ANALYSIS OF FINANCIAL PERFORMANCE Analysis and the interpretation of financial performance refers to the process of determining the financial strengths and weakness of a concern by establishing strategic relationship between the items of the balance sheets, profits and loss account and other operative data. Acc. to MYERS financial statements 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 trend of these factors as shown in a series of statements.
Classification on the basis of the modus operandi Vertical analysis or structural analysis: When an single set of financial statements relating to just one accounting year are analysed the analysis is known as vertical analysis, In the vertical analysis, the figures of the financial statements are analysed column wise i.e. a figure from one years financial statements is compared with a base figure selected from the same years financial statements Horizontal Analysis or Trend analysis: When the financial statement of a number of years is analysed, the analysis is called horizontal analysis. In other word horizontal l analysis is a type of analysis in which there is comparison of the trend of each item in the financial statements over a number of years
Financial statement is an organized collection of data to logical and consistent accounting procedures. The purpose is to convey and understand some financial aspects of business or a firm. It may show a position at a moment of times as in the case of balance sheet, or may reveal a series of activities over a given period of time, as in the case of income statements.
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 strength 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 quantitative relationship between two item/variables. This relationship can be expressed as (a) Percentages (b) Fraction. These alternative methods of expressing items which are related to each other are for the purposes of financial analysis, referred to as ratio analysis.
DEFINITION According to James C.VanHarne, Ratio is a yardstick used to evaluate the financial condition and performance of a firm, relating to two pieces of financial data to each other. Ratio is a relationship between two figures or factors or variables. Th e relationship between them helps to analyze and interpret the financial condition and performance when applied to the financial data. The accounting ratios indicate a quantitative relationship, which can be used for analysis and decision-making. A ratio is quotient of two numbers and the relation expressed between two accounting figures is known as accounting ratio
IMPORTANCE OF RATIO ANALYSIS The major benefits arising from ratio analysis are as follows: 1.Ratio analysis is a very powerful analytical tool used for measuring performance of an organization. 2.Ratio analysis concentrates on the inter-relationship among the figures appearing in the financial statements. 3.Ratios make comparison easy. The ratio is compared with the standard ratio and this shows the degree of efficiency utilization of assets, etc. 4.The results of two companies engaged in the same business can be easily compared (interfirm comparison) with the help of ratio analysis. 5.Short-term liquidity position and long-term solvency position can be easily ascertained with the help of ratio analysis. 6.Ratio analysis helps the management to analyze the past performance of the firm and to make further projections. 7.Ratio analysis allows interested parties like shareholders, investors, creditors, government and analysts to make an evaluation of certain aspects of firms performance. 8.The appraisal of the ratios will make proper analysis about the strength and weaknesses of the firms operations.
(Rs in lakhs)
Sl. No 1 2 3
Analysis:
The above table reveals that the current ratio was 0.791: 1 in the year 2009-10, 0.558: 1 in the year 2010-11 and 0.517: 1 in the year 2011-12. There is a decreasing trend in the ratio from past two years.
(Source: Table 1) Interpretation: The graph clearly indicates the current ratio in 2011and 2012 has decreased. The company is relatively having low current ratio which is not equal to 2:1. Hence from this we can say that the company is not in a satisfactory position to meet its current ratio obligations. Because of increase in current liabilities and decrease in current assets company has decrease in its current ratio.
Quick Ratio=
TABLE 2
(Rs in lakhs)
Sl. No 1 2 3
Current Liabilities Quick Ratio 19206.58 26578.71 28885.67 0.638 0.438 0.415
Analysis: The above table reveals that the quick ratio was 0.638: 1 in 2009-10, 0.438: 1 in 2010-11 and 0.415: 1 in 2011-12. Standard quick ratio is 1:1
(Source: Table 2)
Interpretation: The company has to be conscious with regard to quick ratio. From the analysis the companys quick ratio was decreased from 0.638 to 0.438 in 2010-11 to further to 0.415 in the year ending 2011-12. This is mainly because of low realization of sundry debtors and an increase in current liabilities and comparative decrease in cash and bank balance. Hence, the concern is not in a position to pay its short term liabilities. KSRTC has to increase its current assets to have a better position.
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Cash Ratio =Cash + Cash EquivalentsCurrent Liabilities TABLE 3 Cash and cash equivalents 3013.69 2866.84 4311.83 (Rs in lakhs)
Sl. No 1 2 3
Analysis: The above table reveals that the Cash Ratio was 0.16 in the year 2009-10, there is increase by 0.05 in the year 2010-11 i.e. 0.11 and for the year ending 2012 it was 0.15.
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(Source: Table 3)
Interpretation: A cash ratio of 1.00 and above means that the business will be able to pay all its current liabilities in immediate short term. But businesses usually do not plan to keep their cash and cash equivalent at level with their current liabilities because they can use a portion of idle cash to generate profits, which means that a normal value of cash ratio is somewhere below 1.00.
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It is computed as follows
TABLE 4
(Rs in lakhs)
Sl. No 1 2 3
Analysis: The operating expenses ratio is 1.07 in the year 2009-10; it has increased in the year 2010-11 i.e. 1.10 and in the year 2011-12 it is decreased to 1.05.
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(Source: Table 4)
Interpretation: Operating ratio shows the operational efficiency of the company. The lower operating ratio shows higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is generally considered as standard. Here the above graph shows that the ratio is higher than the standards, hence the operating profits are very less in KSRTC.
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TABLE 5 Sl. No. 1 2 3 Year 2009-10 2010-11 2011-12 Administrative Expenses 8676.5 9334.1 10895.27 Net Sales 151506.05 176899.01 211350.43
Analysis:The Administrative Expense Ratio was 5.73 in the year 2009-10 which was highest in these 3 years, it was decreased to 5.28 in 2010-11 and at the year ending 2012 it was 5.16.
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(Source: Table 5)
Interpretation: Increasing Administrative Expense Ratio is a generally of positive sign, but here in case of KSRTC it is decreasing, so this is a good sign. The rate of decreasing is low.
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ROCE= Return Capital Employed (Return= Net profit+ Financial Cost+ Provision Interest/Dividend from Non-trade Investments Capital Employed= Equity Share Capital+ Reserves+ Debenture and long term liabilities Misc. Expenditure)
Sl. No 1 2 3
Return
8134.11 3885.05
Analysis: The percentage of ROCE was 10.62% in the year 2009-10, it was increased to 10.92% in 201011 but for the year ending 2012 it is decreased to 4.73%.
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(Source: Table 6)
Interpretation: The ROCE percentage had increased in the year 2010-11 to 10.92% from 10.62% in the year 2009-10. But in the year ending 2012 it is4.73%, since the net profit is very less during the year, the rate of return is very low.
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TABLE 7 Sl. No. 1 2 3 Year 2009-10 2010-11 2011-12 Net profit 4884.68 6205.26 1951.68 Equity Capital 29088.7 29088.7 29088.7
(Source: secondary data companys financial statement) Analysis: The above table reveals that the rate of return on equity was 16.79% in the year 200910, increased to 21.33% in the year 2010-11 and at the year ending 2012 it was decreased to 6.71%.
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(Source: Table 7)
Interpretation: Above graph shows in KSRTC Return on Equity was highest in year 2010-11 in these 3 years i.e. 21.33%, since in that year net profits was highest among the 3years. The Equity Capital of the remains the same for these three years, so the variation in the rate is only due to the increase and decrease in net profits of the company.
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It expresses the relationship of gross profit to net sales and is expressed in terms of percentage. Gross profit ratio is a tool that indicates the degree to which sales/revenue may decline without resulting in losses. It is calculated by following formula:
TABLE 8
(Rs in lakhs)
Sl. No 1 2 3
Analysis: The above table reveals that the Gross Profit ratio was 3.45% in the year 2009-10. The ratio was increased to 5.13% in the year 2010-11 and increased to 9.17% in 2011-12.
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(Source: Table 8)
Interpretation: Above graphs shows that for the year ending 2012, KSRTC has greater gross profit ratio i.e. 9.17% because during this period company had earned more revenue and operating expenses was less. Gross profit ratio was very low in the year 2009-10 i.e. 3.45% of thesethree years.
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TABLE 9
Sl. No 1 2 3
Analysis: The above table reveals that the NPR was 3.22 in the year 2009-10, 3.51 in the year 2010-11 and 0.93 for the year ending 2011-12.
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(Source: Table 9)
Interpretation: The comparison of NPR year to year, there is an increase and decrease during the study period. The ratio was 3.22 in the year 2009-10, later in the year 2010-11 it was increased to 3.51, it was because of increase in operating efficiency, good management and greater sale during the year. Whereas for the year ending 2011-12 the NPR was decreased to 0.93, it was due to additional expenditure incurred during the year and the sales growth percentage remained the same.
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TABLE 10
Sl. No 1 2 3
Analysis: The above table reveals that the debt equity ratio was 0.29 in the year 2009-10 and is decreased to 0.23 in year 2010-11 and it continued with same ratio for the year 2011-12.
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Interpretation: Above graph clears that KSRTC has relatively sound and less risk of long term debts in its financial structure. Because of increase in reserves and internal resources and repayment of long term debt, the company achieved favourable debt equity ratio.
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TABLE 11
(Rs in lakhs)
Sl. No. 1 2 3
(Source: secondary data companys financial statement) Analysis:The above table shows that in the year 2009-10 debt ratio was 0.41, it was 0.31 in the year 2010-11 and 0.30 in the year ending 2012
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Interpretation: The Debt Ratio less than 1 indicates that the company has more asset than debt. In the above 3 years the Debt Ratio is less than 1; hence the companys risk level is low.
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Fixed assets to Net worth ratio is a ratio measuring the solvency of a company.It indicates the extent to which the owners' cash is frozen in the form of fixed assets, such as land, building, machinery, plant and equipment to the extent which funds are available for the company's operations.
TABLE 12 Sl. No. 1 2 3 Year 2009-10 2010-11 2011-12 Fixed asset 134027.63 160374.32 182026.09 Net worth 98906.6 102893.56 106880.52
(Rs in lakhs) Fixed Asset to Net worth ratio 1.36 1.56 1.70
Analysis: The above table reveals that the fixed asset to net worth ratio was 1.5 in 2009-10, increased by 0.16 in the year 2010-11 i.e. to 1.66 and at the year ending it is increased to 1.76.
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Interpretation: As above graph showing that fixed asset to net worth ratio is increasing every year, KSRTC as a government company should invest more on fixed assets to improve its solvency position.
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