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.