Abstract

Financial statements are formal record of the financial activities of a business, person or other
entity and provide an overview of a business or person’s financial condition in both short and
long term. They give an accurate picture of a company’s condition and operating results in a
condensed form. Financial statements are used as a management tool primarily by company
executive and investor’s in assessing the overall position and operating results of the company.

Analysis and Interpretation of financial statements help in determining the liquidity position,
long term solvency, financial viability and profitability of a firm. Ratio analysis shows whether
the company is improving or deteriorating in past years. Moreover, comparison of different
aspects of all the firms can be done effectively with this. It helps the clients to decide in which
firm the risk is less or in which one they should invest so that maximum benefit can be earned.

Industries are capital intensive; hence a lot of money is invested in it. So before investing in
companies one has to carefully study its financial condition and worthiness. An attempt has
been carried out in this project to analyze and interpret the financial statements of a company.

Objective
• To understand, analyze and interpret the basic concepts of financial statements of
AABLA.
• Interpretation of financial ratios and their significance.

This project mainly focuses in detail the basic types of financial statements of AABLA Associates
and calculation of financial ratios.

In this project, comparison of different ratios viz. current ratio, debt-equity ratio, net profit
margin and return on investment of all the above e companies has been done for the period
2017-18.It was observed that current ratio of AABLA Associates was always more than 1 from
2017-18 which indicates that liquidity position of the company was good.
Chapter I

Introduction
Introduction
A Financial Statement Analysis & Interpretation
Financial statements are records that provide an indication of the organization’s financial
status. It quantitatively describes the financial health of the company. It helps in the evaluation
of company’s prospects and risks for the purpose of making business decisions. The objective of
financial statements is to provide information about the financial position, performance and
changes in financial position of an enterprise that is useful to a wide range of users in making
economic decisions. Financial statements should be understandable, relevant, reliable and
comparable. They give an accurate picture of a company’s condition and operating results in a
condensed form. Reported assets, liabilities and equity are directly related to an organization's
financial position whereas reported income and expenses are directly related to an
organization's financial performance. Analysis and interpretation of financial statements helps
in determining the liquidity position, long term solvency, financial viability, profitability and
soundness of a firm. There are four basic types of financial statements: balance sheet, income
statements, cash flow statements, and statements of retained earnings.

The analysis of financial statement is a process of evaluating the relationship between

component parts of financial statement to obtain a better understanding of firm financial
position. Analysis is a process of critically examining the accounting information given in
financial statements. For the purpose of analysis, individual items are studied; their
interrelationship with other related figures is established.

Thus analysis of financial statement refer to treatment of information contain in financial

statement in a way so as to afford a full diagnosis of the profitably and financial position of the
firm concern. An attempt has been carried out in this project to analyze and interpret the
financial statements of AABLA Associates.
Objective
• To understand, analyze and interpret the basic concepts of financial statements of
company.
• Interpretation of financial ratios and their significance.
• To know about Liquidity Position
• To Know about Long- Term Solvency
• To Know about Operating Efficiency
• To know about Over-All Profitability
• To Know About Inter- firm Comparison

This project mainly focuses in detail the basic types of financial statements of AABLA Associates
and calculation of financial ratios. Ratio analysis of AABLA Associates was done.
Chapter II

Literature Review
Literature Review
Noel Capon, John U. Farley, Scott Hoenig, Determinants of Financial Performance: A Meta-
Analysis
A meta-analysis of results from 320 published studies relates environmental, strategic and
organizational factors to financial performance. Some factors (e.g., concentration and growth)
have been studied widely and have a relatively consistent positive impact on performance.
Other widely-studied factors (e.g., size) have few consistent effects. Many factors (particularly
organizational variables) are understudied.

William L. Megginson, Robert C. Nash And Matthias Van Randenborgh.The Financial and
Operating Performance of Newly Privatized Firms: An International Empirical Analysis
This study compares the pre- and post-privatization financial and operating performance of 61
companies from 18 countries and 32 industries that experience full or partial privatization
through public share offerings during the period 1961 to 1990

Amalendu Bhunia, Sri Somnath Mukhuti and Sri Gautam Roy, Financial Performance analysis –
A case study
The Present study aims to identify the financial strength of the public sector pharmaceutical
enterprises by properly establishing relationships between the items of the balance sheet and
the profit and loss account. The study two public sector drug and pharmaceutical enterprises
listed on BSE. The study has been undertaken for a period of twelve years from 1997-98 to
2010-09 and the necessary data have been obtained from CMIE database.

Brian K. Boyd, Strategic planning and financial performance: A meta-analysis Review

After two decades of research, the effect of strategic planning on a firms performance is still
unclear. While some studies have found significant benefits from planning others have found
no relationship, or even small negative effects. Interpretation of these is confounded by the act
that many of these studies base their findings on a small number of firms.
Juliet D’Souza and William L. Megginson, The financial operating performance of privatized
firms during the 1990‟s This study compares the pre and the post-privatization financial and
operating performance of 85 companies from 28 industrialized countries that are privatized
through public share offerings between 1990 and 1996. We document significant increases in
profitability, output, operating efficiency and dividend payments and there is a significant
decrease in leverage ratios for our full sample of firms after privatization and for most
subsamples examined.

According to Rajiv and Mishra, Balance Sheet, P&L a/c and cash flow statement contain a lot of
numbers that can be used to draw some meaningful inferences, these inferences can further be
used as the inputs for planning, decision making. The numbers contained in the financial
statements carry a host of information that can be put to use in making judgments‟ regarding
financial strength and weakness of the firm, efficiency and past policies and remedial measures
or corrective action to be taken. Financial management, Rajiv Srivastava, Anil Mishra, Oxford
university press, Pg No: 25Accounting for Management T.Vijaya Kumar McGraw Hill
Publications Pg No: 23.1

According to Slhler, A comprehensive analysis, presenting data in meaningful terms is a

significant aid to understanding the profitability and financial strength of a company. When
properly prepared, financial evaluations can be used in performance appraisal and to highlight
similarities and differences among unit of the same organization.

According to Van Horne, Wachowicz, Financial analysis involves the use of various financial
statements. The Balance Sheet summarizes the assets, Liabilities and owner‟s equity of a
business at the moment in time, usually the end of the year or the quarter. Financial statement
analysis is the art of transforming data from financial statements into information that is useful
for informed decision making. Financial management: Theory and Practice, Slhler Crawford
Davis, Jaico Publication, Pg No: 47. Fundamentals of financial management, James C. Van
Horne, John M.Wachowicz, PHI publications 13th edition, Pg: 128.
According to Prasanna Chandra, Analysis of Financial Statement s is of internet to lenders,
investors, security analyst, managers, corporate boards, regulators and others. Financial
statement analysis may be done for a variety of purposes, which may be range from simple
analysis of the short term liquidity position of a firm to a comprehensive assessment of the
strength and weakness of the firm in various areas. It is helpful in accessing corporate
excellence, judging creditworthiness, forecasting bond ratings; predict bankruptcy, and
accessing market risk.

Amir (1993) was the first to use the term “value relevance” in the context of information
content of accounting figures. An accounting figure/ratio value relevant is it has the significantly
strong predicted association with the stock prices and stock market indicators such, price-
earnings (P/E) or price to book (P/B) ratios. Misund et al. in their study on the value of
relevance of accounting figures in the international oil and gas industry concluded that all
accounting figures are value relevant, be it cash or accrual based.

According to Ohlson(1995) depicted in his work that the value of a firm can be expressed as a
linear function of book value, earnings and other value relevant information. Financial
management theory and practice Prasanna Chandra 7th edition 2010 TATA McGraw Hill Pg No:
69

Amir, E.Harris, T.S & Venuti, E.K (1993) “A comparison of the value relevance of U.S.P-632
Ohlson (1995) depicted in his work that the value of the firm can be expressed. Pg No-454
Mingyi Hung (2000) in his paper on “accounting standards and the value relevance of financial
statements: An international Analysis” concluded that the use of accrual accounting (versus the
cash accounting) negatively affects the value relevance of financial statements in countries with
weak shareholder protection.

According to Liu, Nissim and Thomas (2004), we found that multiples based on reported
earnings outperform multiples based on a variety of reported operating cash flow measures.
EPS forecasts represented substantially better summary measures of value than did operating
cash forecasts in all five countries examined, and this relative superiority was absorbed in most
of the industries. Hardly any studies have been done in the area of investing value relevance of
financial statements based on Indian Accounting Standards. This may be probably because it‟s
just ten years that due to a number of reforms, Indian economy has divulged into a market-
oriented economy. Further, most of the accounting standards have been developed during last
six years by the ICAI. Prior to this, due concerns were not involved in improving the quality and
integrity of financial reporting

Financial Statements
Financial statements (or financial reports) are formal records of the financial activities of a
business, person, or other entity. Financial statements provide an overview of a business or
person's financial condition in both short and long term. All the relevant financial information
of a business enterprise, presented in a structured manner and in a form easy to understand is
called the financial statements.

The analysis of financial statement is a process of evaluating the relationship between

component parts of financial statement to obtain a better understanding of firm financial
position.

A complete set of financial statement comprises:

1) A statement of financial position as at the end of the period:
2) A statement of comprehensive income for the period;
3) A statement of changes in equity for the period:
4) A statement of cash flow for the period.
5) Notes of Account comprising a summary of significant accounting policies and other
explanatory information.

There are four basic financial statements:

 1) Balance sheet: It is also referred to as statement of financial position or condition,
reports on a company's assets, liabilities, and ownership equity as of a given
point in time. The Balance Sheet shows the health of a business from day one to the
date on the balance sheet.

2) Income statement: It is also referred to as Profit and Loss statement (or "P&L"),
reports on a company's income, expenses, and profits over a period of time. Profit &
Loss account provide information on the operation of the enterprise. These include
sale and the various expenses incurred during the processing state. The income
statement shows a presentation of the sales, the main expenses and the resulting
net income over the period. Net income is based on accounting principles which
gives guidance/rules on when to recognize revenues and expenses, whereas cash
from operating activities, obviously is cash based.

3) Statement of Retained Earnings : It explains the changes in a company's retained

earnings over the reporting period. The statement of retained earnings shows the
breakdown of retained earnings. Net income for the year is added to the beginning
of year balance, and dividends are subtracted. This results in the end of year balance
for retained earnings.

4) Cash Flow Statement: It reports on a company's cash flow activities, particularly its
operating, investing and financing activities. The statement of cash flows the ins and
outs of cash during the reporting period. The statement of cash flows takes aspects
of the income statement and balance sheet and kind of crams them together to
show cash sources and uses for the period.

Balance Sheet
In financial accounting, a balance sheet or statement of financial position is a summary of a
person's or organization's balances. A balance sheet is often described as a snapshot of a
company's financial condition. It summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time. These three balance sheet segments give investors an idea as
to what the company owns and owes, as well as the amount invested by the shareholders. Of
the four basic financial statements, the balance sheet is the only statement which applies to a
single point in time.

A company balance sheet has three parts: assets, liabilities and ownership equity. The main
categories of assets are usually listed first and are followed by the liabilities. The difference
between the assets and the liabilities is known as equity or the net assets or the net worth or
capital of the company. It's called a balance sheet because the two sides balance out. A typical
format of the balance sheet has been given in Table It works on the following formula:
Assets = Liabilities + Shareholders' Equity
Table: Balance Sheet

Liabilities
1. Share Capital
Equity Share Capital

2. Reserves & surpluses

Capital Reserve
General Reserve
Premium Account Capital
Redemption Reserve

3. Secured Loans - Loan from Bank

Long Term Loan
Other Secured Loans

4. Unsecured Loans
Loans on Fixed Deposit
Short Term Loans
Other Loans

5. Current Liabilities & Provisions

A. Current Liabilities
B ills Payable
Sundry Creditors
Bank Overdraft
Other Liabilities (if any)

B. Provisions
Provision for Tax
Proposed Dividend
Other Provision
TOTAL

Assets
1. Fixed Assets
Goodwill
Land
Building
Leaseholds
Plant & Machinery
Furniture
Trade marks
Patents
Vehicles
2. Investments
3.Current Assets, Loan and Advances
A) Current Assets
Sundry Debtors
Bills Receivables
Closing Stock
Interest on Investment
Cash at Bank
Cash on Hand
Securities Deposit
Fixed Deposit with Banks

B) Loans and Advances

Prepaid Expenses
Tax Paid in Advance
Advances Paid

4.Miscellaneous Expenditure
Preliminary Expenses
Revenue Expenditures
Discounts Allowed
5. Profit & Loss account
Total

Contents of Balance Sheet

(A) Assets
In business and accounting, assets are economic resources owned by business or company. Any
property or object of value that one possesses, usually considered as applicable to the payment
of one's debts is considered an asset. Simplistically stated, assets are things of value that can be
readily converted into cash.
The balance sheet of a firm records the monetary value of the assets owned by the firm. It is
money and other valuables belonging to an individual or business.
Types of Assets
There is two major type of assets:
• Tangible assets
• Intangible assets

Tangible Assets
Tangible assets are those have a physical substance, such as equipment and real estate.

Intangible Assets
Intangible assets lack physical substance and usually are very hard to evaluate. Assets which do
not possess any material value.
They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc.
Types of Tangible Assets
1. Fixed Assets.
2. Current Assets.

1. Fixed Assets
This group includes land, buildings, machinery, vehicles, furniture, tools, and certain wasting
resources e.g., timberland and minerals.
It is also referred to as PPE (property, plant, and equipment), these are purchased for continued
and long-term use in earning profit in a business.

2. Current Assets
Current assets are cash and other assets expected to be converted to cash, sold, or consumed
either in a year or in the operating cycle. These assets are continually turned over in the course
of a business during normal business activity. There are 5 major items included into current
assets:

• Cash and Cash Equivalents

It is the most liquid asset, which includes currency, deposit accounts, and negotiable
instruments (e.g., money orders, cheque, bank drafts).

• Short-term Investments
It includes securities bought and held for sale in the near future to generate income on short
term price differences (trading securities).

• Receivables
It is usually reported as net of allowance for uncollectable accounts.

• Inventory
The raw materials, work- in-process goods and completely finished goods that are
considered to be the portion of a business's assets that is ready or will be ready for sale.

• Prepaid Expenses
These are expenses paid in cash and recorded as assets before they are used or consumed (a
common example is insurance). The phrase net current assets (also called working capital) are
often used and refer to the total of current assets less the total of current liabilities.
I. Gross Block
Gross block is the sum total of all assets of the company valued at their cost of acquisition. This
is inclusive of the depreciation that is to be charged on each asset. Net block is the gross block
less accumulated depreciation on assets. Net block is actually what the asset are worth to the
company.

II. Capital Work in Progress

Work that has not been completed but has already incurred a capital investment from the
company. This is usually recorded as an asset on the balance sheet. Work in progress indicates
any good that is not considered to be a final product, but must still be accounted for because
funds have been invested toward its production.

III. Investments
• Shares and Securities, such as bonds, common stock, or long-term notes
• Associate Companies
• Fixed deposits with banks/finance companies
• Investments in special funds (e.g., sinking funds or pension funds).
• Investments in fixed assets not used in operations (e.g., land held for sale).

Remark: While fixed deposits with banks are considered as fixed assets, the investments in
associate concerns are treated as non-current assets.

IV. Loans and Advances include

• House building advance
• Car, scooter, computer etc. advance
• Multipurpose advance
• Transfer travelling allowance advance
• Tour travelling allowance advance
• DRS payment.
V. Reserves
• Subsidy Received From The Govt.
• Development Rebate reserve
• Issue of Shares at Premium
• General Reserves

(B) Liability
A liability is a debt assumed by a business entity as a result of its borrowing activities or other
fiscal obligations (such as funding pension plans for its employees). Liabilities are debts and
obligations of the business they represent creditors claim on business assets.
Types of Liabilities
Current Liabilities
Current liabilities are short-term financial obligations that are paid off within one year or one
current operating cycle. These liabilities are reasonably expected to be liquidated within a year.
It includes:
• Accrued expenses as wages, taxes, and interest payments not yet paid
• Accounts payable
• Short-term notes
• Cash dividends and
• Revenues collected in advance of actual delivery of goods or services.

Long-Term Liabilities
Liabilities that are not paid off within a year, or within a business's operating cycle, are known
as long-term or non-current liabilities. Such liabilities often involve large sums of money
necessary to undertake opening of a business, major expansion of a business, replace assets, or
make a purchase of significant assets. These liabilities are reasonably expected not to be
liquidated within a year. It includes:
• Notes payable- debt issued to a single investor.
• Bonds payable – debt issued to general public or group of investors.
 • Mortgages payable.
• Capital lease obligations – contract to pay rent for the use of plant, property or
equipments.
• deferred income taxes payable, and
• Pensions and other post-retirement benefits.

Contingent Liabilities
A third kind of liability accrued by companies is known as a contingent liability. The term refers
to instances in which a company reports that there is a possible liability for an event,
transaction, or incident that has already taken place; the company, however, does not yet know
whether a financial drain on its resources will result. It also is often uncertain of the size of the
financial obligation or the exact time that the obligation might have to be paid.

Fixed Liability
The liability which is to be paid of at the time of dissolution of firm is called fixed liability.
Examples are Capital, Reserve and Surplus.

Secured Loans
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan.

Unsecured Loans
An unsecured loan is a loan that is not backed by collateral. It is also known as signature loan
and personal loan. Unsecured loans are based solely upon the borrower's credit rating. An
unsecured loan is considered much cheaper and carries less risk to the borrower. However,
when an unsecured loan is granted, it does not necessarily have to be based on a credit score.
Profit & Loss Statement
Income statement, also called profit and loss statement (P&L) and Statement of Operations is
financial statement that summarizes the revenues, costs and expenses incurred d uring a
specific period of time - usually a fiscal quarter or year. These records provide information that
shows the ability of a company to generate profit by increasing revenue and reducing costs. The
purpose of the income statement is to show managers and investors whether the company
made or lost money during the period being reported. The important thing to remember about
an income statement is that it represents a period of time. This contrasts with the balance
sheet, which represents a single moment in time. A typical format of the Profit & Loss
Statement has been given in Table

Table: Profit and Loss Statement

PARTICULARS PARTICULARS
Gross Profit(Transferred) Gross Profit(Transferred)
Office and Administration Exp Interest received
Salaries Rent received
Rent Discount received
Postage & telegrams Dividend received
Office electric charges Bad debts recovered
Telephone charges Provision for discount on creditors
Printing and stationary Provision for discount on creditors
Selling and Distribution
Expenses
Carriage outward
Advertisement
Salesmen's salaries
Commission
Insurance
Traveling expense
Bad debts
Packing expense
Financial and Other Expenses
Depreciation
Repair
Audit fee
Interest paid
Commission paid
Bank charges
Legal charges
Profit before Interest Net Loss
Less- Net Interest
Profit before Tax
Less- Tax Payable
Profit after Tax
Less- Dividend
Retained Profit

Contents of Profit & Loss Statement

a. Revenue - Cash Inflows or other enhancements of assets of an entity during a period
from delivering or producing goods, rendering services, or other activities that constitute the
entity's ongoing major operations.

b. Expenses - Cash outflows or other using- up of assets or incurrence of liabilities during a

period from delivering or producing goods, rendering services, or carrying out o ther activities
that constitute the entity's ongoing major operations.

c. Turnover
The main source of income for a company is its turnover, primarily comprised of sales of its
products and services to third-party customers.

d. Sales
Sales are normally accounted for when goods or services are delivered and invoiced, and
accepted by the customer, even if payment is not received until some time later, even in a
subsequent trading period.
e. Cost of Sales (COS)
The sum of direct costs of goods sold plus any manufacturing expenses relating to the sales (or
turnover) is termed cost of sales, or production cost of sales, or cost of goods sold. These costs
include:
• Costs of raw materials stocks
• Costs of inward-bound freight paid by the company
• Packaging costs
• Direct production salaries and wages
• Production expenses, including depreciation of trading-related fixed assets.

(f) Other Operating Expenses

These are not directly related to the production process, but contributing to the activity of the
company, there are further costs that are termed ‘other operating expenses’. These comprises
of costs like:
• Distribution costs and selling costs,
• Administration costs, and
• Research and development costs (unless they relate to specific projects and the
costs may be deferred to future periods).

(g) Other Operating Income

Other operating income includes all other revenues that have not been included in other parts
of the profit and loss account. It does not include sales of goods or services, reported turnover,
or any sort of interest receivable, reported within the net interest category.

(h) Gross Margin (or Gross Profit)

The difference between turnover, or sales, and COS is gross profit or gross margin. It needs to
be positive and large enough to at least cover all other expenses.
(i) Operating Profit (OP)
The operating profit is the net of all operating revenues and costs, regardless of the financial
structure of the company and whatever exceptional events occurred during the period that
resulted in exceptional costs. The profit earned from a firm's normal core business operations.
It is also known as Earnings before Interest and Tax (EBIT).
Operating Profit = Turnover - COS - other Operating Expenses + Other Operating Income

(j) Profit before Tax (PBT)

A profitability measure that looks at a company's profits before the company has to pay
corporate income tax. This measure deducts all expenses from revenue including interest
expenses and operating expenses, but it leaves out the payment of tax.

(k) Profit after Tax (PAT)

PAT, or net profit, is the profit on ordinary activities after tax. The final charge that a company
has to suffer, provided it has made sufficient profits, is therefore corporate taxation.
PAT = PBT - Corporation Tax

(l) Retained Profit

The retained profit for the year is what is left on the profit and loss account after deducting
dividends for the year. The balance on the profit and loss account forms part of the capital (or
equity, or shareholders’ funds) of the company.

Financial Ratios
Objectives of Calculation of Ratio Analysis
The importance of ratio analysis lies in the fact that it presents data on a comparative basis and
enables the drawing of inferences regarding the performance of the firm. Ratio analysis helps in
concluding the following aspects:
To know about Liquidity Position:
Ratio analysis helps in determining the liquidity position of the firm. A firm can be said to have
the ability to meet its current obligations when they become due. It is measured with the help
of liquidity ratios.

To Know about Long- Term Solvency:

Ratio analysis helps in assessing the long term financial viability of a firm. Long- term solvency
measured by leverage/capital structure and profitability ratios.

To Know about Operating Efficiency:

Ratio analysis determines the degree of efficiency of management and utilization of assets. It is
measured by the activity ratios.

To know about Over-All Profitability:

The management of the firm is concerned about the overall profitability of the firm which
ensures a reasonable return to its owners and optimum utilization of its assets. This is possible
if an integrated view is taken and all the ratios are considered together.

To Know About Inter- firm Comparison:

Ratio analysis helps in comparing the various aspects of one firm with the other.

Financial Ratios and Their Interpretation

Different Financial Ratios
S No Category Type of Ratio Interpretation
Net Working Capital = Current assets - It measures the liquidity of a
Current liabilities firm.
 It measures the short term
Liquidity liquidity of a firm.
1
Ratio Current ratio = Current Assets /  A firm with a higher ratio
Current Liabilities has better liquidity.
 A ratio of 2:1 is considered
safe.

Inventory Turnover ratio = Costs of
goods sold / Average inventory
Turnover
2 Debtor Turnover ratio = Net credit
Ratio
sales / Average debtors
Creditor’s Turnover ratio = Net credit
purchases / Average Creditors
Debt-Equity ratio =
Long term debt / Shareholder’s Equity
Debt to Total capital ratio =
Long term debt / Permanent Capital
Or
Capital
3 Structure
Total debt / (Permanent capital +
Ratios
Current liabilities)
Or
Total Shareholder’s Equity / Total
Assets
Interest Coverage =
Earnings before interest and tax /
Interest
Coverage
4
Ratios
Dividend Coverage =
Earnings after tax / Preference
Dividend
 This ratio indicates how fast
inventory is sold.
 A firm with a higher ratio
has better liquidity.
 This ratio measures how
fast debts are collected.
 A high ratio indicates
shorter time lag between
credit sales and cash
collection.
 A high ratio shows that
accounts are to be settled
rapidly
 This ratio indicates the
relative proportions of debt
and equity in financing the
assets of a firm.
 A ratio of 1:1 is considered
safe.
 It indicates what proportion
of the permanent capital of
a firm consists of long term
debt.
 A ratio 1:2 is considered
safe.
 It measures the share of the
total assets financed by
outside funds.
 A low ratio is desirable for
creditors.
 It shows what portion of the
total assets is financed by
the owners’ capital.
 A firm should neither have a
high ratio nor a low ratio.
 A ratio used to determine
how easily a company can
pay on outstanding debt.
 A ratio of more than 1.5 is
satisfactory
It measures the ability of firm
to pay dividend on
preference shares.
 A high ratio is better for
creditors.
Total Coverage ratio = It shows the overall ability of
Earning before interests and tax / the firm to fulfill the
Total Fixed charges liabilities.
A high ratio indicates better
ability.
5 Profitability Gross Profit margin =  It measures the profit in
Ratios Gross profit * 100 / Sales relation to sales.
 A firm should neither have a
high ratio nor a low ratio.
Net Profit margin =  It measures the net profit of
Net Profit after tax before interest / a firm with respect to sale.
Sales  A firm should neither have a
high or low ratio
Or

Net Profit after Tax and Interest /

Sales

Or

Net profit after Tax and Interest /

Sales
Operating ratio = Cost of Goods sold  Operating ratio shows the
+ other operational efficiency of the
Expenses / Sales business.
 Lower operating ratio
Expenses shows higher operating
6
Ratios profit and vice versa .
Cost of Goods sold ratio = Cost of  It measures the cost of
Goods sold / Sales goods sold per sale
Specific Expenses ratio = Specific  It measures the specific
Expenses / Sales expenses per sale.
Return on Assets (ROA) = Net Profit  It measures the profitability
after Taxes * 100 / Total Assets of the total funds per
investment of a firm.
Or
Return on
7
Investments
(Net Profit after Taxes +interest) / 100
Total Assets

Or
 (Net profit after Taxes + Interest) *
100
Tangible Assets

Or

(Net Profit after Taxes + Interest) *

100
Total Assets

Or

(Net Profit after Taxes + Interest) *

100 / Fixed Asset
Return on Capital Employed  It measures profitability of
(ROCE) = the firm with respect to the
(Net Profit after Taxes) * 100 / total total capital employed.
capital employed  The higher the ratio, the
Or more efficient use of capital
(Net Profit after Taxes + Interest) employed.
*100
Total Capital Employed

Or

(Net Profit after Taxes + Interest) *

100 / Total Capital Employed -
intangible assets
Return on Total Share holders’
Equity = Net Profit after Taxes * 100 /
Total shareholders’ equity
Return on Ordinary
shareholders equity =
Net profit after taxes and Pref.
dividend *100 / Ordinary
Shareholders’ Equity
Earnings per Share (EPS) =
Net Profit of Equity holders / Number
Shareholders of Ordinary Shares
8
Ratios
Dividend per Share (DPS) =
Net profits after interest and
 It reveals how profitably the
owner’s fund has been
utilized by the firm.
 It determines whether the
firm has earned satisfactory
return for its equity holders
or not.
 It measures the profit
available to the equity
holders on a per share
basis.
 It is the net distributed
profit belonging to the
 preference dividend paid to
ordinary shareholders / Number of
ordinary shares outstanding
Dividend Payout ratio (D/P) =
Total Dividend To Equity holders /
Total net profit of equity holders
Or
Dividend per Ordinary / Share
Earnings per Share
Earnings per Yield =
Earnings per Share / Market Value per
Share
Dividend Yield = Dividend per share
/ Market Value per share
Price- Earnings ratio (P/E) =
Market value per Share / Earnings per
Share
Earning Power = Net Profit after taxes 
/ Total Assets
9 Activity Inventory turnover = Sales / Closing
Ratios Inventory
Raw Material turnover = Cost of Raw
Material used / Average Raw Material
Inventory
Work in Progress turnover = Cost of
Goods manufactured / Average Work
in process inventory
Debtors turnover = Cost of Goods
manufactured /Average Work in
Process Inventory
shareholders divided by the
number of ordinary shares
 It shows what percentage
share of the net profit after
taxes and preference
dividend is paid to the
equity holders.
 A high D/P ratio is preferred
from investor’s point of
view.
 It shows the percentage of
each rupee invested in the
stock that was earned by
the company.
 It shows how much a
company pays out in
dividends each year relative
to its share price.
 It reflects the price
currently paid by the
market for each rupee of
EPS.
 Higher the ratio better it is
for owners
It measures the overall
profitability and operational
efficiency of a firm
 It measures how quickly
inventory is sold.
 A firm should neither have a
high ratio nor a low ratio.
 It shows how quickly
current assets that are
receivables or debtors are
converted to cash.
 A firm should neither have a
 high ratio nor a low ratio.
Total Assets turnover = Cost of Goods  It measures the efficiency of
Sold / Total Assets a firm in managing and
utilizing its assets.
 Higher the ratio, more
efficient is the firm in
Assets
utilizing its assets.
10 Turnover
Fixed Assets turnover = Cost of Goods
Ratio
Sold / Fixed Assets
Capital turnover = Cost of Goods Sold
/ Capital Employed
Current Assets turnover = Cost of
Goods Sold / Current Assets
Chapter III

Company Profile
Company Profile

AABLA Associates

AABLA Associates aims to enable people fulfill all their ambitions. We think of ourselves, not as
a “loan provider”, but as a partner in your quest to fulfill your biggest ambitions in life and in
business. In this time we have evolved from a consumer finance business to an asset funding
company.

The company has a handpicked team of professionals specially trained in their respective fields.
In the past years, we have won the trust of thousands of customers whose satisfaction and
loyalty shows in our upward moving business graph.

AABLA Associates is in tieup with various Non-Banking Finance Company “NBFC” like EFL,
FIVESTAR and Shakthi and offer an exhaustive suite of financial solutions:

 Home Loans
 Personal Loans
 Auto Loans
 Two Wheeler Loans
 Business Loans
 Education Loans
 Loan Against Shares
 Loan Against Gold
 Loan Against Property
 Trading of Commodities
 Distributers of Electrical goods
What’s more, with the help of our easy-to-use loan assistance schemes, you can decide on the
tenure, interest rate and the loan amount that best suits you.

With our wide range of secured loans there’s no reason for you to settle for something less,
when you can achieve something
Chapter IV

Research Methodology
Research Methodology
Objectives of the Study
Primary Objectives
To make a Financial Analysis of AABLA Associates

Secondary Objectives
 To study all the financial statements of AABLA Associates to identify the changes in
various items present in them.

 To examine the impact of the changes in the financial statement on the financial
position and the profitability of the organization.

 Calculation of liquidity ratios, profitability ratios and operational ratios in order to

ascertain the financial significance of the figure contained in the financial statements by
establishing relationships between them.

Scope of the Study

The study, which is done at the AABLA Associates, aims at financial analysis of the company.
Profitability analysis is a process of understanding the financial strength and weakness between
the various items of balance sheet and profit and loss account.

Need For the Study

Financial Analysis is useful for comparing the performance with pre planned performance with
a view to attain equilibrium between ends and meanings outputs and efforts. It corrects the
deviation from pre-planned path through the media observation, research planning, control
and decision making and thus helps in performance of future activities in an orderly way. It
uncovers uneconomic in operations, weaknesses in organization structure and minimizes
wasteful spending. Prediction helps the firm to control expenses and attains its objective in a
profitable manner.
Research Methodology
The research method used is analytical research. In this type of research the researcher uses
the facts and information already available and analyses them to make a critical of the material.

Research Design
The research is designed in such a way to mainly concentrate on data collected through
secondary mode.

Sources and Collection of Data

For the purpose of this study only secondary data have been used to a large extent.

Source of Data
The main source of data of the study was the annual reports of AABLA Associates, internet
sources, books and articles.

Tools
1. Balance Sheet
2. Ratio analysis
3. Trend Analysis
4. Comparative balance sheet analysis
Chapter V

Data Sheet of AABLA

 Balance Sheet of AABLA Associates 2018 as on 31st - March - 2017

Particulars Amount Total Amount

Source of Funds:
Capital Account 3,53,181.05
Managing Partners Capital 5,95,406.05
Less- Credit card HDFC 12,500.00
Star Health Insurance 9,343.00
Drawings 1,81,362.00
Other Investments 39,020.00
Loans (Liability) 19,08,532.9
Bank OD A/C 9,20,609.95
Secured Loans 8,37,922.95
Unsecured Loans 1,50,000.00
Current Liabilities 2,493,868.57
Provision 76,703.00
Sundry Creditors 23,85,328.50
Unregistered Tax Payable 65,940.00
less- Duties & Taxes 34,102.93
Profit & Loss A/C 3,355,599.45
Opening balance Current 3,355,599.45
Period
Total 50,91,181.97
Application of Funds:
Fixed Assets 1,352,287.87
Car 504,772.50
Mobile 53,842.29
Motor Bike 26,504.40
Plant & Machinery 584,111.40
LCD Monitor 6,936.00
Transport Vehicle 176,121.28
Current Assets 3,738,894.10
Closing Stock 1,235,091.00
Loans & Advances (Assets) 35,642.00
Sundry Debtors 917,360.62
Cash in Hand 1,544,699.00
Bank Accounts 6,101.48
Total 5,091,181.97
 Profit & Loss Statement for 2017

Profit & Loss Statement as per the year ending of 31st Mar, 2017

Particulars Amount Amount

Trading Account:
Sales Account 3599918.00
Sales Ag. D Form 139550.00
Sales Ag. E Form 667113.00
Sales Tax Invoice 5% 2793255.00
Direct Incomes
3599918.00
Cost of Sales 2346186.55
Opening Stock 1035485.00
Add: Purchase Accounts 2539552.55
Less: Closing Stock 1235091.00
2339946.55
Direct Expenses 6240.00
Carriage Inward 2210.00
Job Work Paid 4030.00
Gross Profit 1253731.45
Income Statement:
Indirect Incomes
1253731.45
Indirect Exp. 918132.03
Accounting Charges 13750.00
Advertising Exp. 9752.00
Audit Fees 12500.00
Bank Charges 10752.00
Business Promotion Exp 7524.00
Carriage Outward (-) 2187.75
Commission Exp. 6582.00
Company Insurance 14621.00
Convince Exp. 9850.00
Depreciation 238638.78
Donation (Charity) 1401.00
Factory Rent 120000.00
Festival Exp. 12580.00
Interest on Tata Ace Loan 20992.00
Interest on VAT 154.00
Interest On C.C limit 115379.00
Legal & Professional Charges 9852.00
Office Exp. 1880.00
Printing & Stationary Exp. 9782.00
Salaries 245864.00
Short & Excess (-)5.00
Staff Welfare 2356
Telephone Exp. 15710.00
Toll Tax (Octoy) 180.00
Vehicle Running & Maintenance 40145.00
Weighting & Measurement 80.00
Nett Profit: 335599.42
Chapter VI

Conclusion
Conclusion
Analysis and interpretation of financial statements is an important tool in assessing company’s
performance. It reveals the strengths and weaknesses of a firm. It helps the clients to decide in
which firm the risk is less or in which one they should invest so that maximum benefit can be
earned. It is known that investing in any company involves a lot of risk. So before putting up
money in any company one must have thorough knowledge about its past records a nd
performances. Based on the data available the trend of the company can be predicted in near
future.

This project of financial analysis & interpretation in the production concern is not merely a work
of the project but a brief knowledge and experience of that how to analyze the financial
performance of the firm. The study undertaken has brought in to the light of the following
conclusions. According to this project I came to know that from the analysis of financial
statements it is clear that AABLA Associates have been incurring profit during the period of
study. So the firm should focus on getting of more profits in the coming years by taking care
internal as well as external factors. And with regard to resources, the firm is take utilization of
the assets properly. And also the firm has a maintained low inventory.

This project mainly focuses on the basics of different types of financial statements. Balance
Sheet and Profit & Loss statements of AABLA Associates have been studied.
Appendix
Bibliography

1. M.Y. KHAN, P.K.JAIN (1981), Financial Management, and Cost Accounting (third
edition) New Delhi: McGraw – Hill publishing company limited.

2. I.M.PANDEY.Financial Management New Delhi Vikas publishing house private Ltd –

ninth addition 2004

3. Financial Statement of AABLA Associates

Company Data

 Vouchers of Sale & Purchase of AABLA Associates

 Bank Statement of AABLA Associates
 Other Data of AABLA Associates