A STUDY ON RATIO ANALYSIS FOR DECISION MAKING

Abstract

This paper outlines a financial statement analysis for use in equity valuation. Standard profitability analysis is incorporated, and extended, and is complemented with an analysis of growth. The perspective is one of forecasting payoffs to equities. So financial statement analysis is presented first as a matter of pro forma analysis of the future, with forecasted ratios viewed as building blocks of forecasts of payoffs. The analysis of current financial statements is then seen as a matter of identifying current ratios as predictors of the future ratios that drive equity payoffs. The financial statement analysis is hierarchical, with ratios lower in the ordering identified as finer information about those higher up. To provide historical benchmarks for forecasting, typical values for ratios are documented for the periods, along with their cross-sectional variation and correlation. And, again with a view to forecasting, the time series behavior of many of the ratios is also described and their typical "long-run, steady-state" levels are documented.
In this paper, we compare ratio analysis with the data envelopment analysis approach. It is shown that using ratio analysis implies that a one multidimensional space is projected onto other subspaces many times. As a result, significant distortion of the performance assessment of units takes place. Our theoretical results are validated by computational experiments on the data taken from financial accounts.
Financial statements are used as a management tool primarily by company executives 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.
Mining industries are capital intensive; hence a lot of money is invested in it. So before investing in such companies one has to carefully study its financial condition and worthiness. Unfortunately very limited work has been done on analysis and interpretation of financial statements of Indian for mining companies. An attempt has been carried out in this project to analyze and interpret the financial statements of five coal and non- coal mining companies.