorable in the market as it helps at the time ofdeflationary period is

not sufficient to bear hugewhile it will easy in handling interest burden.

(iv) The management must try to draw up a perfectTo create a well balance in the use ofwhile

using risky capital and non-risky capital. the management plays vital role. A balanced capital

structureorganization is reflecteddazzling upon a modest capital gearing ratio. This situation is

moderate capital gearing ratio. It is that situation which is neither where the risk will not too

risky nor much ortoo conservative.less.

(v) InThe highly geared companies the provide high return of equity shareholders becomes highin the years ofon investment during theirhigh profit years,but it becomes low inwhen the

scenario get disturbs then the shareholders will have to bearthe yearloss on the value of their

Formatted: Page break before

Formatted: Font: Bold

Formatted: Numbered + Level: 1 +Numbering Style: i, ii, iii, + Start atAlignment: Left + Aligned at: 0.25" +at: 0.75"

Formatted: Indent: Left: 0.25"


12/21

return on investment. So during the period of low profit. In a year of high profit it is possible for

the company to companies will declare a high rate of dividend even after paying off high cost of

debt. On the other hand in a year of low profit the major portion of profit earned is used up in

meeting loss and shareholder will get the amount which will be excluding the amount paid in

form ofinterest burden and only a small portion is left for equity shareholders.


13/21

Current Ratio

1. (i) A comparatively higherHigh current ratio indicates a good indicated betterliquidityand it also indicates firms satisfactory debt repayment capacity. So at this moment ofthe

firm. It is also an indicator of safety of investment made bytime creditors. can take

advantage of the situation and go for safety investment.

(ii) A low2. Low current ratio than the is a standard indicates a indication ofbad liquidity, the

debt repayment capacity of the firm will be poor, over-trading, less and working capital and

unsatisfactory debt repayment capacity of the firm. The investment of creditors in a firm having

a low current ratio may not be too safe.

2. (iii) Current ratio expressed in terms of percentage is known as working capital ratio.This ratiowill also indicates the margin of safety or margin of caution of the creditors.be

less. So this type of situation will be good for creditors investment.

3. (iv) APercentage of current ratio is known as ratio of working capital. This ratio will helpcreditors to know the line of safety while investing into the firms.

4. While the high current ratio always indicates a soundstrong debt repayment capacity andathe low current ratio interprets this indicates the poorposition in an adverse manner

this proposition may not be universally trueof the firm in terms of their debt repayment

capacity, but it is not same in all cases. If the current assets do not have a

goodcircumstances, the quality, like they consist of more obsolete ofstock, slow paying

debtors, etc. the good also matters while judging the liquidity position as indicated by a

high current ratio may not be so good in reality. On the other hand. Concurrently, if the

current assets consist ofhigh quality stock and well-paying debtors even a stocks will be

the part of current asset then indication ofcurrent ratio lower than the standard may speak

of does play great role while indicating the sound solvencydebt repayment capacity of the

firm.

5. (v) InAt the time ofmeasuring the short- term liquidity or solvency current ratio shouldnot be takenconsidered as the sole parameter. Other however otherliquidity ratios are


Formatted: Numbered + Level: 1 +Numbering Style: 1, 2, 3, + Start aAlignment: Left + Aligned at: 0.25" +at: 0.5", Adjust space between Latintext, Adjust space between Asian textnumbers




Formatted: Numbered + Level: 1 +Numbering Style: 1, 2, 3, + Start aAlignment: Left + Aligned at: 0.25" +at: 0.5", Adjust space between Latin

text, Adjust space between Asian textnumbers


14/21

also to be calculated for this purpose.should be considered to understand the proper

position of the firm.

6. (vi) If there is a recession in a Recession inparticularindustry, all the firms belonging tothat industryindustries may have largeimpact on theirunsold inventory andwhich in turn

affects long outstanding debtors. These would increase This will add in current assets and

resultasset which helps in aboosting high current ratio. But in this case the trend indicated

by the high current ratio may not stand favorable for the firms.

Liquid or Quick or Acid Test Ratio

(e)

1. (i) A High current ratio along with high quick ratio along with is a high current ratioindicates a good short-term solvency or debtmere indication of better situation of the

firms repayment capacity of the firm.and also better short term solvency.

2. (ii) Even ifAt the time of high current ratio is high, a, low quick ratio doeswill notindicate ahave any kind of impact on firms good debt repayment capacity of the firm..

3. (iii) The authenticity of decision takenconclusion drawn on the basis of current ratiocanwill be verified through with the help ofquick ratio.

4. (iv) A The safety of creditors investment can be ensured with the help ofhigh quick ratioensures the safety of the investment of creditors..

5. (v) The While testing the better liquidity of the firm quick ratio is considered to be abetter test of liquidity more authentic than the current ratio. But However it is difficult to

come to the conclusion as the position of debtors mentioned by liquid asset orquickratio

itselfasset may not be takenin good practice, as a conclusive test of liquidity. Ifthe firm

which have shown quickasset or liquid assets consist of slow paying or defaulting

debtors the good liquidity position as indicated by a high quick ratioasset may notbe sogood in practice. Again if the inventories which are not included in quick assets are not




15/21

so illiquid and have very good turnover the firm may enjoy aenjoying better liquidity

position.

6. So more rigorous or precise test should come in the practice ratherthan what isindicateddepending on the indication of current ratio maintained by a low quick ratio.

(vi) For verifying the trend indicated by the current ratio and supported by the quick ratio it is

required to adopt a more rigorous test of liquidity through the Absolute Liquid Ratio.



16/21


17/21

Fixed Assets Turnover

1. (i) A high fixed assets turnover ratio is an indicator of efficient indicates fixed assetproficient utilization at the time offixed assets in generating sales. It revealsis disclosed

that use of less fixed assets made possible at the time ofhigher generation of sales.sales

less fixed asset can be made possible.

2. (ii) A The ratio oflow fixed assets turnover ratio indicates inefficient managerialasset isthe indication of ineffective marginal ability in utilization ofwhile utilizing the fixed

assetsbecause it reveals that use of as more fixed assets resulted inasset turn up in

generating lowergeneration ofsales.

3. (iii) If the value ofmajor portion ofa firms fixed assets have been depreciatedasset ofthe firm get depreciates its turnover ratio offixed assets turnover ratio may be more than

another firm which has recently purchased asset compare to the other firms with huge

fixed assets. In such case, and then it cannot be saidis considered that the formers

managerial efficiency is more than the latter. So a careful consideration is necessary for

measuring efficiency by using the fixed assets turnover ratio.will be more efficient in

future.

(iv) The While evaluating the activity level of any firm the comparisonbetween ratios ofa firms

fixed assetsasset turnoverratio with that of the compare topast years and also with the that of

industry standard maystandards will be a helpful tool to evaluate the activity level.

Current Assets Turnover

(i) If this ratio is high it indicates an efficient utilization of current assets in generating sales. It

reveals that use of less fixed assets has generated more sales.

(ii) If this ratio is low it is indicative of inefficiency in working capital management. It reveals

that use of more current assets resulted in lower generation of sales.

Formatted: Page break before


Formatted: Numbered + Level: 1 +Numbering Style: 1, 2, 3, + Start aAlignment: Left + Aligned at: 0.25" +at: 0.5"


18/21

(iii) A too high or too low current assets turnover is not a welcoming feature of a firms

management. If this ratio is nearer to the average or standard followed in the industry it is

considered as an indicator of an efficient activity level of the firm.


19/21

Return on shareholders funds

(Same as return on capital employed)

Total shareholders return

(Same as return on capital employed)

Eps

Dps


20/21


21/21

Comparative Financial Statement Analysisfinancial statement analysis

Comparative Financial Statement analysis providesIt gives information in order to

assessaccess the change direction ofchange in thea business. Financial statements arepresentedas onprepared for a particular date for a particular period. The financial statement duration oftime and presented on a fixed day. Balance Sheet indicates sheet is indicative of the financial

position as at the end of an accounting period and the financial statement Income Statementshows the operating and non-operating results for a period. But financial managers and topmanagement are also interested in knowing whether the of abusiness is moving in a favorable or

an unfavorable direction. For this purpose, figures of current year have to during a particularperiod of time and the Income statement shows the operation and the non-operating parameters

for a given period of time. However, the finance managers and the top management of a firm is

very eager to know if the business is heading in a right direction of success. In order tounderstand this, the results and statistics of this year shouldbe compared with thosethat of the

last orprevious years. In analyzingyear. For this waypurpose, comparative financial statementsare prepared.

Comparative Financial Statement Analysis which is also calledknown as Horizontal analysis.

The Comparative Financial Statement provides information about two or more years' figures as

well as any increase or decrease from the previous year's figure and it's percentage of increase

or decrease. This kind of analysisstatement provided the data or figures of two or more

years and also let us knows the differences in the form of increases or decreases which

eventually helps in identifyingfinding or discovering the majorbusiness weaknesses or

improvements and weaknesses.that may be needed. Forexampleinstance, ifthe net income

ofa particularthis year has decreased from its previousas compared to last year, despite anincrease in sales duringthroughout the year, is a matterit becomes an issue ofseriousgreat

concern. for the business. Comparative financial statement analysis in such situations

helpsstatements will certainly help to find outdiscoverwhere the costs havefactor

increased due to which has resulted in lower low net income than the previous year.situation

was faced by the business. Accountancy holds the roots of any business and financial

statements like the Balance sheet, Income statements and Profit and Loss accounts are an

indispensible part of accountancy and business.

Formatted: Font: Times New RomanNot Bold, No underline, Font color: Au

Formatted: List Paragraph, Left, Pat


Formatted: List Paragraph, Left, Indline: 0", Pattern: Clear

Formatted: Font: Times New RomanFont color: Auto











Formatted: Font: Times New Roman

Font color: Auto










Formatted: List Paragraph

a writers Copied Report August 25

Documents

Transcript of a writers Copied Report August 25