PROJECT REPORT ON THE STUDY AND ANALYSIS OF DIFFERENT RATIOS IN AN ORGANISATION

Submitted by Mr. Nitin S Kaulgud. Diploma in Business Management Semester - IV Academic Year 2005-2006 TO THE UNIVERSITY OF PUNE THROUGH INSTITUTE OF BUSINESS MANAGEMENT AND RESEARCH (IBMR) CHINCHWAD PUNE 411033 2005-2006

Acknowledgement: I am greatly and by heart thankful to Director of Prin. Mrs. Asha Pachpande & Our course co-ordinator Mr. S. Ramesh Kumar Mehta of Institute of Business Management & Research, Chinchwad ,Pune 411030. Who helped me in completion of the project by their guidance & most valued knowledge during the study of ratio analysis and helping in preparation of this final report. I am also very much grateful to Mr. Avinash Puntambekar, Managing Director, Avirat Enterprises Pvt. Ltd., for giving me the chance to work in the organization and giving me all the related documents required for preparing this report.

Nitin Kaulgud.

S.

I N D E X I. II. Title Introduction to Ratio Analysis

III. Importance of Ratio Analysis IV. Objectives of Ratio Analysis V. Company Profile

VI. Financial Statements of the Company VII. Application of Different Ratios. VIII. Methodology IX. Suggestions X. Conclusions

TITLE

TITLEStudy and analysis of the different ratios that can be applied in an organization for knowing the financial as well as creditability position of the said organization on the basis of its Balance Sheet.

INTRODUCTION

INTRODUCTION:The information contained in funds and cash flow statements is used by the Management, Creditors, Investors and other to form judgment about the operating performance and financial position of the firm. Users of these statements can get further insight about financial strength and weaknesses of the firm, if they properly analyze information reported in these statements. Management should be particularly interested in knowing financial strength of the firm to make their best use and to be able to spot out financial weaknesses of the firm to take suitable corrective actions. The future plans of the firm should be laid down in view of the firms financial strength and weaknesses. Thus, financial analysis is the sophisticated forecasting and planning procedures. Understanding the past is a pre-requisite for anticipating the future.

IMPORTANCE

IMPORTANCEFinancial Analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the Balance Sheet, Trading and Profit & Loss Accounts. The reasons for selecting this topic can mentioned with the help of its different users as follows:

1. Creditors: Creditors are interested in firms ability to meet their claims over a very short period of time. Their analysis will, therefore, confine to the evaluation of the firms liquidity position.

2. Financial Institutions: Financial Institutions includes Banks, Long Term Moneylenders, etc. They analyze the firms profit ability over time, its ability to generate cans to be able to pay interest and repay principle and the relationship between various sources of funds.

3. Investors: Investors who have invested their money in the firms shares, are most concern about the firm's earnings. They restore more confidence in those firms that shows steady growth in earnings. As such, they concentrate on the analysis of the firm's present and future profitability. They are also interested in the firm's financial structure to the extent it influences the firm's earnings, ability and risk.

4. Management: Management of the firm would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently and that the firm's financial condition is sound.

OBJECTIVE OF RATIO ANALYSIS

OBJECTIVE OF RATIO ANALYSIS

1. With help of various ratios, one can get the information about the ability of the firm to meet its current as well as future obligations.

2. Ratio Analysis helps the Management and other interested parties to get the information about long term solvency against the funds borrowed.

3.

It helps to know the revenue generated from the utilization of funds.

4. Basically, ratio analysis is useful in judging the overall operating efficiency and performance of the firm.

COMPANY PROFILE

COMPANY PROFILE: Company Name Registered Office : : Avirat Enterprises Private Limited. 9, Sant Nagar, Sevanand Society, Near Aryaneshwar, Pune - 411 009. Marketing Office : 26A, Rajdhani Complex, Near Shankar Maharaj Math, Pune - Satara Road, Pune - 411 043. Telephone No. Fax No. Works : : : +91-20-437 5433. +91-20-436 4586. Gat No. 401, S. No. 138, Wadgaon Road, Charoli Khurd, Taluka Rajgurunagar, Dist. Pune. Telephone No. : +91-2135-32 132.

Area of Plot Workshop Shed

: :

2 Acres with Fencing. 2 Nos. of 12 mtrs. X 30 mtrs. X 12.5 mtrs.

Avirat Enterprises Private Limited is one of the associate companies of Unipan Group. Established in 1991, the company has capabilities of executing challenging jobs of heavy fabrications, required by cement and sugar factories, distilleries, material handling projects, etc. The entire staff of the company is been in the heavy fabrication field for almost two decades. The Company's fabrication shop is located at Alandi, 14 kms from Pimpri / Chinchwad industrial belt and 20 kms from Pune, on a acre plot owned by the Company. The sustained healthy association between the staff and the management has created a very congenial work environment, leading to freedom from the stress of labor problems. The company also have an advance hydraulic mobile crane of 8 Ton capacity.

The company is in the process of establishing in-house machining facilities in the near future, with sophisticated machinery and equipment. On the other hand the company is also engaged in erection and commissioning of sugar plants in Maharashtra. The company has completed Lokmangal Sakhar Karkhana, Mohal, Solapur in November 2000 and Loknete Baburao Patil Sahakari Sakhar Karkhana, Angar, Solapur in January 2002. In the company, currently 16 fabrication workers and 4 Office Staff are working. The fabrication workers include skilled, semiskilled and unskilled workers. Out of the 4 office staff, one is as Manager, two are Accounts Personnel and one is Head Foreman.

APPLICATION OF DIFFERENT RATIOS

APPLICATION OF DIFFERENT RATIOS 1. Current Ratio: Current Ratio is calculated with the help of the following formula:

Current Ratio =

Current Assets ------------------------Current Liabilities

Current Assets include cash and those assets which can be converted in cash within a year i.e. marketable securities, debtors and inventories. All obligations maturing within a year are included in Current Liabilities. Current Liabilities include creditors, bills payable,

short term bank loan, income tax liability and long term debt maturing in the current year. Current Ratio is a measure of firm's short term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. A ratio of greater than one means the firm has more current assets than current claims against them.

2. Net Working Capital Ratio:

The difference between the current assets and the current liabilities excluding short term bank borrowings is called net working capital. Net Working Capital is sometimes used as a measure of a firm's liquidity. It is considered that, between firms, the one having the larger net working capital has the greater ability to meet its current obligations. The Net Working Capital is calculated with the help of the following formula.

Net Working Capital Ratio =

Net working capital --------------------------Net Assets

3. Debt Ratio:

Several debt ratios may be used to analyse the long term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. It may be therefore, compute debt ratio by dividing the total debt by capital employed or net assets. Total debt will include short term and long term borrowings from financial institutions, debenture / bonds, deferred payment arrangements for buying capital equipments, bank borrowings, public deposits and any other interest bearing loans. The formula for finding the debt ratio is as under:

Debt Ratio =

Total Debt ----------------------Capital Employed

4. Gross Profit Ratio:

The Gross Profit Ratio reflects the efficiency with which the management produces each unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue. When we subtract the gross profit margin from 100%, we obtain the ratio of cost of goods sold to sales. The formula for the calculation will be as follows.

Gross Profit Gross Profit Ratio = ---------------Sales

5. Net Profit Ratio:

Net Profit is obtained when operating expenses, interest and taxes are subtracted from the gross profit. The formula for calculating the net profit ratio is:

Net Profit Ratio =

Profit after Tax ------------------Sales

METHODOLO GY

Methodology: The project has been performed with the help and the references as stated below:

The theoretical part required for the working and the analysis of the different ratios were referred from the text book, "Financial Management" by Prof. I. M. Pandey. I have worked in the said organization for the period of 2 weeks in the finance department. Undergone through the balance sheets of the organization for last 4 years. Notation of relevant data required for the calculation of the ratios being used by the said organization for various purposes.

Sorting of the required data for the calculation of the respective ratios.

Different ratios were calculated and represented in tabular form. The calculated ratios were further represented in a graphical form.

Suggestion s

SuggestionsIn the respect of the current ratio, there is not much fluctuations and should be stable in all respects. The idle current ratio to be kept for any organization is to in between 2 : 1 to the maximum and 1.5 : 1 to the minimum. In the first year, the company has distributed more advance and investments in the inventories are higher. It is suggested that these two things be reduced. It is also seen that the same has risen in the 2nd year but good work done by the company that it has reduced same in the subsequent year. With reference to the net working capital ratio, it is observed that the borrowings are much higher than the capital invested

1.

2.

which has been affected adversely to the liquidity of the company. The liquidity of the company has drastically changed from first year to second and then it is stabilized in the subsequent years but on the lower side. The standard net working capital ratio or liquidity be maintained between 0.40 to 0.60. It is suggested that the company should try hard to reduce its liabilities and short term loans. 3. Regarding the debt ratio, it is seen that due to the newly commencement of the company, the outside borrowings are on higher side than the capital invested. The company has struggled and reduced the borrowings in the next two years but, in the last year the same has risen due to enhanced cash credit limit and loss sustained in the same year. It is observed that the loss has been occurred due to large amount of depreciation and excess interest paid. It is suggested to reduce the interest payment on the cash credit limits by reducing the excess usage of the limits. 4. With respect to the gross profit ratio, it is observed that even that the turnover has increased to double compare to the first year, the gross profit has not increased to that extent due to the

drastic increase in the labour and wages. The only thing that can be suggested is to reduce the expenses made on labour and wages to the maximum to ensure the gross profit is achieved to the same extent as to the sales. 5. As far as the net profit is concerned, it is affected in second year due to excess expenses made on travelling. In third year, the company has reduced the same expenses which has affected the net profit positively. Unfortunately, in the last year the company has sustained loss due to the reason of high depreciation and excess interest payment. It is suggested to the company to ensure that the administrative or indirect expenses be reduced to the minimum it can be reduced. 6. Overall with respect to the all ratios, it is suggested that the company should try to reduce the liabilities, reduce the advances, excess payments on labour and wages and to reduce the administrative expenses. It is felt necessary to have monitoring on all the expenses i.e. direct expenses as well as the indirect expenses so that the company can have a better liquidity position, a better current ratio and maximum profits.

Conclusion s

Conclusions

The theoretical applications of Ratio Analysis as been taught to us while the lectures and through the text books is been applied by the said organization for the purpose practical usage to some extent i.e. 80%. The company has maintained all the above ratios. The company is trying hard to come out from the past losses and to improve the liquidity situations and to stabilize in the market.