Arif Saiyad Project Report (1)

7/29/2019 Arif Saiyad Project Report (1)

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A

Project Report On

Ratio Analysis of Nesco Ltd.

Master of Business Administration (Finance)

Submitted in partial fulfilment of the requirements for award of

Master of Business Administration of Tilak Maharashtra

University, Pune.

Submitted by

Saiyad Arifali Mahammadali

PRN: 07208013441

Of

PAI International Centre for Management Excellence, Pune

Guided by

Prof. Zafir Asad

Tilak Maharashtra University

Gultekdi, Pune 411 037


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ACKNOWLEDGEMENT

The satisfaction euphoria that accompanies the successful completion of any work would be

incomplete unless we mention the name of the persons, who made it possible, whose constant

guidance and encouragement served as a beacon of light and crowned our efforts with

success. I consider it a privilege to express through the pages of this report, a few words of

gratitude and respect to those who guided and inspired in the completion of this project. I

am deeply indebted to Prof. R.Ganesan for giving me the opportunity to do this interesting

project and the timely suggestions & valuable guidance.

My sincere thanks to Prof. Zafir Asad Sir who has guided me and provided valuable insight

during the project. He constantly encouraged me and showed the right path from day one up

until the completion of my project.

I express my deep sense of gratitude to finance manager R.G. Upadhay and External guide

(HR executive) Mr. Mansur Thakor for providing necessary information and kind co-

operation.

Saiyad Arifali M


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Tilak Maharashtra University, Pune(Deemed Under Section 3 of UGC Act 1956 Vide Notification

No. F.9-19/85 U3 dated 24th

April 1987 By the Government of India.)

Vidyapeeth Bhavan, Gultekdi, Pune 411 037.

CERTIFICATE

This is toCertify that theproject tiled Ratio

Analysis of NescoLtd.is a bonafidework carried

out by Mr. Saiyad Arifali Mahammadali a

student of Master of Business AdministrationSemester3rd,Specialization Finance PRN.

07208013441under Tilak Maharashtra University, intheyear 2009.Head of theDepartment Examiner Examiner

Internal External

Date:

Place :

University Seal


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Certificate of Internal Guide

This is to certify that the project titledRatio Analysis of Nesco Ltd.

is a bonafide work carried out by Saiyad Arifali Mahammadali a

candidate for the award of Master of Business Administration of Tilak

Maharashtra University, Pune under my guidance and direction.

Signature of guide

Name: Prof. Zafir Asad

Date: Dsignations: Lecturer

Place: Pune Institute: PICME


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Contents

Sr. No. Topic Page No.

1. Rationale of the study 1

2. Objectives of the Study 2

3. Profile of the company 3 - 19

4. Review of Literature 20 - 38

5. Research Methodology 39

6. Data analysis and interpretations 40 - 62

7. Findings 63

8. Limitations of the study 64

9. Appendix 65 - 68

10. Bibliography 69


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Chapter 1

Rationale of

the Study


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RATIONALE OF THE STUDY

Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk

and return relationships of firms of different sizes. It compares historical performance and

current financial condition of the company. The term ratio refers to the numerical or

quantitative relationship between two items or variables. This relationship can be expressed

as

(i). Percentages, (ii). Fraction, (iii). Proportion of numbers.

These alternative methods of expressing items which are related to each other are for

purposes of financial analysis, referred to as ratio analysis. It should be noted that computing

the ratios does not add any information not already inherent in the above figures of profits

and sales. What the ratios do is that they reveal the relationship in a more meaningful way soas to enable equity investors; management and lenders make better investment and credit

decisions.

The rationale of ratio analysis lies in the fact that it makes related information comparable. A

single figure by itself has no meaning but when expressed in terms of a related figure, it

yields significant inferences. For instance, the fact that the net profits of a firm amount to,

say, Rs 10 lakhs throws no light on its adequacy or otherwise. The figure of net profit has to

be considered in relation to other variables. How does it stand in relation to sales? What does

it represent by way of return on total assets used or total capital employed? If therefore net

profits are shown in terms of their relationship with items such as sales, assets, capital

employed, equity capital and so on, meaningful conclusions can be drawn regarding their

adequacy. To carry the above example further, assuming the capital employed to be Rs 50

lakhs and Rs 100 lakhs, the net profit are 20 per cent and 10 per cent respectively. Ratio

analysis thus as a quantitative tool, enable analysis to draw quantitative answers to questions

such as: Are the net profits adequate? Are the assets being used efficiently? Is the firm

solvent? Can the firm meet its current obligations and so on?

So, ratio analysis is one of the techniques of financial analysis where ratios are used as a

yardstick for evaluating the financial condition and performance of a firm. Analysis and

interpretation of various accounting ratio gives a skilled and experienced analyst, a better

understanding of the financial condition and performance of the firm than what he could have

obtained only through a perusal of financial statements.


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Chapter 2

Objectives of

the Study


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OBJ ECTIVES OF THE STUDY

To understand the importance and use of different types of ratios in business.

To assess the liquidity of the company. To evaluate the financial condition and profitability of the company.

To know the working capital requirement of the company.

To compare the past performance of the company systematically. To identify the financial strengths and weakness of the company.

To find out the utility of financial ratios in credit analysis and determining the financial

capability of the firm.


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Chapter 3

Profile of the

Company


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PROFILE OF THE COMPANY

New Standard Engineering Company Ltd. (NSE) is a multi product, multi division enterprise

established in 1939. It was promoted in 1939 by Mr. J. V. Patel. The company was

amalgamated with Burjorji Pestonji & Sons Pvt. Ltd., a company incorporated on April 15,

1946. Its name was subsequently changed to new Standard Engineering Company Ltd. on

May 20, 1959. New Standard Engineering is a well diversified company manufacturing

textile spinning machinery, forging equipment, abrasives & onshore oil recovery equipment

with technology from world's leading corporations viz. Wheelabrator Corporation Inc.,

U.S.A.; Davy McKee (Sheffield) Ltd., U.K.; Salzgitter Machinenbau GmbH, Germany;

&Schubert & Salzer, Ingolstadt, Germany.

Due to prolonged depression in its hitherto main product line-textile machinery & thegestation period for its new products, the company made losses from 1984 till 1990. As a

result, the company approached the BIFR to restructure its past dues.

The BIFR package has restructured & rescheduled the past dues & also provided need based

working capital requirements of the company that would be met by banks at an interest rate

of 15% p.a. The company has received an award for its outstanding performance in exports of

textile preparatory & spinning machinery for 1991-92.

The company has also reached an agreement with Wheelabrator Allevard, France, to set up a

joint venture for the manufacture of abrasives in India.


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Location Details NESCO

Location Type Address

Secretarial Office Nesco Limited Western Express Highway Goregaon East

Mumbai - 400063

Maharashtra - India

Phone : 66450123

Branch Office Ahmedabad Office B, Jadhav Chamber 3rd floor

Ahmedabad - 380006

Gujarat - India

Phone : 6580924,6580927,6587822

Sales & Marketing Office Benoy Bhavan 27-B, 5th floor Camac Street

Kolkata - 700016

West Bengal - India

Phone : 22809703

Branch Office Coimbatore office 1176,1st floor Old sangam,Trichy road

Coimbatore - 641045

Tamil Nadu - India

Phone : 315088

Registered Office &

Factory

Nesco Complex Western Express Highway Goregaon

Mumbai - 400063

Maharashtra - India

Phone : 66450123

Fax : 66450101

Email : [email protected]

Sales & Marketing Office B-1-102, 10th floor Himalaya House

New Delhi - 110001

Delhi - India

Phone : 30422644Fax : 30424679

Sales & Marketing Office Fagun Mansion

Chennai (Madras) - 600105

Tamil Nadu - India

Phone : 28271108, 28721821


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Branch Office Bangalore office 15,

Wood Street 2nd floor

Bangalore - 560025

Karnataka - India

Phone : 5300344

Sales & Marketing Office Anand Sojitra Road

Karamsad -

Gujarat - India

Phone : 237992, 233458

Fax : 237991

Sales & Marketing Office Nadiad Khambat Road P.O Vishnoli Anand -

Gujarat - India

Phone : 235347

Factory/plant Nadiad Khambat Road P.O Vishnoli Tal. Pethlad

Anand - Gujarat - India

Phone : 235347


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History of the Company:-

Established in 1939 as the New Standard Engineering Co. Ltd. (NSE), the company is known

as a pioneer in the tool manufacturing segment, as it brought into the country, world class

processes and designs for the manufacture of a number of engineering products. Equipmentsuch as forging hammers and presses, blow room lines and high production cards for the

textile industry; and sucker rod pumps for on-shore oil recovery were some of the main

product lines that emerged as market leaders. As the products manufactured were high in

quality, the company soon saw an incremental rise in its exports, and not only are it products

market leaders in India, but also have found a niche overseas.

Today, the Engineering Group of Nesco continues to be a leading provider of this equipment

to the Indian Railways, numerous Ordnance Factories, and Forging Plants.

In order to reflect on the various new avenues that the company was entering into, the

promoters of the New Standard Engineering Company, decided to change the name to Nesco

Limited. This reflected in the Company's transformation from a pure play Engineering

Company to that of a diversified one, whose diversification entailed it to be a player in the

services segment.

While the company originally operated from Byculla, and set up two more plants at Parel and

Santacruz. In 1959 it consolidated all these three operations and moved to a 70 acre estate on

the Western Express Highway at Goregaon in Mumbai.

In 1986, the company diversified into the realty business by developing and providing

customized built-up space for multinational companies and leading corporates at Goregaon.

In 1992, the company setup an exhibition centre - known as the Bombay Exhibition Centre -

at its complex on the Western Express Highway at Goregaon, Mumbai. Starting with a hall

area of 2, 00,000 sq. ft., this has now been expanded to over 5, 00,000 sq. ft. This venue holds

the distinction of being the largest exhibition centre promoted by the private sector in India

and has hosted over 500 national and international exhibitions, trade fairs, and events since

inception. What sets this Venue apart from the rest is the presence of various permanently air

conditioned hall's ranging from an area of 2,000 Sq. Mts to 20,000 Sq. Mts.


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ORGANIZATION STRUCTURE:-

Milestones Achieved:-

First to bring into India, world class manufacturing process and product designs forForging tools and pumps for on-shore oil recovery.

First Private Exhibition Centre located in the heart of Mumbai, just adjacent to theWestern Express Highway, which serves as an important arterial road transporting

goods to and from the City.

S J PATEL

CMD

R GUPADHAYAY

Finance

M P PARIKH

CEO

M A

VASAVDA

PRESIDNET

T K KACHHIA

VP

J RSUKHADIA

WORKS(K)

B K PATEL

FOUNDRY

P K PARMAR

DESIGN

S R SHAH

PURCHASE

B A PATEL

WORKS (V)

S KMACWAN

HR

A R

KANSARA

P&A

N R PATEL

QC

A R SHAH

ED

N R SHAH

DGM

R H BHATT

MARKETING


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Founder and Chairman:-

Shri J ethabhai Vaghjibhai Patel

Founder Nesco Group

12 J uly 1904 24 J anuary 1996

From a humble beginning, the respected founder Shri Jethabhai Patel created a diversified

business group. He was a true entrepreneur, a person ahead of his times who had courage,

conviction and confidence to achieve the most difficult.

Starting the New Standard Eng. Co. (now known as Nesco Ltd) in 1939 as a small job

workshop, Jethabhai never looked back. He continued to expand by setting up one new unit

after another. He also acquired and turned around 10 companies, as a result he was often

referred as Doctor of Sick Units.

Jethabhai was a pioneer, manufacturing for the first time in India several new products. He

established relations with world leading companies so as to bring to India the latest

technology products.

The Bhagavad Gita states "Your right is with the action only, never to the fruits." This was

closest to Jethabhai's heart.

Jethabhai gave utmost importance to the youth of rural areas and strived to give them the

right direction. He firmly considered that excellent outcome can be attained only by effective

management. Jethabhai's main motto was "There is no substitute for hard work".


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Jethabhai believed in giving back to the society and helped set up schools, hospitals, and

contributed to several other social causes. Jethabhai's values, vision, leadership qualities,

humility will guide and inspire us and future generations at Nesco. Though Jethabhai is no

more, his legacy will live forever.


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Companys Mission:-

"Setting the stage for exhibiting progress" The Bombay Exhibition Centre is driven to emerge

as a purpose-built Convention and Exhibition Centre which offers organizers, participants

and visitors, a touch of Indian hospitality backed up by robust infrastructure for thesuccessful culmination of any event.

Leave Blank The Realty Group imbibes best practices for facilities development and

management, which delivers a secure and pleasant working environment for its client and

their employees.

"The pioneers in meshing global designs with local manufacturing talent" The Engineering

Group delivers stable and functional tools which delivers customer satisfaction and trust,

backed up by a constant improvement in design, cost efficiency, delivery and after sales

service.

Companys Vision:-

The company is committed to customer satisfaction by providing excellent / world class

facilities and services for their exhibitions & events and become top exhibition centre in

India.

Companys Value:-

Nesco Group will act with absolute honesty & integrity in dealing with its Customers,Employees, Stakeholders and Society at large.

Nesco will always care for its customers by delivering value to them & delight themthrough quality products & services.

Nesco will encourage creativity & innovation across the organization and offer equalopportunity for growth to all employees through a culture of meritocracy, teamwork,

commitment & discipline.

Nesco will always adopt fair practices and will aim to become a symbol of Trust &Reliability for all stakeholders. It will strive to maximize value for shareholders as

well as all stakeholders in a balanced manner.


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Companys Policy:-

Indabrator firmly believe that quality cannot happen. It has to be built into the product. It is

committed to provide products and services of a quality that meet the needs and expectations

of customers at a competitive price and Achieve product quality excellence by continualimprovement through strictly adhering to quality management system as per ISO 9001

2000 requirements.

It is committed to continually improve environmental conditions by utilising environment

friendly technique to control potential hazards, reduce risk factors and improve

environmental conditions through strictly adhering to environment management system as

per ISO 14000: 2004 requirements.

It is committed to provide training & tools for safe operation systems to continually improve

occupational health & safety of interested parties as per OSHA 180001: 1999 guidelines.

It is committed to comply with current applicable statutory & regulatory requirements for

production, environment management, occupational health & safety management.


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Board of Directors:-

Chairman & Managing Director Shri. Sumant J . Patel

Director Mr. Ram Tarneja

Director Mr. Bharat Patel

Director Mr. Srinivasa Moorthy

Director Mr. Mahendra. K.Chauhan

J t. Managing Director Mrs. Sudha Patel

Director Mr. Mohan. P. Parikh

Executive Director Mr. Krishna Patel


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GROUP COMPANIES:-

INDABRATOR BOMBAY

EXHIBITION

CENTRE

NESCO

REALTY


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INDABRATOR DIVISION:-

Indabrator is leading manufacturer, supplier and exporter of surface preparation equipments,

providing services to various Indian industries; mainly Foundries, Forging plants,

Automotive industries, Indian railways, Defence organizations, Heavy engineering industries,Ship building industries, Chemical and petrochemical industries etc.

It believes in establishing long term business relationships with its clients by providing them

with nothing short of the best.

Its aim is to provide excellence in its entire range of products; it has successfully supplied

more than 10,000 +machines to a cross section of industries in the domestic as well as the

international market. Presently, its export about 20% of its products to the Middle East,

Bangladesh, Indonesia, Sri Lanka, UK, USA, African Countries and many other places across

the globe.

It has its own captive Alloy Iron Foundry employing shell moulding process for manufacture

of wear resistant components for shot blasting machines. This enables its customers to get all

spares of shot blasting machine off the shelf, so that they do not have to maintain undue

inventory. It supplies quality steel shots & grits to the specifications of IS: 4606/SAE J827.

This enables its clients to get quality abrasives i.e. steel shots & grits at reasonable prices and

in shorter delivery period.

Its sales and service branches are located at Mumbai, Delhi, Kolkata, Chennai, Karamsad

(near Anand, Gujarat) and at Dubai (U.A.E.). These branches provide, after sales service

through service engineers stationed at these branches and supply fast wearing spare parts.


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Mission and Values:-

Its Mission is to become the largest Surface Preparation System provider in Asia, known for

its quality, technology, fully integrated range, innovation, dynamism, ethical behaviour and

business results; and build long lasting customer relationships that will make it their preferredsupplier.

Honesty and Integrity: Nesco group will act with absolute honesty and integrity indealing with its customers, employees, stakeholders and society at large

Care and Concern: Nesco group will always care for its customers by deliveringvalue to them and delight them through quality products and services

Teamwork: Nesco will encourage creativity and innovation across the organizationand offer equal opportunity for growth to all employees through a culture of

meritocracy, team work, commitment and discipline

Trust and Reliability: Nesco will always adopt fair practices and thereby, will aim tobecome a symbol of trust and reliability for all stakeholders. It will strive to maximize

value for its stakeholders in a balanced manner.

Quality Certifications

Customer satisfaction is the hallmark that has earned it several accolades and honours. This

has given it a competitive edge over other players functioning in the same industry.

Following are some of the citations bestowed on Nesco Limited.

ISO 9001 : 2000 ISO 14001:2004 ISO 18001:1999.


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Product and Application:-

Applications

DebarringDeflashing

Descaling

Painting

Peening

Coating removal

Etching

Profiling

Rust removal

Sand removal

Industry Vertical

AutomotiveFoundry / Forge

Steel

Railways

Shipyards

Manufacturing

Equipment

Blasting equipmentsPeening equipments

Spare

Erection and commissioning

Companys Client:-

Indabrator has supplied 10000+equipments in last 43 years of its existence in India and

abroad. Its clients range from public sectors enterprises such as BHEL, BEML, NALCO,

Cochin Shipyards, Indian Railways, HAL to private sector corporate like TATA group,

J indal, L & T, Bajaj and many more.

As per the requirement of its esteemed client we manufacture standard or customized models

of shot blasting / Peening equipments and add value to their primary products.


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BOMBAY EXHIBITION CENTRE:-

Bombay Exhibition Centre (BEC) is the largest and permanent exhibition centre, in the

private sector, in India and was set up in 1991. BEC has hosted several prestigious

International trade fairs/exhibitions ever since.

The centre is ideally situated along the Western Express Highway in Goregaon, within 10

minutes from airports, walking distance to train stations and a 20 minute drive from the heart

of the city. There are numerous hotels, entertainment activities, retail shopping & sightseeing

spots in close proximity.

BEC consists of four halls occupying over 45,000 sq.mtrs of centrally air-conditioned space

for conducting exhibitions. The halls are Wi-Fi enabled, have ample height, good lighting,

well-designed ventilation and strong flooring to withstand even the heaviest machinery.

Major highlights of the available facilities for organizing large or medium scale events in the

commercial and business capital of our country Mumbai, include air-conditioned Seminar/

Convention halls, International lounges, operational air-conditioned restaurants, open air

cafeterias, business communication centres, site offices, service centres and sufficient parking

space within the complex having serene and lush-green surroundings.

Utilities and infrastructure to meet demands of power, water supply and compressed airsupply, telephone lines are available within the exhibition halls to facilitate organization of

major industrial trade fairs/exhibitions.


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Amenities & Facilities:-

The centre is the largest in the private sector in India and plays a pivotal role in further

enhancing the reputation of Mumbai as an international convention city. BEC consists of 4

halls, occupying an area of over 4, 00,000 sq. ft. Plans for expansion are under way. Each hallis Wi-Fi enabled, has ample height, well air-conditioned with tough flooring that can

withstand even the heaviest machinery

Large parking lots inside BEC accommodate over 2000 vehicles at any given time and

loading / offloading can be done from special bays in the halls.

Due to ample power infrastructure, every single machine in the exhibit area can be powered

and made operational to display its features.

Organisers can avail of the following facilities in and around the premises of BEC: -

A convention centre Conference and seminar halls An international lounge An open air area for inaugural / valedictory functions Restaurants

It is the BECs endeavour to provide better infrastructure facilities and services for ensuring

the success of the exhibition & event.


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NESCO REALTY :-

Capitalizing on an area of over 70 acres, in 1986, the Company decided to diversify into

facilities development and management business. Strategically located at Goregaon in

Mumbai, adjacent to the Western Express Highway, it was setup with a simple mission to

become "the preferred location" for corporate by constructing good quality premises, backed

up by consistent and reliable amenities such as uninterrupted power and water, to deliver a

safe and enhanced work atmosphere to our clients. It handle complete property transactions

(right from sourcing of clients to concluding the deal) related to leasing of space for various

real estates use viz., InfoTech, commercial office, industrial, retail and logistics /

warehousing.

As part of its ongoing effort to enhance our deliverables in this segment, it has successfully

received permission to develop an IT Park. This effort will cover a half-million Square Feet

and will be recognized by the STPI as an Export Processing Zone. With this, it plans on

attracting most blue chips IT companies

Its reputed licensee's includes:

Schlumberger Asia Services Limited Sodexo India Citi Group Services Ltd. (a Citibank subsidiary) Intelenet Global Services Pvt. Ltd.)

Sparsh (an Intelenet subsidiary)


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Chapter 4

Review of

Literature


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REVIEW OF LITERATURE

Meaning of Ratio:-

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.

Ratio can be expressed in two ways:

(1). Times: - When one value is divided by another, the unit used to express the quotient is

termed as Times. For example, if out of 100 students in a class, 80 are present, the

attendance ratio can be expressed as follows:

=80 / 100 =.8 Times

(2). Percentage: - If the quotient obtained is multiplied by 100, the unit of expression is

termed as Percentage. For instance, in the above example, the attendance ratio as a

percentage of the total number of students is as follows:

= .8 X 100 =80%

Accounting ratio are, therefore mathematical relationships expressed between inter-connected

accounting figures.


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Following are the objectives of ratio analysis technique:

A financial ratio is a relationship between two financial variables. It helps to ascertainthe financial condition of a firm.

In ratio analysis, the liquidity ratio measures the firms ability to meet currentobligations and is calculated by establishing relationships between current assets and

current liabilities.

The profitability ratio measure the overall performance of the firm by determining theeffectiveness of the firm in generating profit and are calculated by establishing

relationship between profit figures on the one hand and sales and assets on the other.

The main objective of using this technique to judge the performance of the business.Ratio throws light on the profitability of the business, solvency position of the

business, liquidity of the business etc.

Comparisons of ratios of a business enterprise either with ratios of the same concernfor past periods or with ratio of the concern for same period or both, reveals the

weakness of the business and the point of its strengths. Points of weakness are further

investigated and corrective action is taken.

Thus, ratios are useful and perhaps the indispensable part of financial analysis. They

provide the analyst of underlying conditions.


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Ratio analysis is relevant in assessing the performance of a firm in respect of the

following aspects:

Liquidity position

Long term solvency

Operating efficiency

Overall profitability

Inter firm comparison

Trend analysis

We can use ratio analysis to try to tell us whether the business

is profitable

has enough money to pay its bills

could be paying its employees higher wages

is paying its share of tax

is using its assets efficiently

has a gearing problem

is a candidate for being bought by another company or investor


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Importance of Ratio Analysis:-

As a tool of financial management, ratios are of crucial significance. The importance of ratio

analysis lies in the fact that it presents facts on a comparative basis and enables the drawing

of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the

performance of a firm in respect of the following aspects:

Liquidity Position:-With the help of ratio analysis conclusions can be drawn regarding the liquidity

position of a firm. The liquidity position of a firm would be satisfactory if it is able to

meet its current obligations when they become due. A firm can be said to have the

ability to meet its short-term liabilities if it has sufficient liquid funds to pay the

interest on its short-maturing debt usually within a year as well as to repay theprincipal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios

are particularly useful in credit analysis by banks and other suppliers of short-term

loans.

Long-term Solvency:-Ratio analysis is equally useful for assessing the long-term financial viability of a

firm. This aspect of the financial position of a borrower is of concern to the long-term

creditors, security analyst and the present and potential owners of a business. Thelong-term solvency is measured by the leverage or capital structure and profitability

ratios which focus on earning power and operating efficiency. Ratio analysis reveals

the strengths and weaknesses of a firm in this respect. The leverage ratios for instance

will indicate whether a firm has a reasonable proportion of various sources of finance

or if it is heavily loaded with debt in which case its solvency is exposed to serious

strain. Similarly, the various profitability ratios would reveal whether or not the firm

is able to offer adequate return to its owners consistent with the risk involved.

Operating Efficiency:-Yet another dimension of the usefulness of the ratio analysis, relevant from the

viewpoint of management, is that it throws light on the degree of efficiency in the

management and utilization of its assets. The various activity ratios measure this kind

of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis,


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dependent upon the sales revenues generated by the use of its assets-total as well as its

components.

Overall Profitability:-Unlike the outside parties which are interested in one aspect of the financial positionof a firm, the management is constantly concerned about the overall profitability of

the enterprise. That is, they are concerned about the ability of the firm to meet its

short-term as well as long-term obligations to its creditors, to ensure a reasonable

return to its owners and secure optimum utilization of the assets of the firm. This is

possible if an integrated view is taken and all the ratios are considered together.

Inter-firm Comparison:-Ratio analysis not only throws light on the financial position of a firm but also serves

as a stepping stone to remedial measures. This is made possible due to inter-firm

comparison and comparison with industry averages. A single figure of a particular

ratio is meaningless unless it is related to some standard or norm. One of the popular

techniques is to compare the ratios of a firm with the industry average. It should be

reasonably expected that the performance of a firm should be in broad conformity

with that of the industry to which it belongs. An inter-firm comparison would

demonstrate the firms position vis-a-vis its competitors. If the results are at variance

either with the industry average or with those of the competitors, the firm can seek to

identify the probable reasons and in that light, take remedial measures. Ratio analysis

provides data for inter-firm comparison. Ratios highlight the factors associated with

successful and unsuccessful firms. They also reveal strong firms and weak firms,

over-valued and under-valued firms.

Make Intra-firm Comparison Possible:-Ratio analysis also makes possible comparison of the performance of the different

division of the firm. The ratios are helpful in deciding about their efficiency or

otherwise in the past and likely performance in the future.

Trend Analysis:-Finally, ratio analysis enables a firm to take the time dimension into account. In other

words, whether the financial position of affirm is improving or deteriorating over the


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years. This is made possible by the use of trend analysis. The significance of trend

analysis of ratio lies in the fact that the analysts can know the direction of movement,

that is, whether the movement is favourable or unfavourable. For example, the ratio

may be low as compared to the norm but the trend may be upward. On the other hand,

though the present level may be satisfactory but the trend may be a declining one.

Simplifies Financial Statements:-Ratio analysis simplifies the comprehension of financial statements. Ratios tell the

whole story of change in the financial condition of the business.

Help in Planning:-Ratio analysis helps in planning and forecasting. Over a period of time a firm or

industry develops certain norms that may indicate future success or failure. If

relationship changes in firms data over different time periods, the ratios may provide

clues on trends and future problems.

Thus, ratios can assist management it its basic function of forecasting, planning,

coordination, control and communication.


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Limitation of the Ratio Analysis:-

Ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various

limitations. The operational implication of this is that while using ratios, the conclusions

should not be taken on their face value. Some of the limitations which characterise ratio

analysis are as follows:

Difficulty in Comparison:-One serious limitation of ratio analysis arises out of the difficulty associated with their

comparability. One technique that is employed is inter-firm comparison. But such

comparisons are vitiated by different procedures adopted by various firms. The

differences may relate to:

Differences in the basis of inventory valuation Different depreciation methods

Estimated working life of assets, particularly of plant and equipments

Amortization of intangible assets like goodwill, patents and so on

Amortization of deferred revenue expenditure such as preliminary expenditureand discount on issue of shares

Capitalization of lease

Treatment of extraordinary items of income and expenditure and so on.Secondly, apart from different accounting procedures, companies may have different

accounting periods, implying differences in the composition of the assets particularlycurrent assets. For these reasons, the ratios of two firms may not be strictly

comparable.

Another basis of comparison is the industry average. This presupposes the

availability, on a comprehensive scale, of various ratios for each industry group over a


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period of time. If, however, as is likely, such information is not compiled and

available, the utility of ratio analysis would be limited.

Impact of Inflation:-The second major limitation of the ratio analysis as a tool of financial analysis isassociated with price level changes. This, in fact, is a weakness of the traditional

financial statements which are based on historical costs. And implication of the is

feature of the financial statements as regards ratio analysis is that assets acquired at

different periods are, in effect, shown at different prices in the balance sheet, as they

are not adjusted for changes in the price level. As a result, ratio analysis will not yield

strictly comparable and therefore dependable results. To illustrate, there are two firms

which have identical rates of returns on investments, say 15 per cent. But one of these

had acquired its fixed assets when prices were relatively low, while the other one had

purchased them when prices were high. As a result the book value of the fixed assets

of the former type of firm would be lower, while that of the latter higher. From the

point of view of profitability, the return on the investment of the firm with a lower

book value would be over-stated. Obviously, identical rates of returns on investment

are not indicative of equal profitability of the two firms. This is a limitation of ratios.

Conceptual Diversity:-Yet another factor which influences the usefulness of ratios is that there is difference

of opinion regarding the various concepts used to compute the ratios. There is always

room for diversity of opinion as to what constitutes shareholders equity, debt, assets,

and profit and so on. Different firms may use these terms in different senses or the

same firm may use them to mean different things at different times.

Reliance on a single ratio for a particular purpose may not be a conclusive indicator.

For instance, the current ratio alone is not an adequate measure of short-term financial

strength; it should be supplemented by the acid-test ratio, debtor turnover ratio andinventory turnover ratio to have a real insight into the liquidity aspect.

Limitation of Financial Statements:-Ratios are based only on the information which has been recorded in the financial

statements. Financial statements suffer from a number of limitations, the ratios


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derived there from, therefore, are also subject to those limitations. For example, non-

financial changes through important for the business are not revealed by the financial

statements. If the management of the company changes, it may have ultimately

adverse effects on the future profitability of the company but this cannot be judged by

having a glance at the financial statements of the company.

Similarly, the management has a choice about the accounting policies. Different

accounting policies may be adopted by management of different companies regarding

valuation of inventories, depreciation, research and development expenditure and

treatment of deferred revenue expenditure, etc. The comparison of one firm with

another on the basis of ratio analysis without taking into account the fact of

companies having different accounting policies, will be misleading and meaningless.

Moreover, the management of the firm itself may change its accounting policies form

one period to another. It is, therefore, absolutely necessary that financial statements

are they subjected to close scrutiny before an analysis attempted on the basis of

accounting ratio. The financial analyst must carefully examine the financial

statements and make necessary adjustments in the financial statements on the basis of

disclosure made regarding the accounting policies before undertaking financial

analysis.

The growing realization among accountants all over the world, that the accounting

policies should be standardized, has resulted in the establishment of International

Accounting Standards Committee which has issued a number of International

Accounting Standards. In our country, the Institute of Chartered Accountants of India

has established Accounting Standards Board for formulation of requisite accounting

standards. The accounting Standards Board had already issued nineteen standards

including AS-1: Disclosure of accounting Policies. The standard AS-1 has been made

mandatory in respect of accounting periods beginning on or after 1.4.1991. It is hoped

that in the years to come, with the progressive standardization of accounting policies,

this problem will be solved to a great extent.

Ratio alone are not adequate:-Ratios are only indicators; they cannot be taken as final regarding good or bad

financial position of the business. Other things have also to be seen. For example, a

high current ratio does not necessarily mean that the concern has a good liquid


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position in case current assets mostly comprise outdated stocks. It has been correctly

observed, Ratio must be used for what they are financial fools. Too often they are

looked upon as ends in themselves rather than as a means to an end. The value of a

ratio should not be regarded as good or bad inter se. It may be an indication that a

firm is weak or strong in a particular area, but it must never be taken as proof. Ratiosmay be linked to railroads. They tell the analyst, Stop, look, and listen.

Window Dressing:-The term window dressing means manipulation of accounts in a way so as to conceal

vital facts and present the financial statement in a way to show a better position that

what is actually is. On account of such a situation, presence of a particular ratio may

not be a definite indicator of good or bad management. For example, a high stock

turnover ratio is generally considered to be an indication of operational efficiency of

the business. But this might have been achieved by unwarranted price reductions or

failure to maintain proper stock of goods.

Similarly, the current ratio may be improved just before the Balance Sheet date by

postponing replenishment of inventory. For example, if a company has got current

assets of Rs. 4000 and current liabilities of Rs. 2000, the current ratio is 2, which is

quite satisfactory. In case the company purchases goods of Rs. 2000 on credit, the

current assets would go up to Rs. 6000 and current liabilities to Rs. 4000. Thus,reducing the current ratio to 1.5. The company may, therefore, postpone the purchases

for the early next year so that its current ratio continues to remain at 2 on the Balance

Sheet date. Similarly, in order to improve the current ratio, the company may pay off

certain pressing current liabilities before the Balance Sheet date. For example, if in

the above case the company pays current liabilities of Rs. 1000, the current liabilities

would stand reduced to Rs. 1000, current assets would stand reduced to Rs. 3000 but

the current ratio would go up to 3.

No Fixed Standards:-No fixed standards can be laid down for ideal ratios. For example, current ratio is

generally considered to be ideal if current assets are twice the current liabilities.

However, in case of those concerns which have adequate arrangements with their


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bankers for providing funds when they require, it may be perfectly ideal if current

assets are equal to slightly more than current liabilities.

It is, therefore, necessary to avoid many rules of thumb. Financial analysis is an

individual matter and value for a ratio which is perfectly acceptable for one company

or one industry may not be at all acceptable in case of another.

Ratios are a Composite of Many Figures:-Ratios are a composite of many different figures. Some cover a time period, others are

at an instant of time while still others are only averages. It has been said that, a man

who has his head in the oven and his feet in the ice-box is on the average,

comfortable! Many of the figures used in the ratio analysis are no more meaningful

than the average temperature of the room in which this man sits. A balance sheet

figure shows the balance of the account at one moment of one day. It certainly may

not be representative of typical balance during the year.

It may, therefore, be concluded that ratio analysis, if done mechanically, is not only

misleading but also dangerous. It is indeed a double edged sword which requires a

great deal of understanding and sensitivity of the management process rather than

mechanical financial skill. It has rightly been observed: The ratio analysis is an aid to

management in taking correct decisions, but as a mechanical substitute for thinking

and judgment, it is worse than useless. The ratio if discriminately calculated and

wisely interpreted can be a useful tool of financial analysis.

Finally, ratios are only a post-mortem analysis of what has happened between two balance

sheet dates. For one thing, the position in the interim period is not revealed by ratio analysis.

Moreover, they give no clue about the future.

In brief, ratio analysis suffers from some serious limitations. The analyst should not be

carried away by its oversimplified nature, easy computation with a high degree of precision.

The reliability and significance attached to ratios will largely depend upon the quality of data

on which they are based. They are as good as the data itself. Nevertheless, they are an

important tool of financial analysis.


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Financial Ratio Analysis

Financial ratio analysis is the calculation and comparison of ratios which are derived from the

information in a company's financial statements. The level and historical trends of these

ratios can be used to make inferences about a company's financial condition, its operations

and attractiveness as an investment.

Financial ratios are calculated from one or more pieces of information from a company's

financial statements. For example, the "gross margin" is the gross profit from operations

divided by the total sales or revenues of a company, expressed in percentage terms. In

isolation, a financial ratio is a useless piece of information. In context, however, a financial

ratio can give a financial analyst an excellent picture of a company's situation and the trends

that are developing.

A ratio gains utility by comparison to other data and standards. Taking our example, a gross

profit margin for a company of 25% is meaningless by itself. I f we know that this company's

competitors have profit margins of 10%, we know that it is more profitable than its industry

peers which are quite favourable. If we also know that the historical trend is upwards, for

example has been increasing steadily for the last few years, this would also be a favourable

sign that management is implementing effective business policies and strategies.

Financial ratio analysis groups the ratios into categories which tell us about different facets ofa company's finances and operations. An overview of some of the categories of ratios is given

below.

Leverage Ratios which show the extent that debt is used in a company's capitalstructure.

Liquidity Ratios which give a picture of a company's short term financial situation orsolvency.

Operational Ratios which use turnover measures to show how efficient a company isin its operations and use of assets.

Profitability Ratios which use margin analysis and show the return on sales andcapital employed.

Solvency Ratios which give a picture of a company's ability to generate cash flow andpay it financial obligations.


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Types of Ratios:-

Liquidity Ratios

Liquidity refers to the ability of a firm to meet its short-term financial obligationswhen and as they fall due.

The main concern of liquidity ratio is to measure the ability of the firms to meet theirshort-term maturing obligations. Failure to do this will result in the total failure of the

business, as it would be forced into liquidation.

Current Ratio

The Current Ratio expresses the relationship between the firms current assets and its current

liabilities. Current assets normally include cash, marketable securities, accounts receivableand inventories. Current liabilities consist of accounts payable, short term notes payable,

short-term loans, current maturities of long term debt, accrued income taxes and other

accrued expenses (wages).

Current Ratio = Current Assets / Current Liabilities

The rule of thumb says that the current ratio should be at least 2 that are the current assets

should meet current liabilities at least twice.

Quick Ratio

Measures assets that are quickly converted into cash and they are compared with current

liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.

inventories.

The quick ratio, also referred to as acid test ratio, examines the ability of the business to

cover its short-term obligations from its quick assets only (i.e. it ignores stock). The quick

ratio is calculated as follows

Quick Ratio / Acid-test Ratio =Quick Assets / Current Liabilities

Clearly this ratio will be lower than the current ratio, but the difference between the two (the

gap) will indicate the extent to which current assets consist of stock.


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Turnover Ratio

The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Another way

of examining the liquidity is to determine how quickly certain current assets are converted

into cash. The ratios to measure these are referred to as turnover ratios. In fact, liquidity ratios

are not independent of activity ratios. Poor debtor or inventory turnover ratios limit the

usefulness of the current and acid-test ratios. Both obsolete / unsalable inventory and

uncollectible debtors are unlikely to be sources of cash. Therefore, the liquidity ratios should

be examined in conjunction with relevant turnover ratios affecting liquidity.

Inventory Turnover Ratio

It is computed by dividing the cost of goods sold by the average inventory. Thus,

Inventory Turnover Ratio =Cost of Goods sold / Average Inventory

This ratio measures the stock in relation to turnover in order to determine how often the stock

turns over in the business.

It indicates the efficiency of the firm in selling its product. It is calculated by dividing the cost

of goods sold by the average inventory.

The ratio shows a relatively high stock turnover which would seem to suggest that thebusiness deals in fast moving consumer goods.

The trend shows a marginal increase in days which indicates a slowdown of stockturnover.

The high stock turnover ratio would also tend to indicate that there was little chanceof the firm holding damaged or obsolete stock.

Debtors Turnover Ratio

It is determined by dividing the net credit sales by average debtors outstanding during the

year. Thus,

Debtors turnover ratio =Net credit sales / Average debtors


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Net credit sales consist of gross credit sales minus returns, if any, from customers. Average

debtors are the simple average of debtors including bills receivable at the beginning and at

the end of the year. The analysis of the debtors turnover ratio supplements the information

regarding the liquidity of one item of current assets of the firm. The ratio measures how

rapidly receivables are collected. A high ratio is indicative of shorter time-lag between creditsales and cash collection.

Creditors Turnover Ratio

It is a ratio between net credit purchases and the average amount of creditors outstanding

during the year. It is calculated as follows:

Creditors Turnover Ratio =Net credit purchases / Average Creditors

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio

shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool

of analysis as a firm can reduce its requirement of current assets by relying on suppliers

credit. The extent to which trade creditors are willing to wait for payment can be

approximated by the creditors turnover ratio.

Financial Leverage Ratios

The ratios indicate the degree to which the activities of a firm are supported bycreditors funds as opposed to owners.

The relationship of owners equity to borrowed funds is an important indicator offinancial strength.

The debt requires fixed interest payments and repayment of the loan and legal actioncan be taken if any amounts due are not paid at the appointed time. A relatively high

proportion of funds contributed by the owners indicate a cushion (surplus) which

shields creditors against possible losses from default in payment.

The greater the proportion of equity funds, the greater the degree of financial strength.Financial leverage will be to the advantage of the ordinary shareholders as long as the

rate of earnings on capital employed is greater than the rate payable on borrowed

funds.


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Debt to Equity ratio

This ratio indicates the extent to which debt is covered by shareholders funds. It reflects the

relative position of the equity holders and the lenders and indicates the companys policy on

the mix of capital funds. The debt to equity ratio is calculated as follows:

DebtEquity Ratio =Long-term Debt / Shareholders Equity

Debt to Total Capital Ratio

The relationship between creditors funds and owners capital can also be expressed in terms

of another leverage ratio. This is the debt to total capital ratio. Here, the outside liabilities are

related to the total capitalization of the firm and not merely to the shareholders equity.

Essentially, this type of capital structure ratio is a variant of the D/E, ratio described above. Incan be calculated as follows:

Debt to Total Capital Ratio =Total Debt / Total Assets

Profitability Ratios

Profitability is the ability of a business to earn profit over a period of time. Although the

profit figure is the starting point for any calculation of cash flow, as already pointed out,

profitable companies can still fail for a lack of cash.

A company should earn profits to survive and grow over a long period of time.

Profits are essential, but it would be wrong to assume that every action initiated bymanagement of a company should be aimed at maximising profits, irrespective of

social consequences.

The ratios examined previously have tendered to measure management efficiency and risk.

Profitability is a result of a larger number of policies and decisions. The profitability ratios

show the combined effects of liquidity, asset management (activity) and debt management

(gearing) on operating results. The overall measure of success of a business is the

profitability which results from the effective use of its resources.


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Gross Profit Margin

Normally the gross profit has to rise proportionately with sales.

It can also be useful to compare the gross profit margin across similar businessesalthough there will often be good reasons for any disparity.

This indicates that the rate in increase in cost of goods sold are less than rate ofincrease in sales, hence the increased efficiency.

Gross Profit Margin =Gross Profit / Sales X 100

Net Profit Margin

This is a widely used measure of performance and is comparable across companies in similar

industries. The fact that a business works on a very low margin need not cause alarm because

there are some sectors in the industry that work on a basis of high turnover and low margins,

for examples supermarkets and motorcar dealers.

What is more important in any trend is the margin and whether it compares well with similar

businesses. However, to know how well the firm is performing one has to compare this ratio

with the industry average or a firm dealing in a similar business.

Net Profit Margin =Net Profit / Sales X 100

Earnings per Share (EPS)

Whatever income remains in the business after all prior claims, other than owners claims (i.e.

ordinary dividends) have been paid, will belong to the ordinary shareholders who can then

make a decision as to how much of this income they wish to remove from the business in the

form of a dividend, and how much they wish to retain in the business. The shareholders are

particularly interested in knowing how much has been earned during the financial year on

each of the shares held by them. For this reason, earnings per share figure must be calculated.

Clearly then, the earning per share calculation will be:

EPS =Net Profit available to Equity holders / Number of ordinary shares outstanding


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Dividend Pay-out Ratio

D/P ratio is also known as pay-out ratio. It measures the relationship between the earnings

belonging to the ordinary shareholders and the dividend paid to them. In other words, the D/P

ratio shows what percentage share of the net profits after taxes and preference dividend is

paid out as dividend to the equity-holders. It can be calculated by dividing the total dividend

paid to the owners by the total profits / earnings available to them. Alternatively, it can be

found out by dividing the DPS by the EPS. Thus,

D/P Ratio =Dividend per ordinary Share (DPS) / Earnings per share (EPS) X 100

Activity Ratios

If a business does not use its assets effectively, investors in the business would rather taketheir money and place it somewhere else. In order for the assets to be used effectively, the

business needs a high turnover.

Unless the business continues to generate high turnover, assets will be idle as it is impossible

to buy and sell fixed assets continuously as turnover changes. Activity ratios are therefore

used to assess how active various assets are in the business.

Total Assets Turnover

Asset turnover is the relationship between sales and assets

The firm should manage its assets efficiently to maximise sales.

The total asset turnover indicates the efficiency with which the firm uses all its assetsto generate sales.

It is calculated by dividing the firms sales by its total assets. Generally, the higher the firms total asset turnover, the more efficiently its assets

have been utilized.

Total Assets Turnover Ratio =Cost of Goods Sold / Average Total Assets


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Fixed Asset Turnover

The fixed assets turnover ratio measures the efficiency with which the firm has been using its

fixed assets to generate sales.

Generally, high fixed assets turnovers are preferred since they indicate a betterefficiency in fixed assets utilization.

It appears that the activity of the business is relatively constant, with a slight upwardtrend.

The ratio also confirms that the business places a much greater reliance on workingcapital than it does on the fixed assets as the fixed assets (2001 and 2002) turned over

more quickly than stock turnover.

Fixed Assets Turnover =Cost of Goods Sold / Average Fixed Assets


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Chapter 5

ResearchMethodology


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RESEARHC METHODOLOGY

The focus of this chapter is on the methodology used for the collection of data for research.

Data constitutes the subject matter of the analyst. The primary sources of the collection of

sources of the collection of data are observations, Interviews and the questionnaire technique.

The secondary sources are collections of data are from the printed and annually published

materials. A questionnaire form is prepared to secure responses to certain questions. It is

device for securing answers to questions by using a form.

The questionnaire technique is economical and time saving and is an important tool of

collecting information.

Research Design:

A research design is the detailed blue print used to guide a research study towards its

objective. It helps to collect, measure and analysis of data.

The study undertaken is of Descriptive Historical Research Method. Descriptive research is

those which are connected with describing the characteristics of the particular topic.

Secondary data:

Secondary data highlights the contextual familiarities for primary data collection. It provides

rich insights into the research process.

Secondary data is collected through magazine, reference books, journal, articles, websites etc.

Secondary data like balance sheet and profit and loss account and cash flow statement

collected through company and company websites and part of theory from reference books.

Tools and Techniques

In this industry project work the ratio analysis technique has been used. In this project ratio

analysis technique is used for interpretation and evaluation of financial statements.


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Chapter 6

DataCollection and

Analysis


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DATA ANALY SIS AND INTERPRETATION

1. LIQUIDITY RATIOS

A. Current Ratio:-The current ratio of a firm measures its short-term solvency, that is, its ability to meet short-

term obligations as a measure of short-term/current financial liquidity; it indicates the rupees

of current assets (cash balance and its potential source of cash) available for each rupee of

current liability/obligation payable. The higher the current ratio, the larger is the amount of

rupees available per rupee of current liability, the more is the firms ability to meet current

obligations and the greater is the safety of funds of short-term creditors. Thus, current ratio,

in a way, is a measure of margin of safety to the creditors. It is calculated as follows:

Current Ratio = Current Assets / Current Liabilities

Calculation of Current Ratio with Diagram: (Rs. In Crores)

Particulars Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Current Assets 9.70 18.41 18.47 28.39 49.55 68.32

Current Liabilities 17.11 26.20 34.03 37.38 59.33 65.79

Current Ratio 0.56 0.70 0.54 0.75 0.83 1.04


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Diagram of Current Ratio:-

Interpretation:-

Current ratio 2:1 shows excellent liquidity position of the firm. Current ratio between 1:1 to 2:1 shows satisfactory position of the company. Ratio less than 1:1 shows no liquidity at all.

Generally current ratio should 2:1 but as per our calculation inMar'04 it was 0.56, it means

company has 0.56 rupees current assets against current liability on rupees 1. Company has

less current assets than current claims against them. InMar'09 Companys current ratio is

1.04 which is not satisfactory.

0.56

0.70

0.54

0.750.83

1.04

0

0.2

0.4

0.6

0.8

1

1.2

Mar '04 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Times

Year

Current Ratio


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B. Acid-Test / Quick Ratio:-The term quick assets refers to current assets which can be converted into cash immediately

or at a short notice without diminution of value. Included in this category of current assets are

(1) cash and bank balance; (2) short-term marketable securities and (3) debtors/receivables.

Thus, the current assets which are excluded are: prepaid expenses and inventory.

It is calculated as follows:

Quick Ratio =Liquid Assets / Liquid Liabilities

Calculation of Quick Ratio with Diagram: (Rs. In Crores)


Liquid Assets 6.57 13.91 14.11 24.73 44.46 64.12

Liquid Liabilities 17.11 26.20 34.03 37.38 59.33 65.79

Quick Ratio (In

Times)

0.38 0.53 0.41 0.66 0.75 0.97

Diagram of Quick Ratio:-

0.38

0.530.41

0.66

0.75

0.97

0

0.2

0.4

0.6

0.8

1

1.2

Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09

Times

Year

Quick Ratio


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Interpretation:-

Generally quick ratio of 1:1 represents a satisfactory current financial condition. But we have

seen in table that not evens a single year it has achieved. In all five years liquid ratios are less

than 1.It indicates that firm has found difficult to meet its obligations because its quick assets

are lesser than current liabilities. Similarly both year Mar'06 and Mar'07 the company suffers

from the same position. It has increased to 0.97 in Mar'09.


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2. TURN OVER RATIOS

A. Inventory Turnover:This ratio measures the stock in relation to turnover in order to determine how often the stock

turns over in the business. It is calculated as follows:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Calculation of Inventory Turnover Ratio with Diagram: (Rs. In Crores)

Particulars Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Cost Of Goods Sold 19.21 33.08 37.24 50.62 46.44

Average Inventory 3.81 4.43 4.01 4.37 5.14Inventory Turnover Ratio (In Times) 5.04 7.46 9.29 11.58 9.03

Diagram of Inventory Turnover Ratio:-

Interpretation:-

It indicates the efficiency of the firm in selling its product. In Mar'05 inventory turnover is 5

times and in Mar'09 it is 9 times in a year. High inventory turnover ratio is good from view

point of liquidity. We can say company sells its product fast.

5.04

7.46

9.29

11.58

9.03

0

2

4

6

8

10

12

14

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Times

Year

Inventory Turnover Ratio


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B. Debtors Turnover Ratio:-

It is determined by dividing the net credit sales by average debtors outstanding during the

year. The analysis of the debtors turnover ratio supplements the information regarding the

liquidity of one item of current assets of the firm. The ratio measures how rapidly receivablesare collected. It is calculated as follows:-

Debtors Turnover Ratio =Net credit sales / Average Debtors

Calculation of DebtorsTurnover Ratio with Diagram: (Rs. In Crores)


Net Credit Sales 16.68 27.24 39.90 63.22 56.81

Average Debtors 5.06 4.37 5.47 7.97 8.50

Debtors Turnover Ratio (Times) 3.30 6.23 7.29 7.93 6.68

Diagram of Debtors Turnover Ratio:-

Note: - It is assumed that 60% sale is on credit and 40% on cash.

Interpretation:-

The companys debtors turnover ratio of Mar'05 3.30 times, in Mar'08 7.93 times in a year

which indicates company collects its receivable rapidly. We can say year to year the shorter

time lag between credit sales and collection.

3.30

6.23

7.297.93

6.68

0

1

2

3

4

5

6

7

8

9

Mar'05 Mar'06 Mar'07 Mar'08 Mar'09

Times

Year

Debtors Turnover Ratio (Times)


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C. Debtors Collection Period:-

The ratio indicates the extent to which the debts have been collected in time. It gives the

average debt collection period. Debtors Collection Period is calculated from following

formula:Debtors Collection Period =360 / Debtors Turnover Ratio

Calculation of Debtors Collection PeriodRatio with Diagram: (Rs. In Crores)


Days in Years 360 360 360 360 360

Debtors Turnover 3.30 6.23 7.29 7.93 6.68

Debtors Collection Period (in Days) 109 58 49 45 54

Diagram of Debtors Collection Period:-

Interpretation: -

According to debtor collection period from above table, Company was following liberal

credit policy as its collection period of Mar'05 was 109 days. Thus, to decrease the debt

collection period the company has to adopt certain policy s to attract the customers to pay

debts. Policies like trade credit, cash credit. We can see that company has reduced its debtors

collection period during these years it means now a days it follows strict credit policy.

109

5849 45

54

0

20

40

60

80

100

120


Days

Year

Debtors Collection Period (in Days)


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D.Creditors Turnover ratio:It is calculated as follows:-

Creditors Turnover Ratio =Net Credit Purchases / Average Creditors

Calculation of Creditors Turnover Ratio with Diagram: (Rs. In Crores)


Net Credit Purchase 20.58 32.94 33.54 52.05 46.55

Average Creditors 7.86 10.20 11.21 17.18 19.73


(times per year)

2.61 3.22 2.99 2.92 2.35

Diagram of Creditors Turnover Ratio:-

Interpretation:-

Above stated graph indicates that in Mar'05 Company has settled its creditors accounts 2.61times in a year. In Mar'06 it had increased by 3.22 which show that company had settled its

account rapidly. From Mar'07 to Mar'09 it has paid its creditors account average of 3 times.

If creditors turnover ratio is high companys requirements of working capital will increase

and vice-a-versa.

2.61

3.222.99 2.92

2.35

0

0.5

1

1.5

2

2.5

3

3.5


Times

Year



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E.Creditors Payment Period:-It is calculated as follows:-

Creditors Payment Period =360 / Creditors Turnover Ratio

Calculation of Creditors Payment Period with Diagram: (Rs. In Crores)


Days in Years 360 360 360 360 360

Creditors Turnover Ratio 2.61 3.22 2.99 2.92 2.35

Creditors Payment Period

(in Days)

137 111 120 123 153

Diagram of Creditors Payment Period:-

Interpretation:-

We can analyse that in Mar'05 Company has paid its creditor after 137 days. After that this period is

decreasing which shows strict collection policy followed by suppliers. Company has to settle its

payments within short span to time. 1n Mar'09 company makes payment after 153 days which is

comparatively higher than previous years, it means for this year suppliers has given more credit

period to the company. Longer payment period shows the liberal credit terms granted by suppliers. It

will reduce requirement of current assets by relying on suppliers credit.

137

111 120123

153

0

20

40

60

80

100

120

140

160

180


Days

Year

Creditor's Paymeny Period


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F. Fixed Asset Turnover:The fixed assets turnover ratio measures the efficiency with which the firm has been using its

fixed assets to generate sales. It is calculated by dividing the firms sales by its net fixed

assets as follows:

Fixed Asset Turnover Ratio =COGS / Average Fixed Asset

Calculation of Fixed Asset Turnover Ratio with Diagram: (Rs. In Crores)


Cost of Goods Sold 19.21 33.08 37.24 50.62 46.44

Average Fixed Asset 17.37 30.55 52.79 93.50 132.28

Fixed Asset Turnover Ratio (InTimes)

1.10 1.08 0.71 0.54 0.35

Diagram of Fixed Asset Turnover Ratio:-

Interpretation:-

Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in fixed assets

utilization. From the above calculations companys fixed assets turnover ratio is continuously decreasing.

In year Mar05 it is 1.1 and in Mar09 it is 0.35. It means companys efficiency of managing and utilizing

its assets goes down. Company is not utilizing its fixed assets at fullest capacity.

1.10 1.08

0.71

0.54

0.35

0

0.2

0.4

0.6

0.8

1

1.2


Times

Year

Fixed Asset Turnover Ratio


61/84

G.Total Assets Turnover Ratio:Total Assets turnover ratio indicates the efficiency with which firm uses all its assets to

generate sales. It is calculated as follows:

Total Assets Turnover Ratio =Sale / Average Total Assets

Calculation of Total Asset Turnover Ratio with Diagram: (Rs. In Crores)


Sale 27.80 45.41 66.51 105.38 94.69

Average Total Assets 38.82 59.16 93.28 171.67 211.77

Assets Turnover Ratio (In

Times)0.72 0.77 0.71 0.61 0.45

Diagram of Asset Turnover Ratio:-

Interpretation:-

Here, we can interpret that companys asset turnover ratio in Mar05 is 0.72 which is notideal and in Mar06 there is negligible improvement is seen that the ratio is 0.77. In Mar07 ithas decreased and in Mar09 it is 0.45 which indicates under utilization of available resourcesand presence of idle capacity. In operational term, it implies that the firm can expand itsactivity level (in terms of production and sales) without requiring additional capitalinvestment.

0.720.77

0.710.61

0.45

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Times

Year

Assets Turnover Ratio


62/84

3. LEVERAGE or CAPITAL STRUCTURE RATIO

A. Debt to Equity ratio:This ratio indicates the extent to which debt is covered by shareholders funds. It reflects the

relative position of the equity holders and the lenders and indicates the companys policy on

the mix of capital funds. The debt to equity ratio is calculated as follows:

Debt to Equity Ratio =Long Term Debt / Shareholders Fund

Calculation of Debt to Equity Ratio with Diagram: (Rs. In Crores)

Particular Mar '0 Mar '05 Mar '0 Mar '07 Mar '0 Mar '0

Long Term Deb 4.9 2.65 2.25 0.00 0.0 16.82Shareholder Fund 10.94 16.33 26.64 43.79 79.00 110.85

Debt to Equity Ratio

(In Times)

0.45 0.16 0.08 0.00 0.00 0.15

Diagram of Debt to Equity Ratio:-

Interpretation:-

Company debt-equity ratio in Mar'04 is 0.45 and after that in each year it is decreasing. In

Mar'07 and Mar'08 Company is operating its business only on equity. In Mar'09 it has raised

capital from long term debt. This proportion of debt-equity in Mar'09 does not indicate good

financial position.

0.45

0.16

0.08

0 0

0.15

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5


Time

s

Year

Debt to Equity Ratio


63/84

B. Debt Assets Ratio:Debt-asset ratio measures the share of the total assets financed by outside funds. It is

calculated as follows:

Debt Assets Ratio =Total Debt / Total Assets

Calculation of Debt Assets Equity Ratio with Diagram: (Rs. In Crores)


Total Debt 4.94 2.65 2.25 00 000 16.82Total Assets 24.62 38.82 59.16 93.28 171.67 211.77

Debt Assets Ratio 0.20 0.068 0.038 000 000 0.079

Diagram of Debt - assets Ratio:-

Interpretation:-

Above calculation intimates the debt asset ratio in Mar04 is 0.20 which has decreased inMar05 in 0.068. In Mar07 Company was not having even single rupees debt, which

indicates its financial strength. For Mar09 Companys debt has increased but comparatively

its assets have also increased. So we can say that there is a margin of safety available to

company as well as lender.

0.20

0.068

0.038

0 0

0.079

0

0.05

0.1

0.15

0.2

0.25


Pe

rcentage

Year

Debt Assets Ratio


64/84

C. Interest Coverage RatioInterest coverage ratio measures the debt servicing capacity of a firm insofar as fixed interest

on long-term loan is concerned. It is determined by dividing the operating profits or earnings

before interest and taxes (EBIT) by the fixed interest charges on loans. It is calculated as

follows:

Interest Coverage Ratio =EBIT / Interest

Calculation of I nterest Coverage Ratio with Diagram: (Rs. In Crores)


EBIT 11.36 15.61 27.49 56.39 50.50

Interest 0.8 0.4 0.12 0.62 1.62

Interest Coverage Rati 13.52 38.07 229.08 87.72 31.17

Diagram of Interest Coverage Ratio:-

Interpretation:-

Companys interest coverage ratio in Mar05 is 13.52. It has increased in each year after

Mar05. In Mar07 it was 229.08 (highest during these 5 years). In Mar09 interest

coverage ratio was comparatively reduced to 31.17. From all above, we can interpret that

company is having unused debt capacity.

13.5238.07

229.08

87.72

31.17

0

50

100

150

200

250


Times

Year

Interest Coverage Ratio


65/84

D. Proprietary RatioProprietary ratio indicates the extent to which assets are financed by owners funds. It is

calculated as follows:

Proprietary Ratio = Proprietors Funds / Total Assets * 100

Calculation of Proprietary Ratio with Diagram: (Rs. In Crores)


Total Assts 24.62 38.82 59.16 93.28 171.67 211.77

Proprietors Funds 10.94 16.33 26.64 43.79 79.00 110.85

Proprietary Ratio 2.25 2.37 2.22 2.13 2.17 1.91

Diagram of Proprietary Ratio:-

Interpretation:-

A high ratio will indicate high financial strength. High proprietor ratio is desirable for lenders

/ creditors. Company is having proprietor ratio 2.25 in Mar04. We can see that later it is

increasing slowly and steadily. In Mar09 Companys proprietor ratio is 1.91.

2.252.37

2.22 2.13 2.171.91

0

0.5

1

1.5

2

2.5

Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09

Percen

tage

Year

Proprietary Ratio


66/84

4. PROFITABIL ITY RATIOS

A. Gross Profit Ratio:A lower gross profit ratio, generally indicates high cost of goods sold due to the unfavorable

purchasing polices, lesser sales, lower selling prices, excessive competition, over investment

in plant and machinery. Gross profit ratio is decreasing, which means the profitability of the

company is decreasing.

Normally the gross profit has to rise proportionately with sales. It can also be useful to compare the gross profit margin across similar businesses

although there will often be good reasons for any disparity.

It is calculated as follows:

Gross Profit Ratio =Gross Profit / Sales * 100

Calculation of Gross Profit Ratio with Diagram: (Rs. In Crores)


Gross Profit 8.59 12.38 29.27 54.76 48.20

Sales 27.80 45.41 66.51 105.78 94.69

Gross Profit Ratio 30.89 27.26 44.00 52.00 50.00


67/84

Diagram of Gross Profit Ratio:-

Interpretation:-

The gross profit margin reflects the efficiency with which management produces each unit of

the product. This ratio indicates the average spread between the cost of goods sold and the

sales revenue.

In the financial year Mar'05 the gross profit was 30.89% and in financial year Mar'09 it is

50.00%. It indicates higher sales price without a corresponding increasing in the cost of

goods sold or decreasing in cost of sales.

30.8927.26

44.00

52.00 50.00

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


Percentage

Year

Gross Profit Ratio


68/84

B. Net Profit Ratio:This is a widely used measure of performance and is comparable across companies in similar

industries. The fact that a business works on a very low margin need not cause alarm because

there are some sectors in the industry that work on a basis of high turnover and low margins,

for examples supermarkets and motorcar dealers. It is calculated as follows:-

Net Profit Ratio =Profit after Tax / Net Sales * 100

Calculation of Net Profit Ratio with Diagram: (Rs. In Crores)


Net Profit 6.30 9.91 16.12 35.64 31.64

Sales 27.80 45.4 66.51 105.18 94.69

Net Profit Rati 22.66 22.0 24.00 34.00 33.00

Diagram of Net Profit Ratio:-

Interpretation:

This ratio indicates the firm s capacity to face adverse economic conditions such as price

competition, low demand etc. obviously, higher the ratio, the better is the profitability. In the

financial year Mar'05 the net profit was 22.66% and inMar'08 it was increasing by 34.00%

which ensure adequate return to the owner as well as enable a firm to cope with the adverse

economy conditions when selling price is declining or demand of product is falling.

22.66 22.0024.00

34.00 33.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%


Percentage

Year

Net Profit Ratio


69/84

C. Operating Profit Ratio:Operating Profit means profit before interest and tax. The terminterest means interest on

long term borrowings, interest on short term borrowing will be deducted for computing

operating profit. A high operating margin indicates the healthy operating efficiency and

pricing strategy of a company and vice-versa.

The term net profit here means, net income after interest and tax it is different fromthe net

operating profit which is used for computing the return on total capital employed in the

business. This is because the shareholders are interested in total income after tax including

net non operating income. It is calculated as follows:-

Operating Profit Ratio = Earnings before interest and taxes (EBIT) / Net Sales * 100

Calculation of Operating Profit Ratio with Diagram: (Rs. In Crores)


EBIT 9.42 12.79 24.28 55.38 49.82

Net Sales 27.80 45.41 66.51 105.38 94.69

Operating Profit Ratio 34.00 28.00 36.50 52.00 52.61

Diagram of Operating Profit Ratio:-

34.0028.00

36.50

52.00 52.61

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


Percentage

Documents

Arif Saiyad Project Report (1)