Analysis of Financial Statements (Project)
Analysis of Financial Statements (Project)
Analysis of Financial Statements (Project)
PROJECT REPORT
ON
I would like to express my deep sense of gratitude to my project guide Mr. Kamal
Abuja, my mentor at Indiabulls for his immerse support, help & cooperation at every
step of my project. Without his support this project would not have taken in present
form in reality.
I would like to thank all the faculty members of Delhi Institute of Advanced
Studies (DIAS) for extending time to time to help for the fulfillment of this project.
Their invaluable guidance all through this project has enabled me to complete project
work in systematic manner.
I also want to extend my deep sense of gratitude to all the members of Accounts
payable team who helped me to understand the intricacies of working of the
organisation & lent full cooperation & guidance, which was necessary for successful
completion of project.
Palka
2
Executive Summary
In any country; more so far a developing country like India; there is a great need for
capital formation through saving & investments. To achieve this objective individuals
as well as groups savings and investments are to be properly planned, promoted &
channeled.
When an individual or group saves some money and decides to invest the same in
various schemes provided by the financial institutions /companies, they directly
participate in economic development.
On the other hand Financial Institutions/ Companies fulfills the credit needs of a large
percentage of population in India. They offer consumer loans, personal loans,
securities, brokerage and other financial products and services to the customers and
helps to fulfill their dreams.
With the rapid growth and maturation of Indian financial markets provide a unique
opportunity to create a leader in diversified financial services, who is able to offer a
one stop shop for all investment & credit needs of retail clients and builds a long term
relationship with customers. It is believed that ultimately a hand full of big players
will emerge as winners as the credits and securities business continue to grow and
consolidate, and barriers to entry & scale advantages dominate the business.
Technology, analytics and national scale provide unique advantage to a business
model when combined with strong sales & marketing and local presence. Only a
handful of financial institutions are building a national brand & serving the customer
across product needs. With the power of information, technology and strong local
presence Indiabulls Financial Services Ltd. group, have built as winning national
scale credit and securities business.
3
Indiabulls has built one of the largest customer franchises in India with almost
3,00,000 customers as of March 2006. It is leading financial services and Real estate
company having presences over 414 locations in more then 124 cities.
It serves the customers with wide range of financial services and products from
securities, derivatives, trading, depository services, research & advisory services,
insurance, consumer secured and unsecured credit, loans against share & mortgage
and housing finance.
The project has been undertaken to study the financial position of the company, with a
view to understand the functioning & the whole ambit of the Indiabulls Financial
Services Ltd. Group including the Analysis of Financial Statements of four
subsidiaries viz. Indiabulls Financial Services Limited, Indiabulls Credit Services
Limited, Indiabulls Securities Limited & Indiabulls housing Finance Limited.
The project has been divided into 4 chapters. First chapter deals with the theoretical
aspects of the ‘Analysis of Financial statements’ including the Types of financial
statements, Types of financial analysis, Steps involved in financial statement analysis,
Nature & limitations of financial statements, Tools of Financial Analysis.
Second Chapter explains the theoretical aspect of ‘Ratio Analysis ‘, the tool that has
been used for the analysis of financial statements in the project including the
Definition of ratios, Classification of ratios, explanation of ratios covered by each
category, Advantages & Limitations of Ratio Analysis.
Third Chapter has exclusively been devoted to Calculation, analysis & interpratation
of ratios of four companies namely Indiabulls Financial Services Limited, Indiabulls
Credit Services Limited, Indiabulls Securities Limited & Indiabulls housing Finance
Limited for last 3 years.
Chapter 4 exclusively deals with the inter-firm comparisons. The ratios of the four
companies have been compared.
4
PALKA
Table of Contents
Acknowledgement………………………………………………. 2
Executive Summary…………………………………………….. 3-4
1. Introduction………………………………………….….6
2. Company Profile………………………………………..7-13
INTRODUCTION
Every country in the world tries to attain the economic development irrespective of
the degree of development. The economic development is influenced by economic
and non-economic factors. The economic factors include capital stocks and its role of
accumulation, capital output ratio in various sectors. Of course non-economic factors
include political freedom social organizations, general education etc. So among all the
economic developments finance has its key importance. It helps in economic
development, which is necessary for the growth of all economies. Adequate finance is
absolutely necessary to lubricate industrial machines to insure its smooth working.
Indiabulls has emerged as one of the leading and fastest growing in less than two
years since its initial public offering in September 2004. It has a market capitalization
of around US $ 800 million and consolidated net worth of around US $500 million.
Indiabulls has an extra ordinary financial performance as its revenues more than
tripled to Rs. 613.15 crores & it’s net profit after tax more than quadrupled to
Rs.253.36 crores.
The project has been undertaken in order to understand the changes in financial
position of the organisation over the last three years, brief explanation of the financial
services provided by the Financial Services Limited Group and real estate arm of the
6
oraganisation.. An effort has been made through this study to look into the growth
story of the organisation Indiabulls Financial Services Ltd. & also through its
subsidiaries over last 3 years
Company Profile
Indiabulls is India’s leading Financial Services and Real Estate company having
15000 employees with presence over 414 locations in more than 124 cities. Indiabulls
serves the financial needs of more than 3,00,000 customers with its wide range of
financial services and products from securities, derivatives trading, depositary
services, research & advisory services, insurance, consumer secured & unsecured
credit, loan against shares and mortgage & housing finance. With around 5000
Relationship Managers, Indiabulls helps its clients to satisfy their customized financial
goals. Indiabulls through its group companies has entered Indian Real Estate business
in 2005. It is currently evaluating several large-scale projects worth several hundred
million dollars.
Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay
Stock Exchange, Luxembourg Stock Exchange and London Stock Exchange. The
market capitalization of Indiabulls is around USD 800 million, and the consolidated
net worth of the company is around USD 500 million. Indiabulls and its group
companies have attracted USD 300 million of equity capital in Foreign Direct
Investment (FDI) since March 2000. Some of the large shareholders of Indiabulls are
the largest financial institutions of the world such as Fidelity Funds, Capital
International, Goldman Sachs, Merrill Lynch, Lloyd George and Farallon Capital.
Indiabulls is ranked 82nd in the list of most valuable companies in India in BT500.
Business of the company has grown in leaps and bounds since its inception. It hass
been rated as ‘Fastest Growing Large Cap Company’ in India in a report by
Business Today magazine in April, 2006 as revenue of the company grew at a CAGR
of 184% from FY03 to FY06. During the same period, profits of the company grew at
a CAGR of 268%.
7
Indiabulls became the first company to bring FDI in Indian Real Estate through a Joint
Venture with Farallon Capital Management LLC, a respected US based investment
firm. Indiabulls has demonstrated deep understanding and commitment to
Indian Real Estate market by winning competitive bids for landmark properties in
Mumbai and Delhi. In April 2006, Indiabulls announced demerger of its real estate
division to a separate entity.
Financial year 2006 was a transformational year for Indiabulls as the company
executed on its vision to be a leader in diversified financial services and branch out
beyond their heritage in securities business. It has launched its Housing Finance
Company, Indiabulls Housing Finance Limited, strengthened the position of
Indiabulls Credit Services Limited, and continued to show its leadership and
momentum in Securities business.
Indiabulls entered into real estate development through its associate companies 2005
to exploit the huge opportunity in an unconsolidated industry with fat margins and
huge market opportunities, where they can bring its strong execution skills and create
a national leader. Indiabulls partnered with strong international investors to acquire
projects in Delhi and Mumbai and have seen significant appreciation in the value of
holdings. Company kicked off strategic diversification by foraying onto booming real
estate sector by:
8
• Winning bids for Jupiter and Elphinstone mills in Mumbai as part of the NTC
Mills auction
• Forming joint venture with DLF Universal to acquire 35.8 acres of prime land
in south Delhi by putting in the highest bid of 450 crore in the auction carried
out by Delhi Development Authority
• Acquiring over 150 acres of land in Sonepat in national Capital Region
( NCR) to develop prime residential housing complex
Milestones of Indiabulls
9
2005-06 • Indiabulls has acquired over 115 acres of land in
Sonepat for residential home site development.
• Merrill Lynch and Goldman sac, one of the
renowned investment banks in the world have
increased their shareholding in Indiabulls.
• Indiabulls is a market leader in securities
brokerage industry, With around 31% share in
online trading,
• Farallon Capital and its affiliates, the world’s
largest hedge fund committed Rs. 2000 million
for Indiabulls subsidiaries Viz. Indiabulls Credit
Services Ltd. and Indiabulls Housing Finance
Ltd.
• Steel Tycoon Mr. LN Mittal promoted LNM
India Internet venture Ltd. acquired 8.2% stake
in Indiabulls Credit Services Ltd.
10
approval” from Government of India for
development of multi product SEZ in the state
of Maharashtra.
• Dev Property Development plc., has subscribed
to new shares and has also acquired a minority
shareholding from the Company.
CORPORATE STRUCTURE
INDIABULLS
Financial
Real Estate
Services
Group
Group-1
11
PRODUCT PORTFOLIO
1. Indiabulls Estate Ltd.: The real estate sector has been extremely fragmented
with local developers dominating the market. In March 2005 govt. opened real
estate sector to FDI. Indiabulls has positioned its real estates business to
benefit the national scale players who have the relationships with financers and
large corporate customers on one hand and have deep local market knowledge.
7 expertise to execute the projects in time and under the budget on the other
hand.Company has three major projects under development.
12
2. Indiabulls Properties Private Ltd. (IBPPL): This Company has acquired
successfully 11-acre site of Jupiter Mills auctioned by NTC in Mumbai. It is
currently developing a world class IT office complex at the acquired place.
3. Indiabulls Real Estate Company Private Ltd. (IBRECPL): This company
successfully acquired 8 acres site of Elphinstone Mills auctioned by NTC in
Mumbai and currently developing a world class IT office complex on the site
with an expected lea sable square footage of around 1.5 million square feet.
13
Chapter 3
Analysis of Financial statements-An overview
3.2.2 Balance Sheet: Accounting Standards Board, India has defined balance sheets
as, “ a statement of financial position of an enterprise as at a given date which
exhibits its assets, liabilities, capital reserves and other account balances at their
respective book values”. Balance sheet is a statement, which shows the financial
position of a business as on a particular date. It represents the assets owned by
the business and the claims of the owners and creditors against the assets in the
form of liabilities as on the date of statement. According to Harry G. Guthmann,
“ the balance sheets might be described as financial cross section taken at certain
14
intervals and earning statements as condensed history of the growth and decay
between the cross sections”.
3.2.4 Fund Flow Statement: According to Anthony,” The funds Flow Statement
described the sources from which the additional funds were derived and the use
to which these funds were put”. Funds flow statements help the financial analyst
in having amore detailed analysis and understanding the changes in the
distribution of resources between two balance sheet periods. The statement
reveals the sources of funds and their application for different purposes.
3.2.5 Cash Flow Statements: A cash flow statement depicts the changes in cash
position from one period to another. It shows the inflow and outflow of cash and
helps the management in making plans for immediate future. An estimated cash
flow statement enables the management to ascertain the availability of cash to
meet business obligations. This statement is useful for short term planning by
management.
3.2.6 Schedules & Note to Financial Statements: Schedules are the statements, which
explains the items given in the income statement and balance sheet. Schedules
are a part of financial statement, which give detailed information about the
financial position of a business organisation. Certain notes are often used to
supplement the information comprised in basic financial statements. These are
virtually a part of financial statements.
3.2.7 Annual Reports / Corporate reports: Apart from the financial statements annual
report contains other relevant information such as Management discussion &
15
analysis, Reports on corporate Governance, Director’s report, details of the
subsidiary companies. These reports play as important role as financial
statements of the company in understanding of the complete financial position.
16
Accounting conventions are the principles, which enjoy the sanctity of
application on account of long usage, are termed as accounting
conventions. E.g. consistency, conservatism, materiality, full disclosure.
17
viii) The accounting year may be fixed to show a favorable picture of
business. In case of sugar industry a balance sheet prepared in off-season
depicts a better liquidity than in the crushing season.
3.5.2 Common size Statements: The figures shown in financial statements viz. Profit
& loss account and balance sheet are converted to percentages so as to
establish each element to the total figure of the statement and theses statement
are called common size statements. These statements are useful in analysis of
the performance of the company by analyzing each individual element to the
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total figure of the statement. Theses statements will also assist in analyzing the
performance over years and also with the figures of the competitive firm in the
industry for making analysis of relative efficiency.
3.5.3 Trend Analysis: In trend analysis ratios different items are calculated for
various periods for comparison purposes. Trend analysis can be done by trend
percentages, trend ratios and graphic and diagrammatic representation. The
trend analysis is a simple technique and does not involve tedious calculations.
However, comparisons would be meaningful only when accounting policies
are uniform and price level changes do not present a distorted picture of
phenomenon. The trend analysis conveys a better understanding of
management’s philosophies, policies and motivations, which have bought
about the changes revealed over the years. Thus method is a useful analytical
device for the management since by substitution of percentages for large
amounts, the brevity and readability are achieved. However trend percentages
are not calculated only for major items since the purpose is to highlight
important changes.
3.5.4 Fund flow analysis: Fund Flow Statement: Fund flow analysis reveals the
changes in working capital position. Working capital is of paramount
importance in any business so this kind of a analysis proves to be very useful.
According to Anthony,” The funds Flow Statement described the sources from
which the additional funds were derived and the use to which these funds were
put”. Funds flow statements help the financial analyst in having amore detailed
analysis and understanding the changes in the distribution of resources between
two balance sheet periods. The statement reveals the sources of funds and their
application for different purposes. Fund flow analysis has become an important
tool for any financial analyst; credit granting institutions and financial
managers.
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3.5.5 Cash Flow Analysis: A cash flow statement depicts the changes in cash position
from one period to another. It shows the inflow and outflow of cash and helps
the management in making plans for immediate future. An estimated cash flow
statement enables the management to ascertain the availability of cash to meet
business obligations. This statement is useful for short term planning by
management.
3.5.6 Ratio Analysis: Ratio analysis is very important analytical tool to measure
performance of an organisation .The ratio analysis concentrates on the
interrelationship among the figures appearing in the financial statements. The
ratio analysis helps the management to analyze the past performance of the firm
and to make further projections. Ratio analysis allows interested parties like
shareholders, investors, creditors, government and analysts to make an
evaluation of certain aspects of firm’s performance. It is a process of
comparison of one figure against another, which make a ratio, and the appraisal
of the ratios to make proper analysis about the strength and weakness of firm’s
operations. This tool of financial has been discussed in detail in next chapter.
3.5.7 Value Added Analysis: ‘Value Added’ is a basic and important measurement to
judge the performance of an enterprise. It indicates the net value or wealth
created by the manufacturer during a specified period. No enterprise can survive
or grow if it fails to generate wealth. An enterprise can survive without making
profits but cannot survive without adding value.
‘Value added’ is described as “ the wealth created by the reporting entity by its
own and its employees’ efforts and comprises salary, wages, fringe benefits,
interest, dividend, tax, depreciation and net profit (Retained).
Value added is the increase in the market value brought by an alteration in the
form, location or availability of a product or service excluding the cost of
bought in material or services used in that product or service. To carry out the
Value added analysis, a typical statement of added value is prepared as routine
20
part of management information system. The value added statement is basically
rearrangement of information given in income statement.
21
(b) Vertical Analysis: In vertical analysis a study is made of the
quantitative relationship between he various items in the financial
statements on a particular date. It’s a static type of analysis or study of
position. Such an analysis is useful in comparing the performance of
several companies in the same group or divisions or department in the
same company. Since this analysis depends on the data for one period,
this is not very conducive to a proper analysis of the company’s
financial position. It is also called ‘ Static’ analysis as it is frequently
used for referring to ratio developed on the date or for one accounting
period.
Analysis can be done both horizontally and vertically. As a matter of fact one
type of analysis is incomplete in itself. Both are complementary to each other.
Both these analysis form the backbone of the technique of financial statement
analysis.
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Chapter 4
Ratio Analysis – An overview
4.1 DEFINITION
The term ratio implies arithmetical relationship between two related figures. The
technique of ‘Ratio Analysis’ as technique for interpretation of financial statements
deals with the computation of various ratios, by grouping or regrouping the various
figures and/or information appearing on the financial statements (either profitability
statements or balance sheet or both) with the intention to draw the fruitful conclusion
thereform. Ratios, depending on the nature of ratio, may be expressed in either of the
following ways:
(a) Percentage for example, Net Profit as 10% of Sales
(b) Fractions for example, retained earnings as 1/3 rd of share capital
(c) Stated comparison between numbers for example, Current assets as twice the
current liabilities.
The ratio can be defined as the qualitative or mathematical relationship that persists
between two similar variables. In other words it is the precise relationship between
two comparative variables in terms of quantitative figures (either in percentage or
proportion). Comparative variable should have the same unit of measurement.
This technique is based on the premise that a single accounting figure by itself does
not communicate any meaningful information but expressed as a relative to some
other figure. It may definitely give some significant information.
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(b) Income Statement Ratio: The ratio, which are computed by using the
figures in the income statements i.e. profit & loss account only are
called income statement ratios.
(c) Inter-statement Ratio: The ratios which are computed by using the
figures given in balance sheet as well as income statement both at a
time are regarded as inter-statement or composite ratios.
The above classification can be put as under also:
(a) Financial ratios: Ratios which are derived from comparisons of balance sheet items, or
of balance \sheet items with profit & loss items are known as financial ratios.
(b) Operating ratios: Ratios, which are derived from comparisons of items of income &
expanse, are termed as operating ratios.
2. Functional Classification: The classification according to the purpose of
computing the ratio is known as functional classification. On this basis, the
ratio may be classified in the following categories:
(a) Profitability Ratio: Ratio, which measures the profitability of a
business, is termed as profitability ratio. These highlight the
significance of end results of business activities. The main objective is
to judge the efficiency of the business.
(b) Turnover or Activity ratio: It is used to measure the effectiveness of
the use of capital/ assetsRATIOS
are termed as turnover or activity ratio.
(c) Solvency ratio: The ratio which test the financial position / status of an
enterprise are called solvency ratio. They can be further subdivided
into two parts:
--Short term Solvency Ratio
--Long term Solvency Ratio
Profitability Turnover Solvency
Ratios Ratios Ratios
1.Fixed Asset
1.Operating 1.Debt- Equity
Turnover
Ratio Ratio
Ratio
2. Net Profit 2. Proprietary
2. Current
Ratio Ratio
Assets
3. ROI (Return 3. Current Ratio
Ratio
on
3. Working
Investment) 24 Turn-
Capital
over Ratio
4. Capital
Turnover
Ratio
Functional Classification of Ratios
I Profitability Ratios:
The purpose of study & analysis of profitability ratio are to help assess the
adequacy of profits earned by the company & also to discover whether profitability is
increasing or decreasing. The profitability of the firm is the net result of a large
number of policies & decisions. The profitability ratios show the combined effects of
liquidity, asset management & debt management on operating results. Profitability
ratio are measured with reference to sale, capital employed, total assets employed,
shareholders fund etc. The major profitability ratios are following:
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(a) Operating Ratio: The ratio of all operating expanses (i.e. material used, labor,
factory overheads, administration & selling expanses) to sales is the operating
ratio. A comparison of the operating ratio would indicate whether the cost
content is high or low in the figure of sales. If an annual comparison show that
the sales has increased the management would be naturally interested &
concerned to know as to which element of the cost has gone up. It is not
necessary that the management should be concerned only when the operating
ratio goes up. If the operating ratio has fallen, through the unit selling price has
remained the same. Still the position needs analysis, as it may be the some
total of efficiency in certain departments & in efficiency in others. A dynamic
management should be interested in making a complete analysis.
Significance: The ratio is the test of operational efficiency with which the
business being carried. The operating ratio should be low enough to leave a
portion of sales to give affair return to investors. A comparison of operating
ratio will indicate whether the cost component is high or low in the figure of
sales. In case the comparison shows that there is increase in this ratio, the
reason for such increase should be found out & management be advised to
check the increase.
(b) Net Profit ratio: Net profit ratio relates net profit to net sales. Net profit is
“the excess of revenue over expanses during a particular accounting period”.
It is the net result of the working of a company during a period. The ratio may
be computed on the basis of net profit after tax or before tax or both.
This ratio could be compared with that of the previous years and with that of
competitors to determine the trend in Net profit Margins of the company & its
performance in the industry. This measure will depict the correct trend of
performance where there are erratic fluctuations in the tax provisions from year to
year. It is to be observed that majority of the cost debited to the profit & loss
account are fixed in nature & many increase in sales will cause the cost per unit to
26
decline because of the spread of same fixed cost over the increased number of
units sold.
Significance: This ratio help in determining the efficiency with which affairs of
the business are being managed. An increase in the ratio over the previous period
indicates the improvement in the operational efficiency of the business provided
the gross profit ratio is constant. The ratio is thus an effective measure to check
the probability of business.
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II. Turnover Ratios:
Turnover ratios are used to measure the effectiveness of the employment of
resources are termed as activity ratios. Since they relate to the use of assets for
generation of income through turnover, they are known as turnover ratios. How many
times the assets turnover during business operations – is to be measured by these
ratios. The greater the rotation of assets to generate sales, the better it is for the
business. The business would be more profitable if greater turnover is achieved with
lesser use of funds. Hence it is an indirect measure of profitability. More efficient the
operations of an undertaking, the quicker and more number of times the rotation is.
The rate of rotation of capital employed is a significant contributor of to the
profitability of an enterprise.
(a) Fixed Assets Turnover Ratio: This measures the company’s ability to
generate sales revenue in relation to fixed asset investment. In other words it
indicates the extent to which the investment in fixed assets contribute towards
sales. A low asset turnover may be remedied by increasing sales or by
disposing of certain assets or both. This is a difficult set of ratios to interpret as
asset values are based on historic cost. An increase in the fixed asset figure
may result from the replacement of an asset at an increased price. Or the
purchase of an additional asset intended to increase production capacity. The
later transaction might be expected to result in increased sales whereas the
former would more probably be reflected in reduced operating cost.
It is calculated as:
Fixed Assets Turnover = Net Sales
Fixed Assets
Significance:
A high fixed asset turnover ratio indicates the capability of the organisation to
achieve maximum sales with minimum investment in fixed assets. It in
indicates that the fixed assets are turned over in the form of sales more number
of times. So higher the fixed asset turnover ratio better will be the situation.
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(b) Current Asset Turnover Ratio:
The way fixed asset turnover ratio is calculated, similarly Current Assets
turnover Ratio is computed, since the total assets can be divided into two
major parts- fixed assets & current assets. Current assets are composed of
broadly Receivables (Debtors + B/R), stock and cash. The turnover of even
these three can be calculated separately to analyze which part of the working
capital or current assets is efficiently put to operations and which part not.
Net sales includes sales after returns, if any, both cash as well as credit.
Current asset ratio is calculated as:
Significance: A high working capital turnover ratio indicates the capability of the
organisation to achieve maximum sales with the minimum investment in working
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capital. It indicates that working capital is turned over in the form of sales more
number of times. As such, higher the ratio, better will be the situation.
(d) Capital Turnover Ratio:
Capital turnover ratio indicates, efficiency in utilization of capital employed in
generating revenue. This ratio indicates the efficiency with which the capital
employed is being utilized. It is calculated as:
Significance: The ratio indicates the extent to which the owners’ funds are sunk in
different kinds of assets. The high ratio is indicative of the sound financial status of
the company and the creditors are relatively at a comfortable position. Financing of
assets to the extent of more than 50% through the use of outside funds may be
dangerous for the enterprise.
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(ii) Short term Solvency Ratios
(a) Current Ratio: Current ratio measures the solvency of the company in the
short term. Current assets are those assets, which can be converted into
cash with in one year. Current Liabilities and provisions are those
liabilities that are payable within a year. A current ratio of 2:1 indicates a
highly solvent position. A current ratio of 1.33:1 is considered by banks as
the minimum acceptable level for providing working capital finance. A
very high current ratio will have adverse impact on the profitability of the
organisation. A high current ratio may be due to the piling up of inventory,
inefficiency in collection of debtors, high balances in cash and bank
accounts without proper investment. It can be calculated as:
Significance:
It indicates the backing available to current liabilities in the form of current
assets. In other words, a higher current ratio indicates that there are
sufficient assets available with the organisation, which can be converted
into cash, without any reduction in value, in a short span of time, i.e.
current assets, to pay off the liabilities, which are to be paid off in the
short span of time, i.e. current liabilities. As such higher the current ratio ,
better will be the situation.
4.3 ADVANTAGES OF RATIO ANALYSIS
‘Ratio Analysis is to a business what a score board is to a game’. The ratios
are useful in the following ways:
(i) Assessment of Financial health & operational efficiency: Ratios reveal
useful trends for assessment of financial strength and operational efficiency
of an enterprise.
(ii) Facilitates inter-firm Comparison: For inter-firm comparison, ratio analysis
is of immense importance. Suitable relationships can be established between
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various relevant factors in a concern and these can be compared with the
same in other units in the industry or average for the industry as a whole.
(iii)Intra firm comparison possible: The performance of different divisions of
the enterprise can also be compared suitably with the help of ratio analysis.
The departmental efficiency can be judged and appropriate decisions taken
in several directions.
(iv) Planning & Forecasting: Ratios not only perform post mortem operations,
but also serve as barometers for future. Ratios have predatory value and they
are very helpful in forecasting and planning the business activities for a
future period.
The ratio analysis is one of the most popular techniques employed to diagnose the
financial edifice and flow of funds of a firm. The ratios are used to locate symptoms
of problems.
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ratio is calculated on the basis of operating profit by one and net profit before
tax by the other and the net profit after tax by the third.
(v) Effect of inflation: Comparisons become meaningless since, on account of
change in the level of prices, the values shown in the financial statements
loose their significance. Adjustment in the values is required before
undertaking ratio analysis.
(vi) Accuracy of accounts: If the accounts have not been correctly prepared, the
ratio cannot be correctly computed. Ratios are only as accurate as the
accounts on the basis of which these are established. The effect of window
dressing should be eliminated after proper adjustments in case the ratio
analysis is to serve any useful purpose.
(vii) Cause-and-Effect Relation missing: The relationship of cause & effect is
necessary to be established before relating two variables. If ratios of not
significantly related figures are calculated, these will give misleading results.
The exact cause & the exact effect should also be very clear at the outset.
(viii) Correct Interpretation: Ratio computation leads us nowhere; accept to some
summarized figures only after studying the realities behind the financial
statements, the ratio can be correctly interpreted.
(ix) No suitable standards: Suitable standards for comparison are missing. In the
absence of a single standard, it becomes very difficult to apply the technique
to serve any effective purpose.
Chapter 5
Analysis & Interpretation of Ratios
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5.1 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS
FINANCIAL SERVICES LIMITED
I. Profitability Ratios
Operating Ratio
Calculation:
Operating Profit
0.2
0.1659
0.1858
0.15
Ratios
0.0836
0.1
0.05
0
2005 2006 2007
Years
Interpretation: From the above bar graph, it can be concluded that the operating ratio
of the company has increased to a great extent in the year 2006 & 2007 as compared
to 2005. From the figures it can be interpreted that the company’s operating expanses
has gone up considerably in the year 2005-06, which can be because of business
35
expansion spree. Increase in the operating expanses in 2005-06 was 781.8% while
increase in the sales was mere 296.72%. The operating expanses increased to 52.72%
in 2006-07 while sales increased to a higher proportion of 71%, indicating a better
operational efficiency achieved in 2006-07.
Calculation:
0.3
Ratio
0.2
0.1
0
2005 2006 2007
Years
Interpretation: From the bar graph showing the Net profit ratio, it can be very well
concluded that the net profit ratio is showing almost same trend as operating cost
ratio. The figure for net profit has obviously gone up by 214.57 % in the year 2005-06
but it was not proportionate to increase in sales that were approx. 296.72%, resulting
in a decrease in Net profit ratio. This decrease can again be apportioned to increase
36
operating costs in the same year. While situation has been improved to in the year
2006-07 as an increase of 71 % in sales has bought about 106.18 % increase in Net
profits making the picture better. But Net profit ratio for the year 2006-07 has not yet
crossed the 2004-05 mark. But if the trend continues, 2007-08 will see an improving
figure.
(ii) Returns on Capital Employed:
Capital Employed = Share capital + Reserves and surplus + Long term liabilities -
(Non-Business Assets +Fictitious Assets)
Calculation:
R.O.C.
0.1408
0.15
0.1 0.0850
Ratios
0.0586
0.05
0
2005 2006 2007
Years
20,873,998,850
Interpretation: From the figure shown above, the increasing trend of Return on
capital employed in clearly visible, which is obviously a good sign. In the year 2005-
06, 149.74 % increase in capital employed bought about 260.52 % increase in net
37
profit. While in year 2006-07 a mere 3.09% increase in capital employed bought
69.95 % increase in Net profit. It shows better fund management by the company &
overall increase in the efficiency of the business. It shows that borrowing policy of the
company was wise & economic and capital has been employed fruitfully.
Calculation:
300
200
100 18.75
12.862
0
2005 2006 2007
Years
38
Interpretation: A high fixed asset turnover ratio indicates the capability of the
organisation to achieve maximum sales with minimum investment in fixed assets and
vice-versa. A high fixed asset turnover in year 2004-05 shows better utilization of
fixed assets. But in year 2006-07, 13.956 % increase in fixed assets could bring about
an increase of mere 296.72 % in sales reducing the ratio to a great extent. It could be
because of high investment made by the organisation for business expansion. The
situation has slightly improved in the year 2006-07 as an increase of 17% in fixed
assets caused 71.07 % increase in sales. Hence the figures are moving to a better end.
Calculation:
0.15
0.1 0.0662
0.05
0
2005 2006 2007
Years
Interpretation: The current ratio figures are showing an increasing trend over the
years. A high & increasing current ratio figure indicates capability of the organisation
to achieve maximum sales with minimum investment in current assets. Here current
39
assets include Interest accrued, sundry debtors, cash & bank balances, Loans &
advances. In year 2005-06, an increase in 86.68 % in current assets resulted in
296.72% increase in sales. While an increase of 9.53 % in current assets in
year 2006-07, increased the sales to 71%. It shows a better current assets management
i.e efficient cash management & debtors management by the company.
Calculation:
0.15
0.1 0.0679
0.05
0
2005 2006 2007
Years
Interpretation: Working capital ratio is also showing an upward trend over three
years. It indicates the higher increase in sales with less than proportionate increase in
working capital. Hence an increasing working capital turnover ratio shows better
efficiency in utilizing working capital for achieving maximum sales. In year 2005-06,
40
an increase of 79.77 % in working capital showed approx. 292% increase in sales.
While in 2006-07 increase in working capital brought about almost proportional
increase in sales. The situation on this front is improving year by year.
Formula = Sales
Capital Employed
Calculation:
0.1 0.0634
0.05
0
2005 2006 2007
Years
Interpretation: Capital turnover ratio indicates the efficiency of the organisation with
which the capital employed is being utilized. A high turnover ratio indicates the
capability of the organisation to achieve maximum sales with minimum amount of
capital employed. From the above figure, it is clearly visible that the capital turnover
ratio is showing an increasing trend. In the year 2005-06,the ratio has increase 60% as
compared to year 2004-05, while the increase in approx. 65 % in the year 2006-.07.
41
As in year 2005-06, 147.52 % increase in capital employed, increased the sales to
296.72%. While in year 2006-07 a mere 3.122% increase in capital employed caused
71% increase in sales.
Calculation:
0.800
0.6486
0.600
0.400
0.200
0.000
2005 2006 2007
Years
Interpretation: Debt-Equity ratio indicates the stake of shareholders in the
organisation vis-à-vis that of creditors. The debt-equity ratio of the company is
showing a decreasing trend over the years. The ratio is very near to ideal figure in
42
2006. Further the decrease in 2007 to .64 indicates debt repayment or decreased
dependence on external liabilities while there is an increase in the shareholder’s fund.
Calculation:
Proprietory Ratio
0.8
0.5755
0.6
0.473
Ratios
0.4184
0.4
0.2
0
2005 2006 2007
Years
Interpretation: The above figure shows an increasing trend of proprietary ratio over
the years. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio has shown an increase of 13% in the year 2005-06 as compared to 2004-05.
While the ratio increased by 22 % in 2006-07. The increasing proprietary ratio is a
satisfactory indication of organization’s financial health.
43
(iii) Current Ratio:
Calculation:
Current Ratio
200
157.855
150
Ratio
100 86.869
50.39
50
0
2005 2006 2007
Years
44
5.2 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS
SECURITIES LIMITED
Profitability Ratios
0.3
0.2
0.1
0
2005 2006 2007
Years
Interpretation: From the figure give above, it can be seen that operating ratio has
decreased in the year 2005-06 & showed again an increasing trend in year 2006-07 &
reached a figure even more than year 2004-05. In the year 2005-06, 112.30 % increase
in operating cost resulted in 178.06% increase in sales, thus reducing the ratio.
Although the ratio decreased but it was high in absolute terms. In year 2006-07, 33%
increase in sales was bought about by 75.38 % increase in operating cost.
45
(ii) Net Profit Ratio:
Calculation:
0.2
0.1
0
2005 2006 2007
Years
Interpretation: Net profit ratio is showing a trend almost similar to operating cost
ratio. In year 2005-06, increase in sales was 178.06%, while there was more than
proportionate increase in net profit i.e. 281.78%, resulting in a maximum net profit
ratio of 37.50% over three years. However during the year 2006-07, due to increase in
operating expanses as shown by operating cost ratio, profits increased to mere 15.82
% while sales increased to 33%. Hence it can be concluded that the heavy operating
expanses in the 2006-07, resulted in a high operating cost ratio & lower net profit
ratio.
(iii) ROI (Return on investment)
It is calculated as:
46
Net profit before Interest & Taxes
Total Capital Employed
Capital Employed = Share capital + Reserves and surplus + Long term liabilities -
(Non-Business Assets +Fictitious Assets)
Calculation:
0.4 0.3502
0.2782
0.2
0
2005 2006 2007
Years
Net Sales
Fixed Assets (net)
Calculation:
8
5.5159 6.1815
6
Ratios
3.8913
4
2
0
2005 2006 2007
Years
Interpretation: Fixed asset ratio indicates efficiency of using the fixed assets by the
organisation. Higher the fixed asset ratio better will be the position. In year 2005-06,
148.13 % increase in fixed assets resulted in more than proportionate increase in sales
i.e. 178.06%. While in year 2006-07, an increase of 111.3 % in fixed assets bought
only 33% increase in sales. It can be because of investment in fixed assets, which
could not bring immediate increase in the sales.
Net Sales
Current Assets
48
Calculation:
0.2
0
2005 2006 2007
Years
.
Interpretation: This ratio tests the efficiency or inefficiency in utilizing the
investment in current assets made by the organization. Higher ratio indicates the better
efficiency of firm investment i.e. the company can able to utilize their current assets
effectively for generating more sales/revenue. In 2005-06 the ratio decreased by
approx 3% while in 2006-07 the ratio again increased to 0.7542. It indicates that the
current assets utilization is done efficiently in the year 2006-07 as compared to
2005-06. The current assets increase by 33% in year by 2006-07, resulting in a
proportionate increase in sales i.e. 33%. As the current ratio has improved in the
recent years, the figures are showing appositive movement.
Net Sales
Working Capital
Calculation:
49
847,182,769
1
0.6726
0.5
0
2005 2006 2007
Years
Sales
Capital Employed
Calculation:
50
5,339,804,196
0.8 0.5954
0.5876
0.6
0.4
0.2
0
0.5876 0.5954 1.1787
Years
Interpretation: Capital turnover ratio indicates the amount of capital turned over to
achieve the sales/ revenues. In year 2005-06 capital employed increased to 2.74 times
which resulted in almost proportionate increase in sales i.e. 2.78times. While in year
2006-07 capital employed decreased, but sales increase by 33%, resulting in approx 2
times increase in Capital employed turnover ratio. It indicates the efficiency of
organisation in utilizing the capital resources. Capital employed ratio is increasing
over the years, indicating the improving situation, as higher the ratio better will be the
position.
External Liabilities
Shareholders’ funds
51
Calculation:
Debt-Equity Ratio
2.5
1.9376
2
Ratios
1.5
1 0.7939
0.5 0.1239
0
2005 2006 2007
Years
Calculation:
52
For year 2005-06 = 1,817,690,002 = 0.1881
9,659,152,087
Proprietary Ratio
0.6000
0.4768
0.5000
0.4000 0.3190
Ratios
0.3000 0.1881
0.2000
0.1000
0.0000
2005 2006 2007
Years
Calculation:
53
For year 2005-06 = 9,144,936,308 = 2.1372
4,278,809,843
Current Ratio
2.4
2.2245 2.1372
2.2
Ratios
2 1.8622
1.8
1.6
2005 2006 2007
Years
Profitability Ratios
54
(i) Operating Ratio
Operating Costs X 100
Net Sales
Opertaing Ratio
0.8
0.5902
0.6 0.4582
Ratios
0.4
0.2
0.0158
0
2005 2006 2007
Years
Calculation:
1 1.1358
Ratios
0
2005 2006 2007
Years
Interpretation: Net profit ratio is reflecting the increasing trend of operating cost. As
operating costs are increasing, net profit figure is decreasing resulting in a decrease in
Net profit ratio, which is also not a positive sign for the organisation. Sales increased
62.57 times in year 2005-06 while increase in profit was less than proportionate i.e.
19.82 times. While in year 2006-07, sales increase to 3.996 times, making net profits
increase to 2.84 times, which was very near to proportionate. But increase is sales was
lesser than the last year. The net profit ratio is required to increase in the coming
years, as decreasing ratio is reflecting inefficiencies in business operations.
56
For 2006-07 = 425,490,819 = 0.0902
4,716,634,402
Return on investment
0.2
0.1737
0.15
Ratios
0.1 0.0902
0.05 0.0168
0
2005 2006 2007
Years
Interpretation: Return on Investment indicates the Net profit earned on the total
capital employed. Return on capital employed is showing an increasing trend over the
years. In year 2005-06 increase in capital employed was 3.55 times which resulted in
more than proportionate increase in net profit before interest & taxes i.e. 19.07 times.
In year 2006-07, Capital employed increased to 1.55 times of previous year, while
sales increased to 2.98 times. The increase has been steeper in year 2005-06 as
compared to year 2006-07. It is good indicator for the organisation because in spite
of increasing operating costs, it is able to give increasing returns on capital employed.
Net Sales
Fixed Assets (net)
Calculation:
57
For 2006-07 = 3,121,564,463 = 15.675
199,133,425
17
15.675
16
15
14
2006 2007
Years
Net Sales
Current Assets
Calculation:
58
Current Assets Turnover Ratio
0.4
0.3693
Ratios 0.3
0.2 0.1559
0.1
0.00934
0
2005 2006 2007
Years
Interpretation: It indicates the efficiency in utilizing the current assets to achieve the
sales/ revenue. The current assets turnover ratio is showing an increasing trend,
showing that company is improving in utilizing its current assets. In year 2005-06, the
current assets had increased by 3.75 times while the increase in sales was more than
proportionate i.e. 62.57 times. In year 2006-07, an increase of 1.69 times sin current
assets bought about 3.996 times increase in sales. It can be concluded that the
company in improving upon the current asset utilization & managing them in efficient
manner.
Net Sales
Working Capital
Calculation:
59
Working Capital Turnover Ratio
0.6
0.5148
Ratios 0.4
0.2 0.1637
0.0094
0
2005 2006 2007
Years
Sales
Capital Employed
Calculation:
60
Capital Turnover Ratio
0.5
0.4267
0.4
Ratio 0.3
0.1656
0.2
0.1 0.0094
0
2005 2006 2007
Years
Interpretation: Capital turnover ratio indicates the amount of capital turned over to
achieve the sales/ revenues. In year 2005-06 capital employed increased to 3.552
times, which resulted in more than proportionate increase in sales i.e. 62.57 times.
While in year 2006-07 capital employed increased by 1.55 times while sales increase
by 3.996 times resulting in approx 2.5 times increase in Capital turnover ratio. It
indicates the efficiency of organisation in utilizing the capital resources. Capital
employed ratio is increasing over the years, indicating the improving situation, as
higher the ratio better will be the position.
External Liabilities
Shareholders’ funds
Calculation:
61
Debt-Equity Ratio
0.4
0.32865
0.3
Ratios 0.2
0.1
0.00012
0
2006 Years 2007
Interpretation: The leverage reflects the company’s capital structure, which is a very
important financial decision take by company. From the above information we can say
that in the year 2005 company had no debt in their total capital employed whereas in
year 2006 it had increased it to Rs. 568,748 out of the total capital employed. In year
2006-07, external liabilities increased 3182 times while shareholders funds increased
only by 1.17 times resulting in a high debt-equity ratio.
Calculation:
62
Proprietary Ratio
1.5
0.9937 0.9335
1
Ratios 0.5477
0.5
0
2005 2006 2007
Years
Interpretation: This ratio indicates the relationship between the owners’ fund and
total assets. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio is showing a decreasing trend over the years with minimum ratio in 2006-07,
however the ratio in more than 50%, reflecting a satisfactory position. The decrease in
proprietary ratio had been steeper in year 2006-07,as shareholder’s wealth increased
0.85 times while, total assets became 2 times of previous year.
63
Current Ratio
200
160.02
150
Ratio
100
50 20.999
3.539
0
2005 2006 2007
Years
Interpretation:
The current ratio indicates the short-term solvency position of a company. The ideal
ratio is 2:1 for current ratio. The ratio of company is showing a decreasing trend and
moving towards ideal figure. In the initial year i.e. 2005 & 2006 the ratio had been
very high indicating improper balance between current assets & current liabilities. The
ratio is required to be further lowered down by financing current liabilities from
current assets.
I. Profitability Ratios
64
Operating Ratio
0.3
0.2850
0.2
0
2006 2007
Years
Calculation:
0.4
0.2
0
2006 2007
Years
65
Interpretation: The Net profit ratio is reflecting the trend showed by operating
cost ratio. As Operating cost is increasing over the years, Net profit ratio is
showing a decreasing trend, which is not a good indicator. In year 2006-07, the net
sales have gone up by 31.6 times, while corresponding Net Profit after Tax figure
increased less than proportionate i.e. 23 times.
Capital Employed = Share capital + Reserves and surplus + Long term liabilities
(Non-Business Assets +Fictitious Assets)
Calculation:
Return on Investment
0.4 0.3206
0.3
Ratios
0.2
0.1 0.0156
0
2006 2007
Years
66
Interpretation: Return on Investment is showing an increasing trend, which is
positive sign. It shows that in spite of decreasing Net profit ratio & increasing
Operating cost ratio, company’s Return on Investment is increasing. In the year 2006-
07, Total Capital Employed increased only 1.26 times, while Net Profit before interest
& Taxes increased to 26 times the net profit figure of 2005-06.
Net Sales
Fixed Assets (net)
Calculation:
Net Sales
Current Assets
Calculation:
67
Current Ratio
0.4 0.3162
Ratios 0.3
0.2
0.1 0.0165
0
2006 2007
Years
.
Interpretation: As we know that current ratio indicates the efficiency of current asset
utilization, an increasing current assets turnover ratio reflects a positive picture.
Current assets have increased to 1.64 times in year 2006-07, while sales have
increased to 31.6 times which is very high as compared to increase in current assets.
Net Sales
Working Capital
Calculation:
0.3
0.2
0.1 0.0165
0
2006 2007
Years
68
Interpretation: It indicates the efficiency in working capital utilization in making
sales/Revenues. Working capital turnover ratio is showing an increasing trend.
Working Capital is showing an increase of 1.35 times, while sales have increased by
31.6 times.
Sales
Capital Employed
Calculation:
0.3
0.1653
0.2
0.1
0
2006 Years 2007
69
III Solvency Ratio
Calculation:
Proprietary Ratio
1.2
0.9952
1
0.7534
0.8
Ratios
0.6
0.4
0.2
0
2006 Years 2007
Interpretation: The above figure shows a decreasing trend of proprietary ratio over
the years. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio has shown a decrease of 24% in the year 2006-07 as compared to 2005-06.
Shareholder’s wealth increased to 1.26 times, while the total assets increased to 1.67
times.
NOTE:
C.A. include C.A.’s + loans and advances.
C.L. includes C.L.’s + Provisions.
70
Calculation:
Current Ratio
25
20.62
20
Ratios
15
10 5.52
5
0
2006 2007
Years
71
5.5 INTER-FIRM COMPARISON
59.02
60 51.25 45.82 51.6
39.14
40
28.5
20 18.58 16.59
8.36 5.44
1.58 0
0
2005 2006 2007
IFSL ISL Years
ICSL IHFL
72
Net Profit Ratio
120
100 113.58
Ratio (in%)
80 70.52
60 50.66
45.49 35.98 43.47
40 37.5 32.65
27.31 36.07
25.56
20
0
0
2005 2006 2007
IFSL Years
ISL ICSL IHFL
I. Return on Investment
Return on Investment
80
59.56
Ratios (in %)
60
40 35.02 32.06
27.82
20 14.08 17.37
5.86 8.5 9.02
1.68 1.56
0 0
73
IV. Fixed Assets Turnover Ratios
400.00
300.00
200.00
100.00
5.52 6.18 18.18 15.68 19.38
0.00 0 0 12.86 0 18.75 3.89
2005 2006 2007
IFSL ISL Years
ICSL IHFL
60.00
35.81 36.93
40.00 34.77 31.62
14.07 15.59 21.98
20.00 6.62
0.93 1.65
0.00 0
74
Working Capital Turnover Ratio
150.00 135.59
100.00
67.26 51.48
50.00 23.78 38.62
6.79 14.99 16.37
0.94 0 1.65
0.00
2005 2006 2007
IFSL ISL Years
ICSL IHFL
100.00
80.00 59.54
58.76
60.00 42.6741.30
40.00 16.56
20.00 6.34 0.94
10.17 16.53 16.87
0.00 0
2005 2006 2007
IFSL ISL Years
ICSL IHFL
75
II. Debt-Equity Ratio
Debt-Equity Ratio
250.00
193.76
Ratio (in %)
200.00
150.00 133.33 102.40
100.00 79.39 64.86
50.00 12.39 32.86
0.00 0.012
0.00
2005 2006 2007
IFSL Years
ISL ICSL
oprietary Ratio
Properietary Ratio
120.00
99.37
100.00 93.35 99.52
Ratio (in %)
80.00 75.34
54.77
60.00 57.55 47.68
41.84 47.30
40.00 31.90
18.81
20.00
0
0.00
2005 2006 2007
IFSL Years
ISL ICSL IHFL
76
Current Ratio
Current Ratio
200.00
157.86
Ratio (times)
160.02
150.00
100.00 86.87
50.00 50.39
20.99
2.22 0 2.14 20.62 3.54 5.52
1.86
0.00
2005 2006 2007
IFSL ISL ICSL
Years IHFL
77
Bibliography
Website
http://www.indiabnulls.com/
www.nseindia.com
www.investopedia.com
78