Pages

METHODS OR DEVICES OF FINANCIAL ANALYSIS

1.   METHODS OR DEVICES OF FINANCIAL ANALYSIS
The following methods of analysis are generally used:
  • Comparative statements
  • Trend analysis
  • Common – size statements
  • Fund flow Analysis
  • Cash flow Analysis
  • Ratio Analysis
  • Cost – volume profit Analysis
2.   ANOTHER WAY TO ANALYZE THE FIRMS BY MEANS OF    CORPORATE     GOVERNANCE
From the above methods we have selected RATIO ANALYSIS to analyze the financial position of SAIL because this is one of the most powerful tools of analyzing the financial statement of a concern. It is from the help of ratios that the financial statement can be analyzed more clearly and decisions can made from such analysis.
RATIO ANALYSIS:
Ratio analysis is a technique of analysis and interpretation of financial statements. It is a process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weaknesses of a firm. The following are four steps involved in the ratio analysis:
  • Selection of relevant data from the financial statements depending upon the objective of analysis.
  • Calculation of appropriate ratio from the above data.
  • Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparison with the ratios of the industry to which the firm belongs.
  • Interpretation of the ratios.
CLASSIFICATION OF RATIOS (according to test)
In view of the financial management or according to test satisfied, various ratios have been classified as below:
  1. LIQUIDITY RATIO
  2. LONG TERM SOLVENCY RATIO
  3. ACTIVITY RATIO
  4. PROFITABILITY RATIO

LIQUIDITY RATIO
Liquidity refers to the ability of a concern to meet its current obligations as and when these become due. The short term obligations are met by realizing amount from current flotation or circulating assets. The current assets should either be liquid or near liquid. The sufficiency or insufficiency of current assets should be assessed by comparing them with short- term liquidities. The current assets can pay off current liabilities, and then liquidity position will be satisfactory. On the other hand, if current liabilities may not be easily met out of current assets then liquidity position will be bad. To measure the liquidity of the firm, the following can be calculated:
  • Current ratios
  • Quick ratios
  • Absolute liquid ratios

LONG TERM SOLVENCY RATIOS
The term ‘solvency’ refers to the ability of a concern to meet long term obligations. The long–term indebtedness of a firm includes debentures holders, financial institutions providing medium and long term – term loans and other creditors selling goods on installment basis. The long term creditors of a firm are primarily interested in knowing the firm’s ability to pay regularly interest on long- term borrowings, repayment of the principal amount at the maturity and the security of their loans. The following ratios serve the purpose of determining the solvency of the concern:
  1. Debt-Equity ratio
  2. Funded-debt to total capitalization ratio
  3. Propriety ratio or equity ratio
  4. Solvency ratio or ratio of total liabilities to total assets
  5. Fixed assets to net worth or proprietor’s funds ratio
  6. Fixed assets to long-term funds or fixed asset ratio
  7. Ratio of current assets to proprietor’s funds
  8. Debt service ratio or interest coverage ratio
  9. Cash to debt service ratio

ACTIVITY RATIOS
Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of the sales. The better the management of assets, the large is the amount of sales and the profits. Activity ratio measures the efficiency or effectiveness with which a firm manages its resources of assets. These ratios are called turn over ratios because they indicate the speed with which assets are converted or turned over into sales. The following ratios are calculated:
  1. Inventory turnover ratio
  2. Debtors turnover ratio
  3. Fixed assets turnover ratio
  4. Total assets turnover ratio
  5. Working capital turnover ratio
  6. Payables turnover ratio
  7. Capital turnover ratio
PROFITABILITY RATIO
The primary objective of a business undertaking is to earn profits. Profit earning is considered essential for the survival of the business. Profitability ratios are calculated to measure the overall efficiency of the business. Generally, profitability ratios are calculated either in relation to sales or in relation to investment. The various profitability ratios are as follows:
IN RELATION TO SALES:
  • Gross profit ratio
  • Operating ratio
  • Operating profit ratio
  • Net profit ratio
  • Expense ratio

IN RELATION TO INVESTMENT
  • Return on investments
  • Return on capital
  • Return on equity capital
  • Return on total resources
  • Earnings per share
  • Price-earnings ratio

No comments: