Financial
statements: The
statement which provides us the financial position of a Balance Sheet are
called “Finance Statements”, which includes – Trading Account (in case of
Manufacturing concerns), Profit & Loss Account, Balance Sheet, Cash Flow
Statement and Funds Flow Statement. The analysis of Balance Sheet is a process
of bringing down the difficult matter into a simple and easily understandable
one. To have a clear understanding of
the financial position of the Business concern, at least three years financial statements are
to be ascertained. They provide us
treasure of information. Balance Sheet of a business concern shows the strength
of the concern on a given date but not reveal the current state of affairs of
the concerns. Balance Sheet is having
certain limitations, because it does not disclose the critical factors, such as
Managerial Efficiency, Technical competence, Marketing capabilities and Competition
in the market.
Ratio means a comparison of two items which
are having cause and relationship.
Ratios can be expressed in percentage or in number of times. Depending upon the nature, the
ratios are broadly classified in to four categories viz., Liquidity Ratios,
Leverage Or Solvency Ratios, Activity
Ratios and Profitability Ratios.
1.
LIQUIDITY RATIOS: These Ratios helps to find out the ability of
the business concern to pay the short term liability of its liquidity. Any
adverse position in liquidity leads to sudden fall of the unit.
i) Current Ratio: Current Ratio denotes the capacity of the business concern to meet its current obligation out of the total value of the Current Assets. Current Ratio = Current Assets / Current Liabilities. Term Loan installments falling due for payment in next 12 months are to be taken as Term Liability for the purpose of calculation of Current Ratio /MPBF. Inter-corporate deposits are to be treated as Non-Current Assets. Ideal Current Ratio is 2:1. Acceptable Ratio as per our Loan Policy guidelines is 1.33:1 for the limits enjoying above `6.00 crores and 1.15:1 for the business concerns availing limits of below `6.00 crores. Any deviation below the required ratio requires ratification of Higher Authority.
