chapter i intro

7/28/2019 Chapter i Intro

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1.1 INTRODUCTION:

The term Financial Analysis is also known as analysis and interpretation of

financial statement refers to the process of determining financial strength and weakness of the

firm by establishing strategic relationship between the items of the Balance Sheet, Profits and

Loss account and other operative data. There are many different ways to measure financial

performance, but all measures should be taken into aggregations. Line items such as revenue

from operations, operating income cash from operations can be used as well as total unit of sales

furthermore, the analyst or investor may wish to look deeps into financial statement and seek out

margin growth rates or any declining debts.

The performance of the firm can be measured by its financial results, i.e., by its size of

earnings Riskiness and profitability are two major factors which jointly determine the value of

the concern. Financial decisions which increase risks will decrease the value of the firm and on

the other hand, financial decisions which increase the profitability will increase value of the firm.

Risk and profitability are two essential ingredients of a business concern. There has been a

considerable debate about the ultimate objective of firm performance, whether it is profit

maximization or wealth maximization. It is observed that while considering the firm

performance, the profit and wealth maximization are linked and are effected by one-another.

A companys financial performance therefore is normally judged by a series of ratios or

figures, however there are following three ratio parameters which can be used to evaluate

financial performance, they are:

a) Return on Equity

b) Earnings per Share and

c) Price Earnings Ratio.

All three parameters are discussed in detailed along with various other ratios. However, it

is to be noted that fundamentally, the balance sheet indicates the financial position of the

company as on that point of time. However, profit and loss account is a statement, which is


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prepared for a particular financial year. In Indian context, where an analyst has to rely upon the

audited financial statement for a particular company, the performance is to be judged from the

financial statement only. This chapter however indicates some of the techniques, which can be

used for such analysis of financial performance.

1.2 BACKGROUND OF STUDY

MARGHAM Publications was the dream of late Sri.K. Marghabandhu, which could be

realized only after his untimely demise, by his son Mr.M. Narayanan in the year 1984.

Encouraged by the success of its first publication, "Monetary Economics" written by Dr.S.

Sankaran, a renowned author on Economics, Margham Publications added quality titles regularly

and grew rapidly. From the Proprietary ownership when started, Margham became a partnership

firm when the late Sri Margha bandhu's another son Mr. M. Chandrasekaran joined his younger

brother to sustain their father's dream..

Today, with more than 150 titles on a range of subjects including Commerce,

Accountancy, Economics, Management, Mathematics and Computer Science, the firm has

emerged as one of the most popular publishers of educational books, many of which are

recommended as text books by a number of universities. Margham Publishers, in a strategic

business move, acquired their own complete printing facility in 2004 to ensure consistent quality

and timely availability of their titles. Enjoying the enormous goodwill of both teaching &

students communities

From Gurukul schools where knowledge & wisdom were transferred from mouth to ear,

to today's modern universities where information can be accessed at the touch of a button on

computers connected to a network, education has indeed come a long way. From oral

communications to writing on nearly everything that could be written upon - stone, clay, tree

bark, metal sheets, the so called "books" as we know now, too has changed form and shape over

the years. Books are storehouses that hold facts of life, timeless thoughts and scientific truths. A

good book is always a sought after commodity by those who seek information or knowledge.


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Fully realizing the value of books in our lives, late Sri. K. Marghabandhu dreamt of

starting a publishing house and his son Mr. M. Narayanan gave shape & life to his dream, in the

year 1984. Thus started, MARGHAM Publications tasted success even with their first

publication "Monetary Economics", written by Dr.S.Sankaran. Buoyed by the acclaim the book

returned, MARGHAM consciously added quality titles authored by renowned writers. We are

now one of the most trusted publishing house with many of our titles recommended as text books

by universities.

1.3 STATEMENT OF PROBLEM:

In this present world, competition exists in all company, especially in MarghamPublication.

This study is to analyze the performance of Margham Publication by calculating ratio

from the provided companies Balance Sheets for the past five years from 2008-2012 and to

provide suggestions based on the report. This study helps us to find out the present situation of

the firm.

1.4 SIGNIFICANCE OF THE STUDY

To analysis the financial performance of Margham Publication and its strength and

weakness through ration analysis. Analysis and interpretation through compilation of the

account department and revenue income and expenditure. So as to afford full diagnosis of the

profitability of the financial soundness of the business. The More finance spend on the marketing

purposes and totally 6 months only earned profit after that these money utilized other expenses

used. Financial department vital role of company and spend on the money to promotion

activities.


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1.5 Objective of the Study

This study is under taken with an objective of analysis the financial performance of small

industries Development Corporation limited in Tamilnadu. However the study in tended with the

following specific objectives:-

To study the factor influencing the extent of profitabilityTo examine the short term solvencyTo evaluate the solvency position from the long term perspectiveTo examine the liquidness of the corporationTo suggest for improvement and enhancement of the financial position of corporation

1.6 METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It is a

science of studying how research is done scientifically. It is purely and simply the frame work or

plan for a study that guides the collection and analysis of the data.

RESEARCH:

Research can be defined as A scientific systematic research for pertinent information on

specific topics. Research comprises defining and redefining problems, formulating hypothesis

on suggested solution collection, organizing and evaluating data, making deduction and reaching

conclusions to determine whether they fit the formatting hypothesis.

PERIOD OF COVERAGE:

The study covered five year financial statement from the financial year 2008-2012


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RESEARCH PROBLEM:

To find the present financial position of Margham Publication and to know the progress

of growth in terms of profits, sales, debtors, cash position over a period of five years.

RESEARCH DESIGN:

The research design adopted for the study is descriptive research aims to gain familiarity

and new insights into any phenomenon. Descriptive research design is concerned with the

research studies with a focus on the portrayal of the characteristics of a group or individual or a

situation.

1.7 LIMITATIONS OF THE STUDY

It is comprehensive study of financial analysis from the year 2008-2012.

The period of the study is restricted to 5 years.

The value of money is not taken into account.

The study is conducted on the basis of the data provided by the company.

TOOLS USED IN THE ANALYSIS:

The following are the various tools which are used in the analyzing the data:

Common Size Statement Comparative Statement Trend Analysis Ratio Analysis Schedule of changes in Working capital


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Common Size Statement

Common size statement indicates the relationship of various items with some common

items. In this income statement, the sales figure is taken as basis and all other figures are

expressed as percentages sales. In the balance sheets the total assets and liabilities is taken as

base and all the other figures are expressed as percentages total. The percentages so calculated

are compared with corresponding percentages in other periods or other periods or other firms and

meaningful conclusions are drawn.

Comparative Statement

Comparative statements are those which have been designed in a way so as to provide

time perspective to the consideration of various elements of financial position embodied in such

statement. In these statement figures for two or more period are placed side by side to facilitate

comparison.

Trend Analysis:

Trend analysis is immensely helpful in making a comparative study of the financial

statement for several years. The method of calculating trend percentages involves the calculation

of percentage relationship that each item bears to the same item in the base year. It is usually the

earliest year. They are calculated only for important items since the purpose is to highlight

importance changes.

RATIO ANALYSIS

MEANING OF RATIO: - A Ratio is simple arithmetical expression of the relationship of one

number to another. It may be defined as the indicated quotient of two mathematical expressions.

ACCORDING TO ACCOUNTANTS HANDBOOK BY WIXON, KELL AND BEDFORD,

a ratio is an expression of the quantitative relationship between two numbers.


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ACCORDING TO BATTY J.management accounting ratio can assist management in its basic

functions of forecasting, planning coordination, control and communication.

It is helpful to know about the liquidity, solvency, capital structure and profitability of an

organization. It is helpful tool to aid in applying judgment, otherwise complex situations.

RATIO ANALYSIS CAN REPRESENT FOLLOWING THREE METHODS:

1. PURE RATIO OR SIMPLE RATIO: -It is expressed by the simple division of onenumber by another. For example, if the current assets of a business are Rs.200000 and its

current liabilities are Rs.100000, the ratio of current assets to current liabilities will be

2:1.

2. RATE OR SO MANY TIMES: - In this type, it is calculated how many times a figure

is, in comparison to another figure. For example, if a firms credit sales during the year

are Rs.200000 and its debtors at the end of the year are Rs. 40000, its debtors turnover

ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison

to debtors.

3. PERCENTAGE: - In this type, the relation between two figures is expressed in

hundredth. For example, if a firms capital is rs.1000000 and its profit is rs.200000 the

ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%

ADVANTAGES OF RATIOS ANALYSIS:

The information shown in financial statements does not signify anything individually

because the facts shown are inter-related. Hence it is necessary to establish relationship between

various items to reveal significant details and throw light on all notable financial and operational

aspects. Ratio analysis caters to the needs of various parties interested in financial statements.

The basic objective of ratio analysis is to help management in interpretation of financial

statements to enable it to perform the managerial functions efficiently. The following are the

advantages of ratio analysis.


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(1) FORECASTING: Ratios reveal the trends in costs, sales, profits and other inter-relatedfacts, which will be helpful in forecasting future events.

(2) MANAGERIAL CONTROL: Ratios can be used as instrument of control regardingsales, costs and profit.

(3) FACILITATES COMMUNICATION: Ratios facilities the communication function ofmanagement as ratios convey the information relating to the present and future quickly,

forcefully and clearly.

(4)MEASURING EFFICIENCY: Ratios help to know operational efficiency by comparisonof present ratios with those of the past working and also with those of other firms in the

industry.

(5) FACILITATING INVESTMENT DECISIONS: Ratios are helpful in computing returnon investment. This helps the management in exercising effective decisions regarding

profitable avenues of investment.

(6) USEFUL IN MEASURING FINANCIAL SOLVENCY: The financial statementsdisclose the assets and liabilities in a format. But they do not convey relationship of various

assets and liabilities with each other, whereas ratios indicate the liquidity position of the

company and the proportion of borrowed funds to total resources which reveal the short term

and long term solvency position of a firm.

(7) INTER FIRM COMPARISONS: The technique of inter-firm comparisons can be carriedout successfully only with the help of ratio analysis. Otherwise no firm may come forward to

disclose full information. Inter-firm comparisons help the management to compare its

performance with an external bench-mark or standard.


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DISADVANTAGES:

Ratio analysis is to calculate and easy to understand and such statistical calculation

stimulation thinking and develop understanding.

But there are certain drawbacks and dangers they are.

i) There is a trendy to use to ratio analysis profusely.

ii) Accumulation of mass data obscured rather than clarifies relationship.

iii) Wrong relationship and calculation can lead to wrong conclusion.

1. In case of inter firm comparison no two firm are similar in size, age and product

unit.(For example :one firm may purchase the asset at lower price with a higher return and

another firm witch purchase the asset at asset at higher price will have a lower return)

2. Both, the inter period and inter firm comparison are affected by price level changes. A

change in price level can affect the validity of ratios calculated for different time period.

3. Unless varies terms like group profit, operating profit, net profit, current asset, current

liability etc., are properly define, comparison between two variables become meaningless.

4. Ratios are simple to understand and easy to calculate. The analyst should not take

decision should not take decision on a single ratio. He has to take several ratios into

consideration.

chapter i intro

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