BACKGROUND OF THE STUDY:

The background of the study on Visa Steel Limited would provide an overview of the
company, its industry, and the context in which the study is being conducted. Here's an
example of the background for a study on Visa Steel Limited:
Visa Steel Limited is an Indian steel manufacturing company that was incorporated in 2003.
The company specializes in the production of chrome-based products, ferrochrome, and
metallurgical coke. It operates through its manufacturing facilities located in Kalinganagar,
Odisha.
The steel industry is a crucial sector contributing to economic growth and development
worldwide. It serves as a key input for various industries, including construction, automotive,
infrastructure, and manufacturing. However, the steel industry is highly competitive and
influenced by global market dynamics, regulatory frameworks, and technological
advancements.
Visa Steel Limited operates in a highly competitive market, facing competition from both
domestic and international players. The company's market positioning, financial
performance, and operational efficiency are critical factors for its success and sustainability
in the industry.
In recent years, the steel industry has witnessed significant fluctuations in raw material
prices, global demand patterns, and regulatory changes. These factors have posed challenges
and opportunities for steel manufacturers, impacting their financial performance, market
share, and overall competitiveness.
Considering the dynamic nature of the steel industry and the importance of Visa Steel
Limited's financial performance and market position, there is a need to conduct a study to
assess the company's financial health, operational efficiency, competitive strategies, and
potential growth opportunities. This study aims to provide valuable insights to investors,
stakeholders, and decision-makers to understand the company's current position and make
informed decisions regarding investment, strategic planning, and risk management.
By analyzing Visa Steel Limited's financial statements, industry trends, and competitive
landscape, this study aims to identify key challenges, opportunities, and areas of
improvement for the company. It will contribute to the existing body of knowledge on the
steel industry and provide valuable insights for researchers, analysts, and industry
professionals.
STATEMENT OF THE PROBLEM:
The problem is to assess the key challenges and issues faced by Visa Steel Limited in
achieving su

stainable financial performance and maintaining a competitive position in the steel industry.

Some specific aspects that can be addressed in the statement of the problem include:
Financial Performance: Analyzing the factors impacting Visa Steel Limited's financial
performance, such as declining profitability, liquidity concerns, increasing debt levels, or
inefficient utilization of resources.

Operational Efficiency: Identifying operational inefficiencies within Visa Steel Limited's

processes, supply chain management, production capabilities, or cost control measures that
hinder the company's profitability and competitiveness.

Market Position and Competitiveness: Assessing Visa Steel Limited's position in the steel
industry and understanding the challenges it faces in terms of market share, pricing strategies,
competition from domestic and international players, or adapting to changing market
dynamics.

Regulatory and Environmental Factors: Investigating the impact of regulatory compliance,

environmental regulations, or sustainability practices on Visa Steel Limited's operations,
costs, and overall competitiveness.

Technological Upgrades and Innovation: Examining the company's ability to adopt and
leverage advanced technologies, innovation, and research and development efforts to enhance
productivity, product quality, and cost-efficiency.

Risk Management: Identifying risks and vulnerabilities faced by Visa Steel Limited, such as
raw material price fluctuations, foreign exchange risks, geopolitical factors, or disruptions in
the supply chain, and evaluating the company's risk management strategies and mitigation
measures.

It's important to note that the specific problem statement will depend on the objectives and
scope of the study being conducted on Visa Steel Limited, and the information available for
analysis.

SCOPE OF THIS STUDY:

Visa Steel Limited operates in the steel manufacturing industry, which offers various
growth opportunities and potential challenges. The scope for Visa Steel Limited can be
analyzed from different perspectives:
Steel Industry Growth: The steel industry plays a crucial role in infrastructure development,
automotive manufacturing, and various other sectors. With the increasing demand for steel
products, Visa Steel Limited has the potential to capitalize on this growth by expanding its
production capacity, exploring new markets, and diversifying its product portfolio.
Infrastructure Development: Infrastructure projects, such as bridges, roads, railways, and
buildings, require significant amounts of steel. As governments continue to invest in
infrastructure development, Visa Steel Limited can benefit from the increased demand for
steel products and secure contracts for supplying steel to these projects.
Industrial and Manufacturing Sector: Steel is a key component in the manufacturing
sector, including automotive, machinery, appliances, and construction equipment industries.
As industrial activities expand, Visa Steel Limited can cater to the growing demand for steel
from these sectors, particularly by focusing on specialized steel products and forging strategic
partnerships with manufacturers.
Export Opportunities: Visa Steel Limited can explore export opportunities by targeting
international markets. By leveraging its production capabilities and maintaining competitive
pricing, the company can expand its customer base beyond the domestic market and establish
itself as a reliable steel supplier globally.
Technological Advancements: The steel industry is experiencing technological
advancements, such as automation, digitalization, and energy-efficient production processes.
Visa Steel Limited can invest in modernizing its facilities, adopting advanced technologies,
and implementing sustainable practices to enhance operational efficiency, reduce costs, and
improve product quality.
Risk Factors: It's important to consider potential challenges and risk factors that may affect
Visa Steel Limited's growth prospects. These can include volatile raw material prices,
fluctuations in global steel demand, regulatory changes, competition from domestic and
international players, and economic factors that impact the overall business environment.
Overall, Visa Steel Limited has opportunities for growth and expansion in the steel
industry, driven by increasing demand for steel products, infrastructure development, and
industrial growth. By strategically positioning itself, focusing on product quality, operational
efficiency, and exploring new markets, the company can capitalize on these opportunities and
strengthen its position in the industry.

HYPOTHESIS OF THE STUDY:

To provide a hypothesis for the study of Visa Steel Limited, I would need more specific
information about the focus and objectives of the study. However, here are a few hypothetical
examples of research hypotheses that could be explored in a study of Visa Steel Limited:
Hypothesis 1: Visa Steel Limited's profitability has improved over the past three years due to
increased operational efficiency and cost optimization measures.
Hypothesis 2: There is a positive correlation between Visa Steel Limited's investment in
technology and its overall operational performance, as measured by key financial ratios.
Hypothesis 3: Visa Steel Limited's liquidity position has been adversely affected by
fluctuations in raw material prices, leading to challenges in meeting short-term obligations.
Hypothesis 4: Visa Steel Limited's market share and revenue growth are influenced by its
ability to effectively penetrate and capture market opportunities in emerging economies.
Hypothesis 5: Visa Steel Limited's debt-to-equity ratio has increased over the past two years,
indicating a higher risk of financial distress and potential challenges in servicing debt
obligations.
These hypotheses serve as examples and would need to be refined and tailored based on the
specific research objectives and available data. It's important to conduct a thorough analysis
of Visa Steel Limited's financial statements, industry trends, and other relevant factors to
formulate hypotheses that can be tested and supported with empirical evidence.
PURPOSE OF THE STUDY:
The purpose of a study on Visa Steel Limited can vary depending on the specific objectives
of the researchers or analysts conducting the study. Here are some common purposes for
studying Visa Steel Limited:
Financial Performance Evaluation: One purpose could be to analyze the financial
performance of Visa Steel Limited using ratio analysis or other financial metrics. This study
would aim to assess the company's profitability, liquidity, solvency, and operational
efficiency. It helps investors, stakeholders, and financial analysts understand the company's
financial health and make informed decisions.
Investment Analysis: Another purpose could be to evaluate Visa Steel Limited as a potential
investment opportunity. This study would involve assessing the company's financial
statements, market position, growth prospects, competitive landscape, and industry trends.
The aim is to determine whether investing in Visa Steel Limited aligns with the investor's
financial goals and risk tolerance.
Strategic Decision-Making: The study could be conducted to provide insights for strategic
decision-making within Visa Steel Limited. It would involve analyzing internal and external
factors, identifying strengths, weaknesses, opportunities, and threats (SWOT analysis), and
formulating strategies to enhance the company's competitiveness, market share, and long-
term sustainability.
Industry Analysis: The study could focus on analyzing the steel industry as a whole and
Visa Steel Limited's position within it. This research would involve examining industry
trends, market dynamics, emerging opportunities, and competitive forces. It helps the
company understand the industry landscape and make informed decisions regarding market
positioning, product diversification, and strategic partnerships.
Risk Assessment and Mitigation: The purpose could be to identify and assess various risks
faced by Visa Steel Limited, such as market risks, operational risks, financial risks, and
regulatory risks. This study aims to develop risk management strategies and policies to
minimize potential negative impacts and ensure the company's resilience in a dynamic
business environment.
Performance Comparison: The study could involve comparing Visa Steel Limited's
financial performance, operational efficiency, and market position with its competitors. This
analysis helps identify relative strengths and weaknesses, benchmark performance, and gain
insights into areas where the company can improve its competitive advantage.
It's important to note that the purpose of the study may vary depending on the specific
research objectives, the intended audience, and the context in which the study is being
conducted.
LIMITATION OF THE STUDY:
Every study has its limitations, and it's important to acknowledge them to
provide a comprehensive understanding of the research. Here are some potential limitations
that could apply to a study on Visa Steel Limited:
Data Availability: The study's findings and conclusions may be limited by the availability
and quality of data. Access to complete and accurate financial data, industry reports, and
relevant information about Visa Steel Limited could be a constraint.
Time Constraints: The study's scope and depth may be limited by time constraints.
Conducting a thorough analysis of Visa Steel Limited's financial performance, industry
dynamics, and competitive landscape may require an extensive time period, but limited time
may restrict the depth of the study.
Generalizability: The findings and conclusions of the study may be specific to Visa Steel
Limited and may not be easily generalizable to other companies in the steel industry. The
unique characteristics, strategies, and market dynamics of Visa Steel Limited may limit the
general applicability of the study's results.
External Factors: The study's findings may be influenced by external factors beyond the
control of Visa Steel Limited, such as changes in government policies, economic conditions,
or market disruptions. These factors can impact the validity and reliability of the study's
conclusions.
Industry Volatility: The steel industry is subject to significant market volatility, with
fluctuations in raw material prices, demand-supply imbalances, and geopolitical factors.
These inherent industry dynamics may impact the accuracy and predictability of the study's
results.
Subjectivity: The study may involve subjective judgments and interpretations based on the
researchers' analysis. The researchers' biases, assumptions, and limitations may affect the
objectivity and reliability of the study's findings.
Scope of Analysis: The study may focus on specific aspects of Visa Steel Limited's financial
performance or operational efficiency, potentially excluding other relevant factors that could
influence the company's overall performance.
It's important to acknowledge these limitations when interpreting the results of the study.
Researchers should strive to address these limitations to the best of their abilities while
conducting the study and present the findings in a transparent and objective manner.
SIGNIFICANCE OF THE STUDY:
The study of Visa Steel Limited holds several significant implications and benefits,
including:
Financial Decision Making: The study provides valuable insights into Visa Steel Limited's
financial performance, profitability, liquidity, and solvency. This information is essential for
investors, stakeholders, and financial institutions to make informed decisions regarding
investments, lending, and strategic partnerships with the company.
Industry Understanding: By studying Visa Steel Limited, researchers and industry
professionals gain a deeper understanding of the steel manufacturing industry, its dynamics,
and challenges. This knowledge contributes to the overall body of research and can be used to
inform industry strategies, policies, and regulations.
Strategic Planning: The study helps Visa Steel Limited identify its strengths, weaknesses,
opportunities, and threats. By analyzing the company's financial performance, operational
efficiency, and competitive positioning, the study assists in formulating effective strategic
plans to enhance performance, expand market share, and mitigate risks.
Risk Management: The research on Visa Steel Limited's financial performance and industry
dynamics aids in identifying potential risks and vulnerabilities. This knowledge enables the
company to develop robust risk management strategies, improve operational resilience, and
navigate challenges effectively.
Investor Confidence: A comprehensive study on Visa Steel Limited's financial health and
industry outlook can enhance investor confidence. The findings and analysis of the study
provide potential investors with a clear understanding of the company's prospects, risks, and
potential returns, fostering trust and facilitating investment decisions.
Policy and Regulatory Insights: The study offers policymakers and regulators insights into
the steel industry, its challenges, and potential areas for intervention. This information can
contribute to the development of effective policies, regulations, and incentives to support the
growth and sustainability of the industry.
Benchmarking and Comparison: The study enables benchmarking and comparison of Visa
Steel Limited's financial performance, operational efficiency, and market position against
industry peers. This comparative analysis helps the company identify areas of improvement
and implement best practices to enhance its competitiveness.
Academic Research and Knowledge Expansion: The study contributes to the academic
research and knowledge base on the steel industry, financial analysis, and corporate
performance evaluation. It provides researchers with empirical data and insights that can be
used to further explore related topics and theories.
Overall, the significance of studying Visa Steel Limited lies in providing stakeholders,
policymakers, investors, and industry professionals with valuable information and insights to
make informed decisions, improve performance, and contribute to the overall development of
the steel manufacturing sector.
Introduction:

Now a days financial decisions are one of the crucial decisions for managers. Right from the
inception of the company, manger has to take decisions which balances the goals of wealth
maximization along with profit maximization. Accounting ratios are one of the important tool
for financial analysis and decision making. It expresses relationship between two variables. It
helps to assess the financial health, operational proficiency of managers and earning capacity
of the firm by using financial statement analysis. It is useful for inter firm, intra firm and
industry comparison over a period of time. Financial ratios are powerful tools used to analyze
and assess the financial health and performance of a company. These ratios provide valuable
insights into various aspects of a company's operations, profitability, liquidity, solvency, and
efficiency. They are calculated by dividing one financial metric by another, often comparing
different elements of a company's financial statements such as the balance sheet, income
statement, and cash flow statement.

Financial ratios are used by investors, analysts, lenders, and other stakeholders to evaluate a
company's financial condition and make informed decisions. They help identify trends,
compare performance across different companies or industries, and highlight areas of strength
or weakness.
Objectives of ratio analysis:

The objectives of ratio analysis are as follows:

Assessing Financial Performance: Ratio analysis helps in evaluating the financial

performance and profitability of a company. It provides insights into the company's ability to
generate profits, manage expenses, and utilize assets efficiently.

Comparing Performance: Ratios allow for the comparison of a company's performance

over different periods or against industry benchmarks. This analysis helps identify trends,
strengths, and weaknesses, facilitating better decision-making and strategic planning.
Determining Financial Stability: Ratios assist in assessing the financial stability and
solvency of a company. They help determine if the company has enough assets to cover its
liabilities, evaluate its liquidity position, and measure its ability to meet short-term
obligations.

Evaluating Efficiency and Productivity: Ratio analysis can highlight the efficiency and
productivity of a company by examining various operational aspects. For example, ratios like
inventory turnover, receivables turnover, and asset turnover ratios indicate how effectively a
company manages its inventory, collects payments, and utilizes its assets.

Identifying Financial Risks: Ratios help identify potential financial risks and warning signs.
For instance, a high debt-to-equity ratio may indicate excessive leverage, while a declining
profit margin might signal declining profitability. By monitoring these ratios, companies can
take corrective actions to mitigate risks.

Supporting Investment Decisions: Ratio analysis provides crucial information to investors

and stakeholders when making investment decisions. It helps evaluate the financial health,
growth potential, and investment attractiveness of a company. Investors can compare ratios
across different companies to identify the most promising investment opportunities.

Facilitating Decision-Making: Ratios provide quantitative data that aids in decision-making

across various functional areas of a business. Managers can use ratios to assess the
effectiveness of different strategies, evaluate project feasibility, and allocate resources
efficiently.

Monitoring Financial Goals: Ratios serve as benchmarks for monitoring progress towards
financial goals. By comparing actual ratios against predetermined targets or industry
averages, companies can track their performance and take corrective actions if deviations
occur.

Limitations of ratio analysis:

While ratio analysis is a valuable tool for financial analysis, it has certain limitations that
should be considered:

Historical Data: Ratio analysis relies on historical financial data, which may not reflect the
current or future conditions of a company. Economic, industry, or internal changes can render
historical ratios less relevant or inaccurate for predicting future performance.
Lack of Context: Ratios provide numerical values but do not provide the full context or
explanation behind the numbers. They require careful interpretation and consideration of
qualitative factors to obtain a comprehensive understanding of a company's financial
situation.

Industry Differences: Different industries have unique characteristics, business models, and
financial structures. Comparing ratios across industries may not provide meaningful insights
due to variations in norms and standards. Industry-specific ratios or benchmarks should be
used for more accurate comparisons.

Inflation and Currency Fluctuations: Ratio analysis may be affected by inflation and
currency fluctuations. Inflation can distort historical cost figures, affecting ratios based on
those values. Currency fluctuations can impact the financial statements of multinational
companies, making cross-border ratio analysis more complex.

Manipulation and Accounting Practices: Companies may employ creative accounting

techniques to manipulate financial ratios, presenting a more favorable picture of their
performance. Different accounting policies and practices can also impact ratios, making
comparisons between companies challenging.

Limited Focus: Ratios focus primarily on financial aspects and may not capture non-
financial factors that contribute to a company's overall performance, such as management
quality, employee satisfaction, or market share. Therefore, relying solely on ratios may
provide an incomplete assessment of a company's health and prospects.

Lack of Standardization: While certain ratios are widely used, there is no universal standard
for ratio calculation or interpretation. Different analysts and researchers may employ different
formulas or definitions, leading to inconsistencies in ratio analysis results.

Changing Business Models: In today's rapidly evolving business environment, traditional

ratios may not adequately capture the dynamics of emerging business models or industries.
New metrics and analytical tools may be required to assess the performance of companies
operating in innovative sectors.

It is important to consider these limitations and use ratio analysis in conjunction with other
financial analysis techniques and qualitative information to gain a more comprehensive
understanding of a company's financial position and performance.
Classification of ratio analysis:

Ratio analysis can be broadly classified into the following categories:

Liquidity Ratios: These ratios measure a company's ability to meet its short-term obligations
and assess its liquidity position. Common liquidity ratios include the current ratio, quick
ratio, and cash ratio.

Solvency Ratios: Solvency ratios evaluate a company's long-term financial stability and its
ability to meet long-term obligations. Examples of solvency ratios include debt-to-equity
ratio, debt ratio, and interest coverage ratio.

Profitability Ratios: Profitability ratios assess a company's ability to generate profits from
its operations and manage expenses. Key profitability ratios include gross profit margin, net
profit margin, return on assets (ROA), and return on equity (ROE).
Efficiency Ratios: Efficiency ratios measure how effectively a company manages its assets
and liabilities to generate sales and revenue. Common efficiency ratios include inventory
turnover ratio, accounts receivable turnover ratio, and asset turnover ratio.

Market Ratios: Market ratios help evaluate a company's attractiveness to investors and
assess its market value. Examples of market ratios include price-to-earnings ratio (P/E ratio),
price-to-sales ratio (P/S ratio), and market-to-book ratio.

Coverage Ratios: Coverage ratios analyze a company's ability to cover its financial
obligations, such as interest payments or dividends. Common coverage ratios include the
times interest earned ratio and dividend coverage ratio.

Growth Ratios: Growth ratios measure the rate at which a company is growing and
expanding. These ratios include sales growth rate, earnings growth rate, and return on
investment (ROI).

These classifications provide a framework for analyzing different aspects of a company's

financial performance and position. It is important to consider multiple ratios within each
category to obtain a comprehensive assessment. Additionally, industry-specific ratios and
benchmarks can be used for more accurate comparisons and analysis.
  Analysis of financial statement.
 Analysis of operational efficiency of the firms.
 Helps in understanding the profitability of the company.
 Helps in identifying the business risks of the firms.
 Helps in identifying the financial risks of the company.
 For planning and forecasting the future of the firm
 To compare the performance of the firm.
 Ratio analysis is important because it may portray a more accurate representation of
the state of operations for a company.
 Consider a company that made $1 billion of revenue last quarter.
 Though this seems ideal, the company might have had a negative gross profit margin,
 A decrease in liquidity ratio metrics, and lower earnings compared to equity than in
prior periods.
 Static numbers on their own may not fully explain how a company is performing .

Financial statement analysis:

Financial statement analysis is the process of analyzing a company's financial statements for
decision-making purposes. External stakeholders use it to understand the overall health of an
organization and to evaluate financial performance and business value.

Financial Statement Analysis (FSA) is the diagnostic and investigative study of Financial
Statements in order to take logical business decisions. Financial Statement Analysis takes the
raw financial information from the financial statements and turns it into usable information
the can be used to make decisions. The three types of analysis are horizontal analysis, vertical
analysis, and ratio analysis. Each one of these tools gives decision makers a little more
insight into how well the company is performing.
To understand Financial Statement Analysis or FSA we must first learn about the Financial
Statements.

FINANCIAL STATEMENTS
Financial statement is a report which describes the financial health of a company. Financial
statements are usually compiled on a quarterly and annual basis and provide useful financial
information to the user of financial statement. Financial statements are often audited by
government agencies, accountants, firms, etc.
Financial statements for businesses usually include
A. The Balance Sheet portrays the financial position of the organization at a particular point
in time. It shows what you own (assets), how much you owe to vendors and lenders
(liabilities), and what is left (assets minus liabilities), known as equity or net worth). A
balance sheet is a snapshot of the company's financial position as of on a certain date. The
balance sheet equation can be stated as:
Assets - Liabilities = Stockholders' Equity
B. The Income Statement, on the other hand, measures the operating performance for a
specified period of time (e.g., for the year ended December 31, 2001). If the balance sheet is a
snapshot, the income statement is a motion picture. The income statement serves as the
bridge between two consecutive balance sheets. Simply put, the balance sheet indicates the
wealth of a company and the income statement tells you how a company performed last year.
The balance sheet and the income statement tell different things about a company. For
example, the fact the company made a big profit last year does not necessarily mean it is
liquid (has the ability to pay current liabilities using current assets) or solvent (noncurrent
assets are enough to meet noncurrent liabilities). A company may have reported a significant
net income but still have a deficient net worth. In other words, to find out how an
organization is doing, you need both statements. The income statement summarizes your
company's operating results for the accounting period; these results are reflected in the equity
(net worth) on the balance sheet. This relationship is shown in Exhibit1
C. Statement of Retained Earnings, also called statement of changes in equity reflects the
change in company’s retained earnings over the reporting period. Items included in the
statement of retained earnings include profits or losses from operations, dividends paid,
shares issued or redeemed during the period, and any other items charged or credited to
retained earnings.
D. The Statement of Cash Flows provides useful information about the inflows and
outflows of cash that cannot be found in the balance sheet and the income statement.
EXHIBIT 1 Balance Sheet and Income Statement

Exhibit 2 shows how these statements, including the statement of retained earnings, tie
together with numerical figures.
Note: The beginning amount of cash ($30 million) from the 20x4 balance sheet is added to
the net increase ($10 million) or decrease in cash (from the statement of cash flows) to arrive
at the cash balance ($40 million) as reported on the 20x5 balance sheet. Similarly, the
retained earnings balance as reported on the 20x5 balance sheet comes from the beginning
retained earnings balance (20x4 balance sheet) plus net income for the period (from the
income statement) less dividends paid. As one studies financial statements, these
relationships become clearer and as a Financial Analyst you will understand the concept of
articulation better.
EXHIBIT 2 How the Financial Statements Tie Together

FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis (FSA) can also be defined as the process of identifying
financial strengths and weaknesses of the firm by properly establishing relationship between
the items of the balance sheet and the profit and loss account.
Financial Ratios and Financial Statement Analysis emphasizes on the influence of financial
analysis in business. The important figures in a financial statement are intertwined by many a
relationship. It helps the analyst in comprehending these relationships and how each one
plays its vital role in understanding a business’s growth, performance, scalability and other
zones of it.

Any financial statement is known to be used in three main steps for analysis.
The first is to find out the relevant information from all the available data which helps in
decision making.
The second is to organize the selected information in order to emphasize on the relationships
that exist between the crucial figures in a financial statement.
The third is to draw conclusions, infer and evaluate the processed information for final
results.

Financial statement analysis, seeking to describe and explain:

 The demand and supply forces underlying the provision of financial statement data.
 The properties of numbers derived from financial statements.
 The key aspect of decision that use financial statement information.
 The features of the environment in which these decisions are made.
METHODS OF FINANCIAL STATEMENT ANALYSIS
There are various methods or techniques that are used in analyzing financial statements, such
as:
1. Comparative Statements
2. Common Size Percentages
3. Trend Analysis
4. Ratios Analysis.
Financial statements are prepared to meet external reporting obligations and also for decision
making purposes. They play a dominant role in setting the framework of managerial
decisions.
Analysts work in a variety of positions. Some are equity analysts whose main objective is to
evaluate potential equity (share) investments to determine whether a prospective investment
is attractive and what an appropriate purchase price might be. Others are credit analysts who
evaluate the creditworthiness of a company to decide whether (and with what terms) a loan
should be made or what credit rating should be assigned. Analysts may also be involved in a
variety of other tasks, such as evaluating the performance of a subsidiary company,
evaluating a private equity investment, or finding stocks that are overvalued for purposes of
taking a short position.

FINANCIAL STATEMENT ANALYSIS PROCESS:

The process of Financial Statement Analysis Consists 3 major Steps:

1. Reformulating Reported Financial Statements: Reformulating reported financial

statement is restating financial statement in such a way that financial statements serve the
purpose of analysis better and allows to more efficiently and accurately interpret the
performance of the company. In case of income statement reformulation takes form of
dividing reported items into recurring and non-recurring items, separating earnings into core
and transitory earnings. In case of balance sheet reformulation takes form of breaking the
balance sheet items into operating assets/liabilities and financial asset/liabilities. For cash
flow statements removing financing activities(for example interest expense) from cash flow
from operations etc.

2. Adjustments of Measurement Errors: Adjustment of measurement errors is done to

remove the noise present in the input data to enhance the quality of the reported accounting
numbers. For example, removing the R&D expenses from the income statement and showing
in the balance sheet.

3. Financial Ratio Analysis on the Basis of Reformulated and Adjusted Financial

Statements: Conducting ratio analysis on the adjusted financial statements involves
calculating various ratios to derive insight about the performance of a company.

The detailed process of conducting financial analysis is summarized in Exhibit 3

  Phase Sources of Information Output

1. Articulate the The nature of the analyst’s Statement of the purpose or
purpose and context function, such as evaluating an objective of analysis
of the analysis. equity or debt investment or
A list (written or unwritten) of
 issuing a credit rating. specific questions to be answered
by the analysis.
Institutional guidelines related to
developing specific work product. Nature and content of report to be
provided Timetable and budgeted
resources for completion.
2. Collect data Financial statements, other Organized financial statements.
financial data, questionnaires, and
Financial data tables.
industry / economic data.
Completed questionnaires, if
Discussions with management,
applicable
suppliers, customers, and
competitors, Company site visits
(e.g., to production facilities or
retails stores).
3. Process data Data from the previous phase, Adjusted financial statements,
Common-size statements.
Ratios and graphs.
Forecasts.
4. Analyze / interpret Input data as well as processed Analytical results.
the processed data. data.
5. Develop and Analytical results and previous Analytical report answering
communicate reports. questions posed in Phase 1.
conclusions and
Institutional guidelines for Recommendation regarding the
recommendations
published reports. purpose of the analysis, such as
(e.g., with an analysis
whether to make an investment or
report).
grant credit.
6. Follow up. Information gathered by Updated report and
periodically repeating above steps recommendations.
as necessary to determine whether
changes to holdings or
recommendations are necessary.

ATTRIBUTES OF GOOD FINANCIAL STATEMENT ANALYSIS

 1. Objectivity: Results of financial statement analysis should be analyzed objectively

to reduce the possibility of any behavioral bias to minimum.
 2. Precision and Brevity: Financial statement analysis should do with precision and
should provide relevant information in concise form.
  3. Understandability: Information provided by financial statement analysis should be
presented in such a way that the analysis fosters understandability.
 4. Relevance: Analysis of financial statement should be relevant to the purpose of the
analysis. Financial statements used in analysis should be timely and should have a
predictive value.
 5. Reliability: The information derived from the analysis of financial statement must
be free of material error and bias and should provide full and fair disclosure of the
financial performance and other relevant information.

USERS OF FINANCIAL STATEMENTS ANALYSIS

 1. Creditors: Creditors are concerned with the company’s ability to pay interest and
principal when due and are concerned with the company’s cash flow ability.
 2. Shareholders: Shareholders provide company with the much-needed capital and
are interested to know company’s ability to pay dividend, and growth of dividends
and maximize shareholders wealth.
 3. Prospective Investors: Financial statement analysis is used by the prospective
investors to evaluate the attractiveness of the investment in the business.
 4. Management: Management uses financial statement analysis to analysis the
efficiency of operations and make important business decisions. For example, whether
or not to continue or discontinue part of its business, to make or buy certain material,
or to acquire or rent/lease certain equipment.
 5. Regulatory Authorities: For publicly traded companies, financial statements are
analyzed to ensure compliance to various rules and regulations.
TOOLS OF FINANCIAL STATEMENT ANALYSIS
Financial statement analysis procedures fall into two basic categories:
1. Comparisons and measurements relating to financial data for two or more periods,
2. Comparisons and measurements relating to financial data of the current period.

The following analytical tools are used in Financial Statement Analysis:

1.   Comparative Financial Statements: Financial statements presenting financial data for

two or more periods are called comparative statements. Comparative financial statements
usually give similar reports for the current period and for one or more preceding periods.
Comparative statements are considerably more significant than are single-year statements.

a.   Horizontal analysis: Horizontal analysis spotlights trends and establishes relationships

between items that appear on the same row of a comparative statement. Horizontal analysis
discloses changes on items in financial statements over time. Each item (such as sales) on a
row for one fiscal period is compared with the same item in a different period. Horizontal
analysis can be carried out in terms of changes in dollar amounts, in percentages of change,
or in a ratio format. Horizontal analysis may be conducted for balance sheet, income
statement, schedules of current and fixed assets and statement of retained earnings.

            Dollar and Percentage Changes are computed by using the following formulas:

1.   Dollar Change = Amount of the item in comparison year – Amount of the item in base
year

2.   Percentage Change =  

b.   Vertical analysis: Vertical analysis involves the conversion of items appearing in

financial statement columns into terms of percentages of a base figure to show the relative
significance of the items and to facilitate comparison. On the balance sheet, individual assets
can be expressed in terms of their relationship to total assets. Liabilities and shareholders’
equity accounts can be expressed in terms of their relationship to the total of liabilities and
shareholders’ equity. On the income statement, each item is stated as a percentage of sales. In
a vertical analysis the percentage is computed by using the following formula:
 Percentage of base =  

2.   Common-Size Financial Statements: Each item in the common-size statement has a

common basis for comparison, for example, total assets, net sales. Common-size income
statements provide information concerning what proportion of sales dollar is absorbed by cost
of goods sold and various expenses. On comparative, common-size statement, the
comparisons demonstrate the changing or stable relationships within groups of assets,
liabilities, revenues, expenses, and other financial statement categories. Care must be
exercised when such comparisons are made since the percentage change can result from a
change in the absolute amount of the item or a change in the total of the group of which it is a
part, or both.

3.   Trend Analysis: Trend analysis indicates in which direction a company is headed. Trend

percentages are computed by taking a base year and assigning its figures as a value of 100.
Figures generated in subsequent years are expressed as percentages of base-year numbers.

4.   Ratio Analysis: A ratio is an expression of a mathematical relationship between one

quantity and another. If a ratio is to have any utility, the element which constitutes the ratio
must express a meaningful relationship. Ratio analysis can disclose relationships which
reveal conditions and trends that often cannot be noted by inspection of the individual
components of the ratio. Typical ratios are fractions usually expressed in percent or times.

Ratios of Financial Statement Analysis

1       Current Ratio =  

2       Quick Ratio =  

3       Cash Ratio =  

4       Defensive Interval Ratio =  

5       Receivables Turnover Ratio =  

6       Days of Sales Outstanding (DSO) =  

7       Inventory Turnover Ratio =  

8       Days of Inventory on Hand (DOH) =  

9       Payables Turnover Ratio =  

10     Days Payable Outstanding (DPO) =  

11     Cash Conversion Cycle (Net Operating Cycle) = DOH + DSO – DPO

12     Working Capital Turnover Ratio = 

13     Fixed Asset Turnover Ratio =  

14     Total Asset Turnover Ratio =  

15     Gross Profit Margin =  

16     Operating Profit Margin =  

17     Pretax Margin =  

18     Net Profit Margin =  

19     Operating Return on Assets =  

20     Return on Assets =  

21     Return on Equity =  

22     Return on Total Capital =  

23     Return on Common Equity =   

24     Tax Burden =  

25     Interest Burden =  

26     EBIT Margin =  

27     Financial Leverage Ratio (Equity Multiplier) =  

28     Debt-to-Assets Ratio =  

29     Debt-to-Equity Ratio =  

30     Debt-to-Capital Ratio =  

31     Interest Coverage Ratio =  

32     Fixed Charge Coverage Ratio =  

33     Dividend Payout Ratio =  

34     

35     Earnings Per Share =  

36     Book Value Per Share =  

37     Free cash Flow to Equity (FCFE) = Cash flow from Operating Activities – Investment
in Fixed Capital + Net Borrowing
38     Free cash flow to the firm (FCFF) = Cash Flow from Operating Activities + Interest
Expenses *(1 – Tax rate) – Investment in Fixed Capital
 
LIMITATION OF FINANCIAL STATEMENTS ANALYSIS
1. Comparing companies with different fiscal year end can be difficult.
2. Comparing companies with different accounting methods (for example Inventory
LIFO vs. FIFPO, depreciation method) can be difficult.
3. Estimates are as accurate as input and depends on the integrity of the input data.
4. Takes into account only quantitative factors and ignore qualitative factors such as
efficiency, loyalty and honesty of the human resource.
5. Explanation of the results of the analysis involves human decision.
6. Data based on historical events which may not hold in future.
7. Financial statement analysis is an essential skill for individuals involved in investment
management, corporate finance, commercial lending, and the extension of credit.
8. Over the years, it has become an increasingly complex endeavor, as corporate
financial statements have become more difficult to decipher.
9. The Accredited Financial Analyst Designation Program by American Academy of
Financial Management USA is the highest Global Designation in Financial Analysis
& Research the program comprehensively deals with Financial Analysis and gives
cutting edge skills and knowledge to the participants in this complex but enticing field
of Study.
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