TABLE OF CONTENT

Introduction............................................................................................................ ..............03 DEFINITION............................................................................................................. ...................04 Scope of the study background of the study............................................................05 Process/methodology............................................................................................. ...........06 FINANCIAL ANALYSIS OF ABC MINING CORPORATION..........................................................06 FINANCIAL ANALYSIS OF J PHONES LTD................................................................................07 Summary of findings............................................................................................................18 METHODS OF ANALYSIS...........................................................................................................21 REFERENCES........................................................................................................... ..................27

1). INTRODUCTION Finance is an integral part of every organisation whether it is a profit or non profit organisation. And hence Financial Management is very much essential for its systematic planning and development. This is done with the help of preparing Books of Accounts and that involves preparing Journal Entry, Trial Balance, Income Statement, and Balance Sheet and later we analyse the financial position by various methods such as Ratio Analysis, Cash Flow, Trend Flow etc. This helps us in understanding the pros and cons present in the organisation I In this assignment we are taking into consideration two companies namely ABC Mining Corporation & j Phones Ltd and based on the details given we are analysing the financial position of the company in order to advice Mr Ahemet Husain, in which company should he invest. The method which we use for analysing both of these firms is Ratio Analysis. The various methods of ratio analysis used are: 1.) Profitability Ratio 2.) Liquidity Ratio 3.) Management Efficiency Ratio
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4.) Corporate Ratio 5.) Financial Ratio 6.) Employee Ratio These ratios will help in finding the relationship between both firms and their financial position.

A.) 2.DEFINITION 2.1 Ratio Analysis: It is defined by M.D Satpathy and Ansumman Sathoo (2008) as, a process which helps in the decision making of a firm by interpreting the ratios.

2.2 Objectives: Financial forecasting of the business: It helps in the forecasting or predicting the business. Ratio is concerned with the past sales and act as a base for computing the future prospects for a company. Cost control: It is very useful for measuring the standard performance of an organisation. Proper communication: It helps in analysing the strength and weakness of the company.

2.3 SCOPE OF THE STUDY:

We are the Financial advisors will advise to the company related to financial investment.

One of our client Mr. Ahmet Hussain has won GBP 20,000 from a lottery and approached our company for the best financial investment plan. He had also brought two companies namely ABC mining corporations and j phones ltd with their company details.

The details contents are fixed assets, Debtors, Debentures, shares, tax details and other general and administration expenses. Based on those two company details we are working out a investment plan for his proposal.

3. PROCESS/METHODOLGY: 3.1 Analysis of the Financial Performance of ABC Ltd 3.1.1 Income Statement of ABC Ltd for the period ending December 31 2001 & 2002:

ABC L TD
Incom S e tatem for the period endingDecem 31, .........: ent ber Financial Year 2002 Financial Year 2001
Annual Net Sales Less: OperatingCosts Operating Profit Profit Before Interest & Tax Less: Interest Profit Before Corporation Tax Less: Corporation Tax Profit After Inerest & Tax Less:Preference Dividend Retained profit for the year 35000 25900 90 10 9100 375 82 75 8725 2530 69 15 6195 250 3200 24 75 5214 300 2600 21 34 7525 2311 51 24 7705 180 72 55 29635 21930 70 75

3.2 Balance Sheet of ABC Ltd as December 31 2002 & 2001

AB LTD C
Balance S heet for the Financial Year endingDecem 31, .........: ber Financial Year 2002 Financial Year 2001
Fixed Assets Suspense Account Current Assets: Stock at 31/12/2002 Debtors Cash at Bank 49300 11850 6000 9500 7000 22500 83650 Less: Current Liabilities: Trade Creditors Corporation Tax Proposed dividend 26000 2530 375 28905 Less Non-Current Liabilities: 8%Debentures Total Net Assets 14000 2311 180 16491 6000 6000 3000 15000 59805 38000 6805

2500 4 14 33 5 45 22

Equity Finance:
Ordinary Shares 10%Preference Shares Reserves RerainedEarnings 40000 2500 7000 2745 5 45 22 32500 3000 5500 2314 4 14 33

4. Analysis of the Financial Performance of Jphones Ltd 4.1 Income Statement of Jphones Ltd for the period ending December 31 2002 &2001
Income Statement for the period endingDecember 31, 2001 & 2002: Financial Year 2002 Financial Year 2001
Annual Net Sales Less: Operating Costs Profit Before Interest & Tax Less: Interest 8%Debenture 12%Debenture Profit Before Corporation Tax Less: Corporation Tax Profit After Inerest & Tax 412500 268125 144375 144375 12800 36000 95575 95575 0 95575 11543 0 11543 125543 12000 12000 358695 233152 125543

Less: Dividend: Ordinary Sahres 28500 10% Preference Shares 30000 58500 Retained Earning s 37075

18000 1300 31000 82543

4.2 Balance Sheet of Jphones Ltd as December 31.....:

JP O E L D H NS T
B la c S e t fo th F a c l Y a e d gD c m e 3 , .........: a n e h e r e in n ia e r n in e e b r 1 F a c lY a 2 0 in n ia e r 0 2 F a c lY a 2 0 in n ia e r 0 1
Fixed Assets S uspense Ac ount c C urrent Assets: S ka 3 /1 /2 0 toc t 1 2 0 2 D ebtors C sha B nk a t a 150 600 207 585 700 300 100 500 100 50 850 90 1185 307 L ess: C urrent L bilities: ia T de C ra reditors C orpora tion T x a Proposed dividend 300 500 0 440 880 380 980 L Non-C ess urrent L bilities: ia 8 D % ebentures 1 % ebentures 2 D 200 000 0 100 20 220 100 340 800 900 00 100 60 400 900 744 653 100 800 953 44

100 600 300 000 400 600 880 580 427 505

100 500

T ta N tA s t o l e ses

320 600 424 053

Eu F ac: q ity in n e
O rdina S res ry ha 1 %Preferenc S res 0 e ha R eserves R ined E rning era a s 900 50 300 000 200 00 305 77 900 00 100 300 100 000 853 24

427 505

425 043

5.1. Ratio Analysis: 1.) ABC Mining Corporations: 1) Re turn

On Capital Employee Pr ofit = Capital Employee *100 = Z %

2002 Re turn

9100 On Capital Employee = *100 = 17 .41 % 52245

2001 Re turn Conclusion:

7705 On Capital Employee = *100 = 17 .78 % 43314

There was deduction in the return from the capital employed compared to the last year, it increased from 17.78% to 17.41%. a low ROCE can result in a downturn.

2)

Asset Turn O ver

Sales = Net Assets

= Z Times

2002 Asset 2001 Asset

35000 Turn Over = 52245 29634 Turn Over = 43314

= 0.669 = 0.684

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Conclusion: A rising ratio indicates improvement in the company. But in this firm it decreased from 0.684 to 0.669 which shows a negative trend.

3)

Net Pr ofit Net Pr ofit M arg in = * 100 Sales

= Z Times

2002 Net Pr ofit M arg in 2001 Net Pr ofit M arg in Conclusion:

9100 = * 100 = 26 % 35000 7705 = * 100 = 26 % 29634

The Net Profit Margin remained the same at 26% for both the years, which is not a good sign.

4) Current Ratio

Current

Ratio

Current Assets = Cuarrent Liabilitie s

= Z Times

2002 Current 2001 Current

22500 Ratio = =0.778 0.78 28905 15000 Ratio = =0.909 0.9 16491

Conclusion:

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There was a decreasing change in the figures from 0.9 in 2001 to 0.78 in 2002. A high current ratio is a sign of poor capital

5) Quick Ratio
C urrent Asset Stock A cid Test Ratio (Q uick Ratio ) = uarrent Liabilitie s C

= Z Times

2002 Acid 2001 Acid

22500 6000 16500 Test Ratio (Quick Ratio ) = = 28905 =0.57 28905 15000 6000 9000 Test Ratio (Quick Ratio ) = = 16491 =0.54 16491

Conclusions: The quick ratio was increased from 0.54 to 0.57.

6)

D ebtors

Trade D ebtors * 365 Ratio In D ays = redit Sales Total C

2002 Debtors

9500 * 365 Ratio In Days = 35000

= 99.07

2001 Debtors

6000 * 365 Ratio In Days = 29634

= 73.90

Conclusions: The debt collection ratio increased it could be a sign of lack of control in the management and also the need for extra cash.
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7) Management

Cost Of Sales * 365 Efficiency Ratio = Stock

2002

Management

25900 * 365 Efficiency Ratio = =1575 .58 (6000 + 6000 ) / 2

2001

Management

21929 * 365 Efficiency Ratio = =1334 .014 6000

Conclusions: It showed an increasing figure the higher the sales figure the lower will be the stock in relation to the sales.

8) Return on Equality (ROE)

Re turn On Equality

PAIT % Pr eference Share = Ordinary Share

2002 Re turn On Equality 2001 Re turn On Equality Conclusions:

6195 250 = * 100 40000 5214 300 = * 100 32500

= 14.86% = 15.12%

The return on equity was 15.12% in 2001 but it is only 14.86% Corporate Ratio
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9) EPS 2002

PAIT = No Of Shares (Ordinary

Share )

PAIT = 6195 PAIT 10% Preference share=250 6195-250=5945 Ordinary dividend = 3200
5945 3200 =1.85

2001 PAIT = 5214 PAIT 10% Preference share=300 5214-300=5945 Ordinary dividend = 2600
4914 2600 =1.89

Conclusions: EPS ratios declined from 1.89 in 2001 to 1.85 in 2002 10) Operating Performance Ratio

Fixed Asset Turnover Ratio =

Re vence Fixed Assets

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2002 49300 = 0.709 2001

29634 .62 38000

35000

=0.77

Conclusions: The fixed asset turnover ratio was reduced.

J phones
Profitability Ratio 1) Return On Capital employee = 2002 452075
144375 * 100 = 31 .93 %
Pr ofit Capital employee

2001 402543 .48 *100 =31 .18 %

125543 .48

Conclusion:

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There was deduction in the return from the capital employed compared to the last year, it fell from 17.78% to 17.41. 2) Asset Turn Over= 2002 452075 2001 402543 Conclusion: A rising ratio indicates improvement in the company. It increased from 0.89 to 0.91.
412500 =0.91 358695 .65 =0.89 .48
sales N Assets et

2.) Net Profit Margin = 2002 412500

144375 * 100 = 35 % 125543 .48

Net Pr ofit * 100 Sales

2001 358695 .65 *100 = 53 .84 %

Conclusion: The Net Profit Margin decreased from 53.84% to 35%, which shows a decline in the profit margin.

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3) Current Ratio =

Current Assets Current Liabilitie s

2002 898800

895000 =2.2 49000 =2.3

2001 212000

Conclusions: The current ratio reduced from 2.3 in 2001 to 2.2 in 2002 which is a good indicator.

4) Acid Test Ratio (Quick Ratio) =

C urrent Asset Stock C urrent Liabilitie s

2002

895000 73600 =0.41 398800 49000 384000 =0.51 212000

2001

Conclusions: it was also reduced from 0.51 to 0.41. 5) Debtors Ratio = 2002
15000 * 365 412500 90000 * 365 .65
Trade debtors * 365 Total C redit sales

=132 .72 =91 .58

2001 358695

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Conclusions: It was increased from 91.58% to 132.72% which shows lack of financial control.

6) Stock Turn Over Ratio= 2002 (730000

Cost Of Sales Stock

268 .125 * 365 =175 .70 Days + 384000 ) / 2

2001

233152 .17 =221 .61 days 384000

7) Return on equality = 2002

95575 30000 =0.34 190000

PAIT % Pr eference Share Ordinary Share

2001

133543 .48 13000 =0.66 180000

Cooperative Ratio 8) EPS = 2002

PAIT % Perference Share Ordinary Share

95575 30000 =0.69 95000 133543 .48 13000 =1.339 90000

2001

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9) Fixed Acid Turn Over = 2002 165000 2001

412500 358695 .65 180000

Re venue Fixed Acid

Debt Ratio 10) Interest Coverage Ratio =

EBIT Interenst Expense

2002 48800 2001

144375

= 2.95

125543 .48 =10 .46 12000

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Debt Equality Ratio =

858800 =1.89 362000 =0.89 .48

Total Liabilitie s Share H older equality

2002 452075 2001 402543

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Gearing Ratio=

Book Value O Equality f Total Assets

2002 1310875

452075 =0.34

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2001 764543

402543 .48 =0.52 .48

6. Summary of findings From the above income statement and balance sheet as well as ratio analysis we can come to the conclusion that J Phone is the company which is most suitable for Mr. Ahamat Husain as it is giving great returns on Returns on capital employed, Asset Turn over ratio, Net profit ratio, Net Profit Margin. Also J phones limited is a company which invest on technologies which is promises a lot of profit in future. Mr Ahmet Hussain is person whose age is 75yrs so he is most probably not planning for any investment which will take some 10 or 20 years. He expects a quick return for his investment, since ABC Mining Corporation is invest mostly in petroleum and other chemicals it may take some time to get him his returns on investment. Another thing to keep in mind is that J Phone ltd is a newly formed company(only two years) that means it will not have to pay taxes now which also increases its profit. The marketing strategy adopted by the company is also tremendous as they are investing huge amount in advertising, which is catching up with the public which again promises for an increase in profit.

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B.)METHODS OF ANALYSIS: The principal method of analysing company performance I. Ratio Analysis: Ratio analysis is a tool of financial analysis, which is considered as powerful methods of analysis which is used to analyse the financial statement and transactions of business. Benefits: It helps in decision-making: It is considered as a powerful tool for analysing the financial performance the company and hence it helps the management in taking appropriate financial decisions. Proper communication: Through ratio analysis the financial strength and weakness of a particular company can be found out. And hence it is communicated to others in simple and understandable manner. It improves the values of financial statement. Effective control: It is a significant tool for controlling the business. The dissimilarities can be found out by evaluating the various ratios. Estimation and Planning: It helps in the future forecast and planning of the activities of the business.

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(Charles H Gibson( Financial reporting analysis) : Using financial accounting. Page 188)

Limitations: It is historical in its nature: Ratios are generally calculated on the basis of their past dates and they necessarily cannot be treated as a true indicators of the firms future. Rule of thumb: The rule of thumb or standard ratios cannot be applicable for all the ratios and hence its interpretation becomes very difficult.

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 Difficulty in comparing: There is a difference in size of the firm its nature, and the type of production of all firms and hence there will be difference in analysis of financial data.

Classification of Ratios: There are four major classification of ratio analysis. They are as follows: 1.) Liquidity ratio 2.) Solvency ratio 3.) Profitability ratio 4.) Activity ratio

Liquidity ratio: Its also called Quick ratio. It measures the ability of company to utilise its Quick assets to give back its current liability. The following ratio comes under this category:

1.) Current ratio: It is calculated by dividing current assets with current liabilities (Yahoo Matters). Items in Current assets include mainly cash; and the assets which can be converted into cash. Current liability are to be paid off with in an accounting period. High current ratio indicates that a company or firm has the ability to pay its debt when they are due. A low current ratio means that the
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liquidity position of the company is weak. A current ratio of 2:1 is satisfactory. The formula for current ratio is as follows: Current Ratio = Current Assets

Current Liabilities

2.) Quick ratio: It is called acid test ratio as well as liquid ratio. It is calculated by dividing quick assets with current liabilities. Quick assets = current assets -stock.. A quick ratio of 1:1 indicates that the firm have good financial(short term) strength. The formula for quick ratio is as follows: Quick Ratio = Quick Assets

Current Liabilities

3.) Absolute liquidity ratio or Cash ratio: It arises when we are doubtful of a situation. It finds the short term solvency.An absolute liquidity ratio of 0.5:1 or 1:2 ensures liquidity The formula is as follows: Absolute Liquidity Ratio = Cash + Bank + Marketable Securities
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Current Liabilities

Solvency or Leverage ratio: The following comes under its category:

1.) Debt

Equity Ratio: This ratio tells us about the long term

solvency of firm. It indicates the relationship between shareholders fund and outsiders fund. Shareholders fund include equity share capital, preference share capital, retained earnings, reserves etc. A ratio of 1:1 is usually considered satisfactory The formula is as follows: Solvency or Leverage ratio= Outsiders Fund

Shareholders fund
2.)

Proprietary Ratio: It tells us the relationship between

proprietors fund & tangible assets. It measures the long term solvency of the firm. The formula is as follows: Proprietary Ratio= Proprietors Funds

Total Tangible Assets

3.) Interest

Coverage Ratio: The company have to pay off its

contractual interest obligations. And this ratio shows the ability of a particular company to pay off it. It is also known as Debt Servicing Ratio.
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The formula is as follows: Interest Coverage Ratio =Earnings Before Interest and Taxes Interest

Turnover or Activity Ratio: It indicates the speed at which assets are converted into sales. It includes the following ratios:

1.)Inventory or Stock Turnover Ratio: It calculate the size of a particular inventory and the number of times it is turned over in a given period. The formula is as follows: Inventory Turn Over Ratio = Cost of Goods Sold Average Inventory

2.)Debtors Turnover Ratio: It tells us the relation amid sales and debtors of a business. The formula is as follows: Debtors Turnover Ratio=Aveg Debtors receivable * No of working days Net credit Sales 3.)Creditors Turnover Ratio: It is the number of times which a supplier gives a firm to make a payment.
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The formula is as follows: Creditors Turnover Ratio= Net Credit Purchases Avg Trade Creditors
1.) Working

capital turnover Ratio: It is the demand made on the

working capital for maintaining the volume of sales of a firm. The formula is as follows: Working Capital=Current Assets Current Liabilities
2.) Fixed

Asset Turnover Ratio: It shows the degree of investment;

which a company have in fixed asset and its contribution to increase the sales volume.

The formula is as follows: Fixed Asset Turnover Ratio=Cost of Goods Sold Fixed Assets

Profitability Ratio: These are the ratio which indicates a firms operational efficiency. The following are the important profitability ratios:
1.) Gross

Profit Ratio: It measures the relationship amid gross

profit & net sales.

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The formula is as follows: Gross Profit= Gross Profit Net sales 2.)Net Profit Ratio: This is the ratio which establishes the relation amid net profit after tax and net sales. The formula is as follows: Net Profit Ratio= Net Profit After Tax * 100 Net Sales 3.)Operating Profit Ratio: It shows the difference in relationship amid the net sale and COGS(Cost of Goods Sold) as well as other operating expenses. The formula is as follows: Operating ratio=(Cost of goods sold + Operating Expenses) * 100 Net Sales * 100

II.

Funds Flow Analysis: Funds flow is a type of analysis which explains how the funds are used as well as the changes in the financial position of the business for a period of time. Benefits: 1.) One of the main objectives of funds flow is to help and

analyse the financial position of a business. It also shows whether the items are utilised properly or not.
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2.)

It shows the extent to which the resource of a particular

company is used and it also shows the unplanned items as well.

3.) This

analysis also helps the management in finding out the

appropriate decision at the appropriate time. Limitations:

1.) It

should not be or cannot be taken as an alternative of an

income statement and balance sheet. 2.) It doesnt reveal the changes constantly although the

funds flow is summarised. 3.) The future business transactions cannot be predicted on

the basis of this analysis.

III.

Cash flow statement: Cash flow statement includes four items.

Cash. Operating activities. Investing activities. Financing activities.

Cash flow statement is a financial statement that show a companys incoming and out coming cash during time period.

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Benefits: 1. It helps the newly formed companies to evaluate their inflow and their outflow statement to avoid the shortage in their cash. 2. It is the key point for the investor to taking decision either invest the money or not. 3. Cash flow statements are provided periodically i.e for a month, for a quarter or for half a year.

iv)

Common- size analysis: This type of analysis is used to make the comparison of two or more different firms of different size in a much more meaningful way. In case of small figures proper attention and care is required as a small change in the figures can result in a very large percentage change.

Benefits: 1. It indicates the relation of each of its items to the whole 2. It is used for vertical financial analysis and comparison of two business enterprises or two years financial data 3. It is a type of analysis where, sales is considered as the base instead of an income statement and in case of total net assets is considered as the base instead of balance sheet. all items are expressed as a relation to it. (http://www.scribd.com/doc/49189582/common-size-analysis)
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Limitations:
1.

Chances are that all the firms may not use the same accounting policies it may varies and sometimes different accounting policies may be used by inter departments as well. In such situations we will have to make some adjustments for the differences generated.

2. Not only the accounting policies but the accounting year might also be different in different firms. And hence the period of accounting cannot be taken for comparison.

IV.

Comparative statement: It is type financial statements that covers items across a time frame but the statement is prepared in such a way that it makes it possible to compare line items for different periods.

Benefits: 1. Comparative statement is very useful in adding financial meaning to the financial data. 2. It is helps in measuring effectively the conduct of business. And also its activities.

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3. It is mainly used for analysing the financial datas within a firms departments as well as within two firms. 4. It helps us to find out change in the figures and also change in the percentage. 5. An upward or positive change in the amount as well as the percentage indicates an increase and a downward or a negative change in the amount and also the percentage indicate a decrease.

REFERENCES:

1.

Ansumman Sathoo and M.D Satpathy (2008),Financial Management and Accounting, Vrinda Publications.

2.

Charles H Gibson( Financial reporting analysis) : Using financial accounting. Page 188

3.

http://ezinearticles.com/?Advantages-of-Cash-FlowStatement-Helps-You-Run-a-SuccessfulBusiness&id=1353389

4.

http://ezinearticles.com/?Advantages-of-Cash-FlowStatement-Helps-You-Run-a-SuccessfulBusiness&id=1353389

5.

http://www.scribd.com/doc/49189582/common-sizeanalysis
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