# Financial Analysis

Topics: Financial ratio, Financial ratios, Generally Accepted Accounting Principles Pages: 13 (3383 words) Published: March 9, 2013
SIGNIFICANCE OF THE STUDY

Ratio analysis is an extremely useful device for analyzing the financial statements. It helps the bankers, creditors, investors, shareholders etc. in acquiring enough knowledge about the profitability and financial health of the business. In the light of the knowledge so acquired by them, they can take necessary decisions about their relationships with the concern. Through this study I understand that ratio simplifies and summarizes a long array of accounting data and makes them understandable. It discloses the relationship between two such figures which have a cause and effect relationship with each other. Current year’s ratio are compared with those of previous years and if some weak spots are thus located, remedial measures are taken to correct them. Apart from the organization point of view this study is also significant for me as it gives me a chance to understand the corporate environment & increases my analytical abilities to draw references. In this study we have also comparative financial data of GKN Driveline (India) Ltd which let us know the position of GKN Driveline(India) Ltd. in previous years and the in the current.

REVIEW OF RATIO ANALYSIS

Absolute figures expressed in monetary terms in financial statements by themselves are meaningless. These figures often do not convey much meaning unless expressed in relation to other figures. For example:- one trader Anil earns a profit of Rs. 1,50,000, whereas another trader Mr. Sunil earns a profit of Rs. 1,80,000. Which one of them is more efficient? Generally, we can say that Sunil is more efficient as he is earning more profits. But in order to give the correct answer, we must find out, how much the capital is employed by each of them. Suppose, Anil has employed a capital of Rs. 10,00,000 and Sunil has employed Rs. 15,00,000, we can now calculate the percentage of profit earned by each of them on the capital employed:

Anil = 1,50,000 × 100 = 15%
10,00,000

Sunil = 1,80,000 × 100 = 12% 15,00,000

This shows that Anil has earned Rs. 15 for every Rs. 100 of capital, whereas Sunil has earned Rs. 12 for every Rs 100 of capital. As such, Anil is using his capital more efficiently. The above example shows that figures assume significance only when expressed in relation to other figures. Just as in the example given above, the absolute figure of profit was meaningless but when the figure of profit was expressed in relation to capital, it assumed significance. Thus, we can say that the relationship between two figures, expressed in arithmetical terms is called a ‘ratio’. Merits:-

i.Ratio analysis is helpful in analyzing the financial statements.
ii.It simplifies and summarizes a long array of accounting data and makes them understandable. iii.Helpful in comparative study.
Demerits:-
i.False accounting data gives false ratios.
ii.Comparison not possible if different firms adopt different accounting policies. iii.Ratio analysis becomes less effective due to price level changes. iv.Ratios may be misleading in the absence of absolute data. v.Ratios alone are not adequate for proper conclusions.

vi.Effect of personal ability and bias of the analyst.
vii.Window dressing.

CONCEPT OF RATIO

A Ratio is simply one number expressed in terms of another. It is found by dividing one number into the other. Relationship between two figures, expressed in arithmetical terms is called a ratio. Financial ratio is a ratio of selected values on an enterprise's financial statement. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a...