Financial ratio analysis is a process of determining and interpreting relationships between the

items to financial statements to provide a meaningful understanding of the performance and

financial position of an enterprise. Ratio analysis is an accounting tool to present accounting

variables in a simple, concise, intelligible and understandable form. Ratio analysis is a study of

relationship among various financial factors in a business. Thus, it seeks to measure the value of

the entity and purpose which it pursues, financial analysis develops the steps of collecting,

shaping and treatment of range of management information which may clarify the wanted

diagnosis and prognosis.

Many researchers have studied financial ratios as a part of working capital management;

however , very few of them have discussed the working capital policies in specific. Some earlier

work by Gupta & Heffner (1972) examined the differences in financial ratios averages between

industries. The conclusion of both the studies was that differences do exist in mean profitability,

activity, leverages and liquidity ratios amongst industry groups. Pinches et al. (1973) used factor

analysis to develop seven classifications of ratios, and found that classifications were stable over

the 1951-1969 time periods.

Chu et al. (1991) analysed the hospital sectors to observe the differences of financial ratios

groups between hospital sectors and industrial firms sectors. Their study concluded that financial

ratios groups were significantly different from those of industrial firms’ ratios as well these ratios

were relatively stable over the five years period. A significance relationships for about half of

industries studied indicated that results might vary from industry to industry.

Sathamoorthi (2002) focused on good corporate governance and in turn effective

management of business assets. He observed that more emphasis is given to investment in

fixed investments in fixed assets both in management area & research. However, effective

management working capital has been receiving little attention and yielding more significant

results. He analysed selected co-operatives in Botswana for a period of 1993-1997 and concluded

that an aggressive approach has been followed by these firms during all four years of study.

Doron Nissim & Stephen H Penman (1999): In his research article on financial performance he

has pointed that this paper outlines a financial statement analysis for use in equity valuation.

Standard profitability analysis is incorporated, and extended, and is complemented with an

analysis of growth. The perspective is one of the forecasting payoff to equities. So financial

statement analysis is presented first as a matter of Performa analysis of the future, with

forecasted ratios viewed as building blocks of forecasts of payoffs.

John J. Wild, K.R. Subramanyam & Robert F. Halsey (2006): In his research article on

financial 54 performance he has pointed that he have said that the financial statement analysis is

the application of analytical tools and techniques to general purpose financial statements and

related data to derive estimates and inferences useful in business analytics. Financial Statements

analysis reduces reliance on hunches, guesses and intuition for business decisions. It decreases

the uncertainty of business analysis.

I.M. Pandey (2007): In his research article on financial performance he has pointed that the

financial statements contain information about the financial consequences and sources and uses

of financial resources, one should be able to say whether the financial condition of a firm is good

or bad; whether it is improving or deteriorating. One can relate the financial variables given in

financial statements in a meaningful way which will suggest the actions which one may have to

initiate to improve the firms’ financial condition.

Rachchh Minaxi A (2011): In his research article on financial performance he has pointed and

suggested that the financial statement analysis involves analyzing the financial statements to

extract information that can facilitates decision making. It is the process of evaluating the

relationship between components parts of the financial statements to obtain a better

understanding of an entity’s positions and performance.

Priyaaks (Mar 2012): In his research article on financial performance he has pointed that

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

elements and making comparisons with relevant information. It is a tool in decision making

processes related to stocks, bonds and other financial instruments.

From the above literature review, it is evident that, the financial performance depicts the

efficiency of organization. Along with that financial statements are very useful for decision

making in the company by Board Of Directors and management. It is also helps to know the

prosperity of the company with the profitability.

2.2 ABOUT THE TOPIC

FINANCIAL STATEMENT ANALYSIS

The process of reviewing and evaluating a company’s financial statements(Such as balance sheet

and trading and profit and loss statement), thereby gaining an understanding of the financial

health of the company and enabling more effective decision making. Financial statement record

financial data ; however, this information must be evaluated through financial statement analysis

to become more useful to investors, shareholders, managers and other interested parties.

Financial statement are very useful as they serve varied affected group having an economic

interest in the activities in the business entity. The purpose served by financial statement are as

follows:

The basic purpose of financial statement is communicated to their interested users,

quantitative and objective information are useful in making economic decision.

Secondly, financial statements are intended to meet the specialized needs of conscious

creditors and investors.

Financial statements are prepared to provide reliable information about the earning of

business enterprise and it ability to operate of profit in future. The users who are

interested in this information are generally the investors, creditors, suppliers and

employees.

Financial statements are intended to provide the base for tax assessments.

Financial statement are prepare in a way a provide information that is useful in predicting

the future earning power of the enterprise.

Financial statements are prepared to provide reliable information about the changes in

economic resources.

Financial statements are prepared to provide information about the changes in net

resources of the organization that result from profit directed activities.

Thus, financial statement satisfy the information requirements of a wide cross-section of the

society representing corporate managers, executives, bankers, creditors, shareholders, investors,

laborers’, consumers and government institution.