A STUDY ON FINANCIAL STATEMENT ANALYSIS

CHAPTER 1
INTRODUCTION
INTRODUCTION ABOUT STUDY:

Financial Statement:
It is a structured collection of information, that according to logical and consisted accounting
techniques. An objective of this technique is to express an understanding of overall financial
aspects of a business model. It may expose a sequence of actions over a given time period, as in
the case of an income statement.
Financial Analysis :
It is an activity to determine the financial strengths and weakness of the particular company. It is
all about the profit and loss of an account and property relationship with the company. Financial
analysis method can be done by management team of an organization or it may be by the out
sourcing companies. Financial statement Analysis:
Financial statement analysis refers to the process of determining the financial strength &
weakness of the firm by properly establishing strategic relationship between the items of the
balance sheet and profit and loss account.
There are various methods and techniques used in analyzing financial statements, such as
comparative statement, trend analysis, common size statements, schedule of changes in working
capital, fund flow & cash flow analysis, cost volume profit analysis, and ratio analysis and other
operative data.
The analysis of financial statement is used for decision making by various parties.

Types of Financial Statement Analysis :

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Internal and External Analysis:

When an analysis is done on behalf of the management who have accessed to the internal
record is called Internal Analysis, whereas an Analysis undertaken by a outsider who do
not have any access to the books of the firm is called External Analysis.

Horizontal and Vertical Analysis :

Horizontal Analysis is that which covers the financial data for more than one year,
whereas Vertical Analysis is that which analyses the data of only one year.

NEED AND SCOPE FOR THE STUDY

To analyze the financial performance of the company selected for the study.

The financial authorities can use this for evaluating their performance in future, which
will help to analyze financial statements and help to apply the resources of the company
properly for the development of the company and employees to bring overall growth.

There can be forecasting to evaluate the overall performance of the Bharat Earth
Movers Limited in future.

The accounting records maintains and procedures adopted in any business is done with a
specific object of facilitating managerial policy as the size of the business grows
simultaneously.

Therefore a need was felt for a better internal control of the business. Thus accountants
developed a better tools like ratio analysis, comparative statements etc

OBJECTIVES OF THE STUDY:

To analyse the financial performance
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To assess the past performance
To study the liquidity position
To assess the current position
To predict the profitability & growth prospects
To assess the operational efficiency
RESEARCH METHODOLOGY:
Sources of data
Secondary data:
Secondary data are those which have already been collected by someone else and which have
already been passed through the statistical process. Further information required for the study
was collected from the articles available in websites, previous reports, and annual reports.
SAMPLING DESIGN:
Research design:
Analytical research- Analytical research is a type of research that utilises critical thinking to find
out facts about a given topic and from answers obtained developed new and useful way of doing
things. Critical thinking is a method of thinking that puts assumptions into question to decide
whether a given claim is true or false.
Population: The Public Sector Enterprise (BEML).
Sample size: 5 years of financial data of BEML.
Sampling unit: BEML, KGF complex.

Tools and techniques used for the study:

Comparative Statements
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Trend Analysis
Common Size Statements
Ratio Analysis
DuPont Analysis

REVIEW OF LITERATURE

Rachchh Minaxi A (2011), in his research article on financial statement analysis he has
pointed & suggested that the financial statement analysis involves analyzing the financial
statements to extract information that can facilitate decision making. It is the process of
evaluating the relationship between component parts of the financial statements to obtain
a better understanding of an entitys position and performance.

Priyaaks (Mar 2012), in his research article on financial statement analysis he has
pointed that Financial statement analysis is the process of examining relationships among
financial statement elements and making comparisons with relevant information. It is a
tool in decision-making processes related to stocks, bonds, and other financial
instruments.

From the above literature review, it is evident that, the financial statement analysis
depicts the efficiency of organization. Along with that financial statements are very useful
for decision making in the company by Board of Directors and management. It also helps
to know the prosperity of the company with the profitability

LIMITATIONS OF STUDY:
The study was limited to BEML ltd, KGF complex a division on BEML LTD.
The analysis is based on the historical (past) data.
The study is based on the financial data of the company for five years only.
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CHAPTER - 2
INDUSTRY AND COMPANY PROFILE

INDUSTRY PROFILE
INDUSTRIES are the pointing lights of the growth of the country. The development and the
growth of a country largely depend on industrialization of its economy.
The engineering industry is the largest segment of the overall industrial sectors in India. Its
segments

can be broadly categorized into two segments: heavy engineering and light

engineering.
Heavy engineering industry comprises of textile machinery, cement machinery, sugar
machinery, rubber machinery, and material handling equipment, oil field equipment,
metallurgical machinery, mining machinery, diary machinery and machine tools. Light
engineering industry comprises of Rolling bearing, Medical and surgical instruments, Process
control instruments, Industrial fasteners, Ferrous castings, Steel forgings, Seamless steel pipes
and tubes, Electrical resistance welded (ERW) steel pipes and tubes, Submerged-arc welded
(SAW) pipes.

The major end-user industries for heavy engineering goods are power, infrastructure, steel,
cement, petrochemicals, oil and gas, refineries, fertilizers, mining, railways, automobiles, and
textiles among others. Light engineering goods are essentially used as inputs by the heavy
engineering industry.

The setting up of public sector enterprises (PSE) like Hindustan Machine Tools (HMT), Heavy
Engineering Corporation (HEC), Bharat Earth Movers Ltd. (BEML), Bharat Heavy Electricals
Ltd. (BHEL) etc. were aimed at achieving self-sufficiency in the promotion of engineering
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goods. These industries further facilitated the development of other major sectors like fertilizer
plants, railways, defence establishments etc.

Earth moving equipment is the major segment of construction equipment industry.

Construction and mining equipment cover a variety of machinery such as hydraulic
excavators, wheel loaders, backhoe loaders, bull dozers, dump trucks, tippers,
graders, pavers, asphalt drum / wet mix plants, breakers, vibratory compactors,
Cranes, forklifts, dozers, off-highway dumpers (20T to 170T), drills, scrapers, motor
Graders, rope shovels etc. They perform a variety of functions like preparation of
Ground, excavation, haulage of material, dumping/laying in specified manner, material
Handling, road construction etc.This equipment is required for both constructions
And mining activity.
India has only a few, mainly medium and large companies in the organized sector who
Manufacture these. The technology barriers are high, especially with respect to
mining equipment and therefore the role of SMEs is restricted to manufacture of
Components and some sub-assemblies.
Prior to the 1960s, domestic requirements of mining and construction equipment were entirely
met by imports.
Domestic production began in 1964 with the setting up of Bharat Earthmovers Ltd.
A public sector unit of the Ministry of Defence. They began manufacturing dozers,dumpers,
scrapers, etc, for defence requirements.
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In the private sector, the Hindustan Motors Earthmoving Equipment Division, was
established in 1969 at Tiruvallur, near Chennai with technical collaboration from Terex,
UK for manufacture of wheel loaders, dozers & dumpers

In 1974, L&T started manufacturing hydraulic excavators under license from Poclain,
France. In 1980 and 1981, two more units, Telcon and Escorts JCB commenced
manufacture of hydraulic excavators (under license from Hitachi, Japan) and backhoe
loaders (under license from JCB, UK) respectively. Escorts JCB has been taken over
by JC Bamford Excavators Ltd. U.K. in 2003 and is now called JCB India Ltd.

Terex Corporation USA and Vectra Ltd. U.K. have formed a joint venture, which has
started manufacturing construction equipment like backhoe loaders and skid steer
loaders from May 04 at Greater Noida with an investment of USD 12 million. Other
equipment in the Terex range are being sold through their agents in India.

Most of the technology leaders like Case, Caterpillar, Hitachi, Ingersoll-Rand, JCB, John
Deere, Joy Mining Machinery, Komatsu, Lieberr, Proclaim, Terex, Volvo are present in India as
joint venture companies, or have set up their own manufacturing facilities in India.

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COMPANY PROFILE
Background and inception of BEML LIMITED
BEML limited is a premier ISO 9001-2000 company in India and the second largest
manufacturer of earth moving equipment in Asia. A four decade old location and multiproduct
company. BEML has vital application in diverse sectors of company such as coal, mining, steel,
cement, power, irrigation, construction, road, building and railway . It has expanded its product
range to cover high quality hydraulics, heavy duty diesel engines, welding robots, and heavy
fabrications jobs. A public sector undertaking, BEML commands 70% market share in domestic
earth mover industries. Nearly 40% of its equity had been divested to financial institution and
public. BEML has its corporate HQ and central marketing division in Bangalore.

NATURE OF BUSINESS CARRIED

MINING AND CONSTRUCTION BUSINESS
BEML limited offers a comprehensive and diverse range of mining machinery got both opencast
and underground mines. BEML produces machines such as Electric Rope Shovels, Hydraulic
Excavators, Bulldozers, Wheel Loaders, Dump trucks, motor graders pipe layers etc.... the boom
in the mining industry has opened up new avenues for Beml in contract mining.
Beml has formed a joint venture company with its partners, Midwest granite limited and pt.
sumbermitrajaya, Indonesia to take up contract mining within the country and overseas.
The joint venture company is called BEML-MIDWEST LIMITED and the company will bid for
coal and other mining contracts in India and Abroad.
RAIL AND METRO BUSINESS
In recent years, BEML Limited has forayed into high-tech Metro Trains deployed for intra-city
commuting. BEML is expanding its infrastructure to meet the greater needs of metro projects
coming up in the country. Also BEML supplies equipment to Indian railways which include
Integral Rail coaches, Overhead Electric Inspection cars, Postal Vans, AC/DC Electric Multiple
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Units, D-EMUs, utility vehicles, Track laying equipment, Broad-guageTaibus, Treasury Vans,
Spoil Disposal Units etc...

DEFENCE BUSINESS
Being India's leading defence equipment manufacture, Beml limited keeps the Indian Army and
other defence forces abreast with state of the art military equipment. The company manufacture
variants ofTatra vehicles for all terrain operations including bridge layer, field artillery Tractor,
medium and heavy recovery vehicle, Pontoon Mainstream Bridge Systems, Crash Fire Tenders,
Mobile Mast Vehicle, etc...
BEML also supplies engineering mine ploughs, tank transportation trailers, weapon loading
equipment, armoured recovery vehicle, Minirailcoaches' and wagons apart from aircraft weapon
loading trolley and aircraft towing tractor. BEML plays a stellar role in the country's Integrated
guided missile development project by supplying ground support vehicles. The company has also
created a world class test track at its KGF complex to test defence equipment and vehicles.

VISSION
To manufacture equipment in consistent in quality, serviceability to satisfaction of the
customer.
To become a market leader, and diversified company supplying products / are services to
mining / construction, railways / metros and defence services and emerge as a
international players.
MISSION

Improve competitivenessthroughorganizational transformation and collaboration/

strategic, alliance joint venture and technology.
Grow profitability by aggressively pursuing opportunities in national and international
market.
Attract and build people in a rewarding and inspiring environment by fostering creativity
and innovation.

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OBJECTIVES
To maintain a dominant position in design, development, manufacture and marketing of

defense, earth moving/construction and rail/metro equipment.

To diversify and grow.
To internationalize operations by enhancing exports.
To improve profitability.
To maintain state of the art technology for all products.

QUALITY POLICY
Manufacture and supply equipment to meet customers technical needs and guarantee
satisfactory performance of products over their life time.
Have an effective and documented system to ensure that every input to the product is
designed, procured , manufactured and controlled for optimum efficiency and service.
Strive, continuously for a better product quality through technology improvements.
Achieve operational excellence through waste elimination and value engineering affairs.
Establish high reliability standards and offer prompt customer service ensuring high
equipment availability.
Bring out quality awareness in customer personnel in operation and maintenance of products
to maximize their utilizations.
Train and motivate personnel at all levels so as to inculcate quality consciousness and foster
team work.
Build product which satisfy environment and safety standards
Aim at healthy environment in the surrounding through continuous pro active pollution
control measures.

PRODUCTS -

The company has three ranges of products like

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Earth moving equipments

Defense products
Railway product

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The earth moving equipments includes bulldozers, dump trucks, hydraulic excavator,
Wheel loader, wheel dozers, tyre handler, pipe layers, rope shovels, draglines, motor
graders, water sprinklers, aircraft towing tractors and backhoe loaders

BEML PRODUCTS
1. MINING AND CONSTRUCTION

Crawlers
Wheel dozers
Excavators
Dump trucks
Loaders
Backhoe loader
Pipe layer
Walking dragline
Rope shovel
Sprinkler
Grader
Underground mining
Tyre handler
C-crane

2. RAIL AND METRO

Stainless steel metro cars

AC Electrical multiple units
DC Electrical multiple units
Passenger coach
Stainless steel AC EMUs
Rail bus

OTHER EQUIPMENT (Overhead Equipment Inspection cars)

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8 Wheeler OHE
4 Wheeler OHE
Treasury vans
Spoil disposal units
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Utility track vehicle

Track laying equipment
Sky bus

3. DEFENCE

BEML-TATRA T815 VVNC8*8 vehicle.

BEML-TATRA T815 VVL8*8 vehicle.
BEML-TATRA T815 VVTI8*8-Tank Transporter
BEML-TATRA T815 VVNC6*6 High Mobility Vehicle.
BEML-TATRA T815 VVNC6*6 Field Artillery Tractor.
BEML-TATRA T815 VI4*4 High Mobility Vehicle.
PRITHVI missile launcher.
OXIDISER carrier.
Warhead carrier.
Fuel carrier vehicles
Missile Transport.
10T mobile crane.
Ammunition Loader.
Pontoon Bridge set.
Pontoon Truck.
Truck Mounted crane.
Pavement Laying Truck.
Dolly.
Light Recovery vehicle.
Armoured Recovery vehicle.
Backhoe loader transport.
Motor TUG launch ( boat)
Medium recovery vehicle
Light recovery vehicle

SERVICE PROFILE
As part of customer service, technical and logistics supporting including training is provided.
Technical support is rendered to the customer in the following areas:
Compliance of modification and technical instructions
Accident and incident investigation
Training centres with full fledged specialized trained experts offering training for
complete range of equipments on operation and maintenance, troubleshooting and
overhaul/repair of major aggregates.
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In-house training programme to update the skills of service engineers.
Customers support activities

AREAS OF OPERATIONS
BEML has international offices, regional offices, and district offices in addition to that it also
have activity centres.

INTERNATIONAL OFFICE
China
Malaysia
Brazil
Singapore
Indonesia

REGIONAL OFFICES

Bilaspur
Chennai
Dhanbad
Hyderabad
Kolkata
Mumbai
Nagpur
New Delhi
Ranchi
Sambalpur
Singrauli

DISTRICT OFFICES

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Ahmedabad
Asansol
Bacheli
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Bhilai
Bhopal
Bhubaneswar
Chandrapur
Guwahati
Hospet
Jammu
Kochi
Kothagudem
Madurai
Neyveli
Panjim
Ramagundam
Udaipur
Visakhapatnam

ACTIVITY CENTRES

Ongole
Kanti
Hospet
Bangalore

INFRASTRUCTURE FACILITIES
1.
2.
3.
4.
5.
6.

Medical facility
Canteen facility
Safety and Security facility
library
Transportation service
Production Plant and Machinery
a) Machine shop
b) Sheet metal
c) Material preparation
d) Sub assemble
e) Bogie
f) Coach Delivery shop

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In order to meet the demands of heavy earth moving equipments, rail coaches and heavy
duty trailers , BEML has established units at Bangalore, KGF, and Mysore .These units are
equipped with sophisticated manufacturing facilities.
The Bangalore complex has the canteen facility for its employees. It has four canteens in the
factory premises for the employees. The food is provided at the subsidized rates. The employees
are also provided tea or coffee in the morning and evening and the snacks are also provided for
the employees.
They also provide the travelling facility. Pick up and drop facility is available to all employees in
factory divisions for attending to work through company arranged transport.

BEML provides the following medical facilities to its regular eligible employees and their
dependent members

Outpatient or inpatient treatment in company hospitals.

Reimbursement of expenditure for outpatient treatment subject to monetary limits

notified from time to time.

Reimbursement or direct payment for inpatient treatment in company recognized

hospitals.
Reimbursement for treatment of chronic diseases.

In Bangalore complex the treatment is provided either at company hospital or in reputed

hospitals on direct billing arrangement. The employees will also have an option to obtain
treatment at recognized nursing homes and claim reimbursement at approved rates.

COMPITATORS INFORMATION

L&T
Komatsu
Ashok Leyland
Hitachi
Rail coach factory
Volvo

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L&T
Larsen & Toubro Limited (L&T) is a technology, engineering, construction and
manufacturing company. It is one of the largest and most respected companies in India's
private sector.
More than seven decades of a strong, customer-focused approach and the continuous quest
for world-class quality have enabled it to attain and sustain leadership in all its major lines of
business.
L&T has an international presence, with a global spread of offices. A thrust on international
business has seen overseas earnings grow significantly. It continues to grow its global
footprint, with offices and manufacturing facilities in multiple countries.
The company's businesses are supported by a wide marketing and distribution network, and
have established a reputation for strong customer support.

Komatsu
Is

Japanese multinational

corporation that

manufactures construction, mining,

and military equipment, as well as industrial equipment like press machines, lasers
and thermoelectric generators. Its headquarters are at 2-3-6, Akasaka, Minato, Tokyo, Japan. The
corporation was named after the city of Komatsu, Ishikawa, where the company was founded in
1917. Worldwide, the Komatsu Group consists of Komatsu Ltd. and 182 other companies (146
consolidated subsidiaries and 35 companies accounted for by the equity method).
Komatsu is the world's second largest manufacturer of construction equipment and mining
equipment after Caterpillar.

Ashok Leyland

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Is an Indian automobile manufacturing company based in Chennai, India. Founded in 1948, it is
the 2nd largest commercial vehicle manufacturer in India, 4th largest manufacturer of buses in
the world and 16th largest manufacturer of trucks globally. Operating six plants, Ashok Leyland
also makes spare parts and engines for industrial and marine applications. It sells about 60,000
vehicles and about 7,000 engines annually. It is the second largest commercial vehicle company
in India.

Hitachi
Is a Japanese multinational conglomerate company headquartered in Chiyoda, Tokyo, Japan. It is
the parent of the Hitachi Group and forms part of the DKB Group of companies. Hitachi is a
highly diversified company thatoperates eleven business segments

: Information &

Telecommunication Systems, Social Infrastructure, High Functional Materials &Components,

Financial Services, Power Systems, Electronic Systems & Equipment, Automotive Systems,
Railway & Urban Systems, Digital Media & Consumer Products, Construction Machinery and
Other Components & Systems.

Rail coach factory (RFC)

Established in 1986,

was the second coach manufacturing unit of Indian Railways. Its

foundation stone was laid by the then Prime Minister of India Mr. Rajiv Gandhi. It has
manufactured around 16,000 passenger coaches of 51 different types including self propelled
passenger vehicles.
RCF is equipped with CAD centre and CNC machines to undertake design and manufacture
of bogies, shell (both with stainless steel and cordon steel). RCF has also manufactured Alstom
LHB coaches for both Rajdhani Express and Shatabdi Express.

Volvo
Is a Swedish multinational manufacturing company headquartered in Gothenburg. Its principal
activity is the production, distribution and sale of trucks, buses and construction equipment.
Volvo also supplies marine and industrial drive systems and financial services.
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SWOT ANALYSIS:
SWOT Analysis, is a strategic planning tool used to evaluate the strengths, weakness,
opportunities, and threats involved in a project or in a business ventures. It involves specifying
the objectives of the business venture or project and identifying the internal and external factors
that are favourable and unfavourable to achieving that objective.
The aim of any SWOT analysis is to identify the key internal &External factors that are
important to achieving the objectives. SWOT analysis groups key pieces of information into two
main categories
Internal factors: The strength and weakness are internal to the organization
External factors: The opportunities and threats are external to the organization.

Strengths:
Largest manufacturer of earth moving equipment in India.
High scope for additional capital investment & further expansion, due to high profits

backing.
Wide integrated marketing network & product range.
One of the biggest R&D centre in earth moving industry itself.
Fairly good industrial relation.
Continuous up gradation of products to meet customers' requirements.
Centralized and satellite linked central warehouse and spare parts department.

Weakness:

High cost and price .

Delay in decision due to procedures and authority.
Inadequate market research.
Focus on large institutional customers only.
Realization of credits.
Mostly depends on govt. sector including defence.
Lack of global standards.

Opportunities:
Access for latest technology.
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Entry of MNC's
Increase in the order from the defence.
As the company is already an ISO certified company it becomes easy for BEML to bag
orders or tenders outside the company.
BEML has well diversified products which gives BEML the opportunities to enter the
overseas market.
Treats:

Permitting private sector for manufacturing and supplying defense requirements.

Increased competition in mining segment due to entry of MNC's to Indian market.
Unfavorable duty structure.
Liberalization policy of government of India.
Attrition of trained man power.

FUTURE GROWTH and PROSPECTS

The company plans to cross Rs.5000 cr. in the next two years and is putting great efforts to
achieve Rs.10000 cr by 2016-17. For that BEML is gearing up all the necessary infrastructural
facilities for achieving the same. There are chances of merging the Indian Railways Rail Coach
production division with BEML. For the parliamentary committee has asked the Finance
Ministry to grant the infrastructural facilities for the company. This would enable the company to
import components free of import duties.
After successful implementation of DRMC which were supplied by BEML. They have decided
to set up a state of art of factory in Bangalore with Korean technology along with R & D centre.
BEML has in hand certain projects such as BMRC(Bangalore Metro Rail Coaches),
HMRC(Hyderabad Metro Rail Coaches) after DMRC.
One of the key objective of R & D is product diversification. Keeping in mind the future trends
in technology in line with changing business scenario, R & D has in place, plan of action to take
up a number of project with enhanced allocation of resources. To achieve this, R & D
infrastructure and resources are being continuously strengthened/upgraded as needed, to handle
latest technologies effectively. BEML R &D, has plant to develop a series of products/aggregates
covering all the 3 business segments i.e., mining & construction, rail and metro, and defence

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CHAPTER 3
THEORITICAL BACKGROUND OF THE STUDY
Introduction of the topic:

Financial statement analysis (or financial analysis) is the process of reviewing and
analyzing a company's financial statements to make better economic decisions. These
statements include the Income Statement, Balance Sheet, Statement of Cashflows , and a
statement of Retained Earnings,. Financial statement analysis is a method or process
involving specific techniques for evaluating risks, performance, financial health, and
future prospects of an organization.

It is used by a variety of stakeholders, such as credit and equity investors, the

government, the public, and decision-makers within the organization. These stakeholders
have different interests and apply a variety of different techniques to meet their needs
.For example, equity investors are interested in the long-term earnings power of the
organization and perhaps the sustainability and growth of dividend payments. Creditors
want to ensure the interest and principal is paid on the organizations debt securities (e.g.,
bonds) when due.
Common methods of financial statement analysis include fundamental analysis, DuPont
analysis horizontal and vertical analysis and the use of financial ratios. Historical
information combined with a series of assumptions and adjustments to the financial
information may be used to project future performance

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1. Holding Of Share
Shareholders are the owners of the company. Time and again, they may have to take decisions
whether they have to continue with the holdings of the company's share or sell them out.
The financial statement analysis is important as it provides meaningful information to the
shareholders in taking such decisions.
2. Decisions And Plans
The management of the company is responsible for taking decisions and formulating plans and
policies for the future. They, therefore, always need to evaluate its performance
and effectivenessof their action to realise the company's goal in the past. For that
purpose, financial statementanalysis is important to the company's management.

3. Extension Of Credit
The creditors are the providers of loan capital to the company.Therefore they may have to take
decisions as to whether they have to extend their loans to the company and demand for higher
interest rates. The financial statement analysis provides important information to them for their
purpose.
4.Investment Decision
The prospective investors are those who have surplus capital to invest in some profitable
opportunities. Therefore, they often have to decide whether to invest their capital in the
company's share. The financial statement analysis is important to them because they can obtain
useful information for their investment decision making purpose

Types of Financial Statement Analysis :

Internal and External Analysis:

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When an analysis is done on behalf of the management who have accessed to the internal
record is called Internal Analysis, whereas an Analysis undertaken by a outsider who do
not have any access to the books of the firm is called External Analysis.

Horizontal and Vertical Analysis :

Horizontal Analysis is that which covers the financial data for more than one year,
whereas Vertical Analysis is that which analyses the data of only one year.

NEED OF FINANCIAL STATEMENT ANALYSIS :

Financial statement analysis is used to identify the trends and relationships between financial
statement items. Both internal management and external users (such as analysts, creditors, and
investors) of the financial statements need to evaluate a company's profitability, liquidity, and
solvency. The most common methods used for financial statement analysis are trend analysis,
commonsize statements, and ratio analysis. These methods include calculations and
comparisons of the results to historical company data, competitors, or industry averages to
determine the relative strength and performance of the company being analyzed.

Tools of financial statement analysis:

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Comparative Financial Statements: It is an important method of analysis which is used to

make comparison between two financial statements. Being a technique of horizontal analysis and
applicable to both financial statements, income statement and balance sheet, it provides
meaningful information when compared to the similar data of prior periods. The comparative
statement of income statements enables to review the operational performance and to draw
conclusions, whereas the balance sheets, presenting a change in the financial position during the
period, show the effects of operations on the assets and liabilities. Thus, the absolute change
from one period to another may be determined.

Statement of Changes in Working Capital: The objective of this analysis is to extract

the information relating to working capital. The amount of net working capital is determined by
deducting the total of current liabilities from the total of current assets. The statement of changes
in working capital provides theinformation in relation to working capital between two financial
periods.

Common Size Statements: The figures of financial statements are converted to percentages. It
is performed by taking the total balance sheet as 100. The balance sheet items are expressed as
the ratio of each asset to total assets and the ratio of each liability to total liabilities. Thus, it
shows the relation of each component to the whole - Hence, the name common size.

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Trend Analysis: It is an important tool of horizontal analysis. Under this analysis, ratios of
different items of the financial statements for various periods are calculated and the comparison
is made accordingly. The analysis over the prior years indicates the trend or direction. Trend
analysis is a useful tool to know whether the financial health of a business entity is improving in
the course of time or it is deteriorating.

Ratio Analysis: The most popular way to analyze the financial statements is computing ratios. It
is an important and widely used tool of analysis of financial statements. While developing a
meaningful relationship between the individual items or group of items of balance sheets and
income statements, it highlights the key performance indicators, such as, liquidity, solvency and
profitability of a business entity. The tool of ratio analysis performs in a way that it makes the
process of comprehension of financial statements simpler, at the same time, it reveals a lot about
the changes in the financial condition of a business entity.
It must be noted that Financial analysis is a continuous process being applicable to every
business to evaluate its past performance and current financial position. It is useful in various
situations to provide managers the information that is needed for critical decisions. The process
of financial analysis provides the information about the ability of a business entity to earn
income while sustaining both short term and long term growth.

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A STUDY ON FINANCIAL STATEMENT ANALYSIS

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