A Financial Statement Analysis Finance Essay

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The financial statements are the end product of the financial accounting process. The financial statements means presenting financial information presented in concise form and the financial information is related to the financials of the company. The financial statements are prepared by the firm, firstly to communicate with different parties about the financial position of the firm and secondly to analyze the performance and operations of the firm for further planning. Financial statement analysis is a judgmental process. The main objective of financial statement is identification of change in trends and relationship and to see the reasons for the change and what is causing that change. Judgment process can be improved by experience and use of the analytical tools. It is done to determine what all information is relevant from all the information that is available. Secondly it defines the significant relationship between the information and lastly drawing a inference and conclusion. This study contains the following analysis: Comparative Financial Statement Common Size Financial Statement Ratio Analysis

Comparative Financial Statement

In CFS two or more financial statement are presented simultaneously in a columnar form. This statement is prepared to cover a period of number of years in a more meaningful form and by comparing it with different years and measuring the change in each and every year and measuring the trend in various items of financial statement. It can be prepared for both Income Statement and Balance Sheet. CFS is prepared to show: The absolute amount of different items in monetary terms The amount of periodic changes in monetary terms The percentage of periodic changes to reveal the proportionate changes.

Common Size Financial Statement

It represents the relationship of different items of financial statement with some common item expressing each item as the percentage of the common item. The CSS is used not only in intra firm comparisons over a series of different years but also in making inter firm comparisons for the same year or several years. This can also be prepared for both Income Statement and the Balance Sheet.

Ratio Analysis

This is the mostly used tool for analysis in financial analysis. Ratio analysis expresses the relationship in a mathematical form between two items or a group of items related to each other is a logical manner. It is based on the fact that a single figure is not going to communicate meaningful information but when compared with other item expresses significant information. There are various ratios that are used in this project: Liquidity Ratio Current Ratio Liquid Ratio Activity Ratio Debtors Turnover Ratio Average Collection Period Working Capital Turnover Ratio Fixed Assets Turnover Ratio Capital Turnover Ratio Total Assets Turnover ratio Leverage Ratio Total debt Ratio Proprietary Ratio Profitability Ratio Gross Profit Ratio Net Profit Ratio Office & Administrative Expense Ratio Return on Assets

Liquidity Ratios

The liquidity refers to the maintenance of, cash, bank and those assets which are easily convertible into cash in order to meet liabilities as and when they arise. The liquidity ratios study the firm's short term solvency position of the firm. Current Ratio: This is the most common ratio to study the firm short term solvency position. It is calculated by dividing the current asset by the current liabilities. The benchmark for this ratio is 2:1 i.e. 2 parts of assets and 1 part of liabilities. But this benchmark changes from industry to industry. Liquid Ratio: this is also called as acid test ratio or quick ratio. This ratio establishes the relationship between liquid assets and the current liabilities. This is calculated to know firms ability to know the immediate short term position of the firm. Stock is kept out from it as it requires time to be converted into cash. This is calculated by dividing liquid assets by current liabilities.

Activity Ratio

The activity ratios are also called as Turnover Ratio or Performance ratio. It is a measure of movement and indicates how frequently an account has moved over a period of time. It helps us to know how efficiently and frequently the assets of the firm are being utilized. These ratios are usually calculated with reference to sales or cost of goods sold. Debtors Turnover Ratio: If a firms sells its goods on credit than this ratio helps to know how quickly the debtors are collected. This is calculated as percentage by taking net credit sales or total sales and dividing it by average debtors. With the help of this we can also calculate the amount of days or months within which the debtors are calculated. Working Capital Turnover Ratio: It measures the velocity or utilization of the working capital of the firm during the year. This is calculated by dividing average net sales by average working capital. In this if the turnover period is more than more working capital is required if it is less than less working capital is required. Fixed Asset Turnover Ratio: The ratio indicates the extent to which the investments in fixed assets contribute towards sales. It measures the firm's ability to generate net sales from fixed assets. It is calculated by dividing net sales by average fixed assets. Capital Turnover Ratio: It measures the relationship between net sales and the capital employed. This ratio measures the effectiveness of the firm in utilizing its resources. This ratio is the indicator of the overall profitability of the firm. This is calculated by dividing net sales by average capital employed. Total Asset Turnover Ratio: This ratio measures the ability of the firm to use its sales to generate sales. This considers all the assets. It is calculated by dividing net sales by net fixed assets.

Leverage ratio

This ratio measures the long term solvency position of the firm. 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. (E.g.) debt equity ratio, proprietary ratio, etc Total Debt Ratio: This indicates what percentage of the company's assets is provided by provided via debt. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. This is calculated by dividing total debt by total assets. Proprietary Ratio: It relates to the proprietors funds to total assets. It helps the owners to know the owners contribution to the total value of assets. This ratio shows the long-time solvency of the organization it is calculated by dividing proprietor's funds by the total tangible assets.

Profitability Ratios

The aim of any business organization is to earn profit and it should earn enough profits in comparison with the with the capital invested and risk. This helps the firm to measure its efficiency. Gross Profit Ratio: This ratio expresses the relationship between Gross profit and sales. It indicated the efficiency of production or trading operation. A high gross profit ratio is a good management as it implies that cost of production is relatively low. This is calculated by dividing gross profit by net sales. Net Sales: Net profit ratio establishes a relationship between net profit (after taxes) and sales. It is determined by dividing the net income after tax to the net sales for the period and measures the profit per rupee of sales. Office & Administrative Expense: this ratio measures the relationship between the indirect expenses to the net sales and here we are taking office and administrative expenses. This is calculated by dividing administrative expenses by net sales. Return on Assets: Profitability can be measured in terms of relationship between net profit and total assets. It measures the profitability of investment. The overall profitability can be known by applying this ratio. This is calculated by dividing net profit by net sales. Objectives of the Study To study the financial position of the company. To analyze the financial stability and overall performance. To analyze and interpret the trends as revealed by various ratios of the company in particular. To analyze the profitability and solvency position of the unit with the existing tools of financial analysis. To know the quality of services provided from the customers To find out the satisfaction level of the customers To find out where improvements are required in the overall functioning of the company Research Methodology Descriptive research is used in this study because it will ensure the minimization of bias and maximization of reliability of data collected. The researcher had to use fact and information already available through financial statements of earlier years and analyze these to make critical evaluation of the available material. Hence by making the type of the research conducted to be both Descriptive and Analytical in nature. From the study, the type of data to be collected and the procedure to be used for this purpose were decided.


Questionnaire was used for collecting primary data. The questionnaire was constructed with close ended questions in which the respondent had to choose an option from among others as its answer. This form of questionnaire is called structured questionnaire.

Tools Used:

The data was collected in two manners. The primary data was collected through questionnaires, whereas secondary data was collected through the reading of journals and papers and also various brochures which were provided by Matrix Processing House. The primary data was analyzed using the software SPSS. The primary was analyzed using Cross Tabs and frequencies tables. It was depicted using bar charts, line graphs and some pie charts.

Limitation of the Study

The analysis and interpretation are based on secondary data contained in the published annual reports of Matrix Processing House for the study period. Due to the limited time available the study has been confined for a period of 5 years Ratio itself will not completely show the company's good or bad financial position. Inter firm comparison was not possible due to the non availability of competitors data. The study of financial performance can be only a means to know about the financial condition of the company and cannot show a through picture of the activities of the company. Due to limited number of customers the sample size has to be restricted to 15. Due to time and other constraints the study could not include every aspect of the set objective. As is the major limitation of all the surveys, the respondents may not have given true responses. The responses given have been assumed to be true. Some figures have been rounded off to the nearest rupee.
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A Financial Statement Analysis Finance Essay. (2017, Jun 26). Retrieved February 22, 2024 , from

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