Ratio Analysis

Financial Analysis
1.1 GENERAL INTRODUCTION
Finance is the life-blood of business. It is rightly termed as the

science of money. Finance is very essential for the smooth running of the
business. Finance controls the policies, activities and decision of every
business.
Definition:
“Finance is that business activity which is concerned with the

organization and conversation of capital funds in meeting financial needs
and overall objectives of a business enterprise.”- Wheeler
Financial management is that managerial activity which is

concerned with the planning and controlling of a firm financial reserve.
Financial management as an academic discipline has undergone
fundamental changes as regards its scope and coverage. In the early years
of its evolution it was treated synonymously with the raising of funds. In
the current literature pertaining to this growing academic discipline, a
broader scope so as to include in addition to procurement of funds,
efficient use of resources is universally recognized.
Financial analysis can be defined as a study of relationship

between many factors as disclosed by the statement and the study of the
trend of these factors.
Intech Institute of Business Management, Bangalore. 1

Financial Analysis
The objective of financial analysis is the pinpointing of strength

and weakness of a business undertaking by regrouping and analyzing of
figures obtained from financial statement and balance sheet by the tools
and techniques of management accounting. Financial analysis is as the
final step of accounting that result in the presentation of final and the
exact data that helps the business managers, creditors and investors.
Based on this reasoning, this project is an attempt to analyze the

financial performance of HDFC BANK LIMITED.
In the financial analysis a ratio is used as an index for evaluating

the financial position and performance of the firm. The absolute
accounting figures reported in the financial statement do not provide a
meaningful understanding of the performance and the financial position
of a firm. But the accounting figures convey the meaning when it is
related to some other relation information for example Rs.5 crores net
profit may look impressive, but the firms performance can be said good
or bad only when net profit figures is related to the firm’s investment.
Accounting ratios are relationships expressed in the mathematical

terms between figures that are connected with each other in the some
manner .the information contained in the balance sheet, profit and loss
account or the income statements are used by the management, creditors
investors and others to form judgment about the operating performance
and the financial strengths and weaknesses of the firm if we properly
analysis the information reported in the statement.

Financial Analysis
1.2 STATEMENT OF THE PROBLEM
A financial statement contains sales, revenue, tax, expenses, etc, on

one side and the other side shows the liabilities and assets position in the
year.
There are various reasons, which contribute to profits such as

operational costs, marketing efficiencies, reduced interests and many
more.
The essence of the financial soundness of a company lies in

balancing its goals, commercial strategy and resultant financial needs
.The Company should have financial needs. The company should have
financial capability and flexibility to pursue its commercial strategy.
Ratio analysis is a very useful analytical technique to raise

pertinent questions on a number of managerial issues. It provides bases or
clues to investigate such issues in detail. While assessing the financial
health of a company, ratio analysis answers to questions relating to the
companies profitability, asset utilization, and liquidity and financial
capabilities of the company.

Financial Analysis
The statement of the problem can be generalized here as:
 Analysis of the relationship between liabilities and assets.
 Analysis of the liquidity and profitability of the current assets and

current liabilities.
 Detection of the reasons for the variability of profits.
 Analysis of various components of working capital such as cash,

marketable securities, inventories and receivables.
 Find out the business fluctuations, technical developments, etc., on

financial performance.
The study takes into consideration the external analyst point of

view and with the help of the past and latest financial statements,
financial position will tried to be analyzed impartially.

Financial Analysis
1.3 OBJECTIVES OF THE STUDY
Based on the information furnished in the financial statements,

the various objectives of the ratio analysis are:
 To show the firm’s relative strength and weakness.
 To determine the financial condition and financial performance of

the firm.
 To involve comparison for a useful interpretation of the financial

statements.
 To find out the solution to the unfavorable financial conditions and

financial performance.
 To help to take in suitable corrective measures when the firm’s

financial condition and performance are unfavorable to the firm
when compared to other firms in the same industry.
With the help of analysis, analysts can determine the following:

 The ability of the firm to meet its current obligations.
 The efficiency with which the firm is utilizing its various assets in
generalizing sales.
 The overall operating efficiency and performance of the firm.

Financial Analysis
1.4 NEED OF THE STUDY
Any company would like to know its position against its

competitors. The ultimate performance indicator of any company is the
financial parameters because invariably all costs efficiencies; activities
and solvency position of the company will be reflected in the financial
mirror.
The following are stated as the need for the study:
 To understand the volume of the profit and its reasonableness.
 To understand the movement of profit over a period of time.
 To know the reason for the variation in the profit.
 To know the present standing of the company.

Financial Analysis
1.5 SCOPE OF THE STUDY
Ratio analysis is perhaps the first financial tools developed to

analyze and interpret the financial statement and is still used widely for
this purpose. Financial performance analysis is a well-researched area and
innumerable studies have proved the utility and usefulness of this
analytical technique. This research seeks to investigate and constructively
contribute to help:
 The bank in finding out the gray areas for improvement in

performance
 The bank to understand its own position over time
 The managers to understand the contribution to the performance of

the bank
 The present and potential investors outside parties such as the

creditors, debtors, government and many more to get an idea of the
overall performance of the bank

Financial Analysis
1.6 RATIO ANALYSIS
Ratio analysis is one of the most powerful tools of financial

analysis. It is the process of establishing and interpreting various ratios
(quantitative relationship between figures &groups of figures). It is with
the help of ratios that the financial statements can be analyzed more
clearly and scientific decisions are made from such analysis.
Ratio analysis can be also defined as the yardstick that provides a

measure of relationship between two accounting figures. Ratio analysis of
financial statements stands for the process of determining and presenting
the relationship of items and group of items in the statement. Ratio
analysis can be used both in the trend or dynamic analysis and statistical
analysis.
Though financial analysis is subjected to certain limitations, it is

yet useful to the interested parties in the followings ways:
 Investment planning – Present and prospective investors are enabled

to judge the profitability of a concern by computing rate of return on
investment, earnings per share. After a careful study of the earning
capacity of concern that may adopt the extrapolation technique for
studying the trend of dividend and later decide to invest their savings
in the most profitable channel of investment.
 Detection of unfavorable factors – If, on the face of the financial

statements it is possible to find out financial unsoundness, detailed

Financial Analysis
analysis of the statements enable the analyst to separate out the factors
responsible for the same so that corrective action may be taken.
 Forecasting – Besides assisting the users in the making the decisions

appropriate to their objectives, financial analysis is also of immense
significance in making a forecast of the profitability and financial
soundness of an organization.
1.6.1 SIGNIFICANCE OF RATIO ANALYSIS
Ratio analysis is an important technique of analyzing the financial

statement and it helps the analyst to make quantitative judgment with
regard to concern’s financial position and performance.
The followings are the main points of importance of ratio analysis:
(a) Managerial uses of ratio analysis:
 Helps in decision-making
 Helps in financial forecasting and planning
 Helps in communication
 Helps in co-coordinating
 Helps in control

Financial Analysis
(b) Utility to shareholders/investors:
An investor in the bank will like to access the financial position of

the concern where he is going to invest. His first interest will be the
security of his investment and then a return in the form of dividend or
interest. For this purpose he will try to access the value of fixed assets.
Long-term solvency ratios will help him in accessing financial position of
the concern.
Profitability ratios, on the other hand, will be useful to determine

the direction of change and reflects whether the bank’s performance
and financial position has improved, deteriorated or remained
constant over a period of time. But while interpretation of ratios from
comparison over time, one has to be careful about the changes, if any,
in the firm’s policies and accounting policies.
(c) Projected ratios:
Ratios can also be calculated for future standards based upon the
projected or performance financial statement. These future ratios may be
taken as standards for comparisons and the ratios calculated on actual
financial statements can be compared with the standard ratios to find out
variances, if any, such variances help in interpreting and taking corrective
action for improvement in future.

Financial Analysis
(d) Inter-firm comparisons:
Ratios of one firm can also be compared with the ratios of some
other selected firms in the same industry at the same point of time. This
kind of comparison helps in evaluating relative financial position and
performance of the firm.

Financial Analysis
1.7 LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial

management. Though ratios are simple to calculate and easy to
understand, they suffer from some serious limitations:
Limited use of a single ratio:
A single ratio, usually, does not convey much of a sense. To make a

better interpretation a number of ratios have to be calculated which is
likely to confuse the analyst than help him in making any meaningful
conclusion.
Lack of adequate standards:
There are no well-accepted standards or rules of thumb for all ratios,

which can be accepted as norms. It renders interpretation of the ratios
difficult.
Inherent limitation of accounting:
Like financial statements, ratios also suffer from the inherent

weakness of accounting records such as theirs historical nature.
Window Dressing:
Financial statements can easily be window dressed to present a
better picture of its financial and profitability position to outsiders.

Financial Analysis
Hence, one has to be very careful in making a decision from ratios,

calculated from such financial statements. But it may be very difficult for
an outsider to know about the window dressing made from a firm.
Personal Bias:
Ratios are only means of financial analysis and not an end of itself.
Ratios have to be interpreted and different people may interpret the same
ratio in different ways.
Incomparable:
Not only industries differ in their nature but also the firms of the
similar business widely differ in their size and accounting procedures, etc.
it makes comparison of ratios difficult and misleading. Moreover
comparisons are difficult due to differences in definitions of various
financial terms used in the ratio analysis.
Absolute Figures Distortive:
Ratios devoid of absolute figures may prove distortive, as ratio

analysis is primarily a quantitative analysis and not a qualitative analysis.
Price Level Changes:
While making ratio analysis, no consideration is made to the

changes in price levels and this makes the interpretation of ratios invalid.

Financial Analysis
2.1 DESCRIPTION OF RESEARCH DESIGN
Research design
Research design means a search of facts, answers to question and

solution to the problems. It is a prospective investigation. Research is a
systematic logical study of an issue or problem through scientific method.
It is a systematic and objective analysis and recording of controlled
observation that may lead to the development of generalization,
principles, resulting in prediction and possibly ultimate control of events.
Research design is the arrangement of conditions for the collection

and analysis of data in manner that aims to combine relevance to the
research purpose with relevance to economy. There are various designs,
which are descriptive and helpful for analytical research.
In brief a research design contains
 A clear statement of the research problem.
 A specification of data required.
 Procedure and techniques to be adopted for data collection.
 A method of processing and analysis of data.

Financial Analysis
Research design used in the specific study includes the following:

 Identifying the statement of the problem.
 Collection of the company’s specific literature i.e., annual reports

for the study period and the profile of the company.
 Scanning through standard books to understand the theory behind

the financial performance evaluation.
 Collection of information from various journals to understand the

industrial background of the study
 Decision regarding study period in this case it was decided to be 4

years i.e., from 2003-2006.
 Identification of financial ratios likely to reflect the capital

adequacy, resources deployed, assets quality, management quality,
earning quality and liquidity of the organization. In this case it was
decided to be:
1. Profitability Ratio
2. Liquidity Ratio
3. Activity Ratio
 Calculation of the above ratios over the study period and analyzing
it.
 Forwarding certain recommendation and conclusion to the bank.

Financial Analysis
2.2 METHODOLOGIES ASSUMPTIONS
 Definitions used are universal.
 Selected study period is sufficient.
 Selected financial ratio reflects the financial performance of the

bank.
 Ultimate performance evaluation of the bank is shown in its

financial assets.

Financial Analysis
2.3 SOURCES OF DATA
Data is defined as group of non-random symbols in the form of

text, image, or voice representing quantities, actions as objects. Data is
processed into a form that is meaningful to the recipient and is of real and
perceived value in the current or prospective actions or decisions of the
recipient.
Data are mainly classified into two groups:
 Primary data
 Secondary data
Primary data
An investigator originally collects the data or agency for the first

time for any statistical investigation and used by them in the statistical
analysis are termed as primary data.
Secondary data
The data published or unpublished, which have already been

collected and processed by some agencies for their statistical work, are
termed as secondary data as far as second agency is concerned. The
second agency if and when it publishes and files such data, it becomes
secondary data source to any one who later uses the data.

Financial Analysis
This is related to collect the required information about the study.

My source of information is the data available with the bank by on going
through the annual reports.
The study basically relies on secondary data supplied by the bank.

The primary data used for this study consist of informal discussion,
interviews with the deputy manager of the bank.

Financial Analysis
2.4 REVIEW OF LITERATURE
For the purpose of this project information collected is from the

primer data, which was obtained from the field to make the research work
more meaningful. The other information please, collected from different
sources, which are as follows:
 Annual reports of the company (year 2003-2004, 2004-2005,2005-

2006).]
Various theoretical books are:
Financial management (3rd edition) - Jain and Khan
Financial management (7th edition) - IM Pandey
Financial accounting (4th edition) - B.S Raman
Financial management (4th edition) -Prasannachandra

Financial Analysis
2.5 DATA PROCESSING AND ANALYSIS PLAN
The data collected from the various source have to be processed

and analyzed systematically.
These include:
 Selection of the study for the bank
 Identification of the financial ratios likely to reflect the financial
 Performance of the organization
 Application of ratio analysis for the period of the study
 Calculation of Liquidity ratio
 Calculation of activity ratios
 Calculation of Leverages
 Compilation and tabulation of the above for the company and the
study
 Studying of ratio analysis over the study period.

Financial Analysis
2.6 EXPECTED CONTRIBUTION OF THE STUDY
Financial analysis is a well-scrutinized area and contributes

constructively for the benefit of the interested internal users of the study
i.e., the employees and managers of the organization and also the external
users of the study i.e., the shareholders, customers, potential investors,
government and researchers. Overall, It shows the financial performance
of the organization.

Financial Analysis
2.7 AN OVERVIEW OF THE REPORT
The overview of the report proceeds as below:
Chapter - 1: Introduction to the study:
This chapter gives us a general introduction to the study

undertaken. It talks about the problem for which the project has been
taken; the definitions of the study; need, objective and the scope of the
study conducted.
Chapter – 2: Research methodology of the study:
This chapter briefly describes the way in which the study is carried
out. It provides information regarding the specific research design
followed for the study, sources of data, data processing and analysis plan
of the study, expected contribution of the study and the limitations of the
study.
Chapter – 3: Background of the study:
This chapter throws light on the theoretical background of the

study conducted, i.e., financial analysis (ratio analysis). It provides the
theory aspect relating to the various ratios and their definitions. It briefs
about the origin, development and the present status of the exchange
sector.

Financial Analysis
Chapter – 4: Profile of the organization:
This chapter views the origin, growth and the present status of the
organization, i.e., HDFC BANK. It also covers the functional
departments, its organizations structure, its objectives and its future
prospects.
Chapter – 5:Data analysis and interpretation:
In this chapter all calculations pertaining to the study are calculated

and interpreted. Calculations refer to the ratios calculated in the study.
The trends of the ratios are also projected and interpreted. As it is said
that one picture is worth 1000 words, graphs have also been provided foe
better understanding.
Chapter – 6: Conclusions and Suggestions:
This is the final chapter of the study with the conclusions of the
overall study along with the suggestions pertaining to the areas of
improvement.

Financial Analysis
3.1 FINANCIAL STATEMENTS
An organization communicates its financial information to the

users through financial statements and reports. Financial statements
contain summarized information of the organization’s financial affairs,
organized systematically. These statements comprise the income
statements or profit and loss account and the position statement or the
balance sheet.
To give a full view of the financial affairs of the undertaking it is

also necessary to include a statement of retained earnings, a statement of
changes in the financial position and a few schedules such as schedule of
fixed assets and schedule of debtors.
 Income Statement – the profit and loss account sets out income as
well as expenses of the same period and after matching the two, the
difference being the net profit or net loss, is shown as the
difference between the two sides of the account. Thus, the earning
capacity and the potential of an organization are reflected by its
profit and loss account.
 Position Statement – otherwise know as the balance sheet displays

the total resources of a business and the owners and creditor’s
equity in these resources. It indicates a statement of affair of a
business at a particular moment of time and thus it is static in
nature.

Financial Analysis
 Statement of Retained Earning – also known, as the profit and

loss appropriation account, is generally a part of the profit and loss
account. It shows how the profit of the business for the accounting
period is appropriated towards reserve and dividend and how much
of the same is carried forwarded as retained earnings.
 Statement of Changes in Financial Position – also known as the

fund flow statement, summarizes the changes in assets, liabilities
and the owner’s equity between two balance sheet dates. Thus, it is
a statement of flows, i.e., it measures the changes that have been
taken place in the financial position of a firm between two balance
sheet dates. It summarizes the sources and uses of the funds
obtained.

Financial Analysis
CHART SHOWING ANATOMY OF FINANCIAL

STATEMENTS
FINANCIAL
STATEMENT
Position Statement Income Statements Statement of Changes in Statement of

Or Or Owner’s Equity changes changes in
Balance Sheet Profit & loss A/c in Retained Earnings Financial Position
Fund Flow Cash Flow

Statement Statement

Financial Analysis
3.2 FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial

strengths and weakness of the firm by properly establishing relationships
between the items of the balance sheet and profit and loss account. The
purpose of financial analysis is to disclose the information contained in
the financial statements so as to judge the profitability and financial
soundness of the organization.
The first task of the financial analyst is to select the information

relevant to the decision under consideration from the total information
contained in the financial statement.
Secondly, to arrange the information in a way to highlight the

significant relationships.
Finally, to interpret and draw inferences and conclusions. In brief,

financial analysis is the process of selection, relation and evaluation.

Financial Analysis
3.3 ANALYSES AND INTERPRETATION
Analysis of Financial statements is a process of scanning them

with a view to get the necessary information. Accordingly, there are a
large number of persons who are interested in the analysis of financial
statements. However, even with the accompanying schedules, the layman
does not understand the statements. Except an expert analyst, others
including the management cannot follow and digest the information
contained in the statements. Hence, the need for analysis.
Interpretation is drawing conclusions with regard to the nature of

the inter-relationship between figures analyzed.
It is necessary to note in the context, that analysis and interpretation

are complementary and one cannot be stressed or favored as against the
other. In fact, the very object of the analysis is to interpret the significant
relationship between figures, and there cannot be any interpretation
without first analyzing the data. Thus, analysis and interpretation go
hand in hand.

Financial Analysis
3.4 TYPES OF ANALYSIS
When we use the term financial analysis, we do distinguish

between horizontal analysis and vertical whether the analysis and vertical
analysis whether the analysis is for those external to the business or the
managerial personnel.
 Horizontal Analysis- also known as dynamic analysis portrays

figures for a number of years and change in these figures from the
figure of a particular year is chosen as the standard or the base
year. Changes from the figures of the base year, represented as
percentage, gives us a clear idea of the trend, during the year, i.e.
whether there is an increasing trend, decreasing trend or violent
fluctuations so that it is possible to analyze the reasons for the
same.
 Vertical Analysis- aims at making a static analysis of financial

statements for one year only. This method of analysis is useful in
studying the inter-relationship of different figures, as for instance,
the relationship of gross or net profit to total deposits and also for
inter-firm comparison.

Financial Analysis
3.5 TECHNIQUES OF FINANCIAL STATEMENT

ANALYSIS
A financial analyst analyzes the financial statements by selecting

the appropriate techniques according to the purpose of analysis.
Financial statements may be analyzed by means of any of the following
techniques.
 Comparative Statements
 Common-size Statements
 Trend Analysis
 Ratio Analysis
 Fund Flow Statements
 Cash Flow Statements
 Cost-Volume-Profit Analysis

Financial Analysis
Ratio Analysis
A ratio is defined as ‘the indicated quotient of two mathematical

expressions’ and as ‘the relationship between two quantitative terms
between figures which have a cause and effect relationship or which are
connected with each other in some manner or the other. A noticeable
point is that a ratio reflecting a quantitative relationship helps to perform
a qualitative judgment. Such is the nature of all financial ratios.
Ratio analysis is a widely used technique in financial analysis. It

is defined as systematic use of ratio to interpret the financial statements
so that the strengths and weaknesses of the organization, its historical
performance and current financial condition, can be determined.
Classification of Ratios
The use of ratio analysis is not confined to the financial manager

only. There are different parties interested in the ratio analysis for
knowing the financial position of the firm for different purpose. In view
of the various users of ratios, there are many types of ratios, which can be
calculated for the given information in the financial statements.
Following is the classification of ratios:

1. Liquidity Ratio
2. Leverage Ratio
3. Profitability Ratio
4. Activity Ratio

Financial Analysis
Liquidity Ratios
Liquidity refers to the ability of the concern to meet its current

obligations as and when they, become due. These ratios are calculated to
comment upon the short term paying capacity of the concern or the firm’s
ability to meet its current obligations. Much insight could be obtained
into the present cash solvency of the firm and its ability to remain solvent
in the event of emergent: i.e. the firm should ensure that it does not suffer
from any lack of liquidity and also that it is necessary to strike a proper
balance between high liquidity and lack of liquidity.
Leverage Ratios
The short-term creditors like the bankers and the suppliers of raw
materials are more concerned with the firm’s current debt paying ability.
On the other hand, long terms creditors like debenture holders, financial
institutions, etc, are more concerned with the firm’s long-term financial
position. To judge the long-term financial position of the firm, financial
leverage or capital structure ratio is used. The shareholders, debenture
holders and other long-termed creditors like financial institutions are
more interested in the long term financial position or long term solvency
of the firm. Leverage or solvency ratios are used for such an analysis.
These ratios are also used to analyze the capital structure of a company.
That is only these are also called capital-structure ratios. The term
solvency generally refers to the firm ability to pay the interest regularly
and repay the principal amount of debt on due date.

Financial Analysis
There are two aspects of long-term solvency of a firm. They are:
1. Ability to repay the principal amount of loan on the due date.

2. Regular payment of interest.
Accordingly, there are two types of leverage ratios. The first type
of leverage ratio is based on the relationship between owned-capital and
borrowed capital. These ratios are calculated from the balance items. The
second type of leverage ratio is coverage ratios. These are computed from
the profit and loss account.
Profitability ratio
Profit reflects the final result of the business operations. There is

two types of profitability ratios namely margin ratio and ratio on returns
rates. Profit margin ratios show the relation between sales and profits.
The ultimate aim of any business enterprise is to earn maximum

profit. Lord keens remarked, “Profit is the engine that drive the business
enterprise”, a firm should earn profit to survive and grow for a long
period of time. To the management profit is a measurement of efficiency
and control. To the owners it is to measure the worth of their investment.
To the creditors it is the margin of safety.
The management of the company should know how efficiently they

carry out business operation. In other words, the management of the
company is very much interested in the profitability of the company.

Financial Analysis
Beside management, creditors and owners are also interested in the

profitability of the co-creditors, as they want to get interest and
repayment of principal amount regularly. Owners want to get a
reasonable return on their investment.
The profitability ratio measures the ability of the firm to earn and
on sales, total assets and invested capital. Profitability ratios are generally
calculated either in relation to sales or in relation to investment. The
profitability ratios in relation to sales are gross profit ratio. Net profit
ratio, operating ratio, expenses ratio, and etc. the profitability ratios in
relation to investment are return on assets, return on investment, return on
equity capital.
The important profit margin ratios are gross profit margin and net
profit margin .the rate of return ratio reflects the relationship between rate
and profit and investment. The important rate of return ratio is return on
equity and return on investment, etc.
Activity ratio
Funds of the owners and creditors are invested in various assets to

generate sales and profits. The better the management of assets, the larger
the amount of sales. Activity ratios are employed to evaluate the
efficiency with which the firm’s managers utilize their assets.
These ratios are also called turnover ratio because they indicate the
speed with the assets are being converted or turn over into sales.

Financial Analysis
3.6 INDUSTRIAL BACKGROUND
Meaning of Bank
According to banking regulation act of 1949 defines the term

banking as accepting for the purpose of lending or investment of deposits
of money from the public, repay on demand or otherwise and withdraw
by cheques, draft or otherwise.
Kinds or types of bank: -
 Commercial bank
 Industrial bank
 Foreign exchange bank
 Co-operative bank
 Agricultural bank
 Land and development bank
 Saving bank
 Central bank
Commercial bank
These banks are also called as deposit banks as they accept deposits
from the public and lend them for short period. Commercial banks
encourage savings among general public and supply financial needs of
modern business. These banks are purely meant to finance traders and
others. Thus commercial bank accept deposits and lend to needy
customers from short terms.

Financial Analysis
Function of commercial banks
There are two functions namely primary and secondary function:
 Primary function includes acceptance of deposits, advancing of

loans.
 Secondary function includes agency function General, utility

services.
PRIMARY FUNCTIONS
Acceptance of deposits
Banks accept deposits from the public. People keep deposit of

money for safety, interest, easy to transfer cheques. So they accept
following types of deposit.
Current Account Deposits
These deposits constitute major portion of banks circulating

medium of exchange. Normally business people keep money in his
accounts as they can withdraw and issues cheques any number of times.
Banks does not pay any interest for these deposits.

Financial Analysis
Saving Bank Account Deposits
People with steady and monthly income save their excess earning
through this account. There are certain restrictions in the withdrawals.
Bank pays interest at a nominal rate. Small savings are encouraged in this
account.
Fixed Deposit Account
Money is accepted foe a fixed period it cannot be withdrawn before

expiry of fixed period. The interest rate is higher than other accounts. The
longer the period is the rate of interest.
Advancing of Loans
The deposits received are invested by advancing loans to needy

borrowers for higher rate of interest. This function is source of profit for
banks.
Overdrafts
This facility is extended to current account holders where they are

allowed to overdraw more than the credit standing in their account. Since
the facility is only for respectable and reliable customers, bank may not
insist on security. The security will also be taken in the form of fixed
deposits, NSC’S, shares, LIC policy and so on.

Financial Analysis
Cash Credit
Under this account bank gives loans to borrowers against certain

security. The entire loan amount will not be given at one time. It will
allow the borrower to withdraw from time to time depending on the
values of stocks debt in the go-down. The interest rate is charged on the
amount withdrawn.
Discounting of the Bills of Exchange
This is a popular type of lending. If the holder of an exchange of

bills needs money immediately he can get it discounted by the bank.
The bank pays the present price of bills after deducting commission
and when the bills mature the banks can receive the payment form the
party who accepted the bill.
Direct/Term Loans
Bank also gives loans to individuals or firms against collateral

security. The amount sanctioned will be credited to his requirements.
Normally, industrialists, agriculturists and others borrow these loans to
start industries and for his working capital.

Financial Analysis
SECONDARY FUNCTIONS
Agency function
Transfer of Funds
 Banks help customers in transferring of funds from one place to the
other through drafts and other instruments, collect cheques, bills,
salaries, pensions, dividends, and rents on behalf of customers
form other agencies.
 Undertake the payments of subscription, insurance, premiums,
rents, etc.
 Undertake to buy and sell securities, acts as representative for
customers in other banks or financial institutions, acts as a trustee,
execute and administrator to manage trust.
 Carry out deceased customers desire, signs, transfer forms and
documents.
 Banks give advice to customers on income tax matters.
General Utility Service
The banks will safe keep valuables and documents. It collects

credit information regarding customers, transfer of foreign exchange,
providing advisory services to industry, commerce, trade, project,
prospectus, order writing the issue of shares and debentures of
companies.

Financial Analysis
4.1 ORIGIN OF THE BANK
The Housing Development Finance Corporation Limited (HDFC)

was amongst the first to receive approval from the Reserve Bank of India
(RBI) to set up a bank in the private sector, as part of RBI’s liberalization
of the Indian Banking Industry. HDFC Bank was incorporated in August
1994 and commenced operation as a Commercial Bank in January 1995.
Currently, HDFC Bank has a nation spread over 110 cities across the
country and operates in three segments.
Wholesale banking, retail banking and treasury services.
The challenge:
Efficiently Deploy Critical Applications to Branch offices. The
sheer size and complexity of HDFC Bank’s operation made it difficult to
deploy new business-critical banking applications to hundreds of
branches swiftly and efficiently. Operating in an industry where speed,
efficiency and customer responsiveness are key performance metrics,
delays in application deployment mean a loss of productivity, and
spiraling maintenance and support costs.
“The deployment of the application across all access terminals was

of paramount importance”, explained Mr.S.V Surya Parsad, Assistance
Vice President, IT, HDFC Bank.
“However, our existing IT challenges at HDFC Bank also entailed

bringing a standardized system across the enterprise that would enable us
to achieve a broader spectrum of operational and strategic benefits”.

Financial Analysis
4.2 GROWTHS AND DEVELOPMENT OF THE BANK
It is well-recognized fact that the quality of financial management

is a key ingredient in determining the success of an organization. This is
even more relevant in a service industry like banks. At HDFC Bank, they
work for ultimate identity and success of their bank will reside, as it
always has, in the exceptional quality of their people and their
extraordinary effort.
The bank is only as strong as its infrastructure and its processes. At

HDFC Bank, right from inception, they have invested in a robust
technology platform, that’s is seamlessly integrated with centralized and
audited processes.
This has enabled them to expand rapidly and grow manifold while
maintaining acceptable service standards.
The bank’s well-documented procedures, high levels of automation,

intensive training of personnel and ongoing audit review had enabled then
to improve the reliability of their operational processes. ISO 9002
certifications of their cash management, retail centralized processing and
custody and depository operations are indicative of their achievements in
this regard.

Financial Analysis
4.3 FUNCTIONAL DEPARTMENTS OF BANK
The regulatory environment for the Indian banking sector was

characterized by greater liberalization in foreign ownership and related
areas, tightening of certain exposure norms and infrastructure
improvements in the market.
Some of the developments are:
 Ceiling of 5% of the total advances imposed on the capital markets

exposure (fund based and non-fund based) for all commercial
banks.
 Better systems for trading in government securities and settlement

in the foreign exchange and government securities markets
operationalised through the cleaning corporation of India ltd.
(CCIL) and the electronic negotiated dealing system (NDS).
In the growing competition faced by all the banks from various

money market and its effects bank deposits and advances, it has become
necessary to design, develop new instruments which would attack the
customers by satisfying the identical needs.
The product should be evolved after studying customer’s needs and

probable due to the same. To give as idea two such products or
instruments are described in the following paragraph.

Financial Analysis
In the context of products of banks in recent days bank marketing it

is essential to take a look at the following products, which attract the
middle class customers and also are profitable to the bank.
 Customers loan
 Credit card
HDFC bank offers customers the convenience of banking in a

manner of their choice. Customers can bank via their telephone, through
ATMS, on the Internet or even through their mobile phones.
The bank has several respective departments to measure its

performance to decide fulfillment of expectation, deposits that are sources
of funds, and break even analysis can be used in bank marketing for
deciding pricing of a new product all these are in practice for taking the
bank into profitable wings.
As a part of bank marketing it has been introduce two main

distribution channels:
 Branch network
 Specialized branches

4.4 ORGANIZATION STRUCTURE AND CHART
GROUP HEADS FOR RESPECTIVE DIVISIONS
REGIONAL BUSINESS MANAGER
STATE MANAGER
BRANCH MANAGER
SUPERVISOR / AUTHORIZER SUPERVISOR / AUTHORIZER
PERSONAL BANKERS TELLERS & RELATIONSHIP

MANAGERS
5.1 ANALYSES AND INTERPRETATION OF DATA
Financial Analysis:
Financial analysis is the analysis of financial statement of a

Company to assess its financial health and soundness of its management.
‘Financial Statement Analysis’ involves a study of the financial
statements of a company to ascertain its prevailing state of affairs and the
reasons thereof. Such a study would enable the public and the investors
to ascertain whether one company is more profitable than the other and
also to state the causes and factors that are probably responsible.
Ratio Analysis:
Ratio analysis is a technique of analysis and interpretation of

financial statements. It is the process of establishing and interpreting
various ratios for helping in making certain decisions.
A ratio indicates a quantitative relationship, which can be in term

used to make a judgment.
Types of Ratios:
 Short-term solvency ratio
 Long-term solvency ratio
 Profitability ratio
1. SHORT-TERM SOLVENCY RATIO
These are ratios, which measure the short-term solvency of

financial position of a firm. These ratios are calculated to
comment upon the short term paying capacity of a concern or
the firm ability to meet its current obligations.
The various ratios are:
 Current Ratio
 Absolute Liquid Ratio
 Cash Position Ratio

(a) Current Ratio
It may be defined as the relationship between the current assets and

current liabilities. The ratio is a measure of general Liquidity of the firm
for a short period of time. A ratio of 2 : 1 is considered satisfactory as a
rule of thumb
Current Assets (CA)

Current Ratio =
Current Liabilities (CL)
YEAR CURRENT CURRENT RATIO

ASSETS LIABILITIES
(Rupees in Lacs) (Rupees in Lacs)
2002-2003 5,908,62 4,864,33 1.21
2003-2004 7,914,81 6,361,54 1.24
2004-2005 9,905,41 9,336,85 1.06
2005-2006 13,863,24 13,125,72 1.05
Interpretation
The Current ratio form the above calculation is worth 2.21 in 2003.
it has been increased in 2004 to 1.24 and in the year 2005 it has decreased
to 1.06. In 2006, it further decreases to 1.05. The bank needs to maintain
more current assets in order to meet its short-term obligations. We can
conclude that the ratio is favorable as the current asset is slightly more
than the current liabilities.
GRAPH SHOWING CURRENT RATIO
1.24
1.21
1.25
1.2
1.15
Current 1.06 1.05
1.1
Ratio
1.05
0.95
2002-2003 2003-2004 2004-2005 2005-2006
No. Of years
(b) Absolute Liquid Ratio
It may be defined as the relationship between absolute Liquid

assets and current Liabilities. Absolute Liquid assets include cash in
hand and at bank and marketable securities or temporary investments.
A ratio of 1: 1 is considered to be good. Such a ratio will imply

that the firm has enough Liquid assets to meet all current Liabilities of the
firm.
Cash + Marketable Securities
Absolute Liquid Ratio =
Current Liabilities
YEAR ABSOLUTE CURRENT RATIO

LIQUID ASSETS LIABILITIES
(Rupees in Lacs) (Rupees in Lacs)
2002-2003 4,474,79 4,864,33 0.92
2003-2004 5,355,37 6,361,54 0.84
2004-2005 8,800,65 9,336,85 0.94
2005-2006 11,192,64 13,125,72 0.85
Interpretation
The liquid ratio of the bank in the year 2003 was 0.92; in 2004 it
deceases to 0.4. In 2005, it increases to 0.94. In the year 2005, the ratio
was the highest which indicate that the firm has the ability to meet its
current liabilities in time, while on the other hand in the year 2006, it has
decreased to 0.85.
GRAPH SHOWING ABSOLUTE LIQUID RATIO
0.94
0.92
0.94
0.92
0.9
Absolute 0.88
0.84 0.85
Liquid 0.86
Assets 0.84
0.82
0.8
0.78
2002-2003 2003-2004 2004-2005 2005-2006
No. of Years
(c) Cash Position Ratio
It may be defined as the relationship between the available cash

both at bank and in hand and current liabilities.
A ratio of 1 : 1 is considered to be a good ratio but a rate of 0.75 : 1

is also good. Such a ratio would imply that the firm has enough cash on
hand to meet all the current liabilities.
Cash
Cash Position Ratio =
Current Liabilities
YEAR CASH IN THE CURRENT RATIO

FIRM LIABILITIES
2002-2003 1,617,64 4,864,33 0.33
2003-2004 2,622,41 6,361,54 0.41
2004-2005 3,458,19 9,336,85 0.37
2005-2006 3,169,22 13,125,72 0.24
Interpretation
The bank’s cash balances to current liabilities recorded are 0.33,

0.41, 0.37 and 0.24 in the year 2003, 2004, 2005 and 2006 respectively.
In the year 2004, the highest ratio was recorded.
GRAPH SHOWING CASH POSITION RATIO
0.45 0.41 0.37

0.4 0.33
0.35
0.3 0.24
Cash
0.25
Position
Ratio 0.2
0.15
0.1
0.05
0
2002-2003 2003-2004 2004-2005 2005-2006
No. of years
2. LONG TERMS SOLVENCY RATIOS
Long-term solvency ratio conveys a firm’s ability to meet the

interest cost and repayment schedule of its Long-term obligations.
These ratios are helpful to management in proper administration of

capital. It also helps the creditors to know the capacity of a business
concern to pay debt in future.
The various ratios are:
 Proprietary Ratio
 Solvency Ratio
 Fixed asset to net worth Ratio

(a) Proprietary Ratio
This ratio establishes the relationship between the shareholders

funds and the total assets of the firm. It establishes the claims of the
shareholders on the firm’s assets. It usually is expressed as a pure ratio.
Shareholder’s Fund
Proprietary Ratio = * 100
Total Assets
YEAR SHAREHOLDER’S TOTAL RATIO IN

FUND (Rs. in Lacs) ASSETS PERCENTAGE
(Rs. in Lacs)
2002-2003 751,52 11,731,03 6.4
2003-2004 913,03 15,617,33 5.8
2004-2005 1,942,28 23,787,38 8.2
2005-2006 2,248,83 30,424,08 7.4
Interpretation
The proprietary ratio reflects the financial strength of the bank. In

the year 2003, the proprietary ratio of the bank was 6.4%. In the year
2004, it has decreases to 5.8%. In the year 2005, it has increase to 8.2%
and it was 7.4% in the year 2006.
GRAPH SHOWING PROPRIETARY RATIO
9 8.2%
7.4%
8
6.4%
7 5.8%
6
PROPRIETARY 5
RATIO (In
Percentage) 4
3
2
1
0
2002-2003 2003-2004 2004-2005 2005-2006
No. of years
(b) Solvency Ratio
It can be defined as the relationship between total liabilities and

total assets.
Total Liabilities
Solvency Ratio = * 100
Total Assets
Generally lower the solvency ratio, more satisfactory or stable is

the long-term solvency position of a firm.
YEAR TOTAL TOTAL ASSETS RATIO IN

LIABILITIES (Rs. in Lacs) PERCENTAGE
(Rs. in Lacs)
2002-2003 10,979,51 11,731,03 0.94
2003-2004 14,704,27 15,617,33 0.94
2004-2005 21,845,1 23,787,38 0.92
2005-2006 28,175,25 30,424,08 0.93
Interpretation
The above ratios show 0.94% in the year 2003. It has also remained
the same in the year 2004. In the year 2005, it was 0.92% and in the year
2006 it increases to 0.93%. We have notice from the ratios calculated
above that they have remain almost the same in the four consecutive
years.
GRAPH SHOWING SOLVENCY RATIO
0.94 0.94
0.94
0.935
0.93
0.93
SOLVENCY
RATIO
0.925 0.92
0.92
0.915
0.91
2002-2003 2003-2004 2004-2005 2005-2006
No. of years
(c) Fixed Asset to Net Worth Ratio
This ratio establishes the relationship between fixed asset and

shareholders fund. This ratio indicates the extent to which shareholder’s
funds are sunk in the fixed asset. Generally, the purchase of fixed assets
should be financed by the shareholders equity, which includes reserve,
surpluses and retained earnings.
Fixed Asset (After Dep)

Fixed Assets Ratio = * 100
Net Worth
YEAR TOTAL TOTAL RATIO IN

ASSETS LIABILITIES PERCENTAGE
(Rs. in (Rs. in Lakhs)
Lakh)
2002-2003 236,76 751,52 31.51
2003-2004 289,74 913,09 31.17
2004-2005 371,10 1,942,28 19.12
2005-2006 52,86 2,248,83 23.5
Interpretation
The fixed assets to net worth are 31.51%, 31.17%, 19.12% and
23.5%. In the year 2003,2004,2005,2006 respectively. This ratio is in a
good position as the net worth is more than the fixed assets in all the four
years. The shareholder’s funds are sufficient to finance the fixed assets.
GRAPH SHOWING FIXED ASSETS RATIO
35 31.51% 31.17%
30
23.5%
25
19.12%
% of Fixed Asset 20
to Net Worth 15
10
0
2002-2003 2003-2004 2004-2005 005-2006
Years
Profitability Ratio
Profits are measures of overall efficiency of a business. Higher the

profit the more efficient is the business.
In other words they are the ratios, which reveal the total effect of
business transaction and indicate how far the organization has been
successful I its operation.
These ratios are:
 Return on Equity
 Return on Total Resource
 Net Profit Ratio
 Operating Expenses Ratio

Return on Equity
It indicates how the firm has used the resources of owners. This
ratio is one of the most important ratios in financial analysis. The
earnings of a satisfactory return are one of the most desirable objectives
of a business. The ratio of the net profit to owner’s equity reflects the
extent to which the objective has been accomplished.
Profit after tax

Return on Equity = * 100
Equity share capital
YEAR NET PROFIT SHAREHOLDERS RATIO IN

(Rs. in Lacs) FUND PERCENTAGE
(Rs. in Lacs)
2002-2003 120,04 751,52 15.9
2003-2004 210,12 913,09 23.0
2004-2005 297,04 1,942,28 15.3
2005-2006 387,60 2,248,83 17.2

GRAPH SHOWING RETURN ON EQUITY
25 23%
20 17.2%
15.9% 15.3%
RETURN ON 15
EQUITY (In
Percentage)
10
0
2002-2003 2003-2004 2004-2005 2005-2006
No. of years
Return on Total Resource
Return on total resource or total assets ratio is the ratio of net profit
to total resources or total assets. Return here means net profit after taxes
and total resources mean all realizable assets including intangible assets,
if they are realizable. This ratio measures the productivity of the total
resources of a concern.
Formulae
Net Profit
Return On Total Resource = ______________ x 100
Total Asset
YEAR NET PROFIT TOTAL ASSETS RATIO IN

(Rs. in Lacs) (Rs. in Lacs) PERCENTAGE
2002-2003 120,04 11,731,03 1.02
2003-2004 210,12 15,617,33 1.35
2004-2005 297,04 23,787,38 1.25
2005-2006 387,60 30,424,08 1.27
Interpretation
The ratio indicates the return on fixed assets and current assets. The
return on assets in the year 2003 was 1.02%, in the year 2004 it was
1.35%. In the year 2005 it decreases to 1.25% and in the year 2006 it was
1.27%. As the bank purchased more assets during the year 2006 there is a
slight decrease in the returns.
GRAPH SHOWING RETURN ON TOTAL RESOURCE
1.35%
1.4 1.25% 1.27%
1.2 1.02%
1
Return on 0.8
Total
Resource 0.6
0.4
0.2
0
2002-2003 2003-2004 2004-2005 2005-2006
Years
Earning Per Share
The ratio establishes the relationship between profits after tax to

number of equity shares.
Profit after Tax

Earning Per Share = ___________________
Number of Equity Shares
YEAR NET NUMBER OF EQUITY EARNING

PROFIT SHARES PER
(Rs. in Lacs) (Rs. in Lacs) SHARE
2002-2003 120,04 24,32 4.94
2003-2004 210,12 24,36 8.62
2004-2005 297,04 28,10 10.57
2005-2006 387,60 28,20 13.75
Interpretation
The earning per share for the year 2003 was Rs4.94, in the year
2004 it has increased to Rs8.62. in the year 2005, it was Rs10.57 and in
the year 2006, it increases to Rs13.75. the earning per share is in a very
good position. There has been a continuous increase for the four
consecutive years.
Graph Showing Earning Per Share
13.75
14
12 10.57
10 8.62
8
Rupees
4.94
6
0
2002-2003 2003-2004 2004-2005 2005-2006
Years
Interest on Loan
This establishes the relationship between interest received and

Total Loan.
Interest Received
Formulae = ______________ X 100
Total Loan
YEAR INTEREST LOANS RATIOS IN

RECEIVED (Rs. in Lacs) PERCENTAGE
(Rs. in Lacs)
2002-2003 679,87 3,462,34 19.64
2003-2004 1,259,46 4,636,66 27.16
2004-2005 1,702,99 6,813,72 24.99
2005-2006 2,022,97 11,754,86 17.21
Interpretation
The interest on loan has been recorded as 19.64% in the year 2003.
it has increased to 27.61% in the year 2004. In the year 2005, it was
24.99% and in the year 2006 it has decrease to 17.21%.
Graph showing Interest on Loan
30 27.16%
24.99%
25
19.64%
17.21%
20
% of
Interest 15
on loan
10
0
2002-2003 2003-2004 2004-2005 2005-2006
Years
Interest Pay out Ratio
It establishes the relationship between interest paid and earning

before tax and interest.
Interest Paid
Formulae = ______________ X 100
EBIT
EBIT= Profit for the year + Interest paid + Tax
YEAR INTEREST EBIT RATIOS IN

PAID (Rs. in Lacs) PERCENTAGE
(Rs. in Lacs)
2002-2003 374,28 569,13 65.8
2003-2004 753,75 1,072,81 70.3
2004-2005 1,073,74 1,486,12 72.3
2005-2006 1,191,96 1,967,16 60.6
Interpretation
The interest pay out ratio in the year 2003 was 65.8%. In the year
2004 it has increases to 70.3%. In the year 2005, it has increased to
72.3% and in the year 2006 it was recorded as 60.6%.
GRAPH SHOWING PAY OUT RATIO
74 72.3
72 70.3
70
68 65.8
Pay out 66
Ratio in 64
62 60.6
Percentage
60
58
56
54
2002-2003 2003-2004 2004-2005 2005-2006
Years
TABLE SHOWING INCREASE IN NET PROFIT
YEAR NET PROFIT

(Rs. in Lacs)
2002-2003 120,04
2003-2004 210,12
2004-2005 294,04
2005-2006 387,60
Interpretation
In the above table it shows the figure of net profit. There has been a
continuous increase in the net profit of the four consecutive years. This
shows that the profitability of the bank is in a very sound position we can
conclude that the bank have sufficient earnings to meet its expenses and
to pay dividend to its shareholders.
GRAPH SHOWING NET PROFIT
387.6
400
350
294.04
300
250 210.12
Profit 200
150 120.04
100
50
0
2002-2003 2003-2004 2004-2005 2005-2006
Years
TABLE SHOWING DEPOSIT OF HDFC BANK
YEAR DEPOSITS
(Rs. in Lacs)
2002-2003 8,427,20
2003-2004 11,658,11
2004-2005 17,653,81
2005-2006 22,376,07
Interpretation
Deposit constitutes the main source of fund for commercial banks.

Deposit for the year 2005-2006 was also strong. Total deposits
increased by 26.7% from Rs17, 653,81 lacs to Rs22, 376,07
lacs. In the year 2004-2005 total deposit has increased by
51.1% from Rs11, 653,11 lacs to Rs17, 653,81 lacs.
GRAPH SHOWING DEPOSIT OF THE BANK
22376.07
25000
17653.81
20000
15000 11658.11
DEPOSIT
8427.2
10000
5000
0
2002-2003 2003-2004 2004-2005 2005-2006
YEARS
TABLE SHOWING ADVANCES OF THE BANK
YEAR ADVANCES
(Rs. in Lacs)
2002-2003 3,462
2003-2004 4,637
2004-2005 6,814
2005-2006 11,755
Interpretations
Advances represent the amount led by the bank to its customers.

They constitute the most important item on the asset side of the balance
sheet of a bank. Advances may be in the form of loans, overdrafts, and
cash credit. The following figures show the advances of the bank. In the
year 2005-2006 Advances grew by 73% from Rs68, 14 Crores to Rs11,
755 Crores. The advances have been increased over the years and this
shows that the bank is in a sound position.
GRAPH SHOWING ADVANCES
11754.86
12000
10000
8000 6813.72
Advances 6000 4636.66

3462.34
4000
2000
0
2002-2003 2003-2004 2004-2005 2005-2006
Years
6.1 CONCLUSION
The study entitle “A Study of Financial Statement Analysis of

HDFC Bank Limited” has been undertaken with the objective to analyze
and interpret the bank’s financial performance. The analysis of the bank
was undertaken with the help of ratios, which are important tools of
financial analysis.
In general, the bank has achieved tremendous progress over the

recent years. The bank has a healthy financial performance. The bank has
been able to achieve heavy growth across multiple parameters, including
customer’s acquisition, geographical spread, business volumes and
revenues.
The liquidity of the bank is financially sound, but is not up to the

standard when compared to the standard ratio, which is for current ratio,
it is 2: 1 and for liquid ratio it is 1:1. We can say that the liquidity of the
bank is favorable. It has been found that the current assets are more than
the current liabilities and we can conclude that that the bank will be able
to meet all its immediate all its financial commitments, without
succumbing to pressure. Therefore, the short-term solvency position of
HDFC Bank Limited remains healthy.
The proprietary ratio reveals that the net worth of the company is
not sufficient to finance the assets of the bank. It indicates that the bank
ill face some difficulties in raising its long-term financial requirements.
Balance growth during 2005-03 was also strong. Total deposit
increased by 27% from Rs17654 crores to Rs22376 crores. This shows a
heavy financial performance during the year 2005-03 and a positive
outlook for the future. The overall performance of the bank during the
past 4 years remains in a sound position with an increasing net profit
Rs388, Rs297, Rs210 and Rs120 crores for the financial year
2003,2004,2005 and 2006 respectively. As the net profit has been
increased, this shows that the profitability of the bank is in a very good
position.
After having solved the ratios and analyzing the financial data, we
can conclude that the bank has gradually excelled over the years.
Thus, ratio analysis has been a very useful technique, which has
highlighted the performance of HDFC Bank Limited in key-areas and
also has helped in the avocations of certain strategies to be followed by
HDFC Bank Limited, which is indispensable to its future growth.
6.2 SUGGESTIONS
The liquidity of the bank is found to be favorable, but the bank has
to maintain more current assets in order to meet its short-term obligations.
The bank can increase its market share in India’s expanding

banking and financial services industry by following a disciplined growth
strategy and delivering high quality customer service.
HDFC Banks can provide more ATMs and branches in different

localities.
The bank can service its customers through multiple channels that
are phoned Banking, Internet banking and mobile banking.
If the bank ha s to attract more customers and deal with more

transaction, the bank can provide advances and loans to the general public
for the following purposes:
 Loan to small scale industries and cottage industries.
 Loan to self-employed person or young entrepreneurs.
 Increase short-term deposits and long-term deposits by providing

higher rate of interest.
 Provide the facilities of car loans.

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Financial Analysis

1.1 GENERAL INTRODUCTION

Finance is the life-blood of business. It is rightly termed as the

“Finance is that business activity which is concerned with the

Financial management is that managerial activity which is

Financial analysis can be defined as a study of relationship

Intech Institute of Business Management, Bangalore. 1

The objective of financial analysis is the pinpointing of strength

Based on this reasoning, this project is an attempt to analyze the

In the financial analysis a ratio is used as an index for evaluating

Accounting ratios are relationships expressed in the mathematical

Intech Institute of Business Management, Bangalore. 2

1.2 STATEMENT OF THE PROBLEM

A financial statement contains sales, revenue, tax, expenses, etc, on

There are various reasons, which contribute to profits such as

The essence of the financial soundness of a company lies in

Ratio analysis is a very useful analytical technique to raise

Intech Institute of Business Management, Bangalore. 3

The statement of the problem can be generalized here as:

 Analysis of the relationship between liabilities and assets.

 Analysis of the liquidity and profitability of the current assets and

 Detection of the reasons for the variability of profits.

 Analysis of various components of working capital such as cash,

 Find out the business fluctuations, technical developments, etc., on

The study takes into consideration the external analyst point of

Intech Institute of Business Management, Bangalore. 4

1.3 OBJECTIVES OF THE STUDY

Based on the information furnished in the financial statements,

 To show the firm’s relative strength and weakness.

 To determine the financial condition and financial performance of

 To involve comparison for a useful interpretation of the financial

 To find out the solution to the unfavorable financial conditions and

 To help to take in suitable corrective measures when the firm’s

With the help of analysis, analysts can determine the following:

 The overall operating efficiency and performance of the firm.

Intech Institute of Business Management, Bangalore. 5

1.4 NEED OF THE STUDY

Any company would like to know its position against its

The following are stated as the need for the study:

 To understand the volume of the profit and its reasonableness.

 To understand the movement of profit over a period of time.

 To know the reason for the variation in the profit.

 To know the present standing of the company.

Intech Institute of Business Management, Bangalore. 6

1.5 SCOPE OF THE STUDY

Ratio analysis is perhaps the first financial tools developed to

 The bank in finding out the gray areas for improvement in

 The bank to understand its own position over time

 The managers to understand the contribution to the performance of

 The present and potential investors outside parties such as the

Intech Institute of Business Management, Bangalore. 7

1.6 RATIO ANALYSIS

Ratio analysis is one of the most powerful tools of financial

Ratio analysis can be also defined as the yardstick that provides a

Though financial analysis is subjected to certain limitations, it is

 Investment planning – Present and prospective investors are enabled

 Detection of unfavorable factors – If, on the face of the financial

Intech Institute of Business Management, Bangalore. 8

 Forecasting – Besides assisting the users in the making the decisions

1.6.1 SIGNIFICANCE OF RATIO ANALYSIS

Ratio analysis is an important technique of analyzing the financial

The followings are the main points of importance of ratio analysis:

(a) Managerial uses of ratio analysis:

 Helps in financial forecasting and planning