International Research Journal of Management Science & Technology ISSN 2250 1959(0nline) 2348 9367 (Print) A REFEREED JOURNAL OF Shri Param Hans Education & Research Foundation Trust www.irjmst.com www.sphert.org Published by isara
Analysis- An effective interpretation of Financial Statements R. GAYATHIRI **G. KAVIYA Assistant Professor **MAITHREE VARADARAJAN Department of B.Com PA III B.Com PA Students PSGR Krishnammal College for Women, Department of B.Com PA Coimbatore-641004 PSGR Krishnammal College for Women E-mail: gayarathinavelu@gmail.com Coimbatore-641004 Mobile no: 7305012200 Abstract: Financial statements aim at providing financial information about a business enterprise to meet the information needs of the decision makers. Financial statements prepared by a business enterprise in the corporate sector are published and are available to the decision makers. These statements provide financial data, which require analysis, comparison and interpretation for taking decision by the external as well as internal users of accounting information. And analysis is indispensable part of interpretation of results revealed by the financial statements. It provides users with crucial financial information and points out the areas, which require their attention. Keyword: Analysis, Liquidity, Solvency, Profitability, and Activity Turnover i. Introduction A ratio analysis is a quantitative analysis of information contained in a company's financial statements. analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency. The numerical relationships throw light on many latent aspects of the business and provide better understanding of the efficiency with which the business is conducted. ii. About the Airline The study in this paper is confined to the two major lines Jet Airways and SpiceJet. Jet Airways Jet Airways was incorporated on 1 st April 1992 and commenced on 5 th May 1993.It is a major Indian international full-service airline based in Mumbai. In October 2017, it was the second-largest airline in India after Indigo with a 17.8% passenger market share. It operates about 300 flights daily to 68 destinations worldwide from its different hubs. The quality of their product has always set it apart from competition. The company at present has 21 codeshare partners and 32 frequent flier partners. The airline company continues to focus on costs reduction and has been able to reduce cost compared to last year. Despite extant challenges, jet airways recorded its second full year of profitability. http://www.irjmst.com Page 108
SpiceJet SpiceJet is one of the most efficient airlines operating in the fastest growing aviation market in the world having excelled on all operational parameters. It is a low-cost airline headquartered in Gurgaon. It is the third largest airline in the country by number of domestic passengers carried, with a market share of 13.3% as of October 2017.Flying 50,200 passengers through its 380 flights across 52 destinations (45 domestic and 7 international) on a daily basis is one of India s most preferred low-cost airlines. Delivering highest standards in customer value at affordable fares, it facilitates in fulfilling flying dreams of million thereby stimulating and sustaining passenger growths. SpiceJet s remarkable turnaround story has become a global bestseller that has made the aviation world sit up and take notice. The airline was on the verge of shutting down in December 2014, having cancelled hundreds of flights, when the new management took over. iii. About the topic Analysis: A ratio analysis is a quantitative analysis of information contained in a company's financial statements. analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency. Types of Analysis Liquidity Solvency Activity Profitability They measure the firms ability to meet current obligation. These ratio shows the proportion of debt and equity in financing firms asset. They reflect the firms efficiency in utilizing the assets. These ratios measure overall performance and effectiveness of the firm. Table 1: List of Formulas used Liquidity ratio Current ratio Quick ratio Profitability ratio Current assets/current liabilities Formula Used (Current assets - inventory)/ Current liabilities http://www.irjmst.com Page 109
Operating profit ratio Net profit margin ratio Return on capital employed Return on equity Activity Turnover Profit/Loss Before Exceptional, Extraordinary Items And Tax /Revenue From Operations [Net] Profit/Loss After Tax And Before Extraordinary Items /Revenue From Operations [Net] Profit/Loss Before Exceptional, Extraordinary Items And Tax/ (Total assets-current liabilities) Profit/Loss Before Exceptional, Extraordinary Items And Tax/ Total Share Capital Inventory turnover ratio Revenue From Operations [Net]/Inventory Equity turnover ratio Solvency ratio Return on invested capital Debt equity ratio Revenue From Operations [Net]/ Average Share holders Equity Profit/Loss For The Period/ (Total Non-Current Liabilities +Share holders Equity) (Long Term Borrowings+Short Term Borrowings)/ Share holders Equity iv. Objectives of the Study To compute various ratios of the two airlines. To compare the ratios with each other. To analyze the current financial position of the airlines as per the ratios computed. v. Research Methodology a. Research Type It is an analytical research based on the secondary data. It investigates the financial figures of the concerns using theoretical framework of ratio analysis. The period of study is five years. s have been comparatively analyzed and computed form the financial statements of 5 years i.e. 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17. b. Analysis tools and techniques Figures are analyzed using basic formulas of various ratios and it is interpreted using various kinds of charts and graphs. vi. Limitations The study is confined to the details provided in the annual reports and financial statement of the companies. But sometimes, the contents of the financial statements are manipulated by window dressing. If so, the analysis of financial statements results in misleading or meaningless. The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or inflation/deflation. http://www.irjmst.com Page 110
vii. Data Analysis & Interpretation Liquidity Table 2:Table showing Liquidity of SpiceJet and Jet Airways Liquidity Current ratio Quick 2012-13 2013-14 2014-15 2015-16 2016-17 SpiceJet 0.43 0.18 0.25 0.32 0.33 Jet Airways 0.35 0.3 0.37 0.42 0.46 SpiceJet 0.4 0.16 0.23 0.29 0.3 Jet Airways 0.28 0.24 0.3 0.35 0.42 Source: Annual Reports of the respective concerns for the respective years. Interpretation: a. Current ratio: The current ratio is a liquidity ratio that measures a company's ability to pay shortterm and long-term obligations. The ideal current ratio for any company is 2:1 but from the above Table 2, it could be stated that the current ratio of both the airlines is low (both SpiceJet and Jet Airways had the lowest in the year 2014 as 0.18 and 0.3 respectively). As the airlines have a bare minimum level of inventory and cash. Airlines have sufficient cash flow from advance booking of tickets, which also includes government taxes and airport charges. This cash remains with the company for quiet a few days and this can be used to meet the day-to-day expenses, instead of borrowing money from banks. Thus, current liabilities remain higher than current assets because the airline is holding other peoples money. The other reason of current ratio being less 1 is substantial amount of long-term debt and cost of aircraft lease and thus, the high interest amount paid. b. Quick : The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as the acid-test ratio. An acceptable quick ratio is 1:1, but from above Table 1 it can be concluded that ratio is much less than the ideal value. During the selected five years, both the airlines had the lowest in 2014 as 0.16 (SpiceJet) and 0.24 (Jet Airways). The reason for lower value of liquid ratio is the same as of current ratio. The companies maintain a minimum level of inventory. Thus the companies are little depending on inventory. Solvency http://www.irjmst.com Page 111
Table 3:Table showing Solvency of SpiceJet and JetAirways Solvency Return On Invested Capital Debt- Equity 2012-13 2013-14 2014-15 2015-16 2016-17 SpiceJet -0.1-0.52-0.36 0.22 0.25 Jet Airways -0.07-0.51-0.22 0.16 0.05 SpiceJet 3.46 2.83 2.37 1.72 1.72 Jet Airways 102.18 75.58 90.24 81.26 63.59 Source: Annual Reports of the respective concerns for the respective years. Interpretation: a. Return On Invested Capital: It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into profits. The table 3 presents the figure which indicates that SpiceJet as yielding better on the investment when compared to JetAirways. Returns of 0.25% in 2017 means that the company, SpiceJet is able generate Rs. 0.25 on every rupee invested in it whereas JetAirways has generated only 0.05 in the same year. b. Debt-Equity : The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. The Table 3 projects the decreasing trend (from 3.46 in the year 2013 to 1.72 in the year 2017) of debt-equity ratio in SpiceJet thus, it could be concluded that the firm is able to generate sufficient cash flow from its core operation and its reliance on external debt is limited. And at the same time, the sudden increase in the ratio in the year 2015 (from 4.74 to 5.3) of Jet Airways is due to the aggressive expansion policy but the company has reduced it in the next year. Thus, the company is improving its position, i.e., trying to generate sufficient funds. A lower ratio is generally considered better as it shows greater asset coverage of liabilities with own capital. And companies with higher ratio are considered more risky to creditors and investors. Activity Turnover Table 4:Table Showing Activity Turnover of both the SpiceJet and Jet Airways Activity Turnover 2012-13 2013-14 2014-15 2015-16 2016-17 Inventory Turnover SpiceJet 121.65 138.18 114.64 75.44 70.14 Jet Airways 20.19 19.9 19.46 18.63 39.59 http://www.irjmst.com Page 112
Equity Turnover SpiceJet 121.65 138.18 114.64 75.44 70.14 Jet Airways 20.19 19.9 19.46 18.63 39.59 Source: Annual Reports of the respective concerns for the respective years. Interpretation: a. Inventory Turnover : The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is turned or sold during a period. High inventory levels are usually unhealthy because they represent an investment with a rate of return of zero. Table 4 depicts that SpiceJet has been improving its state from the year 2014 to till date (from 138.18 to 70.14). It indicates better liquidity. In case of Jet Airways low turnover rates (during the year 2013 to 2017) indicates poor liquidity, possible overstocking and obsolesce. b. Equity Turnover : Equity turnover is a ratio that measures the proportion of a company's sales to its stockholders' equity. The intent of the measurement is to determine the efficiency with which management is using equity to generate revenue. From the Table 4 it could be stated that Spicejet has an equity intensive capital structure (the lowest was in the year 2015 as 9.12) and this has resulted in low equity turnover but the company gains highly as it doesn t need to pay interest for debt. And for Jet Airways it could be stated that they have skew the equity by increasing the debt percentage (highest of the period is in the year 2017 as 3attract shareholders. This move is very risky as by doing this, the organization is taking the burden of too much debt and eventually they have to pay the debt with interest. Profitability Profitability Operating Profit Net Profit Return on Capital Employed Return On Equity Table 5: Table showing Profitability of SpiceJet and Jet Airways 2012-13 2013-14 2014-15 2015-16 2016-17 SpiceJet -0.04-0.16-0.14 0.07 0.06 Jet Airways -0.04-0.18-0.06 0.06 0.02 SpiceJet -0.03-0.16-0.13 0.08 0.07 Jet Airways -0.03-0.23-0.1 0.06 0.02 SpiceJet -0.19-2.69-11.64 0.58 0.75 Jet Airways -0.08-0.6-0.27 0.25 0.09 SpiceJet -0.39-1.87-1.15 0.68 0.72 Jet Airways -5.62-32.29-15.97 10.33 3.44 Source: Annual Reports of the respective concerns for the respective years. http://www.irjmst.com Page 113
Interpretation: a. Operating Profit : The operating profit ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is also expressed as a percentage of sales and then shows the efficiency of a company controlling the costs and expenses associated with business operations. From the Table 5 it could be interpreted that the companies had suffered losses during the period from 2013 to 2015. And the companies have yielded very low profits from their operation. This is due to high fixed cost and also operational cost. SpiceJet and Jet Airways had shown a positive after three consecutive years of losses as 0.07 and 0.06 respectively. The figures show that the profit has further gone down in the year 2017. b. Net Profit : Net profit is the ratio of net profits to revenues for a company or business segment. Typically expressed how much of each dollar collected by a company as revenue translates into profit. From the above table 5 it could be concluded that Spice Jet is more profitable than Jet Airways during the entire period of study (2013to 2017). SpiceJet and Jet Airways had earn the highest profit in the year 2016 as 0.08 and 0.06 respectively As Net margin ratio includes all the factors that influence profitability whether under management control or not, i.e., it includes fixed cost also. The higher the ratio, the more effective a company is at cost control. c. Return on Capital Employed: Return on Capital Employed indicates how much the company has yielded on the capital employed (Total Assets- Current Liability). From the Table 5 sited above it could be conclude that spice jet had the best Return on Capital Employed in 2017 (as 0.75) and jet airways had the best of it in 2016 (as 0.25). But it should be noted that the ratios are unfavorable i.e., it means that significantly less amount of profits are generated by each rupee of capital employed. d. Return On Equity: The return on equity ratio shows how much profit each dollar of common stockholders' equity generates. From the above Table 5 it could be stated that, Jet Airways has been efficient to employ s investors fund to generate income on the new investment during the period 2015 to 2017 (10.33 and 3.440) unlike the past three years. And in the case of Spicejet, low Return on Equity suggests that, the company has done a poor job in translating the capital investment into profits during the period 2016 and 2017 (0.68 and 0.72). viii. Key findings of the study Analysis of the current financial position http://www.irjmst.com Page 114
From the above study it could be conclude that the firms have improved their management plans to ensure efficiency and effectiveness in their operational activities and also in their financial reports. The results have been positive for certain aspects as their position improved and for the rest it is still below the expectation. As a final mark on their position it could be stated that it has improved ix. Suggestions & Conclusion a. analysis plays a vital role in a business planning process and figuring out the strength, weaknesses, and opportunities of a business enterprise. b. analysis indicates the firm has improved its financial position but none of the ratios are reaching the ideal ratios necessary for enhancement of shareholder s wealth. Hence the firm should concentrate on enhancing the operating efficiency of the firm. References: Books Referred: Jet Airways Annual Report from the year 2012-13 to 2016-17 SpiceJet Annual Report from the year 2012-13 to 2016-17 R.S.N.Pillai., &Bagavathi.,(2010).Management Accounting. New Delhi:S.Chand Websites Referred https://www.wallstreetmojo.com/net-profit-margin-gross-operating/#net https://www.wallstreetmojo.com/category/investment-banking/ratio-analysis/ https://www.myaccountingcourse.com/financial-ratios/return-on-equity http://www.irjmst.com Page 115
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