Project report on financial statement analysis

CONTENTS: Introduction to study Overview of paper industry Company introduction Introduction to financial statement analysis Tools for financial statement analysis Comparative statement analysis Cash flow statement analysis Ratio analysis and interpretation Conclusion.

OBJECTIVES
To study the financial position of the company. To analyse the financial stability and overall performance of industry in general. To analyse the profitability and solvency position of the unit with the existing tools of financial analysis.

PAPER INDUSTRY OVERVIEW: The Indian Paper Industry accounts for about 1.6% of the worlds production of paper and paperboard. The estimated turnover of the industry is Rs 25,000 crore (USD 5.95 billion) approximately and its contribution to the exchequer is around Rs. 2918 crore (USD 0.69 billion). The industry provides employment to more than 0.12 million people directly and 0.34 million people indirectly. As per industry estimates, paper production is likely to grow at a CAGR of 8.4% while paper consumption will grow at a CAGR of 9% till 2012-13. Foreign funds interest in the Indian paper sector is growing. IFC, the investment arm of the World Bank is already associated with at least three of the IPMA member mills.

FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION

A Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements : (i) Profit and loss Account or Income Statement (ii) Balance Sheet or Position Statement These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weaknesses of firm.

 Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. FINANCIAL ANALYSIS SERVES FOLLOWING PURPOSES : Measuring the profitability. Indicating the trend of Achievements. Assessing the growth potential of the business. Comparative position in relation to other firms. Assess overall financial strength. Assess solvency of the firm.

PARTIES INTERESTED
Investors Management Trade unions Lenders Suppliers and trade creditors Tax authorities Researchers Employees Government and their agencies Stock exchange

 Financial statements give complete information about assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. They are not readily understandable to interested parties like creditors, shareholders, investors etc. Thus, various techniques are employed for analysing and interpreting the financial statements. The following are the important tools which are commonly used for analysing and interpreting financial statements : Comparative/Horizontal financial statements, Common size statements, Trend analysis , Ratio analysis, Cash flow analysis.

TECHNIQUES AND TOOLS OF FINANCIALSTATEMENT ANALYSIS

COMPARATIVE BALANCE SHEET

The comparative balance sheet shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show change (increase/decrease) in figures. The fourth column may be added for giving percentages of increase or decrease. While interpreting comparative Balance sheet the interpreter is expected to study the following aspects : (i) Current financial position and Liquidity position (ii) Long-term financial position (iii) Profitability of the concern

Comparative Income statement:

The income statement provides the results of the operations of a business. This statement traditionally is known as trading and profit and loss A/c. Important components of income statement are net sales, cost of goods sold, selling expenses, office expenses etc. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in money value and percentage can be determined to analyse the profitability of the business.

RATIO ANALYSIS:Meaning of Ratio:A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers. Ratio analysis: Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgement, otherwise complex situations.

CLASSIFICATION OF RATIO Ratio may be classified into the four categories as follows: A. Liquidity Ratio a. Current Ratio b. Quick Ratio or Acid Test Ratio B. Leverage or Capital Structure Ratio a. Debt Equity Ratio b. Debt to Total Fund Ratio c. Proprietary Ratio d. Fixed Assets to Proprietors Fund Ratio e. Capital Gearing Ratio f. Interest Coverage Ratio C. Activity Ratio or Turnover Ratio a. Stock Turnover Ratio b. Debtors or Receivables Turnover Ratio c. Average Collection Period d. Creditors or Payables Turnover Ratio e. Average Payment Period f. Fixed Assets Turnover Ratio g. Working Capital Turnover Ratio

D. Profitability Ratio or Income Ratio (A) Profitability Ratio based on Sales : a. Gross Profit Ratio b. Net Profit Ratio c. Operating Ratio d. Expenses Ratio (B) Profitability Ratio Based on Investment : I. Return on Capital Employed II. Return on Shareholders Funds : a. Return on Total Shareholders Funds b. Return on Equity Shareholders Funds c. Earning Per Share d. Dividend Per Share e. Dividend Payout Ratio f. Earning and Dividend Yield g. Price Earning Ratio

CONCLUSION
The strong forecast for the industry (ie general prospects looking good and world demand for paper products remaining strong), There is sales growth in this business, Acceptable ratios as they are quite close to the industry averages, Good cash flows from operating activities and