Prashant Fm Project

8/12/2019 Prashant Fm Project

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INTRODUCTION

Ratio analysis is a process of determining and interpreting relationships between

the items of financial statements to provide a meaningful understanding of the

performance and financial position of an enterprise. Ratio analysis is an accounting tool

to present accounting variables in a simple, concise, intelligible and understandable

form. As per Myers Ratio analysis is a study of relationship among various financial

factors in a business

Ratio analysis is an important and powerful technique or method, generally, used

for analysis of Financial Statements. Ratios are used as a yardstick for evaluating the

financial condition and performance of a firm. Analysis and interpretation of various

accounting ratios gives a better understanding of financial condition and performance of

the firm in a better manner than the perusal of financial statements.

It is process of identifying the financial strengths and weakness of

the firm. This may be accomplished either through a trend analysis of the firm over a

period of time or through a comparison of the firm ratios with its nearest competitorsand with the industry averages

Ratio analysis was pioneered by Alexander Wall, who presented a

system of ratio analysis in the year 1909. Alexander s contention was that

interpretation of financial statements can be made either by establishing quantitative

relationships between various items of financial statements.


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MEANING

A ratio is a mathematical relationship between two items expressed in a

quantitative form.

Ratio can be defined as "Relationship in quantization forms, between figures

which have cause and effect relationship or which are connected with each other in

some manner or the other".

Ratio analysis is an age old technique of financial analysis.

The information provided by the financial statements in absolute form is and

conveying very little meaning to the users.

A ratio or financial ratio is a relationship between two accounting figures,

expressed mathematically. Ratio Analysis helps to ascertain the financial condition of

the firm. In financial analysis, a ratio is compared against a benchmark for evaluating

the financial position and performance of a firm. Financial ratios help to summarise

large quantities of financial data to make qualitative judgment about the firms financial

performance.

Ratios are the symptoms of health of an organisation like blood pressure, pulse

or temperature of an individual. Ratios are the indicators for further investigation.

Ratio analysis is a process of determining and interpreting relationships

between the items of financial statements to provide a meaningful understanding of the

performance and financial position of an enterprise. Ratio analysis is an accounting tool

to present accounting variables in a simple, concise, intelligible and understandable

form.


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As per Myers Ratio analysis is a study of relationship among various financial

factors in a business


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OBJECTIVE

The objective of ratio analysis is to judge the earning capacity, financial

soundness and operating efficiency of a business organization. The use of ratio in

accounting and financial management analysis helps the management to know the

profitability, financial position and operating efficiency of an enterprise.


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CLASSFICATION

Sever al r atios, calculated fro m the accounting data , can be gro uped into

classes according to financial activity or function to be evaluated. The parties

interested in financial analysis are short-term and long-term creditors, owners and

management. Short- term cr editor ' s main interest is in the liquidity position or short-

term solvency of the firm, long-term solvency and profitability of the firm.

Similarly, concentrate on the f ir m ' s profitability and financial condition.

Management is interested in evaluation of every as pect of the f ir m'

s perfor mance.

They have to pr otect the inter ests of all par ties and s ee

that the f ir m grows prof itably.

The r equ ir eme nt of the var ious of r atios, w e may classify them into the follow ing

four

im por tant categor ies.

1. Liqu idity r atios

2. Lever age r atios

3. Activit y r atios

4. Prof itabilit y r atios

LIQUIDITY RATIOS :

It is extr emely essential for a f ir m to meet

its o bligations as they become due. Liquidity ratios measure the ability of the

firm to meet its current obligations. In fact, analysis of liquidity needs the

preparation of cash


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budgets and fund flow statements, but liquidity ratios, by establishing a relationship

between cash and other curr ent assets to curr ent ob ligations, pr ovide a qu ick measur e

of liqu idity.

A firm should ensure that if not suffer from lack of liquidity, and also it does not

have excess liquidity. The failure of a company to meet its obligations due to lack

of

sufficient liquidity, will result in a poor credit worthiness, loss of cr editor ' s

confidence, or even legal tangles resulting in the closure of the company. A very high

degree of liquidity is also bad, idle assets earn nothing. The f ir m ' s funds will be

unnecessar ily tied up in curr ent assets. Ther efor e, it is necessary to s tr ike a pro per

balance between high liqu idity and lack of liqu idity.

The most common ratios, which indicate the extent of liquidity or lack of it, are:

1) CURRENT RATIO

2) QUICK RATIO OR ACID TEST RATIO

3) CASH RATIO

4) NETWORKING CAPITAL RATIO

L EVE R AGE R AT IOS :

The pro cess of magnif ying the

shar eho lder ' s r eturn through the em ployment of de bt is called "tr ading on equity". T

judge the long ter m f inancial position of the firm, financial leverage or capital structure

ratios are calculated. The ratios indicate funds provided by owners and lenders. As

a general


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rule there should be a ppropr iate mix of de bt and own ers equ ity in f inancing the f ir m ' s

assets.

The use of debt magnifies the sh ar eholders ' earning as well as increases their

r isk and f ir m'

s ability of using debt for the benefit of shareholder. Basically these

are pr epar es to know the extent which o per ating prof its ar e suff icie nt to cover the

f ixed

char ges.

The fo llow ing ar e the so me of the im por tant lever age r atios:

1) DEBT EQUITY RATIO

2) TOTAL DEBT RATIO

3) CAPITAL EMPLOYED TO NET WORTH RATIO OR EQUITY RATIO.

AC T IVI T Y R AT IOS :

The funds of cr editors and own ers ar e invested in

var ious assets to gener ate sales and profits, the better assets management, the large

amount of sales. Activity ratios are employed to evaluate the efficiency with which

the firm manages and utilizes its assets. These ratios are also called as turnover ratios,

because they indicate the speed with which assets ar e being conver ted or turned into

sales.

The fo llow ing ar e the im por tant activit y r atios, w hich w ill evaluate the

eff iciency of the f ir m:

1) INVENTORY TURUOVER RATIO.

2) WORKING CAPITAL TURNOVER RATIO.

3) DEBTORS TURNOVER RATIO.


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4) DEBTORS COLLECTION PERIOD.

P R OFI T AB ILI T Y R AT IOS :

Prof it is the diff er ence between

r evenues and ex penses ov er a per iod of time (usually one year). Profit is the

ultimate output of a company, and it will have no future if it fails to make

sufficient profits. Therefore, the financial manager should continuous ly evaluate

the eff iciency of the com pany in ter m of prof its.

The profitability ratios are calculated to measure the operating efficiency

of the company. Besides management of the company, owners are also interested

in the profitability of the firm. Creditors want to get interest and repayment of

principal regularly. Owners want to get a required rate of return on their

investment. This is poss ible only wh en the company earns enough prof its.

The fo llow ing ar e the so me of the im por tant prof itabilit y r atios :

1) GROSS PROFIT RATIO :

It is the f irst prof itabilit y r atio calculated in

r elation to sales. This r atio can be calle d as gross prof it marg in of gross marg in r atio.

This r atio establishes a r elations hi p b etween gross prof it and s ales to measur e the

eff iciency of the f ir m and it r ef lect s its pr icing po licy.


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2) NET PROFIT RATIO :

Net Prof it Marg in Ratio establishes a r elations hi p

between net profit and sales of the firm. It indicates the management ' s ability to earn

sufficient profit on sales to cover all operating expenses, the cost of merchandising of

servicing and also shou ld have a suff icient marg in to pay r easonable compensation to

shar eho lders. A high r atio shows b etter and low r atio shows the oppos ite.

3) OPERATING PROFIT RATIO :

The o per ating prof it can be calculated

by d ividing o per ating prof it by net sales. The operating profits includes net profit =

non operating expenses (interest to be paid, income tax, loss on sale of assets)

minus non operating income (interest on dividend, prof it on s ale of asset) or gross

prof it minus o per ating expenses (administr ative and s elling ex penses). O per ating

prof it r atio = o per ating prof it I net sales.


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USES OF ACCOUNTING RATIO

Ratio analysis is necessary to establish the relationship between two accounting

figures to highlight the significant information to the management or users who can

analyse the business situation and to monitor their performance in a meaningful way.

The following are the Use of ratio analysis:

It facilitates the accounting information to be summarized and simplified in a

required form

It highlights the inter-relationship between the facts and figures of various

segments of business.

Ratio analysis helps to remove all type of wastages and inefficiencies.

It provides necessary information to the management to take prompt decision

relating to business.

It helps to the management for effectively discharge its functions such as

planning,

organizing, controlling, directing and forecasting.

Ratio analysis reveals profitable and unprofitable activities. Thus, the

management is able to concentrate on unprofitable activities and consider to

improve the efficiency.


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Ratio analysis is used as a measuring rod for effective control of performance

of business activities.

Ratios are an effective means of communication and informing about financial

soundness made by the business concern to the proprietors, investors, creditors

and other parties.

Ratio analysis is an effective tool which is used for measuring the operating

results of the enterprises.

It facilitates control over the operation as well as resources of the business.

Effective co-operation can be achieved through ratio analysis.

Ratio analysis provides all assistance to the management to fix responsibilities.

Ratio analysis helps to determine the performance of liquidity, profitability

and solvency position of the business concer


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LIMITATION

Ratio analysis is one of the most powerful tools of financial management. They are

simple and easy to understand.

Ratio analysis provides useful clues to investigate further. They must always be

compared with:

Previous ratios in order to assess trends

Ratios achieved in other comparable companies

Ratios by themselves mean nothing as they have serious limitations. While using

the ratios,caution has to be exercised in respect of the following.Ratio analysis is one

of the important techniques of determining the performance of financial strength and

weakness of a firm. Though ratio analysis is relevant and useful technique for the

business concern, the analysis is based on the information available in the financial

statements. There are some situations, where ratios are misused, it may lead the

management to wrong direction.

The following are some of the limitations:

Ratio analysis is used on the basis of financial statements. Number of

limitations of financial statements may affect the accuracy or quality of ratio

analysis.

Ratio analysis heavily depends on quantitative facts and figures and it ignores

qualitative data. Therefore this may limit accuracy.


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Ratio alysis is a poor measure of a firm's performance due to lack of adequate

standards laid for ideal ratios.

It is not a substitute for analysis of financial statements. It is merely used as

a tool for measuring the performance of business activities.

Ratio analysis clearly has some latitude for window dressing.

It makes comparison of ratios between companies which is questionable due to

differences in methods of accounting operation and financing.

Ratio analysis does not consider the change in price level, as such, these ratio

will not help in drawing meaningful inferences.

1) False Results:

If Financial Statements are not correct Financial Ratio Analysis will

also be correct.

2) Different meanings are put on different terms:

Elements and sun-elements are not uniquely defined. An

enterprise may work out ratios on the basis of profit after Tax and interest while

others work on profit before interest and Tax .So, the Ratios will also be different


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so cannot be compared. But before comparison is to be done the basis for calculation

of ratio should be same.

3) Not comparable :

if different firms follow different accounting Policies.Two

enterprises may follow different Policies like some enterprises may charge

depreciation at straight line basis while others charge at diminishing value. Such

differencesmay adversely affect the comparison of the financial statements.

4) Affect of Price level changes :

Normally no consideration is given to price level

changes in the accounting variables from which ratios are computed.

Changes in price level affects the comparability of Ratios. This handicaps the utility of

accounting ratios.

5) Ignores qualitative factors :

Financial Ratios are on the basis of quantitative

analysis only. But many times qualitative facts overrides quantitative aspects . For

Example : Loans are given on the basis of accounting Ratios but credit

ultimately depends on the character and managerial ability of the borrower. Under

such circumstances, the conclusions derived from ratio analysis would be misleading.


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6) Ratios may be worked out for insignificant and unrelated figures.

Example:

A ratio may be worked out for sales and investment in govt. securities.

Such ratios will only be misleading. Care should be exercised to work out

ratios between only such figures which have cause and effect relationship. One

should be reasonably clear as to what is the cause and what is the effect.

7) Difficult to evolve a standard Ratio :

It is very difficult to evolve a standard ratio

acceptable at all times as financial and economic scenario are dynamic. Again the

underlying conditions for different firms and different industries are not similar, so

an acceptable standard ratio cannot be evolved.

8) Window Dressing:

Financial Ratios will be affected by window dressing.

Manipulations and window dressings affect the financial statements so they are going

to affect the f. ratios also. Therefore a particular ratio may not be a definite indicator of

good or bad management.


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9) Personal Bias :

Ratios have to be interpreted, but different people may

interpret same ratios in different ways. Ratios are only tools of financial analysis but

personal judgment of the analyst is more important. If he does not posses requisite

qualifications or is biased in interpreting the ratios, the conclusion drawn

prove misleading.


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EXPLAINTATION AND SIGNIFICATION

Gross Profit Ratio :

Gross Profit Ratio established the relationship between gross profit and net sales. This

ratio is calculated by dividing the Gross Profit by Sales. It is usllally indicated as percentage.

Gross Profit Ratio = Gross Profit

Net Sales * 100

Gross Profit = Sales Cost Of Good Sold

Net Sales = Gross Sales Sales Return

Higher Gross Profit Ratio is an indication that the firm has higher profitability. It also reflects

the effective standard of performance of firm's business. Higher Gross Profit Ratio will

be result of the following factors.

(1) Increase in selling price, i.e., sales higher than cost of goods sold.

(2) Decrease in cost of goods sold with selling price remaining constant.

(3) Increase in selling price without any corresponding proportionate increase in cost.

(4) Increase in the sales mix.

A low gross profit ratio generally indicates the result of the following factors :

(1) Increase in cost of goods sold.

(2) Decrease in selling price.

(3) Decrease in sales volume.

(4) High competition.

(5) Decrease in sales mix.


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CURRENT RATIO :

Current Ratio establishes the relationship between current Assets and current Liabilities.

It attempts to measure the ability of a firm to meet its current obligations. In order to compute

this ratio, the following formula is used :

Current Ratio = Current Assets

Current Liabilities

The two basic components of this ratio are current assets and current liabilities. Current

asset normally means assets which can be easily converted in to cash within a year's time. On the

other hand, current liabilities represent those liabilities which are payable within a year.

(1) Current ratio helps to measure the liquidity of a firm.

(2) It represents general picture of the adequacy of the working capital position of a

company.

(3) It indicates liquidity of a company.

(4) It represents a margin of safety, i.e., cushion of protection against current

creditors.

(5) It helps to measure the short-term financial position of a company or short-term

solvency of a firm.

(6) Current ratios cannot be appropriate to all busineses it depends on many other

factors.

(7) Window' dressing is another problem of current ratio, for example, overvaluation of

closing stock.

(8) It is a crude measure of a firm's liquidity only on the basis Of quantity and not

quality of current assets.


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QUICK RATIO OR ACID TEST OR LIQUID RATIO :

Quick Ratio also termed as Acid Test or Liquid Ratio. It is supplementary to the

current ratio. The acid test ratio is a more severe and stringent test of a firm's ability to

pay its short-term obligations 'as and when they become due. Quick Ratio establishes the

relationship between the quick assets and current liabilities. In order to compute this

ratio, the below presented formula is used :

Quick Ratio = Quick Assets

Current Liabilities

Quick Ratio can be calculated by two basic components of quick assets and

current liabilities

Quick Assets = Current Assets- (Inventories+ Prepaid expenses)

Current liabilities represent those liabilities which are payable within a year. The ideal

Quick Ratio of I:I is considered to be satisfactory. High Acid Test Ratio is an indication

that the firm has relatively better position to meet its current obligation in time. On the other

hand, a low value of quick ratio exhibiting that the firm's liquidity position is not good.

(I) Quick Ratio helps to measure the liquidity position of a firm.

(2) It is used as a supplementary to the current ratio.

(3) It is used to remove inherent defects of current ratio.

OPERATING RATIO :

Operating Ratio is calculated to measure the relationship between total operating

expenses and sales . The total operating expenses is the sum total of cost of goods sold,

office and administrative expenses and selling and distribution expenses. In other words,


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this ratio indicates a firm's ability to cover total operating expenses. In order to compute

this ratio, the following formula is used :

Operating Ratio = Operating Cost

Net Sales * 100

Operating Cost = Cost of goods sold + Administrative Expenses

+ Selling and Distribution Expenses

Net Sales = Sales - Sales Return (or) Return Inwards.

NET PROFIT RATIO :

Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net

Profit to Sales Ratio. This ratio reveals the firm's overall efficiency in operating the business. Net

profit Ratio is used to measure the relationship between net profit (either before or after taxes)

and sales. This ratio can be calculated by the following formula :

Net Profit Ratio = Net Profit After Tax

Net Sales * 100

Net profit includes non-operating incomes and profits. Non-Operating Incomes such as

dividend received, interest on investment, profit on sales of fixed assets, commission received,

discount received etc. Profit or Sales Margin indicates margin available after deduction cost of

production, other operating expenses, and income tax from the sales revenue. Higher Net Profit

Ratio indicates the standard performance of the business concern.

(1) This is the best measure of profitability and liquidity.

(2) It helps to measure overall operational efficiency of the business concern.

(3) It facilitates to make or buy decisions.


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(4) It helps to determine the managerial efficiency to use a firm's resources to generate

income on its invested capital.

(5) Net profit Ratio is very much useful as a tool of investment evaluation.

RETURN ON INVESTMENT RATIO :

This ratio is also called as ROL This ratio measures a return on the owner's or

shareholders' investment. This ratio establishes the relationship between net profit after interest

and taxes and the owner's investment. Usually this is calculated in percentage. This ratio, thus.

can be calculated as :

Return on Investment Ratio = Net Profit (after interest and tax)------------------------ * 100

Shareholders' Fund (or) Investments

Shareholder's Investments = Equity Share Capital + Preference Share Capital +

Reserves and Surplus- Accumulated Losses

Net Profit = Net Profit - Interest and Taxes.

(1) This ratio highlights the success of the business from the owner's point of view.

(2) It helps to measure an income on the shareholders' or proprietor's investments.

(3) This ratio helps to the management for important decisions making.

(4) It facilitates in determining efficiently handling of owner's investment.

RETURN ON CAPITAL EMPLOYED RATIO :

Return on Capital Employed Ratio measures a relationship between profit and capital employed.

This ratio is also called as Return on Investment Ratio. The term return means Profits or Net


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Profits. The term Capital Employed refers to total investments made in the business. The concept

of capital employed can be considered further into the following ways :

(a) Gross Capital Employed

(b) Net Capital Employed

(c) Average Capital Employed

(d) Proprietor's Net Capital Employed

In order to compute this ratio, the below presented formulas are used:

Return on Capital Employed = Net Profit After Taxes

Gross Capital Employed * 100Return on Capital Employed = Net Profit After Taxes Before Interest

Gross Capital Employed * 100

EARNING PER SHARE RATIO :

Earning Per Share Ratio (EPS) measures the earning capacity of the concern from the

owner's point of view and it is helpful in determining the price of the equity share in the market

place. Earning Per Share Ratio can be calculated as :

Earning Per Share Ratio = Net Profit After Tax and Preference Dividend

No. of Equity Shares

(1) This ratio helps to measure the price of stock in the market place.

(2) This ratio highlights the capacity of the concern to pay dividend to its shareholders.

(3) This ratio used as a yardstick to measure the overall performance of the concern.


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DIVIDEND PAYOUT RATIO :

This ratio highlights the relationship between payment of dividend on equity share capital

and the profits available after meeting tax and preference dividend. This ratio indicates the

dividend policy adopted by the top management about utilization of divisible profit to pay

dividend or to retain or both. The ratio, thus, can be calculated as :

Dividend Payout Ratio = Equity Dividend

Net Profit After Tax and Preference Dividend *100

Dividend Payout Ratio = Dividend Per Equity Share

Earning Per Equity Share * 100

DIVIDEND YIELD RATIO :

Dividend Yield Ratio indicates the relationship is established between dividend per share

and market value per share. This ratio is a major factor that determines the dividend income from

the investors' point of view. It can be calculated by the following formula :

Dividend Yield Ratio = Dividend Yield Ratio

Market Value Per Share * 100

PRICE EARNING RATIO :

This ratio highlights the earning per share reflected by market share. Price Earning Ratio

establishes the relationship between the market price of an equity share and the earning per

equity share. This ratio helps to find out whether the equity shares of a company are undervalued

or not. This ratio is also useful in financial forecasting.


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This ratio is calculated as :

Price Earning Ratio = Market Price Per Equity Share

Earning Per Share

STOCK TURNOVER RATIO :

This ratio is also called as Inventory Ratio or Stock Velocity Ratio. Inventory means

stock of raw materials, working in progress and finished goods. This ratio is used to measure

whether the investment in stock in trade is effectively utilized or not. It reveals the relationship

between sales and cost of goods sold or average inventory at cost price or average inventory at

selling price. Stock Turnover Ratio indicates the number of times the stock has been turned over

in business during a particular period. While using this ratio, care must be taken regarding season

and condition. Price trend. supply condition etc. In order to compute this ratio, the following

formulae are used :

Stock Turnover Ratio = Net Sales

Average Inventory at Cost

Stock Turnover Ratio = Net Sales

Average Inventory at Selling Price

Stock Turnover Ratio = Cost of Goods Sold

Average Inventory at Cost

(1) This ratio indicates whether investment in stock in trade is efficiently used or not.

(2) This ratio is widely used as a measure of investment in stock is within proper limit or

not.

(3) This ratio highlights the operational efficiency of the business concern.


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(4) This ratio is helpful in evaluating the stock utilization.

(5) It measures the relationship between the sales and the stock in trade.

(6) This ratio indicates the number of times the inventories have been turned over in

business during a particular period.

DEBTOR'S TURNOVER RATIO :

Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio or Debtor's

Velocity. Receivables and Debtors represent the uncollected portion of credit sales. Debtor's

Velocity indicates the number of times the receivables are turned over in business during a

particular period. In other words, it represents how quickly the debtors are converted into cash. It

is used to measure the liquidity position of a concern. This ratio establishes the relationship

between receivables and sales. Two kinds of ratios can be used to judge a firm's liquidity

position on the basis of efficiency of credit collection and credit policy. They are (A) Debtor's

Turnover Ratio and (B) Debt Collection Period. These ratios may be computed as :

Debtor's Turnover Ratio = Net Credit Sales

Average Receivables

Or

Average Accounts Receivable

CREDITOR'S TURNOVER RATIO :

Creditor's Turnover Ratio is also called as Payable Turnover Ratio or Creditor's Velocity.

The credit purchases are recorded in the accounts of the buying companies as Creditors to

Accounts Payable. The Term Accounts Payable or Trade Creditors include sundry creditors and


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bills payable. This ratio establishes the relationship between the net credit purchases and the

average trade creditors. Creditor's velocity ratio indicates the number of times with which the

payment is made to the supplier in respect of credit purchases. Two kinds of ratios can be used

for measuring the efficiency of payable of a business concern relating to credit purchases. They

are: (1) Creditor's Turnover Ratio (2) Creditor's Payment Period or Average Payment Period.

The ratios can be calculated by the following formulas:

Creditor's Turnover Ratio = Net Credit Purchases

Average Accounts Payable

Net Credit Purchases = Total Purchases - Cash PurchasesAverage Accounts Payable = Opening Payable + Closing Payable

2

A high Creditor's Turnover Ratio signifies that the creditors are being paid promptly. A

lower ratio indicates that the payment of creditors are not paid in time. Also, high average

payment period highlight the unusual delay in payment and it affect the creditworthiness of the

firm. A low average payment period indicates enhancing the creditworthiness of the company.

WORKING CAPITAL TURNOVER RATIO :

This ratio highlights the effective utilization of working capital with regard to sales. This

ratio represent the firm's liquidity position. It establishes relationship between cost of sales and

networking capital. This ratio is calculated as follows :

Working Capital Turnover Ratio = Net Sales

Working Capital

Net Sales = Gross Sales - Sales Return


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Work Capital = Current Assets - Current Liabilities

It is an index to know whether the working capital has been effectively utilized or not in

making sales. A higher working capital turnover ratio indicates efficient utilization of working

capital, i.e., a firm can repay its fixed liabilities out of its working capital. Also, a lower working

capital turnover ratio shows that the firm has to face the shortage of working capital to meet its

day-to-day business activities unsatisfactorily.

FIXED ASSETS TURNOVER RATIO :

This ratio indicates the efficiency of assets management. Fixed Assets Turnover Ratio is used to

measure the utilization of fixed assets. This ratio establishes the relationship between cost of

goods sold and total fixed assets. Higher the ratio highlights a firm has successfully utilized the

fixed assets. If the ratio is depressed, it indicates the under utilization of fixed assets. The ratio

may also be calculated as:

Fixed Assets Turnover Ratio = Cost of Goods Sold

Total Fixed Assets

Components of Fixed Assets (or) Non-Current Assets

(1) Goodwill

(2) Land and Building

(3) Plant and Machinery

(4) Furniture and Fittings

(5) Trade Mark

(6) Patent Rights and Livestock


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(7) Long-Term Investment

(8) Debt Balance of Profit and Loss Account

(9) Discount on Issue of Shares

(10) Discount on Issue of Debenture

(11) Preliminary Expenses

(12) Other Deferred Expenses

(14) Government or Trust Securities

(15) Any other immovable Prosperities

CAPITAL TURNOVER RATIO :

This ratio measures the efficiency of capital utilization in the business. This ratio

establishes the relationship between cost of sales or sales and capital employed or shareholders'

fund. This ratio may ill so be calculated as :

Capital Turnover Ratio = Cost of Sales

Capital Employed

Components of Capital Employed (Shareholders' Fund + Long-Term Loans)

(1) Equity Share Capital

(2) Preference Share Capital

(3) Debentures

(4) Long-Tenn Loans

(5) Share Premium

(6) Credit Balance of Profit and Loss Account

(7) Capital Reserve


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(8) General Reserve

(9) Provisions

(10) Appropriation of Profits

DEBT EQUITY RATIO :

This ratio also termed as External - Internal Equity Ratio. This ratio is calculated to

ascertain the firm's obligations to creditors in relation to funds invested by the owners. The ideal

Debt Equity Ratio is 1: 1. This ratio also indicates all external liabilities to owner recorded

claims. It may be calculated as

Debt - Equity Ratio = External Equities

Internal Equities

The term External Equities refers to total outside liabilities and the term Internal Equities

refers to all claims of preference shareholders and equity shareholders' and reserve and surpluses.

Debt - Equity Ratio = Total Long-Term Dept

Shareholders' Funds

PROPRIETARY RATIO :

Proprietary Ratio is also known as Capital Ratio or Net Worth to Total Asset Ratio. This

is one of the variant of Debt-Equity Ratio. The term proprietary fund is called Net Worth. This

ratio shows the relationship between shareholders' fund and total assets. It may be calculated as :

Proprietary Ratio = Shareholders' Fund

Total Assets

Shareholders' Fund = Preference Share Capital + Equity Share Capital


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+ All Reserves and Surplus.

Total Assets = Tangible Assets + Non-Tangible Assets + Current Assets (or)

All Assets including Goodwill

This ratio used to determine the financial stability of the concern in general. Proprietary

Ratio indicates the share of owners in the total assets of the company. It serves as an indicator to

the ~reditors who can find out the proportion of shareholders' funds in the total assets employed

in the business. A higher proprietary ratio indicates relatively little secure position in the event of

solvency of a concern. A lower ratio indicates greater risk to the creditors. A ratio below 0.5 is

alarming for the creditors.

CAPITAL GEARING RATIO :

This ratio also called as Capitalization or Leverage Ratio. This is one of the Solvency Ratios.

The term capital gearing refers to describe the relationship between fixed interest and/or fixed

dividend bearing securities and the equity shareholders' fund. It can be calculated as shown

below:

Capital Gearing Ratio = Equity Share Capital

Fixed Interest Bearing Funds

Equity Share Capital = Equity Share Capital + Reserves and Surplus

Fixed Interest Bearing Funds = Debentures + Preference Share Capital

+ Other Long-Tenn Loans.

A high capital gearing ratio indicates a company is having large funds bearing fixed

interest and/or fixed dividend as compared to equity share capital. A low capital gearing ratio


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represents preference share capital and other fixed interest bearing loans are less than equity

share capital.


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DATA ANALYSIS AND INTERPRETATION

OF

Mannapuram Gold

CURRENT RATIO: -

Formula 2009-2010 2010-2011 2011-2012

Current 1.45 1.56 1.82

Assets/Current

Liabilities

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2009-10 2010-2011 2011-12

Series 1

Series 2

Series 3


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SIGNIFICANCE: -

This ratio is calculated for knowing short term solvency of the organization. This ratio indicates

the solvency of the business i.e. ability to meet the liabilities of the business as and when they

fall due. The Current Assets are the sources from which the current liabilities are to be met.

Certain authorities have suggested that in order to ensure solvency of a concern current assets

should be twice the current liabilities and therefore this ratio is known as 2:1 ratio . However it

depends upon the nature of industry. The standard Current Ratio applicable to the Indian

industries is 1.33:1.

Here the Current Ratio of Kalyani Steels Ltd indicates that it has got sufficient assets to pay off

short term liabilities as and when they fall due. The company has maintained its short term

solvency through out the years and it is improving its short term solvency status which is

appreciable.

ACID TEST RATIO: -

Formula 2009-2010 2010-2011 2011-2012

Liquid Assets/Liquid 1.17 1.24 1.35


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Liabilities

SIGNIFICANCE: -

This ratio serves as a realistic guide to the short term solvency of the company. It is a

measure of the extent to which liquid resources are immediately available to meet current

obligation. In so far as it eliminates inventories as part of Formula 2003-2004 2004-2005 2005-

2006 Liquid Assets/Liquid Liabilities 1.17 1.24 1.35

current ratio, this is a more rigorous test of liquidity than the Current Asset Ratio and

when used in conjunction with it, gives a better picture of the firms ability to meet its short term

debts out of its short term assets. An Acid Test Ratio of 1:1 is considered to be ideal and

standard.

Here the Acid Ratios of Kalyani Steels Ltd through out the years considered indicates

that it has adequate assets which can be converted in the form of cash almost immediately to pay

off those liabilities which are to be paid off immediately. It must be remembered that the

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

2009-10 2010-11 2011-12

Series 1

Series 2

Series 3


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company is improving its Acid Test Ratio year by year at a constant rate which is appreciable as

such higher the liquid ratio better the situation.

TURNOVER GROUP

1) Fixed Assets Turnover Group:-

Formula 2009-2010 2010-2011 2011-20

Net Sales/Fixed 2.65 4.31 3.1

Assets

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2009-10 2010-11 2011-12

Series 1

Series 2

Series 3


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SIGNIFICANCE:-

This ratio measures the efficiency in the utilization of fixed assets. This ratio indicates

whether the fixed assets are being fully utilized. It is an important measure of the efficient and

profit earning capacity of the business. Normally standard ratio is taken as five times.

The financial year 2003-04 had not so good fixed asset turnover ratio. The financial year

2004-05 had an appreciable fixed assets turnover ratio indicating fixed assets are turned over

more number of times. This was due to around 72% growth in sales. This shows better asset

management policy as compared to the past year. The same ratio came down to 3.12 times in the

financial year 2005-06 due to fall in sales by around 31.48%.

2) WORKING CAPITAL TURNOVER RATIO: -

Formula 2009-2010 2010-2011 2011-2012

Net Sales/Working 8.63 8.48 3.33

Capital


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SIGNIFICANCE: -

This ratio signifies achievement of maximum sales with less investment in working

capital. As such higher the ratio better will be the situation. The financial year 2003-04 and

2004-05 saw excellent ratio as the company was able to achieve maximum sales with less

investment in working capital which shows better working capital management policy. It must be

remembered that working capital ratio has been increasing through out the years but the financial

year 2005-06 failed to maintain the past records due to fall in sales by 31.48%. The year 2005-06

had heavy investments in working capital which shows rise in activity.

0

1

2

3

4

5

6

7

8

9

10

2009-10 2010-11 2011-12

Series 1

Series 2

Series 3


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3) CURRENT ASSET TURNOVER RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Net Sales/Current Assets 2.69 3.08 1

.SIGNIFICANCE: -

This ratio indicates capability of the organization in efficient use of current assets. This

ratio indicates whether current assets are fully utilized. It indicates the sales generated per

rupee of investment in current assets. The financial year 2004-05 had good current asset

turnover ratio because it had excellent sales in that year. It must remembered that

investments in current assets are increasing year by year at constant rate but the company

failed to register growth in sales and its sales fell down by 31.48%.

4) CAPITAL TURNOVER RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Sales/CapitalEmployed 1.52 2.25 1.29

SIGNIFICANCE: -

This ratio indicates whether capital employed is turned over in the form of sales more

number of times. As such higher the capital turnover better will be situation. The

financial year 2004-05 had acceptable ratio because it had better sales as compared to

other two years. Due to addition or purchase of fixed assets and heavy investments in


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working capital due to rise in activity, the capital turnover ratio for 2005-06 came down

as compared previous years.

5) INVENTORY TURNOVER RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Net Sales/AverageInventory 13.99 1.82 7.45

SIGNIFICANCE: -

It is an indication of the velocity with which merchandize moves through the business.

This is a test of inventory to discover possible trouble in the form of overstocking or

overvaluation. A low inventory turnover may reflect dull business, overinvestment in

inventory or accumulation of absolute and unsaleable goods. A high inventory turnover

indicates relatively lower amount of working capital locked in inventories. The financial

year 2003-04 had excellent inventory turnover ratio locking up smaller part of funds in

inventory. The company had low inventory turnover ratio for the year 2004-05 thus

indicating over investment in inventory but it has improved in the financial year 2006

indicating less investment in inventory.

SOLVENCY GROUP

1) Debt-Equity Ratio: -

Formula 2003-2004 2004-2005 2005-2006

External Liabilities/ 1.24 1.39 1.07

Shareholders Fund


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SIGNIFICANCE: -

It is a measure of financial strength of a concern. Lower the ratio greater the security

available to the creditors. A satisfactory current ratio and ample working capital may not

always be a guarantee against insolvency if the total liabilities are inordinately large. The

purpose of this ratio is to derive an idea of the amount of capital supplied be the owners

and of assets cushion available to creditors on liquidation. Generally 1:2 ratio is

acceptable, but the ratio of at least 1:1 is desirable as banks even do accept this. The

greater the interest of the owners as compared with that of the creditors, the more

satisfactory is the financial structure of the business because in such a situation the

management is less handicapped by interest charges and debt repayment requirements. A

company having a stable profit can afford to operate on a relatively high debt-equity

ratio; whereas in the case of a company having an unstable profit, a high debt-equity ratio

reflects a speculative situation. Too much reliance on external equities may indicate

undercapitalization, whereas too much reliance on internal equities may lead to over-

capitalization. All the financial years considered has debt-equity ratio more than 1:1,

which is appreciable and acceptable indicating equal amount of interest of the owners as

compared with that of creditors.

2) PROPRIETARY RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Total

Assets*100/Owners Fund 61.38% 51% 56.93%


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SIGNIFICANCE: -

This ratio is normally a test of strength of credit-worthiness of the concern. To the extent

the percentage of liability increase or the percentage of capital dwindles, the credit

strength of the concern deteriorates. A high proprietary ratio is however a frequently

indicative of over-capitalization and an exercise investment in fixed assets. A low

proprietary ratio on the other hand is a symptom of undercapitalization and an excessive

use of creditors funds to finance the business. The financial year 2003-04 had good

proprietary ratio as it indicates assets are financed to the extent of 69% by the owners

funds and the balance is financed by the outsiders. The year 2004-05 had fall in

proprietary ratio but in the year 2005-06 the company has improved due to rise in reserve

and surplus due to appreciable profits in the last financial year.

3) CAPITAL EMPLOYED RATIO:-

Formula 2003-2004 2004-2005 2005-2006

Fixed Assets*100/Capital 57.54% 52.27% 41.39%

Employed

SIGNIFICANCE: -

Normally a proprietor should provide all the funds required to purchase fixed assets. If

the capital employed ratio exceeds 100%, it indicates that the company has used short-

term funds for acquiring fixed assets, which policy is not desirable. When the amount of

proprietor funds exceeds the value of fixed assets i.e when the percentage is less that 100,

a part of the net working capital is supplied by the shareholders, provided that there are

no other non-current assets. Though it is not possible to lay down a rigid standard as


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regards the percentage of capital which should be invested in fixed assets in each industry

there always is a maxim which should not be exceeded so that the harmony among the

fixed assets, debtors and stock is not disturbed. The ratio should generally be 65%.

PROFITABILITY RATIOS

1) GROSS PROFIT RATIO: -

Formula 2003-2004 2004-2005 2005-2006

GrossProfit*100/Sales 24.41% 27% 36.06%

SIGNIFICANCE: -

This ratio indicates the degree to which selling prices of goods per unit may decline without

resulting in losses on operations for the firm. A high gross profit ratio as compared with that of

the other firm in the same industry implied that the firm in question produces its products at

lower cost. It is a sign of good management. A low gross profit ratio may indicate unfavorable

purchasing and make-up policies, the inability of management to develop sales volume, theft,

damage, bad maintenance, market reduction in selling prices not accompanied by proportionate

decrease in the cost of goods etc.

2) NET PROFIT RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Net Profit(after

taxes)*100/Sales 2.38% 4.98% 17.07%


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2) RETURN ON CAPITAL EMPLOYED: -

Formula 2003-2004 2004-2005 2005-2006

PAT+Int*100/Capital

Employed 3.65% 13.70% 23.86%

SIGNIFICANCE: -

Return on capital employed measures the profitability of the capital employed in the

business. A high business return on capital employed indicates better and profitable use of long

term funds of owners and creditors. As such a high return capital employed will always be

preferred. The company has rising trend of return on capital employed indicating efficient use of

funds of the creditors and owners by the management which is appreciable.

3) RETURN ON SHAREHOLDERS FUND: -

Formula 2003-2004 2004-2005 2005-2006

PAT*100/TotalShareholders Funds 5.20% 17.54% 14.22%

SIGNIFICANCE:-

The ratio shows how well the firm used the resources of the owner. This ratio is a measure of the

profitableness of an enterprise. The realization of a satisfactory net income is the major objective

is being achieved. The financial year 2003-04 had low returns on shareholders fund as compared


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to next financial years. However the management of the company is improving in utilizing the

resources of the owner in efficient way.

MISCELLANEOUS GROUP

1) CAPITAL GEARING RATIO: -

Formula 2003-2004 2004-2005 2005-2006

Eq Cap+Res&Sur/PrefShare&Loan Cap 3.52 3.29 2.04

SIGNIFICANCE: -

The ratio is a means of analysis of the capital structure. If the proportion of preference

shares and loan capital is high, or where the proportion of ordinary share capital is low, capital is

said to be highly geared and reverse is the position in low gearing. Low gearing indicates that the

equity share capital is not paid an adequate return because the profits are swallowed up by the

high charges in the form of interest and dividends. Capital gearing signifies the process of

maintaining a desired and appropriate gear ratio in an enterprise. When inflationary conditions

are expected, high gearing is to be employed and in the period marked by trade depression, low

gearing should be employed. Here the company is geared which indicates that it attempts to

employ fixed income bearing securities in the capital structure with an intention to increase the earnings of the shareholders.


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(a) Fixed Assets

(i) Tangible assets 11 2,027.04 2,163.72

(ii) Intangible assets 77.88 76.53

(iii) Capital Work-in-progress 307.14 144.04

(iv) Intangible assets under Developments - -

(b) Non Current Investments 50.03 100.03

(c) Deferred tax assets(net) 12 468.31 188.98

(d) Long Term Loans and Advances 13 428.16 523.02

(e) Other Non Current Assets 1,529.81 334.60

CURRENT ASSETS

(a) Current Investments 14 6,925.70 2,082.39

(b) Trade Receivables 15 - -

(c) Cash and cash equivalents 16 8,836.08 8,177.08

(d) Short Term Loans and advances 17 99,985.93 96,621.46

(e) Other current assets 18 6,642.38 10,356.57

TOTAL 127,278.46 120,768.42

Ratio's

1 Current Assets to Current Liability 1.38 136.15

2 Fixed Assets to Balance Sheet 0.02 0.02

3 Current Assets to Balance Sheet 0.96 0.97

4 Current Liabilities to Balance sheet 0.70 0.71

5 Cash & Cash Equivalent to Total current assets 0.07 0.07

6 Non Current Liabilities to Total Liabilities 0.11 0.09


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a

Mannapuram Gold

STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED 31ST MARCH

2 13

Note

For the yearended

31st March2013(Rs.)

For the yearended

31st March2012(Rs.)

Revenue from Operation 19 22,173.14 26,155.48

Other Income 20 468.14 402.97

TOTAL REVENUE 22,641.28 26,558.45EXPENDITURECost of Material consumed 21 - -Purchase of Stock in Trade - -Change in Inventories 22 - -

Employee Benefit Expenses 23 3,409.32 3,090.11

Financial Cost 24 11,894.86 10,891.00

Depreciation and Amortization 25 617.09 482.86

Other Expenses 26 3,654.97 3,322.42

TOTAL EXPENSES 19,576.24 17,786.39

PROFIT BEFORE EXCEPTIONALAND EXTRAORDINARY ITEMS ANDTAX

3,065.048,772.06

EXCEPTIONAL ITEMS - -

PROFIT BEFOREEXTRAORDINARY ITEMS AND TAX

3,065.04 8,772.06


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EXTRAORDINARY ITEMS - -

PROFIT / (LOSS) BEFORETAXATION 3,065.04 8,772.06

TAX EXPENSE:

Current Income Tax 1,260.04 2,959.36

Deferred Tax Asset (279.32) (101.91)Deferred Tax Liability - -

980.72 2,857.45

PROFITS / (LOSS) FOR THEPERIOD 2,084.32 5,914.61Earning per share

(1) Basic 2.48 7.06

(2) Diluted 2.48 7.03


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CONCLUSION

The company has strong short term liquidity position as both the liquidity ratios are

favorable and appreciable which concludes that company has got sufficient assets to pay off

short term debts as and when they fall due. The company had excellent turnover of various assets

in the year 2004-2005 as the sales rose by 72% indicating better assets management policy. The

assets were efficiently employed to generate maximum sales. However for the year 2005-2006

the turnover ratios suffered because of fall in sales by 31.48% and also there was rise in activity

as compared to past years. For inventory turnover the year 2004-2005 was crucial as it had

minimum investment in different inventories avoiding thus blockage of funds. The company has

strong solvency position as all the solvency ratios are favorable. Debt-equity ratio is favorable

indicating equal share of owners and creditors. The working capital ratio indicates the company

has funded for working capital through long term funds which represents accepted finance

policy. The proprietary ratio indicates around 60% of assets are financed by owners fund which

indicates reasonable creditworthiness to the company. The company has got excellent gross

profit ratio and the trend is rising which is appreciable indicating efficiency in production cost.

The net profit for the year 2005-2006 is excellent and it is 6.17 times past year indicating

reduction in operating expenses and large proportion of net sales available to the shareholders of

company. The company has excellent overall profitability ratios indicating effective use of funds

provided be shareholders and creditors. According to the capital gearing ratio the company is

geared by including fixed income bearing securities with an intention to increase the income of

shareholders.


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BIBLIOGRAPHY

Following books were referred for carrying out the project: -

Financial Management M Y Khan/ P K Jain

Financial Management I M Pandey

Financial Management S M Inamdar

Management Accounting M G Patkar

Annual Reports from 2003-2004 to 2004-2005 of Mannapuram Gold

Following websites were referred: -

www. Mannapuram Gold .com

www.bharatforge.com

www.google.com

Documents

Prashant Fm Project