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CHAPTER: 1
MEANING OF FINANCIAL ANALYSIS
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Introduction
Financial analysis (also referred to as financial statement analysis or accounting
analysis) refers to an assessment of the viability, stability and profitability of a business,
sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of
information taken from financial statements and other reports. These reports are usually
presented to top management as one of their bases in making business decisions. Based
on these reports, management may:
Continue or discontinue its main operation or part of its business;
Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the production of its goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
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Financial analysts often assess the firm's:
1. Profitability - its ability to earn income and sustain growth in both short-term and
long-term. A company's degree of profitability is usually based on the income statement,
which reports on the company's results of operations;
2. Solvency - its ability to pay its obligation to creditors and other third parties in the
long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate
obligations;
Both 2 and 3 are based on the company's balance sheet, which indicates the financial
condition of a business as of a given point in time.
4. Stability- the firm's ability to remain in business in the long run, without having
to sustain significant losses in the conduct of its business. Assessing a company's
stability requires the use of, the income statement and the balance sheet, as well as other
financial and non-financial indicators.
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Financial statements
Are formal records of the financial activities of a business, person, or other entity?
In British English, including United Kingdom company law, financial statements are
often referred to as accounts, although the term financial statements are also used,
particularly by accountants.
Financial statements provide an overview of a business or person's financial
condition in both short and long term. All the relevant financial information of a
business enterprise presented in a structured manner and in a form easy to understand, is
called the financial statements. There are four basic financial statements:
Balance sheet: also referred to as statement of financial position or condition,
reports on a company's assets, liabilities, and Ownership equity at a given point in time.
Income statement: also referred to as Profit and Loss statement (or a "P&L"),
reports on a company's income, expenses, and profits over a period of time. Profit &
Loss account provide information on the operation of the enterprise. These include sale
and the various expenses incurred during the processing state.
Statement of retained earnings: explains the changes in a company's retained
earnings over the reporting period.
Statement of cash flows: reports on a company's cash flow activities, particularly
its operating, investing and financing activities.
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Purpose of financial statement
The objective of financial statements is to provide information about the financial
position, performance and changes in financial position of an enterprise that is useful to
a wide range of users in making economic decisions.
Financial statements should be understandable, relevant, reliable and comparable.
Reported assets, liabilities and equity are directly related to an organization's financial
position. Reported income and expenses are directly related to an organization's
financial performance.
Financial statements are intended to be understandable by readers who have "a
reasonable knowledge of business and economic activities and accounting and who are
willing to study the information diligently." Financial statements may be used by users
for different purposes:
Owners and managers require financial statements to make important business
decisions that affect its continued operations. Financial analysis is then performed on
these statements to provide management with a more detailed understanding of the
figures. These statements are also used as part of management's annual report to the
stockholders.
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Employees also need these reports in making collective bargaining agreements
(CBA) with the management, in the case of labour unions or for individuals in
discussing their compensation, promotion and rankings.
Prospective investors make use of financial statements to assess the viability of
investing in a business. Financial analyses are often used by investors and are prepared
by professionals (financial analysts), thus providing them with the basis for making
investment decisions.
Financial institutions (banks and other lending companies) use them to decide
whether to grant a company with fresh working capital or extend debt securities (such as
a long-term bank loan or debentures) to finance expansion and other significant
expenditures.
Government entities (tax authorities) need financial statements to ascertain the
propriety and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business. Media and the general public are also interested in
financial statements for a variety of reasons.
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RATIO ANALYSIS
Introduction to ratio analysis
Ratio analysis is one of the techniques of financial analysis where ratios are used to
evaluate the financial condition and performance of a firm. Analysis and interpretation
of various accounting ratios gives a skilled and experienced analyst better
understanding of financial conditions and performance of the firm ratios are relationship
expressed in anathematic terms by its figures, which are connected with each other in
some manner.
Meaning of Ratio
Generally speaking a ratio is simple one figure expressed in terms of another and
thus its an assessment of one number in relation to other. The relationship must be
established on the basis of some scientific and logical methods these a ratio is a
mathematical quantitative form. When this definitions of ratio is explained with
reference to the items shown in the financial statements, then it is called
Accounting Ratios. Hence in accounting ratio is defined as quantitative
relationship between two items in the financial statement. It is the process of
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determining and interpreting numerical relationship based on financial statements as
they are simple to calculate and easy to understand.
It is one of the techniques of financial analysis where ratios are used as yard for
evaluating the financial conditions and performance of a firm.
STEPS IN RATIO ANALYSIS
The first task of the financial analysis is to select the information relevant to the
decision under consideration from the statements and calculates appropriate ratios.
To compare the calculated ratios with the ratios of the same firm relating to the past
or with the industry ratios. It facilitates in assessing success or failure of the firm.
Third step is to interpretation, drawing of inferences and report writing conclusions
are drawn after comparison in the shape of report or recommended courses of action.
BASIS OR STANDARDS OF COMPARISON
Ratios are relative figures reflecting the relation between variables. They enableanalyst to draw conclusions regarding financial operations. They use of ratios as a tool
of financial analysis involves the comparison with related facts. This is the basis of ratio
analysis. The basis of ratio analysis is of four types.
Past ratios, calculated from past financial statements of the firm.
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Competitors ratio, of the some most progressive and successful competitor firm at
the same point of time.
Industry ratio, the industry ratios to which the firm belongs to
Projected ratios, ratios of the future developed from the projected or pro forma
financial statements
NATURE OF RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements.
It is the process of establishing and interpreting various ratios for helping in making
certain decisions. It is only a means of understanding of financial strengths and
weaknesses of a firm. There are a number of ratios which can be calculated from the
information given in the financial statements, but the analyst has to select theappropriate data and calculate only a few appropriate ratios. The following are the four
steps involved in the ratio analysis.
Selection of relevant data from the financial statements depending upon the
objective of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, or
the ratios developed from projected financial statements or the ratios of some other
firms or the comparison with ratios of the industry to which the firm belongs
INTERPRETATION OF THE RATIOS
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Caliber of the analysis
IMPORTANCE OF RATIO ANALYSIS
Aid to measure general efficiency
Aid to measure financial solvency
Aid in forecasting and planning
Facilitate decision making
Aid in corrective action
Aid in intra-firm comparison
Act as a good communication
Evaluation of efficiency
Effective tool
SIGNIFICANCE OF RATIO ANALYSIS
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Managerial uses of ratio analysis
Helps in decision-making:
Financial statements are prepared primarily for decision-making. But the
information provided in financial statement is not and in itself and no meaningful
conclusion can be drawn from these statements alone. Ratio analysis helps in making
decision from the information provided in these financial statements.
Helps in financial forecasting and planning:
Ratio analysis is of much help in financial forecasting and planning. Planning is
looking ahead and the ratios calculated for a number of years work as a guide for the
future. Meaningful conclusions can be drawn for future from these ratios. Thus, ratio
analysis helps in forecasting and planning.
Helps in communicating:
The financial strength and weakness of the firm are communicated in a more easy
and understandable manner by the use of ratios. The information contained in the
financial statements is covered in a meaningful manner to the one whom it is meant.
Thus, ratios help in communication and enhance the value of the financial statements.
Helps in Co-Ordination:
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Ratios even help in co-ordination, which is of utmost importance in effective
business management. Better communication of efficiency and weakness of an
enterprise results in better co-ordination in enterprise.
Helps in control:
Ratio analysis even helps in making effective control of the business. Standard
ratio can be based upon performed financial statements and variances and deviations, if
any, can be found by comparing the actual with the standards so as to take a corrective
action at the right time. The weakness or otherwise, if any, come to the knowledge ofthe management which helps in effective control of the business.
A) Other Uses:
There are so many other uses of ratio analysis. It is an essential part of the
budgetary control and standard costing. Ratios are of immense importance in the
analysis and interpretation of financial statements as they bring the strength or weakness
of a firm.
B) Utility to share holders/Investors:
An investor in the company will like to assess the financial position of the concern
where he is going to invest. His first interest will be the security of his investment and
then a return in the form of dividend or interest. For the first purpose he will try to
assess the value of fixed assets and the loan rose against them. The investor will feel
satisfied only if the concern has sufficient amount of assets. Long-term solvency ratios,
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on the other hand, will be useful to determine profitability position. Ratio analysis will
be useful to the investor in making up his mind whether present financial position of the
concern warrants further investment or not.
C) Utility to creditors:
The creditors or suppliers extend short-term credit to concern. They are interested
to know whether financial position of the concern warrants their payments at a specified
time or not. The concern pays short-term creditors out of its current assets. If the
current assets are quite sufficient to meet current liabilities then the creditors will not
hesitate in extending credit facilities. Current and acid test ratios will give an idea about
the current financial position of the concerns.
D) Utility of Employees:
The employees are also interested in the financial position of the concern especially
profitability. Their wage increases and amount of fringe benefits are related to volume
of profits earned by the concern. The employees make use of information available in
financial statements. Various profitability ratios relating to gross profit, operating profit,
net profit, etc. enable employees to put forward their viewpoint for the increase ofwages of other benefits.
E) Utility to Government:
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Government is interested to know the overall strength of the industry. Various
financial statements published by industrial units are used to calculate ratios for
determining short-term, long-term and overall financial position of the concerns.
Profitability indexes can also be prepared with the help of ratios. Government may base
its future policies on the basis of industrial information available from various units. The
ratios may be used as indicators of overall financial strength of the public as well as
private sectors. In the absence of the reliable economic information, governmental plans
and policies may not prove successful.
F) Tax Audit Requirements:
The Finance Act, 1984, interested section 44 AB in the Income Tax Act. Under this
section every assessed engaged in any business having turnover or gross receipts
exceeding Rs.40 lacks is required to get the accounts audited by a chartered accountant
and submits the tax audit report before the due date for filing the return of income under
section 139(1). Incase of a professional, a similar report is required if the gross receipts
Exceed Rs.10 lacks. Clause 32 of the Income Tax Act requires that the following
accounting ratios should be given:
Gross Profit/Turnover
Net Profit/Turnover
Stock-in-trade/Turnover
Material Consumed/Finished Goods Produced
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ADVANTAGES OF RATIO ANALYSIS
Simplifies financial statements
Facilitates inter-firm comparison
Makes inter-firm comparison
Helps in planning and forecasting
Helps in decision making
It may also be used as a measurement of efficiency.
LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial management.
Though ratios are simple to calculate and easy to understand, they suffer from some
serious limitations:
Limited Use of a Single Ratio:
A single ratio, usually, does not convey much of a sense. To make a better
interpretation a number of ratios have to be calculated which is likely to confuse theanalyst than help him in making any meaningful conclusion.
No Fixed Standards:
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No Fixed Standards can be laid down for ideal ratios. There are no well-accepted
standards or rules of thumb for all ratios, which can be accepted as norms. It renders
interpretation of the ratios difficult.
Inherent Limitation of Accounting:
Like financial statements, ratios also suffer from the inherent weakness of
accounting records such as their historical nature. Ratios of the past are not necessarily
true indicators of the future.
Change of Accounting Procedures:
Change in accounting procedure by a firm often makes ratio analysis misleading,
example, a change in the valuation of methods of inventories, from FIFO to LIFO
increases the cost of sales and reduces considerably the value of closing stocks which
makes stock turnover ratio to be lucrative and an unfavorable gross ratio.
CLASSIFICATION OF RATIOS
The use of ratio analysis is not confined to financial manager only. There are
different parties interested in the ratio analysis for knowing the financial position of a
firm for different purposes. Various accounting ratios can be classified as follows:
Traditional Classification
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Functional Classification
Significance ratios
1. Traditional Classification
It includes the following.
Balance sheet (or) position statement ratio:
They deal with the relationship between two balance sheet items, e.g. the ratio of
current assets to current liabilities etc., both the items must, however, pertain to the
same balance sheet.
Profit & loss account (or) revenue statement ratios:
These ratios deal with the relationship between two profit & loss account items,
e.g. the ratio of gross profit to sales etc.,
Composite (or) inter statement ratios:
These ratios exhibit the relation between a profit & loss account or income
statement item and a balance sheet items, e.g. stock turnover ratio, or the ratio of total
assets to sales.
2. Functional Classification:
These include liquidity ratios, long term solvency and leverage ratios, activity
ratios and profitability ratios.
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3. Significance ratios:
Some ratios are important than others and the firm may classify them as primary
and secondary ratios. The primary ratio is one, which is of the prime importance to a
concern. The other ratios that support the primary ratio are called secondary ratios.
IN THE VIEW OF FUNCTIONAL CLASSIFICATION
THE RATIOS ARE:
1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio
1. LIQUIDITY RATIOS:
Liquidity refers to the ability of a concern to meet its current obligations as & when
there becomes due. The short term obligations of a firm can be met only when there are
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sufficient liquid assets. The short term obligations are met by realizing amounts from
current, floating (or) circulating assets The current assets should either be calculated
liquid (or) near liquidity. They should be convertible into cash for paying obligations of
short term nature. The sufficiency (or) insufficiency of current assets should be assessed
by comparing them with short-term current liabilities. If current assets can pay off
current liabilities, then liquidity position will be satisfactory.
To measure the liquidity of a firm the following ratios can be calculated
Current ratio
Quick (or) Acid-test (or) Liquid ratio
Absolute liquid ratio (or) Cash position ratio
2. LEVERAGE RATIOS:
The leverage or solvency ratio refers to the ability of a concern to meet its long
term obligations. Accordingly, long term solvency ratios indicate firms ability to meetthe fixed interest and costs and repayment schedules associated with its long term
borrowings.
The following ratio serves the purpose of determining the solvency of the concern.
(a) Proprietary ratio.
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Components of proprietary ratio:
SHARE HOLDERS FUND TOTAL ASSETS
Share Capital Fixed Assets
Reserves & Surplus Current Assets
Cash in hand & at bank
Bills receivable
Inventories
Marketable securities
Short-term investments
Sundry debtors
Prepaid Expenses
3. ACTIVITY RATIO:
Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly effect the volume of sales. Activity
ratios measure the efficiency (or) effectiveness with which a firm manages its resources
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(or) assets. These ratios are also called Turn over ratios because they indicate the
speed with which assets are converted or turned over into sales.
To measure active ratio of the firm following ratios can bee calculated
(a) Working capital turnover ratio.
(b) Fixed assets turnover ratio.
(c) Capital turnover ratio.
(d) Current asset to fixed asset ratio.
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Component of Current Assets to Fixed Assets Ratio:
CURRENT ASSETS FIXED ASSETS
Cash in hand Machinery
Cash at bank Buildings
Bills receivable Plant
Inventories Vehicles
Work-in-progress
Marketable securities
Short-term investments
Sundry debtors
Prepaid expenses
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4. PROFITABILITY RATIOS:
The primary objectives of business undertaking are to earn profits. Because profit is the
engine, that drives the business enterprise.
(a) NET PROFIT RATIO.
(b) RETURN ON TOTAL ASSETS.
(c) RESERVES AND SURPLUS TO CAPITAL RATIO.
(d) EARNINGS PER SHARE.
(e) OPERATING PROFIT RATIO.
(f) PRICE - EARNING RATIO.
(g) RETURN ON INVESTMENTS
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Traditional
classification or
Statement Ratios
FunctionalClassification orClassificationAccording to Tests
Classificationaccording toImportance orSignificance
1. Balance sheet Ratios
or Position Statement
Ratios
2. Profit and Loss
Account Ratios or
Income Statement
Ratios
1. Liquidity Ratios
2. Leverage Ratios
3. Activity Ratios
4. Profitability
Ratios
1. Primary Ratios
2. Secondary
Ratios
CLASSIFICATION OF RATIO
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Traditional Classification or Statement Ratios
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Traditional classification or
Statementratios
Balance SheetRatios or PositionStatement Ratios
Profit and LossAccount Ratios orIncome StatementRatios
CompositeRatios orMixed Ratios
1. Current Ratio
2. Liquid Ratio
3. Absolute Liquid
Ratio
4. Debt-Equity
Ratio
5. Proprietary
Ratio
6. Capital Gearing
Ratio
7. Asset-
Proprietorship
Ratio
8. Inventory to
Working Capital
Ratio
1. Gross Profit Ratio
2. Operating Ratio
3. Operating Profit
Ratio
4. Net Profit Ratio
5. Expense Ratio
6. Interest Coverage
Ratio
1. Stock
Turnover Ratio
2. Debtors
Turnover Ratio
3. Payables
Turnover Ratio
4. Fixed Assets
Turnover Ratio
5. Return on
Equity
6. Return on
Shareholders
Fund
7. Return on
Capital
Employed
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Company Profile
Videocon industries foundation was laid 31 years back in 1979 at the strong hands
of Shri Nandlal Madhavlal Dhoot. Under his guidance and leadership the company
became Indian Multinational. After being in the market for more than three decades the
business is still carried in the strong hands of Shri Venugopal Dhoot (Chairman), &
K.R. Kim (CEO). The Promoters of the company have a good reputation in the business.
The promoter has track record of completing their project in a time with good quality.
Videocon today has become a brand to recon with. Videocon has been in the
business for three decades and in this tenure they have launched many products like
Consumer Electronics, Home appliances, Components, Mobile Phones, Wireless,
Internet, Petroleum, Satellite television and Power. Videocon has its head quarts in
Aurangabad, Maharashtra, India.
Acquisition of Thomson SA
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Videocon through its Wholly Owned Offshore Subsidiary acquired the Colour
Picture Tube (CPT) businesses from Thomson S.A having manufacturing facilities in
Poland, Italy, Mexico and China along with support research and development facilities.
Videocon Industries Ltd.
Type Public (BSE: 5511389)
Industry Conglomerate
Founded 1979
Founder Nandlal Madhavlal Dhoot
Headquarters Aurangabad, Maharashtra, India.
Key people Venugopal Dhoot
(Chairman)
K. R. Kim
(CEO)
Products Consumer Electronics
Home appliances
Components
Office Automation
Mobile Phones
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Wireless
Internet
Petroleum
Satellite television
Power
Revenue US $ 2 billion (2010)
Net income US $ 276 million (2010)
Employees 5,000 (2010)
Website Videocon.com
Videocon is an industrial conglomerate with interests all over the world and
based in India. The group has 17 manufacturing sites in India and plants in China,
Poland, Italy and Mexico. It is also the third largest Picture tube manufacturer in the
world.
Corporate profile
The Videocon group has an annual turnover of US $ 2 billion, making it one of the
largest Consumer electronic and home appliance companies in India. Since 1998, it has
expanded its operations globally, especially in the Middle East.
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Consumer electronics
In India the group sells consumer products like Colour Televisions, Washing
Machines, Air Conditioners, Refrigerators, Microwave ovens and many other home
appliances, selling them through a Multi-Brand strategy with the largest sales and
service network in India. Videocon Group brands include Akai, Electrolux, Hyundai,
Kelvinator, Kenwood, Next, Kenstar, Planet M, Sansui, Toshiba, Philips (TV Products)
etc.
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CHAPTER: 3
RESEARCH METHODOLOGY
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1) Introduction
2) Types of research methodology
3) Objective of study
4) Scope and limitations of study
1) Introduction
Research methodology is a way to systematically solve the research problem. It may
be understood as a science of studying now research is done systematically. In that
various steps, those are generally adopted by a researcher in studying his problem along
with the logic behind them. It is important for research to know not only the research
method but also know methodology. The procedures by which researcher go about
their work of describing, explaining and predicting phenomenon are called
methodology. Methods comprise the procedures used for generating, collecting and
evaluating data. All this means that it is necessary for the researcher to design hismethodology for his problem as the same may differ from problem to problem. Data
collection is important step in any project and success of any project will be largely
depend upon now much accurate you will be able to collect and how much time, money
and effort will be required to collect that necessary data, this is also important step. Data
collection plays an important role in research work. Without proper data available for
analysis you cannot do the research work accurately.
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2) Types of data collection
There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1) Primary data
The primary data is that data which is collected fresh or first hand, and for first
time which is original in nature. Primary data can collect through personal interview,
questionnaire etc. to support the secondary data.
2) Secondary data collection method
Secondary data easily get those secondary data from records, journals, annual
reports of the company etc. It will save the time, money and efforts to collect the data.
Secondary data also made available through trade magazines, balance sheets, books etc.
But primary data collection had limitations such as matter confidential information thusproject is based on secondary information collected through two years annual report of
the company, supported by various books and internet sides. The data collection was
aimed at study of working capital management of the company.
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TYPES OF RESEARCH METHODOLOGY
1. Descriptive V/S Analytical
Descriptive research includes survey & facts finding inquiries of different kinds.The major purpose of descriptive research is description of the state of affairs, as it
exists at present. In analytical research, the research has to use facts or information
already available, and analyze these to make a critical evolution of the material.
2. Applied V/S Fundamental
Applied research aims to finding a solution for an immediate problem facing
society or an industrial or business organization where as a fundamental research is
mainly concerned with generalization & with the formation of a theory.
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Applied v/s
fundamental
Descriptive v/s
analytical
Quantitative
v/s qualitative
Some other
types of
research
Conceptual
v/s empirical
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3. Quantitative V/S Qualitative
Quantitative research is based on the measurements of quantity or amount. It is
applicable to the phenomena that can be expresses in the term of quantity. Qualitative
research is especially important in the behavioral science where is to discover the
underline motives of human behavior.
4. Conceptual V/S Empirical:
Conceptual research is related to some abstract idea (s). It is generally used
philosophers & thinkers to develop new concepts or to interpret existing ones. Empirical
research relies on experience or observation alone often without regard for system &
theory. It is a data base research, coming up with conclusions, which are capable of
being verified, by observation or experiments.
5. Some Other Types Of Research
There may be other types of research such as one time research or the longitudinal
research from the view point of time. Laboratory research or stimulation research,
historical research & exploratory research are some of the other type of research.
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CHAPTER: 4
RATIO ANALYSIS
FINANCIAL ANALYSIS OF VIDEOCON
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Role of ratio analysis
Ratio analysis helps to appraise the firms in the term of their profitability and
Efficiency of performance, either individually or in relation to other firms in same
industry. Ratio analysis is one of the best possible techniques available to management
to impart the basic functions like planning and control. As future is closely related to the
immediately past, ratio calculated on the basis historical financial data may be of goodassistance to predict the future.
Ex:
On the basis of inventory turnover ratio or debtors turnover ratio in the past, the
level of inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate the point out the various arias which
need the management attention in order to improve the situation.
Ex:
Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity position. As
the ratio analysis is concerned with all the aspect of the firms financial analysis
liquidity, solvency, activity, profitability and overall performance, it enables the
interested persons to know the financial and operational characteristics of an
organization and take suitable decisions.
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Vertical Analysis
Vertical analysis is the procedure of preparing and presenting common size
statements. Common size statement is one that shows the items appearing on it in
percentage form as well as in rupees form. Each item is stated as a percentage of some
total of which that item is a part. Key financial changes and trends can be highlighted by
the use of common size statements.
Videocon Industry has a separate financial department where in all financial
decision is taken by the experts, Videocon believes in maximum profit at least cost but
the finances in such a way that the goal of business say, profit maximization is realized.
Financial ratios
In general, there are 4 kinds of financial ratios that a financial analyst will use most
frequently, these are:
Performance ratios
Working capital ratios
Liquidity ratios
Solvency ratios
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These 4 financial ratios allow a good financial analyst to quickly and efficiently
address the following questions or concerns:
Performance ratios
What return is the company making on its capital investment?
What are its profit margins?
Working capital ratios
How quickly are debts paid?
How many times is inventory turned?
Liquidity ratios
Can the company continue to pay its liabilities and debts?
Solvency ratios (Longer term)
What is the level of debt in relation to other assets and to equity?
Is the level of interest payable out of profits?
Liquidity ratios
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Can the company continue to pay its liabilities and debts?
Solvency ratios (Longer term)
What is the level of debt in relation to other assets and to equity?
Is the level of interest payable out of profits?
The Balance Sheet and the Statement of Income are essential, but they are only the
starting point for successful financial management.
Apply Ratio Analysis to Financial Statements to analyze the success, failure, and
progress of your business.
Ratio Analysis enables the business owner/manager to spot trends in a business and
to compare its performance and condition with the average performance of similar
businesses in the same industry.
To do this compare your ratios with the average of businesses similar to yours and
compare your own ratios for several successive years, watching especially for any
unfavourable trends that may be starting.
Ratio analysis may provide the all-important early warning indications that allow
you to solve your business problems before your business is destroyed by them.
Balance Sheet Ratio Analysis
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Important Balance Sheet Ratios measure liquidity and solvency (a business's ability
to pay its bills as they come due) and leverage (the extent to which the business is
dependent on creditors' funding). They include the following ratios:
Liquidity Ratio
Liquidity ratios measure the ability of the firm to meet its current obligations. A
firm should ensure that it does not suffer from lack of liquidity, and also that it does not
have excess liquidity. The failure of a company to meet its obligations due to lack of
lack of sufficient liquidity, will result in poor creditworthiness, loss of creditors
confidence, or even in legal tangles resulting in the closure of the company. A very high
degree of liquidity is also bad; idle assets earn nothing. Therefore, it is necessary to
strike a proper balance between high liquidity and lack of liquidity.
1) CURRENT RATIO
2) QUICK RATIO
1.Current Ratio
Meaning & Objective:
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Current ratio is also known as Working Capital Ratio as it is a measure of
working capital available at a particular time. Current Ratio establishes relationship
between current assets and current liabilities.
Current Ratio of the firm measures its short-term solvency, which indicates the
rupees of current assets available for each rupee of current liability.
The current ratio represents a margin of safety for creditors. It is generally believed
that 2:1 ratio shows a comfortable working capital position. The minimum acceptable
current ratio is obviously 1:1, but that relationship is usually playing it too close for
comfort.
If you feel your business's current ratio is too low, you may be able to raise it by:
Paying some debts.
Increasing your current assets from loans or other borrowings with a maturity of
more than one year.
Converting non-current assets into current assets.
Increasing your current assets from new equity contributions.
Putting profits back into the business.
CURRENT RATIO
Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio also known as Working capital ratio is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial position
(or) liquidity of a firm.
Current assets
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Current ratio =
Current liabilities
Components of current ratio
CURRENT ASSETS CURRENT LIABILITIES
Cash in hand Outstanding or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses
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PARTICULARS FY 07 FY 08 FY 09
CURRENT
ASSET 5,142.49 7,641.68 8,820.90
CURRENT
LIABILITIES 1,616.44 1,444.55 1,521.48
CURRENT
RATIO
3.181 5.29 5.797
Interpretation
As a rule, the current ratio with 2:1 (or) more is considered as satisfactory position
of the firm.
Current ratio for year 2008 was very close to the standard ratio i.e. 2.22.We can
observe sudden increase in current ratio in 2007 and an increase in current ratio 2008
onwards.
QUICK RATIO
Quick ratio is a test of liquidity than the current ratio. The term liquidity refers to the
ability of a firm to pay its short-term obligations as & when they become due. Quick
ratio may be defined as the relationship between quick or liquid assets and current
liabilities. An asset is said to be liquid if it is converted into cash with in a short period
without loss of value.
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Quick or liquid assets
Quick ratio =
Current liabilities
Components of quick or liquid ratio:
QUICK ASSETS CURRENT LIABILITIES
Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Sundry debtors Short-term advances
Marketable securities Sundry creditors
Temporary investments Dividend payable
Income tax payable
Meaning & Objective
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The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures
of liquidity.
"If all sales revenues should disappear, could my business meet its current obligations
with the readily convertible quick' funds on hand?"
From the current assets categories, inventory being least liquid and it normally requires
some time for realizing in to cash therefore it is excluded while calculating quick ratio.
An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets"
are in accounts receivable, and the pattern of accounts receivable collection lags behind
the schedule for paying current liabilities.
QUICK RATIO
PARTICULARS FY 07 FY 08 FY 09
QUICK ASSET 5,142.49 7,641.68 8,820.90
QUICKLIABILITIES
1,616.44 1,444.55 1,521.48
QUICK RATIO 3.181 5.29 5.797
Interpretation
Quick assets are those assets which can be converted into cash within a short
period of time, say to six months. So, here the sundry debtors which are with the long
period does not include in the quick assets. We can observe that for year2009, the quick
ratio was highest. Where as in year 2007 ratio was close to 1:1 ratio. Upward increase in
the ratio is observed from 2007.
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Efficiency ratio
The ratios compounded under this group indicate the efficiency of the organization
to use the various kinds of assets by converting them the form of sale. This ratio also
called as activity ratio or assets management ratio. As the assets basically categorized as
fixed assets and current assets and the current assets further classified according to
individual components of current assets viz. investment and receivables or debtors or as
net current assets, the important of efficiency ratio as follow:
1) Working capital turnover ratio
2) Inventory turnover ratio
3) Current assets turnover ratio
Working Capital Turnover Ratio:
Meaning & Objective:
The Working Capital Turnover ratio measures the company's Net Sales from the
Working Capital generated. A company uses working capital (current assets - current
liabilities) to fund operations and purchase inventory. These operations and inventory
are then converted into sales revenue for the company. The working capital turnover
ratio is used to analyze the relationship between the money used to fund operations and
the sales generated from these operations.
Formula:
Working Capital = total current Assets total current Liabilities
Components of Working Capital:
CURRENT ASSETS CURRENT LIABILITIES
Cash in hand Outstanding or accrued expenses
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Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses
PARTICULAR FY 07 FY 08 FY 09
CURRENT
ASSET 5,142.49 7,641.68 8,820.90
(-)CURRENTLIABILITIES 1,616.44 1,444.55 1,521.48
NET W.C.
3,526.05 6,197.13 7,299.42
Working capital turnover ratio= Net Sales/Working Capital
PARTICULAR FY 07 FY 08 FY 09
NET SALES 6,613.19 7,361.40 7,289.07
W.C. 3,526.05 6,197.13 7,299.42
W.C. TOR 1.875 1.187 0.998
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Interpretation
Income from services is greatly increased due to the extra invoice for Operations
& Maintenance fee and the working capital is also increased greater due to the increase
in from services because the huge increase in current assets. The income from services
is raised and the current assets are also raised together resulted in the decrease of the
ratio of 2008 compared with 2007.
Inventory Turnover Ratio
Meaning & Objective
Inventory turnover ratio reflects the efficiency of inventory management. It
indicates the number of times inventory is replaced during the year. Higher the ratio,
higher is efficient the management of inventory and vice versa in the organization.
Formula
Inventory Turnover Ratio= Cost of Goods sold/ Average inventory
Particulars 2007 2008 2009
Inventory turnover
ratio
8.40 5.99 7.51
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Current Assets Turnover:
Meaning & Objective
Current assets turnover ratio indicates productivity ratio, which measures the
output, produced from the given input employed. Current Assets are inputs, which can
be converted in to cash quickly. Higher the current assets turnover ratio, higher the
liquidity of the firm.
Formula
Current assets turnover ratio= Sales /Current Assets
PARTICULARS FY07 FY08 FY09
SALES 6,613.19 7,361.40 7,289.07
CUREENT ASSETS 5,142.49 7,641.68 8,820.90
C.A. TOR 1.285 0.963 0.826
Profitability ratio:
NET PROFIT RATIO:
Net profit after tax
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Net profit ratio= X 100
Net sales
PARTICULARS FY07 FY08 FY09
Net profit after tax 4,652.98 4,637.15 4,706.12
Net sales 6,613.19 7,361.40 7,289.07
Ratio 0.703 0.629 0.645
Interpretation:
The net profit ratio is the overall measure of the firms ability to turn each rupee of
income from services in net profit. If the net margin is inadequate the firm will fail to
achieve return on shareholders funds. High net profit ratio will help the firm service in
the fall of income from services, rise in cost of production or declining demand.
GROSS PROFIT RATIO:
Gross profit
Gross profit ratio = X 100
Net sales
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PARTICULARS FY07 FY08 FY09
Gross profit 8,083.16 8,947.78 9,004.95
Net sales 6,613.19 7,361.40 7,289.07
Ratio 1.222 1.215 1.235
RETURN ON TOTAL ASSETS
Net profit
Return on assets =
Total assets
PARTICULARS FY07 FY08 FY09
Net profit 4,652.98 4,637.15 4,706.12
Total assets 10,884.50 14,819.39 16,384.59
Return on assets 0.427 0.312 0.287
Interpretation:
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This is the ratio between net profit and total assets. The ratio indicates the return on
total assets in the form of profits.
The net profit is decreased in the current year because of the decrement in the
income from services due to the increase in Operations & Maintenance fee.
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CHAPTER 5
CONCLUSION AND SUGGESTIONS
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BIBLIOGRAPHY
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Books
Financial Management - By Prassana Chandra
Financial Management By Ravi Kishor
Websites
www.moneycontrol.com
www.utvmoney.com
www.videocon.com
www.google.com
Magazines
Money
Business Today
Financial Planning Journal
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