Pooja 1

OBJECTIVE OF THE STUDY
The main focus of our project is to understand and analyze the Financial Analysis of SDG
Software pvt ltd , studying and comparing the Financial Statement of the company, and
carrying out the judgments about the profitability, solvency, liquidity, and soundness.
To enhance our conceptual and practical knowledge, while carrying out the Financial
Analysis.
The objective of the project is to understand the financial aspects of a business firm. A
financial statement analysis consist of the application of analytical tools and techniques to
the data in financial statements in order to derive from them measurements and relationships
that are significant and useful for decision making.
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RESEARCH METHODOLOGY USED IN THE PROJECT:
Methods are the means to accomplish the objective. This study of “ANALYSIS OF
FINANCIAL STATEMENT OF SDG SOFTWARE INDIA PVT LTD ” is primarily
accomplished through the secondary data. Since the collection of the data was made
through published annual repots of the company. Tools that are being used for data
collection are:
• Various records being available at factory premises.
• Audited annual reports for the period of five years.
• PERSONAL interaction with the finance employees at the factory premises.
• Web site of the company
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COMPANY PROFILE
SDG Corporation headquartered in Norwalk, Connecticut, U.S.A. has multiple Offshore
Development Centers (ODC) in India. We are an Accredited Supplier for a Fortune 5 Company,
having more than 500 employees. We are ISO 9001:2000 certified and have internalized Six
Sigma methodology. SDG is preferred employer with a host of Employee Friendly benefits and
competitive compensation packages. We also provide work on latest technologies.
We have strategic alliances with best of breed technology companies. SDG provides vibrant,
learning & open culture with immense opportunities for growth
SDG empowers forward-thinking companies by partnering seamlessly to strategize, create and
implement knowledge-driven, innovative business and technology solutions increasing
efficiency and enabling growth.
SDG is led and managed by principals with a combined corporate and consulting experience of
over 50 years in various IT disciplines. With its core competencies aligned for a value domain
leadership, SDG strives to deliverbest of class service and product.
From creating digital strategy to integrating legacy and enterprise applications across today's
Internet and distributed processing technologies, SDG provides custom-tailored solutions to help
businesses make the change to a dynamic, digital enterprise. SDG leverages pre-built, reusable
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software components supporting the industry's widest array of tested solutions for business and
distributed applications.
SDG is having strong partnership with Accenture, IBM, ADT Tyco, American Standard
companies, L & T Limited, Motorola, Oxford health Plan, Bankone, Passlogix, Sun
Microsystems, Vignette Corporation, Harvard University, British Petroleum and many more.
ORGANIZATIONAL STRUCTURE
The SDG Software Pvt Ltd is divided into divisions dealing with
1. Finance and Accounts Division.
2. Personnel and Administration Division.
3. Infra dept Division
4. Sales and Marketing Division
5. Technical Division
Each department has its own functioning and deals with other departments as and when
required
1. Finance and Accounts Division
FAD is record all the Transaction related to Journal entries, sales, purchase, receipt and
payment. FAD generates balance sheet, general ledger, trial balance, profit & loss statement and
daybooks besides many other transactional reports.
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2. Personnel and Administration Division
Functions of Personnel & Administration Division:
1. Manpower planning
2. Placement and Recruitment
3. Training & Development
4. Establishment
5. Industrial Relations
6. Welfare
7. General Administration
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Analysis of Financial statements-An overview
MEANING OF FINANCIAL STATEMENTS
According to Hampton “ A financial statement is an organized collection of data according
to logical & consistent accounting procedures. Its purpose is to convey an understanding of
some financial aspects of a business firm. It may show a position at a moment of time as in
the case of balance sheet, or may reveal a series of activities over a given period of time, as
in the case of an income statement”.,
“On the basis of the information provided in the financial statements, management makes
review of the progress of the company and decides the future course of action.
DIFFERENT TYPES OF FINANCIAL STATEMENTS
• Income Statement: The income statement or profit & loss account is considered as a
very useful statement of all financial statements. It depicts the expenses incurred on
production, sales and distribution and sales revenue and the net profit or loss for
particular period. It shows whether the operations of the firm resulted in profit or loss at
the end of a particular period.
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• Balance Sheet: Accounting Standards Board, India has defined balance sheets as, “a
statement of financial position of an enterprise as at a given date which exhibits its
assets, liabilities, capital reserves and other account balances at their respective book
values”. Balance sheet is a statement, which shows the financial position of a business as
on a particular date. It represents the assets owned by the business and the claims of the
owners and creditors against the assets in the form of liabilities as on the date of
statement.
• Statement of Retained Earnings: The statement of retained earnings is also called
profit & loss appropriation account. It is a link between income statement & balance
sheet. Retained earnings are the accumulated excess of earnings over losses and
dividends. The balance shown by the income statements is transferred to the balance
sheet through this statement after making the necessary appropriations.
• Fund Flow Statement: According to Anthony,” The funds Flow Statement described
the sources from which the additional funds were derived and the use to which these
funds were put”. Funds flow statements help the financial analyst in having a more
detailed analysis and understanding the changes in the distribution of resources between
two balance sheet periods. The statement reveals the sources of funds and their
application for different purposes.
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• Cash Flow Statements: A cash flow statement depicts the changes in cash position from
one period to another. It shows the inflow and outflow of cash and helps the
management in making plans for immediate future. An estimated cash flow statement
enables the management to ascertain the availability of cash to meet business
obligations. This statement is useful for short term planning by management.
Annual Reports / Corporate reports: Apart from the financial statements annual report
contains other relevant information such as Management discussion & analysis, Reports on
corporate Governance, Director’s report, details of the subsidiary companies. These reports
play as important role as financial statements of the company in understanding of the
complete financial position.
• Schedules & Note to Financial Statements: Schedules are the statements, which
explains the items given in the income statement and balance sheet. Schedules are a part
of financial statement, which give detailed information about the financial position of a
business organisation. Certain notes are often used to supplement the information
comprised in basic financial statements. These are virtually a part of financial
statements.
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NATURE OF FINANCIAL STATEMENTS
According to the American Institute of Certified Public Accountants, financial statements
reflect “ a combination of recorded facts, accounting conventions and personal judgments
and conventions applied affect them materially”. It means that data presented in financial
statements is affected by recorded facts, accounting concepts & conventions and personal
judgments.
a) Recorded fact :
The term-recorded facts refer to the figures, which are shown in the book
of accounts. The figures, which are not recorded in the books, are not depicted in financial
statements, no matter how important or unimportant those facts are.
b) Accounting policies, Assumptions, concepts & conventions:
Accounting policies encompasses the principles, bases, conventions, rules and procedures
adopted by in preparing and presenting financial statements. Accounting policies of the
organisation are consistently followed over along period of time and are reported as schedule to
financial statements or as notes to financial statements in the annual report.
As per accounting standards Board, India, fundamental accounting assumptions mean “ basic
accounting assumptions which underline the preparation & presentation of financial statements.
Usually, they are not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed”. Some fundamental accounting assumptions are
Going concern concept, consistency, accrual etc.
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Accounting concepts are basic framework on the basis of which accounting work is carried out.
Some accounting concepts are Business entity concept, Money measurement concept, going
concern concept, cost concept, matching concept, Dual aspect concept etc.
Accounting conventions are the principles, which enjoy the sanctity of application on account of
long usage, are termed as accounting conventions. E.g. consistency, conservatism, materiality,
full disclosure.
c ) Personal Judgments: Personal judgments of the accountant are of importance despite of
properly laid down concepts, conventions, policies and assumptions. The judgment needs to be
exercised in proper classification of assets, classification of expenditure into capital & revenue,
creation of provisions and reserves.
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LIMITATIONS OF FINANCIAL STATEMENTS
i) Financial statements disclose only monetary facts. There are certain assets and
liabilities, which are not disclosed in the balance sheets. For example the most
tangible assets of the company is its management force and its dissatisfied labor
force is its liability which are not disclosed in the balance sheet
.
ii) The financial statements are generally prepared with from the point of view of
shareholders and their use is limited in the decision making by the management,
investors and creditors
.
iii) An investor likes to analyze the present and future prospects of the business while
the balance sheet show the past position. As such the use of balance sheet is limited.
iv) Even the audited financial statement does not provide complete accuracy.
v) Profit arrived at by profit & loss account is interim in nature. Actual profits can be
ascertained only after the firm achieves the maximum capacity.
vi) The profit & loss account does not disclose the factors like quality of product and
efficiency of management.
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VARIOUS TECHNIQUES OF FINANCIAL ANALYSIS
COMPARATIVE FINANCIAL STATEMENTS: Comparative financial statements are
statements of financial position of a business designed to provide time perspective to the
consideration of various elements of financial position embodied in such statements.
Comparative statements reveal the following:
(i) Absolute data (Money value or rupee amounts )
(ii) Increase or reduction in absolute data (in terms of money values)
(iii) Increase or reduction in absolute data (in terms of percentage )
(iv) Comparison (in terms of ratios)
(v) Percentage of totals
Comparative balance sheets, comparative income statements and comparative statements of
changes in financial position can be prepared. American Institute of Certified Public accountants
have explained the utility of preparing the comparative statements, thus:
“ The presentation of comparative statements is annual and other reports enhance the usefulness
of such reports and brings out more clearly the nature and trend of current changes affecting the
enterprise. Such presentation emphasis the fact that statements for a series of period are far more
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significant that those of a single period and that the accounts of one period are but an installment
of what is essentially a continuous history. In any one year, it is ordinarily desired that the
balance sheet, the Income statement and the surplus statement be given for one or more
preceding years as well as for the current years”.
COMMON SIZE STATEMENTS: The figures shown in financial statements viz. Profit &
loss account and balance sheet are converted to percentages so as to establish each element to
the total figure of the statement and theses statement are called common size statements. These
statements are useful in analysis of the performance of the company by analyzing each
individual element to the total figure of the statement. Theses statements will also assist in
analyzing the performance over years and also with the figures of the competitive firm in the
industry for making analysis of relative efficiency.
TREND ANALYSIS: In trend analysis ratios different items are calculated for various periods
for comparison purposes. Trend analysis can be done by trend percentages, trend ratios and
graphic and diagrammatic representation. The trend analysis is a simple technique and does not
involve tedious calculations. However, comparisons would be meaningful only when accounting
policies are uniform and price level changes do not present a distorted picture of phenomenon.
The trend analysis conveys a better understanding of management’s philosophies, policies and
motivations, which have bought about the changes revealed over the years. Thus method is a
useful analytical device for the management since by substitution of percentages for large
amounts, the brevity and readability are achieved. However trend percentages are not calculated
only for major items since the purpose is to highlight important changes.
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CASH FLOW ANALYSIS: A cash flow statement depicts the changes in cash position from
one period to another. It shows the inflow and outflow of cash and helps the management in
making plans for immediate future. An estimated cash flow statement enables the management
to ascertain the availability of cash to meet business obligations. This statement is useful for
short term planning by management.
FUND FLOW ANALYSIS: Fund Flow Statement: Fund flow analysis reveals the changes in
working capital position. Working capital is of paramount importance in any business so this
kind of a analysis proves to be very useful. According to Anthony,” The funds Flow Statement
described the sources from which the additional funds were derived and the use to which these
funds were put”. Funds flow statements help the financial analyst in having amore detailed
analysis and understanding the changes in the distribution of resources between two balance
sheet periods. The statement reveals the sources of funds and their application for different
purposes. Fund flow analysis has become an important tool for any financial analyst; credit
granting institutions and financial managers.
RATIO ANALYSIS: Ratio analysis is very important analytical tool to measure performance
of an organization .The ratio analysis concentrates on the interrelationship among the figures
appearing in the financial statements. The ratio analysis helps the management to analyze the
past performance of the firm and to make further projections. Ratio analysis allows interested
parties like shareholders, investors, creditors, government and analysts to make an evaluation of
certain aspects of firm’s performance. It is a process of comparison of one figure against
another, which make a ratio, and the appraisal of the ratios to make proper analysis about the
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strength and weakness of firm’s operations. This tool of financial has been discussed in detail
further.
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COMPARATIVE BALANCE SHEET
Figures in Crores
Application 2008 2007 Change in 2008 Percentage change
1.Fixed assets 30.29 31.28 (-)0.99 (-)3.16
2. Current Assets
Inventory 25.96 21.55 4.41 20.46
Sundry debtors 63.95 34.92 29.03 83.13
Cash & bank 12.57 16.32 (-)3.75 (-)22.97
Loan & advance 9.17 8.99 0.18 2.00
Other current assets 0.73 0.37 0.36 97.2
Total (2) 112.38 82.15 30.23 36.79
3.Misc. Exp _ _ _ _
Profit & loss account 14.99 16.01 (-)1.02 (-)6.37
Total(1+2+3) 157.66 129.44 28.22 21.80
Sources 2008 2007 Change in
2008
Percentage change
1.Share capital 47.76 47.76 _ _
2.Loan funds
Secured 13.86 8.85 5.01 56.6
Unsecured 24.51 27.04 (-)2.53 (-)9.35
Table(2) 38.37 35.89 2.48 6.91
3.Current Liab. &
provision
71.54 45.82 25.72 56.1
Total(1+2+3) 157.67 129.47 28.20 21.78
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COMPARATIVE INCOME STATEMENT
Figures in Crores
Significance/interpretation of comparative financial statements
Particulars 2009 2008 Change in
2009
Percentage change
Gross sales 161.32 133.92 27.4 20.45
Less: Excise duty 7.45 7.28 0.17 2.33
Net sales 153.87 126.64 27.23 21.50
Less: Cost of goods
sold
108.36 86.34 22.02 25.50
Gross profit 45.51 40.30 5.21 12.90
Add: other income
1.19 2.14 0.95 44.39
46.70 42.44 4.26 10.03
Less: indirect
expense
Employees
remuneration
23.89 23.98 0.09 0.37
Interest
2.54 0.88 1.66 188.63
Adm., selling &other
expense
2.06 1.05 1.01 96.19
Depreciation 5.81 5.18 0.63 12.16
Total indirect
expenses
34.30 31.09 3.31 10.64
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The Comparative balance sheet reveals many facts about the composition of assets and
financial structure of the firm. The fixed assets have decreased over the period by 3.16%
and the current assets have been increased by 36.79% mainly due to the increase in the
sundry debtors by 83.13%. Moreover the current liabilities have increased by 56.1%.
Loans include both secured and unsecured loans of which secured loans increased by
56.6%. Whereas unsecured loans decreased by 9.35%. The increase in total assets by
21.80% is matched with increase in total liabilities by 21.80%.
On the basis of comparative income statement, it can be said that gross sales during the
period had increased by20.45%. However excise duty during the period had increased by
2.33%. Net sales during the period had increased by 21.50%. There was increase in the cost
of the good sold by 25.50%. As compared to net profit of Rs 11.35 Crores in the previous
year there was a net profit of Rs 12.40 Crores during the period. Administration and selling
expenses during the period had increased by 96.19%.
So the comparative financial statement explains about the changes in different items of the
financial statements. However despite this revelation the comparative financial statement
fails to highlight the component changes in relation to total assets or total liabilities. The
comparative financial statement does not throw light on the variations in each asset as a
percentage of the total assets for a particular period or changes in different liabilities in
relation to total liabilities for that period etc. Now this drawback of comparative financial
statements is taken care of by the common size statements
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COMMON SIZE BALANCE SHEET
Figures in Crores
Application 2009 2008 % Change in 2009 % Change in 2008
1.Fixed assets 30.29 31.28 19.21 24.16
2. Current assets
Inventory 25.96 21.55 16.46 16.64
Sundry debtors 63.95 34.92 40.55 26.97
Cash & bank 12.57 16.32 7.97 12.60
Loan & advance 9.17 8.99 5.81 6.94
Other current assets 0.73 0.37 0.46 0.28
Total (2) 112.3
8
82.15 71.27 63.46
3.Misc. Exp
Profit & loss A/c 14.99 16.01 9.50 12.36
Total(1+2+3) 157.6
6
129.44 100 100
Sources 2008 2007 % Change in 2008 % Change in 2007
1.Share capital 47.76 47.76 30.29 36.88
2.Loan funds
Secured 13.86 8.85 8.79 6.83
Unsecured 24.51 27.04 15.54 20.88
Table(2) 38.37 35.89 24.33 27.72
3.Current liability
& prov.
71.54 45.82 45.37 35.39
Total(1+2+3) 157.6
7
129.47 100 100
COMMON SIZE INCOME STATEMENT
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Figures in Crores
Significance/interpretation of common size statement
Particulars 2009 2008 % Changein2009 % Change in 2008
Gross sales
161.32 133.92 104.84 105.74
Less: Excise duty
7.45 7.28 4.84 5.74
Net sales
153.87 126.64 100 100
Less: Cost of goods
sold
108.36 86.34 70.42 68.17
Gross profit 45.51 40.30 29.57 31.82
Add: other income
1.19 2.14 0.77 1.68
46.70 42.44 30.34 33.50
Less: indirect expense
Employees
remuneration
23.89 23.98 15.52 18.93
Interest 2.54 0.88 1.65 0.69
Adm., selling &other
expense
2.06 1.05 1.33 0.82
Depreciation 5.81 5.18 3.77 4.09
Total indirect
expenses
34.30 31.09 22.30 24.54
Net profit /loss
12.40 11.35 8.05 8.96
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The common size balance sheet reveals that the proportion of the fixed assets had decreased
from 24.16% to 19.21% whereas the proportion of the currents assets had increased from
63.46% to 71.27%. This simply shows the increasing reliance of the company on the
current assets.
Similarly out of the total liabilities the proportion of the share capital had decreased from
36.88% to 30.29% whereas the proportion of the loans had decreased from 27.72% to
24.33% and the proportion of the current liabilities had increased from 35.39% to 45.37%.
The common size income statement reveals that the proportion of the cost of goods sold out
of net sales had increased from 68.17% to 70.42%. There is a marginal dip in percentage
net profit from 8.96% to 8.05%.
It can be observed that the common size statement can be used for analyzing and comparing
the financial position of a company for two different periods or between two companies for
the same year. The common size statement can be easily used for analyzing and for some
real insight into operational and financial position of the company over a period of different
years.
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Trend Analysis:
Figures in Crores
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2009 2008 2007
Particulars Actual % Actual % Actual %
Working
capital 40.84 99.43 36.33 88.45 41.07 100
Depreciation 2.06 226.37 1.05 115.3 0.91 100
Inventories 25.96 164.30 21.55 136.3 15.80 100
Adm., selling
& other
expenses 5.81 69.08 5.18 61.59 8.41 100
Interests 2.54 246.6 0.88 85.43 1.03 100
Cash & bank
balance 12.57 72.11 16.32 93.63 17.43 100
Current assets 112.38 157.9 82.15 115.4 71.15 100
Current
liabilities 71.54 237.7 45.82 152.2 30.09 100
Net sales 153.87 152.8 126.64 125.7 100.68 100
Mfg. expenses 108.36 155.2 86.34 123.7 69.78 100
Significance/interpretation of trend analysis
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On the whole year 2009 was the best year as compared to the previous years i.e. 2008, 2007 in
terms of overall financial performance. As from the above table we can see that the financial
performance of the company is much better in 2009 because of the fact that company has
registered a profit before taxes of Rs 12.40 Crores as compared to the previous years profits of
Rs 11.35 Crores, 3.69 Crores in year 2008, 2007 respectively.
Working capital of the company had increased in the year 2007 by 87.37% whereas it decreased
by 72.75% in year 2008 and eventually increased by 95.18% in the year 2009.
Administration & other expenses have been increased by Rs. 2.12 crores in 2007 , decreased by
Rs. 3.23 crores in 2008 , and then eventually increased by Rs. 60 lacs in 2009.
Cash and bank balances have increased by Rs. 8.91 crores in 2007 , and then decreased by Rs.
1.11 crores and Rs. 3.75 crore in 2008,2009 respectively.
Current assets have been continuously raising at a rapid pace in the previous 3 years as current
assets of the company for the previous three years i.e. 2007,2008,2009 have increased by Rs.
3.44 crore , Rs . 11 crore and Rs. 30.23 crore.
Current liabilities increased to Rs. 71.54 Crores in the year 2009 as compared to Rs. 45.82
Crores in the year 2008.
Net sales of the company have been consistently rising for the past 3 years. Net sales increased
by Rs. 13 crore , Rs. 26 crore and Rs. 27.23 crore in the years 2007, 2008 and 2009
respectively.
RATIO ANALYSIS – AN OVERVIEW
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DEFINITION
The term ratio implies arithmetical relationship between two related figures. The
technique of ‘Ratio Analysis’ as technique for interpretation of financial statements deals
with the computation of various ratios, by grouping or regrouping the various figures and/or
information appearing on the financial statements (either profitability statements or balance
sheet or both) with the intention to draw the fruitful conclusion thereform. Ratios, depending
on the nature of ratio, may be expressed in either of the following ways:
Percentage for example, Net Profit as 10% of Sales
Fractions for example, retained earnings as 1/3 rd of share capital
Stated comparison between numbers for example, Current assets as twice the current
liabilities.
The ratio can be defined as the qualitative or mathematical relationship that persists between
two similar variables. In other words it is the precise relationship between two comparative
variables in terms of quantitative figures (either in percentage or proportion). Comparative
variable should have the same unit of measurement.
This technique is based on the premise that a single accounting figure by itself does not
communicate any meaningful information but expressed as a relative to some other figure. It
may definitely give some significant information.
CLASSIFICATION OF RATIOS
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Classification of ratios depends upon the objective for which they are calculated. It may also
depend upon the availability of the data. Analysis of financial statements is made with a
view to ascertain the efficiency and financial soundness of the company; as such ratios can
be classified on the basis of profitability, turnover and financial capability. Further in
different situations, different analyst may calculate different ratios.
Liquidity Ratios measure a firm's ability to meet its current obligations.
Profitability Ratios measure management's ability to control expenses and to earn a return
on the resources committed to the business.
Leverage Ratios measure the degree of protection of suppliers of long-term funds and can
also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities
on time.
Efficiency, Activity or Turnover Ratios provide information about management's ability to
control expenses and to earn a return on the resources committed to the business
Profitability Ratios
Profitability is a relative term. It is hard to say what percentage of profits represents a
profitable firm, as profits depend on such factors as the position of the company and its
products on the competitive life cycle (for example profits will be lower in the initial years
when investment is high), on competitive conditions in the industry, and on borrowing
costs.
For decision-making, we are concerned only with the present value of expected future
profits. Past or current profits are important only as they help us to identify likely future
profits, by identifying historical and forecasted trends of profits and sales.
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We want to know whether profits are generally on the rise; whether sales stable or rising;
how the profits compare to the industry average; whether the market share of the company is
rising, stable or falling; and other things that indicate the likely future profitability of the
firm.
Profitability ratios based on Sales of the Firm
Profits are a factor of sales and are earned indirectly as a part of sales revenue. So whenever
a firm makes sales, it earns profit. But how much? How the total sale revenue is is going to
be used for meeting the cost of goods sold, indirect expenses and return to shareholders etc.
All this aspect can be analyzed with the help of Profitability Ratio
Profitability ratios based on Assets/Investments
A financial analyst can employ another set of financial ratios to find out how efficiently the
firm is using its assets because the profitability of a firm can be analyzed with reference to
assets employed to earn a return. Normally, the more the assets employed, greater should be
the profits and vice-versa.
Profitability analysis from point of view of Owners
Ultimately the profits of the firm belong to the owners who have invested their funds in the
form of equity capital or preference share capital or retained earnings. Therefore the
Profitability of the firm should be analyzed from the point of view of owners also.
Profitability Measures assess the firm's ability to operate efficiently and are of concern to
owners, creditors, and management. Profitability ratios provide a measure of the returns that
a firm is generating:
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A ) Gross Profit Margin
B ) Operating Profit Margin
C ) Net Profit Margin
Efficiency, Activity, or Turnover ratio
Provide information about management's ability to control expenses and to earn a return on
the resources committed to the business.
IT is a more sophisticated analysis of a firm's liquidity, evaluating the speed with which
certain accounts are converted into sales or cash; also measures a firm's efficiency
A ) Sales to Working Capital (Net Working Capital Turnover)
B ) Fixed Asset Turnover
C )Inventory Turnover
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial
obligations. They are of particular interest to those extending short-term credit to the firm.
Two frequently used liquidity ratios are the current ratio (or working capital ratio) and the
quick ratio or Acid Test.
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A higher ratio would indicate a greater liquidity and lower risk for short-term lenders. The
Rules of Thumb for acceptable values are: Current Ratio (2:1), Quick Ratio (1:1).
While high liquidity means that the company will not default on its short-term obligations,
one should keep in mind that by retaining assets as cash, valuable investment opportunities
might be lost. Obviously, cash by itself does not generate any return. Only if it is invested
will we get future return.
A )Current ratio or working capital ratio
B ) Quick Ratio
Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike
liquidity ratios that are concerned with short-term assets and liabilities, financial leverage
ratios measure the extent to which the firm is using long term debt.
A ) Debt ratio (Debt-to-Total-Assets)
B )Debt-to-equity
C )Total Debts to Assets
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PROFITABILITY RATIOS
• GROSS PROFIT RATIO= (GROSS PROFIT/NET SALES) *100
It is also called as average mark up ratio. The Gross Profit is the difference between sales
revenue and the cost of generating those sales. Therefore, the gross profit amount and the
gross profit ratio depend upon the relationship between selling price and cost of production
including direct expenses. The gross profit ratio reflects the efficiency with which it
produces/purchases goods. The gross profit ratio should be analyzed and studied as a time
series
.
YEAR
G. PROFIT (+)
LOSS (-) NET SALES RATIO
2004-2005 (+) 0.51 60.06 (+) 0.84
2005-2006 (+) 1.62 87.68 (+) 1.84
2006-2007 (+) 4.21 100.68 (+) 4.18
2007-2008 (+)4.30 126.64 (+)31.82
2008-2009 (+)45.51 153.87 (+)29.57
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The Gross Profit Ratio for the company is on an increase mainly due to the continuous increase
in the Gross profit, which is mainly due to the increase in sales as a percentage of direct
expenses are more. A Gross Profit ratio of 50% means that on every 1-rupee sale, the firm is
earning a gross profit of 50 paise. This ratio indicates the degree to which the selling price of
goods per unit may decline without resulting in losses from operations to the firm.
SIGNIFICANCE/INTERPRETATION OF GROSS PROFIT RATIO
This ratio reveals profit-earning capacity of the business with reference to its sales. This
ratio works as a guide to the management in determining it’s selling and distribution
expenses. The gross profit should be enough to cover the selling expenses of the company.
Gross profit ratio has decreased from 31.82% in the year 2008 to 29.57% in the year 2009.
It clearly implies that company has not been successful in attaining the same level and in
thus generating less Gross Profit than the previous year which in is not a good sign for the
company.
0.84
1.84 4.18
31.82 29.57
0
5
10
15
20
25
30
35
2005 2006 2007 2008 2009
year
Gross Profit Ratio chart
Gross Profit Ratio
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• Operating Ratio
Formula = Cost of good sold+ Operating expense
Net sales
Particulars 2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
Cost of good sold 36.26 58.52 65.95 86.34 108.36
Operating expense 3.10 6.28 8.42 5.18 5.81
Total 39.36 64.5 74.37 91.52 114.17
Net sales 60.05 87.67 100.6
8
126.6
4
153.87
Operating Margin 65.55 73.57 73.87 72.26 74.19
34

SIGNIFICANCE/INTERPRETATION OF OPERATING RATIO
This ratio indicates the ratio of operational cost to the sales. It is also related to net profit
ratio. It reveals the cost content and operational expenses absorbed in the sales.
From the above data, we see that operating ratio for the year 2009 has increased to 74.19%
from 72.26%, which is not again a positive sign for the company which shows that company
has not been able to increase its net profit by making an effective positive change in its
operating cost. A lots of efforts need to be done to make things even better for the company.
• Net profit ratio
Formula = Net Profit
Net Sales
0perating Ratio Chart
65.55
102.05
73.87
72.26
74.19
2005
2006
2007
2008
2009
Year
Operating Ratio
35

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Net Profit (-) 2.35 (-) 0.56 3.04 11.35 12.40
Net sales 60.06 87.68 100.68 126.64 153.87
NET PROFIT
RATIO
(-) 3.87 (-) 0.64 3.01 8.96 8.05
SIGNIFICANCE/INTERPRETATION
Net Profit Ratio Chart
-3.87
3.01
8.05
-0.64
8.96
-6
-4
-2
0
2
4
6
8
10
2005 2006 2007 2008 2009
Years
2005
2006
2007
2008
2009
36

This ratio indicates the ratio of net profit to the net sales. It measures of net income
generated by sales of goods or services.
From the above data, we see that net profit ratio for the year 2009 has decreased to 8.05%
from 8.96% which is not a positive sign for the company which shows that company has not
been able to increase its net profit by making an effective improvement in its sales of their
products, production, administration selling, financing, pricing and tax management.
37

Formula = Total Liabilities
Total Assets
Particulars 2004-
05
2005-
06
2006-
07
2007-
08
2008-09
Total liabilities 114.42 104.52 109.37 129.47 157.67
Total Assets 81.24 76.13 90.52 82.15 112.38
Total Debts ratio 1.41 1.37 1.20 1.57 1.40
1.41 1.37
1.2
1.57
1.4
0
0.5
1
1.5
2
2005 2006 2007 2008 2009
year
Total Debt Ratio Chart
Total Debts ratio
39

From the above chart, as the ratio are more than one it means that total liabilities are more
than that total assets and its shows that the firm is not able to meet its liabilities. It shows the
financial unsoundness and the state of probable insolvency. It can be easily interpreted that
the solvency ratio for the year 2009 has decreased to 1.40 % from 1.57 % in the year 2008
which indeed is encouraging for the company but definitely a lot of thinking has to be done
on that to ensure better results for the company in the coming year.
• Debt-to-Equity
Formula = Total Debt
Total Equity
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Total debt 42.14 35.37 31.52 35.89 38.37
Total equity 37.77 37.77 47.77 47.76 47.76
Debt-to-equity 1.12 0.94 0.66 0.75 0.80
40

It indicates what proportion of equity and debt the company is using to finance its assets. A
high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense. The ideal ratio is acceptable as 2:1.
Debt equity ratio for the year 2009 has been 0.80% as compared to 0.75% in the year 2008
which shows that there has been more outsider funds involved than shareholders funds in the
year 2009.
1.12
0.94
0.66
0.75 0.8
0
0.2
0.4
0.6
0.8
1
1.2
2005 2006 2007 2008 2009
year
Debt-to-Equity Chart
Debt-to-equity
41

• Debt ratio /Debt-to-Total-Assets
Formula = Total Debt
Total Assets
Particulars 2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
Total debt 42.14 35.37 31.52 35.89 38.37
Total Assets 81.24 76.13 90.52 82.15 112.38
Debt ratio 0.52 0.46 0.35 0.43 0.34
It compares the total debts with total assets. This ratio depicts the proportion of total assets
financed by total liabilities. The higher the total debt ratio the more risky is the situation
because all liability is to be repaid sooner or later (greater financial risk) .
0.52
0.46
0.51
0.43
0.34
0
0.1
0.2
0.3
0.4
0.5
0.6
Debt Ratio
2005 2006 2007 2008 2009
Years
Debt Ratio Chart
42

• Current Ratio
Formula = Current Assets
Current Liabilities
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Current Assets 72.23 67.71 71.16 82.15 112.38
Current Liabilities 34.52 36.32 30.08 45.82 71.54
Current Ratio 2.09 1.86 2.36 1.79 1.57
2.09
1.86
2.36
1.79
1.57
0
0.5
1
1.5
2
2.5
2005 2006 2007 2008 2009
year
Current Ratio Chart
Current Ratio
44

The standard current ratio is supposed to be two times or 2:1. Current assets should be two
times of the current liabilities. This ratio has fallen from 1.79% in year 2007 to 1.57% in
year 2009, so it can be said that the financial position of the company is not very sound since
lower ratio shows the under utilization of the capacity of the business to meet its current
obligations.
• Quick Ratio
Formula =Current Assets – Inventory
Current Liabilities
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Current Assets 72.23 67.71 71.16 82.15 112.38
Inventory 28.19 19.36 15.80 21.55 25.96
Current Liabilities 34.52 36.32 30.08 45.82 71.54
45

The standard quick ratio is 1. Since the ratio concentrates on cash, marketable securities and
receivables in relation to current obligation, it provides a more pretending measure of
liquidity to the current ratio.
Now the quick ratio has decreased from 1.32% in the year 2008 to 1.20% in the year 2009,
which is definitely a positive sign for the company.
Quick Ratio Chart
1.27
1.33
1.84
1.32
1.2
2005
2006
2007
2008
2009
Year
Quick Ratio
46

• Inventory Turnover
Formula =Cost of Goods Sold
Average Inventory
47

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Cost of Goods Sold 36.21 58.52 65.95 86.34 108.36
Average Inventory 23.03 17.92 9.76 10.77 12.83
Inv Turnover 1.57 3.27 6.76 8.01 8.44
This ratio measures how many times the average stock/inventory is sold during the year.
Promptness of sale indicates better performance of the business. It also shows efficiency of
1.57
3.27
6.76
8.01 8.44
0
2
4
6
8
10
2005 2006 2007 2008 2009
year
Inventory Turnover
Inv Turnover
48

the concern. Immediate sales of goods produced require further production, which
consequently activates the productive process and is responsible for rapid development of
the business. Higher inventory/stock turnover ratio is always beneficial to the concern.
Stock turnover ratio for the year 2009 increased to 8.44 times from 8.01 times in the year
2008 which in itself seemed to be a remarkable achievement for the company and it reflects
that the company is on the right track.
• Fixed Asset Turnover
Formula = Net Sales
Net Fixed Assets
Particulars 2004-
05
2006-
07
2006-
07
2007-
08
2008-
2009
Net Sales 60.06 87.68 100.68 126.64 153.87
Net Fixed Assets 9.02 8.42 19.35 31.28 30.29
Fixed Asset
Turnover
6.66 10.41 5.20 4.04 5.07
49

This ratio ensures whether investment in the assets have been judicious or not. From the above
table, it can be seen that fixed assets turnover ratio has increased from 4.04 times in the year
2008 as compared to 5.07 times in the year 2009 which clearly indicates that the company has
made effective utilization of the fixed assets in the year 2009
• Sales to Working Capital/Net Working Capital Turnover
Formula = Net Sales
Working Capital
50
6.66
10.41
5.2 4.04 5.07
0
5
10
15
2005 2006 2007 2008 2009
year
Fixed Asset Turnover chart
Fixed Asset
Turnover

Particulars 2004-05 2005-06 2006-07 2007-08 2008-
2009
Net Sales 60.06 87.68 100.68 126.64 153.87
Working Capital 37.71 31.39 41.07 36.33 40.84
Sales to Working
Capital Turnover
1.59 2.79 2.45 3.48 3.76
This ratio studies the velocity of utilization of the working capital of the company during a
year. The higher the ratio lower is the investment in the working capital and higher would be
the profitability.
From the above table, ratio increased from 3.48 times in the year 2008 to 3.76times in the
year 2009, which clearly implies that the company is utilizing working capital properly.
1.59
2.79
2.45
3.48 3.76
0
1
2
3
4
2005 2006 2007 2008 2009
Year
Sales to Working Turnover Chart
51

In spite of all significance of the study (analysis of financial statements) it has the following
limitations: -
The study has been completed during a short period of six to eight weeks so it was not
possible to study the problems well in detail.
Suffering from the limitations of financial statements: - financial statements suffer from
variety of weaknesses. Balance sheet is prepared on historical record of the value of assets.
Financial statements are prepared according to certain conventions at a point of time,
whereas the investor is concerned with the present and future of the company. Certain assets
and liabilities are not disclosed. In other words we can say that balance sheet cannot be said
to have a complete accuracy. Financial statement suffers from these weaknesses, so analysis
based upon these statements cannot be said to be always reliable.
Absence of standard universally accepted terminology: - accounting is not an exact science.
It does not have standard, universally accepted terminology. Different meanings are given to
a particular item. There are different methods of providing depreciation. Interest may also be
charged on different rates. In this way there is sufficient possibility of manipulation. As a
result financial analysis also proves to be defective.
Ignoring price level changes: - the results shown by financial statements may be misleading,
if price level changes have not been accounted for. Ratios of two years will not
be meaningful for comparison if the prices of the two commodities are different. Change in
price affects cost of production, sales and value of assets and as a consequence
comparability of ratios also suffers.
53

Ignoring qualitative aspect: - financial analysis does not measure the qualitative aspects of
the business. It does not show the skill, technical know how and the efficiency of its
employees and managers. It is the quantitative measurement of the performance. It means
that analysis of financial statements measures only the one sided performance of the
business. It completely ignores human resource.
Misleading results in the absence of absolute data: - results shown by financial analysis may
be misleading in the absence of absolute data. We cannot have the idea of the size of the
business. Profitability ratios of the two firms may be same, but magnitude of their business
may be quite different.
Financial analysis is only a tool, not the final remedy: - AFS is a tool to measure the
profitability, efficiency and financial soundness of the business. It should be noted that
personal judgment of the analyst are important in financial analysis. We should not rely on a
single ratio. Before reaching any conclusion we should calculate several ratios. Accountant
should not be biased in the calculation of the ratios. It should not be calculated to prove the
personal contention.
Financial analysis spots the symptoms but does not arrive at diagnosis: - financial analysis
shows the trend of the affairs of the business. It may spot symptoms of financial soundness
and operational inefficiency but that cannot be accepted. A final decision in this regard will
require further investigation and thorough diagnosis.
54

RECOMMENDATION
It is recommended that the company must carry on with its Research & Development
Department effectively and put more efforts to come out with some more good results in the
years to come.
Inventory turnover ratio is falling a low inventory turnover ratio, which may ultimately
result in heavy, loses. So the firm should reduce the level of inventories.
The production of the company has increased in the year 2009,101.05 Crores as against
previous year 2008, 85.42, which is a good sign for the company.
The sale of the company has also increased rapidly, as the production has increased, from
Rs. 93.42 Crores in year 2007-08 to Rs. 107.11 Crores in year 2008-09 which is about
14.74% more than the previous year and it is a good condition for the company.
Net Worth of the company has been increased during the year.
Current Ratio has been improved during the year as against previous year. Now the company
is in a good position to pay off its current obligations.
Quick Ratio is not satisfactory some corrective steps should be taken by the company to
satisfy it.
Gross Profit Ratio shows that the management is achieving its target.
Stock Turnover Ratio has been increased to 6.76 times from 3.27 times during the year,
which is a remarkable achievement for the company.
55

Fixed Assets Turnover Ratio has been decreased to 5.20 times in the year 2008 as compared
to 10.41 times in the year 2007, which shows that the fixed assets is not utilized properly so
serious steps should be taken in the coming years.
Debt Equity Ratio has been decreased 0.66% for the year 2007as compared previous year
2006, 0.94%, which shows that lesser outsider funds involved than shareholders funds in the
year 2008 so effective steps should be taken to overcome the problem.
56

CONCLUSION
The aim of this project is to analyze the financial performance of a company. Every
company is concerned with the financial activities and in order to ascertain the financial
status of the business every enterprise prepares certain statements known as financial
statements. An understanding of the basic financial statements and the analysis of these
statements is necessary.
After calculation of financial statement and ratio , it is clear company has been growing
process. The sale of production of the company has also increased rapidly .
57

BIBLIOGRAPHY
FINANCIAL MANAGEMENT KHAN & JAIN
FINANCIAL MANAGEMENT I.M.PANDEY
MANAGEMENT ACCOUNTING I.M.PANDEY
ANNUAL REPORTS OF SDG SOFTWARE INDIA PVT LTD
INTERNET
http://www. google.co
http://www.altavista.com
http://www.celindia.co.in
58

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