DEPARTMENT OF MANAGEMENT STUDIES

JAWAHARLAL NEHRU NATIONAL COLLEGE OF ENGINEERING

SHIMOGA-577204




Seminar on
MODEL-7
ANALYSIS OF FINANCIAL PERFORMANCE OF A FIRM

Under the guidance of
MRS.ASWHINI.H.A
LECTURER
Dept. of M.B.A
Jawaharlal Nehru National College of Engineering

PRESENTED BY
NAGARJUN.V
1
st
SEM, MBA,
DEPERTMENT OF MANAGEMENT STUDIES
Jawaharlal Nehru National College of Engineering
SHIMOGA
DATE-6-01 -2012

Learning Objectives in the model Analysis of
Financial Performance of a Firm

To know the meaning of Financial Analysis
To know the different technique of Financial Analysis
To know the meaning & importance of Ratio Analysis
To know the different types of Ratio Analysis
To know about the Dupont Analysis

CONTENTS
MEANING OF FINANCIAL STATEMENT
Technique (Tools or Methods) of Analysis
& Interpretation
Ratio Analysis
Importance of Ratio Analysis
Classification of Ratios
Dupont Analysis
Conclusion
Bibliography
Probable Questions

MEANING OF FINANCIAL STATEMENT


Analysis is the process of critically examining in
detail accounting information given in the financial
statement.

Technique (Tools or Methods) of Analysis &
Interpretation
1. Comparative Financial Statements
2. Common Measurement Statements
3. Trends Percentages Analysis
4. Funds Flow Statement
5. Net Working Capital Analysis
6. Cash Flow Statement
7. Ratio Analysis

1. Comparative
Financial
Statements


Main reason of
reduction in the
increase in the
net profit is
increase of
operating
PARTICULARS 2010 2011 INCR
EASE
OR
DECR
EASE
%OF
CANG
ES
Net Sales 100000 125000 25000 25%
Less cost of
goods sold
75000 75000 Nil Nil
Gross profit 25000 50000 25000 100%
Less operating
expenses
5000 10000 5000 100%
Net operating
profit
20000 40000 20000 100%
Less interest &
income tax
5000 15000 10000 200%
Net profit 15000 25000 10000 66%
Comparative Income Statements

Comparative balance sheet
2. Common Measurement Statements
Common Size Income Statement
For the year ending 2005 & 2006

Common Size Balance Sheet
as on 31
st
March 2005 & 2006






3. Trends Percentages Analysis

Trend Ratios
(taking year 1985 as the base year in %age)
as on 31 December 1985-1988

ASSETS
December 31st (Rupees in lakhs) Trend percentages Base year 1985
1985 1986 1987 1988 1985 1986 1987 1988
Current
Assets
Cash 100 80 60 40 100 80 60 40
Debtors 200 250 325 400 100 125 163 200
Stock-in-
trade 300 400 350 500 100 133 117 167
Other
Current
Assets 50 75 125 150 100 150 250 300
Total
Current
Assets 650 845 880 1190 100 129 135 183
Fixed
Assets
Land 400 500 500 500 100 125 125 125
Building 8000 8000 8000 8000 100 100 100 100
Plant 1000 1000 1200 1500 100 100 100 150
Total
Fixed
Assets 2200 2500 2900 3500 100 114 132 159
4. Fund Flow Statement

5. Cash Flow Statement

6. Net Working Capital Analysis



Net Working Capital= Current Assets Current Liabilities
7. Ratio Analysis

A ratio analysis can be defined as the
indicated quotient of two mathematical
expressions & as the relationship between
two or more things. Ratio is thus, the
numerical or an arithmetical relationship
between the two figures. It is expressed
where one figure is divided by another.

Importance of Ratio Analysis

Useful in financial position analysis
Useful in forecasting purposes
Useful in locating the weak spots of the
business
Useful in comparison of performance

Classification of Ratios

Turnover (Performance or Activity) Ratios:
Turnover ratios measure the efficiency or
effectiveness with which a firm manages its
resources or assets.

Important turnover ratios usually
calculated by a concern are-


Fixed Assets Turnover ratio

It is calculated as under-

Fixed assets turnover ratio = Net sales
Fixed assets

This ratio is supposed to measure the
efficiency with which the fixed assets are
employed


Total Assets Turnover Ratio


Total Assets Turnover Ratio = Net sales
Total Assets

Total assets are simply the balance sheet
total at the end of the year.


Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold
Average inventory

Cost of goods sold= opening stock + purchases +
manufacturing expenses - closing stock or sales
gross profit

Average inventory= opening stock + closing stock
2


Accounts Receivable Turnover Ratio
(Debtors turnover ratio)

Debtors turnover ratio= Net Credit sales
Average Accounts Receivables

Average Collection Period (ACP)
ACP = Days in a year
Debtors turnover ratio

Or

ACP = Average Accounts receivables x Days in a
Credit Sales year








Accounts Payable Turnover Ratio
(Creditors turnover ratio)

Creditors turnover ratio= Net Credit Purchases
Average Accounts Payable

Average Payment Period (APP)
APP= Days in a year
Creditors turnover ratio

Or

APP= Average Accounts Payable x Days in
Credit Purchases a year





Financial Ratios
These Ratios are calculated to judge
financial position of the concern from long-
term as well as short-term solvency point of
view.
These ratios can be divided into two broad
categories-
Liquidity Ratios
Stability Ratios
Liquidity Ratios
Current Ratio:

Current Ratio = Current Assets
Current Liabilities

Current Assets : Current Liabilities
2 : 1

Quick (Liquid or Acid Test) Ratio
Quick ratio = Quick Assets
Quick Liabilities

Quick Assets = Current Assets Stock Prepaid
Expensess

Quick Liabilities = Current Liabilities Bank Overdraft

Quick Assets : Quick Liabilities
1 : 1

Stability Ratios

These ratios help in ascertaining long term
solvency of a firm which depends on firms adequate
resources to meet its long term funds requirements,
appropriate debt equity mix to raise long term funds
& earnings to pay interest & instalment of long term
loans in time.

The following ratios can be calculated for this
purpose-
Debt Equity Ratio
Proprietary Ratio

Debt Equity Ratio
Debt Equity Ratio = Long Term Debts
Shareholders Funds

Long Term Debts = Debentures + Public Debts

Share Holders Funds = Equity Shares + Preference
Shares + Share Premium + P & L a/c Preliminary
Expenses

Long Term Debts : Share Holders Funds
2:1

Proprietary Ratio
Proprietary Ratio = Share Holders Funds
Net Assets

Share Holders Funds = Equity Shares +
Preference Shares + Share Premium + P &
L a/c Preliminary Expenses

Net Assets = Current Assets + Fixed Assets
Goodwill Preliminary Expenses

Dupont Analysis
The Dupont analysis acts as a search
technique to find out the major areas, which
are responsible for the firms financial
position. It tries to locate the major area,
which is affecting the overall performance of
the firm.

Conclusion
At least we can note all these different
financial statements will help in decision
making process & are most relevant to
analyze the future financial condition of the
firm.
It is not useful for past but it is helpful for
future decision analysis & plan.

Bibliography
ACCOUNTING FOR MANAGERS
(Fifth Edition, 2007)
-S.P. Jain
-K.L. Narang
-Simmi Agrawal
www.googleimages.com
PROBABAL QUESTIONS
3 marks
1) What are profitability ratios? (June/July 2009)

5 marks
1) Write a note on Dupont Analysis. (July 2006)
2) What are the limitations of financial statement?
(Dec 2009/Jan 2010)

7 marks
1) Mention the merits of Ratio Analysis. (Dec 2006/Jan 2007)
2) What is common size statement? How useful is it?
(Dec 2006/Jan 2007)
3) What do you mean by financial statement Analysis? What are
its purpose? (Jan/Feb 2005)


Thanks for your attention


Any Questions?