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Financial Performance Analysis

November 6, 2012

FINANCIAL PERFORMANCE ANALYSIS

Financial performance analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of balance sheet and profit and loss account. It also helps in short-term and long term forecasting and growth can be identified with the help of financial performance analysis.The dictionary meaning of ‘analysis’ is to resolve or separate a thing in to its element or components parts for tracing their relation to the things as whole and to each other.The analysis of financial statement is a process of evaluating the relationship between the component parts of financial statement to obtain a better understanding of the firm’s position and performace.This analysis can be undertaken by management of the firm or by parties outside the namely, owners,creditors,investors.

The analysis of financial statement represents three major steps:

  • The first step involves the re-organization of the entire financial data contained  the financial statements. Therefore the financial statements are broke down into individual components and re-grouped into few principle elements according to their resemblances and affinities. Thus the balance sheet and profit and loss accounts are completely re-casted and presented in the condensed form entirely different from their original shapeThe second step is the establishment of significant relationships between the individual components of balance sheet and profit and loss account. This is done through the application tools of financial analysis like Ratio analysis, Trend analysis, Common size balance sheet and comparative Balance sheet.
  • Finally, the result obtained by means of application of financial tools is evaluated.
  • In brief financial analysis is the process of selection, relation and evaluation of financial statements. The tools of analysis are used for determining the investment value of the business, credit rating and for testing efficiency of operation.

Thus financial analysis helps to highlight the facts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and credit worthiness of the company.

OBJECTIVES:

  • To study the financial performance analysis of “THE CHENNAI PORT TRUST”.
  • To analyze the financial changes over a period of five years.
  • To analyze the financial statements of the company by using financial tools.
  • To evaluate the financial position of the company in terms of solvency, profitability, activity and earning ratios.
  • To suggest effective measures in the existing system of the company.
    RESEARCH METHODOLOGY : Research means “know about new things”. Sometimes, it may refer to scientific and systematic search pertinent information on specific topic. In fact research is an art of scientific investigation.
    According to Clifford Woody research comprises of. “define and redefining problem, formulating hypothesis or suggested solution, collecting, organizing and evaluating data; making deduction and reaching conclusion; and at last carefully testing the conclusion to determine whether they fit the formulating hypothesis”. Redman and Moray define research as a “systematic effort to gain new knowledge”. Research can be defined as the search of knowledge or any systematic investigation to establish fact. The primary purpose for applied research (as opposed to basic research) is discovering, interpreting, and the development of methods and systems for the advancement of human knowledge on a wide variety of scientific matters of our world and the universe. Research can use the scientific method, but need not do so.Research can also be said as a process that is followed by a person to answer either his/her own queries or somebody else queries about a particular object, person, subject etc.Data collection: The data collections classified into two types are

    • Primary data
    • Secondary data

    Secondary data

    The secondary data are data are collected from information which is used by other. It is not direct information. This information is already collected and analysis by other and that information is used by others. The secondary data are collected from following:-

    • Company’s annual report
    • Company’s website
    • Manual

    Data analysis:

    The data’s analyzed using the following tools:-

    • Comparative Balance sheet
    • Common size balance sheet
    • Ratio analysis
    • Trend Analysis

    NEED FOR THE STUDY:Financial statement analysis is an important tool for measuring the financial performance of any company. The main aspect of financial management is working capital management and it should be done on day-to-day basis. Hence the company permits me to do in the area of finance. This study helps to review the financial performance of the company.

    Scope of the study

    The study covers almost the entire area of financial operations covered by THE CHENNAI PORT TRUST” the study has been conducted with the help of data obtained from audited financial records. The audited financial records are the company annual reports pertaining to past 5 years from 2004-05 to 2008-2009 and the audited financial records are obtained from the company’s annual report. The researcher tries to measure the performance of the organization and its working capital management in terms of financial wealth.

    LIMITATIONS OF THE STUDY:

    • The study is restricted for a period of five years
    • Assumed that 5 years are a responsible period to get fault accurate picture

    policies and practices of management of the company.

    • Due to the inadequate time it is not possible to analyze all respects relevant to the study.
    • The analysis is based on annual reports of the company.
    • Authorities were reluctant to reveal full information about the working of the Company.

    REVIEW OF LITERATURE

    FINANCIAL ACCOUNTING:

    Financial accounting is the process of systematic recording of the business transactions in the various books of accounts maintained by the organization with the ultimate intention of preparing the financial statement there from. These financial statements are basically in two forms. One, profitability statement which indicates the result of operations carried out by the organization during a given period of time and second balance sheet which indicates the state of affairs of the organization at any given point of time in terms of its assets and liabilities.

    Main purpose of financial accounting is to ascertain profit or loss and to indicate financial position of an enterprise. Two fundamental statements of financial accounting are income and expenditure statement and balance sheet. The profit and loss account or income and expenditure account is prepared for a particular period to find out the profitability of the firm and balance sheet is prepared on a particular date to determine the financial position of the firm.

    Financial accounting summaries transactions taking place during a period with the objective of preparing the financial statement.

    FINANCIAL PERFORMANCE ANALYSIS

    Financial performance analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of balance sheet and profit and loss account. It also helps in short-term and long-term forecasting and growth can be identified with the help of financial performance analysis.

    The dictionary meaning of ‘analysis’ is to resolve or separate a thing in to its element or components parts for tracing their relation to the things as whole and to each other.

    FINANCIAL STATEMENTS

    ‘FINANCIAL STATEMENT’ refers to formal ad original statements prepared by a business concern to disclose its financial information

    According to John.N.Meyer, “The financial statement provides summary of accounts of a business enterprise, the balance sheet reflecting assets, liabilities and capital as on a certain date and the income statement showing the result of operation during a certain period”

    The financial statements are prepared with a view to depict the financial position of the concern. They are based on the recorded facts and are usually expressed in monetary terms. The financial statement are prepared periodically that is generally for the accounting period

    The term financial statement has been widely used to represent two statements prepared by accountants at the end of specific period. They are :

    • Profit and loss a/c or income statement
    • Balance sheet or statement of financial position

    Limitation of Financial Statement:

    • Information shown in financial statement is not precise since it is based on practical experience and the conventions and rules developed therefore
    • Financial statements do not always disclose the correct financial position of the business concern as they are influenced by the personal opinions,judgement,subjective view and whims of accountant of each concern
    • Balance sheet of a concern is a statics document it disclose the financial position of a concern on a particular date.
    • Information disclosed by profit& loss a/c may not be the real profit as many items shown in the profit & loss a/c may not the real
    • Financial statements are dumb, because they speak themselves. The statements require further detailed analysis and interpretation.
    • Financial statement of the one period may not be comparable.
    • Financial statement do not disclose the contribution of man towards the efficiency of the business.

    ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT

    The various tools of financial statement are used for decision-making process. The financial statement becomes a tool for future planning and forecasting. The analysis of these statements involves their division according to similar groups and arranged in desired form. The interpretation involves the explanation of financial facts in a simplifiers manner.

    Objectives of Analysis and Interpretation:

    The users of financial statement have definite objectives to analysis and interpret .Therefore; there are variations in the objectives of interpretation by various classes of people. However, there are certain specific and common objectives which are listed below:

    • To interpret the profitability and efficiency of various business activities with the help of profit and loss account;
    • To measure managerial efficiency of the firm;
    • To ascertain earning capacity in future period;
    • To measure short-term and long -term solvency of the business;
    • To determine future positional of the concern;
    • To measure utilization of various assets during the period;
    • To compare operational efficiency of similar concerns engaged in the same industry

    Type of Analysis:

    The process of financial statement analysis is of different types. The process of analysis is classified on the basis of information used and ‘modus operandi’ of analysis. The classification is as under:

    Financial statement analysis

    On the basis of information on basis of ‘modus operandi’ of

    Used: analysis:

    (a) External analysis (a) Horizontal analysis

    (b) Internal analysis (b) Vertical analysis

    LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

    Financial statement analysis is a very important device but it has Certain limitation which are to be kept in mind. Following are the limitations of financial statement analysis.

    1. Based on past data:

    The nature of financial statements is historical. Past cannot be the index of future estimation, forecasting, budgeting and planning.

    1. Financial statement analysis cannot be a substitute for judgment :

    Analysis is a tools which can be utilized usefully by an expert may lead to erroneous conclusion by unskilled analysis. Thus the result analysis cannot be considered as judgment or conclusion.

    1. Reliability of figures:

    The accuracy and reliability of analysis depends on reliability of figures derived from financial statement.

    1. Different interpretation:

    Result of the analysis may be interpreted differently by different user

    1. Change in accounting methods:

    Analysis will be effective if the figures taken from financial statements comparable. If there are frequent change in accounting policies and method, figures of different periods will be different and comparable.

    1. Price level change:

    The ever rising inflation erodes the value of money in the present day economic situation, which reduces the validity of analysis.

    1. Limitations of the tools of analysis:

    Different techniques of analysis are used by an analyst. These tools are suitable for different type of analysis. Application of a particular tool or technique depends on the skill and expertise of the analyst. If an unsuitable technique is used, it give misleading result. It may lead to wrong conclusions and prove harmful to the business concern.

    METHODS OF ANALYSIS AND INTERPRETATION

    The analysis and interpretation of financial statement is used to determine the financial position and result of operation as well. The following are the tools that are used for analyzing the financial position of the company:

    • Ratio Analysis
    • Comparative balance sheet
    • Common size balance sheet
    • Trend analysis

    RATIO ANALYSIS

    Ratio analysis is an important and age-old technique. It is a powerful tool of financial Analysis. It is defined as “The indicated quotient of two mathematical expressions” and as “the relationship between two or more things” .Systematic use of ratio is to interpret the financial statement so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined.

    A ratio is only comparison of the numerator with the denominator .The term ratio refers to the numerical or quantitative relationship between two figures. Thus, ratio is the relationship between two figures and obtained by dividing a former by the latter. Ratios are designed show how one number is related to another.

    The data given in the financial statements are in absolute form and are dumb and are unable to communicate anything. Ratios are relative form of financial data and are very useful technique to check upon the efficiency of a firm. Some ratios indicate the trend or progress or downfall of the firm.

    In the view of the requirements of the various users of ratio, it is divided in to the following important categories.

    • 1. Liquidity ratios
    • 2. Activity ratios
    • 3. Profitability ratios
    • 4. Earning ratios

    LIQUIDITY RATIOS:

    Liquidity ratios measure the ability of the firm to meet it’s a current obligation. In fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements; but liquidity ratios, by establishing a relationship between cash and other current asset to current obligations provide a quick measure of liquidity.

    A firm should ensure that it does not suffer From lack or liquidity, and it does not have excess liquidity .the failure of the company to meet its obligations due to its lack of liquidity, will result in a poor creditworthiness, loss of creditor’s confidence, or even in legal tangles resulting in the closure of the company a very high degree of liquidity is also bad idle assets earn nothing. The firms fund will be unnecessarily tied up in current assets. Therefore it is necessary to strike a proper balance between high liquidity and lack of liquidity.

    ACTIVITY RATIO OR TURNOVER RATIO:

    Activity Ratio highlights the activity and the operational efficiency of the business concern . The better managements of asserts the larger the amount of sales. Activity ratio measures the relationship between the sales and the assets. Turnover ratios are employed to evaluate the efficiency with which the firm manages and utilize s its assets. Their ratio indicates the speed with which assets are brought converted as turn over into sales.

    PROFITABILITY RATIOS:

    Profitability reflects the final result of the business operations. Profit earning is considered essential for the survival of the business. There are two types of profitability ratios profit margin ratio and the rate of return ratios. Profit margin ratio shows the relationship between profit and sales.

    Popular profit margin ratios are gross profit margin and net profit margin ratio. Rate of return ratio reflects between profit and investment. The important rates of return measures are rate of return on total assets and rate in equity.

    EARNINGS RATIOS:

    Earnings are income to the shareholders of the share invested by them. Hence the earning ratio will be useful to the investors to the value of the shares that is been holding by them

    COMPARATIVE BALANCE SHEET:

    The comparative balance sheet is helpful in analysing and evaluating the financial position of the firm over a period of years. The comparative balance sheet analyse is the study of the trend of the same items, group of items, and computed items in two or more balance sheet of the same business enterprise on different dates.

    The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of the period and these changes can help in forming an opinion about the progress of an enterprise

    COMMON SIZE BALANCE SHEET:

    Financial statements when read in absolute figure are not easily understandable. They are even miss leading. Each items of asset is converted in to percentage to total asset and each item of capital and liabilities is expressed to total liability and capital fund. Thus the whole balance sheet is converted in to percentage form i.e., every individual item stated as a percentage of total 100.such converted balance sheet is known as common size balance sheet. The percentage so calculated can be easily compared with the corresponding percentages in some other period.

    TREND ANALYSIS:

    The ‘trend’ signifies a tendency and as such the review and appraisal of tendency in accounting variables are nothing but the trend analysis. Trend analysis is carried out by calculating trend ratio. Trend analysis is significant for forecasting and budgeting. Trend analysis discloses the change in financial and the operating data between specific periods.

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12 Comments
  1. sam Cyomugisha permalink

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  2. odede felix oghenero permalink

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