chapter i introduction...limitations of the study the study is subject to certain limitations in...

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CHAPTER I

INTRODUCTION

“In a modern money using economy, finance may be defined as the provision of

money at time it is wanted.” The ambitious plans of the businessmen would remain

mere dreams unless adequate money is available to convert them into reality. In the

early stages of industrial revolution, capital was not much consequent and the

financial requirements of businesses were limited. The methods of production were

extremely simple and tools and equipments were inexpensive. Labour was more

important, relatively than capital. Production could, thus, be termed as ‘Labour

intensive’. Under such a set up, finance didn’t pose any big problem. As the time

passed, industries grew and production began to be carried on a mass scale for

national and international markets. It necessitated the use of huge and complex

machineries, very large quantities of raw materials and large number of workers. All

these made industry ‘capital intensive’ and capital became the most important factor

of production.

Finance is required at different stages of business beginning from its formation,

expansion extending up to its winding up. The success of every business depends

upon the way in which required funds are arranged at the right time, in the right

quantity from right sources and at the least cost. All these aspects are covered by

financial management. Financial management in simple terms is concerned with

three broad decision areas like investment decisions, financing decisions and dividend

decisions.

In the present day Capitalistic regime the size of business enterprises is increasing

resulting into corporate empires empowered with a lot of social and political

influence. This makes corporate finance all the more important. Corporate finance is

also referred to as Financial Management. Every management aims to utilize its funds

is a best possible and profitable way. The success and growth of a firm depends upon

adequate return on investment. The investors or shareholders can be attracted by a

firm only by maximization of their wealth through the application of principles and

procedures as laid down by corporate finance.

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STATEMENT OF THE PROBLEM

To function to create profit and earn goodwill, all businesses needs the financial

support. To carry out its operations, they have to procure funds and make optimum

utilization of these funds. This calls for sound decisions making specifically when it

comes to decision pertaining to finance as all other decisions have financial impact.

Financial management is a managerial activity is a separate discipline; it has evolved

as a separate body of knowledge but still depends heavily on economics for its

theoretical concepts. Besides economic theories, it uses accounting knowledge,

mathematical rules, aspects of system analysis and behavioral science for arising

financial managers. The subject of financial management is of immense interest to

both academicians and practicing managers. Indeed, the emergence of financial

management as a separate discipline have increased the scope of Chartered

Accountants, Cost and Work Accountants, MBA holders etc. It is even important in

our personal life and inevitable in business life.

SCOPE AND SIGNIFICANCE OF THE STUDY

The study on ‘Financial Analysis and Performance Evaluation of Geodesic Limited’

is carried out to get a clear picture of the company by examining its liquidity,

profitability, return on capital employed, earnings per share etc. The performance

effectiveness of the company is also analyzed by comparing with past few years.

Geodesic is a technology company focused on delivering solutions/products in the

field of communication, content management, collaboration and customer

management to the enterprise and retail segments. As the company is dealing with

software development and hardware products, their main focus is on innovation. The

customer base of the company covers major financial institutions, banks, public sector

undertakings, multinational companies, broking houses, mutual funds and insurance

providers. The company assures that they design and build their products and

solutions to help their customers around the world to reduce their communication

costs and sales cycles and improve efficiency to grow their businesses. Hence, in the

world of innovation, a study on an Electronic Communication Technology Company

like Geodesic Limited who serves general public and government is significant from

economic point of view.

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OBJECTIVES OF THE STUDY

The main purpose of the study is to examine the financial performance of the

‘Geodesic limited’ for the last five years, with the help of their published financial

statements. Through the analysis, the following objectives are accomplished.

1. To assess the profitability, liquidity, solvency and efficiency of the company.

2. To assess the extent of operation and market performance

3. To decide about future prospects of the company

4. To analyze income and expenditure pattern so as to focus its impact on

profitability.

5. To calculate various ratios based on their final accounts.

METHODOLOGY

The proposed in the study is descriptive and analytical in nature. The study is based

on secondary data. The secondary data was collected from books, reports and

journals. The information so collected has been rearranged in a meaningful manner

for the purpose of analysis and interpretation. For analysis and interpretation of data

ratios, averages, charts etc. have been used.

PERIOD OF THE STUDY

The study covers a period of consecutive years from 2006-2007 to 2010-2011. For the

purpose of studying the performance of Geodesic Ltd the researchers have used the

data for five years commencing from 2006-2007 to 2010-2011.

LIMITATIONS OF THE STUDY

The study is subject to certain limitations in spite of the care taken in collection,

classification and analysis of data, the following limitations are noted.

1. The study has the limitations of accounting ratios.

2. The study was concerned on a single company and no comparison is being

made.

3. The study is based only on secondary data.

4. Only financial aspects are studied in detail.

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5. Financial statements are only interim reports and cannot be final because

true profit/loss can be ascertained only when the business is closed down

CHAPTERIZATION

CHAPTER I- INTRODUCTION

The introductory chapter starts with a brief introduction characterizing the importance

of finance in a business concern and emergence of financial management as a separate

discipline. It is followed by the statement of the problem, scope and significance of

the study, objectives of the study, methodology, period of the study and limitations.

CHAPTER II – FIANCIAL MANAGEMENT AND A COMPANY PROFILE

OF GEODESIC LIMITED

An overview of Financial Management and a detailed note on business of Geodesic

limited, products they offer to various market segments and operational and financial

highlights of the company is given in this chapter.

CHAPTER III- FINANCIAL ANALYSIS- A THEORETICAL FRAMEWORK

This chapter explains various tools and techniques which are generally used for

financial statement analysis to judge about the profitability, liquidity and solvency of

a concern.

CHAPTER IV – ANALYSIS AND ITERPRETATION OF FINANCIAL

STATEMENTS

For getting a clear picture of the company’s performance effectiveness and

management, the data collected are analyzed in detail making use of the tools such as

ratio analysis, comparative statement analysis and trend analysis.

CHAPTER V –FINDINGS, SUGGESTIONS AND CONCLUSIONS

The chapter deals with the observations during the study and suggestions given by the

researchers and conclusions drawn there from.

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CHAPTER - 2

FINANCIAL MANAGEMENT AND

COMPANY PROFILE OF GEODESIC LTD.

FINANCIAL MANAGEMENT- AN OVER VIEW

Financial Management is an appendage of the finance function with the creation of a

complex industrial structure, the function has grown so much that it has given birth to

a given subject- Financial Management- which is today recognized as the most

important branch of business administration. One cannot think of any business

activity in isolation from its financial implications. The management may accept or

reject a business proposition on the basis of its financial viabilities. In this connection,

Howard and Upton observe: “Financial Management involves the application of

general management principles to a particular financial operation”. Financial

management is that part of management which is concerned mainly with raising funds

in the most economic and suitable manner ; using these funds as profitably as

possible; planning future operations and controlling current performances and future

developments through financial accounting, cost accounting, budgeting, statistics and

other means.

Financial Management is dynamic, evolving or making of day to day financial

decisions in a business of any size. The old concept of finance as treasurer ship has

broadened to include the new, equally meaningful concept of controllership. While

the treasurer keeps track of moneys, the controller’s duties extend to planning,

analysis and the improvement of every phase of the company’s operations, which are

measured with a financial yardstick.

OBJECTIVES OF FINANCIAL MANAGEMENT:

• Profit Maximization

• Wealth Maximization

In the former approach, financial decisions are oriented to maximize the profits of

EPS of the shareholders. Those actions that increase profits are undertaken and those

decrease profits are avoided. Anyhow this objective is suitable only for sole trading

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concerns where an individual’s capital was employed in anticipation of returns to be

enjoyed by him.

The latter approach aims to maximize the market value of the shares of the firm.

Under this, those decisions which ultimately increase the value of shares, are

considered efficient decisions and decisions which result in decline in the share price,

are poor decisions. It means the aim of financial management is to maximize the

wealth of shareholders, who are the owners of the company.

A’S OF FINANCIAL MANAGEMENT

It refers to the role played by a financial management in a business enterprise.

• Anticipating financial needs

• Acquiring financial resources

• Allocating fund in a business

• Administrating the allocation of funds

• Analyzing the performance of funds

• Accounting and reporting to the management

The link between Economics and Financial Management is close. A study of financial

management is likely to be a barren if it is divorced from the study of Economics.

Modern financial management concentrates on Micro- economic areas with which a

business enterprise has to deal during its day to day operations.

FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT

Functional areas of financial management are the following:

Determining financial needs, determining sources of funds, Financial Analysis,

Optimal Capital Structure, Cost Volume Profit Analysis, Profit planning and Control,

Fixed assets management, Project planning and evaluation, Capital budgeting,

Working capital management, Dividend policies, acquisitions and merger and

Corporate taxation.

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FINANCIAL DECISIONS

These are the decisions relating to financial matters of a corporate enterprise. These

are areas of financial management, which facilitate a business firm to achieve wealth

maximization.

• Financial requirement decisions

• Investment decisions

• Financing decisions

• Dividend decisions

With technological progress, financial management almost forced to improve its

methodology. Such things as cost of capital, optimal capital structure, effects of

capital structure upon cost of capital and market value of a firm were incorporated in

the subject. Moreover financial management laid emphasis on international business

and finance, and showed a serious concern for the effect of multi- naturals upon price

level. The discipline of financial management was conditioned by changes in the

socio- economic and legal environment. Its emphasis shifted from profitability

analysis to cash flow generation; and it developed an interest in internal management

procedures and control. Modern financial management however, is basically

concerned with optimal matching of uses and sources of corporate funds that lead to

the maximization of a firm’s market value.

Finance function of a business is closely related to its other functional area. The

relationship between accounting and finance is intimate. Charles Gatenberg visualizes

the influence of scientific arrangement of records, with the help of which inflow and

outflow of funds can be efficiently managed and stocks and bonds can be efficiently

marketed. All the accounting tools and control devices, necessary for appraisal of

financial policy can be correctly formulated if the accounting data is properly

recorded. And hence the finance manager has to depend heavily on the accuracy of

the accounting data.

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COMPANY PROFILE OF GEODESIC LTD

OVERVIEW

Geodesic company is a technology company focused on delivering solutions in the

space of Communication, Content Management, Collaboration and Customer

Relationship Management to the enterprise and retail segments. Their innovative

products and services, emphasis on substantial cost reductions, and enhanced

productivity for the enterprise and retail segments, have lead to improve their earnings

and revenues, besides win several global awards. Their mobile products are used by

millions of people around 108 countries at the last count.

Genesis of Geodesic Limited (Geodesic) was started on 8th July of 1999 as Geodesic

Information Systems Private Limited. The Company is an innovator in software

products focused on Information, Communication and Entertainment for mobile

phones and desktop computers under the 'Mundu' brand name for the retail segment.

Headquartered in Mumbai, India, Geodesic's Mundu suite of award-winning products

includes solutions for Instant Messaging, Voice-over-IP and Internet Radio. Geodesic

has offices in Mumbai and Bangalore in India, USA (Silicon Valley), as well as

Sweden, Hong Kong and Singapore.

Their mission is to make Content, Communication and Collaboration accessible and

truly affordable across networks. This in turn will increase productivity and

efficiency. Fun at Work is the mantra at Geodesic. Geodesic is indeed, innovative in

practice.

MILESTONES

Following gives us a summarized picture of the progress of the company Geodesic

ltd.:

1999 - On 8th

July of 1999, Geodesic Ltd. came into existence as Geodesic

Information

Systems Pvt. Ltd.

2000 - The company launched Hamarashop.net (E-commerce portal) and Mundu IM

(world’s first truly Interoperable Messaging System)

2001 - The company launched Mundu IM on Indiatimes.com. in November.

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2003 - Launched company’s revolutionary technology ‘IM Around’

2004 - Won Deolitte Touche Tohmatsu Asia Pacific Technology Fast 500 Award in

January and started its operations for the first time in US.

2005 - Established its operations in UK, Hong Kong and Sweden.

2006 - Introduced a mobile VOIP product under the name ‘Mundu Speak’ in March.

2007 - The mobile entertainment product of the company, Mundu Radio had

received the ‘CNET Webware 100’ award for the mobile category in June

and in August the company designed its product Mundu IM for the iPhone.

2008 - Launched a New Era in Mobile Entertainment with True Internet Radio

Access in February and w.e.f. 19th

September the company changed its name

from Geodesic Information Systems to Geodesic Limited.

CUSTOMER BASE OF THE COMPANY

They address the following primary segments:

� ENTERPRISES

They provide enterprises with their Unified Communication and Collaboration stack,

the CRM module and Content Management System. These modules help Enterprises

in reducing their communication costs, enhancing their productivity through

collaboration, and reducing their sales cycle through better content analytics/

management and a powerful CRM.

� TELECOM OPERATORS AND HANDSET MANUFACTURERS

They have a deep line that easily adds value to Telcos and Handset Vendors who

solely rely on value added services and features they provide to their customers. They

bundle their applications on the handsets and are part of the offerings by the Telecom

Operators.

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� RETAIL CONSUMERS

They provide mobile consumers with products in the space of communication

including Mundu IM, Mundu Universal Messenger, Spokn, and Mundu SMS. They

offer streaming, live and on- demand content to users through Mundu Radio and

Mundu TV. All of their applications are available across multiple platforms including

iOS, Androld, Blackberry, Symbian, Java and on Windows and MacOS desktops. In

the last quarter they launched Carrom MP- a game based on Physics for iPad.

� SYSTEM INTEGRATORS AND VALUE ADDED RESELLERS

They recognize this as an extremely important segment. They integrate almost all of

their products and solutions and reach out to customers not easily accessible by them.

� GOVERNMENT AND FINANCIAL INSTITUTIONS

They provide GeoAmida (hand- held device) based solutions to this segment and on

offer are the following solutions: Mahatma Gandhi Rural Employment Guarantee Act,

Law Enforcement, Public Distribution Systems, Financial Inclusion and Remote

Health Management.

Geodesic now have 14 offices worldwide and over 700 employees. While they have

invested substantially in innovation and growth, they have managed to extend their

competitive advantage, fortified their leadership and retained their work culture.

SUBSIDIARIES AND ASSOCIATE COMPANIES

SUBSIDIARIES

Geodesic and its subsidiaries follow a consistent work ethos with a sprinkling of

region or country specific culture added into enhance the fun quotient across Geodesic

companies. Geodesic and its subsidiaries reflect their philosophy of innovation, adapt

to change and quick response to customer needs. Subsidiaries are:

• Chandamama India Ltd.

• FilmOrbit.com India Pvt. Ltd.

• Geodesic Grid point Energy Pvt. Ltd.

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The steps- down subsidiaries are:

• Geodesic Information Systems Inc, USA

• Geodesic Hong Kong Ltd, Hong Kong

• Interactive Network International British Virgin Islands

• Publicidad Digital SA, Uruguay

• Geodesic Technology FZE, Dubai

• Emilotto Associated Inc, Panama

Other two more companies

• Spokn Communications’ Pte. Ltd, Singapore

• Zomo Technologies Limited, British Virgin Islands

ASSOCIATE COMPANIES

ITM Digital Pvt. Ltd was incorporated as a Joint Venture Between ZEE

Entertainment Enterprises Ltd and Geodesic Ltd to offer applications for delivery of

content to mobile and internet devices through Mundu TV. Due to lack of

coordination between ZEEL and Geodesic, on mutual understanding and consent,

both the companies decided for the severance of the Joint Venture Agreement. The

deed of Cancellation was signed on 18th

April, 2011. Their holdings in ITM Digital

Pvt. Ltd were transferred to ZEEL as a mark of separation. A step- down subsidiary of

Geodesic Ltd is Republique Media Pvt. Ltd.

WORK CULTURE

Work culture at Geodesic involves challenges, healthy competition, constructive rule

breaking and above all, fun. Each employee becomes a part of the Geodesic family,

which extends beyond the boundaries of work. High retention has been achieved by

continuously upgrading the competencies of the employees. While their focused

initiatives at creating work life balances also serves as a powerful tool for increasing

retention in addition to other factors such as best pay packages and entrepreneurial

work styles.

Geodesic’s emphasis on innovation and commitment to cost containment means each

employee is a hand- on contributor. There is little in the way of corporate hierarchy

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and everyone wears several hats. At Geodesic, believe in transparency, flexibility,

interaction, integration of thoughts, ideas, culture, values and results across the

organization irrespective of the hierarchy. Though growing rapidly Geodesic still

maintains a small company feel. Almost everyone eats at the Geodesic café, sitting at

the table enjoying conversations with colleagues and friends from various

departments.

BUSINESS MODELS

Geodesic addresses a diverse market segment and have been successful in adopting

unique business models for each of their market segments. They include license and

support fee, usage fee and revenue share and subscriptions. These are built to help

their clients succeed in delivering business value to this enterprise.

Their business models are resilient, adapting to the continuously changing market and

economic environment. Their business models, supported by the long term financial

model, have enabled to deliver strong earnings consistently, cash flows and returns to

share holders in changing economic environment.

ADMINISTRATION

The company comprises of a Supervisory Board of Directors that has an optimum

combination of Executive and Non-Executive Directors who have an in depth

knowledge and a wealth of experience in running successful business. The

Independent Non- Executive Directors bring an external and wider perspective in

Board deliberations and decisions in addition to the expertise in their areas of

Specialization.

ROLE OF BOARD OF DIRECTORS

The primary role of Board is that of the trusteeship to protect and enhance

shareholders’ value through strategic supervision of the company and its subsidiaries.

The board is entrusted with the ultimate responsibility of management, general affairs,

direction and performance of the board has been vested with the requisite powers,

authorities and duties.

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Table No. 2.1

DETAILS OF BOARD OF DIRECTORS AS ON 31st March 2011

Name of the

Directors

Designation Category

Mr. Pankaj Kumar Chairman Promoter&

Executive director

Mr. Kiran Kulkarni MD Director

Mr.Prashant

Mulekar

Executive Director Director

Mr. Vinod Seth Director Independent

Director

Mr. Nitin Potdar Director Independent

Director

Mr. G Krishnan Director Independent

Director

AWARDS AND RECOGNITIONS

The company describes how valuable their commitment to innovation has been

resulted in the growth of the company. It is visible in the range of products they have

developed and milestones they have achieved. Following are the awards won by

Geodesic Ltd.in the Financial year 2010-2011.

• Mundu TV was ranked No.1 in Entertainment Application on the Apple

Appstore in the entertainment category and was ranked No. 2 across all

categories on the Apple Appstore and in NDTVs ‘ 10 Apps For Every Indian’.

• Geoamida won the NASSCOM India Leadership Forum 2010 and its project

was nominated for the PC Quest Best IT Implementations in the field of

Mobility and Field Force Automation Projects.

• Business standard listed Mundu Radio amongst the top 10 Internet radio

stations.

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• Geodesic was ranked amongst Deolitte Technology Fast 50 India 2010

Program and Fast 500 Asia Pacific 2010 Program.

• The company was ranked amongst Data Quest Top 200 companies of the

Indian IT Industry.

KNOWLEDGE MANAGEMENT

Knowledge Management at Geodesic allows geodesic minds together the collective

experiences and knowledge towards better product delivery, individual and

organisational excellence.

Their culture resonates with their goals to create an open and transparent organization

in which knowledge is created and shared in a supportive environment where

creativity and innovation are highly valued Geodesic minds are encouraged to bring

forward any idea for improvement or innovation to offer applications for delivery of

content to mobile and internet devices through Mundu TV.

PRODUCTS AND SERVICES OF GEODESIC LIMITED

The retail products of Geodesic Ltd classify into two categories: Communication and

Content Management & Delivery.

1).ENTERPRISE PRODUCTS

Their Enterprise products have been designed for desktop and mobile platforms that

include Continuum, Spyder and .fn suite of products.

• Continuum

The Unified Communication and Collaboration solution delivers rea- time

communication and collaboration services across a powerful contact

management module unifying user experience while leveraging an enterprise’s

existing IT and telephony infrastructure. Unified Communication,

collaboration, Content Analytics and CRM for the Enterprise Market, Portals,

Financial Institutions, System Integrators and Value Added Resellers.

Continuum is a Unified Communication and Collaboration suite of products

combining the capabilities of the enterprise communication framework and

sophisticated contact management into a single, powerful solution. Continuum

as a concept and as a solution is more relevant to all enterprises as the number

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of remote workers continues to grow overtime. They have now enhanced

Continuum by adding enterprise wide social CRM elements and business

continuity tools to add more value to the product.

• Spyder

An advanced Client Relationship alignment Management System for the

complex needs of a financial institution that sells intellectual product

manifesting as opinion (backed by research) and it is an ideal solution for

Fund Management and Investment Banking. CRM for Financial Institutions,

Enterprises, System Integrators and Value Added Resellers. Spyder has been

successfully integrated within Continuum to ensure they are a unique offering

of Content Management, Unified Communication& Collaboration and CRM.

• .fn solution or Financial Portal Network

In suite of financial products is designed to provide seamless, smart analytics

interface between Financial Service Providers and their ever- demanding

customer base. Their state of the art financial solutions and powerful Analytics

Framework help to create custom bespoke offerings that are both, value- rich

and competitive. Their elite clientele comprises major Financial Institutions,

Banks, Broking Houses, Mutual Funds and Life Insurance Companies.

Their .fn products include Wallet Wap, Wealth Console and WIT, a content

analytics and management tool. These applications in general provide multi-

dimensional portfolio analysis to enterprises and consumers on their desktops

and phones.

• Wallet Wap : It is the key to anytime /anywhere delivery of personalized

market and investment information. The fastest, most direct channel to keep

clients informed about the happenings in the markets, it is compatible with all

mobile devices.

• Wealth Console: It is an enterprise-ready, client server solution that improves

communication between Financial Wealth Managers and their clients.

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2).RETAIL PRODUCTS

Their retail products are classified into three categories- Communication, Content

streaming (live/ on- demand) &Management and Gaming.

COMMUNICATION

� Mundu IM/ UM

A messenger that unifies different messaging services ( AIM, Face book, Gtalk, ICQ,

Jabber, MSN,Yahoo) in an easy to use single interface. Mundu IM/UM is available on

all platforms including Symbian, iOS, and Android, Blackberry and Feature phones.

� Mundu SMS

A global service that allows mobile users to send text messages using the Internet on

their mobile phones and desktops to connect with their contacts at a fraction of the

cost incurred by mobile users on their GSM/ CDMA networks. Mundu SMS retains

their regular SMS usability and user perception.

� Spokn

A worldwide Telecom service based on the internet that enables people to make

phone calls and send short Voice Messages(VMS) using their computers, internet

enabled smart phones and PSTN phones. Spokn phone calls and voice messages are

economical by a margin of 70% over regular GSM/PSTN/CDMA calls.

CONTENT MANAGEMENT AND DELIVERY

• Mundu TV: A live streaming and on- demand video application that allows

consumers to watch live TV and video-on-demand content on their mobile

phones and desktops. Live TV and on-demand video apart from great music,

have been touted as two of the most wanted in the 3G space.

• Mundu Radio: An internet radio solution that offers high quality digital audio

on mobile handsets and desktops. The solution allows mobile and desktop

users to choose music genres of their choice from thousands of genre based

Internet radio stations. Consumers can choose a genre/album/song of their

choice or simply discover serendipitously.

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MOBILE GAMING

• Carom MP: An intriguing strategic board game which is fully compliant with

the laws of Physics, for the iPad. Geodesic launched Carrom MP-an exciting

multiplayer board game app for the Apple iPad.

ELECTRONIC COMPUTING

They have included variants of Geoamida to suit solutions in the area of Law

Enforcement, Rural Employment Guarantee Act, Public Distribution Systems,

Financial Inclusion, Micro Finance, Healthcare, and as a ERP device.

• Geoamida: the world’s first integrated mobile computer based on Linux. It

includes biometric sensors and smartcard readers/writers. It is a multi-lingual,

real-time computing and transaction system with an integrated text to speech

facility.

• Chandamama: it is in the process of internationalizing its content and plans to

deliver this content over the electronic medium including mobile phones and

tablets. They have remodeled their offline distribution channels to maximize

its reach besides actively promoting Chandamama products on online stores

andwww.chandamama.com.

• ENLYTE (Education ‘N’ Learning You Take Everywhere): Their education

device has passed rounds of alpha testing and has entered the crucial phase of

beta testing.

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CHAPTER-3

FINANCIAL ANALYSIS- THEORETICAL FRAMEWORK

FINANCIAL STATEMENTS

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments’ and decisions by users of the information.

It involves recording, classifying and summarizing various business transactions. The

end products of business transactions are the financial statements comprising

primarily the position statement or the balance sheet and the income statement or the

profit and loss account. These statements are the outcome of summarizing process of

accounting and are; therefore the sources of information on the basis of which

conclusions are drawn about the profitability and the financial position of a concern.

They play a dominant role in setting the framework of managerial decisions. But the

information provided in the financial statements is not an end in itself as no

meaningful conclusions can be drawn from these statements alone. However, the

information provided in the financial statements is of immense use in making

decisions through analysis and interpretation of financial statements.

Financial statements are also called financial reports. In the words of Anthony,

“financial statements, essentially are interim reports, presented annually and reflect a

division of life of an enterprise into more or less arbitrary accounting period- more

frequently a year.” Generally Accepted Accounting Principles (GAAP) specifies that

a complete set of financial statements must include:

� A Balance Sheet

� An Income Statement

� A Statement of changes in owners’ accounts, and

� A Statement of changes in financial position

The analysis of financial statements and data is an indispensable component of

investing, financing and dividend decisions.

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FINANCIAL ANALYSIS

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

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

and Profit and Loss Account. The term ‘Financial Statement Analysis’ includes both

‘Analysis’ and ‘Interpretation’. A distinction should, therefore, be made between the

two terms. While the term ‘Analysis’ is used to mean the simplification of financial

data, ‘Interpretation’ means, explaining the meaning and significance of the data so

simplified. However, both ‘Analysis’ and ‘Interpretation’ are interlinked and

complimentary to each other. Analysis is useless without Interpretation and

Interpretation without Analysis is difficult or even impossible.

OBJECTIVES OF FINANCIAL ANALYSIS

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 are shown in a series of statements. The main objective of

financial statement analysis is given as follows:

1. To examine the earning- capacity and efficiency of various business activities

with the help of financial statements

2. To determine the short term and long term solvency of the business concern

with the help of statement of position.

3. To investigate the future potential of the concern.

4. To make comparative study of the operational efficiency of similar concern

engaged in the identical industry and

5. To estimate about the performance efficiency and managerial ability by the

management of a business concern.

The objectives of the analysis may be varied according to the uses of the financial

statement analysis. Nowadays, the analysis of financial statements and related data

was considered to be important and a number of techniques were developed and used

for analyzing.

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Figure – 3.1

TYPES OF FINANCIAL ANALYSIS

On the basis of material used On the basis of Modus

Operandi

External Internal Horizontal

Vertical

1. EXTERNAL ANALYSIS

This analysis is done by outsiders who do not have access to the detailed internal

accounting records of the business firm. The outsiders include investors, creditors,

government agencies, general public etc. For financial analysis, they depend entirely

on the published financial statements.

2. INTERNAL ANALYSIS

This analysis is conducted by persons who have access to the internal accounting

records of a business firm. Such analysis can be performed by executives and

employees of an organization.

3. HORIZONTAL ANALYSIS

It refers to the comparison of financial data of a company for several years. This type

of analysis is also called ‘Dynamic Analysis’ as it is based on the data from year to

year rather than data of any one year. Comparative Statements and Trend Percentages

are two tools employed in horizontal analysis.

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4. VERTICAL ANALYSIS

It refers to the study of relationship of various items in the financial statements of one

accounting period. It is also known as ‘Static Analysis. Common-size statements and

Financial Ratios are the two tools employed in vertical analysis.

METHODS AND DEVICES OF FINANCIAL ANALYSIS

The analysis and interpretation of financial statements 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 statements. The following methods of

analysis are generally used:

1) COMPARATIVE STATEMENTS

2) TREND ANALYSIS

3) RATIO ANALYSIS

4) COMMON-SIZE STATEMENTS

5) FUNDS FLOW ANALYSIS

6) CASH FLOW ANALYSIS

COMPARATIVE STATEMENTS

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. The comparative

statements may show absolute figures, changes in absolute figures; absolute data in

terms of percentages and increase or decrease in terms of percentages. Comparative

financial statement is very useful to the analyst because they contain not only the data

appearing in single statements but also information necessary for the study of

financial and operating trends over a period of years. They indicate the direction of

the movement with respect of the financial position and operating results.

COMPARATIVE BALANCE SHEET

Increase and decrease in various assets and liabilities as well as in proprietors’ equity

or capital brought about by conduct of a business can be observed by a comparison of

the balance sheets at the beginning and the end of the period. Such observation often

yields considerable information which is of value in forming an opinion regarding the

22

progress of the enterprise and in order to facilitate comparison, a simple device known

as “Comparative Balance Sheet” may be used.

COMPARATIVE INCOME STATEMENT

An income statement shows the net profit or net loss resulting from the operation of a

business for designated period of time. A comparative income statement shows the

operating results for a number of accounting periods so that changes in absolute data

from one period to another may be started in terms of money and percentages.

The comparative income statements contain the same columns as the comparative

balance sheet and provide the same type of information-the accounts balances,

increase and decrease in money amounts. The cost of goods sold should not increase

out of proportion to the increase in sales and this would adversely affect gross profit

on sales. Selling expenses bear a direct positive correlation to sales volume because

most of these expenses vary more or less in the same proportion as the sales.

TREND ANALYSIS

This method determines the direction upwards or downwards and involves the

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

item in the base year. The figures of the base year are taken as 100 and trend ratios for

other years are calculator on the basis of the year

A series of financial statement may be analyzed by determining and studying the

trend of the data shown in the statement. This method of analysis one of direction-

upward or downward- and involves the computation of percentage relationship that

each statement item bears to the same item in the ‘base year’ which may be the

earliest year involved in comparison or the latest year or any intervening year. Trend

percentages relate to the base year, emphasize changes in the financial operating data

from year to year and make a possible a horizontal study on the data.

23

COMPUTATION OF TREND PERCENTAGES

1. A statement is taken as the base with reference to which all other statements

are to be studied.

2. Every item to be stated as 100 in the statement which is taken as the base.

3. If the amount of an item on the other statement is less than that in the base

statement, the trend percentages will be below 100 and if the amount is more

than the base amount, the trend percentage would be above 100 percent.

4. Trend ratios can be computed by dividing each amount in the statements with

the corresponding item in the statement taken as base.

EVALUATION OF TREND PERCENTAGES

It is noted that, though trend ratios show whether an item has increased or decreased

as well as the degree of change, they are valuable only to the extent to which they

provide clues to favorable or unfavorable tendencies and point the way for further

analysis.

The comparability of trend ratios is adversely affected to the extent to which

accounting principles and policies published by the accounts have not be followed

consistently through the period being studied. Comparability of the data is also

adversely affected when the price level has changed materially during the year under

review. Some analysis deflate the statement data by dividing the money amounts with

the related price index thereby providing figures that will give abroad idea of changes

in physical quantity and volume exclusive of price charges.

RATIO ANALYSIS

It is the process of establishing and interpreting various ratios (quantitative

relationship between figures and groups of figures). It is with the help of ratios that

the financial statements can be analyzed more clearly and decisions made from such

analysis. Ratio analysis is a technique of analysis and interpretation of financial

statements. It is the process of establishing and interpreting various ratios for helping

in making certain decisions. It is not only a means of better understanding of financial

strengths and weaknesses of a firm. Calculation of mere ratios does not serve any

purpose, unless several appropriate ratios are analyzed and interpreted. There are a

24

number of ratios which can be calculated from the information given in financial

statements, but the analyst has to select the appropriate data and calculate only a few

appropriate ratios from the same keeping in mind the objective of analysis. The ratios

may be used as a symptom like blood pressure, the pulse rate or the body temperature

and their interpretation depends upon the caliber and the competence of the analyst.

The following are the steps involved in the ratio analysis:

1. Selection of relevant data from the financial statements depending upon the

objective of the analysis.

2. Calculation of appropriate ratios from the above data.

3. Comparison of the calculated ratios with the ratios of the same firm in the past

or the ratios developed from the projected financial statements or the ratios of

some other firms or the comparison with ratios of the industry to which the

firm belongs.

4. Interpretation of the ratios.

INTERPRETATION OF THE RATIOS

The interpretation of the ratios is an important factor. Though calculation of ratios is

also important but it is only a clerical task whereas interpretation needs skill,

intelligence and foresightedness. The inherent limitations of ratio analysis should be

kept in mind while interpreting them. The impact of factors such as price level

changes, change in accounting policies, window dressing etc., should also be kept in

mind when attempting to interpret ratios.

The interpretation of ratios can be made in the following ways:

1. SINGLE ABSOLUTE RATIO

Generally speaking one cannot draw any meaningful conclusion when a single ratio is

considered in isolation. But single ratios may be studied in relation to certain rule of

thumb which is based upon well proven conclusions as for example 2:1 is considered

to be a good ratio for current assets to current liabilities.

2. GROUP OF RATIOS

Ratios may be interpreted by calculating a group of related ratios. A single ratio

supported by other related additional ratios becomes more understandable and

25

meaningful. For example, the ratio of current assets to current liabilities may be

supported by the ratio of liquid assets to liquid liabilities to draw more dependable

conclusions.

3. HISTORICAL COMPARISON

One of the easiest and most popular ways of evaluating the performance of the firm is

to compare its present ratios with past ratios called comparison overtime. When

financial ratios are compared over a period of time, it gives an indication of the

direction of change and reflects whether the firm’s performance and financial

performance has improved, deteriorated or remained constant over a period of time.

But while interpreting ratios from comparison over time, one has to be careful about

the changes, if any, in the firm’s policies and accounting procedures.

4. PROJECTED RATIOS

Ratios can be calculated for future standards based upon the projected or proforma

financial statements. These future ratios may be taken as standard for comparison and

the ratios calculated on actual financial statements can be compared with the standard

ratios to find out variances, if any. Such variances help in interpreting and taking

corrective action for improvement in future.

5. INTER-FIRM COMPARISON

Ratios of one firm can also be compared with the ratios of some other selected firms

in the same industry at the same point of time. This kind of comparison helps in

evaluating relative financial position and performance of the firm.

26

Figure – 3.2

CLASSIFICATION OF RATIOS

(A) (B) (C)

Traditional Classification Functional Classification Significance

Ratios

� Balance Sheet Ratios Liquidity Ratios Primary

Ratios

� Revenue Statement Leverage Ratios Secondary

Ratios

Ratios

� Composite or mixed Activity Ratios

Ratios

Profitability Ratios

FUNCTIONAL CLASSIFICATION OF RATIOS

A). LIQUIDITY RATIOS

The short term creditors of a company like suppliers of goods of credit and

commercial banks providing short-term loans are primarily interested in knowing the

company’s ability to meet its current or short-term obligations as and when these

become due. Therefore, a firm must ensure that it does not suffer from lack of

liquidity or the capacity to pay its current obligations. If a firm fails to meet such

obligations due to lack of good liquidity position, its goodwill in the market is likely

to be affected beyond repair. It will result in a loss of creditor’s confidence in the firm

and may even lead to the closing down of the firm. Even a high degree of liquidity of

27

the firm. To measure the liquidity of a firm, current ratios, quick ratios etc. are

calculated.

B).SOLVENCY RATIOS

The term ‘solvency’ refers to the ability of a concern to meet its long term obligations.

The long- term indebtedness of a firm includes debenture holders, financial

institutions providing medium and long-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 regular interest on long-term borrowings, repayment

of the principal amount at the maturity of the security and the security of their loans.

Accordingly, long-term solvency ratios indicate a firm’s ability to meet the fixed

interest and costs and repayment schedules associated with its long-term borrowings.

Debt-equity ratios, equity ratios, etc. are the ratios applied to analyze the solvency of

a business enterprise.

C). PROFITABILITY RATIOS

The primary objective of a business undertaking is to earn profits. Profit earning is

considered essential for the survival of the business. In the words of Lord Keynes,

“Profit is the engine that drives the business enterprise”. A business needs profits not

only for its existence but also for expansion and diversification. A business enterprise

can discharge its obligations to the various segments of the society only through

earning of profits. Profitability ratios are calculated to measure the overall efficiency

of the business. Generally

Profitability ratios are calculated in relation to sales or in relation to investment.

These ratios can be divided into General and Overall Profitability ratios. Gross profit

ratio, net profit ratio, return on capital employed etc. are examples.

D).LEVERAGE RATIOS

It is concerned with analysis of capital structure. The term ‘capital structure’ refers to

the relationship between various Long-term source of financing such as debentures,

preference share capital and equity share capital including reserves and surplus.

Financing the firm’s assets is a very crucial problem in every business and as a

general rule there should be a proper mix of debt and equity capital in financing the

firm’s assets. Leverage or capital structure ratios are calculated to test the long-term

financial position of a firm. Capital gearing ratio, financial leverage etc. are examples.

28

E).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 sales. The

better the management of assets, the larger is the amount of sales and the profits.

Activity ratios measure the efficiency or effectiveness with which a firm manages its

resources or assets. These ratios are also called turnover ratios because they indicate

the speed with which assets are converted or turned over into sales. Inventory

turnover ratio is an example.

COMMON-SIZE STATEMENTS

Under this statements are shown in analytical percentages. The figures are shown as

percentages of total assets total liabilities and total sales. These statements are also

known as Component Percentage or 100% Statements because every individual item

is stated as a percentage of total 100. The short-comings in comparative statements

and trend percentages where changes in items could not be compared with the totals

have been covered up. Preparation of comparative financial statements and the

calculation of trend percentages or ratios as methods of analyzing financial

statements, have one common short coming-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 a whole, because there is no common base of

comparison when dealing with absolute figures. However, in case the balance sheet

and income statement items are shown in analytical percentages, i.e., percentage or

ratios of the total of appropriate item, a common base for comparison is provided. The

statement in this form is designated as ‘Common Size Statements’.

FUND FLOW STATEMENT

The balance sheet gives a static view of the resources (liabilities) of a business and the

uses (assets) to which these resources have been put at a certain point of time. It does

not disclose the causes for changes in the assets and liabilities between two different

points of time. Hence, another statement has to be prepared to show the change in the

assets and liabilities from the end of one period of time to the end of another point of

29

time. This statement is called a Statement of Changes in Financial Position or a Funds

Flow Statement.

The importance of fund flow statement can be well followed from its various uses.

• It helps in the analysis of financial operations

• It throws light on many perplexing questions of general interest

• It help in the formulation of a realistic dividend policy

• It help in the proper allocation of resources

• It acts as a future guide

• It helps in uprising the use of working capital

• It help in knowing overall credit worthiness of a firm

CASH FLOW STATEMENT

It is a statement which describes the inflows (sources) and outflows (uses) of cash and

cash equivalents in an enterprise during a specific period of time. A cash flow

statement summarizes the causes of changes in cash position of a business enterprise

between dates of two balance sheets. It takes into account receipts and disbursements

of cash. Inflow of cash is known as sources of cash and outflow of cash is known as

use of cash. Cash Flow Statement is a statement designed to highlight upon the causes

which bring changes in cash position between two balance sheets.

UTILITY OF CASH FLOW ANALYSIS

A cash flow statement is useful for short term planning. It is an important tool for the

management. Its chief advantages as follows:

• It helps in efficient cash management

• Helps in internal financial management

• Discloses the movements of cash

30

CHAPTER – 4

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

RATIO ANALYSIS

A. LIQUIDITY RATIOS

1. CURRENT RATIO

Current ratio may be defined as the relationship between current assets and current

liabilities. It is also known as working capital ratio. It is used in the analysis of short-

term financial position of a firm. It is calculated using the formula:

Current Assets

Current Liabilities

Current assets are those assets which can be easily converted into cash within a short

period. It includes cash, debtors, bills receivables etc. Current liabilities are those

obligations which are payable within a short period i.e., within one year. Examples

are creditors, bills payables etc.

Table no. 4.1

STATEMENT SHOWING CURRENT RATIO (in crores)

YEAR

CURRENT

ASSETS

CURRENT

LIABILITIES

RATIO

( no. of times)

2006-2007 200.25 10.54 19.01

2007-2008 816.28 57.85 14.11

2008-2009 784.99 105.04 7.47

2009-2010 782.3 91.74 8.53

2010-2011 906.35 332.28 2.73

Graph showing Current ratio for the years

The table 4.1 shows the current ratio during the years 2007 to 2011. Current ratio has

shown a decreasing trend from 2007 to 2011. Though there was a slight increase in

2010 to 8.5 from 7.47 in 2009, the rate was less than the rate in 2007 which was

19.01. The optimal current ratio is 2:1.

pay off current liabilities. Usually, current assets should be twice of current liabilities.

Excessive current assets indicate idleness of working capital and shortage of funds

indicates the absence of liquidity. The current ratio of Geodesic ltd. has never reached

the ideal level except on 2011. And the ratio was 2.73:1. Though steps must be taken

by the firm for improving its short

shown a decreasing trend.

2. QUICK RATIO

Quick ratio, also known as Acid Test or Liquid ratio, is a more rigorous test of

liquidity than the current ratio. Quick ratio may be defined as the relationship between

quick or liquid assets and current or

most liquid Assets.

31

Figure 4.1

Graph showing Current ratio for the years March 2007to March

CURRENT RATIO

Source – Table 4.1




The optimal current ratio is 2:1. There should be sufficient current assets to





by the firm for improving its short-term liquidity position as the current ratio

shown a decreasing trend.



quick or liquid assets and current or liquid liabilities. Cash in hand and at bank are the

0

5

10

15

20

2007 2008 20092010

2011

March 2011




There should be sufficient current assets to





term liquidity position as the current ratio has



liquid liabilities. Cash in hand and at bank are the

32

Quick ratio is calculated using the formula:

Quick or Liquid assets

Current liabilities

Quick assets = Current assets- (inventories + Prepaid expenses)

Table No.-4.2

STATEMENT SHOWING LIQUID RATIO(in crores)

YEAR

LIQUID

ASSETS

CURRENT

LIABILITIES

RATIO

(no. of times)

2006-2007 200.15 10.54 18.99

2007-2008 814.5 57.85 14.08

2008-2009 784.6 105.04 7.47

2009-2010 777.04 91.74 8.47

2010-2011 897.16 332.28 2.7

The table 4.9 showing liquidity ratio reveals that the ratio has shown same trend that

current ratio in the table 4.7 has shown. During the year 2008 and 2009, the liquidity

ratio which was 18.99 in 2007 fell down to 14.08 and 7.47 respectively. Afterwards in

2010, though there was an increase to 8.47, it declined to 207 in 2011. As a rule of

convention a ratio of 1:1 is considered satisfactory. A liquidity ratio of 1:1 does not

necessarily mean satisfactory liquidity position if all the debtors cannot be realized

and cash is needed immediately to meet current obligations. In the same manner, a

low liquidity ratio does not necessarily mean a bad liquidity position as inventories

are not absolutely liquid.

Graph showing Quick ratio

B. SOLVENCY RATIOS

1. DEBT-EQUITY RATIO

Debt-equity ratio, also known as External

measure the relative claims of outsiders and the owners (shareholders)

assets. This ratio indicates the relationship between outsiders’ funds and shareholders’

funds. Thus, Debt- Equity ratio is calculated as:

Shareholders’ funds = Equity capital + Preference Capital +

Accumulated Profits + Accumulated Losses

Outsiders’ funds = Debentures + Mortgage Loans + Bonds + Long

10

20

33

Figure 4.2

Graph showing Quick ratio for the years March 2007 to March

QUICK RATIO


B. SOLVENCY RATIOS

EQUITY RATIO

equity ratio, also known as External- Internal Equity Ratio is calculated to

measure the relative claims of outsiders and the owners (shareholders) against firm’s


Equity ratio is calculated as:

Outsiders’ funds

Shareholders’ funds

Shareholders’ funds = Equity capital + Preference Capital + Reserves and Surplus +

Accumulated Profits + Accumulated Losses

= Debentures + Mortgage Loans + Bonds + Long- term Loans

0

10

20

20072008

20092010

2011

March 2011

Internal Equity Ratio is calculated to

against firm’s


Reserves and Surplus +

term Loans

34

Table No. - 4.3

STATEMENT SHOWING DEBT-EQUITY RATIO (in crores)

YEAR

OUTSIDERS’

FUNDS

SHAREHOLDERS’

FUNDS

RATIO

(no. of times)

2006-2007 .19 320.04 .01

2007-2008 506.79 426.38 1.18

2008-2009 640.97 602.72 1.06

2009-2010 586.93 762.42 .76

2010-2011 614.07 964.23 .63

Debt- equity ratio is calculated to measure the extent to which debt financing has been

used in a business. As a general rule, there should be an appropriate mix of owners’

funds and outsiders’ funds in financing the firms’ assets. Interpretation of this ratio

depends primarily upon the financial policy of the firm and the nature of the business.

Generally speaking, a low ratio is considered as favorable from the Long-term

creditors’ point of view because a high proportion of funds provide a larger margin of

safety for them at the time of liquidation of the firm. But from the perspective of the

owners, a low ratio is unfavorable as it indicates that the firm has not been able to use

low-cost outsiders’ funds to magnify their earnings.

The table 4.9 above showing Debt-equity ratio from 2007 to 2011, projects a

fluctuating trend. The ratio which was .001:1 in 2007 moved upwards to 1.18:1 in

2008 which later showed a sudden decline to 1.06, .76 and .63 in 2009, 2010 and

2011 respectively.

The ratio was satisfactory from outsiders’ point of view and the company in 2007,

2010 and 2011. Because outsiders’ fund was less than owners’ funds in all these years

(low ratio) except in 2008 and 2009 which was favorable to the owners of the

company. In 2008 and 2009 the ratio was not favorable to the firm as it was higher

than the generally accepted norm of 1:1.

Graph showing Debt

2. FUNDED DEBT TO TOTAL CAPITALISATION

This ratio establishes a link between long

long-term funds available in the business. The two words used in this ratio are:

Funded Debt = Debentures + mortgage Loans + Bonds + other long

Total Capitalization = Equity capital + Preference

Funded Debt

This ratio is calculated as,

0.5

1.5

35

Figure 4.3

Graph showing Debt-equity ratio for the years March 2007 to March

DEBT-EQUITY RATIO

Source- Table 4.3

2. FUNDED DEBT TO TOTAL CAPITALISATION

This ratio establishes a link between long-term funds raised from outsiders and total

term funds available in the business. The two words used in this ratio are:

= Debentures + mortgage Loans + Bonds + other long

Total Capitalization = Equity capital + Preference capital + Reserves and Surplus +

This ratio is calculated as, Funded Debt

Total Capitalization

0

0.5

1

1.5

2007 2008 2009 2010 2011

March 2011

funds raised from outsiders and total

term funds available in the business. The two words used in this ratio are:

= Debentures + mortgage Loans + Bonds + other long- term loans

Reserves and Surplus +

36

Table No. 4.4

STATEMENT SHOWING FUNDED DEBT TO TOTAL CAPITALISATION

(In crores)

YEAR FUNDED DEBT TOTAL

CAPITALISATION

RATIO

(%)

2006-2007 0.19 320.23 .1

2007-2008 506.79 933.18 54

2008-2009 640.97 1243.69 51

2009-2010 586.93 1349.35 43

2010-2011 614.07 1578.3 39

A study of this ratio helps us to know how much the company has relied on outside

sources for raising long-term funds. Though there is no ‘Rule of Thumb’ but still the

less the reliance on outsiders’ funds the better it will be. If the ratio is smaller, better

it will be, up to 50% or 55% this ratio may be tolerable and not beyond.

The above table indicates that the portion of Funded Debt in total long-term funds is

satisfactory. Because in all these five years the percentage of Funded Debt in Total

Capitalization is less than 55%. It was least in 2007 (only 1%). Though it increased to

54% in 2008, there was a decline afterwards. The debt financing was at peak in 2008

i.e. 54% which reduced to 39% in 2011.

The ratio which was 1% in 2007 is quite low. It is because the Company hadn’t raised

unsecured loans in 2007 and also the amount of debt raised in all the following years

was low. Hence, there is enough scope for the company to raise long- term loans from

outsiders.

Graph showing funded debt to total capitalization

FUNDED DEBT TO TOTAL CAPITALISATION RATIO

3. PROPRIETARY/ EQUITY RATIO

This ratio also known as Net Worth to total assets ratio is an important ratio for

determining long-term solvency of a firm. Net worth means shareholders’ funds and

total assets on the other hand denote total resources of the concern. The ratio is

calculated as under:

STATEMENT SHOWING EQUITY RATIO

YEAR SHAREHOLDERS’

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

37

Figure 4.4

ed debt to total capitalization for the years March

2011


Source- Table 4.4

RY/ EQUITY RATIO


term solvency of a firm. Net worth means shareholders’ funds and



Total Assets

Table No.4.5

STATEMENT SHOWING EQUITY RATIO (in crores)

SHAREHOLDERS’

FUNDS

TOTAL ASSETS RATIO

320.04 330.37

426.38 991.02

602.72 1348.73

762.42 1441.09

964.23 1910.58

0

20

40

60

2007 2008 2009 2010 2011

March 2007 to



term solvency of a firm. Net worth means shareholders’ funds and


crores)

RATIO

(%)

97

43

45

53

50

The table above showing statement of equity ratio

owners’ funds to total assets. Higher the ratio or the ratio or the share of the

shareholders in the total capital of the company, better is the long

position of the company. This ratio indicates that the extent

company can be lost without affecting the interest of the creditors of the creditors of

the company.

In 2007, the ratio was 97% it is the year in which the ratio was at peak in all the five

years. Then in 2008, the ratio came do

ratio was lowest. In 2009 and 2010, it showed an increasing trend by 45% and 53%

respectively. But it fell down to 50% in 2011. Though the performance was

satisfactory, the company should try to raise equity capit

Graph showing Equity ratio

4. RATIO OF TOTAL LIABILITIES TO TOTAL ASSETS

This ratio indicates the relationship between the Total liabilities to outsiders to

Assets of a firm and can be calculated as follows:

0

20

40

60

80

100

38

The table above showing statement of equity ratio represents the relationship of


shareholders in the total capital of the company, better is the long-term solvency

position of the company. This ratio indicates that the extent to which the assets of the



years. Then in 2008, the ratio came down to 43% and it was the year in which the



satisfactory, the company should try to raise equity capital again.

Figure 4.5

Graph showing Equity ratio for the years March 2007 to March

EQUITY RATIO


ATIO OF TOTAL LIABILITIES TO TOTAL ASSETS

This ratio indicates the relationship between the Total liabilities to outsiders to

Assets of a firm and can be calculated as follows:

Total liabilities to outsiders

Total assets

20072008

20092010

2011

represents the relationship of


term solvency

to which the assets of the



wn to 43% and it was the year in which the



March 2011

This ratio indicates the relationship between the Total liabilities to outsiders to Total

STATEMENT SHOWING

YEAR

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

The above table representing Solvency ratio explains that the total liabilities forms 1%

of total resources of the firm in 2007, which increased to 51% in 2008. But there was

a decline in 2009, 2010 and 2011 by 48%, 41% and 32% respectively. The ratio was

at its maximum in 2008 i.e. 51%. Generally, lower the ratio of total liabilities to total

assets is considered as favorable to the long

was most satisfactory only in 2007. Hence, the company should try again to redu

liabilities to outsiders.

Graph showing Solvency Ratio

20

40

60

39

Table No.4.6

STATEMENT SHOWING SOLVENCY RATIO (in crores)

TOTAL

LIABILITIES TO

OUTSIDERS

TOTAL

ASSETS

10.73 330.77

564.64 991.02

746.01 1348.73

678.67 1441.09

946.35 1910.58





assets is considered as favorable to the long-term solvency position. Hence, the ratio

was most satisfactory only in 2007. Hence, the company should try again to redu

Figure 4.6

Graph showing Solvency Ratio for the years March 2007 to March

SOLVENCY RATIO


0

20

40

60

2007 2008 2009 2010 2011

(in crores)

RATIO

(%)

3

57

55

47

50





term solvency position. Hence, the ratio

was most satisfactory only in 2007. Hence, the company should try again to reduce

March 2007 to March 2011

40

5. FIXED ASSETS TO NETWORTH RATIO

This ratio establishes the relationship between fixed assets and shareholders’ funds.

The ratio is calculated as follows:

Fixed assets after depreciation


Table No.4.7

STATEMENT SHOWING FIXED ASSETS TO NETWORTH RATIO (in

crores)

YEAR FIXED ASSETS SHAREHOLDERS’

FUNDS

RATIO

(%)

2006-2007 56.58 320.04 18

2007-2008 67.64 426.38 16

2008-2009 62.86 602.72 10

2009-2010 59.86 762.42 8

2010-2011 104.41 964.23 11

The table below representing the ratio of fixed assets to net worth indicates the extent

to which shareholders’ funds are sunk into the fixed assets. Generally, the purchase of

fixed assets should be financed by shareholders’ equity. If the ratio is less than 100%,

it implies that owners’ funds are more than total fixed assets and a part of working

capital is provided by the shareholders. And if vice versa, it implies that owners’

funds are not sufficient to finance the fixed assets and the firm has to depend upon

outsiders to finance the fixed assets. From the table above it is understood that the rate

have shown a decline to 2010 from 18% in 2007 to 8% in 2010. Though there was an

increase of 11% in 2011, it was less than the rate of 2007. Anyhow, since, the ratio is

less than 100%, we can say that the owners’ funds is more than fixed assets and a part

of working capital is also financed by shareholders’ funds. That means, the company

does not need to depend on debt financing for purchasing fixed assets.

Graph showing fixed assets to net worth ratio of

FIXED ASSETS TO NET WORTH RATIO

6. FIXED ASSETS RATIO

It is a variant to fixed assets to net worth ratio which is calculated

STATEMENT SHOWING FIXED ASSETS RATIO

YEAR FIXED ASSETS

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

The above table indicates the extent to which the total of fixed assets is financed by

long-term funds of the firm. Generally, the ratio should be 100. But if the fixed

0

2

4

6

8

10

12

14

16

18

41

Figure 4.7

Graph showing fixed assets to net worth ratio of for the years March

2011

FIXED ASSETS TO NET WORTH RATIO


ASSETS RATIO

It is a variant to fixed assets to net worth ratio which is calculated as:

Fixed assets after depreciation

Long term funds

Table No. 4. 8

STATEMENT SHOWING FIXED ASSETS RATIO

FIXED ASSETS LONG-TERM

FUNDS

RATIO (%)

56.58 320.23

67.64 933.17

62.86 1243.69

59.86 1349.35

104.41 1578.3


term funds of the firm. Generally, the ratio should be 100. But if the fixed

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011

March 2007 to

RATIO (%)

18

7

5

4

7


term funds of the firm. Generally, the ratio should be 100. But if the fixed assets

exceed the total long-term funds, it implies that the firm ha

assets out of current funds or the working capital which is not a good financial policy.

The table shows that the trend of fixed assets to long

2007 to 2010, from18% to 4%.

rate of 2007. However, not only the fixed assets requirements but also a part of

working capital is met out from the long

ratio of fixed asset is much less than 100%, t

investments in fixed assets, as increase in

of the concern.

Graph showing fixed assets ratio of

C. GENERAL PROFITABILITY RATIOS

1. OPERATING PROFIT RATIO

This ratio indicates the portion remaining out of every rupee worth of sales after all

operating costs and expenses have been met. This ratio is calculated by dividing

operating profit by net sales or income from operations.

Operating Profit = Operating Income

Operating Profit Ratio = Operating Profit

42

term funds, it implies that the firm has financed a part of fixed

of current funds or the working capital which is not a good financial policy.

The table shows that the trend of fixed assets to long-term funds is declining from

18% to 4%. Though it increased to 7% in 2011, it was less than the

However, not only the fixed assets requirements but also a part of

working capital is met out from the long-term funds of the company. But since the

ratio of fixed asset is much less than 100%, the company has to make more

investments in fixed assets, as increase in fixed assets means increase in the solvency

Figure 4.8

Graph showing fixed assets ratio of for the years March 2007 to March

FIXED ASSETS RATIO


PROFITABILITY RATIOS

1. OPERATING PROFIT RATIO



sales or income from operations.

Operating Profit = Operating Income – Operating Cost

Operating Profit Ratio = Operating Profit

Income from operations

0

5

10

15

20

2007 2008 2009 2010 2011

s financed a part of fixed

of current funds or the working capital which is not a good financial policy.

term funds is declining from

increased to 7% in 2011, it was less than the

However, not only the fixed assets requirements but also a part of

term funds of the company. But since the

he company has to make more

fixed assets means increase in the solvency

March 2011



Operating Cost

STATEMENT SHOWING OPERATING PROFIT RATIO

YEAR

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

From the table it is understood that

from 2007 to 2011. The ratio which was 68.82% in 2007 fell to 61.32%, 54.91%,

54.39% and 47.04% in 2008, 2009, 2010 and 2011 respectively. Generally, higher the

operating profit ratio, the better is the pro

downwards. It implies the company has to take steps to improve the situation.

Graph showing operating profit ratio of

2. NET PROFIT RATIO

The net profit ratio establishes a relationship between Net Profit after Taxes and

Sales, and indicates the efficiency of the management in manufacturing, selling,

administrating and other activities of the firm. This ratio is the overall

profitability and is calculated

43

Table No. 4.9

STATEMENT SHOWING OPERATING PROFIT RATIO (in crores)

OPERATING

PROFIT

INCOME FROM

OPERATIONS

113.62 165.09

156.66 255.46

271.18 493.79

265.04 487.27

315.84 671.43

From the table it is understood that the operating profit has shown a declining trend



operating profit ratio, the better is the profitability. But here the rate has gone


Figure 4.9

Graph showing operating profit ratio of for the years March 2007 to

OPERATING PROFIT RATIO


NET PROFIT RATIO



administrating and other activities of the firm. This ratio is the overall measure of the

profitability and is calculated as:

0

20

40

60

80

2007 2008 2009 2010 2011

(in crores)

RATIO (%)

68.82

61.32

54.91

54.39

47.04

the operating profit has shown a declining trend



fitability. But here the rate has gone


2007 to March 2011



measure of the

44

Net Profit Ratio = Net Profit after Tax

Income from Operations

Table No. 4.10

STATEMENT SHOWING NET PROFIT RATIO (in crores)

YEAR

NET PROFIT

AFTER TAX

INCOME FROM

OPERATIONS

RATIO (%)

2006-2007 94.34 165.09 57

2007-2008 110.37 255.46 43

2008-2009 191.41 493.79 39

2009-2010 174.88 487.27 36

2010-2011 234.64 671.43 35

The two basic elements of the ratio are net profits and sales. The net profits are

obtained after deducting income tax. The ratio is very useful as if the profit is not

sufficient, the firm shall not be able to achieve a satisfactory return on its investment.

This ratio also indicates the firm’s capacity to face adverse economic conditions such

as price competition, low demand etc. Obviously, higher the ratio better is the

profitability. The table representing the net profit ratio indicates a decreasing trend.

The ratio was at peak in 2007 at 57% which fell down to 43% in 2008, 39% in 2009,

36% in 2010 and 35% in 2011. It means the profitability of the concern has heavily

deteriorated in 2011 when compared to all other years. The company has to be very

conscious in coming future to recover the prosperity at least in 2007.

Graph showing operating profit ratio of

D. OVERALL PROFITABILITY RATIOS

1. RETURN ON NET WORTH

Return on shareholders’ investment, popularly known as Return on Investment, is the

relationship between net profits after interest and tax and the proprietors’ funds.

profit after interest and tax is taken only because

available to shareholders. This ratio is one of the most important ratios used for

measuring the overall efficiency of a firm. As this ratio reveals how well the resources

of a firm are being used. Higher the ratio better ar

Thus:

Return on Net Worth

45

Figure 4.10

Graph showing operating profit ratio of for the years 2007 to 2011

NET PROFIT RATIO


D. OVERALL PROFITABILITY RATIOS

1. RETURN ON NET WORTH

on shareholders’ investment, popularly known as Return on Investment, is the

relationship between net profits after interest and tax and the proprietors’ funds.

profit after interest and tax is taken only because those will be the only profits



of a firm are being used. Higher the ratio better are the results.

= Net Profit (after interest and tax)

Share holders’ funds

0

10

20

30

40

50

60

2007 2008 2009 2010 2011

for the years 2007 to 2011

on shareholders’ investment, popularly known as Return on Investment, is the

relationship between net profits after interest and tax and the proprietors’ funds. Net

those will be the only profits



46

Table No. 4.11

STATEMENT SHOWING RETURN ON NET WORTH (in crores)

YEAR

NET PROFIT

SHARE

HOLDERS’

FUNDS

RATIO (%)

2006-2007 94.34 320.04 29

2007-2008 110.37 426.38 26

2008-2009 191.41 602.72 32

2009-2010 174.88 762.42 23

2010-2011 234.64 964.23 24

The above table showing return on net worth explains that the ratio has shown a

fluctuating trend. The ratio which was 29% in 2007 fell to 26% in 2008 which later

became 32% in 2009.

There was a tremendous decline to 23% in 2010. Though there was a further increase

in 2011, it was only by 1% i.e. 24%. The company has much to improve.

Figure 4.11

Graph showing return on net worth ratio of for the years March 2007 to March

2011

RETURN ON NET WORTH


0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011

47

2. EARNINGS PER SHARE

EPS is a small variation of return on equity capital and is calculated by dividing the

net profit after taxes and preference dividend by total number of equity shares. Thus,

Earnings per Share = Net Profit after Tax – Preference Dividend

Number of Equity Shares

Table No. 4.12

STATEMENT SHOWING EARNINGS PER SHARE (in crores)

YEAR

NET PROFIT

AFTER TAX AND

DIVIDEND

NUMBER OF

EQUITY

SHARES

RATIO

(Rs.)

2006-2007 94.34 5.9165 15.94

2007-2008 110.37 9.2153 11.97

2008-2009 191.41 9.2215 20.75

2009-2010 174.88 9.2244 18.95

2010-2011 234.64 9.0141 26.03

The EPS is a good measure of profitability. Preference dividend is deducted from net

profit after interest and tax to find out the net income available for equity

shareholders. The performance and prospects of the company are affected by EPS.

EPS calculated for a number of years indicate whether or not earnings power of the

company has increased or not.

The table above explains that the EPS for the last five years has shown a fluctuating

trend. EPS which was Rs. 15.94 in 2007 dropped to Rs. 11.97 in 2008 which again

increased to Rs. 20.75 in 2009. But there was a fall in 2010 to Rs. 18.95 which

increased to Rs. 26.03 in 2011. EPS was at peak in this year.

48

Figure 4.12

Graph showing Earnings per Share of for the years March 2007 to March 2011

EARNINGS PER SHARE


3. RETURN ON CAPITAL EMPLOYED

Return on capital employed establishes the relationship between profits and the

capital employed. It is the primary ratio and is most widely used to measure the

overall profitability and efficiency of the business. There are three classifications

given to capital employed:

A).Gross Capital Employed = Fixed Assets + Current Assets

B). Net Capital Employed = Total Assets – Current Liabilities

C). Proprietors’ Capital Employed = Fixed Assets + Current Assets – Outsiders’

liabilities

Return on Net Capital Employed = Profit before Interest and Tax

Net Capital Employed

0

5

10

15

20

25

30

2007 2008 2009 2010 2011

49

Table No. 4.13

STATEMENT SHOWING RETURN ON CAPITAL EMPLOYED (in crores)

YEAR

NET

PROFITBEFORE

INTEREST AND

TAX

NET CAPITAL

EMPLOYED

RATIO (%)

2006-2007 119.99 320.23 37

2007-2008 168.6 933.18 18

2008-2009 291.35 1243.69 23

2009-2010 272.39 1349.36 20.1

2010-2011 322.29 1578.3 20.4

The owners are interested in knowing the profitability of the business in relation to

amounts invested in it. A high percentage of return on capital employed will satisfy

the owners that their money is profitably utilized.

From the table above it is understood that the trend of the return on capital employed

is highly fluctuating. The trend which was 37% in 2007 fell to 18% which increased

to 23% in 2009. But the rate again dropped down to 20.1% which later in 2011

showed a slight increase to 20.4%. Rate was at peak in 2007 (37%) and lowest in

2008 (18%).

Figure 4.13

Graph showing Return on capital employed for the years March 2007 to 2011

RETURN ON CAPITAL EMPLOYED


0

10

20

30

40

2007 2008 2009 2010 2011

50

4. DIVIDEND PAY- OUT RATIO

Dividend payout ratio is calculated to find the extent to which Earnings per Share

have been retained in the business. It is an important ratio because ploughing back of

profits enables a company to grow and pay more dividends in future.

Pay- out Ratio = Dividend per Equity Share

Earnings per Share

Table No. 4.14

STATEMENT SHOWING DIVIDEND PAY-OUT RATIO (in Rs.)

YEAR

DIVIDEND PER

EQUTY SHARE

EPS

RATIO (%)

2006-2007 .4 15.94 2.5

2007-2008 .6 11.97 5

2008-2009 1.6 20.75 8

2009-2010 1.75 18.95 9

2010-2011 2.75 26.03 11

Pay-out ratio is very important from shareholders’ point of view, as it tells him that if

a company has used wholly or substantially the whole of its earnings for paying

dividend and retained nothing for future growth ad expansion purposes, then there

will be very dim chances of capital appreciation in the price of shares of such

company. In other words, an investor who is more interested in capital appreciation

must look for a company having low pay-out ratio.

The table above showing pay-out ratio shows an increasing trend. The rate which was

2.5% in 2007 increased to 11% in 2011. It means there is less chance for capital

appreciation, because the payment of dividend is low.

Graph showing Dividend pay

E. LEVERAGE RATIOS

1. CAPITAL GEARING RATIO

The term ‘capital gearing’ is used to describe the relationship between equity share

capital including reserves and surplus to preference share capital and other

interest bearing loans. If preference share capital and other fixed interest bearing loans

exceed the equity share capital and including reserves, the firm is said to be highly

geared and if vice versa, the firm is said to be in low gear.

Capital Gearing Ratio = Equity Share capital + Reserves and surplus

Capital Gearing Ratio = Fixed Income Bearing Funds

0

2

4

6

8

10

12

51

Figure 4.14

Graph showing Dividend pay-out ratio for the years March 2007 to

DIVIDEND PAY-OUT RATIO


LEVERAGE RATIOS

1. CAPITAL GEARING RATIO


capital including reserves and surplus to preference share capital and other



geared and if vice versa, the firm is said to be in low gear.

aring Ratio = Equity Share capital + Reserves and surplus

Preference Share Capital + Long-Term

Debt bearing fixed interest

Capital Gearing Ratio = Fixed Income Bearing Funds

Total Capital Employed

0

2

4

6

8

10

12

2007 2008 2009 2010 2011

2007 to March 2011


capital including reserves and surplus to preference share capital and other fixed



aring Ratio = Equity Share capital + Reserves and surplus

STATEMENT SHOWING CAPITAL GEARING RATIO

YEAR

CAPITAL &

RESERVES

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

The table representing capital gearing ratio explains that the company was low geared

in 2007, 2010 and 2011, and the ratio was 163:1, 1.3:1 and 1.6:1 respectively. In 2008

and 2009, the company was in high gear i.e. .87:1 and .96:1.

Graph showing Capital gearing rat

52

Table No. 4.15

STATEMENT SHOWING CAPITAL GEARING RATIO (in crores)

EQUITY

CAPITAL &

RESERVES

PREFERENCE

CAPITAL &

LONG-TERM

DEBT

(NO. OF TIMES)

300.8 1.84

439.36 506.79

614.07 640.97

770.36 586.93

969.32 614.07

capital gearing ratio explains that the company was low geared


and 2009, the company was in high gear i.e. .87:1 and .96:1.

Figure 4.15

Graph showing Capital gearing ratio for the years March 2007 to March

CAPITAL GEARING RATIO


0

100

200

2007 2008 2009 2010 2011

(in crores)

RATIO

(NO. OF TIMES)

163

.87

.96

1.3

1.6

capital gearing ratio explains that the company was low geared


March 2011

53

Tab

le N

o. 4.1

6

CO

MP

AR

AT

IVE

BA

LA

NC

E S

HE

ET

(A

SS

ET

S S

IDE

) (i

n c

rore

s)

Yea

r &

C

han

ge

Ass

ets

Marc

h

2007

Ch

an

ge

in

(%)

Marc

h

2008

Ch

an

ge

in

(%)

Marc

h

2009

Ch

an

ge

in

(%)

Marc

h

2010

Ch

an

ge

in

(%)

Marc

h

2011

Fix

ed a

sset

s

56.5

8

19.5

67.6

4

-7.1

62.8

6

-4.8

59.8

6

74.4

104.4

1

Cap

ital

work

-

in-

pro

gre

ss

33.8

6

93.9

65.6

4

12.6

73.9

4

14.9

84.9

4

-66

28.8

6

Inves

tmen

ts

40.0

8

3.5

41.4

7

930

426.9

4

20.4

514

69.4

870.9

6

Cu

rren

t ass

ets,

loan

s &

ad

van

ces

200.2

5

308

816.2

8

3.8

3

784.9

9

-.34

782.3

15.8

6

906.3

5

Mis

cell

an

eou

s

exp

ense

s

1.7

2

762

14.8

2

-23.4

11.3

5

-30

7.9

4

-35.8

9

5.0

9

54

Tab

le N

o. 4.1

7

CO

MP

AR

AT

IVE

BA

LA

NC

E S

HE

ET

(L

IAB

ILIT

IES

SID

E)

(in

cro

res)

Y

ear

&

C

han

ge

L

iab

ilit

ies

Marc

h

2007

Ch

an

ge

in %

Marc

h

2008

Ch

an

ge

in

%

Marc

h

2009

Ch

an

ge

in

%

Marc

h

2010

Ch

an

ge

in

%

Marc

h

2011

Eq

uit

y s

hare

cap

ital

31.1

4

-35

20.2

7

-9

18.4

4

.05

18.4

5

-2.2

8

18.0

3

Pre

fere

nce

sh

are

cap

ital

1.6

5

_

_

_

_

_

_

_

_

Res

erv

es a

nd

surp

lus

288.9

7

45.6

7

420.9

3

41.5

595.6

3

26.2

4

751.9

1

26.5

951.2

9

Sec

ure

d l

oan

s .1

9

-36.8

.1

2

-66.6

7

.04

-75

.01

700

.08

Un

secu

red

loan

s _

_

506.6

7

26.6

5

640.9

3

-8.4

3

586.9

2

4.6

1

613.9

9

Cu

rren

t

liab

ilit

ies

10.5

4

448.8

6

57.8

5

81.5

7

105.0

4

-12.6

6

91.7

4

262

332.2

8

55

INTERPRETATION

While interpreting the comparative balance sheet, the interpreter is expected to study the

following aspects:

1. Current financial position and the liquidity position

2. Long-term financial position

3. Profitability of the concern

The comparative balance sheet analysis of the past five years from 2007 to 2011 reveals

that, the changes in the balance sheet items has shown an uneven movement. From a

close view into the statement it is understood that, the net working capital has shown a

tremendous increase by Rs. 568.72 Crores in the year 2008. But it fell down by Rs.

78.48 Crores in 2009. Though there was a slight increase in 2010 by Rs. 10.61 Crores,

the decline was at peak in 2011 i.e. 116.49 Crores. This is understood by the analysis of

current assets and current liabilities. Working capital is the excess of current assets over

current liabilities. An increase in working capital indicates the improvement in the

current financial position of the business. Comparative analysis carried out reveals that,

in the case of current assets, the rate increased by 308% in 2008 and it was the year in

which the rate of increase in current assets was at peak. In the following year too there

was an increase but at a lesser rate by 3.83%. Despite of increase in the previous years,

the same declined by 34% in 2010 and the year 2011 showed a slight increase in the rate

by 15.86%.

In the case of current liabilities too there was an increase by 81.57% in 2009, though at a

lesser rate. The rate later fell down by 12.66% in 2010. In spite of all these, there was a

stunning increase in the rate by 262% in 2011 which turned unfavorable.

The long-term financial position of the concern can be analyzed by studying the changes

in fixed assets, long-term liabilities and share capital. Fixed assets are generally financed

by the issue of either long-term securities or fresh share capital. The comparative

statement explains that, there was a stunning increase in long-term securities and share

capital which was 4265% in 2008. But the increase was only 26% in 2009. Later the

funds fell down by 85 in 2010. And though there was an increase in 2011, it was only by

56

4.4%. At the same time, there was an increase in fixed assets by 19.5% and 74.4% in

2008 and 2011 respectively. In the years between i.e. 2009 and 2010, there was a decline

in investment in fixed assets by 7.1% and 4.8%. The increase was at peak in 2011 and the

decline was on the top in 2009. It confirms that, not only fixed assets but also a part of

working capital is financed through long-term sources in the years 2008 and 2009. It is

because long-term funds increase exceeds the increase in fixed assets. Where as in 2010

and 2011, since the increase in fixed assets is more than increase in long-term funds, it is

understood that fixed assets have not only been financed from long-term sources but a

part of the same has been financed from working capital. But it is not a wise financial

policy. One more important thing is that, the company has financed major part of long-

term funds through the issue of share capital except in 2011. In that year long-term funds

were given preference.

When the aspect of profitability is concerned, we have to study about the increase or

decrease in the retained earnings and other reserves. The statement projects that, the

reserves of the company has never declined. That means major part of the earnings of the

company has been kept as retained earnings for future expansion and development

purposes. This is understood from the ratio analysis of dividend pay-out.

The capital work-in-progress increased by 93.9% in 2008, 12.6% in 2009 and 14.9% in

2010. Though the capital work-in-progress increased at a decreased rate 2009 and 2010,

the rate in 2010 was higher when compared to the rate in 2009.Unfortunately the rate

declined by 66% in 2011.

The rate of investment never declined in all these five years. The increase in the rate was

at peak in 2009i.e. 930% when compared to 2008. But increase in the rate was only

20.4% in 2010.

There is nothing much to explain about miscellaneous expenses or preliminary expenses

as they cannot be considered as assets as they are actually deferred expenses.

57

Tab

le N

o. 4.1

8

TR

EN

D B

AL

AN

CE

SH

EE

T (

AS

SE

TS

SID

E)

(in

cro

res)

Yea

r &

C

han

ge

Ass

ets

Marc

h

2007

Ch

an

ge

(%)

Marc

h

2008

Ch

an

ge

(%)

Marc

h

2009

Ch

an

ge

(%)

Marc

h

2010

Ch

an

ge

(%)

Marc

h

2011

Ch

an

ge

(%)

Fix

ed

ass

ets

56.5

8

100

67.6

4

120

62.8

6

111

59.8

6

106

104.4

1

185

Work

-in

pro

gre

ss

33.8

6

100

65.6

4

194

73.9

4

218

84.9

4

251

28.8

6

85

Inves

tmen

ts

40.0

8

100

41.4

7

103

426.9

4

1065

514

1282

870.9

6

2173

Cu

rren

t

ass

ets

200.2

5

100

816.2

8

408

784.9

9

392

782.3

391

906.3

5

453

Mis

cell

an

eou

s

exp

ense

s

1.7

2

100

14.8

2

862

11.3

5

660

7.9

4

462

5.0

9

296

58

Tab

le N

o. 4.1

9

TR

EN

D B

AL

AN

CE

SH

EE

T (

LIA

BIL

ITIE

S S

IDE

) (i

n c

rore

s)

Yea

r &

C

han

ge

Lia

bil

itie

s

Marc

h

2007

Ch

an

ge

(%)

Marc

h

2008

Ch

an

ge

(%)

Marc

h

2009

Ch

an

ge

(%)

Marc

h

2010

Ch

an

ge

(%)

Marc

h

2011

Ch

an

ge

(%)

Eq

uit

y

cap

ital

31.1

4

100

20.2

7

65

18.4

4

59

18.4

5

59

18.0

3

58

Pre

fere

nce

cap

ital

1.6

5

100

_

_

_

_

_

_

_

_

Res

erv

es

an

d

Su

rplu

s

288.9

7

100

420.9

3

146

595.6

3

206

751.9

1

260

951.2

9

329

Sec

ure

d

loan

s

.19

100

.12

63

.04

21

.01

5

700

42

Un

secu

red

loan

s

_

100

506.6

7

_

640.9

3

127

586.9

2

116

613.9

9

121

Cu

rren

t

liab

ilit

ies

10.5

4

100

57.8

5

549

105.0

4

997

91.7

4

870

332.2

8

3153

59

INTERPRETATION

The trend analysis of Balance sheet reveals that the current assets showed a decrease

from 2008 to 2010 when compared to the base year 2007. Current assets which were

407.6% in 2008 fell to 390.6%. On the other hand, current liabilities showed a decrease

only in 2010(870.4%). In 2011, the same acquired a tremendous increase to 3152.6%

which is more than the increase in current assets.

Share capital projected a decreasing trend. While reserves and investments projected an

increasing trend. The trend of fixed assets was uneven. It decreased to 111% in 2009 and

106% in 2010 from 120% in 2008.

Work-in progress registered an increase except in 2011. It fell to 85% in 2011 from 194%

in 2008. Secured loans decreased in 2008, 2009 and 2010 to 63%, 21%, 5% and though

there was an increase in 2011, it was only 42%. Unsecured loans were at peak in

2009(127%). It fell to 116% in 2010 and increased to 121% in 2011.

60

Tab

le N

o. 4.2

0

CO

MP

AR

AT

IVE

IN

CO

ME

ST

AT

EM

EN

T (

in c

rore

s)

Item

s

2007

Ch

an

ge

in (

%)

2008

Ch

an

ge

in (

%)

2009

Ch

an

ge

in (

%)

2010

Ch

an

ge

in (

%)

2011

Oper

atin

g I

nco

me

165.0

9

+55

255.4

6

+93

493.7

9

-1.3

487.2

7

+38

671.4

3

Oper

atin

g

Ex

pen

ses

51.4

6

+92

98.8

+

125

222.6

2

-0.1

8

222.2

3

+60

355.5

9

Oper

atin

gP

rofi

t 113.6

2

+38

156.6

6

+73

271.1

8

-2.2

6

265.0

4

+19

315.8

4

Add:

Non-

oper

atin

g i

nco

me

6.3

7

+87

11.9

4

+91

22.8

2

+68

7.3

6

-11

6.5

3

Les

s: N

on

- o

per

atin

g e

xpen

se

26.5

+

61

42.5

5

+100

85.1

1

+17

99.4

1

-15

84.7

1

PB

T

93.4

9

+35

126.0

5

+66

208.8

9

-17

172.9

9

+34

237.6

6

Les

s: T

ax

-0.8

9

-19.6

7

15.6

8

+11.4

8

17.4

8

-110.8

-1

.89

-260.3

3.0

3

NP

AT

94.3

3

+17

110.3

7

+73

191.4

1

-8.6

4

174.8

8

+34.1

7

234.6

3

61

INTERPRETATION OF COMPARATIVE INCOME STATEMENT

Geodesic Ltd .a Technology Company does not engage in trading of retail physical

products. Operating income is taken as sales and operating expenses is taken as cost of

sales. As a first step of Analysis firstly increase or decrease in operating income should

be compared with increase or decrease in operating expenses. An increase in operating

profit will result from the increase in sales/income from operations and control of

operating expenses and vice versa decrease in operating profit. The comparative income

statement presented above reveals that operating income increased by 93% in 2009 which

was only 55% in 2008. At the same time operating expenses also registered an increase

by 125% in 2009 from 92% in 2008. Though the increase in operating expense was more

than the increase in operating income, operating profit also projected an increase to 73%

in 2009.

In the case of non-operating income, the same showed an increase by 91% in 2009 which

was 87% in 2008. Non-operating expenses which were 60% in 2008 increased to 100%.

As a result Profit before Tax also increased by 66% in 2009 from 35% in 2008 was high

profits of 2008 and 2009 didn’t tell.

But the year 2010 was not at all favorable to the company. The fall in operating income

was -1.3% and operating expenses was -0.16%. Fall in operating income was more than

fall in operating expense which was resulted in decline of operating profit by -2.3%.

Similarly the non-operating expense increased by 17% which turned the profit before tax

negative. Though there was a refund of income tax in the year 2010, the Net Profit for the

year declined by -8.6%. This is only due to huge fall in non-operating income and

increase in non-operating expenses. The operating profit of the year 2011 increased by

19% only because of the increase in operating income by 38%. There wasn’t appreciable

increase due to increase in operating expenses which was 60%. Non-operating income

and expenses for the year declining by -11.3% and -15%, PBT increased by 37% only

because the rate of decline of non-operating expense was more than decline in the rate of

non- operating income. Net profit for the year also increased by34%. Though there were

fluctuations in Income Statement, it is understood from the Ratio analysis operating profit

and net profit of the company has shown a decreasing trend from 2007 to2011.

62

CHAPTER- 5

FINDINGS, SUGGESTIONS AND CONCLUSIONS

FINDINGS

Just like a doctor examines his patient by recording his body temperature, blood pressure,

etc. before making his conclusion regarding the illness and before giving his treatment, a

financial analyst analyses the financial statements with various tools of analysis before

commenting upon the financial health or weaknesses of an enterprise. This is essential to

bring out the mystery behind the figures in financial statements.

1. A current ratio equal to or near to the rule of thumb 2:1 i.e. current assets double

the current liabilities is considered to be satisfactory. The idea of having double

the current assets as compared to current liabilities is tom provide for delays and

losses in the realization of current assets. Geodesic Ltd. hasn’t yet reached this

ideal level in all these years except in 2011. The ratio was 2.73:1. But the ratio

hasn’t gone below 2:1.

2. As a rule of thumb, quick ratio of 1:1 is considered satisfactory. It is generally

thought that if quick assets are equal to current liabilities then the concern may be

able to meet its short-term obligations. The study explains that the firm have

more liquid assets than current liabilities and the ratio was lowest in 2011i.e.2.7:1

and peak in 2007 i.e. 18.99:1

3. From the shareholders point of view, a low debt-equity ratio is unfavorable and it

indicates that the firm has not been able to use low-cost outsiders’ funds to

magnify their earnings. And from the perspective of outsiders, a low ratio is

favorable as a high proportion of funds provide larger safety for them during

liquidation. However, the study explains that the ratio was more than the

generally accepted norm of 1:1 in 2008 and 2009.

4. From the analysis of funded debt to total capitalization, it is understood that the

ratio of all the five years is satisfactory as it is less than 55% the maximum ideal

level.

63

5. The analysis of Equity ratio projects that the long-term solvency of the company

is satisfactory as the proportion of owners’ funds to total assets neared to half in

2008 and 2009 and was even more in than half in 2007, 2010 and 2011

respectively.

6. Solvency ratio or the ratio of total assets to total liabilities is a small variant to

equity ratio and can be calculated as 100-equity ratio. The analysis has helped us

to find that this ratio was worst in 2008, 2009, 2010 and 2011 as the total

liabilities neared to half of total assets in 2010 and was more than half in 2008,

2009 and 2011. It was least in 2007and was only 3%.

7. Fixed assets to net worth ratio of Geodesic Ltd. was less than 100% in all the five

years which implies that owners’ funds are more than Total Fixed Assets and a

part of the Working Capital is provided by the shareholders.

8. Fixed Assets Ratio is a variant to the ratio of Fixed Assets to Net Worth. The only

difference is that it indicates the extent to which the total fixed assets are financed

by long-term funds of the firm and not the net worth. The analysis show that the

fixed assets haven’t exceeded long-term funds and a part of working capital

requirements is met out of long-term funds of the firm.

9. From the analysis it is also understood that the operating profit and the net profit

of the firm has heavily deteriorated from 2007 to 2011.

10. As the primary objective of the business is to maximize its earnings, Return on

Investment / Return on Net worth Ratio indicates the extent to which this primary

objective of business is being achieved. The analysis of this ratio shows that the

rate has a highly fluctuating trend and hence the company has to acquire stability.

11. EPS calculated for a number of years indicates whether or not earning power of

the company has increased. The performance and prospects of the company are

affected by EPS. If EPS increases, there is a possibility that the company may pay

more dividend or issue bonus shares. Though the EPS of the firm is not

satisfactory, it was at peak in 2011 i.e. Rs. 26.03.

12. Return on Capital employed helps to formulate the borrowing policy of the

enterprise. The rate on interest on borrowings should always be less than the

return on capital employed. The outsiders like bankers, creditors, other financial

64

institutions will be able to find whether the concern is viable for giving credit or

exceeding loans or not. The return on capital employed of the company was high

only in 2007 (37%).

13. The dividend pay-out ratio of the firm has shown an increasing trend. The ratio

indicates as to what proportion of EPS has been used for paying dividend and

what has been retained for ploughing back. From the analysis it is understood that

the major portion of EPS has been kept as retained earnings. Such a ratio is

suitable for an investor who is more interested in capital appreciation.

14. Capital Gearing is very important leverage ratio. The ratio was low geared in

2007, 2010 and 2011. In such a case, the dividend on preference shares and

interest is very low equity shareholders get a high rate of dividend.

15. As far the matter of income statement is concerned, in the year 2010, the

operating profit showed a negative trend. It is because the decline in the operating

income. Operating expenses showing negative trend is favorable as it leads to

increase in the profit. But in the case of Geodesic Ltd., the rate of decline in

Operating Income was more than the rate of decline in operating expenses which

resulted in the decline of operating profit. It is the decline in operating income

which resulted in the decline in net profit after tax, and it is the only reason why

the net profit dropped down even though the tax charges went down in this year.

16. Altogether, 2010 was the year which was worst for the company. Fixed assets,

current assets, operating profits and net profits of the company were at least in

this year when compared to other years. Though loan funds was least acquired to

other years.

SUGGESTIONS

• The company was low geared in 2007, 2010 and 2011. Such a decision is

suitable during depression period and it is better for the company not to resort

to fixed interest bearing securities as source of financing during such period.

• Though the current assets of the is more than its current liabilities, as the

current liability increased as current assets registered increase, we can’t say

the short-term liquidity of the firm is better and this change in current assets

65

and current liabilities has affected the working capital of the company.

Current ratio has also shown a decreasing trend. It means the company may

face difficulty in paying its short-term liabilities in time and effectively

utilizes fixed assets due to non- availability of liquid funds.

• Generally the total of fixed assets should be equal to the total of long term

funds or say, the ratio should be 100%. But the Fixed asset Ratio of the

company indicates that this ratio is very much less than 100%. Hence the

company has to make more investment in fixed assets. As increase in the fixed

assets means increase in the long term solvency of the concern. The company

has an opportunity to rely on long term loans funds to purchase fixed assets.

• Though the Debt- Equity Ratio was more than generally accepted norm of 1:1

in 2008 and 2009, it is equally important that higher the ratio of debt to equity,

greater the return for equity shareholders. But the EPS of Geodesic was

Rs.26.03 in 2011 debt-equity ratio on the other hand was only 63:1. Also if a

firm that does not use debt cannot make use of financial leverage. Geodesic’s

shareholders’ funds exceeds loan funds, as far as profitability of the firm is

concerned it is better for the company.

• The value of the firm can be maximized only if the share holders’ wealth is

maximized; most of the companies believe that by following a stable dividend

policy with a higher pay-out ratio, they can maximize the market value of

shares. The firms following this policy can, thus, successfully approach the

market for raising additional funds for future prospects as and when required.

But in the case of Geodesic Ltd it has paid fewer dividends and has retained

major portion of EPS as retained earnings. If profits are not distributed

regularly and are retained, the shareholders may have to pay a higher rate of

tax in the year when accumulated profits are distributed.

• Retained earnings of the company are higher than its share capital. It is wise

to retain a portion of total earnings to compete with future but there earnings

accrue to a firm only because of some sacrifice made by the shareholders is

not receiving the dividend out of the available profits.

66

• Alike Current ratio, Quick ratio also showed a decreasing trend. Though 1:1 is

generally accepted norm, a firm having high quick ratio may not have a

satisfactory liquidity position if it has low paying debtors. On the other hand,

a firm having a low quick ratio may have a good liquidity position if it has fast

moving inventories.

• However, we can’t argue that the financial position of Geodesic Ltd is

satisfactory just because of its assets exceed liabilities. Net profit and

operating profit has gone down. Investments in Fixed assets are very low,

there is a chance for shortage of working capital in near future, and dividend

payout is lower and so on.

CONCLUSIONS

Geodesic Ltd. is a technology company focused on delivering solutions in the space of

Communication, Content Management, Collaboration and Customer Relationship

Management to the enterprise and retail segments. They have invested substantially in

innovation and growth; they have managed to extend their competitive advantage,

fortified their leadership and retained work culture of Geodesic Ltd.

Their business has grown significantly since inception, resulting in substantial increase in

revenues. However, their revenue growth has been moderate over the last few years as a

result of a number of factors including volatility in global economy, increased

competition, and new depth initiatives and enhanced sales cycle. .

However, they have a well integrated, advanced platform that includes Content

Management, Communication, Collaboration and a CRM module across platforms. This

will help to stay ahead of competition.

At Geodesic, they believed that good governance is a key element to enhance and retain

shareholders’ trust, it generates goodwill among business partners, customers and

investors and respect from society at large. They always seek to ensure that try to attain

their performance goals with integrity, ethical, legal and business expectations and at the

same time fulfill its social obligations and responsibilities. They have tried to blend

growth and efficiency with governance and ethics.

67

BIBLIOGRAPHY

1. Jain, S. P. and Narang, K. L. (2000) Corporate Accounting. New Delhi: Kalyani

Publishers

2. Jain, S. P. and Narang, K. L. (2010) Financial Accounting. New Delhi: Kalyani

Publishers

3. Maheshwari, S. N. (2000) Principles of Management Accounting. New Delhi:

Sultan Chand & Sons Educational Publishers

4. Sharma, R. K. and .Guptha Shashi. (2010) Financial Management. New Delhi :

Kalyani Publishers

5. Sharma, R. K. and Guptha Shashi. (2002) Management Accounting. New Delhi:

Kalyani Publishers

Annual Reports – Geodesic Ltd. (2010-2011)

Web Site _ www.geodesic.in

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