16

CHAPTER 11

CONCEPTS AND REVIEW OF LITERATURE

Financial statements render a yeoman's service to owners, suppliers,

government agencies, employees, customers and even common public in

their respective field of interest. It may, however, be observed that mere

presentation of these statements does not serve the purpose of none of the

aforesaid parties in any way. In other words, the significance of these

statements lies not in their preparation but in their analysis and

interpretation. There is need for developing some scientific methods, like

that one used in the preparation of these statements through the use of which

these accounting data is made to speak nothing but what is reality.

COMPARATIVE STATEMENTS

Comparative statements are those statements which summarise and

present related accounting data for a number of years incorporating therein

the changes (absolute or relative or both) in individual items. While

preparing (and then making use of) comparative statements for the purpose

of financial analysis, the techniques, procedures and principles followed in

the collection, recording and presentation of accounting data do not differ

over the period of which the business history is studied. Any material change

in the techniques, procedures and principles will render these comparative

 17

statements to be useless and become an insignificant tool of financial

analysis.

COMMON SIZE STATEMENTS

For the purpose of analysis, the various items of assets and liabilities

of Balance sheets are shown not at their absolute figures but at their relative

values. In other words, each item of asset is converted into percentage to

Total Assets and each item of capital and liabilities is expressed into

percentage to Total Liabilities and Capital Fund. Thus, the whole Balance

sheet is converted into percentage form. Such converted Balance sheet is

known as common size balance sheet. When balance sheets of the same

concern for several years and or when balance sheets of two or more than

two concerns for the same year are converted into percentage form and

presented as such, they are known as comparative common-size balance

sheets. However, such comparative conmion-size balance sheets cannot

convey any knowledge about the nature of a particular asset or liability. This

statement depict as what changes have taken place in relationship of one

item of asset to total assets. Though this type of information is not much

useful for the analyst a number of significant decisions taken on the basis of

such information, provided there are some predetermined standards for such

relationship among various items of assets. Some experts hold the opinion
 18

that such statements are not used to determine the trend. Moreover, these

statements are used in getting the proportion or ratio of one item of Assets to

Total Assets. The special feature of this presentation is that Balance sheet of

one concern cannot only fully compared with another balance sheet of the

same concern, but with corresponding balance sheet of any other concern

also.

TREND ANALYSIS

The trend analysis also occupies an important place in the analysis

and interpretation of financial statements. Trend in general term signifies a

tendency. In other words, the review and appraisal of tendency in accounting

variables are nothing but trend analysis. Such an analysis of business facts is

very significantfi*omthe point of view of forecasting or budget. It discloses

the changes in the financial and operating data between specific periods and

makes possible for the analyst to form an opinion as to whether favourable

or unfavourable tendencies are reflected by the data. The analysis of the

trend in business facts may be made in any of the following ways.

a. By calculating trend ratio or percentages or

b. By plotting on graph-paper or chart.

 19

TREND RATIOS

Financial statements of a number of years are required for the purpose

of calculating trend ratios or percentages and information contained in these

statements are tabulated separately for a number of years. The calculation of

trend ratio involves the ascertainment of arithmetical relationship with each

item of several years' bears to the same item of base year. Thus, one

particular year out of many years is taken as base. The values of one

particular item out of several items shown in the financial statements are

converted into ratio or percentage taking the value of that item in base year

as equal to 100. In fact trend analysis implies such a statistical method which

has been used by the statisticians fi-om the very begirming. This method is

also used in Economics for calculating price indices. Thus, trend ratios like

indices (index numbers) which indicate the movements of fluctuations in

various financial facts of the business.

RATIO ANALYSIS

Ratio analysis is one of the techniques of financial analysis where it is

used as a yardstick for evaluating the financial conditions and performance

of a firm. Analysis and interpretation of various accounting ratios gives a

skilled and experienced analyst a better understanding of the financial

condition and performance of the firm than what he could have obtained
 20

only through a perusal of financial statements. Ratios are relationships

expressed in mathematical terms between figures which are connected with

each other in some manner. Obviously, no purpose will be served by

comparing two sets of figures which are not at all connected with each other.

Moreover, absolute figures are also unfit for comparison.

Significance and Use

Ratio analysis is a powerful tool of financial analysis. It is used as a

device to analyse and interpret the financial health of a firm. Analysis of

financial statements with the aid of ratios helps the management in decision

making and control.

The use of ratio analysis is not confined to financial managers only.

Different parties are interested in knowing thefinancialposition of a firm for

different purposes. Ratio analysis is used by creditors, banks, financial

institutions, investors and shareholders. It helps them in making decisions

regarding the granting of credit and making investments in the firm. Thus

ratio analysis has wide applications and is of immense use.

Important Managerial uses of Ratio Analysis

1. Simplifies Financial Statement

Ratio analysis simplifies the comprehension of financial statements. It

explains the whole story of change in thefinancialcondition of the firm.

 21

2. Helps measuring Performance and Position:

Through leverage and solvency ratios, ratio analysis helps in assessing

the financial position of a firm. Similarly, activity ratios and profitability

ratios are usefiil in evaluating the efficiency of performance.

3. Facilitates intra-firm comparison

Comparison of ratios of the same firm over a period of years can be

made. This will help to know whether the financial performance is

improving or deteriorating. Similarly, comparison of the performance of

different divisions of the firm can be made to assess their relative efficiency.

4. Facilitates inter-firm comparison

Absolute figures are not suitable for comparison between two or more

firms. Ratios of a firm can be compared with the ratios of similar firms in

the industry. Such a comparison will indicate how well the company is

operating relatively to its competitors.

5. Helps in Forecasting and Planning:

Profitability ratios indicate trends in costs, sales, profits, etc. The

ascertainment of trends helps in making forecasts. Such financial forecasts

are useful in planning.

 22

6. Helps in Coordination:

Ratio analysis communicate thefinancialstrengths or weaknesses of a

firm in a more easy and understandable manner. Such a clear

communication helps in better coordination in the enterprise.

7. Helps in Control:

Comparison of actual ratios with the standards reveals the deviations

and weaknesses. This helps the management to take corrective action at the

right time. Control of costs as well as performance is ensured.

CLASSIFICATION OF RATIOS

Accounting ratios, can be classified in a number of ways. Important

among them are stated below:

1. Classification according to Statement

a. Profit and Loss Account Ratios

Ratios calculated on the basis of the items of the profit and loss

account only. Eg. Gross Profit Ratio, Expenses Ratio, Net Profit Ratio etc.

b. Balance Sheet Ratios

Ratios calculated on the basis of the figures of Balance Sheet only.

Eg. Current Ratio, Quick Ratio, Proprietary Ratio etc.

 23

c. Composite Ratios

Ratios based on figures of Profit and Loss account as well as the

Balance sheet, eg. Debtors and Creditors turnover ratio, return on capital

employed, return on total resources etc.

2. Classification according to Function

a. Financial Ratios

Eg. Short term and long term solvency ratios.

b. Profitability Ratios

Eg. Gross Profit Ratio, Net Profit Ratio, Operating Ratio, Return on

Capital employed Ratio.

c. Turnover or activity ratios

Eg. Stock turnover ratio, Debtors Turnover ratio, Creditors turnover

ratio.

d. Capital Structure Ratio:

Eg. Capital gearing ratio.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis suffers fi^om certain limitations. They are discussed

below:
 24

1. Inadequacy of Standards:

Ratios are useful only if they are compared with some standards. But

adequate standards are not easily available.

2. Limitations of Financial Statements:

Ratios are based only on the information recorded in the financial

statements. Financial statements suffer from a number of limitations. Hence,

the ratios derived from them are also subject to those limitations.

3. Ratios alone are not adequate:

Ratios are only indicators. They cannot be taken as final regarding

good or bad financial position of the firm. Other things have also to be seen.

For example, a high current ratio generally means a satisfactory liquidity

position. But current assets may comprise of outdated stocks and this will

affect the liquidity position of a concern.

4. Difficulty in Comparison:

In actual practice, it is difficult to have similar companies for

comparison. Even if similar companies are available, their accounting

periods may differ. This makes inter-firm comparisons extremely difficult.

 25

5. Problem of Price Level Changes:

Ratio analysis does not take into account the effects of changes in

price level. Ratios become invalid if due weightage is not given for changes

in price level.

6. Window Dressing:

Financial statements can easily be window-dressed to present a better

picture of the financial and profitability positions. Hence, one has to be very

careful in making a decision on the basis of ratios calculated fi-om such

financial statements. But, it is very difficult for an outsider to know about

the window-dressing made by firm.

7. Personal Bias:

Ratios are only a means of financial analysis. They have to be

interpreted and different people may interpret the same ratios in different

ways.

8. No Fixed Standards:

No fixed standards can be laid down for ideal ratios. However in case

of firms which have adequate credit arrangement with their bankers, it may

be perfectly ideal to have a ratio of 1:1.

 26

9. No indicators of Future:

Ratios are generally calculated from past financial statements. Hence,

they are no indicators of future.

REVIEW OF LITERATURE

The following are the reviews of the previous studies carried on by the

different academicians on several areas of finance.

An early attempt has been made by ProfRamanathan on

Finances of Public Enterprises in 1971, wherein he has examined and

analyzed different aspects of financing of public enterprises. While focusing

his attention on the profit and profitability criteria, he has explored into the

impact of pricing policies on the public sector financing.'

Sharma has highlighted the problems of financing the operations of

public enterprises at different stages such as gestation, operation and

expansion. It is observed from the study that the government was the major

provider of finances of these enterprises. The pattern of financing during

period was similar to the gestation period. The contribution of internal funds

was far behind the potential mainly due to the poor operating profits, which

Ramanathan, V.V., Finance of Public Enterprises, Asia Publishing House, Bombay, 1971
 27

led to the dependence on borrowed funds in the total capital structure of

these enterprises.

Singh has made an exploratory study on the performance of public

enterprises during the period of ten years ending in 1979-80. He has

identified a number of reasons for the performance of public enterprises,

which include the long gestation periods, adoption of administered price

policies, managerial inefficiencies and indifferences, accountability, role of

policies in policy making etc.^

Singhania and Balakrishna (1981) analyzed the relative performance

of the public and private sector taking a larger sample of 16 out of the 32

companies during the period 1977-78. They found out that share capital as a

percentage of total fimds employed had been fairly stable at 33 to 36 percent

in the private sector while it had risen steadily from 67 to 80 percent in the

public sector within five years. While tiie private sector generated and

retained sizeable funds for plough back, there had been erosion of capital in

public sector due to large accumulated losses. As for external finance, the

private sector units mostly relied on secured loans, debentures and term

loans while the public sector has brought in sizeable funds as unsecured loan

^ Sharma, B.S. Financial Planning in Indian Public Sector, Vikas Publishing House, New Delhi, 1974
' Singh, K.R. Public Sector Enterprises: An Evaluation of Performance, Southern Economist, Dec.1-15,
1981,pp.9-14
 28

from government. Utilization of funds was markedly encouraging (efficient)

in the private sector than in the public.'^

Bagchi had made an evaluation on the role of public sector in India

against the explicit and implicit objectives during the period 1976 and 1985.

He has appreciated the performance of these enterprises in respect of their

efficiency in generation of employment and their contribution to the net

domestic savings in India, He lamented on non-implementation of different

recommendations made by the different committees for the betterment of the

efficiency of these enterprises. He has pleaded for restructuring the

management styles and accountability aspects of these enterprises.^

Bhatia has made a review on different studies relating to the profitability

performance of public enterprises. The studies reviewed by him have

concluded that the common melody for deteriorating performance of public

enterprises is the lack of commitment and lack of accountability of

management at all levels.^

Prakash has made an attempt to find out suitable criteria for

measuring the efficiency of public sector in India. After a careful analysis of

Singhania and Balakrishnan, performance of private and public sector units, 1981
Bagchi, [Link], "The Role of Public enterprises in India", Asian Development Review, 1982, pp.89-
100.

* Bhatia, B.S., Researchers on Profitability of Public Enterprises, RBI Occasional Papers, 1983, pp.32-39
 29

the works of different authors like Sergeant Florence, Gilber Walker, Om

Prakash, G.P. Keshav and others he suggested a set of different financial

measures to evaluate the efficiency of public sector.^

Economic Times Research Bureau (1984) presented detailed analysis

of the performance 101 giant companies and 150 mini giant companies in

the private sector. As regards the industries in particular it found that the

major profitability ratios declined marginally in the year 1981-82 compared

To 1980-81.^

Rao of Reserve Bank of India has evaluated the performance of non-

financial non-departmental enterprises in public sector covering a period of

two decades ending in 1980-81. He observes good capital-output ratios and

capital formation rates during this period. He has evaluated the productivity

in operations by employing Cobb-Douuglas production fiinctions between

operating surpluses and the fixed assets turnover ratios and gross figure. He

found that the entire capital formation is financed through borrowing either

fi*om government or other institutional agencies. He observes that the hike

' Prakash, J., Measuring the efficiency of public enterprises, the Journal of Institute of public Enterprises,
April-June 1983
* Corporate sector in India, Economic Times Research Bureau 1984, Vikas Publishing house Pvt. Ltd.,
New Delhi.
 30

in inflation rate has been reducing the operating surpluses to the extent of

0.92 percent with every one percent rise in Price Index.^

Kapadia has made a study to find out the contribution of "taken over"

units, in the poor financial surpluses earned by public sector enterprises

during 1978-83. He observes that the taken over units account for 18

percent of total investment, 22 percent of total sales turnover and much

higher 45 percent of employment of all central government enterprises. He

observes that 48 taken over units are in red during the entire six-year period

of the study amounting to Rs. 936 crores. He suggests for no-more

takeovers of sick industrial units just for the sake of protecting the

employment as these units subsequently behaving as relief undertakings and

mostly is non-viable to achieve the commercial results from them.^^

Chalam and Murthy have made a study on the performance of public

sector enterprises in India and they have attributed the poor financial

performance to the excessive use of external sources in their capital

structure. They have evaluated the effects of heavy external finances on net

incomes and on short-term liquidity position, in turn affecting the working

funds available for successful operation. They have suggested for allowing

' Ramachandra Rao, K.S., Profitability of Non Financial and Non Departmental Enterprises in Public
Sector, 1961-62 to 1980-81, RBI Staff Occasional Papers, 1984. pp.83-125
'° Kapadia, M.S., Public Sector's Poor financial returns: Place for takenover units, Financial Express, No.7,
1985, p.5.
 31

more private equity participation increasing the operating efficiency through

controlling costs and improving the capacity utilization and factor such

alike.^^

Srinivasan has made a study on some of the recent trends in financing

public sector enterprises in India. He observes that the role of equity has

been declining in public enterprises form 26.4 percent to 20.6 percent and

interest bearing fimds have been occupying 30.3 percent to 33.6 percent of

the total capital structure during 1975 and 1983. These shifts together with

increasing interest rates have hiked up the interest burden of the enterprises

and have adversely affected the financial viability. This is contrary to the

performance of private sector enterprises that were able to bring down the

share of costlier bank loans during the same period. He suggested for

adopting a more realistic approach in the preparation of financing plans and

adoption of irmovative modes of financing, considering the debt capacity

and the available operating surpluses in public sector enterprises.

Trivedi has made an analysis on working of public sector enterprises

to construct a criterion for evaluating their financial performance. While

discarding the concept of profitability as traditional criterion on the grounds

" Chalam, G.V. and Dakshinamurthy. D., Performance of Public Enterprise in India: Impact of Heavy
External Financing, Public Enterprise, Vol.6, No.2,1985
'^ Srinivasan, C,V., Some Recent Trends intiieFinancing of Public sector enterprises, Lokudyog, June
1985
 32

that this criterion suffers from the problems of accounting limitations, he has

suggested a simple multiple indicator. As per his indicator, the performance,

is a weighted average of labour productivity and the ratio of production to its

capacity. Further he has suggested an eight step alternative measure for

1 Q

evaluating the performance of a unit in public sector.

Viswanathan has evaluated the performance of public sector

enterprises during 1979-80 and 1984-85. Between the two categories of

industrial unit, he observes that the production-oriented industries are faring

in a better way than the others. In the light of loosing the entire capital base

by some of the loss making enterprises, he recommends for the adoption of

joint-stock concept by putting the enterprises on rails.^

Shastri Mehta had made a survey on the existing literature on the

working of public sector enterprises during the last three and half decades

and feels that because of the interference from different quarters, from

project approval to implementation, leads to lack of accountability. He

estimates that the delays, poor coordination, wrong decisions, wrong

selection of sites, machinery and staff will cost the nation to the extent of 10

percent of total seventh plan outlay. He suggests for writing the

" Trivedi, Prajapathi, Public Enterprises in India: If not for profit then for what? Economic and Political
Weekly, [Link], No.48, Nov.1986, pp.I37-I48
"* Viswanathan, K.R., Performance Appraisal of Public Enterprises, Financial Express, April 1986, p.5.
 33

accumulated losses of some public sector undertaking and gives a chance to

introduce a new work culture for the future betterment in them.^^

Gupta has made a study to find out how the investments in central

public enterprises are financed. He has analyzed the role of extra budgetary

provisions and the recent prominence of public sector bonds, external

commercial borrowings, inters enterprise borrowings fi*om specialized

coordinating committees, development funds and such others. He observes

that the governments' budgetary support has been declining during the

recent past. This has made the enterprises to find sources for themselves on

competitive lines. ^ ^

Venkatachalam has made a study on the performance of public

sector enterprises especially considering the trends and relative roles of

external and internal sources in public sector enterprises covering a period of

nineteen years from 1960-61 to 1978-79. He has evaluated the financing

patterns of public sector enterprises and found that these enterprises were

increasingly dependent upon external sources of finance. The borrowing

from government and semi-government agencies are continuously

increasing. He has observed that the imbalances in the financial structure

'^ Shastri Mehta. Has Public Sector lived up to our expectations, Yojana, April 16-30, 1987, pp. 12-16
'^ Gupta, [Link], Financial Public Enterprises investment in India, Economic and Political Weekly,
VoLXXII, No.51, Dec. 17,1988, pp.2697-2702
 34

caused by heavy loses of debt capital has created the interest burden and it is

constituting in its own way for the poor financial performance. He has

suggested for improving the operating efficiency through allowing private

equity participation, re-organization of capital structure and rationalization

of pricing policy.'''

Chattopadyaya has brought an evaluation work on the performance of

central Government enterprises covering a period of 18 years from 1969-70

to 1986-87. He presented the criticisms leveled against the performance of

ps enterprises and evaluated that the public sector units do have the

potential to record much better results, provided they are run on business

lines by maximizing the rate of return on capital employed. He has put

forwarded a number of suggestions to improve the working of these units,

including the application of principles of sound management. ^^

Sankar and Sai have conducted a comparative study on private

and public sector enterprises with respect to their financial efficiency during

period between 1986-87 and 1988-89. The study identifies that the private

and public sector enterprises differ in creating a surplus to the extent of 9

percent on sales. The capital employed in public sector enterprises showed a

" Venkatachalam, G., Financing of Public Enterprises in India, Himalaya Publishing House, Bombay, 1988
'^ Chattopadhayaya, P, Central Government Enterprises: An 18 Year Profile, Facts for You, Vol.10, No.9,
March 1989, pp.11-19
 35

better performance. The profits earned in private sector are three times

higher in size of the equity than in the public sector. Capital structuring

strategy and the accumulation of reserves helped the private sector to a high

financial efficiency.'^

Rao and Latha have made study on the Financial Management

and productivity in public sector enterprises covering a period of Ten years

from 1975-76 to 1985-86. Operational and financial performance of these

enterprises was evaluated through various operational and financial ratios. It

was observed that high capital output ratio and slow growth rates in partial

and total factor productivities as explanation for poor profitability in most

public enterprises during the period. It was also noticed from the study that

there exists widerfiuctuationsin operating cost responsiveness, utilization of

resources and excessive investment on fixed assets of these enterprises.

The study identified lower profitability in these enterprises during the study

period and suggest for improvement by allowing these enterprises work in

an entrepreneurial atmosphere.^°

" Sankar, T.L., and Sai, S.S.T, Private and Public Sector - A Comparative study of their financial
efficiency during 1986-87 and 1988-89, the Journal of Institute of Public Enterprises, Vol.13, No.4,
Dec.l 990, pp.291-316
^° Chandrasekara Rao, K., and Madhavi Latha, K., Financial Management in Public Sector Enterprises,
Discovery Publishing House, New Delhi, 1991
 36

The performance appraisal of Tyre industry in India was made by

Aziz [25] by taking five important tyre units viz., Appollo Tyres limited,

MRF Ltd., Dunlop tyres Ltd., Ceat Tyres of India Ltd., and Good year India

Ltd. He has used the performance appraisal techniques like ratio analysis

and value added analysis. By using these techniques, he ahs analyzed the

production performance; cost and sales trends, profit performance and

comparative financial strength of these companies for a period of 7 years

i.e., during 1980 to 1986.^^

Rao and Parthasaraty, (1994) in their study of Debt-service coverage

ratio with reference to Andhra Pradesh state financial corporation and

analyses resources of SFCs, which influence the ratio. After identifying a

fluctuating trend in ratio, they suggested a ceiling on cash holding by the

SFCs. Disposing of assisted sick units and careful screening of loan

applications.^^

Singh, Arora and Anand (1994) have evaluated the performance

of Haryana financial corporation, and in doing so; they have compared it

with the performance of other SFCs using various ratios. They opined that

its performance was commendable in developing SST's in backward

^' Aziz, A. Performance appraisal - Accounting and Quantitative Approaches - Pointer Publishers, Jaipur,
1993
22
Rao and Parthasarathy, Reports of Andhra Pradesh state financial Corporation 1993-94
 37

regions, but its operation at efficiency and financial performance were

disappointing?^

Majumdar has examined a study on relative performance of public,

and private sectors in Indian industry during the periods of 16 years between

1973-74 and 1988-89. The performance of these sectors was measured

through growth rates in total fixed assets, working capital and human capital

against the output of the respective sectors. The study results indicate that

the joint sectors firms but less efficient than those of in the private sector.^"^

Indrasena Reddy made a study on the performance of public

enterprises through value added approach during the period form 1988-89 to

1992-93 selecting BHEL as a study unit. It is observed form the study that

the productivity ratios in terms of value added in relation to various

resources of BHEL were increasing during 1988-89 and 1992-93 except

with regard to capital employed. The study concluded that there exists

greater scope for fiirther improvement of value added ratios of BHEL

followed suitable cost control measures.

^^ Singh, Arora and Anand, "Reports of Haryana Financial corporations" 1993-94

^'* Sumit [Link], Public, Joint and Private sectors in Indian Industry - Evaluating the Relative
Performance Differences, Economic and Political Weekly, Feb. 1995, pp. 18-25
^^ Indresena Reddy, P, Performance Appraisal in Public Enterprises through value added approach - A case
study, the Journal of Institute of Public Enterprises, Vol.18, (3 & 4), 1996, pp.164-170
 38

Griffin (1984) has identified indices such as production efficiency,

corporate structure, health of earnings, R&D, economic function, executive

effectiveness, service to stockholders effectiveness of Board of Directors,

fiscal policies and sales, as factors that affect the performance of

organizations. Some reservations could be expressed as to the possibility of

evaluating these measures effectively in view of their subjective nature. But

that is a general limitation that makes social research completely different

from physical science research.

[Link] (1996)^^ has noted that the working capital

management is the Blood stream in the care of any company and is an

integral part of the overall corporate management. Very frequently one come

across the pessimist, the imitated or the excuse finder who laments about the

imponderables and obstacles of effective working capital management.

Management is the art of Anticipating and preparing for risks and

uncertainties and overcoming obstacles for the finance manager also is ready

to play this role and has a working knowledge of the tools and techniques he

can employ to carry out his tasks. The working capital sphere throws open a

welcome challenge and opportunity too.

^^ Griffin, The Journal of Institute of Public Enterprises, Vol. 19, No.5, Dec. 1996, p.350
^' [Link], An [Link] Commerce dissertation entitled Working Capital Management A study with
particular reference to Steel Authority of India Limited, submitted to Bharathidasan University, April,
1996, p. 134.
 39

Surendar Yadhav, [Link] and Sanjiv Gambir made an attempt to

study the financial health of manufacturing companies in private sector.

They have selected 150 private companies of 5 years from 1991 to 1994. In

this study, they have analyzed the short-term liquidity and long-term

solvency of these companies through ratio analysis. From this study it is

observed that the current ratios have shown consistency over the periods of

the study, but there is not sufficient cushion to meet current liabilities. This

has also been confirmed by acid test ratios because of the fact that around

40% of current assets are in the form of inventories. As regards leverage

and coverage measures, the debt equity ratio is calculated which shows a

decreasing trend. When this ratio is calculated including short term loans, it

shows a similar term but reveals that loans form a significant part (75%) of

the total capital of a company. This means there is a fixed liability which

these companies have to bear year after year. The trends in interest coverage

ratios are fluctuating but above the norms required by the financial

institutions. Also the debt service coverage ratio is above the norms

required by the financial institutions. Also the debt service coverage ratio is

above the level stipulated by the financial institutions except in one year.

^* Surendar Yadav, P.K. Jain, and Sanjiv Gambir, Management and Change, Vol.2, No.22, Jime-Dec.1998
 40

Management Succession and Financial Performance of Family

controlled firms by Smith, Brain-F; Amoako-Adu, Ben in the year 1999.

This paper examines the immediate and long-term impacts on financial

performance of 124 management successions within Canadian family

controlled firms when family successors are appointed, stock prices decline

by 3.20% during the 3-day (-1 to +1) event window, whereas there is no

significant decrease when either non-family insiders or outsiders are

appointed. However, a cross-sectional analysis indicates that the negative

stock market reaction to family successors is related to their relatively young

age, which may reflect a lack of management experience rather than their

family connection per se. Investors are uncertain about the "management

quality" of family successors who have less established reputations than

more seasoned non-family insiders and outsiders. Non-family member

appointments tend to follow periods of poor operating performance implying

that there might be more scope for improvement when a non-family

successor is appointed. Unlike the US sample in Mc Conayghy et al (1998),

which indicates that the median percentage of votes held by controlling

families isles than 15%, the Canadian sample indicates a more concentrated

ownership with the median percentage of family controlled votes exceeding

51%. Of the firms in our sample, 62% use dual class capitalization to
 41

maintain control within the family. Driving financial performance through

the du pont identity A Strategic Use of Financial Analysis and planning by

Firer, Colin in the year 1999. The researcher presents an easy to understand

conceptual model that provides a framework within which to explore the

financial health of the firm as well as a consideration of international

practices. It has been argued that the traditional layout of the du pont

identity should be modified. To correctly interpret changes in the financial

health of the firm brought about by changes in the management of the firm's

assets, the use of net assets rather than total assets and short-term debt

should be grouped together with long-term debt in the sources of fluids

portion of the balance sheet. It is also shown that the concept of sustainable

growth can easily be integrated into the du pont identity, providing the

linkage between financial analysis and financial planning. Pitfalls in the use
on

of some of the published sustainable growth models are identified.

The business cycle financial performance and the retirement of capital

goods by Goolsbee, Austan in the year 1998 the neoclassical investment

literature assumes that capital is homogeneous, lives forever, and has a

^' Smith, Brain F., Amoako, Adu, Ben, Management Succession and Financial Performance of Family
controlled Firms, Review of Economic Dynamics, April 1998 1(2), 474-496 Journal-Article United States
^° Firer, Colin, Drivingfinancialperformance tlirough the Du Pont Identity, A Strategic use of Financial
Analysis and Planning, Journal of Corporate Finance, Contracting, Governance and organisation,
December 1999,5(4) 341-68, Canada
 42

constant depreciation rate. More recent theories of investment have shown

that when there are distinct capital vintages with embodied technologies,

depreciation and capital vintages with embodied technologies, Depreciation

and capital retirement become economic decisions and this raises important

problems with existing empirical work. Directing testing of these issues,

however, has been rare because of the lack of micro data. This paper uses

new data on the services levels of individual capital goods in the airline

industry to empirically examine the impact that economic factors have on

capital retirement. The results strongly support the views that retirement is

fundamentally an economic decision. Retirement is much more likely in

recessions, which the cost of capital is low, or when a firm has good

financial performance. Factor prices and industry regulation are also

important. Since many of these factors also influence capital expenditures,

the results imply that estimates fi'om the conventional investment literature,

such as the effect of the cost of capital or financial performance, may

substantially overstate the case since their impact on net investment may be

much more modest than their impact on gross investment. The results also

have implications for the measurements of productivity.

•'^ Goolsbee, Austan, The Business Cycle, Financial performance and the Retirement of capital Goods,
Universitat, Pompeu Fabra, Economics and Business Working Paper, 348, Jan 1999; 20-Barcelona-Spain
 43

A Note on the Dimensionality of the Firm Financial Performance

Construct Using Accounting, Market, and Subjective Measures by Rowe, W,

Glenn; Morrow, - J-L, Jr" in the year!999. Most research in strategic

management. operationalizes firm financial performance by using either

accounting or market-based measures. Recently, some have suggested that

subjective measures may be useful in assessing a firm's financial

performance. We argue that there is a theoretical basis for viewing firm

financial performance as having a higher order structure consisting of three

separate yet distinct dimensions. Using second-order confirmatory factor

analysis, we found that while differences exist among accounting, market,

and subjective measures of firm financial performance, there is evidence to

support the concept of a single underlying construct. While ourfindingsare

statistically significant and thus support our hypotheses, the substantive

nature of our results suggests that much more research is needed before we

fully understand the dimensionality offirmfinancialperformance.

Corporate Governance And Financial Performance: A Study of

German and UK initial public offerings by Goergen, Marc in the year 1998.

Analyzes the ownership of both German and UK companies that went public

^^ Rowe. [Link], Morrow, J.L. Jr., A Note on the Dimensionalisty of Firm Financial Performance
Construct using Accounting, Market and subjective measures, Financial practice and Education, Spring-
Summer 1999 9(1) 34-45,
 44

during the 1980's, the evolution of ownership from the flotation to six years

afterwards, and the consequences for corporate value. Provides an overview

of institutional arrangements in Germany and the United Kingdom and

analyzes whether possible differences in the listing rules and inheritance tax

explain the observed differences in ownership of British and German firms

studies the evolution of ownership and control in the German initial public

offerings (IPOs) compares German IPOs with UK IPOs using two matched

samples, one matching German with UK firms of the same size and the other

matching German with UK firms in the same industry. Develops an

econometric model to analyze the evolution of ownership and control in the

two matched samples and explains different ownership structures between

the firms and coteries by levels of risk, the personal liquidity nee^s of he

initial shareholders, the pre-IPO ownership concentration, and the

involvement of the founder in his firm. Analyzes whether firms of different

ownership structures levels of financial performance derives policy

implications.

[Link] has made a study on the "financial performance of

public sector enterprises in India 'with reference to selected Heavy and

^^ Goergen, Marc, Corporate Governance and Financial performance, A Study on German and UK,
Revenue Canadienne Sciences Administration, Canadian Journal of Administrative Sciences March 1999,
16(1) 58-70
 45

Medium engineering enterprises. This study covers a periods of 21 years

from 1975-76 to 1995-96, He has taken the tools like capital-output ratios;

value added, capital formation, trends in productivity and management of

funds and productivity. The results of the various indicators favoured the

BHEL of Heavy engineering and BEL in case of Medium engineering

enterprises and their performance was found to be good during the study

period next to the two sample units, the respective groups during the study

period. All the other sample units did not have progressive performances.'^'*

Sudha has made a study in the year 2001 on Financial Performance of

public sector enterprises and New Economic Policy". From the study, it is

observed that the financial performance of public sector enterprises have

been much better than what one expected after NEP. The general contention

that all public sector enterprises are loss making and are best privatized is

not the most appropriate conclusion that can be understood on logical terms.

From the study, it is quite clear that public sector enterprises made good

provisions to gear up against the challenges of competition and a rather

hostile wave against them. It is thus commendable that despite all the

^'' Seetharaman, V.P., Financial performance of Public Enterprises in India with reference to Heavy and
Medium Engineering Industries, unpublished Doctoral work, Pondicherry University, April 2000
 46

charges of sluggish performance and growth, all public sector enterprises are

taken tighter at the end of the day make profits.

Voulgari, Fotini made a study on "Size and Financial Performance

in The Greek Manufacturing Sector" in the year 2002 this purer explores the

financial aspects of the manufacturing sector in Greece and investigates

differences in the financial performance between small and medium sized

enterprises (SMEs) and large sized enterprises (LSEs). Financial panel data

are utilized covering a period of nine years. The ANOVA and MANOVA

tests were used to examine whether the mean scores differ significantly

between the two-size groups based on selected performance measures. The

research revealed that Greek SMEs have significantly different performance

fi'om LSEs. More specifically, they exhibit higher liquidity, lower

profitability, inefficient inventory management and lower net profit margins

compared to the large sized firms of the sector.

Hamill, Philip, A. Mcilkenny, Philip, Opong, and Kwaku, K, made a

study on "Directors' share Dealings and Company's Financial Performance"

in the year 2002. This paper examines the response of security prices to the

share dealings by directors of small capitalized firms in the United Kingdom

35
Sudha, Business Perspectives, A Journal of Biria Institute of Management Technology, Vol.1, No.l, Jan-
June 2001
^^ Voulgari, Fotini, Size and Financial Performance in the Greek Manufacturing sector in the year 2002,
Archives of Economic History, Jan-June 2002,14 (1), pp.99-118
 47

and tests as to whether the share dealing contain information with regard to

the firm's fUture financial performance. The results of the study indicate

that investors respond positively to the information signals of directors'

equity purchases. Researchers find little evidence to suggest that directors'

equity sales possess significant information content. The results suggest that

there is a positive association between financial performance and the type of

trade directors engage in.

Cheng, Yuk-Shing; Lo, Die made a study on the topic "Explaining the

Financial Performance of China's Industrial Enterprises: Beyond the

Competition-Ownership Controversy". Scholarly explanations of the

worsening financial performance of Chinese industry over the reform era,

particularly the loss-making phenomenon, have coalesced around two rival

stories: the "inefficient institutions causing poor financial performance"

story and the "increased competition inducing profitability decline' story.

This article critically reviews the arguments and empirical substantiation of

the two stories, and gives an alternative explanation that takes demand

conditions and industrial configurations is a macro as well as micro problem

that the worsening financial performance is a macro as well as micro

^^ Hamill, Philip, A Mcilkenny, Philip, Opong, Kwaku, K A study on Directors' Share Dealings and
Company Financial Performance in the Year 2002, Journal of Management and Governance, 2002, 6(3):
215-234
 48

problem that points to the fiindamental contradictions in contemporary

Chinese poHtical economy. Some poUcy implications from this analysis are

raised in the concluding section.

[Link] (2004) has expressed the need of financial systems that

with the operating up our country to world through liberalization.

Privatisation and Globalization, it became very difficult for our country's

products to cope with the competition of products from other countries

which are giving high quality products at a low price.

The cost factor thus has become a major concern for the industries

companies change their production areas to the areas where they could get

cheap labour to cut down their costs in this situation, where the cost plays a

major role. The study on cost management is attaining it efficiently through

costing techniques which is the need of the hour for the Management and so

the study on activity based costing and effectiveness of implementing it is

studied.

[Link] (2004)"^° has explained in his dissertation that the

financial performance analysis and especially the budgetary control means

^' Cheng Yuk-Shing, Lo Die, Explaining the Financial Performance of China's Industrial Enterprises:
Beyond the Competition-Ownership Controversy, China Quarterly, June 2002, 0(170), 413-440
^' [Link], The Dissertation entitled Activity Based Costing - A Dynamic Costmg System with Special
Reference to Costmg System of Neyveli Lignite Corporation Limited, submitted to Bharathidasan
University, MBA Degree, July 2004, p. 17
'"' [Link], A Dissertation submitted for MBA Degree to Bharathidasan University entitled
Evaluation of Budgetary Control System with reference to Salem Steel Plant, July, 2004, p.40
 49

laying down in monetary and quantitative term what exactly has to be done

and how exactly it has to be done over the coming period and then to ensure

that actual results do not diverse from the planned course more than

necessary. The word "Necessary" is not to be loosely interpreted.

Divergence due to inefficiency is not necessary.

[Link] (2005)"^^ has stated in his research work that the

financial Information system (FIS) is a budgetary control system which is

designed to help user to express and formatise the management plan and

future actions. It also helps to prepare and cater the information relating to

the annual budget in an easy and systematic manner. And also added that

there are two steps in the budgetary control systems which are the

measurable targets and related comparison & actual with targets. If so it is

possible to design and implement a total budgetary control system for all the

departments of a company or at staff level that can also be used as

Measurement tool for incentives.

Sai Krishna (2006)'*^ in his article stated that the development of

financial markets has played a significant role in promoting the process of

industrialization. Strong financial markets are vital for proper economic

"" [Link], An Analysis of Budget Process Mechanisms and Monitory System at BHEL, Tricliy, a
dissertation submitted to Bharatiiidasan University for an MBA Degree, July 2005, p.8
^^ Sai Krishna, Faculty member, the ICFAI National College, Hyderabad, An Article entitled Globalisation
of the Financial Markets, October 2006, p.25.
 50

development. Banks and other financial institution play a major role in the

formal financial systems vacantly. Stock markets have marked their

presence especially with foreign capital flows and through the entry of

foreign investment institutions and are playing an important role in the

economy. After globalization and liberalization of financial markets,

developing countries have become highly susceptible to speculative capital

Movements.

[Link] (2007)'^^ in his article has stated that the financial

literacy is the ability of Individuals to make infonned judgements and

effective decisions about the use and management of money. The delivery

of financial education can be said to comprise three key themes, building

skills, increasing knowledge and developing understanding and in each of

these a client's confidence should also be developed.

[Link] Basha, (2007)'*'^: There has been a sea change in the

Functioning of Banking Scenario since the implementation of liberalization

policy in 1991. The rapid growth and Development of information

technology and communication system have made banking services

accessible to customers at the click of mouse/his finger tips. The

*^ [Link], Faculty in Commerce, MKU College, Andipatti, Tamilnadu, An Article published in ICFAI
Reader, June 2007, p.51
'"' [Link] Basha, Consulting Editor, The ICFAI Research Centre, Pane
 51

organization of these things has resulted in acute competition not only

among domestic banks but also between domestic banks and foreign banks.

The Indian banking system has undergone a major and rapid structural

transformation over the last four decade from social banking to commercial

banking; traditional class banking to mass banking; brick and mortal

banking (Banking at Fixed Branch premise) to electronic banking and local

banking to Universal banking.

V.P. Prasanth (2008)'^^: The unraveling of the global fmancial

crisis sends a clear signal that India has to make Fundamental changes in its

Management of the Banking and Financial Sector. The First Pre-requisite is

a return to relationship banking, and the arrangement under which contact

between the Lending Bank Manager and the Borrowing and the direct and

not Impersonal. The Immediate Indian Response to the Global crisis shall be

to work towards lowering interest rates which at their high level have hurt

manufacturing investment in both the large and small scale seeders. The

economy also needs the pursuit of an Expansionary policy by waiving the

Fiscal roles.

45
[Link], Economic and Political Weekly, October 24,2008, p.22.
 52

[Link] (2009)^^^ Liberalization and Financial integration

may not have resulted in excess exposure of the Indian Banking system to

the Toxic assets that Originated in the US and Europe. It has altered banking

behaviour. So, that it has begun it resemble that of Banks in those Countries.

One Consequence is increased Exposure to Risk, which is a matter of

concern in itself and not just because, the Indian regulatory System is not yet

geared to deal with such risk, if it can at all.

Bernard D'mello: Since the late 1970's, a gravitational shift of

economic activity from the production of Goods and Non-Financial services

to Finance has been underway. One Indicator of this process has been the

rapid growth since then of the share of financial profits in total corporate

profits. Also reflective of this process of "Financialisation", is the Explosive

Growth Private debt-household, Non-financial, and financial business - as a

proportion of gross domestic product and the piling of layers upon layers of

claims with the existence of instruments like options Futures, swaps and the

like and financial entities like hedge fimds and structural investments

vehicles. With Financialisation of employment of money capital in the

finance markets and in speculation, more generally to make more money.

46
[Link] is with the Centre for Economic studies and planning, Jawaharlal Nehru University,
New Delhi, Economical and political - weekly. May, 15,2009. Page No: 8.
 53

bypassing the rate of commodity production, increasingly became the name

of the game.'^^

Jyotimoy Bhattacharya (2009) : There is no reason why larger

borrowing by the government need raise interest rates in the economy. It is a

case of prejudice in Favour of "Small" Government, That is the Reason for

the continued Currency of the View. Or even if the expressed view is due to

desire to keep foreign institutional investors happy, should it not be better to

control speculative capital directly instead of recommending deflationary

fiscal policies in the midst of recession?

Amaresh Samantaraya, (2009)'^^: Monetary policy is a key constituent

of overall economic policy across the industrial and emerging economics for

the purpose of stabilization of output and prices. In a standard textbook

sequence, monetary expansion reduces interest rates and augments aggregate

demand through increase in investment and consumption spending. This

increase in aggregate demand exerts a temporary influence on real output,

while the upward pressure on price is presumed to be of a permanent nature.

In a similar fashion, monetary retightening leads to reduction of prices and a

temporary output loss. In practice, the conduct of monetary policies involves

•''' Bernard D'Mello, Economic & Political Weekly, May 15,2009, p.27
^^ Jyotimoy Bhattacharya, Indian Institute of iVIanagement, Kozhikode, Economic and Political Weekly,
June 5,2009, p.20
'" Amaresh Samantaraya, Reserve Bank of India, Economic and Political Weekly, May 22,2009, p.46.
 54

setting bank reserves or the short-term policy rate to obtain Financialisation

and Monetary conditions consistent with achieving the objectives of

monetary poUcy.

Preeti Phuskele,^°: Consulting Editor, the ICFAI, Research Centre,

Pune, says, the financial markets all over the world is facing turmoil. This

has reduced the confidence levels of the general public in the international

financial institutions. Restoring financial stability is one of the major issues

confronting of these institutions and economists all over the world. This

problem of financial stability emerged due to lack of liquidity.

Economists have contradictory views on the significance of the

liquidity to finance stability. It is true that liquidity is very important for the

smooth functioning of any economy and excess liquidity can be more

harmful, if not tackled by the monetary authorities of the country, simulated

less liquidity can also be dangerous for the smooth functioning of the

economy as discussed in the article.

SR Rajagopal,^' The Government departments and financial

institutions have their ovm audit sections/departments. However, corporate

entities, excepting a few have not given importance to such internal audit

system. In the changed global envirormient an internal audit team with

^° Preeti Phuskele, Consulting Editor, Tlie ICFAI, Research Centre, Pune

" [Link], PA To Manager, SBI Zonal Inspection Office, Chennai
 55

Qualified Personnel is a must. The internal audit reports should be

processed honestly and remedial actions for the irregularities should be

pointed out. Internal audit must be looked upon as a tool for the top

management to manage their activities and to know how their

administration and operational departments are functioning.

Some scholars (Campfield, 1971; Martindell, 1962) have earlier

advanced a rather holistic argument saying that a good way of measuring

performance is by a complete review and evaluation of the organisation's

total set of activities. It was further argued that by doing so, factors that

impinge on organizational performance and identified and evaluated.

52 Campfield, and Martindell, The Journal of Institute of Public Sector enterprises, Vol.3, No.4, pp.348-360