Ratio Analysis , Victor Tools Jalandhar

7/31/2019 Ratio Analysis , Victor Tools Jalandhar

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1.1 INTRODUCTION TO RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is the mathematical relationship

between two quantities in the form of a fraction or percentage. It is essentially concerned with

the calculation of relationships which after proper identification and interpretation may provide

information about the operations and state of affairs of a business enterprise.

The analysis is used to provide indictors of past performance in terms of critical success factors

of a business. This assistance in decision making reduces reliance on guesswork and intuition

and establishes a basis for a sound judgment

In financial analysis, a ratio is used as a benchmark for evaluating the financial position and

performance of a firm. The absolute accounting figures reported in the financial statements do

not provide a meaningful understanding of the performance and financial position of a firm.

Absolute figures expressed in monetary terms in financial statements by themselves are

meaningless. These figures do not convey much meaning unless expressed in relation to other

figures.

For example: One trader Rohit earns a profit of Rs. 2,00,000, whereas another trader Ronit earns

a profit of Rs. 2,50,000. Which one is more efficient?Generally, we can say that Ronit is more efficient as he is earning more profits. But in order to

give the correct answer, we must find out how much the capital is employed by each of them?

Suppose, Rohit has employed a capital of Rs. 10,00,000 and Ronit has employed 15,00,000. We

can now calculate the percentage of profit earned by each of them on the capital employed:

Rohit = 2,00,000 /10,00,000*100 = 20%

Ronit = 2,50,000 715,00,000*100 = 17%

This shows that Rohit has earned Rs. 20 for every Rs. 100 of capital, whereas Ronit has earned

Rs. 17 for every Rs. 100 of capital. As, Rohit is using his capital more efficiently.


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The above example shows that figures assume significance only when expressed in relation to

other figures. Just as in the example given above, the absolute figure of profit was meaning less

but when the figure of profit was expressed in relation to capital, it assumed significance.

Thus, we can say that the relationship between two figures, expressed in arithmetical terms is

called a 'RATIO'.

In the words ofR.N. ANTHONY"A ratio is simply one number expressed in terms of another. It

is found by dividing one number into the another".

Ratio may be expressed in the following three ways:

1. Pure Ratio or Simple Ratio:

It is expressed by the simple division of one number by another. For example, if the

Current Assets of a business are Rs. 2,00,000 and Current Liabilities are Rs. 1,00,000, then

the ratio of "Current Assets to Current Liabilities" will be 2:1.

2. Rate or So Many Times:

In this type, it is calculated how many times a figures is, in comparison to another figure.

For example, if a firm's credit sales during the. year are Rs. 2,00,000 and its debtors at the

end of the year are Rs. 40,000, its DEBTORS TURNOVER RATIO = 2,00,000/40,000 = 5

times. It shows that the credit sales are 5 times in comparison to debtors.

3. Percentage:

In this type, the relation between the two figures is expressed in hundredth. For example, if

a firm's capital is Rs. 10,00,000 and its profit is Rs. 2,00,000, the ratio of profit to capital in

terms of percentage = 2,00,000/10,00,000*100 = 20%.

1.2.1 Objectives of Ratio Analysis

Ratios are regarded as the true test of earning capacity, financial soundness and operating

efficiency of a business organization. In other words, the objective of using ratios in accounting


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and financial management analysis are to test the profitability, financial position and operating

efficiency of an enterprise.

1.2.2 Advantages of Ratio Analysis

Simplifies financial statements. Ratio analysis simplifies the comprehension of financialstatements. Ratios tell the whole story of the changes in financial condition of a business.

Facilitates inter firm comparison. Analysis provides data for inter firm comparison.Ratios high-light the factors associated with successful and unsuccessful firms. They also

reveal strong firms and weak firms, overvalued and undervalued firms.

Makes intra-firm comparison possible. Ratio analysis also makes possible comparison ofthe performance of the different divisions of the firm. The ratios are helpful in deciding

about their efficiency or otherwise in the past and likely performance in the future.

Helps in planning. Ratio analysis helps in planning and forecasting. Over a period of timea firm or industry develops certain norms that may indicate future success or failure. If

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

clues on trends and future problems.

1.2.3 Types of RatiosRatios are classified according to tests. Mainly ratios are falling under 4 categories.

LIQUIDITY RATIOS LONG TERM SOLVENCY RATIOS ACTIVITY RATIOS PROFITABILITY RATIOS

Figure 1.1: Classification of Ratio According to Tests


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1.2.4 Analysis of Short-Term Financial Position or Test of Liquidity


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The short-term creditors of a company like suppliers of goods of credit providing short-term

loans are primarily interested in knowing the company's ability to meet its current or short-term

obligation as and when these become due.

Two types of ratios can be calculated for measuring short-term financial position or short-term

solvency of a firm.

1. Liquidity Ratios

2. Current Assets Movement or Efficiency Ratios.

1. Liquidity Ratios:

It refers to the ability of a firm to meet its short-term financial obligations when and as

they fall due.

In fact, analysis of liquidity needs the preparations of cash budgets and cash and fund

flow statements; but liquidity ratios by establishing a relationship between cash and other

current assets to current obligations, provide a quick measure of liquidity.

The main concern of liquidity ratio is to measure the ability of the firm to meet their

short-term maturing obligations. Failure to do this will result in total failure of the

business, as it would be forced into liquidation.

To measure the liquidity of a firm, the following ratios can be calculated:

I. Current Ratio

II. Quick or Acid Test or Liquid Ratio

III. Absolute Liquid Ratio or Cash Position Ratio

I. Current Ratio:


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This ratio explains the relationship between Current Assets and Current Liabilities of a business.

The formula for calculating the ratio is:-

Current Ratio= Current Assets/ Current Liabilities

'Current Assets' includes those Assets which can be converted into cash within a YEAR'S time

like Cash in Hand, Cash at Bank, B/R, Short-term Investments, Debtors, Stock, and Inventories

etc.

'Current Liabilities' include those liabilities which are repayable in a YEAR'S time like Bank

O/D, B/P, Creditors, Provision for Taxation, Proposed Dividends, Outstanding Expense and

Loans payable with in a year etc.

SIGNIFICANCE:-

This ratio is used to assess the firm's ability to meet its short term liabilities on time. According

to accounting principals, a current ratio of 2:1 is supposed to be an IDEAL RATIO. It means that

Current Assets of a business should, at least, be twice of its Current Liabilities. The higher the

ratio, the better it is, because the firm will be able to pay its Current Liabilities more easily. The

reason of assuming 2:1 as the Ideal Ratio is that the Current Assets includes such Assets as

Stock, Debtors etc. from which full amount cannot be realized in case of need, hence even if half

the amount is realized from the Current Assets on time, the firm can still meet its Current

liabilities.

If the Current Ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital.

But a much higher ratio, even though it is beneficial to' the short term creditors, is not necessarily

good for the company. A much higher ratio than 2:1 may indicate the poor investment policies of

the management.

While calculating Current Ratio, we have taken Loans & Advances as Debtors in the Current

Assets. In Current Liabilities, we included the Provisions to calculate Total Current Liabilities.

II QUICK OR ACID TEST OR LIQUID RATIO:


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Quick Ratio indicates whether the firm is in a position to pay its current liabilities within a month

or immediately. As such the quick ratio is included by dividing liquid assets (Quick Assets) by

current Liabilities:-

Quick Ratio or Acid Test Ratio = Liquid Assets/Current Liabilities

'Liquid Assets' means those assets which will yield cash very shortly. All current assets except

stock and prepaid expenses are included in liquid assets. Stock is excluded from liquid assets

because it has to be sold before it can be converted into cash. Prepaid expenses too are excluded

from the list of liquid assets because they are not expected to be converted into cash. Liquid

assets thus include cash, debtors, bill receivable and short term securities.

SIGNIFICANCE:

An ideal quick ratio is said to be 1:1. if it is more, it is considered to be better. The idea is that for

every rupee of current liabilities, there should be at least one rupee of liquid assets. This ratio is

better test of short-term financial position of the company than the current ratio, as it considers

only those assets which can be easily converted into cash. Stock is not included in liquid assets

as it may take a lot of time before it is converted into cash.

Quick ratio thus is more rigorous test of liquidity than the current ratio and when used together

with current ratio, it gives a better picture of the short term financial position of the firm.

While calculating Quick Assets, we have deducting Inventories assuming as a stock -from

Current Assets so that Quick Assets are obtained.

Ill ABSOLUTE LIQUID RATIO OR CASH RATIO:

Generally, debtors and bill receivables are 'more liquid than inventories. There may be doubts

regarding their realization into cash immediately or in time. Some authorities are of the opinion


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that the absolute liquid ratio should also be calculated together with current assets and find out

the absolute liquid assets.

Absolute Liquid Ratio/ Cash Ratio= Cash + Short Term Securities/ Current Liabilities

SIGNIFICANCE:

Absolute Liquid Assets include cash in Hand and at Bank and marketable Securities or

temporary investments. The acceptance norm for this ratio is 50% or 0.5:1 or 1:2 i.e. Re. 1 worth

Liquid Assets are considered adequate to pay Re. 2 worth Current Liabilities in time as all the

creditors are not expected to demand cash at the same time and then cash may also be realized

from debtors and inventories.

1.2.5 Current Assets Movement or Efficiency/Activity Ratios:

Funds are invested in various assets in business to make sales and earn profits. The efficiency

with which assets are managed directly affects the volume of sales. The better the management

of assets, the larger is the amount of sales and profits. Activity ratios measure the efficiency or

effectiveness with which a firm manages its resources or assets. These ratios are also called

turnover ratios because they indicate the speed with which assets are converted or turned over

into sales.

For example: Inventory turnover ratio indicates the rate at which the funds invested in

inventories are converted into sales. Depending upon the purpose, a number of turn over ratios

can be calculated, as Debtors or Receivable Turnover, Average Collection Period, Stock/

Inventory Turnover, Creditors/Payable Turn over, Average Payment Period, Working Capital

Turnover Ratio.\

I. Inventory/Stock Turnover Ratio:

This ratio indicates the relationship between the cost of googs sold during the year and average

stock kept during that year.


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Stock Turnover Ratio= COGS/Average Stock

Cost of Goods Sold= Opening Stock + Purchases + Carriage +

wages + other direct charges - Closing Stock OR Net Sales - Gross profit.

Average Stock= (Opening Stock + Closing Stock)/ 2

SIGNIFICANCE:

This ratio indicates whether stock has been efficiently used or not. It shows the speed with which

the stock is rotated into sales or the number of times the stock is turned into sales during the year.

The higher the ratio the better it is. Since it indicates that the stock is selling quickly. In a

business, where stock turnover ratio is high, goods can be sold at a lower margin of profit and

even the profitability may be quite high. A low stock turnover ratio indicates that stock does not

sell quickly and remains lying in the godown for a long time. This results in increased storage

cost, blocking of funds and losses on account of goods becoming obsolete. This ratio can be

compared with the previous year, the management can access whether the stock has been more

efficiently used or not.

1.2.6Analysis of Long-Term Financial PositionorTest of Solvency

These ratios are calculated to assess the ability of the firm to meet its long term liabilities as and

when they become due. Long term creditors including debentures holders are primarily

interested to know whether the company has ability to pay regularly interest due to them and to

repay the principle amount when it become due. Solvency ratios disclose the firm's ability to

meet the interest cost regularly and long term indebtedness at maturity. Solvency ratios include

the following ratios:

1. Debt-Equity Ratio

2. Funded-Debt to Total Capitalization Ratio

3. Equity Ratio

4. Solvency Ratio

5. Proprietor's Funds Ratio

6. Fixed Assets Radio


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7. Ratio of Current Assets to Proprietor's Fund

1. Debt-Equity Ratio:

This ratio expresses the relationship between long term debt and shareholders funds. It indicates

the proportion of the funds which are acquired by long term borrowings in comparison to

shareholders funds. This ratio is calculated to ascertain the soundness of the long term financial

policies of the firm. The Debt-Equity can be calculated are as follows:

Debt-Equity= Outsiders Funds/ Shareholders Funds

or External Equities/ Internal Equities

Outsiders Funds:

These refer to long term liabilities which mature after one year. These include debentures,

mortgage loans, public deposits etc.

Shareholder's funds:

These include equity share capital, preference capital, share premium, general reserve and other

reserves and credit balance of profit and loss account. However accumulated losses and fictitious

assets remaining to be written off like preliminary expenses, underwriting commission, share

issue expenses should be deducted.

SIGNIFICANCE:

This ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally

Debt-Equity Ratio is of 2:1 is considered safe, if this is more than that it shows a rather risky

financial position from the long term point of view as it indicates that more and more funds are

invested in the business; are provided by long term lenders. The lower this ratio the better it is

for long term lenders because they are more secure in that case. Lower than 2:1 Debt-Equity

Ratio provides sufficient protection to long term lenders. A high Debt-Equity Ratio which that

the claims of Creditors are greater than those of owners, may not be considered by the time of

liquidation of the firm


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.

2. FUNDED DEBT TO TOTAL CAPITALIZATION RATIO:

The ratio establishes a link between the long term funds raised from outsiders and total long term

funds available in the business. The debt to total capitalization can be calculated are as follows:

Funded Debt to Total Capitalization Ratio= Funded Debt/Total Capitalization*100

Funded Debt= Debentures + Mortgage Loans + Bonds + other Long term Loans.

Total Capitalization Equity Share Capital + Preference Share capital + Reserve & Surplus

+ Other Undistributed Reserves + Debentures + Mortgage Loans + Bonds + Other Long

Term loans.

SIGNIFICANCE:

As funded Debt to Total Capitalization represents the relationship of long term funds. There is no

'Rule of Thumb' but still the lesser the reliance on outsiders the better it will be. If this ratio is

smaller, better it will be, up to 50% or 55% this ratio may be to tolerable and beyond.

3. PROPRIETORY RATIO OR EQUITY RATIO

This ratio establishes the relationship between shareholder's funds to total assets of the firm. This

ratio is important for determining long term solvency of a firm. The equity ratio may be

calculated are as follows:

Equity Ratio= Shareholder's Funds/Total Assets

Shareholder's Funds= We include Share Capital and Reserves & Surplus. We deduct

Depreciation Reserve Fund as it is included in Reserve and Surplus.

Total Assets= It is calculated by deducting depreciation reserve fund from total of assets side of

the balance sheet.


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SIGNIFICANCE:

As this ratio represents the relationship of owner's funds to total assets, higher the ratio better is

the long term solvency position of the company. This ratio indicates the extent to which the

assets can be lost without affecting the interest of creditors of the company.

4. SOLVENCY RATIO OR THE RATIO OF TOTAL ASSETS:

This ratio indicates the relationship between the total liabilities to outsiders to total assets of a

firm and can be calculated as follows:

Solvency Ratio= Total Liabilities to Outsiders/ Total Assets

SIGNIFICANCE:

As this ratio represents the relationship between the total liabilities to outsiders to total assets,

more satisfactory of stable is the long-term solvency position of firm.

Total liabilities to outsiders are assumed as current Liabilities.

5. RATIO OF CURRENT ASSETS TO PROPRIETOR'S FUNDS:

The ratio is calculated by dividing the total of current assets by the amount of shareholder's

funds. It is calculated as follows:

C/A to Proprietor's Funds= Current Assets/Proprietor's Funds*100

SIGNIFICANCE:

The ratio indicates the extent to which proprietor's funds are invested in current assets. There is

no 'Rule of Thumb' for this ratio and depending upon the nature of the business there may be

different firms. Proprietor's funds are assumed as shareholder's funds.

1.2.7ANALYSIS OF PROFITABILITY OR PROFITABILITY RATIOS


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The main object of all the business concerns is to earn profit. Profit is the measurement of the

efficiency of the business. Equity shareholders of the company are mainly interested in the

profitability of the company. Profitability Ratios measure the various aspects of the profitability

of a company such as

1. What is the rate of the profit on sales?

2. Whether the profits are increasing or decreasing?

And if decreasing, then it helps in finding out the cause of their decrease.

3. Whether an adequate return is being obtained on capital employed?

Profitability Ratios include the following:-

1. General Profitability Ratios

2. Overall Profitability Ratios

1. General Profitability Ratios

The following ratios are known as general profitability ratios:

I. Gross Profit Ratio II. Operating Ratio

III. Operating Profit Ratio

IV. Expenses Ratio V. Net Profit Ratio

I. Gross Profit Ratio:

This ratio shows the relationship between gross profit and sales.

Gross Profit Ratio= Gross Profit/Net Sales*100

Net Sales= Sales- Sales Return

SIGNIFICANCE:

This ratio measures the margin of profits available on sales. The higher the ratio, the better it is.

The ratio should be adequate enough not only to cover the operating expenses but also to provide

for the depreciation, interest on loans, dividends and reserves. The ratio is compared with earlier

ratio and important conclusion is drawn from such comparison for instances if there is a decline

in gross profit ratio in comparison to previous year it may be concluded that:


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I. Price of material purchased, freight, wages and direct changes may have gone up but selling

price may not have gone up in proportion to increase in the cost.

II. The selling price may have fallen but the price of the materials, freight, wages and other direct

charges may have not fallen relatively.

III. There is a fall in sales of more profitable variety of goods.

II. OPERATING RATIO:

It establishes the relationship between cost of goods and other operating expenses on the one

hand and the sales on the other hand. It measures the cost of operations by dividing operating

costs with the net sales.

Operating Ratio= Operating Cost/Net sales*100 Operating

Cost = COGS+ Operating expenses

SIGNIFICANCE:

This ratio indicates the percentage of net sales that is consumed by operating cost. Obviously,

higher the operating ratio, the less favorable it is, because it would have margin (operating profit)

to cover interest, income-tax dividend and reserves. There is no rule of thumb for this ratio as it

may differ from to firm depending upon the nature of its business and its capital structure

III. OPERATING PROFIT RATIO:

This ratio is calculated by dividing operating profit by sales. This ratio is calculated are as

follows:

Operating profit ratio = Operating profit x 100

Sales

Operating Profit = Net sales - Operating Cost

Operating Cost = Cost of goods sold + Administrative and office expenses + selling and

distributive expenses.


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This ratio can also be calculated as:

Operating profit ratio = 100-operating ratio

IV) EXPENSES RATIOS:

Expenses ratios indicate the relationship of various expenses to net sales. Expenses ratios are

calculated by dividing each item of expenses with the net sales to anlyse the cause of several of

the operating ration. The rati can be calculated for each individual item of expenses like cost of

sales ratio, administrative expenses ratio, selling expenses ratio, material consumed ratio, etc.

SIGNIFICANCE:-

This ratio indicates the relationship of various expenses to net sales. The lower the ratio, the

greated is the profitability and higher the ratio, lower is the profitability. While interpreting the

ratio, it must be remembered that for a fixed expenses like rent, the ratio will fall if sales increase

and for a variable expense, the ratio in proportion to sales shall remain nearly the same.

EXPENSES RATIO MAY BE CALCULATED AS:

1. Cost of goods sold ratio:

Cost of goods sold/ Sales

2. Administrative & Office expenses ratio: Administrative & Office expenses x 100/ Sales

3. Selling & Distribution Expenses Ratio : Selling & Distribution Expenses x 100/Sales

4. Net Profit ratio:

This ratio shows the relationship between net profit and sales. It may be calculated by two

methods:

1. Net Profit ratio = Net Profit/Net sales x 100

2. Net Profit ratio = Operating Net Profit/Net sales x100

SIGNIFICANCE:-


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This ratio measures the rate of net profit earned on net sale. It helps in determining the overall

efficiency of the business operation. An increase in ratio over the previous year shows

improvement in the overall efficiency and profitability of the business.

1.2 INTRODUCTION TO MANUFACTURING

Manufacturing flow provides a cost-effective way for small and mid-size manufacturers to

optimize their business systems. The implementation of manufacturing flow strategies can help

our company do more with less.

In order for manufacturers to supply products to distribution channels, processes must be

flexible enough to respond to market changes and must also accommodate mass customization.

There are barriers to this process, including long set-ups and changeovers, unreliable

manufacturing, poorly designed systems, cumbersome paperwork, and problems in

transportation and logistics.

Whether a company wants to improve one area or achieve holistic operational improvement,

manufacturing flow strategies can provide optimal rewards. Managements provide a

synchronized flow of product achieved with maximum speed, flexibility, and distance. We use

management to develop a common understanding throughout the organization and effectively

change the traditional mindset toward a new culture of speed, agility, simplicity, and velocity of

product flow. We focus on major problems utilizing an 80-20 approach where 80% of the desired

results come from 20% of the improvement.

The characteristics of flow and lean processes are:

1. Straight and short product flow patterns.

2. Make to order

3. Single-piece production

4. Just-In-Time materials dependent demand scheduling

5. Short cycle times

6. Highly flexible and responsive processes

7. Highly flexible machines and equipment

8. Quick changeover

9. Continuous flow work cells


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10. Collocated machines, equipment, tools and people.

11. Compressed space

12. Multi-skilled employees

13. Empowered employees

14. High first-pass yields with major reductions in defects

Continuous Flow Manufacturing: -

Improvement Continuous flow manufacturing (CFM) is a system's approach to total system. The

Center for Entrepreneurial Studies and Development (CESD) has developed clearly defined steps

to achieving better throughput and reducing inventories and operating expenses. The steps

combine employee-driven cellular design and constraint management. In its simplest form, CFM

is a process for developing improved workflow using team-based problem solving.

Some advantages of continuous flow manufacturing:

Improved customer service. Improved retention and reduced absenteeism. Improved quality control and elimination of waste. Improved materials handling practices and production process layout. Improved scheduling and reduced flow time and costs. Reduced in-process inventory and improved inventory control.Increased utilization of capacity (decrease in machine maintenance).

Reduced set-up times. Elimination of non value-added tasks. Improved safety practices.

Set up time: -Set-up time is defined as the time that passes between when the last good piece comes off the

current run and when the first good piece comes off the next run, while running at optimum rate.

Set-up time has the following meanings:

1. The overall length of time required to establish a circuit-switched call between users.


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2. For data communication, the overall length of time required to establish a circuit-switched call

between terminals; e.g., the time from the initiation of a call request to the beginning of the

call message.

Setup time Reduction

One of the most accomplishments in keeping the price of our products low is the gradual

shortening of the production cycle. The process of manufacture and the more it is moved

about, the greater is its ultimate cost.

Some basic concepts on reducing set-up times

1. Understand the difference between internal and external activities. Internal activities are those

that must be done while the machine is stopped, such as changing welding probes on a

welding machine. External activities are those done while the machine is running, such as

retrieving parts and tools for the upcoming order.

2. Change as many internal activities as possible to external ones. Get parts, tools and other

needed items ahead of time. If the changeover is being delayed pending first-piece

inspection, determine the risk of running while doing the inspection.

3. Pre-heat and install parts hot. Remove the parts hot.

4. Put changeover tasks in a checklist and revise the list as set-up time improves.

Proper planning

Planning in organisation and public policy is both the organizational process of creating and

maintaining a plan and the psychological process of thinking about the activities required to

create a desired goal on some scale. As such, it is a fundamental property of inteligent behaviour.

Planning is a process for accomplishing purpose. It is a blue print of business growth and a road

map of development. It helps in deciding objectives both in quantitative and qualitative terms. It

is setting of goals on the basis of objectives and keeping in view the resources.


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Importance of the planning process

A plan can play a vital role in helping to avoid mistakes or recognize hidden opportunities.

Preparing a satisfactory plan of the organization is essential. The planning knows the business

and those they have thought through its development in terms of products, management,

finances, and most importantly, markets and competition.

Planning helps in forecasting the future, makes the future visible to some extent. It bridges

between where we are and where we want to go. Planning is looking ahead.

Tips for Proper Planning of Time

The six steps in planning are

1. Set objectives.

2. Assess you present situation.

3. Survey your alternatives.

4. Decide on the course of action.

5. Provide for control.

6. Implement the plan.

Lack of proper planning

A survey conducted by Collaboration, Management and Control Solutions (CMCS) has revealed

that poor project planning and methodology, unrealistic target completion dates, and lack of

communication mainly cause project failure in the region.

Some points have decreased the proper planning:

Lack of communication, coordination and motivation.

Increase the conflict. No workers satisfaction. Absenteeism of the workers.


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Supply chain management

Supply chain management as the "design, planning, execution, control, and monitoring of supply

chain activities with the objective of creating net value, building a competitive infrastructure,

leveraging worldwide logistics, synchronizing supply with demand, and measuring performance

globally."

Supply Chain Management is the systemic, strategic coordination of the traditional business

functions and the tactics across these business functions within a particular company and across

businesses within the supply chain

Supply chain manasgement problems

Supply chain management must address the following problems:

Distribution Network Configuration: number, location and network missions of suppliers,production facilities, distribution centers, warehouses, and customers.

Information: Integration of processes through the supply chain to share valuableinformation, including demand signals, forecasts, inventory, transportation, potential

collaboration, etc.

Inventory Management: Quantity and location of inventory, including raw materials,work-in-progress (WIP) and finished goods.

Cash-Flow: Arranging the payment terms and methodologies for exchanging funds acrossentities within the supply chain.

Customer satisfaction

Customer satisfaction, a business term, is a measure of how products and services

supplied by a company meet or surpass customer expectation. It is seen as a key

performance indicator within business and is part of the four of a balanced score card.

In a competitive marketplace where businesses compete for customers, customer

satisfaction is seen as a key differentiator and increasingly has become a key element of

business strategy.

There is a substantial body of empirical literature that establishes the benefits of

customer satisfaction for firms.


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Customer Satisfaction Survey

We knew that customer satisfaction is essential to the survival of our business. We find

out that out customers are satisfied and the best way to find out whether our customers

are satisfied is to ask him.

When we conduct a customer satisfaction survey, what we ask the customer is

important and how often we ask this question are also important. The most important

thing about conducting a customer satisfaction survey is what we do with their answer.

Improving Customer Satisfaction

Once we have established what needs to be improved, and how much it needs to be improved,

plans need to be developed to make improvement happen. The keys to successful planning are

to:

Involve front-line employees and management in the planning process,Make sure plans are specific,

Evaluate the success of plans once they have been put into place. It is doing by measuringactual improvement in operations and customer satisfaction.

Customer-Based Improvement Goals

Once we have identified what needs to be improved, we need to develop a plan for improving

each identified area. Such plans need to be based on what customers really need, rather than what

management believes to be a good goal. If customers really desire wait times of ten minutes or

less, having management dictate that wait times must be reduced to fifteen minutes will have

limited appeal with customers. We may need to do a separate survey with customers to actually

set appropriate goals. If this is not economically feasible, at least talk to a number of customers

and gain their input before setting a goal.

On Time Delivery

We focus on all elements that support On Time Delivery and hold ourselves accountable to

stringent tolerances. When an order is placed, it is scheduled based on a requested delivery date.

Once a commitment is made, we do everything within our control to adhere to this date.


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Scheduling buffers are set up in front of each manufacturing process to help synchronize the

workload and build in flexibility to absorb unexpected changes and delays.

The improved ability of an organization to deliver a product or service that meets to meet

customer requirements against a specification for delivery time. While price has always been a

key determinate in the purchasing decision, the emphasis on timely delivery is becoming

increasingly important, for both individual consumers and subassemblies.

On-time delivery is measured as percent achievement within a window of time that brackets the

customer-requested date and the business committed date and is not improved by quoting long

lead times and turning down tough business. Using time as a metric allows for improved quality

and decreased costs as process times are reduced through systematic barrier removal.

The key element to improving on-time delivery is the standardization of the criteria by which

each supply chain segment is measured against. Problems arise when different segments define

on-time delivery differently and in ways that are not tied to the commitment date to the

customer. By aligning all internal lines to a common standard it is easier to drive different parties

towards what they need to achieve.

Capacity Utilization

A firms productive capacity is the total level of output or production that it could

produce in a given time period. Capacity utilizationis the percentage of the firms total

possible production capacity that is actually being used.

If market demand grows, capacity utilization will rise. If demand weakeness, capacity

utilization will slacken Economists and bankers often watch capacity utilization

indicators for signs of inflation pressures. It is believed when utilization rises above

somewhere between 82% and 85%, price inflation will increase. Excess capacity means

that insufficient demand exists to warrant expansion of output.

Just in time

Just-in-time (JIT) is an inventory strategy that strives to improve a business's return on

investment by reducing in-process inventory and associated carring cost. The process relies on

signals between different points in the process, which tell production when to make the next part.

JIT can improve a manufacturing organization'sreturn on investment, quality, and efficiency.


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Quick notice that stock depletion requires personnel to order new stock is critical to the

inventory reduction at the center of JIT. This saves warehouse space and costs. However, the

complete mechanism for making this work is often misunderstood.

Its effective application cannot be independent of other key components of a lean manufacturing

system or it can "...end up with the opposite of the desired result.

Benefits

Main benefits of JIT include:

Reduced setup time. Cutting setup time allows the company to reduce or eliminateinventory for "changeover" time.

The flow of goods from warehouse to shelves improves. Small or individual piece lotsizes reduce lot delay inventories, which simplifies inventory flow and its management.

Employees with multiple skills are used more efficiently. Having employees trained towork on different parts of the process allows companies to move workers where they are

needed.

Production scheduling and work hour consistency synchronized with demand. If there isno demand for a product at the time, it is not made. This saves the company money,

either by not having to pay workers overtime or by having them focus on other work or

participate in training.

Increased emphasis on supplier relationships. A company without inventory does notwant a supply system problem that creates a part shortage. This makes supplier

relationships extremely important.

Supplies come in at regular intervals throughout the production day.

1.3 INTRODUCTION TO VICTOR TOOLS

Victor Forgings is Indias leading name in manufacturing Hand Tools since 1954 located at

Jalandhar, which is around 400 Kms. North West of Indias capital New Delhi. With a total plant

area of 35,000 Sq.m. and covered area of 25,000 Sq.m. Latest equipments combined with state-

of-the-art technology and above all excellent raw material have helped us to offer Trustworthy

Quality, Timely Shipments and Reasonable Rates.


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Manufacturers of Hand Tools, Spanners, Pliers, Spanners, Pliers Tools, Woodworking Tools,

Garden Tools, Measuring Tools, Plumbing Tools, Striking Tools, Leather Products, Vices,

Automobile, Lubrication, Canvas Products, Packaging Tools Hand & Allied Tools

QUALITY POLICY

Victor Forgings endeavourers to be a leading exporter of hands tools.

To achieve this we commit to:-

Comply with requirements and continually improve the effectiveness of quality managementsystem.

Develop product for higher end market through technology up- gradation. Improve output performance through process monitoring and employee involvement.ENVIRONMENTAL POLICY

Victor Forgings ltd. To be leading exporter of hand tool by maintaining neat and clean

Environment.

To achieve this we commit to:-

Preserve and continually improvement with minimum wastage of resource, reduction inpollution and by creating awareness amongst management employees and suppliers.

Protect environment by compiling with environment legal and other related requirement.

ISO Certificate

The company is awarded ISO 9002 certificate by RvA Netherlands.

The Company is certified as manufacturer of Spanners as per the safety law of Germany by TUV

Rheinland, Koln, Germany.

The Company is also certified as a manufacturer of Spanners as per the safety laws of Germany

by VPA Remscheid, Germany.

The Company is producing Spanners of various designs and sizes as per DIN standards and is

allowed to markGS on products as a sign of a quality product.


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We have continued to extend our range and are now able to offer a comprehensive range of

Automotive Tools in addition to the well established Hand Tools range.

REVIEW OF LITERATURE

It is desirable to review the relevant literature while understanding the research problem. It

provides base for preparing the research design of the study and conceptualizing the concepts of

the study. In this chapter a brief review of these studies, pertinent to the present research have

been presented. The review of past studies has been presented to provide a glimpse of work done

in this area.

Horrigon (1963) found that a variety of financial ratios were developed by analysts in the early

decades of this century. The statistical nature of financial ratios will be analyzed that is

amenability of these ratios to statistical analysis will be evaluated. The usual concern has been

converted into ratios. In other words, financial ratios are not normally distributed or their

dispersion is very large. The statistical nature of financial ratios are more complicated,

correlation between ratios are also presented.

Altman (1968) examined a brief review of the development of traditional ratio analysis as a

technique for investigating corporate performance is presented in section. In section the

shortcomings of this approach are discussed and multiple discriminant is introduced with the

emphasis centering on its compatibility with ratio analysis in a bankruptcy prediction context

Edmister (1972) found this study develops and empirically tests a number of methods of

analyzing financial ratios to predict small business failure. Although not all of the methods and

ratios are predictors of failure, many ratio variables are found which do predict failure of Small

Business Administration borrowers and guarantee recipients. Methods of analysis found useful

are (1) classification of a borrower's ratio into quartiles relative to other borrowers in the sample,

(2) observation of an up- or down-trend for a three-year period, (3) combinatorial analysis of a

ratio's trend and recent level, (A) calculation of the three-year average, and (5) division of a ratio


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by its respective RMA industry average ratio. This leads the author to qualify his conclusion

above with the provision that at least three consecutive financial statements be available for

analysis of a small business.

Saris (1985) examined a procedure for computing the power of the likelihood ratio test used in

the context of covariance structure analysis is derived. The procedure uses statistics associated

with the standard output of the computer programs commonly used and assumes that a specific

alternative value of the parameter vector is specified. Using the noncentral Chi-square

distribution, the power of the test is approximated by the asymptotic one for a sequence of local

alternatives.

Nissim and penman (1996) examined that Financial statement analysis has traditionally been

seen as part of the fundamental analysis required for equity valuation. An analysis of operating

activities is distinguished from the analysis of financing activities. The perspective is one of

forecasting payoffs to equities. So financial statement analysis is presented as a matter of pro

form analysis of the future, with forecasted ratios viewed as building blocks of forecasts of

payoffs. The analysis of current financial statements is then seen as a matter of identifying

current ratios as predictors of the future ratios that determine equity payoffs. The financial

statement analysis is hierarchical, with ratios lower in the ordering identified as finer information

about. And, again with a view to forecasting, the time series behavior of many of the ratios is

also described and their typical long-run ,steady-state levels are documented.

Financial statement analysis - ratio analysis - equity valuation

Salmi and martikeinen (1996) : This paper provides a critical review of the theoretical and

empirical basis of four central areas of financial ratio analysis. The research areas reviewed are

the functional form of the financial ratios, distributional characteristics of financial ratios,

classification of financial ratios, and the estimation of the internal rate of return from financial

statements. It is observed that it is typical of financial ratio analysis research that there areseveral unexpectedly distinct lines with research traditions of their own. A common feature of all

the areas of financial ratio analysis research seems to be that while significant regularities can be

observed, they are not necessarily stable across the different ratios, industries, and time periods.


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Stafford and Glowa (1998) found progressive-ratio schedules of drug delivery generate an

index of a drugs or doses reinforcing efficacy (the breaking point) and are being used

increasingly as tools in the analysis of drug self-administration. Progressive-ratio schedules of

drug delivery have been used to characterize the effects of pretreatment drugs, lesions, drug

deprivation, physical dependence, and repeated non-contingent drug exposure on breaking

points. The objectives of this review are to critique existing research themes, outline potential

limitations of progressive-ratio procedures, and to suggest potentially fruitful uses of these

procedures in future research.

Chinn (2000) found a systematic review may encompass both odds ratios and mean differences

in continuous outcomes. A separate meta-analysis of each type of outcome results in loss of

information and may be misleading. It is shown that a ln(odds ratio) can be converted to effect

size by dividing by 1.81. The validity of effect size, the estimate of interest divided by the

residual standard deviation, depends on comparable variation across studies. If researchers

routinely report residual standard deviation, any subsequent review can combine both odds ratios

and effect sizes in a single meta-analysis when this is justified

Werner and Brand (2001) examined stable isotope ratios are reported in the literature in terms

of a deviation from an international standard (-values). The referencing procedures, however,

differ from instrument to instrument and are not consistent between measurement facilities. This

paper reviews an attempt to unify the strategy for referencing isotopic measurements. In

particular, emphasis is given to the importance of identical treatment of sample and reference

material (IT principle), which should guide all isotope ratio determinations and evaluations.

The implementation of the principle in our laboratory, the monitoring of our measurement

quality, the status of the international scales and reference materials and necessary correction

procedures are discussed

Jacobs (2003) found that Operational management needs to know the causes of off-standard

performance in order to improve operations. The knowledge of variances (real result versus

budget) will aid control, at least if and when these variances are understood well enough. The

only criterion for the calculation of a variance is its usefulness. This paper presents a few

examples, with quotes from various textbooks and examinations.


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There are various studied conducted in the field of Ratio analysis and its application where the

researcher studied on different types of ratios. The researcher studied the appropriate ratios and

various types of ratios which helps in analyzing the financial position of the companies. The

statistical nature of financial ratios will be analyzed that is amenability of these ratios to

statistical analysis will be evaluated. There is still a wide gap existing in the research field with

the same aspect in Indian context. Considering the emerging importance of ratios in maintaining

the records of the companies, the study is conducted in order to determine the fair value of

liquidity or overall position of the company.

NEED, SCOPE AND OBJECTIVES OF THE STUDY

3.1 NEED OF THE STUDY

The brief study on review of literature revealed the fact that number of studies has been carried

out in the field of financial analysis of the company and its impact on the companies decisions.

However there is still a wide gap exist in regards to Indian context with regards to importance

and need of financial analysis of the companies. The need of the study arises to know the

financial stability of the company and whether company has the sufficient funds to deal with the

day to day requirements.

3.2 SCOPE OF THE STUDY

The scope of the present study was limited to Victor tools, Jalandhar. The study is based on

secondary data and all information available with in the organization. The study was limited to

Jalandhar only due to time constraint.

3.3OBJECTIVES OF THE STUDY


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The present study focused on the primary objective to find out the liquidity position of the

company. The explicit objectives of the study were:

To know short term and long term solvency of the Victor tools. To know whether activity ratio are satisfactory or they need improvement. To find out the efficiency of the Victor tools.

RESEARCH METHODOLOGY

In order to achieve the objectives mentioned a systematic methodology norms followed. Every

minute detail data was collected by direct method i.e. through interaction as well as by indirect

method i.e. by assessing the written records. The work was preceded under the direction of

finance manager and category wise report was prepared. This project was basically a fact

gathering exercise and evaluating and comparing aspects drew influence.

4.1 RESEARCH DESIGN

Research design is known as framework within which the whole activity of research and

methods or procedures is clearly mentioned under which the research was to conduct.

Descriptive research design was used for the study.

Descriptive research design implies the study of complete information regarding therespondents profile and his/her views/opinions/preferences towards some problem. It can

be called a research framework whereby the complete description of the respondents is

studied and data is collected and analyzed to draw conclusions for a problem.

4.2 DATA COLLECTION AND ANALYSIS

4.2.1 Data Collection

Both primary and secondary data are used for the study.


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Secondary Data

The secondary data are those data which have already been collected by someone else and

which have already been passed through the statistical process. company profile, industry

profile, official web sites and certain books are used as source of secondary data.Primary Data

Primary data is first hand information and thus happen to be original. Such original data is

complied and studied for a specific purpose. Data is collected from the accounts department

of Victor tools, Jalandhar.

4.3 TOOLS USED:

4.3.1 Financial Tools: Following financial tools were used to analyze the

actual performances of organization by adopting various techniques.

Ratio analysis is used to calculate the various ratios.

4.3.2 Presentation Tools: The presentation tools have been used to present the

facts and figures in an attractive manner. The details of the same exhibits have

been also mentioned alongside for the easy reference of the readers. Following

main presentation tools have been used for better exhibition of the data:

Tables and Pie-Charts are used to present the facts and figures.

4.4 LIMITATIONS OF THE STUDY

Due to constraints of time and resources, the study is likely to suffer from certain limitations.

Some of these are mentioned here under so that the findings of the study may be understood in a

proper perspective.

The limitations of the study are:

Due to the policies of company only screened information is provided by the accountingdept.

Information already compiled by the company is the basis of the study & not theinformation from the gross roots.

Policies of company & government are frequently changing.


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DATA ANALYSIS AND INTERPRETATION

The data has been processed and analyzed by tabulation interpretation so that findings can be

communicated and can be easily understood. The findings are presented in the best possible way.

Tables and graphs had been used for illustration of findings of the research.

Statement 1: To know about the current ratios of Victor tools from 2008 to 2011

Table 5.1: Calculation of Current Ratio

Particulars 2008-09 2009-10 2010-11Total Current assets 2,12,14,922 2,15,93,245 2,19,59,656Total Current

liabilities 2,32,39,019 1,94,68,281 1,87,26,499Current Ratio 0.91 1.10 1.17

Figure 5.1: Calculation of Current Ratio

Analysis and interpretation:

In current ratio, 2:1 is regarded as satisfactory level. From the above table it is clear that the

company was not able to maintain the thumb rule of 2:1 in any of the years. However the results

show that there was increasing trend in the current ratio and company is working to improve it.The company must invest in the current assets in order to maintain good liquidity position and

goodwill in the market.

Statement 2: To know about quick ratio of Victor tools from 2008 to 2011


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Table 5.2: Calculation of Quick Ratio

Particulars 2008-09 2009-10 2010-11Total quick assets 1,14,59,282 1,37,60,124 1,45,68,076Total current

liabilities 2,32,39,019 1,94,68,281 1,87,26,499Quick Ratio 0.49 0.70 0.77

Figure 5.2: Calculation of Quick Ratio


The rule of thumb quick ratio is 1:1. The quick ratio depicts the company is highly liquid so as to

fulfill current liabilities well in time. The analysis shows that the company is not able to fulfill

the thumb rule. However the quick ratio was improving over the number of years.

Statement 3: To know about absolute liquid ratio of Victor tools from 2008 to 2011

Table 5.3: Calculation of Absolute Liquid Ratio

Particulars 2008-09 2009-10 2010-11Absolute liquid

assets 7,03,294 40,82,407 32,67,852Total current

liabilities 2,32,39,019 1,94,68,281 1,87,26,499Absolute Liquid

Ratio 0.03 0.20 0.17

Figure 5.3: Calculation of Absolute Liquid Ratio


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The thumb rule of absolute liquid ratio is 0.5:1 which means the absolute liquid assets are half of

the current liabilities. The company is not able to maintain the satisfactory level in any of the

year. However the absolute liquid ratio has been increased in 2009-10 from 2008-09 but there

was slight decrease in the ratio in 2010-11. The company needs to improve the liquidity position

in order to meet the short term requirements.

Statement 4: To know about stock turnover ratio of Victor tools from 2008 to 2011

Table 5.4: Calculation of Stock Turnover Ratio

Particulars 2008-09 2009-10 2010-11Cost of Goods sold 3,35,19,868 3,47,81,252 3,92,67,539Average stock 90,62,871 87,94,380 76,12,350Stock Turnover

Ratio 3.69 3.95 5.15

Figure 5.4: Calculation of Stock Turnover Ratio


Inventory turnover ratio indicates the velocity with which stock of finished goods is sold. A high

ratio is suggests efficient inventory control and sound sales policies where as low ratio suggests

the possibility of slow moving items and poor selling policy. The analysis shows that the

turnover ratio has been improved every year which means company is showing improvement in

selling policies.

Statement 5: To know about debtors turnover ratio of Victor tools from 2008 to 2011

Table 5.5: Calculation of Debtors Turnover Ratio


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Particulars 2008-09 2009-10 2010-11Net credit sales 3,27,28,988 3,74,75,506 4,09,52,852Average debtors 99,85,675 1,02,16,852 1,04,88,970Debtors turnover ratio 3.28 3.66 3.90Note: All sales are taken as credit sales.

Figure 5.5: Calculation of Debtors Turnover Ratio


Normally higher the turnover ratio more efficient the management would be. It signifies speedy

and effective collection where as lower turnover indicates sluggish and inefficient collection

leading to doubtful debts. From the data, it was analyzed that the ratio has been improved in

from 2008 to 2011. The management has good turnover ratio however they can improve the

turnover to meet short terms demands.

Statement 6: To know about creditors turnover ratio of Victor tools from 2008 to 2011

Table 5.6: Calculation of Creditors Turnover RatioParticulars 2008-09 2009-10 2010-11Net credit purchase 1,76,21,188 1,83,12,602 2,19,04,913Average creditors 1,90,67,237 1,96,85,909 1,73,85,428Creditors turnover ratio 0.92 0.93 1.25Note: All purchases are taken as credit sales.

Figure 5.6: Calculation of Creditors Turnover Ratio


If the payable turnover ratio is high the company in not using the credit facility and may believe

in availing cash discounts. On the other hand lower the ratio; better the liquidity position of the


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company because the higher creditors turnover ratio signifies that creditors are being paid

promptly. The table shows that there is significant decrease in the ratio which increases the

payment period. The company is enjoying high credit facilities and able to maintain high

liquidity in the organization.

Statement 7: To know about debt equity ratio of Victor tools from 2008 to 2011

Table 5.7: Calculation of Debt Equity Ratio

Particulars 2008-09 2009-10 2010-11Total debt 31,77,267 60,33,997 35,43,501Shareholder's Funds 1,19,27,000 1,22,11,217 1,31,37,913Debt Equity Ratio 0.26 0.49 0.29

Figure 5.7: Calculation of Debt Equity Ratio


Acceptable limit for debt equity ratio is 2:1, but generally it should be less so that the company

does not completely exhaust its borrowing capacities. The portion of debt is very less in the

capital structure of the company.

Statement 8: To know about equity ratio of Victor tools from 2008 to 2011

Table 5.8: Calculation of Equity Ratio

Particulars 2008-09 2009-10 2010-11Shareholder's Fund 1,19,27,000 1,22,11,217 1,31,37,913


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Total Assets 3,86,39,153 3,78,96,245 3,51,11,777Equity ratio 30.86% 32.22% 37.41%

Figure 5.8: Calculation of Equity Ratio


Out of the total assets, only 37% of assets have been financed through owners funds in 2010 -11,

this indicates too much reliance of the company on borrowed funds. The company should make

efforts to reduce it by repayment of debt or issue of fresh capital if it does not want to impair its

ability to borrow in future.

Statement 9: To know about the solvency ratio of Victor tools from 2008 to 2011

Table 5.9: Calculation of Solvency Ratio

Particulars 2008-09 2009-10 2010-11Equity ratio 30.86% 32.22% 37.41%Solvency ratio 69.14% 67.78% 62.59%

Figure 5.9: Calculation of Solvency Ratio

Analysis and Interpretation:

Generally, it is assumed that lower the solvency ratio, more satisfactory or stable is the long-term

solvency position. The solvency ratio is decreasing over the number of years, the company is

making necessary steps in improving solvency ratio.


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Statement 10: To know about gross profit ratio of Victor tools from 2008 to 2011

Table 5.10: Calculation of Gross Profit Ratio

Particulars 2008-09 2009-10 2010-11Gross Profit 63,31,132 72,58,554 79,36,662Net Sales 3,27,28,998 3,74,75,506 4,09,52,852Gross profit ratio 19.34% 19.36% 19.37%

Figure 5.10: Calculation of Gross Profit Ratio


A high ratio is a sign of good management as it implies that the cost of production of the firm is

low. A firm should have a reasonable gross margin to ensure adequate coverage for operating

expenses of the firm and sufficient returns to the owners of the business, which is reflected in the

net profit margin. The above table shows that our gross profit is good and it is improving over

the number of years.

Statement 11: To know about net profit ratio of Victor tools from 2008 to 2011

Table 5.11: Calculation of Net Profit Ratio

Particulars 2008-09 2009-10 2010-11Net Profit 12,93,691 9,36,054 14,08,227


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Net Sales 3,27,28,998 3,74,75,506 4,09,52,852Net profit ratio 3.95% 2.5% 3.43%

Figure 5.11: Calculation of Net Profit Ratio


A high net profit margin would ensure adequate return to the owners as well as enable a firm to

withstand adverse economic conditions when selling price is declining, cost of production is

rising and demand for the product is falling. This net profit was highest in 2008-09 and it

reduced in 2009-10, however the company had taken some measure and the ratio increased in

2010-11.

Statement 12: To know about operating profit ratio of Victor tools from 2008 to 2011

Table 5.12: Calculation of Operating Profit Ratio

Particulars 2008-09 2009-10 2010-11Operating

Profit 19,14,736 15,93,683 19,87,495

Net Sales 3,27,28,998 3,74,75,506 4,09,52,852Operating

profit ratio 5.85% 4.25% 4.85%

Figure 5.12: Calculation of Operating Profit Ratio


The company in 2008-09 has highest operating profit ratio which is 5.85%. The operating profit

ratio declined in 2009-10 but it again increased in 2010-11 which shows that company had taken

some steps in order to improve the profitability.


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Statement 13: To know about cost of goods sold ratio

Table 5.13: Calculation of Cost of Goods Sold

Particulars 2008-09 2009-10 2010-11Cost of

goods sold 3,08,14,262 3,58,81,823 3,89,65,357Net Sales 3,27,28,998 3,74,75,506 4,09,52,852Cost of goods

sold 94.15% 95.75% 95.15%

Figure 5.13: Calculation of Cost of Goods Sold Ratio

Analysis and interpretation

The cost of goods sold ratio of the company in 2008-09 is 94.15%, in 2009-10 is 95.75% and in

2010-11 is 95.15%. The cost of goods sold increased in 2009-10 which reduced the profitabilityof the company. However the company has taken some measures and reduced the cost of goods

sold in 2008-09.

FINDINGS OF THE STUDY

The research is conducted on Victor tools to know their perspective over different aspects of

Derivative instruments. And after getting the information, the various findings of the research

are mentioned below:


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The current ratio was less than the thumb rule 2:1 which showed that the company is nothaving adequate assets to meet the liabilities.

The quick ratio was again less than the satisfactory level 1:1, which showed the companydoesnt have adequate level ofliquid assets.

The absolute liquid ratio was very less than from the satisfactory which showed that theliquidity position of the company is not adequate.

The inventory turnover ratio is increasing which showed that the company has goodselling policies.

The debtor turnover ratio was increased at a lower rate, the collection policy of thecompany was improved marginally.

The creditor turnover ratio was increased by approximately 27% in 2010-2011 from2009-2010 which in turn showed that the company used credit facility.

The debt equity ratio was quite less which showed that the company believes in ownfunds.

The equity ratio increased over the period of time, the shareholders have one third portionin the total assets of the company.

The gross profit of the company was same over the period of time which showed that thecompany had maintained stability in profitability.

The net profit of the company was increased in the 2010-2011 from 2009-2010 whichshowed the company had controlled the overheads significantly.

CONCLUSION AND RECOMMENDATIONS

7.1 CONCLUSION


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Victor tools is one of the leading manufacturers of Electric Motors, Mono - Block Pumps and

Centrifugal Pumps in Northern India. It has been awarded National Award for Quality Products

for Pumps Motors and Centrifugal Pumps.

Financial ratios are the good instruments for measuring liquidity, profitability, and solvency of

the industry. While analyzing the ratios of company management comes to know the strong areas

and weak areas of the company and then can take necessary steps to increase the profitability of

the company. Same with the solvency ratios these ratios indicate the soundness of the company

to pay out its debts. A company is good if it is able to meet out all its obligations without any

difficulty.

The overall financial health of the company is good. The liquidity position of the company is not

satisfactory, as the company doesnt had adequate assets in order to fulfill the liabilities. The

management of the company was trying their best in improving themselves which was depicted

by in the increase in both inventory and debtor turnover ratio. The overall performance of the

management is quite satisfactory.

The major portion in the capital structure was of own funds, there is very less percentage of

borrowed funds in the capital structure of the company. The company maintained stability in

profitability. The net profit of company increased by the efficient performance of management,

as the management was able to reduce the cost of production.

7.2 RECOMMENDATIONS OF THE STUDY

The research has been conducted to know about the Ratio Analysis of Victor tools, Jalandhar

.Various view point has been given by different account data. Some of the valuablerecommendations are included in this research.

The company doesnt enjoy the satisfactory liquidity position, however the companyneeds to take necessary steps in order improve the liquidity position by increasing current

assets like cash in hand, cash at bank, debtor etc


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The inventory turnover ratio was increasing but the increase in the ratio was not enoughto meet the competition in the market.

The efficiency ratios of the companies are increasing but the management was not able togive the desired results, so it was advised to management to make changes in their

policies.

The company was not enjoying the benefit of debt in the capital structure, however thecompany can use debt portion in order to increase the earning for the shareholders.

The management has able to control the overhead cost but however the managementneeds to take some steps in order to control the operating cost up to some extent in order

to increase gross profit.

REFERENCES

Akintoye, I. (2009). Consideration for selected food and beverages companies in nigeria.Journal of Business Finance and Accounting. 30 (3), 75-84.

Cook, M. et al. (2007). An examination of the effects of ratios on financial records onperformance. University of Arkansas-Fayetteville.

Fliess, L.(2009). Financial ratios. 15(30), 12 Gray. (2007). Ratio analysis. Retrieved June 21, 2010 from

http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=850364

Hanson, E. (1966). The accounting review. American Accounting Association. 41 (2), 239-243

Janssens. (2004). Impact of ratios in soundness of business. Retrieved July 23, 2010 fromhttp://www.informaworld.com/smpp/content~content=a912506753&db=al

Jones. (2010). Isotope ratios. Retrieved June 26, 2010 fromhttp://janicejones.cgpublisher.com/product/pub.28/prod.788
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Documents

Ratio Analysis , Victor Tools Jalandhar