Users of financial statements
' Investors: Investors are basically the one who invests there shares in the company for the future profits. And, the profit of the investor is calculated by the company's current year performance.
' Employees: The employees should know whether the employer can offer them sufficient payment and possible pay rises. The employees are interested to know the salaries and benefits enjoyed by other senior employers.
' Creditors: They use financial analysis to see the company's liquidity position. They see whether the company has the ability to meet their claims from a short period of time.
' Government Agencies: In order to see the company's taxable income is correct or not, the government agencies calculate the company's financial position especially its net income.
' Owners: In order to check the profitability, liquidity of the company the owners of the company uses financial ratios to test the factors and even they find that the company is able to survive or not. (accounting-simplified, 2013)
Total figures which are expressed in monetary terms in financial statements by themselves are meaningless. These figures don't convey much meaning until and unless expressed in relative to others.
RATIO: Ratio means the relationship between two figures which is been expressed in arithmetic manner. Basically accounting means, 'The relationship between one accounting result and another, which is intended to provide a useful comparison.'
'A ratio is simply one number expressed in terms of another. Which is actually originated by calculating two digits into one other?
For example: 2:1 (expressed in proportion)
Ratio Analysis is a widely used tool of financial analysis. The company's financial situation, past performance, strength and weaknesses can be resolute by the efficient use of ratio. The term ratio refers to the numerical or quantitative relationship between two items or variables. These relationships can be expressed in fraction, percentage or proportion of numbers. (Jain, 2005)
CLUB MAHINDRA HOLIDAYS AND RESORTS LIMITED
Mahindra holidays and resorts India ltd. (MHRIL) is a hospitality industry which is been found in 1966 by Mr. Anand Mahindra. It is a company of Mahindra Group which is best known for its automobiles. The basic aim is to provide holidays on timeshare basis. The aim of this company to open more and more resorts in and around the world. The company's flagship brand 'Club Mahindra Holidays' currently owns 43 resorts in India as well as abroad. In which 38 resorts are there in India and 5 resorts in abroad. It also gives the benefits to guests by providing them the membership of the company. There is a minimum amount the guests need to deposit to get the membership benefits to avail the membership benefits. It eventually offers holiday activities ranging from indoor games to adventure sports, water sports, camping and treks.
As said by Mr.Manav Vijay, an analyst at Edelweiss Securities Ltd by , 'he membership fee the company retains the title of the property, it provides a holiday resorts services over a period of time to members.'
CLASIFICATION OF RATIOS:
Ratios can be classified into 4 main categories:
A) LIQUIDITY RATIOS:
'A liquidity ratio means accounting ratio which measures the ability of a borrower to meet their short term obligations.' (investopedia, 2013)
The ratios which deals the ability of a corporation to meet its short term Debt obligations. When the company falls these ratios helps the company to pay off its short term liabilities by measuring the ability of the company.
The liquidity ratios are an outcome of separating cash and other liquid assets by current liabilities and the short term borrowings. If the value is less than 1 than, it means the short term obligations are not fully covered. It means the value should be greater than 1. If the liquidity ratio is greater than 1 it means the company is in good financial strength and the company is less likely to fall into financial problems.
Generally, the higher will be the liquidity ratio the lesser will be the chances of the company to meet current liabilities (readyratios, 2013)
Ratios Formulae For 2013 For 2012
Working Capital Current Assets ' Current Liabilities 7489501017 - 3200432043 7044071185 ' 2988160381
= 4289068974 =4055910804
Current Ratio Current Assets/ Current Liabilities 7489501017/ 3200432043 7044071185/ 2988160381
=2.34 :1 =2.36:1
Quick Ratio Quick Assets/current liabilities 7489501017 ' 72308580
Operating Cash Flow Ratio Operating Cash flow/Current Liabilities 2187717656 / 3200432043 2187717656 / 3200432043
' Working Capital : In this the working capital of the Club Mahindra Company in year 2012 was 4289068974 which is increased in the year by 233158170 which means company has to pay more interest and increase in debtors means that the company is collecting less cash than its revenue. A positive change in working capital leads to a lower cash flow than net income.
' Current Ratio: The standard ratio set is 2:1 which means company should have twice the assets so as to satisfy the current liabilities.
In Year 2012 current ratio is 2.36:1 and which increase in the year to 2.34:1 which means assets of the company are more than 2 but liability is 1 which means more assets are available to satisfy liability. If current ratio is below, than company may have problems paying its billion times. But no such problems can be seen in this company. This shows that the company is making profit and the funds are not idle.
' Quick Ratio: A company with Quick ratio less than 1 cannot currently fully pay back its current liabilities. Hence, ratio of 1 is acceptable. In Year 2012 it is 2.34:1 while in 2013 it's 2.31:1 which is quite acceptable and company has such quick assets to pay its liabilities.
' Operating Cash flow Ratio: Operating cash flow is the ratio that gives analysis to its investors and indicates to generate cash from its sales. In my case, the revenue in 2012 was 5,738,298,030 and in 2013 were 6,585,371,424 which shows an increase by 14.76%. Further it also means that if the cash flow does not increase in the increase in sales than it might affect the following factors :
A. Change in the terms of sales. (as shown in the line above)
B. In- effective management f trade receivables.
And, if the trade doesn't meet the operating expenses that means it is not generating the adequate revenue which is not present in this case.
The higher the ratio, better it is for the company. In this case, in 2012 was 0.68 and in 2013 was same 0.68.Therefore, the company needs to increase its sales and or revenue.
B). SOLVENCY RATIOS: The solvency ratios help to find out that whether the company is able to meet its short term as well as long term liabilities. If the companies solvency ratio is low, than there is greater chances that it will default on its debt obligations. A solvency ratio measures the degree of debt that is used to finance operations of the company and indicate, in part its ability to meet long term financial obligations.
The investors are mostly interested in this ratio as they constantly prefer low risk over high risk while leading funds to any enterprise.
Ratios Formulae For 2013 For 2012
Debt Equity Ratio Long term Debt/Equity 148795150 / 6127921878 140583846 / 5633631615
Total Assets to Debt ratio Total Assets/Long term Debts 74895001017 / 148795150 7044071185 / 140583846
Proprietary Ratio Shareholder's funds/Total Assets 6127921878 / 7489501017 5633631815 / 7044071185
Operating cash flow to total liabilities OCF/Total Liabilities 2187717656 / 22432275393 2054088018 / 19811806612
' Debt Equity Ratio: The standard Debt Equity Ratio is 2:1. In Year 2012 it is 0.024:1 and in 2013 it is 0.024:1 which means that the firm has good long term financial policies and would be preferred by the lenders.
' Total Assets to Debt Ratio: It is the proportion of total assets of a company to its debt. It is also leverage ratio which defines the total amount of debt relative to assets. Thus, enables comparisons of leverage to be made across different companies. In Year 2012, it is 50.10:1 while it increased in 2013 to 50.33:1. The higher the ratio larger the safety margin. Which shows that the company has a big safety margin and is in a safe position?
' Proprietary Ratio: In Year 2012 it is 0.79:1 while it increases to 0.81:1 in 2013. High ratio indicates a strong financial position of the company and greater security for creditors. Low ratio indicates that the company is already depending on debts for its operation which shows that the firm is less dependent on external sources and is financially sound as compared to the previous year.
' Operating cash flow to total liabilities: In Year 2012 the ratio is 0.10:1 which is same as 2013 0.10:1. The ratio for both the year remained constant but operating cash flow and current liabilities both increased for approximately same value, which was the reason that the ratio being constant.
C). ACTIVITY RATIOS: 'The ratios that highlight the effectiveness in using the available resources are called Activity Ratios.'
(Iyenger, Hotel Finance, 2008)
It calculated the efficiency with which a firm uses funds at his clearance. The number of times the capital employed in rotating the business can be specified by this ratio. The higher the turnover ratios the better use of resources and this lead to higher profitability in the business. Activity ratios show how rapidly the corporation's assets can be twisted in to cash or sales. The quicker an organization is able to renovate its assets into cash or sales, the more effective it goes. (wisegeek 2013)
Ratios Formulae For 2013 For 2012
Stock turnover ratio Cost of goods sold/Average stock 232956720 / 72308580 146735368 / 41913032
3.22 times 3.50 times
Working Capital turnover COGS/Net working capital 232956720 / 4289068974
146735368 / 4055910804
0.054 times 0.036 times
Fixed Assets turnover Net Sales/Net Fixed assets 6944450388 / 8747651647 5781134718 / 7240926280
0.79 times 0.79 times
' Stock Turnover: Stock turnover ratio in year 2012 is 3.50 times while in year 2013 is 3.22 times. A low ratio may leads to overstocking or obsolesces in the marketing effort. High ratio may indicate in-adequate inventory levels, which may lead to a loss in business as stock is low.
' Working Capital Turnover: In year 2012 it is 0.036 times while it increased to 0.054 times in year 2013. It is generally considered high when it is greater than turnover ratios od similar companies in the same industry. High ratio can potentially give a competitive edge. It indicates working capital more times per year. This shows that as compared to the previous year the resources and the working capital are being used efficiently.
' Fixed Assets Turnover: In year 2012 it is 0.79 times while it remains same in year 2013 . Higher ratio shows that company has been more effective in using fixed assets such as investment to generate revenues.
D). PROFITABILTY RATIOS: A ratios that define the capacity of a company to produce earnings in evaluation to its costs and expenses over a certain period of time.
The establishment with a higher profitability ratio than their contenders is considered to be doing well. These ratios vary from industry to industry, so comparison should be done with other companies which are in the same field. When comparing, the company with the higher profit margin is able to sell at lower expenses or higher margins. (boundless)
Common examples of profitability ratios are Gross profit margin, net profit margin, operating profit and operating profit margin. These ratios indicated that how well the company is generating profits relative to a certain length.
It offers different measures to generate profit to the company. It gives the overall account of the efficiency of the form. There are mainly four major types of ratios which are as follows:
Ratios Formulae For 2013 For 2012
Gross Profit Ratio Gross Profit/Net Sales x 100 6944450388-232956720 ?? 100
5781134718 ' 146735368 ?? 100
96.64 % 97.46%
Net Profit Ratio Net Profit/Net Sales x 100 909207855 ?? 100
6944450388 1023324635 ?? 100
Operating Profit Ratio Operating profit/Net Sales x 100 1404140264 ?? 100
1426111124 ?? 100 5781134718
Operating Ratio COGS+ Operating Expenses / Net Sales x 100 232956720 + 4108478976 ?? 100 6944450388
146735358 + 3497961734 ?? 100 5781134718
' Gross profit Ratio: In year 2012 it is 97.46% and in year 2013 it is 96.64%. It is preferred at higher side so as to satisfy investors and other customers to invest in such company. A consistent improvement in GPR indicated continuous improvements.
' Net Profit Ratio: It measures the profitability of an organization. It also reveals the remaining profit after all cost of production and administration. In year 2012 it is 17.70% while it decreased in year 2013 by 13.09%. High ratio indicates the efficient profit of the affairs of the business. This shows that the efficiency of the firm is going down as compared to the previous year.
' Operating profit Ratio: In year 2012 it is 24.66% and in year 2013 it is 20.21%. High OPR means that company has good control or that sales are increasing faster that cost which is optimal situation for the company.
' Operating Ratio: In Year 20122 the operating ratio was 63.04% and in year 2013 it decreases to 62.57% which means COGS, operating expenses and Net sales has increased but not in the same ratio due to which there is a slight change in current year ratio. Since the ratio has declined it is a good sign for the firm as lower ratio will result in more profit.
E). INVESTORS RATIOS:
Investor's ratio is not as important type of ratio, but else it is mentioned in the company for making the investors to understand that whether the company is earning profit or not. And, how much dividend the investors would be getting and knowing the future potential of investing.
Ratios Formulae For 2013 For 2012
ROCE PBIT/Capital employed 1404140264
ROA Net Profit/Total Assets x 100 909207855 x 100
7489501017 1023324635 x 100
ROE Net Profit/Shareholder Funds 909207855
' ROCE: In Year 2012 ROCE was 0.126:1 but in year 2013 ROCE was 0.107:1 this means that return on capital invested by the owner has been reduced. This might be because of the percent increase in return was less than the percent increase in capital employed.
' ROA: In 2012 ROA was 14.52:1 but in 2013 it has reduces to 12.13:1. This means that the profitability on assets employed in 2013 has been reduced. This might be because of the percent increase in assets employed was higher than percent increase in profitability.
' ROE: In 2012 ROE was 0.18:1 but in 2013 ROE was 0.14:1 after comparing this result is clear that the return on equity has reduced in 2013 as compared to 2012.
The ratio analysis of Club Mahindra Resorts company ltd. Shows that the tangible assets and the capital work are in progress. Basic earnings and the diluted earnings per share has been decreased from last year which means that the net profit generated is decreased due to changes in pricing of the products sold and produced. But, the company has generated more revenue from last year which directly shows that the company is in high profit comparing to the last year. In addition, the company might be coming with lot of upcoming projects which are to be completed in the upcoming financial years as one can see the asset has increased by 1,506,725,367.
As mentioned by the Director of Club Mahindra Resorts ltd, during the year, the company continued to move ahead with its strategy to achieve its growth objectives. The company added another 560 units to its inventory during 2012-2013 across 13 resorts ' two of which are at the international locations. After accounting for inventory discharged, the net addition during the year was 431 units ' representing a 21 per cent growth in inventory over the past year. In spite, of tough situation, the company performed credibility through the year.
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