5/24/2018 KFL

1/15

INTRODUCTION OF THE STUDY

Financial performance analysis is to identifying the financial strengths and weaknesses of the

firm by properly establishing the relationship between the items of balance sheet and profit and

loss account. It also helps in short-term and long term forecasting and growth can be identified

with the help of financial performance analysis. Financial performance analysis is usually carried

out to study the financial position of the company from the point of view of the shareholders,

debenture holders and financial institutions, statutory financial statement are prepared for

presenting a periodical review or report on progress by management and deal with the status of

investment in the use and results achieved during the period under review.The analysis of

financial statement is to evaluating the relationship between the component parts of financial

statement to obtain a better understanding of the firms position and performance.This analysis

can be undertaken by management of the firm or by parties outside the namely, owners, creditors

and investors.

The basic objective of financial statement is to assist in decision making. Decision making

requires a critical interpretation of published financial statements and comparative balance sheet.

The present study is conducted to assess the strength and weakness of Kerala Feeds Limited

Kalletumkkara, Thrissur by using various tools for analysis.

Organization being deliberate and purposive creations is created for the fulfillment of certain

designated objectives today the society large and complex institution with many people working

together. People have great expectation of their jobs organization structure determine the

efficiency of the individual and hence of the organization. Various positions in the organization

are grouped in various ways horizontally, vertically or both each position holders certain amount

of authority to perform organizational functions in certain way.

Organizational chart is the vital tool for providing information about organization relationship. It

shows the major functions the channel of formal authority etc. Organization is a human group

constituted for certain specified objectives largely depends up on the fact that human beings

effort are properly co-ordinate and integrated.

5/24/2018 KFL

2/15

Human beings are the most precious part of the capacity of human resources depended upon the

management. Every organization success depends on its performance this study was done to

analyze the financial performance of Kerala Feeds Limited.

STATEMENT OF PROBLEM

Financial performance analysis of Kerala Feeds Limited is the problem under the study. A

company financial performance is highlighted by its financial statements like income statement,

balance sheet etc. The profitability, liquidity, solvency and overall efficiency of a company is the

main indicators of financial performance. For the purpose of indicating these kinds of

parameters, the annual financial statement of the company for the five years have been analyzed.

This study mainly covers the analysis of the financial position and operational strengths and

weakness of Kerala Feeds Limited.

OBJECTIVES OF THE STUDY

Primary Objectives

The primary objective of the study is to analyze and evaluate the financial performance of the

company.

Secondary Objectives

To assess the profitability position of the company for the period of five years. To assess the liquidity position of the company. To know the operating efficiency of the company. To get better insight in to the strength and weakness of the company.

SCOPE OF THE STUDY

The study of financial performance conducted in Kerala Feeds Limited to know the financial

operation of the company. The study covers almost the entire area of financial operations

covered in Kerala Feeds Limited. The study has been conducted with the help of data obtained

from audited financial records. The audited financial records are the company annual reports

pertaining to past 5 years from 2006-07 to 20010-2011 and the audited financial records are

obtained from the companys annual report.

5/24/2018 KFL

3/15

THEORETICAL BACKGROUND AND LITERATURE REVIEW

The financial statements are the end products of financial accounting. They are statement

containing financial information of a business enterprise. They are summarized periodical reports

of financial and operative data contained in the books of accounts, known as the General Ledger.

Financial statement may be defined as the statement containing summaries of detailed

information about the financial position and performance of an enterprise. They refer to a

package of statements such as balance sheets, and income statement. The basic purpose of

preparing financial statement is to convey to owners, creditors and the investors about financial

position of the enterprise.

Every organization has a purpose and it is generally stated in the form of mission or vision

statement. To achieve this purpose, organizations need finance, which is raised from the capital

market through debt or equity and such capital is raised either directly from the investors or

through intermediary institutions like Banks. Once capital is raised, the capital is invested in

assets, which can be broadly classified into fixed and current assets. Several factors determine

the choice of assets and proportion of investments in different types of assets. For instance,

banking industry will invest less on real fixed assets whereas automobile manufacturer would

invest substantial part of the capital to buy fixed assets. After raising capital and acquiring assets,

the business unit runs the operations and generates revenue.

Financial statement analysis is the process of examining relationships among financial statement

elements and making comparisons with relevant information. It is a valuable tool used by

investors and creditors, financial analysts, and others in their decision-making processes related

to stocks, bonds, and other financial instruments. The goal in analyzing financial statements is to

assess past performance and current financial position and to make predictions about the future

performance of a company. Investors who buy stock are primarily interested in a companys

profitability and their prospects for earning a return on their investment by receiving dividendsand/or increasing the market value of their stock holdings. Creditors and investors who buy debt

securities, such as bonds, are more interested in liquidity and solvency: the companys short-and

long-run ability to pay debts. Financial analysts, who frequently specialize in following certain

industries, routinely assess the profitability, liquidity, and solvencies of companies in order to

make recommendations about the purchase or sale of securities, such as stock and bonds.

5/24/2018 KFL

4/15

Analysts can obtain useful information by comparing a companys most recent financial

statements with its results in previous years and with the results of other companies in the same

industry. Three primary types of financial statement analysis are commonly known as horizontal

analysis, vertical analysis, and ratio analysis.

FINANCIAL STATEMENTS

A financial statement may be defined as an organized collection of accounting information in a

systematic, logical and consistent manner with the users of accounting information. According to

the Kohler, "Financial statements are those statementswhich show both the performance and the

financial position. They indicate Balance Sheets, Income statements, Fund statements or any

supporting statements or other presentation of financial data derive from accounting records.

A set of financial statements is a structured representation of the financial performance and

financial position of a business and how its financial position changed over time. It is the

ultimate output of an accounting information system and has three components. They are:-

1. Income Statement2. Balance Sheet3. Statement of Cash flow

INCOME STATEMENTS

The income statement is an important component of a set offinancial statements.It measures the

performance of a business during an accounting period by calculating one or more of the

following:

1. Gross Profit2. Operating Income3. Net Income4. Earnings per Share (EPS)There are four basic elements of a typical income statement. These are:

Revenues:Revenues are the earnings from usual business activities. In most cases, revenues are

earned from sales of goods and services.

http://accountingexplained.com/financial/statements/income-statementhttp://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/http://accountingexplained.com/financial/statements/earnings-per-sharehttp://accountingexplained.com/financial/introduction/revenuehttp://accountingexplained.com/financial/introduction/revenuehttp://accountingexplained.com/financial/introduction/revenuehttp://accountingexplained.com/financial/statements/earnings-per-sharehttp://accountingexplained.com/financial/statements/http://accountingexplained.com/financial/statements/balance-sheethttp://accountingexplained.com/financial/statements/income-statement

5/24/2018 KFL

5/15

Gains:Gains are the enhancements in the assets or the reductions in liabilities caused by

activities outside the usual course of business and which are eligible to be recorded according to

acceptable accounting practices.

Expenses:Expenses include consumption of assets or the creation of liability against the

business in the course of normal business activities.

Losses:Losses are the reductions in assets or the enhancements in liabilities caused by activities

other than those in the main course of business.

BALANCE SHEET

A balance sheet also known as the statement of financial position tells about the assets, liabilities

and equity of a business at a specific point of time. It is a snapshot of a business. A balance sheet

is an extended form of the accounting equation. Anaccounting equation is:

Assets = Liabilities + Equity

Assets are the resources controlled by a business, equity is the obligation of the company to its

owners and liabilities are the obligations of parties other than owners.

A balance sheet is named so because it lists all resources owned by the company and shows that

it is equal to the sum of all liabilities and the equity balance.

A balance sheet has two formats: account form and report form. An account form balance sheet

is just like a T-account listing assets on the debit side and equity and liabilities on the right hand

side. A report form of balance sheet lists assets followed by liabilities and equity in vertical

format.

STATEMENT OF CASH FLOW

A statement of cash flows is a financial statement which summarizes cash transactions of a

business during a given accounting period and classifies them under three heads, namely, cash

flows from operating, investing and financing activities. It shows how cash moved during the

period by indicating whether a particular line item is a cash in-flow or cash out-flow. The term

cash as used in the statement of cash flows refers to both cash and cash equivalents. Cash flow

http://accountingexplained.com/financial/introduction/expensehttp://accountingexplained.com/financial/introduction/expensehttp://accountingexplained.com/financial/introduction/equationhttp://accountingexplained.com/financial/introduction/equationhttp://accountingexplained.com/financial/introduction/expense

5/24/2018 KFL

6/15

statement provides relevant information in assessing a company's liquidity, quality of earnings

and solvency.

NATURE OF FINANCIAL STATEMENT

Recorded facts: Financial statements contain the fact relating to the business transaction

already recorded in the book of accounts. The unrecorded facts, whatever important they might

have not included in financial statements.

Accounting principles: In the interpretation of financial statements, certain accounting

principles, concepts, and convention are followed

Personal judgment: Personal judgment will have an impact on the financial statements.

Personal opinion, judgments and estimates are made while preparing the financial statement to

avoid any possibility of over statement of assets and liabilities, income and expenditure, keeping

in mind the convention of conservatism.

OBJECTIVES OF FINANCIAL STATEMENTS

The specific objectives include the following:

To provide information about economic resources and obligations of a business. To provide information about the earning capacity of the business. To provide information about cash flows. To judge effectiveness of the management. Provide information about activities of business affecting the society. Disclosing accounting policies.

TYPES OF FINANCIAL ANALYSIS

Horizontal Analysis

When an analyst compares financial information for two or more years for a single company, the

process is referred to as horizontal analysis, since the analyst is reading across the page to

compare any single line item, such as sales revenues. In addition to compare dollar amounts, the

5/24/2018 KFL

7/15

analyst computes percentage changes from year to year for all financial statement balances, such

as cash and inventory. Alternatively, in comparing financial statements for a number of years,

the analyst may prefer to use a variation of horizontal analysis called trend analysis. Trend

analysis involves calculating each years financial statement balances as percentages of the first

year, also known as the base year. When expressed as percentages, the base year figures are

always 100 percent, and percentage changes from the base year can be determined.

Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single financial statement as a

percentage of a total. The term vertical analysis applies because each years figures are listed

vertically on a financial statement. The total used by the analyst on the income statement is net

sales revenue, while on the balance sheet it is total assets. The approach to financial statement

analysis, known as component percentages, produces common-size financial statements.

Common-size balance sheet and income statements can be more easily compared, whether across

the years for a single company or across different companies.

Ratio Analysis

Ratio analysis enables the analysts to compare items on a single financial statement or to

examine the relationships between items on two financial statements. After calculating ratios for

each years financial data, the analysts can then examine trends for the company across years.

Since ratios adjust for size, using this analytical tool facilities intercompany as well as intra

company comparisons. Ratios are often classified using the following terms: profitability ratios

(also known as operating ratios), liquidity ratios, and solvency ratios. Profitability ratios are the

gauges of the companys operating success for a given period of time. Liquidity ratios are

measures of the short term ability of the company to pay its debts when they come due and to

meet unexpected needs for cash. Solvency ratio indicate the ability of the company to meets its

long-term obligations on a continuing basis and thus to survive over a long period of time. In

5/24/2018 KFL

8/15

judging how well on a company is doing, analysts typically compare a companys ratios to

industry statistics as well as to its own past performance.

To have a clear understanding of the profitability and financial position of a business, the

financial statements will have to analyzed and interpreted. Financial analysis will give the

management considerable insight into the levels and areas of strength and weakness.

MEANING OF FINANCIAL ANALYSIS AND INTERPRETATION

The process of critical evaluation of the financial information contained in the financial

statements in order to understand and make decisions regarding the operations of the firm is

called Financial Statement Analysis. It is basically a study of relationship among various

financial facts and figures as given in a set of financial statements and the interpretation thereof

to gain an insight into the profitability and operational efficiency of the firm to assess its

financial health and future prospects.

The term interpretation means explaining the meaning and significance of the data so arranged. It

is the study of relationship between various components of the financial statements. Analysis isuseless without interpretation, and interpretation without analysis is difficult or even impossible.

SIGNIFICANCE OF FINANCIAL ANALYSIS

The demand for financial statement analysis is derived from the improvement in the decision

making by the user of accounts. Various users of accounts are:

1. Finance Manager: Financial analysis is focuses on the facts and relationship related tomanagerial performance, corporate efficiency, financial strength, weakness and

creditworthiness of the company. A finance manager must be well equipped with

different tools of analysis to make rational decisions for the firm. The tools for analysis

help in studying accounting data so as to determine the continuity of the operating

5/24/2018 KFL

9/15

policies, investment value of the business credit ratings and testing the efficiency of

operations.

2. Top Management: The importance of financial analysis is not limited to the financemanager alone. Its scope of importance is quite broad which includes top management in

general and the other functional managers. It helps the management in measuring the

success or otherwise the companys operations, appraising the individuals performance

and evaluating the system of internal control.

3. Trade creditors: A trade creditor through an analysis of financial statements, appraise notonly the urgent ability of the company to meet its obligations but also judges the

probability of its continued ability to meet all its financial obligation in future.

4. Lenders: Suppliers of long term debt are concerned with the firms long term solvencyand survival. They analyze the firms, profitability overtime, its ability to generate cash to

pay interest and repay the principal and the relationship between various sources of

funds.

5. Investors: Investors, who have invested their money in firms shares, are interested aboutthe firms earnings. As such, they concentrate on the analysis of the firms present and

future profitability. They are also interested in the firm capital structure to ascertain its

influence on firms earning and risk.

6.

Labour Unions: Labour Unions analyze the financial statements to assess whether it canpresently afford a wage increase and whether it can be absorb a wage increase through

increased productivity or by raising the prices.

7. Others: The economists, researchers, etc. analyze the financial statements to study thepresent business and economic conditions. The government agencies need it for price

regulation, taxation and other similar purpose.

TOOLS OF FINANCIAL ANALYSIS

The most commonly used techniques of financial analysis are as follows:

Comparative Statements:These are the statements showing the profitability and the financial

position of a firm for different periods of time in a comparative form to give an idea about the

5/24/2018 KFL

10/15

position of to two or more periods. It is usually applies to the important financial statements,

namely, Balance Sheet and Income Statement prepared in a comparative form.

The financial data will be comparative only when same accounting principles are used in

preparing statements. If this is not the case, the deviation in the use of accounting principles

should be mentioned as a footnote. Comparative figures indicate the trend and direction of

financial position and operating results. This is also known as horizontal analysis

Common Size Statement:These are the statements which indicate the relationship of different

items of a financial statement with some common item by expressing each item as a percentage

of the common item. The percentage thus calculated can be easily compared with the results

corresponding percentages of the previous year or some other firms, as the numbers are brought

to common base. Such statements also allow an analyst to compare the operating and financing

characteristics of two companies of different sizes in the same industry.

Advantages of the common size financial statement

1. One advantage of having the various amounts expressed in percentage is, the percentageassets of any company can be compared to another company or to other companies in the

industry.

2. The size of the companies being compared, is not important. The companies beingcompared may be small or big. Hence, it is termed as common size. Since size of thecompany does not matter, it removes any kind of bias, while comparing companies.

Analyzing the operational activities of comparing companies can also be obtained.

3. Changes in different values pertaining to companys performance can also be ascertainedduring a particular period. For example, if one wishes to know how the cost of goods sold

over a span of time has changed, the common size financial statement can be helpful.

4. A common size financial statement is used for predicting future trends and analyzingprevailing trends in the industry.

Trend Analysis: It is a technique of studying the operational results and financial position over a

series of years. Using the previous years data of a business enterprise, trend analysis can be

done to observe the percentage changes over time in the selected data. The trend percentage is

the percentage relationship, which each item of different years bear to the same item in the base

5/24/2018 KFL

11/15

year. Trend analysis is important because with its long run view it may point to basic changes in

the nature of the business.

Advantages of trend analysis

Reveal potentially fruitful areas of audit investigation Detect significant variations over time Be easily understood and communicated Be readily accepted due to its widespread use

Disadvantages of trend analysis

Provides little insight into the root causes of variations Fail to indicate what the entitys normal or benchmark position Be undermined by frequent changes in financial reporting formats Be heavily influenced by the choice of the base fiscal period.

Ratio Analysis

It describes the significant relationship which exists between various items of a balance sheet and

a profit and loss account of a firm. As a technique of financial analysis, accounting ratio

measures the comparative significance of the individual items of the income and position

statements. It is possible to assess the profitability, solvency and efficiency of an enterprise

through the technique of ratio analysis.

Advantages of Ratio Analysis

Simplifies financial statements: it simplifies the comprehension of financial statements.Ratios tell the whole story of changes in the financial condition of the business.

Facilitates inter-firm comparison: it provides data for inter-firm comparison. Ratioshighlight the factors associated with successful and unsuccessful firm. They also revealstrong firms and weak firms, overvalued and undervalued firms.

Helps in Planning: it helps in planning and forecasting. Ratios can assist management, inits basic functions of forecasting. Planning, co-ordination, control and communications.

5/24/2018 KFL

12/15

Makes inter-firm comparision possible: Ratio analysis also makes possible comparison ofthe performance of different divisions of the firm. The ratios ae helpful in deciding about

their efficiency or otherwise in the past and likely performance in the future.

Help in investment decisions: it helps in investment decisions in the case of investors andlending decisions in the case of bankers etc.

Limitation of Ratios Analysis

I. The ratios analysis is one of the most powerful tools of financial management. Thoughratios are simple to calculate and easy to understand, they suffer from serious limitations.

II. Limitations of financial statements: Ratios are based only on the information which hasbeen recorded in the financial statements. Financial statements themselves are subject to

several limitations. Thus ratios derived, there form, are also subject to those limitation.

For example, non- financial changes through important for the business are not relevant

by the financial statement. Financial statement are affected to a very great extent by

accounting conventions and concepts. Personal judgement plays a great part in

determining the figures for financial statements.III. Comparitive study required: Ratios are useful in judging the efficiency of the business

only when they are compared with past results of the business. However, such a

comparison only provide glimpse of the past performance and forecasts for future may

not prove correct since several other factors like market conditions, management

policies, etc may affect the future operations.

IV. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as finalregarding good or bad financial position of the business. Other things have also to be

seen.

V. Problems of price level changes: a change in price level can affect the validity of ratioscalculated for different time periods. In such a case the ratio analysis may not clearly

indicate the trend in solvency and profitability of the company. The financial statements,

5/24/2018 KFL

13/15

therefore, be adjusted keeping in view the price level changes if a meaningful

comparison is to be made through accounting ratios.

VI. Lack of adequate standard: no fixed standard can be laid down for ideal ratios. There areno well accepted standards or rule of thump for all ratios which can be accepted as norm.

it renders interpretation of the ratios difficult.

VII. Limited use of single ratios: a single ratio, usually, does not convey much of a sense. Tomake a better interpretation, a number of ratios have to be calculated which is likely to

confuse the analyst than help him in making any good decision.

VIII. Personal bias: ratios are only means of financial analysis and not an end in itself. Ratioshave to interpret and different people may interpret the same ratio in different way.

IX. Incomparable: not only industries differ in the nature, but also the firms of the similarbusiness widely differ in their size and accounting procedures etc. it makes comparison

of ratios difficult and misleading.

Cash flow Analysis: It refers to the analysis of actual movement of cash into and out of an

organization. The flow of cash into the business is cash inflow or positive cash flow and the flow

of cash out of the firm is called as cash outflow or a negative cash flow. The difference between

the inflow and outflow of cash is the net cash flow. Cash flow statement is prepared to projectthe manner in which the cash has been received and has been utilized during an accounting year

as it shows the sources of cash receipts and also the purpose for which payment are made. Thus,

it summarizes the cause for the changes in cash position of a business enterprise between dates of

two balance sheet.

(a) Objectives of Cash Flows Analysis

I. To show the causes of changes in cash balance between two balance sheet datesII. To indicate the factors contributing to reduction of cash balance in spite of increase in

sales and profit and vice versa.

(b) Advantages of Cash Flow Analysis

5/24/2018 KFL

14/15

I. It gives a clear picture of the causes of changes in the cash flow position of a firm. It isvery useful in ascertaining the current cash position.

II. It is an important tool of short term financial planning. The repayment of loans,replacement of an asset and such other programmes can be planned on its basis.

III. It indicates the reason for the reduction of cash balance in spite of increase in income orfor increase of cash balance in spite of decrease in income.

IV. It helps to control cash expenditure by comparing cash flow statement with cash budget.V. It helps the management in ascertaining how much cash is needed, from which sources it

will be raised, how much can be raised internally and how much from external source.

VI. The projected cash flow statement helps in planning for the investment of surplus ormeeting the deficit. It is important for capital budgeting decisions.

ROLE OF FINANCIAL ANALYSIS IN FINANCIAL MANAGEMENT

Financial analysis today is performed by various users of financial statements. Investors and

management perform the financial analysis to understand how profitably or productively the

assets of the company are used. Lenders and suppliers of good look for the ability of the firm to

repay the dues on time. For instance, as a deposit holder of a bank, you would be interested I

liquidity of the bank and would expect the bank to pay you the amount when you need.Customers would like to know the long term solvency of the bank to get continued support. For

example, as a borrower, you would like your bank to be healthy and profitable since you will be

depending on the bank for your future needs. Of course, employees would be interested in

profitability as well as liquidity of the bank. Finance managers not only prepare financial

statements but also analyze the same to get further insight on the performance of the

organization. They need to examine the organization from the perspective of several users so that

they can follow the needs of them and satisfy several stakeholders. Sometimes, profitability

might be affected when the managers try to satisfy the needs of various stakeholders but if you

focus too much on profitability, it might affect the organization in other ways. For instance, we

would expect that our deposit holder need liquidity. If we plan for more liquidity, it might affect

profitability. On the other hand, if we continue to have low liquidity, we may not get funds or we

need to pay more interest to attract funds.

5/24/2018 KFL

15/15

While financial analysis is often used for evaluating current or historical performance,

management uses the input of such analysis for future planning exercise. For instance, in

preparing budgets, the inputs of financial analysis are extensively used. Financial analysis

provides linkage between operating activities and funding activities. Normally, top management

sets the goal and operational managers then determine the level of operation required to achieve

the goal. It would be difficult to increase the level of operation without any investments unless

there is a huge idle capacity. Thus increased activity demands more addition to assets and this in

turn puts a demand for capital. The first step in this process is to know how much of additional

assets we need and how much of capital we need to mobilize from various sources. Financial

analysis, which provides historical linkage between various financial components, is useful.

Suppose the top management fixes a goal to increase the net income by another 20% for the

coming year. Using profit to sales linkage, we can estimate additional turn over required to

achieve the goal. Once we know additional turnover, it is possible for us to assess how much of

additional assets are required (fixed and current assets in the case of manufacturing companies)

and then additional funds that are required to buy the assets. Thus financial analysis is a

prerequisite for financial planning

STEPS INVOLVED IN FINANCIAL STATEMENT ANALYSIS

I. Reorganization and re-arrangement of the financial statement.II. Establishment of significant relationships between the individual components of profit

and loss account and balance sheet by different tools of analysis like ratio, common size,

trend percentage, etc.

III. Evaluation of the significance of comparative data obtained by applying tools of analysis.