A NOTE ON FINANCIAL RATIO ANALYSIS
Case code - MISC010
Published - 2004
This technical note explains in detail
the analysis of financial statements of a company. It provides insights into two
widely used financial tools, ratio analysis and common size statements analysis.
The objective of this note is to help the reader understand how these tools
should be used to analyze the financial position of a firm. To demonstrate the
process of financial analysis, Hindustan Lever Limited's (HLL's) balance sheet
and income statements are analyzed in this note.
The major financial statements of a company are the balance sheet, income
statement and cash flow statement (statement of sources and applications
of funds). These statements present an overview of the financial position
of a firm to both the stakeholders and the management of the firm. But
unless the information provided by these statements is analyzed and
interpreted systematically, the true financial position of the firm cannot
be understood. The analysis of financial statements plays an important
role in determining the financial strengths and weaknesses of a company
relative to that of other companies in the same industry. The analysis
also reveals whether the company's financial position has been improving
or deteriorating over time.
FINANCIAL RATIO ANALYSIS
Financial ratio analysis involves the
calculation and comparison of ratios which are derived from the information
given in the company's financial statements. The historical trends of these
ratios can be used to make inferences about a company's financial condition, its
operations and its investment attractiveness.
Financial ratio analysis groups the ratios into categories that tell us about
the different facets of a company's financial state of affairs. Some of the
categories of ratios are described below:
Liquidity Ratios give a picture of a
company's short term financial situation or solvency.
Operational/Turnover Ratios show how
efficient a company's operations and how well it is using its assets.
Leverage/Capital Structure Ratios show
the quantum of debt in a company's capital structure.
Profitability Ratios use margin
analysis and show the return on sales and capital employed.
Valuation Ratios show the performance
of a company in the capital market.
LEVERAGE/CAPITAL STRUCTURE RATIO
CALCULATING FINANCIAL RATIOS OF HLL
COMMON SIZE INCOME STATEMENT OF HLL
2010, ICMR (IBS Center for Management Research).All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted
in any form or by any means - electronic or mechanical, without permission.
To order copies, call +91- 8417- 236667 or write to ICMR,
Survey No. 156/157, Dontanapalli Village, Shankerpalli Mandal,
Ranga Reddy District,
Andhra Pradesh, INDIA.
Mob: +91- 9640901313, Ph: +91- 8417- 236667,
Fax: +91- 8417- 236668