Ratio Analisys

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EXECUTIVE SUMMERY

I work out study on Ratio Analysis in the FLAMINGO INDUSTRIES

LIMITED, Khed.

It is a crucial topic to me to study the procedure, methods, merit, demerit of the ratio

analysis under study I referred various resource persons like Mr. C. A. Pujari (Sr.

Executive Accounts ) & I got lot of information on the topic. Familiar with the

working environment in an organization, deal with at least some of the problem or

aspects practically and tackle them or at least understand and analyze them. This of

course paves a road for the where they have to lead later.

Customers are satisfied with the performance of the company and expect the

after sales service to be more efficient.



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Company Profile

Flamingo Industries Limited has come a long way since its origin in a

kitchen laboratory in 1941.

Over the years, Flamingo came to be known as an industry leader in the

area of agro-chemicals and agro-chemical intermediates. Using its

expertise in Chemistry and Chemical technology, Flamingo also expanded

its chemicals manufacturing range to include Water treatment chemicals

and Polymer Additives and few other speciality chemicals.

Flamingo¶s commitment to sustainable development led us to venture into

the field of Environment and Bio-technology. Flamingo is a Pioneer and

Technology leader in rapid conversion of Municipal Solid Waste to

organic compost. Our organic plant protection and soil/crop productivity

enhancers are well accepted in the market.

In order to ensure focused attention to the expanded range of activities, the

agro business division was spun off as a separate company, Flamingo

Crop Care Limited in 2003. Today, Flamingo is organized into two

divisions i.e. a. Chemicals, b. Environment and Biotech.

Ever since our inception, we have built up a solid history and reputation of



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developing, manufacturing and exporting chemicals. We have achieved

over 100 product and process breakthroughs that even now are serving the

specific needs of various clients.

We have excellent research facilities in Mumbai and at our manufacturing

locations. During the last six decades, we have received numerous awards

in recognition of our dedication and excellence in the field of chemicals.

From the very beginning, in 1941, when our founder Mr. C. C. Shroff

established Flamingo, we have believed that in every interaction we have

with our clients, our individual as well as our corporate character, integrity

and professionalism is under scrutiny.

We have always kept the virtues of high quality, cost effectiveness,

consumer need fulfillment, fair prices and fair trade practices uppermost in

our minds.



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VISION

We the Members of Flamingo Parivaar Visualise Flamingo as a Responsible,

Respected and Sound Corporate Citizen Serving India and World through Its

knowledge, Services, Products and Solutions Through holistic approach

Integrating chemistry, Chemical Technology, Pharma Technology, Biology, Soil

Management, Water Management, City and Farm Waste Management To serve

Industry, Agriculture and Horticulture With Growth, Value Addition, Wealth

Generation, Customer Joy, Investor fulfillment, Society Satisfaction and

Enrichment of its people.



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Quality Policy

We at Flamingo Industries Limited, manufacturer and

supplier of Industrial Chemicals, Intermediates and Crop

Protection Chemicals are committed to :

1 Enhance customer satisfaction by providing

Quality Products, Information, and Services;

2 Comply with applicable regulatory requirements;

3 Continual improvement of the Quality

Management System;

4 Establish and review the Quality objectives;

5 Be a preferred alliance partner for development of

new products;

6 Work intensely on new business developments;



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Board Of Dire ctors

K. C. Shroff

Chairman Emeritus

G. Narayana

Chairman Emeritus

A. C. Shroff

Chairman & MD

Usha A Shroff

Vice-Chairperson

Other Board Members

Setumadhav Rangrao Potdar - Executive Director

Dipesh K. Shroff - Director

Ramchandra N. Bhogale - Director

Atul G. Shroff - Director

Harish Narendra Motiwalla - Director

Priyam S Jhaveri - Director

Madhukar Balvantray Parekh - Director

Nilesh Bhaskar Sathe - Director



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Awards

2004 National Energy Conservation Award (Second Prize) in

chemical sector for the year 2004 from Ministry of Power, New

Delhi. (For Roha Site)

2004 International Spirit at work award for nurturing the human spirit

at work and inspiring others by your example.

2004 ICMA Award for Excellence in Management of Health, Safety

and Environment.

2004 Greentech Safety Silver Award by Greentech Foundation, New

Delhi.

2003 National Safety Council ± Maharashtra Chapter ± Maharashtra

Safety Award for achieving Lowest Accident Frequency Rate

During The Year 2003 in Chemicals and Fertilizers Sector. (For

Lote Parshuram, Ratnagiri).

1998-99 GPFA Prestige Award for outstanding contribution in

developing indigenous technology for manufacture of pesticides

and winning recognition in domestic as well as international

market and giving thrust to India¶s Export contribution

1995-96 The Chartered Financial Analyst is pleased to present the

Certificate of Honour



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OBJECTIVES OF THE STUDY

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

y To assess the liquidity of the company.

y To evaluate the financial condition and profitability of the company.

y To know the working capital requirement of the company.

y To compare the past performance of the company systematically.

y To identify the financial strengths and weakness of the company.

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

financial Capacity.



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RESEARHCH METHODOLOGY:-

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 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:

describing the characteristics of the particular topic.



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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 book.



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Introduction to Ratio Analys is :-

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 ³Times´. 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 ³Percentage´. 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:

y A financial ratio is a relationship between two financial variables. It helps to

ascertain the financial condition of a firm.

y In ratio analysis, the liquidity ratio measures the firm¶s ability to meet current

obligations and is calculated by establishing relationships between current

assets and current liabilities.

y The profitability ratio measure the overall performance of the firm by

determining the effectiveness 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.

y 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.

y Comparisons of ratios of a business enterprise either with ratios of the same

concern for 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:

y Liquidity position

y Long term solvency

y Operating efficiency

y Overall profitability

y Inter firm comparison

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

is profitable

y has enough money to pay its bills

y could be paying its employees higher wages

y is paying its share of tax

y is using its assets efficiently

y has a gearing problem



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Importance of RatioA

nalys is :-

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:

y 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 the

principal. 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.

y 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. The



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long-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.

y 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,

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

components.

y Overall Profitability:-

Unlike the outside parties which are interested in one aspect of the financial position

of 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.



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y 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 firm¶s 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.

y 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.

y 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

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,



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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.

y 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.

y 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 firm¶s data over different time periods, the ratios may provide

clues on trends and future problems.

Thus, ³ratios can assist management it its basic function of forecasting, planning,

coordination, control and communication´.



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Limitation of the Ratio Analys is :-

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:

y 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:

y Differences in the basis of inventory valuation

y Different depreciation methods

y Estimated working life of assets, particularly of plant and equipments

y Amortization of intangible assets like goodwill, patents and so on

y Amortization of deferred revenue expenditure such as preliminary

expenditure and discount on issue of shares

y Capitalization of lease

y 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 particularly

current assets. For these reasons, the ratios of two firms may not be strictly

comparable.



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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

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

available, the utility of ratio analysis would be limited.

y Impact of Inflation:-

The second major limitation of the ratio analysis as a tool of financial analysis is

associated 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.

y 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



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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 and

inventory turnover ratio to have a real insight into the liquidity aspect.

y 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

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

nonfinancial 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



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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.

y 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

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

observed, ³Ratio 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´. Ratios

may be linked to railroads. They tell the analyst, ³Stop, look, and listen´.



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y 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.

y 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.



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

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.

y 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: ³The 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.



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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.

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. If 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.



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Financial ratio analysis groups the ratios into categories which tell us about different

facets of a company's finances and operations. An overview of some of the categories

of ratios is given below.

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

capital structure.

y Liquidity Ratios which give a picture of a company's short term financial

situation or solvency.

y Operational Ratios which use turnover measures to show how efficient a

company is in its operations and use of assets.

y Profitability Ratios which use margin analysis and show the return on sales

and capital employed.

y Solvency Ratios which give a picture of a company's ability to generate cash

flow and pay it financial obligations.



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Types of Ratios :-

Liquidity Ratios

y Liquidity refers to the ability of a firm to meet its short-term financial

obligation when and as they fall due.

y The main concern of liquidity ratio is to measure the ability of the firms to

meet their short-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 firm¶s current assets and its

current liabilities. Current assets normally include cash, marketable securities,

accounts receivable and 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.



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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 ³quick´ 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.

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



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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 the business

deals in fast moving consumer goods.

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

stock turnover.

y The high stock turnover ratio would also tend to indicate that there was little

chance of 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

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 credit sales and cash collection.



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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 creditor¶s turnover ratio is an

important tool of analysis as a firm can reduce its requirement of current assets by

relying on supplier¶s credit. The extent to which trade creditors are willing to wait for

payment can be approximated by the creditors¶ turnover ratio.

Financial Leverage Ratios

y The ratios indicate the degree to which the activities of a firm are supported

by creditors¶ funds as opposed to owners.

y The relationship of owner¶s equity to borrowed funds is an important

indicator of financial strength.

y The debt requires fixed interest payments and repayment of the loan and legal

action can 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.

y The greater the proportion of equity funds, the greater the degree of financial

strength.



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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.

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

company¶s policy on the mix of capital funds. The debt to equity ratio is calculated as

follows:

Debt±Equity Ratio = Long-term Debt / Shareholders¶ Equity

Debt to Total Capital Ratio

The relationship between creditors¶ funds and owner¶s 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 shareholder¶s equity.

Essentially, this type of capital structure ratio is a variant of the D/E, ratio described

above. In can be calculated as follows:

Debt to Total Capital Ratio = Total Debt / Total Assets

Profitability Ratios



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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.

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

time.

y Profits are essential, but it would be wrong to assume that every action

initiated by management 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.

Gross Profit Margin



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y Normally the gross profit has to rise proportionately with sales.

y It can also be useful to compare the gross profit margin across similar

businesses although there will often be good reasons for any disparity.

y This indicates that the rate in increase in cost of goods sold are less than rate

of increase 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)



33

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

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



34

Activity Ratios

If a business does not use its assets effectively, investors in the business would rather

take their 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

y The firm should manage its assets efficiently to maximise sales.

y The total asset turnover indicates the efficiency with which the firm uses all

its assets to generate sales.

y It is calculated by dividing the firm¶s sales by its total assets.

y Generally, the higher the firm¶s total asset turnover, the more efficiently its

assets have been utilized.

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

Fixed Asset Turnover



35

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

using its fixed assets to generate sales.

y Generally, high fixed assets turnovers are preferred since they indicate a

better efficiency in fixed assets utilization.

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

upward trend.

y The ratio also confirms that the business places a much greater reliance on

working capital 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

.

METHODOLOGY FOR ANALYSIS:-



36

The methodology opted for carrying out project was by way of collection of data

from the company s annual reports for the past three years i.e. from 2006-2007 to

2008-2009, for the calculation of ratios. The theory related to ratios was gathered

from various financial management books, which served the purpose of calculation

and analysis of ratios. Further based on the above statements ratios related to

liquidity, turnover, solvency, profitability and over profitability groups and

miscellaneous groups have been calculated and interpreted in an intra firm

comparison method. Similarly the ratios have been presented in graphical format to

have clear understanding of it during three financial years and changes in it. ( we are

taking all figurers in lack )

LIQUIDITY GR OUP





38

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

This ratio indicates the solvency of the business i.e. ability to meet the liabilities of

the business as and when they fall due. The Current Assets are the sources from

which the current liabilities are to be met. Certain authorities have suggested that in

order to ensure solvency of a concern current assets should be twice the current

liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon the

nature of industry. The standard Current Ratio applicable to the Indian industries is

1.33:1. Here the Current Ratio of Flamingo industries Ltd indicates that it has got

sufficient assets to pay off short term liabilities as and when they fall due. The

company has maintained its short term solvency through out the years and it is

improving its short term solvency status which is appreciable

2) Acid Test Ratio: -

Formula 2006 - 07 2007 - 08 2008 - 09



39

Li ui Assets/Li ui

Liabilities

1.20 1.20 1.20

Li ui Assets 33417.87 37054.04 37021.73

Li ui

Liabilities

28336.31 31618.92 29869.33

nterpretation: -

Thi rati serves as a realisti gui e t the shor t term solvency of the

0

0.2

0.4

0.6

0.8

1

1.2

2006 - 07 2007 - 08 2008 - 09



40

company. It is a measure of the extent to which liquid resources are immediately

available to meet current obligation.In so far as it eliminates inventories as part

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

and when used in conjunction with it, gives a better picture of the firms ability to

meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is

considered to be ideal and standard. Here the Acid Ratios of Flamingo industries Ltd

through out the years considered in dicates that it has adequate assets which can be

converted in the form of cash almost immediately to pay off those liabilities which are

to be paid off immediately. It must be remembered that the company is improving its

Acid Test Ratio year by year at a constant rate which is appreciable as such higher

liquid ratio better the situation.



41

T R VER GR UP

1) Fi ed Assets Turnover Group:- ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

et ales/Fi ed

Assets

12.83 10 8

et sales

58761.14 68370.32 62372.01

Fi ed Asset 4578.72 6833.47 7894.69

nterpretation: -

This ratio measures the eff iciency in the utili ation of f i ed assets. This ratio

0

2

4

6

8

10

12

14

2006 - 07 2007 - 08 2008 - 09



42

indicates whether the fixed assets are being fully utilized. It is an important measure

of the efficient and profit earning capacity of the business. Normally standard ratio

is taken as five times.

The financial year 2009 had not so good fixed asset turnover ratio. The financial year

2008 had an appreciable fixed assets turnover ratio indicating fixed assets are turned

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

better asset management policy as compared to the past year. The same ratio came

raised in the financial year 2007 due to increasing in sells.

2) Working Capital Turnover Ratio: - ( on sales )

Formula 2006 - 07 2007 - 08 2008 - 09

Net Sales/Working

Capital

5.60 5.80 4.30

Net Sales 58761.14 68370.32 62372.01

Working capital 9968.66 11861.68 14446.46



43

nterpretation: -

This ratio signif ies achievement of maximum sales with less investment in work ing

capital. As such higher the ratio better will be the situation. In present situation

company¶s work ing capital ratio is decreasing in 2008 ± 09.

0

1

2

3

4

5

6

2006 - 07 2007 - 08 2008 - 09



44

3) Current Asset Turnover Ratio: -

Formula 2006 - 07 2007 - 08 2008 -09

et ales/Current

Assets

1.50 1.57 1.40

et sales 58761.14 68370.32 62372.01

Current Assets 38304.97 43480.60 44315.79

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2006 - 07 2007 - 08 2008 - 09



45

Interpretation: -

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

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

generated per rupee of investment in current asset.

The financial year 2007-08 had good current asset turnover ratio because it had

excellent sales in that year. It must remembered that investments in current assets

are increasing year by year at constant rate but the company failed to register

growth in sales and its sales fell down by year 2008 ± 09 .



46

4) Capital Turnover Ratio: -

Formula 2006 - 07 2007 - 08 2008 - 09

ales/Capital

Employed

3.61 3.22 2.57

ales 58761.14 68370.32 62372.01

Capital

Employed

16269.11 21189.24 24237.32

0

0.5

1

1.5

2

2.5

3

3.5

4

2006 - 07 2007 - 08 2008 - 09



47

Interpretation: -

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

sales more number of times. As such higher the capital turnover better will be

situation. The financial year 2006-07 had acceptable ratio because it had better sales

as compared to other two years. Due to addition or purchase of fixed assets and heavy

investments in working capital due to rise in activity, the capital turnover ratio for

2008-09 came down as compared previous years.



48

5) Finished goods or stock turnover ratio :- ( days cost sale )

Formula 2006 -07 2007 - 08 2008 - 09

Cost of goods sold

/ Average stock

3.70 3.80 5.00

Interpretation: -

Indicates how fast inventory is used / sold. A higher turnover ratio generally

indicates fast moving mater ial while low ratio may mean dead or excessive stock.

In 2008 ± 09 company¶s ratio is high as compare 2006 ± 07 & 2007 ± 08.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2006 - 07 2007 - 08 2008 - 09



49

6) Interest Coverage : -

Formula 2006 - 07 2007 - 08 2008 - 09

Earning before

Interest & Tax /

Interest

25 21 41

Earning before

Interest & Tax

6429.23 7374.85 4804.54

Interest 256.24 346.60 117.09

0

10

15

20

25

30

35

40

45

2006 - 07 2007 - 08 2008 - 09



50

Interpretation: -

Indicates ability to meet interest obligation of the current year should be generally

greater than 1. Company have good position to meet interest obligation.

7) Creditor turnover :- ( days cost of sale )

Formula 2006 - 07 2007 - 08 2008 - 09

Credit purchases /

Average accountpayable

112.50 108.10 105.70

0

20

40

60

80

100

120

2006 - 0¡

200¡

- 08 2008 - 09



51

Interpretation: -

Indicates velocity of debt payment. Company¶s. Higher creditor turnover ratio or a

lower credit period enjoyed signifies that the trade creditors are being paid promptly.

It enhances credit worthiness of the company. A very low ratio indicates that the

company is not taking full benefit of the credit period allowed by the creditor.

Profitability ratio

1) Gross profit :- ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

Gross profit /

sales

18.70 18.77 18.13

Gross Profit 11005.50 12839.02 11313.20

Sales 58761.14 68370.32 62372.01



52

Interpretation: -

This ratio indicates the degree to which selling pr ices of goods per unit may

decline without resulting in losses on operations for the f irm. A high gross prof it ratio

as compared with that of the other f irm in the same industry implied that the f irm in

question produces its products at lower cost. It is a sign of good management. A low

gross prof it ratio may indicate unfavorable purchasing and make-up policies, the

inability of management to develop sales volume, thef t, damage, badmaintenance,

market reduction in selling pr ices not accompanied by propor tionatedecrease in the

cost of goods etc.

The company is growing at a constant rate as far as gross prof it is concernedwhich is

appreciable indicating eff iciency in production of goods at relatively lower costs.

0

2

4

6

8

10

12

14

16

18

20

2006 - 07 2007 - 08 2008 - 09



53

2) Net prof it margin :- ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

Net prof it / sales 8.40 8.00 5.7

Net prof it 4916.69 5474.13 3546.39

ales 58761.14 68370.32 62372.01

Interpretation: -

This ratio differs from the ratio of operating prof its to net sales in as much as it is

calculated af ter adding non-operating incomes, like interest, dividends on investments

0

1

2

3

4

5

6

7

8

9

2006 - 07 2007 - 08 2008 - 09



54

etc to operating profits and deducting non-operating expenses such as loss on sale of

old assets, provisions for legal damage etc. from such profits. The ratio is widely used

as a measure of over-all profitability and is very useful to the proprietors. Reading

along with the operating ratio it gives an idea of the efficiency as well as profitability

of the business to a limited extent. The company has decrease its net profits by the

year 2008-09 from the 2006-07 which is not appreciable which shows not

considerable proportion of net sales to the owners and shareholders after all costs,

charges and expenses including income tax, have been deducted. Company ratio

decreasing contunasoly.



55

3) Operating prof it ratio :- ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

Operating

prof it /

ales

9.20 9.20 9.40

Operating prof it 53844.45 62896.19 58825.62

ales 58761.14 68370.32 62372.01

0

1

2

3

4

5

6

7

8

9

10

2006 - 07 2007 - 08 2008 - 09



56

Interpretation: -

Indicator of operating performance of business. It is a test of the efficiency of

the management or in other words, operating efficiency of the business is

assessed by this ratio. operating profit ratio of the company is a satisfactory

level.



57

OVER PR OFITABILIT GR OUP

1) Return on Assets: - ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

Net

Prof it*100/Assets

10.60 10 6.40

Net prof it after

tax

4916.69 5474.13 3546.39

Assets 46390.25 54442.98 55557.09

0

2

4

6

8

10

12

2006 - 07 2007 - 08 2008 - 09



58

Interpretation: -

The ratio is a measure of the return on the total resources of the business

enterprise. It shows how efficiently management has used the funds provided be the

creditors and the owners. It can be referred that the financial year 2008-09 had not so

good ratio because of high operating expenses. However the company is decrease

year by year at a constant rate. The financial year 2006-07 had good as returns on its

various resources which is appreciable.

2) Return on Capital Employed: - ( % )

Formula 2006 - 07 2007 - 08 2008 - 09

PAT+Int*100/Capital

Employed

63.50 54.40 30

PAT + Interest10329.53 11537.35 7257.84

Capital Employed 16269.11 21189.24 24237.32



59

Interpretation: -

R eturn on capital employed measures the prof itability of the capital employed

in the business. A high business return on capital employed indicates better and

prof itable use of long term funds of owners and creditors. As such a high return

capital employed will always be preferred.

The company has not r ising trend of return on capital employed indicating not

eff icient use of funds of the creditors and owners by the management which isnot

appreciable.

0

10

20

30

40

50

60

70

2006 - 07 2007 - 08 2008 - 09



60

3) Earning per share :- ( Rs )

Formula 2006 - 07 2007 - 08 2008 - 09

( PTA ±

Preference

dividend ) /

Number of

E uity shares

17.84 19.66 12.44

PTA 7564.56 8332.44 5274.00

No. of equity

shares

423.82 423.82 423.82

0

5

10

15

20

25

30

2006 - 07 2007 - 08 2008 - 09



61

Interpretation: -

Earning per share represent earning of the company whether or not dividends are

decaled. R eturn or income per share, whether or not distr i buted as dividends. In

2007 ± 08 company gave good return on his stock holder.

4) Dividend per share :- (Rs )

Formula 2006 - 07 2007 - 08 2008 - 09

Dividend /

Number of

Equity shares

2.20 2.20 2.00

0

0.5

1

1.5

2

2.5

2006 - 07 2007 - 08 2008 - 09



62

Interpretation: -

Higher ratio signifies that the company has utilized larger portion of its earning for

payment of dividend to equity share holders. Lower ratio indicates that smaller

portion of earning has been utilized for payment of dividend and large portion has

been retain. Amount of dividend distributed per share. in 2007 & 2008 company

paid Rs.2.20 as dividend. 2009 company paid Rs. 2 as a dividend. Comparatively less

to 2007 & 2008.



63

Findings

y As Company¶s current ratio is satisfactory so it is a good balance of current

assets and current liabilities.

y As company¶s fixed assets turnover ratio is continuously decreasing it means

it has under utilization of available resources. So it can expand its activity

level without any additional capital investment.

y Liquid ratio is satisfactory it may result in easy to meeting current obligation.

y Company utilized its resources efficiently having high inventory turnover ratio

and operating with reduced cost.

y working capital by availing credit period from suppliers. Period of working

capital is satisfactory not changes in previous 3 years.

y Company is not making optimum utilization of fixed assets as its fixed assets

turnover ratio is continuously decreasing.



64

LIMITATIONS

Limitations:

While doing the project I was unable to collect the data from primary source

which restricted me in developing various outcomes from this study. Through

interviews with the concerned authorities, I could have got first hand information

about the company and this could have certainly given me a broader perspective

on the company¶s future plans.

Future changes are largely unpredictable; more so when the economic and

business environment is buffeted by frequent winds of change. In an environment

characterized by discontinuities, the past record proves to be a poor guide to future

performance.



65

BIBLIOGRAPHY

Following books were referred for carrying out the project: -

Financial Management M Y Khan/ P K Jain

Financial Management I M Pandey

Financial Management S M Inamdar

Management Accounting M G Patkar

Annual Reports from 2007-2008 to 2009 of Flamingo Industry Ltd

Following websites were referred: -

www.Flamingo ind.com

www.moneycontrol.com



66

Income Statement [TOP]

31-Dec-09(12)

31-Dec-

08(12)

31-Dec-

07(12)

Profit / Loss A/C Rs mn Rs mn Rs mn

Net Sales (OI) 62372.01 68370.32 58761.14

Material Cost 321.28 338.60 42920.33

Increase Decrease Inventories 0.00 0.00 0.00

Personnel Expenses 3892.35 4029.64 3060.68

Manufacturing Expenses 46845.18 51163.07 1774.62

Gross Profit 11313.20 12839.02 11005.50

Administration Selling and

Distribution Expenses6023.60 5097.36 4252.21

EBITDA 5289.60 7741.66 6753.29

Depreciation Depletion and

Amortisation485.06 366.81 324.06

EBIT 4804.54 7374.85 6429.23

Interest Expense 256.24 346.60 117.09



67

Other Income 725.70 1304.19 1252.42

Pretax Income 5274.00 8332.44 7564.56

Provision for Tax 1727.60 2858.31 2647.88

Extra Ordinary and Prior

Period Items Net

0.00 0.00 0.00

Net Profit 3546.39 5474.13 4916.69

Adjusted Net Profit 3546.39 5474.13 4916.69

Dividend - Preference 0.00 0.00 0.00

Dividend - Equity 423.82 466.20 466.20



68

Balance Sheet [TOP]

31-Dec-

09

31-Dec-

08

31-Dec-

07

Equity Capital 423.82 423.82 423.82

Preference Capital 0.00 0.00 0.00

Share Capital 423.82 423.82 423.82

Reserves and Surplus 23813.51 20765.72 15839.63

Loan Funds 0.00 0.20 5.66

Current Liabilities 29869.33 31618.92 28336.31

Provisions 1450.44 1596.28 1656.81

Current Liabilities and

Provisions

31319.76 33215.21 29993.11

Total Liabilities and

Stockholders Equity

(BT)

55557.09 54442.98 46390.25

Tangible Assets Net 6623.92 5349.81 3358.04

Intangible Assets Net 107.38 108.52 137.23



Net Block 6731.30 5458.32 3519.30

Capital Work In Progress

Net

1163.39 1375.14 1059.42

Fixed Assets 7894.69 6833.47 4578.72

Investments 168¢

79 611.24 704.55

Inventories 7294.06 6426.53 4887.10

Accounts Receivable 28577.30 29758.87 24235.63

Cash and Cash Equivalents 5241.40 3482.31 6428.64

Other Current Assets 3203.03 3812.88 2753.60

Current Assets 44315.79 43480.60 38304.97

Loans & Advances 3176.86 3517.66 2802.02

Miscellaneous Expenditure

Other Assets

0.00 0.00 0.00

Total Assets (BT) 55557.09 54442.98 46390.25

Documents

Ratio Analisys