THE FINANCIAL STATEMENT ANALYSIS

A financial statement audit is the examination of an entity's financial statements and

accompanying disclosures by an independent auditor. The result of this examination is a report
by the auditor, attesting to the fairness of the presentation of the financial statements and related
disclosures. The auditor's report must accompany the financial statements when they are issued
to the intended recipients. The purpose of a financial statement audit is to add credibility to the
reported financial position and performance of a business. The Securities and Exchange
Commission requires that all entities that are publicly held must file annual reports with it that
are audited. Similarly, lenders typically require an audit of the financial statements of any entity
to which they lend funds. Suppliers may also require audited financial statements before they will
be willing to extend trade credit (though usually only when the amount of requested credit is
substantial).

Audits have become increasingly common as the complexity of the two primary
accounting frameworks, Generally Accepted Accounting Principles and International Financial
Reporting Standards, have increased, and because there has been an ongoing series of disclosures
of fraudulent reporting by major companies.

RATIO ANALYSIS

Ratio analysis compares line-item data from a company's financial statements to reveal
insights regarding profitability, liquidity, operational efficiency, and solvency. Ratio analysis can
mark how a company is performing over time while comparing a company to another within the
same industry or sector. A financial ratio or accounting ratio is a relative magnitude of two
selected numerical values taken from an enterprise's financial statements. Often used in
accounting, there are many standard ratios used to try to evaluate the overall financial condition
of a corporation or other organization.

OBJECTIVES OF RATIO ANALYSIS

Determine liquidity or Short-term solvency and Long-term solvency. Short-term solvency

is the ability of the enterprise to meet its short-term financial obligations. Analyze the
profitability of the business. Help in comparative analysis, i.e. inter-firm and intra-firm
comparisons. It simplifies complex accounting statements and financial data into simple ratios of
operating efficiency, financial efficiency, solvency, long-term positions, etc. Ratio analysis helps
identify problem areas and brings the attention of the management to such areas. Ratio Analysis
is a process of determining and interpreting relationships between the items of financial
statements. Its purpose is to provide a meaningful understanding of the performance and
financial position of an enterprise. Thus, it is a technique for analyzing financial statements by
computing ratios. Ratio analysis is a useful management tool that will improve your
understanding of financial results and trends over time, and provide key indicators of
organizational performance. The CA uses ratio analysis to pinpoint strengths and weaknesses
from which strategies and initiatives can be formed. Ratio analysis is a quantitative method of
gaining insight into a company's liquidity, operational efficiency, and profitability by studying its
financial statements such as the balance sheet and income statement. Ratio analysis is an
indispensable part of the interpretation of results revealed by the financial statements. It provides
users with crucial financial information and points out the areas which require investigation.
Ratio analysis is a technique that involves regrouping data by application of arithmetical
relationships, though its interpretation is a complex matter. It requires a fine understanding of the
way and the rules used for preparing financial statements. Once done effectively, it provides a lot
of information that helps the analyst:

To know the areas of the business which need more attention;

To know about the potential areas which can be improved with the effort in the desired direction;

To provide a deeper analysis of the profitability, liquidity, solvency, and efficiency levels in the
business;

To provide information for making cross-sectional analysis by comparing the performance with
the best industry standards; and

To provide information derived from financial statements useful for making projections and
estimates for the future.
ADVANTAGES OF RATIO ANALYSIS

The ratio analysis if properly done improves the user’s understanding of the efficiency
with which the business is being conducted. The numerical relationships throw light on many
latent aspects of the business. If properly analysed, the ratios make us understand various
problem areas as well as the bright spots of the business.

The knowledge of problem areas helps management take care of them in the future. The
knowledge of areas that are working better helps you improve the situation further. It must be
emphasized that ratios are means to an end rather than the end in themselves. Their role is
essentially indicative and that of a whistle-blower.

EVALUATION OF OPERATIONAL EFFICIENCY OF AUDITOR

A chartered accountant in practice within the meaning of the Chartered Accountants Act,
1949 has also some right to conduct such propriety audit in a limited sense according to the
provisions contained in Section 227 of the Companies Act, 1956 . An operational audit process is
the series of steps an auditor takes to evaluate the operational activities of a given company or
other organization. The audit does not usually focus on a single department or project, because
each department plays a role in the overall operational process and is interconnected .

An operational audit is a systematic review of effectiveness, efficiency, and economy of

operation. An operational audit is a future-oriented, systematic, and independent evaluation of
organizational activities. The criteria in compliance audits are points for evaluating effectiveness
and efficiency, normally established policies, procedures, there is an obligation to evaluate those
objectives regulations, and laws, which are usually in written and performance standards
themselves. Operational audits focus on the review and assessment of single or multiple business
processes.
CLASSIFICATION OF RATIO ANALYSIS BY CS FIRM

The traditional classification has been based on financial statements to which the
determinants of ratios belong. Although accounting ratios are calculated by taking data from
financial statements the classification of ratios based on financial statements is rarely used in
practice. It must be recalled that the basic purpose of accounting is to throw light on the financial
performance (profitability) and financial position (it’s capacity to raise money and invest them
wisely) as well as changes occurring in financial position (possible explanation of changes in the
activity level).

RATIOS USED FOR ANALYSIS

CURRENT RATIO
LIQUID RATIO
NET PROFIT RATIO
GROSS PROFIT RATIO
OPERATING PROFIT RATIO
FIXED ASSETS TURNOVER RATIO
DEBT EQUITY RATIO
RETURN ON INVESTSMENT
RETURN ON EQUITY SHARE HOLDER FUNDS
WORKING CAPITAL TURNOVER RATIO

CURRENT RATIO

Current assets include current investments, inventories, trade receivables (debtors and
bills receivables), cash and cash equivalents, short-term loans and advances and other current
assets such as prepaid expenses, advance tax and accrued income, etc. Current liabilities include
short-term borrowings, trade payables (creditors and bills payables), other current liabilities, and
short-term provisions. The current ratio is the proportion of current assets to current liabilities. It
is expressed as follows:

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐬𝐬𝐞𝐭
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲
TABLE:4.1

YEAR CURRENT ASSET CURRENT LIABILITY CURRENT RATIO

2020 979.79 960.49 1.02

2021 1429.09 1393.09 1.02

2022 1880.66 1904.05 0.98

INTERPRETATION :
We can clearly understand that the current ratio is constantly increasing in the above
chart. The current ratio indicates the ability to pay off the short-term liquidity. The ideal ratio of
the current ratio is 2:1. It shows the ability in managing to pay off its short-term liquidity in the
future.
CHART : 4.1

CURRENT RATIO
1.02 1.02

1.02

1.01

0.99 0.98

0.98

0.97

0.96
2020 2021 2022

CURRENT RATIO
LIQUID RATIO

The liquid ratio is used to determine a company's ability to pay its short-term debt
obligations. The metric helps determine if a company can use its current, or liquid, assets to
cover its current liabilities.

𝐐𝐮𝐢𝐜𝐤 𝐚𝐬𝐬𝐞𝐭𝐬
𝐋𝐢𝐪𝐮𝐢𝐝 𝐫𝐚𝐭𝐢𝐨 =
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

TABLE 4.2

YEAR LIQUID ASSET CURRENT LIQUID RATIO

LIABILITIES

2020 568.13 960.49 0.59

2021 881.22 1363.09 0.64

2022 1080.78 1904.05 0.56

INTERPRETATION :
This ratio is ascertained to determine the liquidity position of a company. This ratio
indicates that if the stage is high the company deals with the potential risks. The organization has
a minimum level of debt which the company is on the safer side whereas the increase in the ratio
level indicates the company reduced its dependence on outside sources of funds for future
business purposes and also the company getting more of its finance from its own.
CHART : 4.2

LIQUID RATIO
0.64

0.64

0.62

0.59
0.6

0.58
0.56

0.56

0.54

0.52
2020 2021 2022

LIQUID RATIO

NET PROFIT RATIO :

 Net Profit Ratio, also referred to as the Net Profit Margin Ratio, is a profitability ratio that
measures the company’s profits to the total amount of money brought into the business. In other
words, the net profit margin ratio depicts the relationship between the net profit after taxes and
net sales taking place in a business.

Net profit
Net Profit Ratio = * 100
Sales
TABLE : 4.3

YEAR NET PROFIT SALES NET PROFIT

RATIO
2020 47.33 2489.06 1.90 %

2021 0.21 2218.90 0.009 %

2022 70.96 3614.98 1.96%

INTERPRETATION :
In the above analysis it clearly indicates the net profit was decreased in the previous
year and increased in the current year.
CHART : 4.3

NET PROFIT RATIO

2022 1.96

2021 0.009

2020 1.90

0 0.5 1 1.5 2 2.5

Column1

GROSS PROFIT RATIO :

 A company's gross profit margin percentage is calculated by first subtracting the
cost of goods sold (COGS) from the net sales (gross revenues minus returns, allowances,
and discounts). This figure is then divided by net sales, to calculate the gross profit margin in
percentage terms.

GROSS PROFIT
GROSS PROFIT RATIO = * 100
SALES

TABLE : 4.4

YEAR GROSS PROFIT SALES GROSS PROFIT

RATIO
2020 35.54 2489.06 1.42%
2021 0.89 2218.90 0.04%
2022 94.58 3614.98 2.61%

INTERPRETATION :
In this ratio the gross profit ratio was increased . Hence it indicates the company failed to
make a sustainable profits in the last 2 years but the company increased the profit ratio and
satisfied the ideal ratio.
CHART : 4.4

GROSS PROFIT RATIO

3
2.61

2.5

1.42
1.5

0.5
0.04

0
2020 2021 2022

Column3

OPERATING PROFIT RATIO :

Operating profit ratio is a metric that is obtained by dividing the operating income of a
business by its net sales. It is a ratio that depicts how much profit a business is making for each dollar
worth of sales it is making. Operating profit ratio does not account for tax or interest in the numbers it
deals with.
 OPERATING PROFIT
OPERATING PROFIT RATIO = *
100
NET SALES

TABLE : 4.5

YEAR OPERATING NET SALES OPERATING

PROFIT PROFIT RATIO
2020 2644.1 2489.06 106%
2021 2414.84 2218.90 108%
2022 3884.32 3614.98 107 %

INTERPRETATION :

CHART : 4.5
 OPERATING PROFIT RATIO

2022,10 2020,10
7% 6%

2021,108%

2020 2021 2022

FIXED ASSETS TURNOVER RATIO :

The fixed asset turnover ratio reveals how efficient a company is at generating
sales from its existing fixed assets. The fixed asset turnover ratio is calculated by dividing net
sales by the average balance in fixed assets. A higher ratio implies that management is using its
fixed assets more effectively.

SALES
FIXED ASSETS TURNOVER RATIO =
FIXED ASSETS

TABLE : 4.6

YEAR SALES FIXED ASSETS FIXED ASSETS

TURNOVER
RATIO
2020 2489.06 56.53 44

2021 2218.90 49.9 44.46

2022 3614.98 64.68 55.89

INTERPRETATION :

CHART : 4.6
 FIXED ASSETS TURNOVER RATIO

2022 55.89

2021 44.46

2020 44

0 10 20 30 40 50 60

Series 3

DEBT EQUITY RATIO :

 The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to
its assets. It is found by dividing a company's total debt by total shareholder equity. A higher
D/E ratio means the company may have a harder time covering its liabilities.

TOTAL LONG TERM DEBT

DEBT EQUITY RATIO =
SHARE HOLDERS FUND

TABLE : 4.7

YEAR TOTAL LONG SHARE HOLDERS DEBT EQUITY

TERM DEBT FUNDS RATIO
2020 296.14 663.73 0.44

2021 357.34 660.69 0.54

2022 276.83 733.69 0.37

INTERPRETATION :

CHART : 4.7
 0.6

0.54

0.5

0.44

0.4
0.37

0.3

0.2

0.1

0
2020 2021 2022

DEBT EQUITY RATIO

RETURN ON INVESTMENT :
 Return on investment (ROI) is a performance measure used to evaluate the
efficiency or profitability of an investment or compare the efficiency of a number of different
investments. ROI tries to directly measure the amount of return on a particular investment,
relative to the investment’s cost.

OPERATING PROFIT
RETURN ON INVESTMENT =
CAPITAL EMPLOYED

TABLE : 4.8

YEAR OPERATING CAPITAL RETURN ON

PROFIT EMPLOYED INVESTMENT
2020 2671.61 1026.53 2.60

2021 2413.37 1083.21 2.23

2022 3966.49 1069.91 3.70

INTERPRETATION :

It helps the investors and the financial professional to quickly check the prospect of
investment and thus he saves on time and money. ROI also helps in exploring as well as
measuring the potential returns on different investment opportunities. Here the ROI is fluctuating
between the years. A high ROI means the investment's gains compare favourably to its cost.

CHART : 4.8
 RETURN ON INVESTMENT

3.7
4

3.5

2.6
3

2.23
2.5

1.5

0.5

0
2020 2021 2022

RETURN ON EQUITY SHARE HOLDER FUND :

 The Return On Equity ratio essentially measures the rate of return that the
owners of common stock of a company receive on their shareholdings. Return on equity
signifies how good the company is in generating returns on the investment it received from its
shareholders.

NET PROFITAFTER INT &

TAX
RETURN ON EQUITY =
CAPITAL EMPLOYED

TABLE : 4.9

YEAR NET PROFIT CAPITAL RETURN ON

EMPLOYED EQUITY
2020 49.06 663.73 0.07

2021 1.82 660.69 0.002

2022 76.47 733.69 0.104

INTERPRETATION :
CHART : 4.9

RETURN ON EQUITY

2020,0.07

2022,0.104

2021,0.002

2020 2021 2022

WORKING CAPITAL TURNOVER RATIO :

Working capital turnover is a ratio that measures how efficiently a company is

using its working capital to support sales and growth. Also known as net sales to working
capital, working capital turnover measures the relationship between the funds used to finance a
company's operations and the revenues a company generates to continue operations and turn a
profit.

WORKING CAPITAL SALES

TURNOVER RATIO =
WORKING CAPITAL

TABLE : 4.10

WORKING
CAPITAL
YEAR SALES WORKING TURNOVER
CAPITAL RATIO
2020 2489.06 19.3 128.9

2021 2218.90 36 61

2022 3614.98 (23.39) (154.54)

INTERPRETATION :
CHART : 4.10

WORKING CAPITAL TURNOVER RATIO

150
128.9

100

61

50

-154.54
0
2020 2021 2022

-50

-100

-150

-200
CONCLUSION :

On the final note, we would like to conclude that Wheels India Limited has decent
financial management. Still, they have enough time to improve and strengthen their financial
position. And also, we can come to know about their special attention like

Maintenance of resources.

Timely using of current assets.

Proper utilization of capital

If the company focuses on the above mention things it has growth prospects in the near future,
their performance in certain areas were tremendously appreciable with the same spirit if they
focuses on the other issues then this company would be the market leader in the particular field
with recognizable market share.