A STUDY ON FINANCIAL PERFORMANCE ANALYSIS

INTRODUCTION

Financial statements refer to a wide range of statements, such as income statement,
balance sheet, statement of changes in working capital and cash flow statement. Of these,
income statement and Balance sheet are of primary importance. Infact, other statements are
based on these two. While income statement shows the results of the business (i.e., profit or
loss), balance sheet indicates the financial position of the company as on a particular date. These
two statements provide very important information. But, for a better understanding of the
financial statements ratio analysis is a very powerful tool. It provides insight into the financial
performance of a company. For example, the gross profit and net profit may show an increase in
absolute terms. But the rate of profit may show a declining trend.
Comparison of absolute figures will not disclose this whereas net profit ratio will throw
light on the downfall in profitability.

1. Short-term Solvency
Ratio analysis helps to draw conclusions regarding the liquidity position of a company.
The liquidity or short-term solvency can be regarded as good if the company is able to meet the
short-term obligations without difficulty. The liquidity ratios are useful to banks and other short-
term lenders in credit evaluation.
2. Long-term solvency
Ratio analysis is useful in evaluating the long-term solvency of a company. it is measured
by leveraged or capital structure ratios. Ratio analysis discloses the strengths and weakness of a
company in this regard. The capital structure ratios reveal whether a firm has a reasonable
proportion of various sources of finance-mainly debt and equity. If the company is heavily
loaded with debt, it is exposed to serious risks of default in payment of interest / principal.


3. Operating Efficiency
Ratio analysis helps to evaluate the efficiency of the management in the utilisation of its
assets. Various activity ratios such as assets turnover and stock turnover throw light on the
operational efficiency of the company. Average collection period indicates the efficiency in the
collection of dues from debtors.

4. Overall profitability
Profitability is a fundamental condition for the continuous survival / growth of the
company. For the assessment of profitability, comparison of absolute figures is not sufficient.
Ratio analysis presents a clear picture of profitability by studying it in relation to sales as well as
investment.

5. Inter-firm comparison
Inter-firm comparison refers to comparison of performance of two or more firms in the
same industry. Ratio analysis is an excellent tool as it provides standards for comparison. For
instance, comparison of rate of gross profit, rate of net profit, return on equity, stock turnover
and average collection period helps in a better and clear understanding of relative strengths and
weakness of each firm.

6. Trend analysis
Ratio analysis enables a company to take time dimension into account. In other words,
trend analysis indicates whether performance and position of a company are improving or
deteriorating over a period of time.


SCOPE OF THE STUDY
Sterlite Industries (India) Limited, popularly known as Sterlite is among the leading
copper producers in India. It was the first private sector company to set up a copper smelter and
refinery and operate the largest continuous cost copper rod capacity plants. It was also the first
Indian company with an LME registration on all the manufactured and traded copper brands.
The company has operations in Zinc and Aluminium through its subsidiaries. Bharat
Aluminium Ltd and Hindustan Zinc Limited.
The turnover of the company had increased from Rs.39.92 crores to Rs.11,566 crores in
the last six years.
Profit after tax (PAT) had zoomed to Rs.1236.41 crores from Rs.106.41 crores. Capital
employed had also shot up from Rs.6328.23 crores to Rs.16,785.16 crores.
In view of the companys marvelous growth. It was felt that a study of its financial
performance would be a fruitful academic exercise. Application of ratio analysis would help to
understand the implication of financial performance. Hence Sterlite Industries (India) Ltd was
chosen for this project work.

NEED OF THE STUDY
The chief objective of the study is to analyse the financial performance of Sterlite
Industries Ltd. The specific objectives are:
1. to assess the liquidity position of the company.
2. to examine the profitability Sterlite Industries in relation to sales and investment,
3. to evaluate the operating efficiency,
4. to study the capital structure, and long-term solvency, and
5. to study the dividend behavior of the company.


METHODOLOGY
The present study on the financial performance of Sterlite Industries is based on
secondary data. Financial data presented in the annual reports of the company for five years
(2004 2005 to 2008 2009) formed the subtratum of analysis. The financial data was
rearranged to arrive at the figures necessary for analysis. Important financial ratios were
calculated to assess liquidity, profitability, solvency and dividend pay-out. For the purpose of
evaluation, comparison was made with the standard ratios (where ever available) or with the
ratios of the past taking as the base year.

LIMITATION
The study is based solely on secondary data. Primary data could not be gathered due to
resource constraints. The limitation of secondary data is reflected in the identification of the
exact causes for the results shown by financial analysis.