10 - Chapter 5 PDF

Study of Financial Performance Evaluation of Indian Companies
Chapter 5
Financial Analysis of Companies

- Balance sheet
- Profit & Loss A/C
- Cash Flow Statement
- Key Financial Ratio Analysis
- Du Pont Chart Analysis
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FINANCIAL STATEMENTS
Financial statements are summaries o f the operating, financing,
and investment activities o f a business. Financial statements
should provide information useful to both investors and
creditors in making credit, investment, and other business
decisions80. And this usefulness means that investors and
creditors can use these statements to predict, compare, and
evaluate the amount, timing, and uncertainty of potential cash
flows. In other words, financial statements provide the
information needed to assess a company's future earnings and
therefore the cash flows expected to result from those earnings.
ACCOUNTING PRINCIPLES AND ASSUMPTIONS

The accounting data in financial statements are prepared by the
firm 's management according to a set o f standards, referred to
as generally accepted accounting principles (GAAP). The
financial statements o f a company whose stock is publicly
traded must, by law, be audited at least annually by independent
public accountants (i.e., accountants who are not employees of
the firm). In such an audit, the accountants examine the
financial statements and the data from which these statements
are prepared and attest—through the published auditor's
opinion—that these statements have been prepared according to
GAAP. The auditor's opinion focuses on whether the
statements conform to GAAP and that there is adequate
disclosure of any material change in accounting principles.
The financial statements are created using several assumptions

that affect how we use and interpret the financial data:
Transactions are recorded at historical cost. Therefore, the

values shown in the statements are not market or replacement
values, but rather reflect the original cost (adjusted for
depreciation, in the case of depreciable assets).
80. Agarvval, J.D., and Aman Agarwal, Literature in Finance: Specialised Finance (VOL.
IV)
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The appropriate unit o f measurement is the dollar. While this

seems logical, the effects of inflation, combined with the
practice o f recording values at historical cost, may cause
problems in using and interpreting these values.
The statements are recorded for predefined periods o f time.

Generally, statements are produced to cover a chosen fiscal year
or quarter, with the income statement and the statement o f cash
flows spanning a period‘s time and the balance sheet and
statement of shareholders' equity as o f the end o f the specified
period. But because the end of the fiscal year is generally
chosen to coincide with the low point o f activity in the firm 's
operating cycle, the annual balance sheet and statement o f
shareholders' equity may not be representative of values for the
year.
Statements are prepared using accrual accounting and the

matching principle. M ost businesses use accrual accounting,
where income and revenues are matched in timing such that
income is recorded in the period in which it is earned and
expenses are reported in the period in which they are incurred to
generate revenues. The result of the use o f accrual accounting is
that reported income does not necessarily coincide with cash
flows. Because the financial analyst is concerned ultimately
with cash flows, he or she often must understand how reported
income relates to a company's cash flows.
It is assumed that the business will continue as a going concern.

The assumption that the business enterprise will continue
indefinitely justifies the appropriateness o f using historical costs
instead o f current market values because these assets are
expected to be used up over time instead o f sold.
Full disclosure requires providing information beyond the

financial statements. The requirement that there be full
disclosure means that, in addition to the accounting numbers for
such accounting items as revenues, expenses, and assets,
narrative and additional numerical disclosures are provided in
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notes accompanying the financial statements. An analysis o f

- financial statements is therefore not complete without this
additional information.
Statements are prepared assuming conservatism. In cases in

which more than one interpretation o f an event is possible,
statements are prepared using the most conservative
interpretation.
The financial statements and the auditors 4 findings are

published in the firm 's annual and quarterly reports sent to
shareholders and the SEBI. Also included in the reports, among
other items, is a discussion by management, providing an
overview of company events. The annual reports are much more
detailed and disclose more financial information than the
quarterly reports.
T here are three basic financial statem ents:

Balance sheet
Income statement
Cash Flow statement
T H E BALANCE SH EE T 81
The balance sheet is a summary o f the assets, liabilities, and
equity o f a business at a particular point in time—usually the
end o f the firm's fiscal year. The balance sheet is also known as
the statement o f financial condition or the statement of financial
position. The values shown for the different accounts on the
balance sheet are not purported to reflect current market values;
rather, they reflect historical costs.
Assets are the resources o f the business enterprise, such as plant

and equipment that are used to generate future benefits. I f a
company owns plant and equipment that will be used to produce
goods for sale in the future, the company can expect these assets
(the plant and equipment) to generate cash inflows in the future.
81. www.moneycontrol.com
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Liabilities are obligations o f the business. They represent

commitments to creditors in the form of future cash outflows.
When a firm borrows, say, by issuing a long-term bond, it
becomes obligated to pay interest and principal on this bond as
promised. Equity, also called shareholders4 equity or
stockholders6 equity, reflects ownership. The equity of a firm
represents the part of its value that is not owed to creditors and
therefore is left over for the owners. In the most basic
accounting terms, equity is the difference between what the
firms owns— its assets— and what it owes its creditors— its
liabilities.
ASSETS
There are two major categories o f assets: current assets and
noncurrent assets, where noncurrent assets include plant assets,
intangibles, and investments. Assets that do not fit neatly into
these categories may be recorded as either other assets, deferred
charges, or other noncurrent assets.
CURRENT ASSETS
Current assets (also referred to as circulating capital and
working assets) are assets that could reasonably be converted
into cash within one operating cycle or one year, whichever
takes longer. An operating cycle begins when the firm invests
cash in the raw materials used to produce its goods or services
and ends with the collection o f cash for the sale o f those same
goods or services. For example, if Fictitious manufactures and
sells candy products, its operating cycle begins when it
purchases the raw materials for the products (e.g., sugar) and
ends when it receives cash for selling the candy to retailers.
Because the operating cycle o f most businesses is less than one
year, we tend to think of current assets as those assets that can
be converted into cash in one year. Current assets consist o f
cash, marketable securities, accounts receivable, and
inventories. Cash comprises both currency—bills and coins—
and assets that are immediately transformable into cash, such as
deposits in bank accounts. Marketable securities are securities
that can be readily sold when cash is needed. Every company
needs to have a certain amount o f cash to fulfill immediate
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needs, and any cash in excess o f immediate needs is usually

invested temporarily in marketable securities.
Investments in marketable securities are simply viewed as a

short term place to store funds; marketable securities do not
include those investments in other companies4 stock that are
intended to be long term. Some financial reports combine cash
and marketable securities into one account referred to as cash
and cash equivalents or cash and marketable securities.
Accounts receivable are amounts due from customers who have
purchased the firm‘s goods or services but haven't yet paid for
them. To encourage sales, many firms allow their customers to
—buy now and pay later,! perhaps at the end o f the month or
within 30 days o f the sale. Accounts receivable therefore
represents money that the firm expects to collect soon. Because
not all accounts are ultimately collected, the gross amount of
accounts receivable is adjusted by an estimate o f the
uncollectible accounts, the allowance for doubtful accounts,
resulting in a net accounts receivable figure. Inventories
represent the total value o f the fimTs raw materials, work-in-
process, and finished (but as yet unsold) goods. A manufacturer
o f toy trucks would likely have plastic and steel on hand as raw
materials, work-in-process consisting o f truck parts and partly
completed trucks, and finished goods consisting o f trucks
packaged and ready for shipping. There are three basic methods
o f accounting for inventory, including82:
■ FIFO (first in, first out), which assumes that the first items
purchased are the first items sold,
■ LIFO (last in, first out), which assumes that the last items
purchased are the first items sold, and
■ Average cost, which assumes that the cost o f items sold, is the
average o f the cost of all items purchased.
82. Swamy, Narayan, Financial Accounting, pg.267
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asset1s cost is allocated over the life o f the asset; the reported
value is the original cost of the asset, less whatever has been
amortized. The number o f years over which an intangible asset
is amortized depends on the particular asset and its perceived
useful life. For example, a patent is the exclusive right to
produce and sell a particular, uniquely defined good and has a
legal life o f 17 years, though the useful life o f a patent—the
period in which it adds value to the company-may be much less
than 17 years. Therefore the company m ay choose to amortize a
p a te n ts cost over a period less than 17 years. As another
example, a copyright is the exclusive right to publish and sell a
literary, artistic, or musical composition, and is granted for 50
years beyond the author‘s life, though its useful life in terms o f
generating income for the company may be much less than 50
years. More challenging is determining the appropriate
amortization period for goodwill. Goodwill was created when
one company buys another company at a price that exceeds the
acquired company‘s fair market value o f its assets.
A company may have additional noncurrent assets, depending

on their particular circumstances. A company may have a
noncurrent asset referred to as investm ents, which are assets
that are purchased with the intention o f holding them for a long
term, but which do not generate revenue or are not used to
manufacture a product. Examples o f investments include equity
securities of another company and real estate that is held for
speculative purposes. Other noncurrent assets include long
te rm prepaid expenses, arising from prepayment for which a
benefit is received over an extended period of time, and
d eferred tax assets, arising from timing differences between
reported income and tax income, whereby reported income
exceeds taxable income.
Long-term investment in securities of other companies may be

recorded at cost or market value, depending on the type o f
investment; investments held to maturity are recorded at cost,
whereas investments held as trading securities or available for
sale are recorded at market value. W hether the unrealized gains
or losses affect earnings on the income statement depend on
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whether the securities are deemed trading securities or available

for sale.
LIABILITIES
Liabilities, a firm‘s obligations to its creditors, are made up o f
current liabilities, long-term liabilities, and deferred taxes.
Current Liabilities
Current liabilities are obligations that must be paid within one
operating cycle or one year, whichever is longer. Current
liabilities include83:
Accounts payable, which are obligations to pay suppliers. They
arise from goods and services that have been purchased but not
yet paid.
Accrued expenses, which are obligations such as wages and
salaries payable to the employees o f the business, rent, and
insurance.
Current portion of long-term debt or the current portion of
capital leases. Any portion of long-term indebtedness—
obligations extending beyond one year—due within the year.
Short-term loans from a bank or notes payable within a year.
The reliance on short-term liabilities and the type of current

liabilities depends, in part, on the industry in which the firm
operates.
LONG TERM LIABILITIES

Long-term liabilities are obligations that must be paid over a
period beyond one year. They include notes, bonds, capital
lease obligations, and pension obligations. Notes and bonds
both represent loans on which the borrower promises to pay
interest periodically and to repay the principal amount o f the
loan.
A lease obligates the lessee—the one leasing and using the
leased asset—to pay specified rental payments for a period o f
time. W hether the lease obligation is recorded as a liability or is
expensed as lease payments made depends on whether the lease
is a capital lease or an operating lease.
83. Pandey, I.M ., Financial Management, pg.568
182
A company's pension and post-retirement benefit obligations

may give rise to long-term liabilities. The pension benefits are
commitments by the company to pay specific retirement
benefits, whereas post-retirement benefits include any other
retirement benefit besides pensions, such as health care.
Basically, if the fair value o f the pension plan's assets exceeds

the projected benefit obligation (the estimated present value of
projected pension costs), the difference is recorded as a long
term asset. If, on the other hand, the plan's assets are less than
the projected benefit obligation, the difference is recorded as a
long-term liability. In a similar manner, the company may have
an asset or a liability corresponding to post-retirement benefits.
DEFFERED TAXES
Along with long-term liabilities, the analyst m ay encounter
another account, deferred taxes. Deferred taxes are taxes that
will have to be paid to the federal and state governments based
on accounting income, but are not due yet. Deferred taxes arise
when different methods o f accounting are used for financial
statements and for tax purposes. These differences are
temporary and are the result o f different timing o f revenue or
expense recognition for financial statement reporting and tax
purposes. The deferred tax liability arises when the actual tax
liability is less than the tax liability shown for financial
reporting purposes (meaning that the firm will be paying the
difference in the future), whereas the deferred tax asset,
mentioned earlier, arises when the actual tax liability is greater
than the tax liability shown for reporting purposes.
EQUITY
Equity is the owner's interest in the company. For a
corporation, ownership is represented by common stock and
preferred stock. Shareholders' equity is also referred to as the
book value o f equity, since this is the value o f equity according
to the records in the accounting books. The value of the
ownership interest of preferred stock is represented in financial
statements as its par value, which is also the dollar value on
which dividends are figured. For example, if you own a share o f
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preferred stock that has a $100 par value and a 9% dividend

rate, you receive $9 in dividends each year.
Further, your ownership share of the company is $100.

Preferred shareholders4 equity is the product of the number of
preferred shares outstanding and the par value of the stock; it is
shown that way on the balance sheet. The remainder of the
equity belongs to the common shareholders. It consists of three
parts: common stock outstanding (listed at par or at stated
value), additional paid-in capital, and retained earnings. The par
value of common stock is an arbitrary figure; it has no relation
to market value or to dividends paid on common stock. Some
stock has no par value, but may have an arbitrary-value, or
stated value, per share. Nonetheless, the total par value or
stated value of all outstanding common shares is usually
entitled —capital stock! or —common stock.! Then, to inject
reality into the equity part of the balance sheet, an entry called
additional paid-in capital is added; this is the amount received
by the corporation for its common stock in excess of the par or
stated value.
THE INCOME STATEMENT84

An income statement is a summary of the revenues and
expenses of a business over a period of time, usually one
month, three months, or one year. This statement is also
referred to as the profit and loss statement. It shows the results
of the firm‘s operating and financing decisions during that time.
The operating decisions of the company—those that apply to

production and marketing—generate sales or revenues and
incur the cost of goods sold (also referred to as the cost of sales
or the cost of products sold). The difference between sales and
cost of goods sold is gross profit. Operating decisions also
result in administrative and general expenses, such as
advertising fees and office salaries. Deducting these expenses
from gross profit leaves operating profit, which is also referred
to as earnings before interest and taxes (EBIT), operating
income, or operating earnings.
84. Khan and Jain, Financial Management, pg. 345
184
The results of financing decisions are reflected in the remainder

of the income statement. When interest expenses and taxes,
which are both influenced by financing decisions, are subtracted
from EBIT, the result is net income. Net income is, in a sense,
the amount available to owners of the firm. If the firm has
preferred stock, the preferred stock dividends are deducted from
net income to arrive at earnings available to common
shareholders. If the firm does not have preferred stock (as is
the case with Fictitious and most non-fictitious corporations),
net income is equivalent to earnings available for common
shareholders. The board of directors may then distribute all or
part of this as common stock dividends, retaining the remainder
to help finance the firm.
Companies must report comprehensive income prominently

within their financial statements. Comprehensive income is a
net income amount that includes all revenues, expenses, gains,
and losses items and is based on the idea that ail results of the
firm—whether operating or non -operating should be reflected
in the earnings of the company. This is referred to as the all-
inclusive income concept. The all-inclusive income concept
requires that these items be recognized in the financial
statements as part of comprehensive income.
It is important to note that net income does not represent the

actual cash flow from operations and financing. Rather, it is a
summary of operating performance measured over a given time
period, using specific accounting procedures. Depending on
these accounting procedures, net income may or may not
correspond to cash flow.
CASH FLOW STATEMENT

It is a statement, which measures inflows and outflows of cash
on account of any type of business activity. The cash flow
statement also explains reasons for such inflows and outflows
of cash so it is a report on a company's cash flow activities,
particularly its operating, investing and financing activities.
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FINANCIAL ANALYSIS
Financial analysis is a tool of financial management. It consists
of the evaluation of the financial condition and operating
performance of a business firm, an industry, or even the
economy, and the forecasting of its future condition and
performance. It is, in other words, a means for examining risk
and expected return. Data for financial analysis may come from
other areas within the firm, such as marketing and production
departments, from the firm‘s own accounting data, or from
financial information vendors such as Bloomberg Financial
Markets, Moody4s Investors Service, Standard & Poor‘s
Corporation, Fitch Ratings, and Value Line, as well as from
government publications, such as the Federal Reserve Bulletin.
Financial publications such as Business Week, Forbes, Fortune,
and the Wall Street Journal also publish financial data
(concerning individual firms) and economic data (concerning
industries, markets, and economies), much of which is now also
available on the Internet.
Within the firm, financial analysis may be used not only to

evaluate the performance of the firm, but also its divisions or
departments and its product lines. Analyses may be performed
both periodically and as needed, not only to ensure informed
investing and financing decisions, but also as an aid in
implementing personnel policies and rewards systems. Outside
the firm, financial analysis may be used to determine the
creditworthiness of a new customer, to evaluate the ability of a
supplier to hold to the conditions of a long-term contract, and to
evaluate the market performance of competitors.
Firms and investors that do not have the expertise, the time, or
the resources to perform financial analysis on their own may
purchase analyses from companies that specialize in providing
this service. Such companies can provide reports ranging from
detailed written analyses to simple creditworthiness ratings for
businesses. As an example, Dun & Bradstreet, a financial
services firm, evaluates the creditworthiness of many firms,
from small local businesses to major corporations. As another
example, three companies—Moody1s Investors Service,
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Standard & Poor's, and Fitch— evaluate the credit quality of

debt obligations issued by corporations and express these views
in the form o f a rating that is published in the reports available
from these three organizations.
(A) FINANCIAL RATIO ANALYSIS 85

Ratio analysis is such a significant technique for financial
analysis. It indicates relation o f two mathematical expressions
and the relationship between two or more things. Financial
ratio is a ratio o f selected values on an enterprise’s financial
statement. There are many standard ratios used to evaluate the
overall financial condition o f a corporation or other
organization. Financial ratios are used by managers within a
firm, by current and potential stockholders o f a firm, and by a
firm's creditor. Financial analysts use financial ratios to
compare the strengths and weaknesses in various companies.
Essence o f ratio analysis

Financial ratio analysis helps us to understand how profitable a
business is, if it has enough money to pay debts and we can
even tell whether its shareholders could be happy or not.
Financial ratios allow for comparisons:
1. between companies
2. between industries
3. between different time periods for one company
4. between a single company and its industry average
To evaluate the performance o f one firm, its current ratios will
be compared with its past ratios. When financial ratios over a
period o f time are compared, it is called time series or trend
analysis. It gives an indication o f changes and reflects whether
the firm's financial performance has improved or deteriorated
or remained the same over that period o f time. It is not the
simply changes that has to be determined, but more importantly
it must be recognized that why those ratios have changed.
Because those changes might be result o f changes in the
accounting polices without material change in the firm 's
performances.
85. Ratio analysis is the main part o f the study and so read from many places like books,
journals, magazines, websites, projects etc.
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Another method is to compare ratios of one firm with another

firm in the same industry at the same point in time. This
comparison is known as the cross sectional analysis.
It might be more useful to select some competitors which have

similar operations and compare their ratios with the firm ‘s. This
comparison shows the relative financial position and
performance o f the firm. Since it is so easy to find the financial
statements o f similar firms through publications or Medias this
type of analysis can be performed so easily.
To determine the financial condition and performance o f a firm,
its ratios may be compared with average ratios of the industry to
which the firm belongs. This method is known as the industry
analysis that helps to ascertain the financial standing and
capability o f the firm in the industry to which it belongs.
Industry ratios are important standards in view o f the fact that

each industry has its own characteristics, which influence the
financial and operating relationships. But there are certain
practical difficulties for this method. First finding average ratios
for the industries is such a headache and difficult. Second,
industries include companies o f weak and strong so the
averages include them also. Sometimes spread may be so wide
that the average may be little utility. Third, the average may be
meaningless and the comparison not possible if the firms with
in the same industry widely differ in their accounting policies
and practices. However if it can be standardized and extremely
strong and extremely weak firms be eliminated then the
industry ratios will be very useful.
Use of Ratio by stakeholders

As before mentioned there are varieties o f people interested to
know and read these information and analyses, however
different people for different needs. And it is because each of
these groups has different type o f questions that could be
answered by a specific number and ratio.
Therefore we can say there are different ratios for different
groups, these groups with the ratio that suits them is listed
below:
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1. Investors: These are people who already have shares in the

business or they are willing to be part o f it. So they need to
determine whether they should buy shares in the business, hold
on to the shares they already have or sell the shares they already
own. They also want to assess the ability of the business to pay
dividends. As a result the Return on Capital Employed Ratio is
the one for this group.
2. Lenders: This group consists o f people who have given
loans to the company so they want to be sure that their loans
and also the interests will be paid and on the due time. Gearing
Ratios will suit this group.
3. Managers: Managers might need segmental and total
information to see how they fit into the overall picture of the
company which they are ruling. And Profitability Ratios can
show them what they need to know.
4. Employees: The employees are always concerned about the
ability of the business to provide remuneration, retirement
benefits and employment opportunities for them, therefore these
information must be find out from the stability and profitability
o f their employers who are responsible to provide the
employees their need. Return on Capital Employed Ratio is the
measurement that can help them.
5. Suppliers and other trade creditors: Businesses supplying
goods and materials to other businesses will definitely read their
accounts to see that they don't have problems; after all, any
supplier wants to know if his customers are going to pay them
back and they will study the Liquidity Ratio o f the companies.
6. Customers: are interested to know the Profitability Ratio of
the business with which they are going to have a long term
involvement and are dependent on the continuance o f presence
o f that.
7. Governments and their agencies: are concerned with the
allocation of resources and, the activities of businesses. To
regulate the activities o f them, determine taxation policies and
as the basis for national income and similar statistics, they
calculate the Profitability Ratio of businesses.
8. Local community: Financial statements may assist the
public by providing information about the trends and recent
developments in the prosperity o f the business and the range of
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its activities as they affect their area so they are interested in

lots o f ratios.
9. Financial analysts: they need to know various matters, for
example, the accounting concepts employed for inventories,
depreciation, bad debts and so on. Therefore they are interested
in possibly all the ratios.
10. Researchers: researchers' demands cover a very wide range
o f lines o f enquiry ranging from detailed statistical analysis o f
the income statement and balance sheet data extending over
many years to the qualitative analysis o f the wording o f the
statements depending on their nature o f research.
Classification of Ratios
In isolation, a financial ratio is a useless piece o f information. In
context, however, a financial ratio can give a financial analyst
an excellent picture of a company's situation and the trends that
are developing. A ratio gains utility by comparison to other data
and standards.
Financial ratios quantify many aspects o f a business and are an
integral part o f financial statement analysis. Financial ratios are
categorized according to the financial aspect of the business
which the ratio measures. Although these categories are not
fixed in all over the world however there are almost the same,
just with different names:
1. Profitability ratios which use margin analysis and show the
return on sales and capital employed.
2. Rate of Return Ratio (ROR) or Overall Profitability
Ratio: The rate o f return ratios are thought to be the most
important ratios by some accountants and analysts. One reason
why the rate of return ratios is so important is that they are the
ratios that we use to tell if the managing director is doing their
job properly.
3. Liquidity ratios measure the availability o f cash to pay debt,
which give a picture o f a company's short term financial
situation.
4. Solvency or Gearing ratios measures the percentage o f
capital employed that is financed by debt and long term finance.
The higher the gearing, the higher the dependence on borrowing
and long term financing. The lower the gearing ratio, the higher
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the dependence on equity financing. Traditionally, the higher

the level o f gearing, the higher the level of financial risk due to
the increase volatility of profits. It should be noted that the term
—Leverage is used in some texts.
5. T u rn over Ratios or activity group ratios indicate
efficiency o f organization to various kinds of assets by
converting them to the form o f sales.
6. Investors ratios usually interested by investors.
(B) COM M O N SIZE STA TEM EN T ANALYSIS86
Vertical analysis of financial statements is a technique in which

the relationship between items in the same financial statement is
identified by expressing all amounts as a percentage a total
amount. This method compares different items to a single item
in the same accounting period. The financial statements
prepared by using M s technique are known as common size
financial statements.
This analysis is performed on the income statement as well as

the balance sheet.
* Balance Sheet: When applying this method on the balance sheet,
all o f the three major categories accounts are compared to the
total assets. All o f the balance sheet items are presented as a
proportion o f the total assets. These percentages are shown
along with the absolute currency amounts.
• Income Statem ent: And when applying this technique to the
income statement, each o f the expense is compared to the total
sales revenue. The expenses are presented as a proportion o f
total sales revenue along with the absolute amounts. The main
advantage o f using vertical analysis o f financial statements is
that income statements and balance sheets o f companies o f
different sizes can be compared. Comparison o f absolute
amounts o f companies o f different sizes does not provide useful
conclusions about their financial performance and financial
position.
86 Financial analysts is the main part o f the study and so read from many places like books, journals, magazines,
websites, projects etc.
191
Usually the vertical analysis is performed for a single

accounting period to see the relative proportions o f different
account balances. But it is also useful to perform vertical
analysis over a number of periods to identify changes in
accounts over time.
(C) CASH FLOW AND FUND FLOW ANALYSIS 87
Cash flow is essentially the movement of money into and out of

your business; it's the cycle o f cash inflows and cash outflows
that determine your business' solvency.
Cash flow analysis is the study o f the cycle of the business' cash
inflows and outflows, with the purpose of maintaining an
adequate cash flow for the business, and to provide the basis for
cash flow management.
Cash flow analysis involves examining the components o f the

business that affect cash flow, such as accounts receivable,
inventory, accounts payable, and credit terms. By performing a
cash flow analysis on these separate components, one is able to
more easily identify cash flow problems and find ways to
improve your cash flow.
A quick and easy way to perform a cash flow analysis is to

compare the total unpaid purchases to the total sales due at the
end of each month. If the total unpaid purchases are greater than
the total sales due, there is need to spend more cash than what is
received in the next month, indicating a potential cash flow
problem.
A fund flow statement, also called a statement o f changes in

capital and statement of changes in financial position, is a
financial statement that represents how an organization has been
financed, the sources of funds and how they have been used
within a specific period o f time.
87. Financial analysis is the main part o f the study and so read from many places like
books, journals, magazines, websites, projects etc.
192
Author Roy A. Foulke, writing in the book, "The Commercial

Market Paper," defines a fund flow statement as a "statement of
sources and application of funds is a technical device designed
to analyze the changes in the financial condition of a business
enterprise between two dates." Simply put, a fund flow
statement highlights the flow of funds (sources and uses)
between two dates.
A fund flow statement is a financial analysis tool that helps
managers makes decisions. It highlights the changes in the
financial position of a company. Unlike other financial
statements, such as an income statement and balance sheet that
provide only a static view of an organization's financial
operations, a fund flow statement is dynamic and depicts the
flow of funds and how they have been allocated between
various business activities. It provides complete information to
financial managers on the effectiveness of fond allocation and
reveals an organization's fond-generating strengths and
weaknesses. A fond flow statement also throws light on the
financial position of a firm at a given point in time and
highlights the financial consequences of major business
operations, allowing managers to take corrective actions if
required. Funds flow statements allow financial managers to
plan on how to improve the rate of return on assets, manage the
effects of insufficient funds and cash balance and plan how to
pay interest to creditors and dividends to shareholders.
(D) DUPONT ANALYSIS88:
It is believed that measuring assets at gross book value removes

the incentive to avoid investing in new assets. New asset
avoidance can occur as financial accounting depreciation
methods artificially produce lower ROEs in the initial years that
an asset is placed into service. If ROE is unsatisfactory, the
DuPont analysis helps locate the 'part of the business that is
underperforming.
88. Financial analysis is the main part o f the study and so read from many places like
books, journals, magazines, w ebsites, projects etc.
193
This method of performance measurement -was started by the

DuPont Corporation in the 1920s. With this method, assets are
measured at their gross book value rather than at net book value
in order to produce a higher return on equity (ROE). It is also
known as "DuPont identity".
DuPont analysis tells us that ROE is affected by three things:
-Operating efficiency, which is measured by profit margin
-Asset use efficiency, which is measured by total asset turnover
-Financial leverage, which is measured by the equity multiplier
194
5.1 FINANCIAL ANALYSIS OF THE COMPANIES89
1. Financial Analysis of Tata Motors Ltd.
Key Financial Ratio analysis:

l.In the year 2009-10 Debt Equity ratio is increasing and the main
reason is increased in Current Liability. This can be proved with
the use o f almost stable long term debt equity ratio and
decreasing current ratio in the same years.
2. In the year 2009 the sales turnover of the company has gone
down. As from 2008 to 2010 there was a period o f recession for
India, almost all the organization faced the problem regarding
the sales and Tata Motors is also one o f them. Because o f
decreased sales, all turnover ratios like Fixed assets, Inventory,
Debtors are showing the downward trend.
3. For the same reason cited above the profitability' o f the
organization is also not increasing with good rate.
4. The main reason which affects not only this company but overall
all companies of India is the world crisis. As in the period o f
2008-09 the fall down o f Lehman Brothers affected the UK and
US economy, this affected the other country economy also. On
the same time, India adopted the stringent monetary policy
which created liquidity problems in the market. These multiple
problems affected the company in decreased profitability and
increased liability.
5. The above reasons cited have affected different profitability
ratios o f the organization.
6. The interest coverage ratio in the year 2009-10 has decreased a
lot the main reason is decrease in the profitability and increase
in the liability.
Balance sheet analysis:
l.The equity share capital o f the company has drastically gone
down in the year 2009-10 and the main reason is that the
company has paid up the preference capital in these years.
89. The financial analysis o f the companies selected is 100% done on own and no
references are taken for it.
195
2 . The capital reserve is also increased from the year 2009 to 2010,
which is also one o f the reasons in reduction in equity capital.
3. Tata motors has issued Share warrants in the year 2011, that
increases the capital of the company.
4. There are many changes in the capital structure o f the company
as company has issued the convertible debenture in the year
2009 while in the years 2009 and 2010 company has paid up the
term loans and unsecured loans.
5.In case o f the gross block there is lass change, as the sales have
not increased in last 2009 and 2010 so use of assets are bit less.
And so the sundry debtors have also decreased in the year 2009
to 2010 from 635.98 crore to 434.83 crores.
6. While there is a reverse trend in terms o f sundry creditors as it
has gone up from 3243.42 crore to 4046.25 crore because of the
cash crisis in the organization. The cash crisis of the
organization can be seen in the cash flow analysis.
Income statement analysis:

1.As already discussed above the sales turnover o f the organization
is not increasing with good rate and there is a cash crisis in the
organization as the cash from operating activities have
drastically decreased.
2.Tata motors has sold many o f its investments and that created
cash flow to the organization.
3.In case o f the manufacturing and operating expenses there is no
big change and the main reason is the not so increasing sales,
leads to no big increase in the production.
4. Debenture interest of the company is going up and down as
company has converted the debentures as well as the debentures
are paid back also.
5. Depreciation is in increasing trend for the organization as the
assets got purchased and so in the initial years the depreciation
is high.
6. In the year 2010 the dividend has decreased by 50% that from
160 to 80, which shows cash problems with the organization in
the year 2009-10.
196
Cash flow analysis:

1. Net cash from operating activities in the year 2010 has gone
down one fifth which is very much alarming.
2. There are many changes in the working capital of the company
from last three years, as in case o f inventory, the investment is
high and in case o f trade payables, payments are more.
3.In case of the net cash used in financing activities, it has gone
down in last three years because o f cash crisis and less cash
flow from operating activities.
4. As discussed above the company has paid debentures and long
term liabilities in last three years, the cash flow are getting
down.
5. Compare to the profit earned the interest paid is more and so it
also creates the problem for the cash flow o f the organization.
Du Pont Analysis:
1. After analysing the key ratios, if in brief the important ratios to
be analysed the Du Pont Analysis is very useful. The Du Pont
chart covers the important ratios like PBDIT to Sales ratio,
Sales to Net Asset ratio, PBDIT to Net Asset ratio. PAT to
PBDIT ratio, Net Asset to Net Worth ratio and all this lead to
the final Return on Equity (ROE) o f the organization.
2. As we can see from the Du Pont Ratios from the table given above
all the ratios described have gone down from the year 2007 to
2011. And in particular, in the year 2009 it is at lowest.
3. The reasons are already discussed and remain the same, which
because of the slowdown in the world market, the effect o f it to the
Indian economy. The problems faced by different companies
because of this effect as well as the Indian financial problems,
companies have faced a lot.
197
4. Especially the ROE of the Tata Motors have gone down drastically
from 30.98% in 2007 to 5.34% in 2009 and again 10.37% in 2011.
198
2. Financial Analysis of Mahindra & Mahindra Ltd.

Key Financial Ratio analysis:
l.In the year 2007 the debt equity ratio of the company was 0.39
while it has gone up to 0.69 in the year 2009 while again it has
gone down to 0.29 in the year 2011. The main reason of this up
and down is in the year 2007 the secured loan amount was
106.65 crore which has gone up to 981 crore in 2009 and the
same happened with the debentures also. In the year 2007 it was
5.51 crore which has increased to 600.01 crore in the year 2009.
But, again up till the year 2011 both the items gone down as
company has paid their most lo the liabilities.
2.1f we take the turnover ratios, all the ratios like asset turn over,
inventory turnover and debtors turnover has gone down and the
main reason behind it is there is drastic change and decrease in
the sales turnover of the company.
3.In case of the interest coverage ratio from the year 2007 to 2009
it has gone down. The main reason behind it is the interest is
going up because of more debt and sales and profitability of the
organization is going down. It is not a good sign for any
company. But as discussed above, again till year 2011 company
has paid most of the debt and profit and sales have also
increased, the interest coverage ratio started going up.
4. All the profitability ratios like, PBIDTM (%), PBITM (%), CPM
(%), APATM (%) and RONW (%) had shown the same change.
199
That is from the year 2007 to 2009 it is going down because of

the reasons discussed above and then it has started going up.
5.The overall ratio analysis can tell that from the year 2007 to 2009
the financial situation of the company was not very sound
because of the world economy situation and its effect on the
Indian economy. But then after as we know that Indian
economy has started recovering, companies also started making
good profits.
Balance Sheet Analysis:
1. The analysis o f the capital structure of the company focuses on

certain important facts.
2. Like, there is negligible change on the equity capital of the
company but the debt has very much up and down in the
figures.
3. The main reason o f this variation is that, company was not
making good sales and profit in the year 2009-10 which crated
cash scarcity in the organization. And in the3 same period
because o f the markets were falling down and investors not
having trust in the market, company would not be able to issue
new equity and thus, it has to rely more on the debt funds.
4. In case of the total reserves o f the organization, the reserves have
gone up after 2009, up till that it was stable. The main reason of
increase in the reserves is the increase in the Profit and Loss
account balance. The main reason for this balance increase is
200
increased sales, profitability and o f course the decrease in the

interest paid.
5. After the sources o f funds, if we analyse the application o f funds
it shows good use o f the money by the company.
6. Because, in last five years company have invested a lot in the
assets and it increase the gross block of the organization. In the
same way company has invested a lot in the government
securities as well as in the equity market. It shows the
foresightedness o f the company as in the slowdown period at
less rates it has invested money which will be giving them good
return in the later years.
7. The total assets of the organization have gone up in last five
years while the liabilities are slowly going down which is a
good trend for the company.
Income Statement Analysis:

1. Analysis of the profit and loss account o f the company shows a
negligible increase in the sales turnover from 2007 to 2009 and
after that the growth is quite ok.
2 .In the same manner company’s operating income shows less rate
o f growth but seeing to the figures, one thing is interpreted that
the operating expenses of the company is less compare to the
other automobile companies. And the main reason for it is that
the Mahindra motors rely more on the auto components and
they make the cars thus, the operating expenses are less.
201
3.The equity dividend of the company in the year 2007 was 115
which have gone down to 100 in the year 2009, which has gone
up to 230 in the year 2011. It shows the effect of world
economy in the year 2009 -10 and then after the increase in the
dividend because of increase in the profitability and good
market condition.
Cash Flow statement Analysis:
1. The cash flow statement of Mahindra shows drastic decrease in
the year 2008 from the past year. In the year 2008 it was
1168.94 crore which has gone down to 825.83 crore. The main
reason is the falling world market, increased rate of the
automobile parts and the problems faced by the Indian
monetary policy and the market this scenario was almost
everywhere.
2. As already discussed above with the balance sheet analysis that
the company has taken more debt in the year 2009-10 the
interest paid was also very high. This shows less profitability
because of less income and high fixed charges.
3.In case of the cash generated from the investment activities are
high, because company has invested a lot in the last five years
but with the same internal investments are also high in the form
of fixed assets. It gives the mixed results in case of the cash
generation.
202
Du Pont Analysis:
l.A s the above statement analysis shows, the same is reflected
from the Du Pont Analysis as well.
2.1t shows decrease in the PBDIT to Sales (%), Sales to Net Assets
(%), PBDIT to Net Assets (%) from the year 2007 to 2009
because o f the same reasons discussed above.
3. The company also shows decrease in the Return on equity from
the year 2007 to 2009 which proves the above discussed reasons
correct. The ROE was 33.2% in the year 2007 which has gone
down to 18.1% in the year 2009.
4. But as the scenario changed it has again gone up to 31.96% in
the year 2010 and 29.39% in the year 2011. Same with the case
o f Return on Capital Employed as in the year 2007 it was
32.25% which has gone down to 14.83% in 2009 but again rose
up to 30.68% in the year 2011.
203
3. Financial analysis of Cipla Ltd.:
Key financial ratio analysis:
1. The debt equity ratio was 0.11 in the year 2007 which has gone
down to 0.1 in 2008 which has again gone up to 0.18 in the year
2009 and again going down in the year 2010 and 2011. This up
and down trend is because o f the secured and unsecured loans
coming and going in the balance sheet. The other main reason
for it is the use of packing credit, cash credit and bills.
2. Except the year 2009, the current ratio of the company is above
two which is more than the norms. And again the main reason is
the trade credit, packing credit, bills receivables and other
current assets of the organization.
3.In case o f the turnover ratios all ratios are almost stable like fixed
assets, inventory, and debtors.
4. The interest coverage ratio o f the company .has continuously
increasing because the sales and profit of the company is going
up year over year and the interest charges are almost stable.
5. The profitability ratios are affected negatively in the year 2009
not mainly because o f the internal reasons but because o f the
slowing down market reasons.
6. Mainly the Return on Capital Employed and Return on Net
Worth is little slowing down because o f the decreasing sales
and profitability.
204

1. The equity capital of the company is stable in all last five years
as company has not issued any new equity in last five years.
2. Reserves of the company increased year over year as the profit
and loss account balance o f the company has increased.
3.In case of the assets, it has increased year over year in last five
years and so as the investments o f the company.
4. Company also increased the research and development activities
and so investment into that has also gone up.
5. Company has invested more in the current assets in last five
years while current liabilities have gone down, which can be
seen from the balance sheet as well as the ratios.

1. Looking to the Profit and Loss account of Cipla, the sales
turnover is increasing with almost 15% from 2007 to 2008,23%
from 2008 to 2009 but then it drop down to 7% in 2010 and
then again it rose up to 12% in 2011. So it shows a normal
increasing trend. Only in 2009-10 it gone down drastically
because of the world market situation, increasing inflation and
other economy effects.
2. Analysis of the operating income, operating expenses and
operating profit shows that almost 67% of operating expenses
are there year over year means the operating profit is around
23% every year.
205
3.Dividend paid by Cipla was stable i.e. 100% from the year 2007
to 2010 and it gone up to 140% in the year 2011 which shows
good trend and it can attract the long term investors.
Cash Flow Statement Analysis:
1. Cash flow from operating activities from the year 2007 to 2009
was almost stable i.t. near to 350 crores every year which all of
a sudden rose to 1041 crore in 2010 and 987 crore in the year
2011. It shows the growing trend for the company.
2 . Company is not having very high debt on it thus; fixed income
charges are very less. It is a boon for any company.
3. Year over Year Company is increasing the investments which
can be seen from the cash used in investment activities. In year
2007 the investment was 485 crore which has gone up to 1136
crore in the year 2011, means almost three fold.
4. Because company has taken less money in terms o f debt the
internal use of funds is high, and company has also given some
money to other companies which can be seen from the
financing activities.
Du Pont Analysis:
1. The analysis of Du Pont table shows decrease in almost all ratios
from year 2007 to 2009 and then increase till 2011.
2. PBDIT to sales ratio has decreased from 26.11% in year 2007 to
22.01% in the year 2009 and again gone up to d28.06% in the
year 2010.
206
3.In the same manner the ratio like sales to net assets have gone
down to 0.88 from 1.05 from the year 2007 to 2011.
4. As the income statement shows positive results but ROE says
very different story. In the year 2007 the ROE of Cipla was
25.69% while it has gone down to 15.36% in the year 2011,
which is very near to almost half, means the sales turnover is
increasing but with it the profit margin is decreasing and the
reason can be operating expenses and other manufacturing
expenses. As we know that in last 2-3 years inflation has gone
up, leads to increase in the prices and it increases the different
expenses of the organizations.
207
4. Financial Analysis of Sun Pharmaceuticals Ltd.:
Key Financial Ratio Analysis:

1. The Debt Equity ratio o f the company was 0.72 in the year 2007
which has become 0 in the year 2010 and 0.01 in the year 2011.
This means company has become almost unlevered and relying
fully on the equity. This situation can be taken in two ways i.e.
becoming unlevered means no fixed financial charges which
will give benefitto the shareholders when company is growing
but the problematic side is that they will not be getting the
benefit o f trading on equity.
2. Company has also worked better in case o f the current ratio as in
the year 2007 it was 4.62 which is very high, and it has gone
down to 2.71 in the year 2011, which is very near to the
required norms. It shows that earlier company was keeping
more money in the Current Assets which might not give them
proper return and the money will be kept idle. But to reduce this
ratio means enough investment in current asset, less idle money
and more money put into the long term investment which will
increase overall return o f the company.
3. When the above two ratios shows very good trend on the other
side the turnover ratios are decreasing where the first is
decrease in th3e fixed asset turnover ratio. The analysis o f
balance sheet shows negligible increase in the fixed assets but
the sales turnover is also not increasing and so this ratio is going
down.
208
4. The good sign is decrease in the debtors and so there is decrease

in the ratio. It means that the company must have made the
credit policy more stringent, but it might affect the sales also.
5. All the profitability ratios show increase year over year, it is a
good sign for the company.

l.T he capital structure of the organization is very easy to analyse
as there is no change in the equity and other funds in last five
years. So as with the debt funds that company has very less debt
finds and in recent years that became almost zero.
2 .In case of the reserves of the organization, it is increasing year
over year and the main reason is increase in the profit and loss
account n balance. As the sale is going up in last five years and
profitability is also increasing with good rate the reserves are
reflecting the same.
3 .Sun is continuously investing in the new technology year over
year which increases the gross block o f the organization.
4. Sun Pharma also shows good increase in the investment part as
year over year the Investment has increased. In the year 2007 it
was 1057.49 crore which has gone up to 3601.42 crore in the
year 2011 means three fold in last five years.
5.In case of the current assets company has decreased it or kept
stable, the reasons already discussed above in the thesis and in
case of the current liabilities it is almost in the down trend.
209

1. Sales turnover of the company is almost same and in certain
years it is going up and down, this shows the general trend of
pharma sector.
2. As the company has increasing investments in last five years, the
income from interest is also increasing year over year.
3. Total expenditure compare to the income earned is less than half
and this gives good operating profit to the company, the main
reason for this situation is decreasing raw material cost which is
the important part of the manufacturing expenses.
4. Company has not spent any money on advertisement and
marketing in last five years but still the sale is going up. There
are two main reasons to it; one that the drugs are in too much of
demand and compulsory purchased on requirement and the
second reason is that this market is highly influenced by the
doctors so promotional campaigns don’t give any results.
5. The equity dividend (%) is increasing year over year. In the year
2007 it was 135% which has gone up to 350% in the year 2011,
but on the other side the EPS is almost stable but still increased
dividend is very good for the shareholders.

l.Cash flow from the operating activities have shown very varies
trend as in the year 2007 it was 450 crore which has gone up to
626 crore in 2008 and again 1262 crore in 2009. But all of a
sudden it gone down to 646 crore in the year 2010 and again
210
gone up to 1230 crore in the year 2011. The main reason for it
could be fluctuating sales, manufacturing and other operating
expenses.
2. Sun Pharma has increased the investment in last five years,
which can be seen in the cash flow used in the investment
activities. In the year 2007 it was 112 crore which has gone up
to 1105 crore in the year 2011 which is almost ten times high.
3.Sun Pharma has also given money to other companies for
finances because it can be seen from the cash flow from the
financing activities in last five years.
Du Pont Analysis:
l.The analysis of the Du Pont table gives an idea that in last five
years almost all the profitability ratios have gone up but on the
same time the ROE has gone down.
2.1n the year 2007 the PBDIT to sales ratio was 30.21% which
increased to 48.10% in the year 2011 in the same manner
PBDIT to Net asset was 0.2 in the year 2007 while it gone up to
0.23 in the year 2011.
3. Same with the case of PAT to PBIDT, that it was o0.41% in the
year 2007 which has increased to 91.11% in the year 2011 but
the Sales to Net asset ratio has decreased in the same time
duration.
4.1n the year 2007 it was 0.65 which has decreased to 0.47 in the
year 2011, this all shows that the company has invested money
211
into the assets but the utilization of assets is not efficient and so
it is not reflecting into sales.
5.The ROE in the year 2007 was 32.15% which has gone down to
22.32% and it can interpreted the same way that the money put
into the business is not utilized properly and thus it is not
earning proper return. The different market factors are also
affecting the company results.
21 2
5. Financial Analysis of Ambuja Cement Ltd.
1. The Debt Equity ratio of the company was 0.35 in the year 2006
while it has gone down to 0.02 in the year 2010 which is almost
near to 0 and it is because of the decrease in the debt while the
equity was stable in last five years.
2. Current ratio of the company was near to 1 in last five years
which shows that the company has not invested much in the
current assets and neither in the current liabilities as well.
3,In case of the turnover ratios, the Fixed assets, inventory and
debtors shows the down trend and the main reason is the change
in fixed assets is very negligible and so as in the debtors. And in
the same way the sales turnover also shows negligible change
and so the ratios are little bit decreasing in last five years.
4. In case of the interest coverage ratio, it has gone up from the year
2006 to the year 2010. In the year 2006 it was 17.26 which have
gone up to 81.4 in the year 2009 which shows that the
profitability of the company is continuously increasing and it is
more able to cover the interest to be paid.
5. The profitability ratio of the company is showing the mix trend
as in certain years the ratios are increasing and in some it is
decreasing. The main ratio i.e. ROCE was 34.1% in the year
2006 which has gone up to 42.49% in 2007, again 30.75% in
2008 and finally 24.39% in the year 2010. But overall company
has earned good rate of return in last five years.
213

1. Ambuja has not changed much the capital structure o f it as the
equity remains the same in last five years, no new equity capital
is issued and in case o f the debt in the year 2006 the debentures
issued were o f 220 crores but then after it has gone down to 100
crores for three years. In the year 2010 company has paid all the
debentures.
2 . Company’s reserves have increased twofold in last five years
which shows that company has earned good amount o f money
and with that they have also kept good amount back in the
organization.
3.In case of the assets o f Ambuja, that also increased twofold in
last five years which shows good amount o f investment in the
internal- assets o f the company. As in last ten years the
infrastructure market is in boom it is understandable to invest
more in the assets to earn more.
4. As far as current assets and specifically inventories are
concerned it has also increased in last five years from 408 crore
to 901 crore which shows growth in the production and use of
different type o f inventories.
5. Because that the company is not having much amount o f debtors,
the liquidity o f Ambuja is good which can be seen from the
ratios also.
21 4

1. The sales turnover o f the company has increased twofold in last
five years, from 4677 crore to 8257 crore in the year 2010,
which depicts the growth in the infrastructure in India and no
substitute of cement.
2. Looking at the profit and loss account one interesting fact is
coming in the notice, that in last five years the dividend income
is reducing while the interest income in going up which shows
the trend of the market. As in last few years the equity market is
going down the debt market is safe to invest money.
3.In all last five years the operating expenses compare to total
expense is almost half as the inflation is going up, market is
going down and the prices o f crude and all other material is
continuously increasing.
4. Company has sold big amount of assets in the year 2007 as it has
gone for some modernization in the year 2007.
5.In all last five years company has not only paid dividend but also
interim dividend which shows good profitability and liquidity of
the organization.
Cash Flow Analysis:

l.N e t cash from operating activities shows a bit fluctuating trend in
last five years, as the sales in increasing but the expenses are
also increasing because of the above discussed reasons.
2 .In certain years company has also received money as foreign
exchange transactions.
215
3.In case o f the cash used in the investment activities, it increased

YOY, in the year 2006 it was 632 crore which has gone up to
1194 crore in the year 2009. Majority o f this money is invested
in the purchase of fixed assets.
4. As discussed earlier also the interest income has increased a lot
in last five years as company has invested money in the debt
market instead of equity market.
5. In case o f the cash used in financing activities, has gone down in
last five years which shows that the company is not investing
money into the financing activities as not required also.
Du Pont Analysis:
1. The PBDIT to Sales ratio has gone down in last five years from
32.51% to 25.41% as the sales is increasing but the operating
expenses are increasing and thus company has decreased
operating income.
2. But in case of the sales to net asset ratio, it is almost stagnant in
last five years, as in the year 2006 it was 1.61 which is now
1.12, which shows the effective use o f the assets.
3.1n case o f PAT to PBDIT the ratio is fluctuating as in the year
2006 it was 65.9% which has gone down to 57.4% in the year
2009 and again increased in the year 2010 to 60.24%. But
overall the ratio is good because o f the company sales and
profit.
4.Last but important ratios is ROE which was 35.36% in the year
2006 which has continuously gone down and reached to 18.31%
216
in the year 2010 which depicts the market situation to the

company.
217
6 . Financial Analysis of UltraTech Cement Ltd.:

1. Debt equity ratio o f UltraTech is continuously decreasing from
the year 2007. It was 1.08 in the year 2007 which has gone
down to 0.38 in the year 2011. It is good for the organization as
the debt is decreasing and equity is increasing but it may not
benefit much to the equity shareholders as they will not be
getting the benefit of trading on equity.
2. The current ratio of the company is stable in last five years and it
is less than one. In the year 2007 it was 0.7 and in the year 2011
it was 0.69 which shows that company is not keeping idle
money in the current assets and not having much of current
liabilities also which is good.
3.In case o f the turnover ratios almost all the ratios are going down
except debtors turnover ratio. The debtors turnover ratio was
30.8 in the year 2007 which has gone up to 36.32 in the year
2011 while the inventory turnover ratio has gone down to 10.7
from 13.49.
4. The interest coverage ratio o f the company has gone down from
14.43 in the year 2007 to 7.44 in the year 2011 which is not a
good sign as this ratio shows the interest covered by the profit.
5. The profitability ratios o f the company have gone down
drastically and the main reason is increasing expenses. The
sales turnover o f the company has increased twofold in last five
years but the operating expenses are half o f the total expense
218
and the total expenses are also increasing which is affecting the
profitability negatively.

l.In last five years there is no big change in the capital structure
except the issue of equity capital in the year 2011. Company has
issued equity capital of 150 crore in the year 2011.
2.As far as the reserves are concerned, there is all o f a sudden
increase in the year 2011 and the main reason is issued equity
funds and almost doubled sales turnover compare to last year.
In the year 2010 it was 4482 crore which has gone up to 10387
crore in the year 2011.
3.In case of the debt funds, in the year 2011 company has issued
non-convertible debentures o f 1037 crore. It shows that the
company is in the expansion phase as it is increasing the capital
to invest.
4.1n the same line it has also taken term loan of 450 crores in the
same year.
5.In the year 2011 company has also invested a lot in the assets to
use the taken money from the market and use it for the
expansion purpose.
6.As far as inventories are concerned in the year 2011 it has
increased more than double compare to last year, all these
figures interpreting the growth in the company. And the main
reason o f such growth is infrastructural development.
219

1. Sales turnover o f the company was 5484 crore in the year 2007
which has gone up to 14,858 crore in the year 2011. Means in
last five years it has grown more than 100%. But the main
change has come from the year 2010 to 2011. As in the year
2010 the sales was 7729 crore which has become 14,858 crore
in the year 2011, which is almost double.
2. With this the total expense also increased. It was 4939 crore in
the year 2007 which has gone up to 13,558 crore in the year
2011. It shows that with sales, expenses are also increases.
Means the profitability will not be having very positive growth.
3 . The equity dividend o f the company has gone up from 49.79
crore in the year 2007 to 164.42 crore in the year 2011, it shows
the increase but if we consider the percentages, it was 40% in
the year 2007, 50% in the year 2009, and 60% in both the year
2010 and 2011.
Cash Flow Analysis:
1.Net cash from the operating activities shows increase year over
year as in the year 2007 it was 1113 crore which has gone up to
2074 crore in the year 2011.
2.As the profit and loss account shows increase in sales turnover
the cash has to be increased but it doesn’t shows the same
growth rate because the expenses are also increasing with the
same pace.
220
3.N et cash used in the investment activities have gone down as

company is investing more into the assets and especially in the
year 2011 it has gone up drastically.
4.1n the year 2011 company has also issued loans to subsidiary
company as in the same year company has taken money from
the market.
5.N et cash used in the financing activities, were less from the year
2007 to 2009 but it increased in the year 2010 and 2011 as
company has given loan to its subsidiary and also some other
financing activities.
Du Pont Analysis:
1. PBDIT to Sales ratio o f the company has gone down from
26.97% in the year 2007 to 19.03% in the year 2011. As
discussed earlier the sales have gone up but with the same the
expenses have also increased and so the profitability o f the
organization is not showing much positive growth.
2. Same is the case with sales to net assets and PBDIT to net asset.
The company has invested a lot into the assets and sales have
also gone up but still because of less profitability the ratios are
going down.
3. The company looks in the expansion stage as the equity, assets
and sales everything is increasing but because of market
situations and effect o f different economic factors the ROE has
gone down drastically. In the year 2007 it was 55.84% which
has gone down to 18.39% in the year 2011.
221
7. Financial Analysis of Steel Authority of India Ltd. (SAIL):

1. The debt equity ratio o f the company has increased year over
year. In the year 2007 it was 0.28 which has gone up to 0.52 in
the year 2011. The main reason behind this is increase in debt.
In last three years company has taken high amount of term loan
and also issued non-convertible debentures.
2. Current ratio of the company was 1.36 in the year 2007 which
has gone up to 1.7 in the year 2011, which is minor change.
3. The inventory and debtor turnover ratios have decreased year
over year and it is because o f the market conditions.
4. The interest coverage ratio o f SAIL has gone down almost to
half. In the year 2007 it was 29.37 and in the year 2011 it was
16.15. As discussed earlier the debt has increased a lot in last
three to five years and so as the interest expenses. Because of
this reason the interest coverage ratio has decreased which is
not good for any company. But because it is a government
company the investors need not to worry.
5.1n case o f the profitability ratios, all ratios are on the down going
side and the main reason is the recession in the world market
and its impact on the India economy and companies.
l.The share capital of the company is stagnant in the last five
years, being the government company; there is no change in the
share capital as expected.
222
2. In the reserves also, there is no big change as the only contributor

in the reserves is profit and no capital addition.
3. As other government organizations, SAIL has also issued
debentures and it amounted to 6411 crore in the year 2011.
4. SAIL has also taken term loan in last three years and that has
also increased year over year. The term loan was 800 crore in
the year 2009 which has gone up to 5318 crore in the year 2011;
it is a very big rise in the debt of the company.
5. Looking to the other side, assets-of the SAIL has not increased
much in last five years. It was 29,912 crore in the year 2007
which has gone up to 38,263 crore in the year 2011.
6.In case of the current assets, it is also rising at moderate rate. The
main contributor in the current asset is inventory which was
6814 crore in the year 2007 which has gone up to 11,470 in the
year 2011.

1. Sales turnover o f the company has increased year over year with
a moderate rate. In the year 2007 it was 39,481 crore which has
gone up to 47,008 crore in the year 2011.
2. The interest income received by SAIL is high compare to
dividend received in last five years. The main reason is being
the government company it needs to invest in other government
company bonds and debentures and so the interest income is
high.
3 . Compare to total revenue, total expenditure is also high and thus
company is not earning very huge profit. Total expenditure in
the year 2007 was 25,123 crore which has gone up to 37,219
223
crore in the year 2011. Thus, the profit has increased by only
1000 crore from 2007 to 2010 and rather decreases by 1000
4. Despite of less profits or decreasing profits SAIL has paid very
i
good interim and regular dividend.

5. But looking to the dividend rate, it is fluctuating. In the year
2007 it was 31% which has gone down to 27% in the year 2009
and again gone down to 24% in the year 2011, in the same time
it has reached to 37% in the year 2008 ancLagain 33% in the
year 2010.
Cash Flow Analysis:
1. Cash flow from operating activities shows very fluctuating

scenario as in the year 2007 it was 5632 crore which has gone
up to 8378 crore in the year 2009 and then after it is
continuously decreasing and reached to 2156 crore in the year
2011.
2. Year over year the investment is rising in SAIL, either internal or
external. As company has invested in the assets also and in the
other government funds also, the amount was 587 crore in the
year 2007 which has gone up to 8933 crore in the year 2011.
3. As far as the financing activities are concerned, SAIL is
continuously financing different government agencies and its
own business as well. The cash used in the financing activities
was 1608 crore in the year 2007, 3088 crore in the year 2009
and so on.
224
Du Pont Analysis:
1.All the profitability ratios are going down year over year and the
main reason is the effect of world market, recession and its
impact on Indian economy.
2.The PBDIT to sales ratio was 27.78% in the year 2007 which has
gone down to 19.48% in the year 2011.
3.In the same manner all the profitability ratios, importantly PAT
to PBDIT has gone down to 53.57% from 56.56%. But compare
to other steel companies it is very good.
4. In case of ROE it has gone down drastically as in the year 2007 it
was 41.47% which has gone down to 13.94% which is even
less than half.
5. Looking at overall performance, SAIL is doing well but because
of the world market conditions, and recession it got affected in
certain years.
225
8. Financial Performance of Tata Steel Ltd.
Key Financial ratio Analysis:
1. The debt equity ratio of the company was increased from the
year 2008 to 2010 and then it’s gone down, and the main reason
is increasing debt. The ratio was 0.51 in the year 2007 which
has gone up to 0.78 in the year 20101 again it decreased to 0.64
in 2011.
2. Current ratio of the company is almost stable from last five
years, and it is near about 1.3 which is good for the company.
3. Turnover ratios shows increasing trend as fixed assets turnover
ratio was 1.26 in the year 2007 which has gone up to 1.41 in the
year 2011. The inventory turnover ratio has increased from 8.77
to 9.07 and same with the case of debtors turnover ratio was
33.75, which has gone up to 73.95.
4.1n case of the interest coverage ratio; it has gone down from
25.92 to 6.8 which is very good for the company. Company’s
profitability has gone up and it is good for the investors.
5.The profitability ratios of the company are almost stable as only
1 to 2% of rise or fall is seen. Mainly the ROCE shows more
down trend, as in the year 2007 it was 36.63% which has gone
down to 16.68% in the year 2011.
6.Same with the case of RONW, as in the year 2007 it was 35.4%
and it gone down to 16.36% in the year 2011. Basically this
down drop is because of the world market situations and its
impact on the Indian economy.
226
1. The share capital o f the company was stable from the year 2007
to 2010 and then after company has issued new equity, thus
there rise in the equity share capital.
2. As far as the reserves are concerned in last five years it has
increased almost threefold from 13,368 crore in 2007 to 45,807
crore in 2011, which shows that company is in the growing
mode and it is putting money into reserves for future
expansions.
3.In last five years company has not issued a very big amount o f
debentures but it has taken big amount of term loan in last five
years.
4 .In case of the assets, there is more than threefold increase as in
the year 2007 it was 23,741 crore which has gone up to 75,246
5 .Current assets and current liabilities of the company are not
showing big change and it can also be concluded from the
current ratio as it is almost stable in last five years and near to
1.3.
1. Sales turnover o f the company has increased at a moderate rate in

last five years, in the year 2007 it was 19,762 crore which has
increased to 31,902 crore in the year 2011.
2.1n last three years company has sold many of its investments and
through it gained money. Looking to the market scenario it was
227
a good decision to sale certain investments which are not

providing positive returns.
3.In last five years total income o f the company has increased
almost twofold. In the year 2007 it was 18,109 crore which has
gone up to 30,746 crore.
4. Looking to the expenses side in last five years selling and
advertisement expenses are continuously on rise which shows
the impact of competition.
5. From 2007 to 2009 the dividend paid is rising and then after in
gone down. In the year 2007 it was 943 crore which has gone
up to 1168 crore in 2008 and 2009 but again it gone down to
709 crore in 2010 and then increased in the year 2011 to 1151
crore. It shows very fluctuating trend and the main reason
behind it is the world market situation and its impact on Indian
market.
1. Net cash from operating activities have increased from 4896

crore in the year 2007 to 8542 crore in the year 2011 which
shows increase in the sales revenue.
2 . Company has invested more money in last five years but it is on
fluctuating basis. In the year 2007 it was 5429 crore which gone
up to 29,318 crore in 2008 and again in the year 2009 it gone
down to 9580 crore which again gone down to 5254 crore and
13,288 crore in the year 2011.
3. As already discussed earlier company has invested in fixed assets
in last five years and the same can be analysed from the cash
flow statement.
228
Du Pont Analysis:
1. The PBDIT to sales ratio was almost stable in last five years. In
the year 2007 it was 37.1% which was 39.52% in the year 2011.
This shows the stable growth in the company and facing the
competition well.
2. Same is the case with the sales to net asset ratio. In the year 2007
it was 0.84 and then after from 2008 to 2011 it was near to 0.40.
3. The PAT to PBDIT ratio was 57.58 which was 54.45 in the year
2011 and it also not showing big fluctuations.
4. As the above all discussed ratios showing almost the stable trend
the ROE is showing decreasing trend. It was 35.4% in the year
2007 which has gone down to 25.97% in 2008, 21.885 in 2009,
14.19% in the year 2010 and 16.36% in the year 2011.
229
9. Financial analysis of State Bank of India:
1. Current ratio of the bank is 3.09 right now which is very

high compare to the standard ratio but in the bank it is
understandable that the requirement o f current assets is
high and so the. current ratio o f any bank must be high.
2. Same is the case with the quick ratio, it is 9.07 which is
quite high because o f the above discussed reason.
3. EPS o f the bank is very high compare to past. Right now it
is 144.37 which is good. Shareholders o f the bank are
getting good return on their investments.
4. The balance sheet o f the bank shows good amount o f
assets but the biggest problem is of the NPA. Because SBI
is a government bank the credit policy is strict but the
collection efforts are not so very high and so the NPA is
high.
5. The profitability o f the bank is very high and the main
reason is very large customer base of the bank.
10. Financial Analysis o f ICICI Bank:
1. The current ratio o f the bank is only 0.020 which is

very low and it indicates underutilization o f the
current assets which is not good.
2. But the bank like ICICI, the liquidity is good
because of high capitalization and deposits.
3. The EPS o f the bank is continuously increasing
from last five years because of increased
profitability and relatively less increase in the
number of shares.
4. It also shows the effective utilization o f capital and
efficient use o f the loan funds instead o f owners
fund.
5. Due to huge increase in the net profit and capital
employed increase the return on capital employed is
has gone up and it is a good sign for any entity.
230

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Study of Financial Performance Evaluation of Indian Companies

Financial Analysis of Companies

ACCOUNTING PRINCIPLES AND ASSUMPTIONS

The financial statements are created using several assumptions

Transactions are recorded at historical cost. Therefore, the

The appropriate unit o f measurement is the dollar. While this

The statements are recorded for predefined periods o f time.

Statements are prepared using accrual accounting and the

It is assumed that the business will continue as a going concern.

Full disclosure requires providing information beyond the

notes accompanying the financial statements. An analysis o f

Statements are prepared assuming conservatism. In cases in

The financial statements and the auditors 4 findings are

T here are three basic financial statem ents:

Assets are the resources o f the business enterprise, such as plant

Liabilities are obligations o f the business. They represent

needs, and any cash in excess o f immediate needs is usually

Investments in marketable securities are simply viewed as a

82. Swamy, Narayan, Financial Accounting, pg.267

A company may have additional noncurrent assets, depending

Long-term investment in securities of other companies may be

whether the securities are deemed trading securities or available

The reliance on short-term liabilities and the type of current

LONG TERM LIABILITIES

A company's pension and post-retirement benefit obligations

Basically, if the fair value o f the pension plan's assets exceeds

preferred stock that has a $100 par value and a 9% dividend

Further, your ownership share of the company is $100.

THE INCOME STATEMENT84

The operating decisions of the company—those that apply to

The results of financing decisions are reflected in the remainder

Companies must report comprehensive income prominently

It is important to note that net income does not represent the

CASH FLOW STATEMENT

Within the firm, financial analysis may be used not only to

Standard & Poor's, and Fitch— evaluate the credit quality of

(A) FINANCIAL RATIO ANALYSIS 85

Essence o f ratio analysis

Another method is to compare ratios of one firm with another

It might be more useful to select some competitors which have

Industry ratios are important standards in view o f the fact that

Use of Ratio by stakeholders

1. Investors: These are people who already have shares in the

its activities as they affect their area so they are interested in

the dependence on equity financing. Traditionally, the higher

(B) COM M O N SIZE STA TEM EN T ANALYSIS86

Vertical analysis of financial statements is a technique in which

This analysis is performed on the income statement as well as

Usually the vertical analysis is performed for a single

(C) CASH FLOW AND FUND FLOW ANALYSIS 87

Cash flow is essentially the movement of money into and out of

Cash flow analysis involves examining the components o f the

A quick and easy way to perform a cash flow analysis is to

A fund flow statement, also called a statement o f changes in

Author Roy A. Foulke, writing in the book, "The Commercial

(D) DUPONT ANALYSIS88:

It is believed that measuring assets at gross book value removes

This method of performance measurement -was started by the

DuPont analysis tells us that ROE is affected by three things: