A STUDY ON

LIQUIDITY AND FINANCIAL PERFORMANCE

With Special Reference to Muthoot Finance, Visakhapatnam

A Project Report submitted to JNTU, Kakinada

In partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By
LALAM RAJESH
ROLL NO: 16521E0018

Under the guidance of

A.K.BHADRADRI
MBA
Assistant Professor

DEPARTMENT OF MANAGEMENT STUDIES

VISWANADHA INSTITUTE OF TECHONOLOGY AND
MANAGEMENT (VITAM)
(Approved by AICTE, New Delhi & Affiliated to JNTU, Kakinada)
MINDIVANIPALEM(V) ANANDAPURAM(M) VISAKHAPATNAM-531173
2016 – 2018
 DECLARATION

I hereby declare that the project entitled “LIQUIDITY AND FINANCIAL

PERFORMANCE” With Special Reference to Muthoot Finance, Visakhapatnam

submitted by me to the , JNTU KAKINADA, in partial fulfillment for the award of the

degree of Master of Business Administration is a original work carried out by me.

I have completed this work under the guidance of A.K.BHADRADRI, Associate

Professor, Department of Management Studies, Viswanadha institute of technology and

management (VITAM) mindivanipalem(V) anandapuram(M)viskhapatnam-531173

I also declare that this project has not been previously formed the basis for the

award to the candidate of any Degree, Diploma Associate ship, Fellowship or similar title

in this university or in any other university.

Place: Visakhapatnam

Date: (L.RAJESH)
 CERTIFICATE

This is to certify that the Project Report entitled “LIQUIDITY AND

FINANCIAL PERFORMANCE” With Special Reference to Muthoot Finance,

Visakhapatnam submitted in partial fulfillment for the award of Master of

Business Administration by L.Rajesh during the academic year 2016-2017 under

my guidance and supervision. This report has not been submitted previously for

the award of any Degree, Diploma, Associate ship, Fellowship or similar title in

this University or in any other University.

(A.K.BHARADRI) (U.RAMU)
Associate Professor & Associate Professor & Head
Project Supervisor

External Examiner
 ACKNOWLEDGEMENT

I take this opportunity to express my heartfelt thanks to Mr.V.Narasimham

Secretary and Correspondent, VITAM, for her support and encouragement in the campus.

I acknowledge my deep sense of respect & gratitude to Prof. V.Sridhar Patnaik,

Principal, Viswanadha institute of technology and management , Visakhapatnam for

giving me an opportunity to undertake the project work.

I thank our Head of the Department,Mr.U.Ramu, for his support and

encouragement to complete my project work and other academic endeavors.

I have deep sense of gratitude to my guide A.K.BHADRADRI, Associate

Professor. for his valuable guidance and other faculty members of VITAM, for their

useful suggestions in preparation of this report.

I sincerely thank to Manager, Muthoot Finance, Visakhapatnam for permitting me

to undergo my project work in their organization. And I also profoundly thank the staff

members for their support in gathering the required information.

Finally, my sincere thanks to my friends and the other persons who directly or

indirectly helped me in completing the project report.

L.RAJESH

Reg.no: 16251E0018
 CONTENTS

CHAPTER-I Page No.

 Introduction 1-11
 Need for The Study
 Scope of The study
 Objectives
 Methodology
 Limitations

CHAPTER-II 12-19

 Profile of Muthoot Finance, Visakhapatnam

CHAPTER-III 20-57

 Theoretical Background

CHAPTER-IV 58-68

 Analysis and interpretation

CHAPTER-V 69-72

 Summary And Suggestions

 Bibliography
 Annexure
 CHAPTER-I
Introduction
 CHAPTER-II
Profile of Muthoot Finance
 CHAPTER-III
Theoretical Background
 CHAPTER-IV
Analysis and Interpretations
 CHAPTER-V
Summary and Suggestions
 CHAPTER-I
INTRODUCTION

Success of an industry largely depend upon its earning sufficient and earning its

surplus. It helps to the expansion capacity of financing the resources and minimizes the

needs for external funds. No technology is advanced if it doesn’t increase productivity.

Finance is an integral part of modern economic life and occupies and

important place in all economic activities. Financial is the science of money and life

blood of industrial system. Finance management us that managerial activities which is

concerned with the planning and controlling of the forms financial management is in its

fancy dealt with the financing of corporate enterprises. Its evaluation may be dividends in

the two broad phases that is the traditional phase and the modern phase. Its scope was

treated in the narrow scène of procurement of funds by corporate enterprises to meet their

financing needs. Because it is central emphasis on the procurement of funds.

Financial analysis is one of the most powerful tools of the financial statement

analysis. In place a vital role in evaluation of the financial performance and financial

need of the company. Ratio analysis is a technique of analyzing and interpreting the

financial statements. Thus, one can use ratio analysis for comparing the performance of a

company’s of comparable firms and of past years.

FINANCIAL MANAGEMENT:

Financial Management is that managerial activity, which is concerned which the

"planning” management studies about the procuring and optimum utilization of financial

resources with the view to maximize the value of the firm.

Finance is life of blood of any business and gold the key to all the business as well

as 'human activities' the government also treats as a sign and healthy indicator to control

and measure is steps. Finance plays the role in every economic situation where there is a

present or future payment of money.

Financial management is broadly concerned with the acquisition and use of funds by a

business firms. The scope of financial management can be defined in terms of following

questions:

 How large should be the firm and how fast should it grow?

 What should be composition of firm’s assets?

 What should be the composition of firms financing?

FINANCE AND OTHER MANAGEMENT FUNCTIONS:

Although it may be difficult to separate the finance functions from production

marketing and other functions. Yet the functions themselves can be readily identified.

The functions of raising funds investing them in assets and distributing return earn from

assets to shareholders are respectively know as financing investment and dividend

decision while perfuming these functions a firm’s attempts to balance cash inflows. This

is called liquidity decision and we add it to the list of important financial decision

include.

 Investment of long –term assets mix decision

 Financing are capital mixed decision

  Dividend or profit allocation decision

 Liquidity or short term mixed decision

A firm performs finance functions simultaneously and continuously in the normal

course of the business. They do not necessarily occur in a sequence. Finance function

call for skillful planning control and executive of affirms activities.

FINANCE DECISIONS

1. INVESTMENT DECISION:

Investment decision involves the careful selection of profitable investment

proposals, allocation of funds to the investment proposals with a view to obtain the

net present value of the future earnings of company and to maximize its value.

Investment decision involves the decision of allocation of capital to long

tern assets (capital budgeting decisions) and short - term assets? (Management of

working capital) two important aspects of the investment decisions re evaluation of

the prospective profitability of new investments. The measurement of cut - off rate

against that the prospective return of new investment could be compared.

Investment decision involves risk, because of uncertain future investment

proposals should, therefore be evaluated in terms of both expected return and risk.

2. FINANCE DECISIONS:

Finance function includes where, where and how to acquire funds to meet the

firm investment needs determining the proposition of equity and debt i.e., capital

structure of the firm , once optimum capital structure is designed finance manager

raises the appropriate amount through the best available sources. In this area one must

be concentrated on debt equity mix the advantages and disadvantage of having debt
 component in capital mix impact of taxation and depreciation on earning per share

etc.

3. DIVIDEND DECISIONS:

Dividend decision is where the financial manager must decide whether the firm

should distribute all profits or distribute a portion and retain the balance

The optimum dividend policy is that which maximizes the market value of the

shares. For these determination of optimum dividend payment rate is essential the

payment return is equivalent to the percentage of dividends to earning available to

shareholders.

4. LIQUIDITY DECISION:

Finance decision is generally affected by current assets management, so current

assets should be managed efficiently for safeguarding the firm against the damages of

lack of liquidity. The main aim of decision is that to ensure that to ensure that neither

more is invested in current assets nor it should have insufficient investment in current

assets.

Significance of Financial Statements

The financial statements that refer to a packing of statements such as balance

sheets, income statements, statements of retained earnings funds flow statements cash

flow statement.

Analysis and Interpretation of financial statements in the most important step in

accounting to have a very clear understanding of the profitability and financial position of

a company, the financial statements have to be analyzed and interpreted analysis refers to
the

methodical classification of the given in the financial statements. For example, the

amount of capital employed is not directly available in the balance sheet. The figures

have to rearrange to calculate the amount of capital employed.

Analysis and Interpretation are closely related. Interpretation is not possible

without analysis and without interpretation analysis has no value. Hence, the term

analysis is widely used to refer both analysis and interpretation; in short, analysis and

interpretation of financial statements are complementary to each other.

Financial statements of any company (PSU) indicate the significance factors like

profitability and financial soundness. Financial statement analysis largely to study of

relationship among the various financial factors in a company as disclosed by a single

statements and study of the trend of these factors as shown in different type of statements

such as comparative statements, common size statements, trend percentages and financial

ratios.

Comparative Statements: Comparative statement shows the financial condition of

business at a given point of time. The elements of financial position are shown in

comparative form so as to given an idea of financial position at two are more periods is

known as

A comparative statements comparative statement shows. While interrupting

comparative mean covers the aspects or current financial position of liquidity position

and profitability position. A comparative statement not only exhibits the absolute figures
and changes in absolute figures of a company but also gives absolute data in terms of

percentages and they are increased or decreased percentages.

Trend Analysis: Trend analysis is very helpful in making a comparative study of the

financial statements for several years. This method determines the direction upward or

down ward and involves the computation of the percentage relationship. Under this

technique information for a number of years is taken up and one year (usually the first

year) is taken as the base year. Each item of the base year is taken as 100 and on that

bases the percentages for other years are calculated.

Common Size Statements: Financial statements present absolute figures. A comparison

of absolute figures could be misleading for example, cost of sales in absolute figures

might have gone up but as a percentage of sales it might have come down. In the income

statement in sales figures is assumed to be 100 and all figures are expressed as a

percentage of sales. Similarly in the balance sheet the total of assets and liabilities is

taken as 100 and all the figures are expressed as a percentage of this total the statements

so prepared are called common size statements and they are useful to a financial analysis

for a better understanding of balance sheet and income statement.

Ratio Analysis: Ratio Analysis is an extremely useful, widely used and powerful tool of

financial Analysis. It is generally used to analyze and interpret the financial position of an

enterprise. The financial statements are analyzed to have a diagnosis of the financial

health or weakness of an enterprise.

 The Management also can take the help of the Ration Analysis in carrying out its

functions of coordination, control and communication. It also helps the management

where the policies and programmers adopted by the management and implemented in a

correct way.

It helps the financial institutions to know the financial soundness and

creditworthiness of the organization. It also helps them in analyzing the profitability of

the company and the adequacy of the capital structure.

The Ratio is a simple, arithmetic expression of the relationship of the one number

to another. Thus, one financial quantity of the Company for example profit is expressed is

a Ratio of another financial quantity for example sales. The resulting ratio will give an

idea of profitability of the company over the years. Financial management is important

because it has an impact on all the actives of a firm. Its primary responsibility is to

discharge the finance function successfully. It touches o all the other business functions.

NEED FOR THE STUDY

I intend to undertake the study the Liquidity and Financial Performance in

Muthoot Finance Private Limited.VSP. It is a. Muthoot Finance Limited. It is a

continually Profit making Undertaking. It has got a very good finance and accounting

wing with a number of Chartered Accountants on its roles. The need of study is

continued to one of the key arrears of finance i.e., analysis and interpretations of financial

statement and it is also required to aid an economic decision-making.

 The required data for the study of financial analysis will be collected from the

Annual Financial statements of the Muthoot Finance Limited. The study provides an

insight into the financial, personnel, marketing and other aspects of the company.

Ratio analysis serves as a tool for the performance of all above financial functions

and decisions so the study made by me helps owners, managers, creditors, potential

investors to get an ideal about the financial position of the organization

OBJECTIVES OF THE STUDY

The main objective of the Study is to apply the theoretical concepts to the

practical situations in. Muthoot Finance Limited is so as to compare and correlate the

actual achievements with theoretical conclusions from (2009-2014). The main objectives

of the financial performance Study of the Muthoot Finance Limited as under:

1. To analyses the liquidity position of the Muthoot Finance Limited.

 2. To evaluate the company’s profitability over a period of time and its

future profitability.

3. To judge the financial position, i.e. the short-term liquidity position and

the long-term solvency of the Muthoot Finance Limited.

4. To measure the operational efficiency of Muthoot Finance Limited.

5. To study the efficiency of overall operations using Financial Ratio

Analysis.

6. To know the extent to which the Company has used its long term funds to

meet the current liabilities.

7. To give suggestions if any for the better performance of the present

organization.

METHODOLOGY

The methodology followed to complete the study successfully is basically from two

sources, those are:

 Through the sources of primary data and

 Through the sources of secondary data

PRIMARY DATA
 Primary data was collected by interviewing various persons relating to the finance

departments.

SECONDARY DATA

Secondary data was collected from magazines of Muthoot Finance Limited,

present and previous annual reports, company web sites and cost sheets of the company.

LIMITATIONS OF THE STUDY

1. The major limitation is the short span available for the study.

2. Reliability on usage of secondary data is another limitation.

3. Some aspects of financial information are held due to confidentially of the

Muthoot Finance Limited.

4. There is no scope of gathering current information as the auditing has not been

done by the time of project work.

CONTENTS

CHAPTER-I
 Introduction
 Need for The Study
 Scope of The study
 Objectives
 Methodology
 Limitations

CHAPTER-II
 Profile of Muthoot Finance, Visakhapatnam

CHAPTER-III

 Theoretical Background
CHAPTER-IV

 Analysis and interpretation

CHAPTER-V

 Summary And Suggestions

 Bibliography
 Annexure

CHAPTER-II
Muthoot Finance Limited

Decades ago, India’s gold loan industry recognized this anomaly and set out to make

financial inclusion a reality for all those millions holding small gold savings. The result is

that the total lending of this responsible national sector, against gold has totaled about

Rs.1, 500 billion, the majority across rural and semi-urban India with a credit recovery

higher than 98%. As India’s leading gold finance company, Muthoot Finance reported a

67% increase in disbursement and a 80% growth in its profit after taxing 2012- 13.

Muthoot Finance was the first Indian company to corporatize this business under the

Non-banking Finance Company framework. It welcomes government regulation as a

decisive step towards responsible industry growth. Muthoot Finance addresses extensive

RBI requirements through the

Following compliances:

• The Company files monthly, quarterly and annual returns to the RBI

• The Company addressed the tightening capital adequacy ratio requirements (from 10%

to 12% to 15%) with corresponding compliances

• The Company introduced Fair Practices Code, KYC norms and Anti-Money

Laundering Norms with speed.

• The Company is subject to periodic RBI inspection

SERVICES OF MUTHOOT FINANCE

Gold Services

Muthoot Finance was one of the first gold loan companies to provide India’s millions

with the option of a timely loan against their precious holdings just when they required it.

Muthoot Finance served rural and semi-urban Indians through the following initiatives:

• Nearly 70% of the Company’s 3678 locations were located in rural and semi-urban

locations.

• The Company’s rural and semi-urban offices were customized in décor around the

prevailing environment without intimidating potential loan seekers

• The Company recruited for its local branch from within that geography, enhancing local

familiarity

• The Company entered district headquarters and fanned out to the peripheral districts,

enhancing regional visibility and familiarity

• The Company provided short-term loans that could be liquidated as soon as the

borrower possessed the funds

Gold other Services

Muthoot Finance was the first Indian gold loan company to advocate that this prejudice

was misplaced and perhaps the time had come to treat this product as a smart loan

solution. Muthoot Finance transformed this gold loan mindset through the following

initiatives:

• The Company created an exhaustive advertisement campaign in 2005 around how gold

loans could serve diverse short-term needs – funding for agriculture, business, education,

purchase of stock and home renovation, among others

• The Company directed its advertisement at women, generally ornament owners and

those considered critical decision makers

• The Company positioned gold loans as a lifestyle option that would benefit the entire

family.

Performance of Muthoot Finance

Muthoot Finance was among the first Indian gold loan companies to embrace good

corporate governance. Muthoot Finance responded to the need for a progressive way of

doing things through the following initiatives:

• The Company strengthened its Board with a 50% Independent Director presence

• The Company created an instruction manual for employees, eliminating the room for

operational ambiguity

• The Company’s audit reports are reviewed by an Audit Committee headed by an

Independent Director

• The Company has adopted a whistle blower policy

• The Company created regional and central cell to address customer grievances.
Rural Services

Muthoot Finance was one of the first NBFC gold loan company to disburse

about half its loan book across rural India and a majority across rural/semi urban

India. Muthoot Finance energized the rural economy through the following initiatives:

• The Company provided last mile financing by locating itself close to consumer clusters

• The Company provided privileges to repeat customers

• The Company provided loans without any penalty for prepayment and levied interest

only for actual number of days which the loan was availed.

• The Company standardized practices, demonstrated transparency in operations and

reinforced safety for pledged ornaments, providing comfort to rural borrowers. Our

trained staffs, drawn from the same locality, provide a friendly service.

“Desire is the key to motivation, but it’s determination and commitment to an

unrelenting pursuit of your goal — a commitment to excellence — that will enable you to

attain the success you seek.” — Mario Andretti

Growth and money cannot sustain an organization for as long as uniqueness and

excellence can. We at Muthoot Finance Limited are harbingers of this belief since our

inception. Moreover, being a part of the rapidly growing family, Muthoot Group, fosters

in our culture, profound values of integrity, honesty and humility.

Vision
“Be the most trusted, globally diversified institution enriching lives of the masses while

contributing back to the society.”

Mission

“To build leading customer-centric businesses enabled by technology, maintaining the

highest standards of corporate governance and uncompromising values.”

These values were inculcated when the company was formed, with the vision of “creating

an organization capable of serving the versatile needs of a growing Indian financial

market”. The purpose at hand is to identify and utilize untapped sections of the market

and reach out to as wide an audience as possible. The focus of the company is on

creating liquidity with an asset class, namely gold, that has the largest consumer market

in India. We see it as one of the pre-eminent ways of creating wealth in the economy.

With over 6 million loan accounts in its loan portfolio, Muthoot Finance is recognized as

a pioneer in gold financing. Undoubtedly, gold funding is our niche; nonetheless our

lending’s are not restricted to gold loans. An assorted asset portfolio impels us on the

road to pioneer a competent financial market.

At Muthoot Finance, we understand the responsibility that rests on our

shoulders. Being a company with an increasing asset base, we take upon ourselves the

onus of ensuring smoother processes of monetary transactions, whether they are money

transfer, gold loans or gold bonds. Being entrusted with the purpose of delivering value

enables us to consider each customer’s need as unique. We cater to gold loan

requirements varying from a principle loan amount of Rs. 1500 up to the maximum

extent of Rs 10,000,000 (1 crore). This is instrumental in accomplishing our objective of

holistic growth for the economy.

Our Products

• Gold loans

Other services

• Money transfer services

• Collection services

• Windmill Power Generation

The Company maintained an average of Rs. 5 lakh in cash across all its branches to meet

payout. Unexpected regional deficits were identified through a continuous monitoring of

respective branch balances as well as by arrangements with various banks followed by

immediate cash transfers. The Company’s structural liquidity

management system measures liquidity positions on an ongoing basis with a scrutiny of

liquidity requirements evolving under different assumptions. This monitors its asset and

liability matching on an ongoing basis to ensure adequate liquidity at all times.

Key initiatives, 2012-13

• Muthoot increased its borrowings from banks from Rs. 6,053 crore as on March 31,

2011 to Rs. 9,232 crore as on March 31, 2012

• The Company responded to the revised RBI capital adequacy ratio

requirement of 15% from March 31, 2012 with a 15.82% CAR as on March

31, 2012 and 18.29% as on March 31, 2013.

• The Company had Rs. 7,863 cr of outstanding Secured Non-convertible

Debentures portfolio as on March 31, 2013 to strengthen its funding pipeline

• The Company made two public issue of Secured Non-Convertible

Debentures raising Rs.1,153 cr

Sales and marketing

Muthoot’s sales and marketing team drives the Company’s widening presence, making it

possible to touch areas relatively under-served by the country’s banking network

(conventional and alternative) and reach customers closer to where they live or work. The

Company’s sales and marketing team comprised 1912 managers, marketing executives

and customer relations executives. The Company prides itself on being able to provide a

much-needed presence in rural and semi-urban centres. The Company has a direct

presence without franchisees. Muthoot’s network expansion is achieved through an

analysis of demographic, competitive, regulatory, customer presence and land availability

factors. In addition to promotional activities for new branches, the Company’s 1871

executives carry out loyalty programmes, make personal visits and cover high net worth

clients as well. The Company’s customer relations executives are responsible for product

promotion and telemarketing. The Company invests extensively in promotional TV

campaigns, print advertisements and road shows to enhance the Company’s brand and

gold loan product proposition. These initiatives translated into a sales and marketing

spend of Rs. 87 cr in 2012-13 (Rs. 65 cr in 2011-12).

Initiatives, 2012-13

• Penetrated new markets and reached a larger number of customers previously serviced

by the unorganized sector.

• Emerged as a lead sponsor for Delhi Daredevils in the 2012 Cricket IPL season,

graduating the Company’s recall from a South Indian company into a national brand

• Used wall paintings to advertise its presence in rural India

• Branded buses, bus depots, local trains and boats in high-traffic areas to enhance brand

visibility

• Repositioned gold loans from a distress to a smart lifestyle option to reduce the related

stigma, which helped expand the product to upper middle and upper income groups

comprising businessmen, vendors, traders and farmers. The Company will differentiate

its products from those offered by other financial institutions through

convenience, accessibility and expediency.

Corporate Social Responsibility

Muthoot Group is a responsible corporate citizen, enhancing value for its shareholders,

providing career growth for its employees and value for the communities of its presence
 CHAPTER-III
REVIEW OF LITERATURE
Financial analysis is the process of identifying the finance strengths and weakness

of the firm by property establishing relationship between the items of the Balance Sheet

and Profit and Loss account. Financial analysis can be undertaken by management of the

firm or by parties outside of the firm, viz., honors, creditors, investors and others to form

judgment about the operating performance and financial position of the firm. Users of the

financial statements can get better inside about the financial strengths and weakness of

the firm, to make their best use and to be able to spot out the financial weaknesses to take

suitable corrective actions. The future we plan of the firm should be laid down in view or

the firm’s financial strengths and weaknesses. Thus, financial analysis is the starting

point for making plants, before using any sophisticated and planning procedures.

Undertaking the past a prerequisite for anticipating the future. The natures of the analysis

where different depending on the purpose of the analyst. For example, Trade creditors

are interested in the firm’s ability to their claims over a very short period of time. They

will give the preference to the evaluating of the firms long term solvency and survival.

They analyze the firm’s profitability over time, its ability to generate cash to be able to

pay various sources of firms. Investors, who have interest their money in the firm’s

shares, or more concerned about the firms earnings. They restore more confidence in

those firms that shows study growth in earnings. It is helpful in assessing corporate

excellence, judging correct worthiness, forecasting bond ratings, predicting bankruptcy,

and assessing, marketer’s.

 In other words it can be explained as the final product of accounting work done

during the accounting period, which shows the financial position and resulting of

business activities for that accounting period. The financial statements is historical

documents and related to the past period or it can be explained as use of financial data in

the evolution of current and past performances of an enterprise and to assess items its

sustainability in future.

DEFINITIONS:

According to “FINNEY AND MILLER”, Financial analysis consist in separating

facts according to some definite plan, arranging them in group according certain

circumstances and then presenting them in a convenient and easily read and

understandable form.”

According to “JOHN MYERS, “Financial statement analysis is largely a study of

relationship among the various financial factors in a business as disclosed by a single set

of statements and a study of the trends of these factors, as shown in a series of

statements.”

The term financial statements generally include two statements.

1) Profit and Loss Account or Income Statement:

It is a report of business activities for definite accounting period and is prepared to

ascertain net profit or net loss by the enterprises for that period that includes items of

sales and other incomes, expenses and losses pertaining to the accounting period. Profit

and loss account is also calls income statement.

2) Balance sheet:
 It is a sheet of balances of assets, liabilities and capital as on a particular date. It is

a screen picture of financial position of enterprises or indicates the financial position of

the business as on certain date. For this reason it is also termed as position statement.

Features of Financial Analysis:

1. To present the complex accounting data in simple and understandable form

2. To classify the items given in profit and loss Account and Balance sheet in

convenient and related groups.

TOOLS OF FINANCIAL ANALYSIS:

The analysis and interpretation of financial statement is used to determine the

financial position and results of operations as well. A number of methods or devices are

used to study the relationship between different statements. The following methods of

analysis are generally used.

1) Comparatively statements

2) Trend analysis

3) Common size statements analysis

4) Ratio analysis

5) Fund flow statement analysis

6) Cash flow statements

FINANCIAL STATEMENTS
INTRODUCTION:
Accounting process involved recording, classifying and summarizing various

business transactions. The aim of maintaining various records is to determine

profitability of the enterprise from operation of the business and also to find out is

financial position. Financial statements are in term reports, presented annually and
reflect a division of the life of an enterprise in to more or less arbitrary accounting period

more frequently a year. The financial statement is an organized collection of data

according to logical and consistent accounting procedures its purpose is to convey of a

business firm.

DEFINITIONS:

According to John N. Myer “The financial statements provide a summary of the

accounts of a business enterprise, the balance sheet reflecting the assets, liabilities, and
capital as on a certain date and the income statement showing the results of operations
during a certain period”.

The term financial statement generally refers to following basic statements:

1. The income Statement.

2. The Balance Sheet.
3. A Statement of Retained earring.
4. A Statement of Changes in financial position.

FINANCIAL
STATEMENT
 STATEMENT STATEMENT OF
INCOME BALANCE OF CHANGES IN
STATEMENT SHEET RETAINED FINANCIAL
EARNINGS POSITION

Income Statement

The income statement (also termed as profit and loss account) is generally

considered to be the most useful of all financial statements. It explains what has

happened to a balance sheet dates. The nature of the ‘income’ which is the focus of the

income statement can be well understood if a business is taken as an organization that

uses ‘inputs’ to ‘produce’ output.

Balance Sheet

It is a statement of financial position of a business at a specified moment of time.

It represents all assets owned by the business at a particular moment of time and the

claims of the owners and outsiders against those assets at that time. The important

distinction between as income statement is for a period while balance sheet is on a

particular date.
Statement of Retained Earnings

The term retained earnings means the accumulated excess earnings over

losses and dividends. The balance shown by the income statement is transferred to the

balance sheet through this statement after making necessary appropriations. It is

fundamentally a display of things that have caused the beginning of the period retained

earnings balance to be changed in to the one show in the end-or-the-period balance sheet.

Statement of changes in financial position

The balance sheet shows the financial condition of the business at a

particular moment of time while the income statement discloses the results of operations

of business over a period of time for a better understanding of the affairs of the business,

it is essential to identify the movement of working capital or cash in the statement of

changes in financial position.

Nature of Financial Statements

The financial statements are prepared on the basis of recorded facts. The

recorded facts are those which can be expressed in monetary terms. The statements are

prepared for a particular period, generally one year. The transactions are recorded in a

chronological order as and when the events happen. The financial statements by nature
are summaries of the items recorded in the business and there statements are prepared

periodically generally for the accounting period.

The following points explain the nature of financial statements

1. Recorded Facts

The term ‘Recorded facts; refers to the data taken out from the accounting records.

The records are maintained on the basis of actual cost data. The figures of various

accounts such as cash in hand, cash at bank, bills receivables, Sundry debtors, fixed

assets are taken as per the figure recorded in the accounting books. As the recorded facts

are not based on replacement costs the financial statements do not show current financial

condition of the concern.

2. Accounting Conversions
Certain accounting converters are followed while preparing financial statements. The

conversion of valuating inventory at cost or market price, whichever is lower, is

followed. The valuing of assets at cost less depreciation principle for balance sheet

purposes statements comparable, simple and realistic.

3. Postulates
The accountants make certain assumption while making accounting records. One of

these assumptions is that the enterprise is treated as a going concern. The other

alternative to this postulate is that the concern is to be liquidated the concern. So the

assets are shows on a going concern basis. Another important assumption is to presume

that the value of money will remain in the same in different periods.
 4. Personal Judgments
Even though certain standard accounting conversions are followed in preparing

financial statement but still personal judgment of the accountant plays on important part.

Characteristics of financial statement

The financial statements are prepared with a view to depict financial position of a

concern. The financial statements should be prepared in such a way that they are able to

give a clear and orderly picture of the concern. The ideal financial statement has the

following characteristics.

1. Depict true financial position

The information contained in the financial statements should be such that a true
and correct idea is taken about the financial position of the concern.

2. Attractive
The financial statements should be prepared in such a way that important information is
underlined so that it attracts the eye of the reader.

3. Comparability
The results of financial analysis should be comparable. The financial statements should
be presented in such a way that they can be compared to the previous year’s statements.
Previous year’s figures in the balance sheet.

4. Brief
If possible, the financial statements must be prepared in brief. The reader
will be able to form as idea about the figures.

Importance of financial statements

 Financial statements contain a lot of useful and valuable information
regarding profitability financial position and future prospective of business concern. The
utility of financial statement to different parties may be summarized as follows:

1. Management
The financial statements are useful for assessing the efficiency of different cost
centers. The management is able to decide the course of action to be adopted in future.

2. Creditors
The trade creditors are to be paid in a short period. The CRS will be interested in
current solvency of the concerns. The calculations of current ratio and liquid ratio will
enable the creditors to assess the current financial position of the concerns in relation to
their debts.

3. Investors
The investors include both short-term and long term investors. They are
interested in the security of the principal amounts of loan and regular payments by the
concern. The investors will not only analyze the parent financial position but will also
study the future prospectus and expansion plans of the concern.

4. Government
The financial statements are used assess tax liability of business enterprises. The
Government studies economic situation of the country from these statements. These
statements enable the government to find out whether business is following various rules
and regulations or not.

5. Trade Association
 These associations provide service and protection to the members. They may
analyze the financial statements for the purpose of providing facilities to these members.
They may develop standard ratios and design uniform system of accounts.

6. Stock Exchange
The stock exchange deal in purchase and sale of securities of different companies.
The financial statements enable the stock broker to judge the financial position of
different concerns. The fixation of prices for securities etc. is also based on the
statements.

LIMITATIONS OF FINANCIAL STATEMENTS

Financial statements are relevant and useful for the concern, still they do

not present a final picture of the concern, and otherwise misleading conclusions may be

drawn. The financial statements suffer from following limitation:

1. Ignoring of non-monetary aspects

These statements are prepared with the help of accounting information

which mainly consider monetary aspects only. The value of business depends both on

qualitative and quantitative factors.

2. Historical cost
3. The statements are prepared on the basis of historical cost. The value of fixed

assets is at their original cost less depreciation. The balance sheet value are not

shown the value of assets may be sold more over they do not reflect the market
 value which is as important factor in determining the solvency of an enterprise.

4. Personal Judgment
In preparing financial statements certain items are left to the personal Judgment of
the accountant. If any accountant is not following accounting principles correctly his
judgment will give wrong picture.

5. Conversion of Conservation
Due to conversion of conservation the income statement may not disclose true
income of the business. This is due to ignorance of probable incomes and accounting
probable losses.

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strength and

weakness of the firm by properly establishing between the items of the balance sheet and

profit and loss account. There are various methods or techniques used in analysis

financial statements such as comparative statements, trend analysis, common size

statements, schedule of changes in working capital, funds flow and cash flow analysis –

Cost Volume Profit Analysis and Ratio Analysis.

Meaning and concept of financial analysis

The terms ‘financial analysis’ also known as analysis and interpretation of

financial statements refers to the process of determining financial strength and

weaknesses of the firm by establishing strategic relationship between the items of the

balance sheet, profit and loss account and other operative data.
Types of financial analysis

Financial analysis can be classified in to different categories depending up

on:

A. On the basis of material used.

B. On the basis of modules operand

 Types of
Financial
Analysis

On the basis On the basis

of material of modules
Used Operandi

Internal External Horizontal Vertical

Analysis Analysis Analysis Analysis

[A] In the basis of material used

According to the basis, financial analysis can be of two types.

External Analysis

This analysis is done by those who are outsiders for the business. These
persons mainly depend up on the published financial statements. Their analysis serves
only a limited purpose.
Internal Analysis

This analysis is done by persons who have access to the books of account and at

other information related to the business. Such as analysis can be done by executives and

employees of the organization. The analysis is done depending up on the objective to be

achieved through this analysis.

[B] On the basis of modules operandi

According to this financial analysis can also be of two types:

Horizontal Analysis

In case of this type of analysis, financial statements for a number of years are

reviewed and analyzed the current year’s figures are compared with the standard or base

year. The analysis statement usually contains figures for two or more year and the

change are shown regarding each item from the base year usually in the form of

percentage. Since this type of analysis based on the data from year to year rather than on

date, it is also termed as “Dynamic Analysis”

Vertical Analysis

In case of this type of analysis a study is made of the quantitative relationship of

various items in the financial statement on a particular date. Since this analysis depends

on the data for one period, this is not very conductive to a proper analysis of the
company’s financial position. It is also called ‘static analyses as it is frequently used for

referring to ratio developed on one date or for one accounting period.

Techniques of financial analysis

A financial can adopt one or more of the following techniques/ tools of financial

analysis:

Financial
Analysis
Techniques

Comparative
Financial Trend Ratio Funds flow
Statements Percentages Analysis Analysis

Common Size
Financial Ratio C.V.P. Cash Flow
Statements Analysis Analysis
RATIO ANALYSIS

Financial analysis depends to very large extents of the use of ratios through there

are other equality important tools of such analysis. Thus, a direct examination of the

magnitude of two released items is somewhat enlightening but the comparison is greatly

facilitated by expressing the relationship as a ratio.

Ratio analysis of business enterprises enters on efforts to derive quantitative

measures or guides concerning the expected capacity of the firm to meet its future

financial obligation or expectations present and past data are used for the purpose and

whatever extrapolations appear necessary. They are made to provide no indication of

feature performance. Alexander Walt, who criticized the bankers for its lap sided

development owing to their decisions regarding the grant of credit on current ratios a

lone, made the presentation of an elaborate system of ratio analysis in1919.

Ratio

Ratio is an expression of the quantitative relationship that exists between the two

numbers. The ratio is defined as “the indicated quotient of two mathematical

expressions” the ratio should be determined between related accounting variables to be

meaningful and effective.

Techniques of Financial Analysis:

A financial analyst can adopt one or more of the following techniques/

tools of financial analysis:

• Comparative statement analysis

• Common-size statement analysis

 • Trend analysis

• Funds flow analysis

• Cash flow analysis

• Ratio analysis

• C.V.P. analysis

1. Comparative Financial Statement:

The statements which have been designed in a way so as to provide time

perspective to the consideration of various elements of financial position embodied in

such statements figures for two or more period side by side to facilitate comparison.

Both the income statement and balance sheet can be prepared in the form of

comparative financial statements

2. Comparative Income Statement:

The income statement discloses net profit or net loss on account of operations. A

comparative income statement will show the absolute figures for two or more periods, the

absolute change from one period to another and if desired the change in terms of

percentages. Since the figures for two or more periods are shown side by side, the reader

can quickly ascertain whether sales have increased or decreased, whether cost of sales has

increased or decreased etc.

3. Comparative Balance Sheet:

The balance sheet prepared on a particular date reveals the financial position of

the concern on the date to study the trends of business over a period of time comparative

balance sheet reveals the cause for changes in the financial position on amount of various
transactions. The comparative studies throw light on financial policies adopted by

management.

4. Common Size Statements:

Common-size statement is financial tool of studying key changes and trends in

financial position of the company. In common-size statement, each item is stated as a

percentage of the total of which that is a part; each percentage exhibits the relation of the

individual item to its respective total. Therefore, the common-size percentage method

represents a type of ratio analysis.

5. Common Size Income Statement:

The common-size income statement is designed to exhibit what proportion of the

net sales has been absorbed by the various costs and expenses incurred by the enterprise,

and the proportion that remains as net income. For preparing common-size income

statement all items in the income statement are expressed in percentage from in terms of

total sales.

6. Common Size Balance Sheet:

Common-size balance sheet is prepared by setting the total assets as 100and

reducing individual assets into percentages of the total. Likewise, individual liability

items are expressed as percentages of the total liabilities.

Thus, the common-size Balance sheet percentage shows the relation of each asset

item to total assets and of each liability and owner’s equity item to total liabilities and

owners’ equity.

7. Trend Analysis:
 Trend analysis depicts behavior of the ratios over a period of time and the trends

in the operation of the enterprise. The trend figures are index figures giving a bird’s eye

view of the comparative data by presenting it over a period of time. Under this form of

analysis, generally financial ratios are studied for a specified number of years. It is a

dynamic analysis depicting the changes over a stated period.

8. Cost-Volume-Profit Analysis:

Cost – Volume – Profit analysis is an important tool of profit planning. It

studies the relationship between cost, volume of production, sales and profit. It is not

strictly a technique used for analysis of financial statements.

9. Ratio Analysis:

This is the most important tool available to financial analysts for their

work. All accounting ratios show relationship in mathematical terms between two

interrelated accounting figures. The figures have to be interrelated, because no useful

purpose will be served if ratios are calculated between two figures, which are not at all

related to each other.

10. Cash Flow Analysis:

Cash Flow Analysis enables the management to plan and co-ordinate the financial

operations of the enterprise, and furnish the basis for evaluating financing policies. It

provides a barometer for ensuring the profitability of the business and makes financing

problems of the business much more manageable.

11. Funds Flow Analysis:

Funds flow analysis has become an important tool in the analytical kit of and

financial managers. This is because the balance sheet of business reveals its financial
status at a particular point of time. It does not sharply focus those major financial

transactions.

Funds flow analysis reveals the change in working capital positions. It tells about the

sources from which the working capital was obtained and the purpose for which it was

used. Working capital being the life blood of the business. Such an analysis is extremely

useful.

Users of financial statement analysis:

Financial analysis is the process of identifying the financial strength and weaknesses

of the firm by properly establishing relationships between the items of the balance sheet and

profit and loss account. Financial analysis can be uncertain by management of the firm, or by

parties outside the firm viz. owners, creditors, investors and others. The nature of analysis

will differ depending on the purpose of the analyst.

Trade creditors are interested in firm’s ability to meet their claims over a very short

period of time. Their analysis will, therefore confine to the evaluation of the firm liquidity

position.

Suppliers of long -term debts are concerned with the firm’s long-term solvency and

survival. They analyze the firm’s profitability over time, its ability to generate cash to be

able to pay interest and repay principal and the relationship between various sources of funds.

Investors who have interested their money in the firm’s shares are most concerned

about the firm’s earnings. They restore more confidence in those firms that show steady

growth in earnings. As such, they concentrate on the analysis of the firm’s present and future

profitability. They also interested in the firm’s financial structure to the extent it influence the

firm’s earnings ability and risk.

 Management of the firm would be interested in every aspect of the financial analysis.

It is their over all responsibility to see that the resources of the firm are used effectively and

efficiently, and that the firm’s financial condition is sound.

Limitations of financial analysis

Financial analysis is a powerful mechanism of determining financial strengths and

weaknesses of a firm. But, the analysis is based on the information available in the financial

statements. Thus, the financial analysis suffers from the serious inherent limitations of the

financial statements. The financial analyst also to be careful about the impact of price level

changes, window-dressing of financial statements, change in accounting policies of a firm,

accounting concepts and conventions and personal judgment, etc.

Some of the important limitations of financial analysis are:

1. It is only study of interim reports.

2. Financial analysis is based upon only monetary information and non-monetary factors

are ignored.

3. It does not consider the changes in price levels.

4. As the financial statements are on the basis of going concern, it does not give the

exact position, thus accounting concepts; conventions cause serious limitation to

financial analysis.

5. Changes in accounting procedure by a firm may often make financial analysis

misleading.

6. Analysis means not an end itself. The analyst has to make interpretation and draw his

own conclusions. Different people may interpret the same analysis in different ways.

Comparative statements:
 The comparative financial statements are statements of the financial position at different

periods of time. The elements of financial position are shown in a comparative form so as to

give an idea of financial position at two or more periods. Any statement prepared in a

comparative form will be covered in comparative statements. From practical point of view,

generally one financial statement (balance sheet) is prepared in comparative from for

financial analysis purpose. Not only comparison of the figures of two periods. But also the

relationship between balance sheets enables an in-depth study of financial position and

operative results. The comparative statement show:

1. Absolute figures(rupee amounts).

2. Changes in absolute figures i.e., increase or decrease in absolute figures.

3. Absolute data in terms of percentages.

4. Increase or decrease in terms of percentages.

The analysts are able to draw conclusions when figures are given in a comparative

position. The figures of sales for a quarter, half-year or one year may tell only the present

position of sales efforts. When sales figures of previous periods are given along with figures

of current periods, then the analyst will be able to study the trends of sales over different

periods of time. Similarly, comparative figures will indicate the trend and direction of

financial position and operating results.

The financial data will be comparative only when some accounting principles are used in

preparing these statements. In case of any deviation in the use of the accounting principles.

This fact must be mentioned at the foot of the financial statements and the analyst should be

careful in using these statements. I.e. comparative balance sheet.

Comparative balance sheet:

 The comparative balance sheet analysis is the study of the trend of the same items,

group of items and computed items in two or more balance sheets of the same business

enterprise on different dates. The changes in periodic balance sheet items reflect the conduct

of a business. The changes can be observed by comparison of the balance sheet at the

beginning and at the end of period and these changes can help in forming an opinion about

the progress of an enterprise. The comparative balance sheet has two columns for the data of

original balance sheets. A third column is used to show increases in figures. The fourth

column may be added for giving percentages of increases or decreases.

Comparative income statement:

The income statement gives the results of the operation of the business. The

comparative income statement gives an idea of the progress of a business over a period of

time. The changes in absolute data in money values and percentages can be determined to

analyze the profitability of the business. Like comparative balance sheet, income statement

also has four columns. First two columns give figures of various items for two years .Third

and fourth columns are used to show increase or decrease in figures in absolute amounts and

percentages respectively.

Common size statements:

Preparation of comparative financial statements and the calculation of trend

percentages of ratios, as methods of analyzing financial statements have one common short

coming i.e the inability of the analyst to comprehend the changes that have taken place from

year to year in relation to the total assets, total liabilities and capital or total net sales. The

seriousness of this limitation is brought forth when a comparison is being made of two or

more business units or of one unit with statements for an industry as whole, because there is
no common base of comparison when dealing with absolute figures. However, in the case of

balance sheet, items are shown in the form of percentage, i.e. percentages or ratios of total

appropriate item (total assets, total liabilities and capital), a common base for comparison is

provided. The statement in this form is designated as ‘common-size statements’

Therefore ’common size’ statements are often called component percentage or 100

percent statements because cash statement is reduced to total of100 and each item is started

as a percentage of total of 100.each percentage shows the relation of the individual item to its

respective total.

Computation of common-size statements:

1. Total assets, total liabilities and capital and total net sales are started as 100percent.

2. The ratio of each statement item to the statement total is found out by dividing individual

money amounts by the total amount in the statement.

Common-size income statement:

The common-size income statement percentages show the amount or percentages of

net sales that has been absorbed by each individual cost or expense item. A comparison of

common-size income statement ratios is significant in as much as they show that a large

particular or smaller relative amount of net sales figure was used in meeting costs or

expenses, though percentages may be influenced by variations in sales prices, higher or lower

cost of goods acquired or both.

Common-size balance sheet :

The common size balance sheet percentages show the relation of each asset item to

total assets and each liability and capital item to total liabilities and capital. As these

percentages show the relationship balance sheet totals, variations from year to year do not
necessarily indicate changes in money amounts. In fact the balance sheet common size ratios

may reflect a change in the individual item, a change in total or a change in total or a change

in both.

Procedure followed for the computation of common-size statements:

The financial performance of the Nagarjuna Construction Company limited has been

compared with IVRCL infrastructure & projects ltd (a Hyderabad based company) , and

GAMMON India ltd.(a Bombay based company, founded by Mr .J.G.GAMMON) .which are

the competitors to the company in the construction industry, for the financial year 2008-

09.with the help of the common-size balance sheet.

Trend analysis

The financial statements may be analyzed by computing the trends of series of

information. This method determines the direction upward or downward and involves the

computation of percentage relationship that each statement item bears to the same item in

the base year. The information for a number of years is taken up to into one year

.generally the first year is taken as the base year. The figures of the base year are taken

as100 and the trend ratios for the other years are calculated on the basis of the base year.

The analyst is able to see the trend of the figures, whether upward or down ward. For

example, if sales figures for the year 2005 to 2010 are to be studied, then the sales of

2005 will be taken as 100 and the percentage of sales for all the other years will be

calculated in relation to the base year.

Procedure for calculating trends:

1. One year is taken as the base year. Generally, the first or last is taken as base year.

2. The figures of the base year are taken as 100.

 Trend percentage is calculated in relation to the base year. If a figure in the other

years is less than the figure in the base year the trend percentages will be less than 100

and it will be more than the 100 if figure is more than the base year figure. Each year’s

figure is divided by base year’s figures. The base period should be carefully selected.

The base period should be carefully selected the base period should be a normal period.

The price level changes in the subsequent years may reduce the utility of trend ratios. The

accounting procedures and conventions used for collecting the data and preparation of

financial statements should be similar; otherwise the figures will not be comparable.

Ratio analysis:

Ratio analysis is a widely used tool of financial analysis. It is defined as the

systematic use of ratio to interpret the financial statements so that the strengths and

weaknesses of a firm as well as its historical performance and current financial condition

can be determined the term ‘ratio’ refers to the numerical or qualitative relationship

between two items or variables. This relationship can be expressed as follows.

1. Percentages say net profits are 35 percent pf sales (assuming net profits of rs.25,

000and the sales of rs.1, 00,000).

2. Fraction (net profit is one fourth of net sales).

3. Proportion of numbers (the relationship between net profits and sales is 1:4).

The alternative methods of expressing items, which are related to each other. For

purpose of financial analysis, referred to as ratio analysis it should be noted that

computing the ratios does not add any other information not already interpret in the above
figures of profit and sales. What the ratios do is that they reveal the information in the

more meaningful way so as to enable us to draw conclusions from them.

Importance of ratio analysis:

As a tool of financial management, ratios are crucial significance. The importance

of ratio analysis lies in the fact that it presents on a comparative basis and enables the

drawing of inferences regarding the performance of a firm ratio analysis is relevant in

assessing in the respect of the fallowing aspects.

Liquidity position:

Suppliers of short term loans. With the help of the ratio analysis, conclusions can

be drawn regarding the liquidity of a firm. The liquidity position of a firm would be

satisfactory it is able to meet its current obligations when they become due. This ability is

reflected in the liquidity ratios of a firm. The liquidity ratios are powerfully useful in the

credit analysis by banks.

Long-term solvency:

Ratio analysis is equally useful for assessing the long-term financial viability of a

firm. This aspect of a financial position of a borrower is of concern to the long-term

creditors. Security analysis and present owners of the business. The long-term solvency is

measured by the leverage /capital structure and profitability ratios with focus on earning

power and operating efficiency.

Operating efficiency:

Yet another dimension of the usefulness of the ratio analysis, relevant from the

view point of management, is that it throws light on the degree of efficiency in the

management and the utilization of its assets. The various activity ratios measure this kind
of operational efficiency .in fact, the solvency of affirm is ,in the ultimate analysis,

dependant upon the sales volumes generated by the use of assets total as well as its

components.

Overall profitability:

Unlike the outside parties, which are interested in one aspect of the financial

position of the firm. The management is constantly concerned about the profitability of

the enterprise. That is they are concerned about the ability of the firm to meet its short-

term as well as long-term obligations to its creditors. To ensure a reasonable returns to its

owners and secure optimum utilization of assets of the firm. This is possible if an

integrated view is taken and all the ratios are considered together.

Inter-firm comparison:

Ratio analysis is not only throws light on the financial position of a firm but also

serves as a long stepping stone to remedial measures. This is made possible due to inter-

firm comparison and comparison with industry averages. A single feature of a particular

ratio is meaningless unless it is related to some standard or norm. One of the popular

techniques is to compare to the ratios of the firm with the industry average. An inter-firm

comparison would demonstrate the firm’s position with its competitors. If the results are

at various either with the industry average or with those of competitors, the firm can seek

to identify the probable reasons and, in that light, take remedial measures.

Limitations:

Ratio analysis has a number of pitfalls and in many respects. It is equally important to

have an idea of these. As it is to know that the mechanistic process of calculating the

ratios and deriving the results.

1. Ratios are useful in so far as they give expression to a study of the relative aspect

of a problem because ratio is meaningless by it and acquires significance only

when it is studied along with the other ratios. Thus the experience of a firm over a

period of time may be compared with that of the industry as a whole so that if

deviations are detected, they can be investigated. Similarly, a change in the

accounting policies by a firm will make inter-firm comparison meaningless.

2. Ratios are as a matter of fact tools of quantitative analysis and it is quite possible

that qualitative factors may be override numerical aspects with the consequence

that the conclusions from the ratio analysis may get distorted. Thus, despite the

fact that credit may be granted to a customer on the basis of the information

regarding the financial position of his business as gleaned from certain ratios,

ultimately the grant of credit depends upon the character and the managerial

ability of the customer.

3. Another limitation of ratio analysis lies in the illusionary aspects of the

accounting data. Which lend an air of precision to the arithmetical results due to

the numerical nature of such data. In fact, data are usually estimates regarding the

life of assets, proper rate of depreciating assets, provision for doubtful debts etc.

hence the analyst should not feel unnecessarily elated with the result of his

calculations.

4. In a way ratios are attempt to delve in the past as financial statements, from which

they are derived historical documents. On the other hand, in the modern business

it is more important to have an idea of probable happening in the future, rather

 than of those in the Past. From this point of view, ratios will have relevance only

if they are able to give a linking of this future.

Types of ratios:

Several ratios calculated from the accounting data, can be grouped into various

classes according to the financial activity or function to be evaluated. In view of

requirements of the various users of ratios, we may classify them into the fallowing

categories.

1. Liquidity ratios.

2. Leverage ratios.

3. Turnover ratios.

4. Profit margin ratios.

5. Return on investment ratios.

6. Valuation ratios.

Liquidity ratio:

The liquidity ratio measures the ability of a firm to meet its short-term

obligations and reflect short-term strength or solvency of a firm. The fallowing are

liquidity ratios.

Net working capital:

Net working capital represents the excess of current assets over current liabilities.

The term assets refer to the assets that can be converted into the cash with in very span of

time and without diminution in the face value. Current liabilities are those liabilities,

which has to be paid in the short period.

Net working capital=current assets-current liabilities.

Current ratio:

It is the ratio of current assets to current liabilities. The current assets constitutes

inventories, debtors, loans, advances and cash .where the current liabilities include

creditors, advances and provisions.

A current ratio of1.5:1desirable for the construction industry.

Current ratio= Current assets / Current liabilities

Quick ratio:

It is the ratio of quick assets to quick liabilities. Quick assets include inventories

and pre paid expenses as they take more time to convert into cash. To determine the

quick liabilities, bank overdraft will be excluded from the current liabilities, as it is

renewable.

Quick ratio=quick assets/quick liabilities.

Quick assets=current assets-current liabilities.

Quick liabilities=current liabilities-bank over draft.

Turnover ratio:

Turn over ratios is concerned with measuring the efficiency in the asset

management. These ratio measures how rapidly assets are converted into cash. These

ratios are also expressing the relationship between the amount invested in the assets and

the results accruing in terms of sales.

Inventory turnover ratio:

It will be calculated by dividing the cost of goods sold to the average inventory.

Cost of goods sold=net sales-gross profit.

Average inventory=opening inventory + closing inventory/2.

 Inventory turnover ratio=cost of goods sold /average inventory.

This ratio measures how quickly inventory is sold. It is the test of efficiency of

inventory management. A high ratio is desirable; a low ratio implies that the stock is

converting into cash slow rate.

Debtor’s turnover ratio:

It is determined by dividing the net credit sales by average debtors outstanding

during the year. In case information on credit sales is not available. Sales can be taking as

numerator.

D4ebtors turn over ratio= net sales /average debtors.

Net sales=gross sales-returns.

Average debtors=opening debtors + closing debtors/2.

The ratio measures how rapidly the debtors are collected. A high ratio is

indicative of shorter time lag between credit sales and cash collection. A low ratio shows

that the debts are not being collected rapidly.

Working capital turns over ratio:

This ratio is defined as it is cost of goods sold to the working capital.

Working capital turnover ratio=cost of goods sold/working capital.

Working capital=current assets-current liabilities.

Cost of goods sold=net sales-gross profit.

A high working capital turnover ratio indicates that efficient utilization of firm’s

funds. However, it should over-trading.

Fixed assets turnover ratio:

It is defined as net sales to the gross fixed assets.

 Fixed assets turnover ratio=Net sales / Gross fixed assets (including depreciation).

It is used to highlight the extent of poor utilization of machinery and equipment. A low

ratio is indicative of poor utilization of machinery and equipments. A high ratio is

preferable. Sometimes the purchase of asset may not result in higher sales but may cause

however in reduction in cost and thereby result in increase in profits.

Leverage or capital structure ratios:

Leverage ratios are designed to measure the contribution of the company‘s

owner’s funds to the capital structure and contribution of outsiders funds to the capital

structure.

Debt and equity ratio:

It reflects the relative claims or creditors and share holders against the assets of

the business. Debt usually refers to the long-term liabilities. Equity includes equity and

preference capital and reserves.

Debt equity ratio = long term liabilities / share holder’s funds.

A debt equity ratio of 2:1 is considered ideal. A firm with debt equity ratio of 2 or

less expose it creditors to relatively lesser risks. A firm with high debt equity ratio

exposes its creditors to greater risk.

Proprietary ratio:

It relates to the owners/ proprietary funds with total assets. The ratio indicates the

proportion of total assets by owners. It will be computed by dividing proprietor’s funds

by total assets.

Proprietary ratio = net worth / fixed assets.

Interest coverage ratio:

 This ratio indicates whether a business is earning sufficient profits to pay the

interest charges. It is calculated as

Interest coverage ratio = PBIT/Fixed interest charges.

PBIT = Profit before Interest and Taxation.

Fixed Interest Charges = Interest paid on term loans taken.

A ratio around 6 is normally considered ideal. The higher the ratio, the better it is, as it

indicates a greater margin of safety to the lenders of long term debt.

Overall profitability ratios:

Return on capital employed ratio:

This ratio reveals the earning capacity of the capital employed in the business. It

is calculated as

Profit before interest and taxation / capital employed.

Capital employed = equity share capital + preference share capital + reserves + long term

loans and debentures - fictitious assets - non operating assets.

The return on capital employed is exact measure of the firm’s ability to generate

return for its share holders. Return on capital employeed tells us whether an investor is

better of f continuing with his investment in the business or should he be looking for the

other opportunities .it should be more than the cost of capital employed. The higher the

return on capital employeed the better it is.

Return on net worth:

It indicates the return, which the share holders are earning on their resources

invested in the business. It is calculated as Profit after tax / net worth.

Where net worth=

 Equity share capital + preference share capital + reserves - fictitious assets.

The return on the net worth measures the returns being earned by the investors for

the funds invested by them .similarly, it estimates the earnings of investors in long-term

debt from the numerator. Only the earnings accruing to equity and preference share

holders are taken in the numerator.

Profitability ratios:

Profitability ratio measures the profitability of a concern. Generally they are

calculated either in relation to sales or in relation to investments.

Gross profit ratio:

Gross profit ratio is one of the most commonly used ratios. It reveals the results of

trading operation of the business. It indicates the profitability of the core activity of the

business. It is calculated as

Gross profit / net sales.

There is no ideal or standard gross profit ratio. The higher the ratio, the better will be the

performance of the business. However, gross profit of the current year must be compared

with previous years to know the change in performance.

Net profit ratio:

It indicates the result of overall operation of the firm. While gross profit ratio

indicates the extent of profitability of core business.net profit ratio tells us about the

overall profitability. It is calculated as

Profit after tax / net sales

The higher the ratio, the more profitable is the business. However, one must look at the

factors contributing to the net profit. For example; a low gross profit ratio coupled with a

relatively higher net profit ratio may suggest that the business is earning profits from

other income or from non-operating income.

Operating ratio:

It expresses the relationship between expenses incurred for running the business

and the resultant net sales. It is calculated as

Operating cost / net sales

Operating cost = cost of goods sold + office and administration expenses + selling and

distribution expenses.

A low operating ratio is an indication of operating efficiency of the business. lower the

ratio better it is.

Earnings per share:

It is the earnings accruing to the quit share holders on every one share held by

them. In other words, earning per share is the net profit after tax and preferences divided

that is earned on unit of equity share. It is calculated as

Profit after tax – preference dividend / number of equity shares.

The higher the EPS, the better the performance of the company. The EPS is one

of the motivating factors in investment analysis and perhaps the most widely calculated

ratio among all the ratios used the financial analysis.

 CHAPTER- IV
DATA ANALYSIS AND INTERPRETATION
Financial performance of Muthoot Finance Limited.
PARTICULARS FY 2014-2015 FY 2015-2016 % inc(+)/dec(-)
(Crs) (Crs) Over previous year
Sales turnover 45366 53588 8222
Expenditure 32178 38756 6578
Profit before tax 15144 13312 1872
Profit after tax 10042 8920 1122
Source: Annual Reports of Muthoot Finance Limited from 2009 to 2014

8222

53588 6578

38756

1872
45366 13312 1122
32178 8920
15144 10042
0
Sales turnover Expenditure Profit before tax Profit after tax

INTERPRETATION:
Turnover was increased 8222 crores and expenditure increased by 6578 crores. Profit
before tax of were increase by 1872 crores over previous year (13132 crores). The profit
margins strained 1122 crores during the current year due to steep increase of loans and
deposits.

Table NO 4.1 Balance Sheets of VSP Ltd. From 2009-10 to 2015-16 Sources of Funds
(Rs in Crores)
PARTICUALRS 31-03-16 31-03-15 31-03-14 31-03-1 31-03-10
Share Holders Fund
Share Capital 9827.32 9827.32 9827.32 9827.32 9827.32
Reserves & Surplus 5401.90 5057.68 4592.59 3653.72 1710.88
(A) 13229.22 12886.00 12419.91 11481.04 9538.20
 Loan Funds - - - - -
Secured Loans 1002.40 274.89 907.72 332.78 604.45
Unsecured Loans 861.87 825.27 100.04 107.95 312.51
(B) 1136.76 1232.55 1007.76 440.73 916.96
Current Liabilities - - - - -
Liabilities 3271.43 2871.95 2560.79 1610.15 1011.53
Provisions 1336.06 1435.89 1620.53 1581.47 1092.77
(C) 4607.49 4307.84 4181.32 3191.62 2104.30
Deferred Tax Liability - - - - -
(D) 79.97 97.82 124.49 163.12 291.29
Total (A+B+C+D) 25692.45 24523.21 27733.48 25276.51 32850.75
Source: Annual Reports of Muthoot Finance Limited from 20010 to 2016

Table NO 4.2 Application of Funds (Rs in Crores)

PARTICUALRS 31-03-16 31-03-15 31-03-14 31-03-13 31-03-12
Fixed Assets
Gross Block 9794.60 9473.90 8971.80 8900.83 8875.62
Less: Deprecation 8264.71 7008.55 6749.74 8516.19 7675.16
Net Block 1629.89 1465.35 1242.06 1394.64 1890.46
Held for Disposal 0.03 0.05 0.05 0.04 0.00
Capital Work-inprog. 9436.71 7506.90 4652.00 2087.19 597.19
(A) 11066.63 8972.30 5874.11 3471.87 2387.65
Investments (B) 0.58 0.25 0.05 0.05 0.05
Current Assets & - - - - -
Advances
Inventories 4254.71 2551.52 5215.28 2761.15 5203.24
Sundry Debtors 430.61 381.18 181.27 134.41 278.80
Cash & Bank 1998.89 5415.54 6624.17 7699.11 7194.68
Balances
Other Assets 95.96 187.40 458.91 792.43 814.48

Loans & Advances 1965.04 1465.02 3569.69 2958.49 3518.90

(C) 8625.21 9650.66 13859.32 21804.59 20448.10
Miscellaneous
Expenditure (D) 0.61 0.00 0.00 0.00 14.96
Profit & Loss A/C 0.00 0.00 0.00 0.00 0.00
(E)
 Total (A+B+C+D+E) 25692.45 24523.21 27733.48 25276.51 32850.75
Source: Annual Reports of Muthoot Finance Limited from 20010 to 2016

FINANCIAL ANALYSIS OF MUTHOOT FINANCE LIMITED

Current Ratio: Current Assets
Current Liabilities
Years Current assets Current Liabilities Ratio Sourc
2009-10 10572 2367 0.31
e:
2010-11 8200 5754 0.13
2011-12 19727 6909 0.15 Annu
2012-13 233722 44227 5.2 al
2013-14 73155 294162 4.02 Repor
ts of Muthoot Finance Limited from 2009 to 2014

6 Current Ratio
5

0
2009-10 2010-11 2011-12 2012-13 2013-14

INTERPRETATION:
The current ratio indicates that for every one rupee of current liability there is more

than two rupees of current assets, the current ratio of MFL is in excellent position, but the

current ratio decreasing from 2012-13 to 2012-2014 i.e., 5.2 and 4.02 respectively.

Gross profit Ratio:

 Years Net profit Turnover Ratio
2009-10
Years Gross
977
profit Turnover
6204 15.74
Ratio
2009-10
2010-11 1481
2275 10893
6204 20.38
23.87
2010-11
2011-12 3455
4941 23158
10893 21.33
31.07
2011-12 7612 23158 32.86
2012-13 13312 45790 29.26 Gross
2013-14 15114 53871 28.05 Profit :
GrossProfit X 100
Turnover

GROSS PROFIT RATIO

35

30

25

20

15

10

0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: It is seen from the above table GPR is favorable in all the years. This

ratio is in fluctuating trend.

Net Profit Ratio:

 2012-13 8920 45790 19.60
2013-14 10042 53871 18.64

Years Ratio
Debt Equity
Net
profi
t:

Turnover

Net profit Ratio

25

20

15

10

0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: It is seen from the above table NPR is favorable in all the years. This

ratio is in decreasing trend.

DEBT EQUITY RATIO:

 2009-10 31655 3711 8.53
2010-11 52805 5845 9.03
2011-12 119385 13343 8.94 Debt
2012-13 65102 29257 2.22 Equi
2013-14 85162 37355 2.27 ty
Years EBIT Capital Employed Ratio

Ratio :
Debt
Equity

Debt Equity Ratio

10

0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: The debt equity ratio indicates that every one rupee of shareholders fund

there is less than one rupee of outsider’s fund. The debt equity ratio is in good position

why because the debt always less than equity, but the this ratio from 2009-10 to 2013-14

is good to the MFL so that MFL’s management has take right decision for increasing this

ratio for benefit of trade on equity.

EBIT TO CAPITAL EMPLOYED:

 2009-10 1481 35367 0.04
2010-11 3455 58675 0.05
2011-12 7612 132754 0.05
2012-13 13312 233722 0.05
2013-14 15114 294162 0.05
EBIT TO Capital Employed = EBIT/Capital Employed

EBIT TO CAPITAL EMPLOYED

0.06

0.05

0.04

0.03

0.02

0.01

0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: EBIT To Capital Employed ratio seen all most constant during the
study period and equal EBIT to capital employed.

PBT to Net worth

 PBT to NW = PBT/Net Worth

Years Net profit Net Worth Ratio

2009-10 977 3711 0.26
2010-11 2275 5845 0.38
2011-12 4941 13343 0.37
2012-13 8920 29257 0.30
2013-14 10042 37355 0.26

PBT to NW

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: EBT To Net Worth ratio seen decreasing trend during the study
period and this ratio is not favorable.

Fixed Turnover Ratio

 Years Turnover Fixed Assets Ratio
2009-10 6204 34042 0.18
2010-11 10893 57064 0.19
2011-12 23158 130336 0.17
2012-13 45790 38947 1.16
2013-14 53871 95963 0.56

Fixed Turnover Ratio = Turnover/Fixed Assets

Fixed Assets Turnover Ratio

1.4

1.2

0.8

0.6

0.4

0.2

0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: Fixed Assets Turnover ratio is not good during the study period
except in the 2013-14. It implies that this most of the funds mobilized for increase the
fixed assets. This ratio is not favorable.
 Years Current assets Turnover Ratio
2009-10 10572 6204 0.18
Cu
2010-11 8200 10893 0.19
rre
2011-12 19727 23158 0.17
nt
2012-13 233722 45790 1.16
As
2013-14 73155 53871 0.56
set
s Turnover Ratio:

Current Assets Turnover Ratio = Turnover/Current Assets

Current AssetsTurnover Ratio

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2009-10 2010-11 2011-12 2012-13 2013-14

Interpretation: Current Assets Turnover ratio is not good during the study period
except in the 2012-13. It implies that this most of the funds mobilized for increase the
current assets. This ratio is not favorable.

CHAPTER – V
 SUMMARY, FINDINGS AND SUGGESTIONS

5.1 SUMMARY

This study concentrated on the financial state of affairs of the company

Muthoot Finance Limited. It involved study of Balance sheet profit and loss account and

ratio analysis and also their comparison over the last five years, it has presented a broader

picture of the financial position of the company. The study analyzed the company’s

success in being able to effectively manage its day to day requirements pertaining to cash

and funds flow and effectively channelizing the short term and long term funds of the

company to meet the requirements.

The performance of the Muthoot Finance Limited in terms of Sales and

Revenue has been satisfactory, the Company surrounded various adverse situations

during the past 5 years. The Company is planning to expand its branches in all the

country.
5.2 FINDINGS

 It is observed that debt equity ratio is in fluctuating trend during the study period

in the year 2012 to 2014 is favorable.

 It is observed that Total Assets of the Muthoot Finance Limited has been

increased trend during the study period.

 Current Assets turnover ratio is not favorable except in the year 2013-14.

 Current ratio of the firm for the past 5 years was also in decreased trend.

Maximum was seen in the year 2008-09 i.e. 4.96 times. And the minimum was

1.65 times in the year 2013-14.

 Liquidity ratio i.e. Current Ratio, Liquidity ratio, Cash to Current Liabilities are

up to conventional level and satisfactory. Overall liquidity position is good.

 Working Capital is in decreasing trend for the year 2007-08 to 2013-14. It can be

further improved by increase in current assets and decrease in Current Liabilities.

As per the Debt Equity ratio, it is found maximum ratio in the year 2013-14 i.e.

0.43 times.

 Profitability i.e. GP Ratio and NP Ratio are good during the study period.

 Proprietary ratio of the Firm has been fluctuated. Minimum ratio was seen in the

year 2008-09 and higher ratio was seen in the year 2013-14 i.e. 77.57% This ratio

reflects the share capital contribution was 0.71 paisa per rupee of the total assets.
 Return on Assets and Return on Capital employed of the Firm for the past 5 years

within decreased trend.

 As per the Comparative Statement analysis of 5 years, Progress of earnings is

quite satisfactory.

 Profitability of the Firm was not positive sign. Fixed Assets, Quick Assets and

Current Assets were at increasing trend.

 It is observed that during the year 2013-14, most of reserve funds of the firm are

mobilized to expand the existing project.

5.3 SUGGESTIONS

 High profit realization by selling the products in higher margins will eventually

result in higher cash accrual and hence higher credit rating.

 Since the firm performance is largely dependent on availability of sources of

income, In order to avoid the uncertainties in acquiring the income New and

innovative steps will be taken to effectively utilize the surplus funds.

 The present level of the cash can be used in expansion in order to maintain the

current ratio i.e., between current assets and current liabilities at the optimum

level.

 The other main area where Muthoot Finance Limited has tremendous scope for

improvement is in grants loans and commercial products. This will result in

better sales realization and higher profits.

 It is suggested that Muthoot Finance Limited should monitor its funds with long
 term investment it generated more income.

BIBLIOGRAPHY

Financial Management I.M. Pandey

Financial Management prasanna Chandra
Cost Management Accounting I.M. Pandey

Annual Reports of Muthoot Finance Limited

General Articles and Magazines of Muthoot Finance Limited
Website: www.muthootfinance.com
www.indiainfoline.com,
Newspapers: Deccan Chronicle, the Hindu.