Chapter 1 Introduction 1.1 Overview- Ratios 1.2Companies for Analysis 1.3Objective & Scope of Research Study 1.

4Limitation of Study 1.5 Research Methodology Comparative analysis is an important tool of analyzing and evaluating the performance and prospects of a firm. The analysis and interpretation offinancial statements is used to determine the financial position and results ofoperations a well. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerialdecisions. But the information provided in the financial statements is not anend in itself as no meaningful conclusions can be drawn from thesestatements alone. However, the information provided in the financial statements is of immenseuse in making decisions through analysis and interpretation of financialstatements. Financial analysis is the process of identifying the financialstrengths and weaknesses of the firm by properly establishing relationshipbetween the items of the balance sheet and the profit and loss account. 1.1 Ratios The most prevalent method of comparative analysis is through ratio analysis.The ratio analysis can be for a single year or it may extend to more than oneyear. The ratios can also be compared with similar ratios of others concernsto make a comparative study. First, all ratios will be worked out for each year and each set of comparable items. The ratios worked out will be put in the context of a trend over several years. They will be compared with similar companies/ standard ratios. i.For the year concerned, and ii.Over a period of time.

Types of Ratio 1. Liquidity Ratio i). Current Ratio The ratio is worked out by dividing the current assets of the concern by itscurrent liabilities. Current ratios indicate the relation between current assetsand current liabilities. Current liabilities represent the immediate financialobligations of the company. Current assets are the sources of repayment ofcurrent liabilities. Therefore, the ratio measures the capacity of the companyto meet financial obligation as and when they arise. Textbooks claim a ratioof 1.5 to 2 is ideal; bit in practice this is rarely achieved. This ratio is alsoknown as working capital ratio. ii). Acid Test Ratio Quick assets represent current assets excluding stock and prepaid expenses. Stock is excluded because it is not immediately realizable in cash. Prepaid expenses are excluded because they cannot be realized in cash. A minimumof 1: 1 is expected which indicates that the concern can fully meet itsfinancial obligations. This also called as Liquid ratio or Quick ratio. 2. Activity Ratios i). Debtors Turnover Ratio The ratio obtained should be compared with that of other similar units. If theratio of the company being studied is greater (say, 10 weeks as against 6weeks for the industry), it indicates that the company is allowing longer thanthe usual credit periods. This may be justified in the case of new companiesor existing companies entering into new ventures ii). Creditors Turnover Ratio This ratio shows how frequently company is paying to its creditor. Usually, higher the ratio- betters the performance of company. iii). Inventory Turnover Ratio The ratio is usually expressed as number of times the stock has turned over.Inventory management forms the crucial part of working capitalmanagement. As a major portion of the bank advance is for the holding ofinventory, a study of the adequacy of abundance of the stocks held by thecompany in relation to its production needs requires to be made carefully bythe bank. iv). Fixed Assets Turnover Ratio The ratio shows the efficiency of the concern in using its fixed assets. Higherratios indicate higher efficiency because every rupee invested in fixed assetsgenerates higher sales. A lower ratio may indicate

inefficiency of assets. Itmay also be indicative of under utilizations or non-utilization of certain assets. Thus with the help of this ratio, it is possible to identify such underlined or unutilized assets and arrange for their disposal. 3. Leverage Ratio i). Debt-Equity Ratio Also known as external - Internal equity ratio is calculated to measure therelative claims of outsiders against the firms assets. This ratio indicates therelationship between the external equities or the equities or the outsidersfunds and the internal equities or the shareholders funds. ii). Interest Coverage Ratio Higher the ratio better is the coverage. The firm may not fail on its commitments to pay interest even if profits fall substantially. 4. Profitability Ratios i). Gross Profit Ratio A comparison with the standard ratio for the industry will reveal a picture ofthe profitability of the concern. Also the ratio may be worked out for a fewyears and compared to verify if a steady ratio is maintained. ii). Net Profit Ratio This ratio serves a similar purpose as, and is used in conjunction with, the gross profit ratio. iii). Return on Assets This ratio measures the profits of the concern as a percentage of the totalassets. For the purpose of this ratio, the operating profit is calculated byadding back to net profit: (1) Interest paid on the long term borrowings and