CHAPTER-1 INTRODUCTION Meaning of Financial Analysis The first task of financial analysis is to select the information relevant to the decision under consideration to the total information contained in the financial statement. The second step is to arrange the information in a way to highlight significant relationship. The final step is interpretation and drawing of inference and conclusions. Financial statement is the process of selection, relation and evaluation. Features of Financial Analysis To present a complex data contained in the financial statement in simple and understandable form. To classify the items contained in the financial statement inconvenient and rational groups. To make comparison between various groups to draw various conclusions. Purpose of Analysis of financial statements To know the earning capacity or profitability. To know the solvency. To know the financial strengths. 1
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CHAPTER-1
INTRODUCTION
Meaning of Financial Analysis
The first task of financial analysis is to select the information relevant to the decision
under consideration to the total information contained in the financial statement. The second step
is to arrange the information in a way to highlight significant relationship. The final step is
interpretation and drawing of inference and conclusions. Financial statement is the process of
selection, relation and evaluation.
Features of Financial Analysis
To present a complex data contained in the financial statement in simple and
understandable form.
To classify the items contained in the financial statement inconvenient and rational
groups.
To make comparison between various groups to draw various conclusions.
Purpose of Analysis of financial statements
To know the earning capacity or profitability.
To know the solvency.
To know the financial strengths.
To know the capability of payment of interest & dividends.
To make comparative study with other firms.
To know the trend of business.
To know the efficiency of management.
To provide useful information to management.
Procedure of Financial Statement Analysis
1
The following procedure is adopted for the analysis and interpretation of financial
Statements:-
The analyst should acquaint himself with principles and postulated of accounting. He
should know the plans and policies of the managements that he may be able to find out
whether these plans are properly executed or not.
The extent of analysis should be determined so that the sphere of work may be decided.
If the aim is find out. Earning capacity of the enterprise then analysis of income
statement will be undertaken. On the other hand, if financial position is to be studied
then balance sheet analysis will be necessary.
The financial data be given in statement should be recognized and rearranged. It will
involve the grouping similar data under same heads. Breaking down of individual
components of statement according to nature. The data is reduced to a standard form. A
relationship is established among financial statements with the help of tools &
techniques of analysis such as ratios, trends, common size, fund flow etc.
The information is interpreted in a simple and understandable way. The significance and
utility of financial data is explained for help indecision making.
The conclusions drawn from interpretation are presented to the management in the form
of reports.
Analyzing financial statements involves evaluating three characteristics of a company: its
liquidity, its profitability, and its insolvency. A short-term creditor, such as a bank, is primarily
interested in the ability of the borrower to pay obligations when they come due. The liquidity of
the borrower is extremely important in evaluating the safety of a loan. A long-term creditor, such
as a bondholder, however, looks to profitability and solvency measures that indicate the
company’s ability to survive over a long period of time. Long-term creditors consider such
measures as the amount of debt in the company’s capital structure and its ability to meet interest
payments. Similarly, stockholders are interested in the profitability and solvency of the company.
They want to assess the likelihood of dividends and the growth potential of the stock.
COMPANY PROFILE
2
Chennai Port, the third oldest port among the 12 major ports, is an emerging hub port in
the East Coast of India. This gateway port for all cargo has completed 128 years of glorious
service to the nation’s maritime trade.
Maritime trade started way back in 1639 on the sea shore Chennai. It was an open road -
stead and exposed sandy coast till 1815. The initial piers were built in 1861, but the storms of
1868 and 1872 made them inoperative. So an artificial harbour was built and the operations were
started in 1881.The cargo operations were carried out on the northern pier, located on the
northeastern side of Fort St. George in Chennai. In the first couple of years the port registered
traffic of 3 lakh tonnes of cargo handling 600 ships.
Being an artificial harbour, the port was vulnerable to the cyclones, accretion of sand
inside the basin due to underwater currents, which reduced the draft. Sir Francis Spring a
visionary skillfully drew a long-term plan to charter the course of the port in a scientific manner,
overcoming both man-made and natural challenges. The shifting of the entrance of the port from
eastern side to the North Eastern side protected the port to a large extent from the natural
vulnerabilities. By the end of 1920 the port was equipped with a dock consisting of four berths in
the West Quays, one each in the East & South Quay along with the transit sheds, warehouses and
a marshalling yard to facilitate the transfer of cargo from land to sea and vice versa. Additional
berths were added with a berth at South Quay and another between WQ2 & WQ3 in the forties.
India’s Independence saw the port gathering development, momentum. The topography
of the Port changed in 1964 when the Jawahar dock with capacity to berth 6 vessels to handle
Dry Bulk cargoes such as Coal, Iron ore, Fertilizer and non hazardous liquid cargoes was carved
out on the southern side.
In tune with the international maritime developments, the port developed the Outer
Harbour, named Bharathi Dock for handling Petroleum in 1972 and for mechanized handling of
Iron Ore in 1974. The Iron ore terminal is equipped with Mechanized ore handling plant, one of
the three such facility in the country, with a capacity of handling 8 million tonnes. The Chennai
port’s share of Iron ore export from India is 12%. The dedicated facility for oil led to the
development of oil refinery in the hinterland. This oil terminal is capable of handling Suezmax
vessels.
3
In 1983, the port heralded the country’s first dedicated container terminal facility
commissioned by the then prime minister Smt.Indira Gandhi on 18th December 1983. The Port
privatized this terminal and is operated by Chennai Container Terminal Private Limited. Having
the capability of handling fourth generation vessels, the terminal is ranked in the top 100
container ports in the world. Witnessing a phenomenal growth in container handling year after
year the port is added with the Second Container Terminal with a capacity to handle 1.5 M TEUs
to meet the demand. To cater to the latest generation of vessels and to exploit the steep increase
in containerized cargo the port is planning to welcome the future with a Mega Container
Terminal, capable of handling 5 Million TEUs expected to be operational from 2013.
The Chennai port is one among the major ports having Terminal Shunting Yard and
running their own Railway operations inside the harbor on the East Coast. The port is having
railway lines running up to 68 kms and handles 25% of the total volume of the cargo, 4360 rakes
(239412 wagons) during 2009-10.
The port with three Docks, 24 berths and draft ranging from 12m to 16.5m has become a
hub port for Containers, Cars and Project Cargo in the East Coast. The port has handled an all
time high of 61.06 Million tons of cargo registering an increase of 6.2% over previous year. An
increase of 10.14% in handling of cars from 273917 Units in the year 2009-10 when compared
with 248697 Units in the year 2008-09 and an increase of 6.39% in handling of containers from
1143373 TEUs in the year 2008-09 to 1216438 TEUs in the year 2009-10. The long term plan
for Chennai Port envisages that the Port will mainly handle 4C’s i.e. Containers, Cars, Cruise
and Clean Cargo.
Future Plans
Master plan for Port Railway, Realigning Rail and Road network.
Dedicated Elevated Expressway from Chennai Port to Maduravoyalupto NH4 has been
approved by the Government to enhance the hinterland connectivity.
Development of Ro-Ro Terminal and a Multi-level car parking facility with a capacity
of 5000 cars.
4
Chennai Mega Container Terminal with a continuous quay length of 2 km with 18-22m
side along draft. Capable of handling ultra large container ships carrying over 15000
TEU’s.
The break water extension from existing outer arm will be utilized to develop deep draft
oil berth for handling VLCCs.
PORT DETAILS:
Geographical Location
Latitude - 13° 06’ N
Longitude - 80° 18’ E
Climate - Tropical
Time - +5 Hrs. 30 Minutes
Temperature -30° C Max. 18° C Min.
Annual Rainfall - About 125 Cms.
Spring Tides - 1.2 Metres
Water Area -420.00 acres (169.97 hectares)
Land Area - 586.96 acres (237.54 hectares)
Navigation Channel:
Entrance Channel
Soil - Predominantly sandy and silt
Length of Channel - About 7 kilometres
Depth of Inner Channel - 18.6m at chart datum
Depth of Outer Channel - 19.2m at chart datum
Depth of Outer Channel - 19.2m at chart datum
Swell Allowance - 3.00 Metres.
5
Width of Channel - The width of channel gradually increases from
Total Operating Income 62809.45 57472.13 4877.23 38.78
Source: Secondary data
4.1.1 Chart showing Operating Income for the year 2007-08
cargo handling & storage charges
Port & Dock Railway earnings Estate rentals Container handling-1000
-5000
50010001500200025003000
2875.43
-744.92
498.979999999999
-58.85
2306.59Variance
Variance
Interpretation:
With reference to the above table it indicates that the budget variance for Operating Income for cargo handling storage charges and container handling and Railway earnings are favourable and others is unfavourable. Container handling are highest variance is Rs.2875.43 and port and dock is lowest variance Rs.744.92.
26
4.2 Table Statement showing Operating Income for the year 2008-09(Rs. In lakhs)
Particulars 2008-09
Actual Revised Estimates
Variance Percentage Remark
Cargo handling & storage
charges
31891.93 29422.00 1869.93 6.35 favourable
Port & Dock 16951.27 15430.00 1521.27 9.85 Favourable
Total Operating Income 67149.38 66226.00 322.78 -45.09
Source: Secondary data
4.2.1Chart showing Operating Income for the year 2008-09
Cargo han
dling &
storag
e charg
es
Port & Dock
Railway
earn
ings
Estate
rental
s
Container
handlin
g
-2500-2000-1500-1000
-5000
500100015002000
1869.93 1521.27
-371-674.45
-2022.97
variance
Variance
Interpretation:
With reference to the above table it indicates that the budget variance for Operating Income for cargo handling storage charges and port and dock are favourable and others is unfavourable. Cargo handling storage charges are Rs.1869.93 is highest variance and container handling is lowest variance is Rs.-2022.97
27
4.3. Table Statement showing Operating Income for the year 2009-10(Rs. In lakhs)
Particulars 2009-10
Actual Revised
Estimates
Variance Percentage Remark
Cargo handling & storage
charges
32830.75 33743.00 -912.25 -2.77 Unfavourable
Port & Dock 19597.93 17655.38 1942.55 11.00 Favourable
Total Operating Income 71835.05 76300.00 1632.66 19.71
Source: Secondary data
4.3.1 Chart showing Operating Income for the year 2009-10
-1000-500
0500
100015002000
-912.25
1942.55
-371188.35000000
0001784.91
Variance
Variance
Interpretation:
With reference to the above table it indicates that the budget variance for Operating Income for port and dock ,estate rental and container handling are favourable and others is unfavourable. Port and dock are highest is Rs.1942.55 and cargo handling are lowest variance is Rs.-912.25.
4.4 Table Statement showing Operating Income for the year 2010-11
28
(Rs. In lakhs)Particulars 2010-11
Actual Revised
Estimates
Variance Percentage Remark
Cargo handling & storage
charges
27934.17 35698.20 -7764.03 -27.78 unfavourable
Port & Dock 19110.63 20567.50 -1456.87 -7.63 Unfavourable
Total Operating Income 68391.131 76500.00 -8108.86 -68.35
Source: Secondary data
4.4.1 Chart showing Operating Income for the year 2010-11
cargo handling,&storage
charges
Port & Dock Railway earnings Estate rentals Container handling
-8000
-6000
-4000
-2000
0
2000
4000
-7764.03
-1456.87 -1414.21
24.47
2501.77
variance
Interpretation
With reference to the above table it indicates that the budget variance for Operating Income for estate rental and container handling are favourable and others is unfavourable. Container handling are highest is Rs.2501.77 and cargo handling are lowest variance is Rs.-7764.03.
4.5 Table statement showing Operating Income for the year 2011-12
29
(Rs. In lakhs)Particulars 2011-12
Departments Actual Revised
Estimates
Variance Percentage Remark
Cargo handling, & storage
charges
22963.15 22652.00 311.15 1.37 Favourable
Port & Dock 17518.72 17900.00 -381.28 -2.17 Unfavourable
Total Operating Income 62710.64 62181.00 529.64 26.64
Source: Secondary data
4.5.1 Chart showing Operating Income for the year 2011-12
-4000
400800
311.15
-381.28
625.83
-218.26
165.2
Variance
Variance
Interpretation
With reference to the above table it indicates that the budget variance for Operating Income for cargo handling, Railway earning and container handling are favourable and others is unfavourable. Railway earning are highest is Rs.625.83 and Port and dock are lowest variance is Rs.-381.28
30
4.6 Table showing Comparative Budget Deviation Analysis for Operating Income
Department Deviation (in %)
2007-08 2008-09 2009-10 2010-11 2011-12
Cargo handling, & storage
charges
11.15 6.35 -2.77 -27.78 1.37
Port & Dock -4.92 9.85 11.00 -7.63 -2.17
Railway earnings 10.90 -7.67 -8.68 -49.31 39.26
Estate rentals -2.32 -36.20 13.92 1.30 -12.75
Container handling 23.98 -17.42 6.18 15.07 0.91
Total Operating Income 38.78 -45.09 19.71 -68.35 26.62
Source: Secondary data
4.6.1 Chart Showing Comparative Budget Deviation Analysis for Operating Income
With reference to the above chart is indicates that the budget Deviation for Operating Income for during the year 2007-08 , 2009-10 and 2011-12 are favourable and others is unfavourable. 2007-08 are highest deviation 38.78% and 2010-11 are lowest deviation is Rs. -68.35.
31
LINEAR REGRESSION
To find out the future of the company
The trend equation is Y=a + b(x) …………… 1
Where a= ∑Y /N ………….…2
b= ∑ XY∑ X 2
……….……3
Table showing the Linear regression
Year Income X XY X^2
2006 43169.4 -2 -86339 4
2007 53497.2 -1 -53497 1
2008 62809.4 0 0 0
2009 67149.4 1 67149.4 1
2010 71835 2 143670 4
2011 68391.1 3 205173 9
TOTAL 366852 3 276157 19
Substitute the values of ∑X2, ∑Y, ∑XY in equation “2” & “3”
We get,
a = 366852
6
a = 61142
b = 276157
19
b = 14534.58
Equation “1” becomes,
Y= 61142 + 14534.58(X)
32
2006 2007 2008 2009 2010 2011 2012 2013 20140
20000
40000
60000
80000
100000
120000
140000
160000
Linear Regression
Income
YEAR
INC
OM
E
Charting showing the future income of the company
From the above table, income of the company for six year is taken as “Y”.
In order to project the future income of the company we can use the statistical formula for trend
equation which is given below:
Y= a+ b (X)
Here a = 61142 & b = 14534.58Finding the income for the year 2012 we can take X= 4
Y= 61142 + 14534.58(X)
Y=119280.2
Finding the income for the year 2013 we can take X= 5
Y= 61142 + 14534.58(X)
Y=133814.8
Finding the income for the year 2014 we can take X= 6
Y= 61142 + 14534.58(X)
Y=148349.4
INFERENCE
It can be inferred that the company income is estimated to 119280.2 in the year 2012 and
113814.8 in the year 2013 and 148349.4 in the year 2014.
33
OVER HEAD VARIANCEANALYSIS
Variance is defined as the difference between actual and the standard amounts.
Total expenditure variance
Fixed cost overhead variance
Variable cost overhead variance
Semi variable cost overhead variance
Total expenditure variance
Formula:
Total expenditure variance = Revised total overhead – Actual total overhead