Ratio Anaysis Intorduction Rahul

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INTRODUCTION

OBJECTIVE:

To understand the information contained in financial

statements with a view to know the strength or weaknesses

of the firm and to make forecast about the future prospects

of the firm and thereby enabling the financial analyst to

take different decisions regarding the operations of the

firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One

aspect looks at the general (qualitative) factors of a

company. The other side considers tangible and

measurable factors (quantitative). This means crunching

and analyzing numbers from the financial statements. If

used in conjunction with other methods, quantitative

analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers

from the balance sheet, income statement, and cash flow

statement. It's comparing the number against previous

years, other companies, the industry, or even the economy

in general. Ratios look at the relationships between

individual values and relate them to how a company has

performed in the past, and might perform in the future.

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MEANING OF RATIO:

A ratio is one figure express in terms of another figure.

It is a mathematical yardstick that measures the

relationship two figures, which are related to each other

and mutually interdependent. Ratio is express by dividing

one figure by the other related figure. Thus a ratio is an

expression relating one number to another. It is simply the

quotient of two numbers. It can be expressed as a fraction

or as a decimal or as a pure ratio or in absolute figures as so many times. As accounting ratio is an expression

relating two figures or accounts or two sets of account

heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the

relationship of items or group of items in the financial

statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative

measure or guides concerning the financial health and

profitability of business enterprises. Ratio analysis can be

used both in trend and static analysis. There are several

ratios at the disposal of an annalist but their group of ratio

he would prefer depends on the purpose and the objective

of analysis.

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While a detailed explanation of ratio analysis is beyond the

scope of this section, we will focus on a technique, which is

easy to use. It can provide you with a valuable investment

analysis tool.

This technique is called cross-sectional analysis. Cross-

sectional analysis compares financial ratios of several

companies from the same industry. Ratio analysis can

provide valuable information about a company's financial

health. A financial ratio measures a company's performance

in a specific area. For example, you could use a ratio of a

company's debt to its equity to measure a company's

leverage. By comparing the leverage ratios of two

companies, you can determine which company uses greater

debt in the conduct of its business. A company whose

leverage ratio is higher than a competitor's has more debt

per equity. You can use this information to make a

judgment as to which company is a better investment risk.

However, you must be careful not to place too much

importance on one ratio. You obtain a better indication of

the direction in which a company is moving when several

ratios are taken as a group.

OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of

business organization-

A) Solvency-

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1) Long term

2) Short term

3) Immediate

B) Stability

C) Profitability

D)Operational efficiency

E) Credit standing

F) Structural analysis

G)Effective utilization of resources

H)Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to

or more variables / accounting figures, such relationship

can be expressed in different ways as follows

A] As a pure ratio:

For example the equity share capital of a company is

Rs. 20,00,000 & the preference share capital is Rs.

5,00,000, the ratio of equity share capital to preference

share capital is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

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In the above case the equity share capital may also

be described as 4 times that of preference share capital.

Similarly, the cash sales of a firm are

Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio

of credit sales to cash sales can be described as 2.5

[30,00,000/12,00,000] or simply by saying that the credit

sales are 2.5 times that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a

percentage of some other item. For example, net sales of

the firm are Rs.50,00,000 & the amount of the gross profit

is Rs. 10,00,000, then the gross profit may be described as

20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards.

The standard ratio may be the past ratio of the same firm or

industrys average ratio or a projected ratio or the ratio of

the most successful firm in the industry. In interpreting the

ratio of a particular firm, the analyst cannot reach any

fruitful conclusion unless the calculated ratio is compared

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with some predetermined standard. The importance of a

correct standard is oblivious as the conclusion is going to be

based on the standard itself.

TYPES OF COMPARISONS

The ratio can be compared in three different ways

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the

firm is to compare them with the ratio or ratios of some

other selected firm in the same industry at the same point

of time. So it involves the comparison of two or more firms

financial ratio at the same point of time. The cross section

analysis helps the analyst to find out as to how a particular

firm has performed in relation to its competitors. The firms

performance may be compared with the performance of the

leader in the industry in order to uncover the major

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operational inefficiencies. The cross section analysis is easy

to be undertaken as most of the data required for this may

be available in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the

performance of a firm is evaluated over a period of time. By

comparing the present performance of a firm with the

performance of the same firm over the last few years, an

assessment can be made about the trend in progress of thefirm, about the direction of progress of the firm. Time series

analysis helps to the firm to assess whether the firm is

approaching the long-term goals or not. The Time series

analysis looks for (1) important trends in financial

performance (2) shift in trend over the years (3) significant

deviation if any from the other set of data\

3] Combined analysis:

If the cross section & time analysis, both are combined

together to study the behavior & pattern of ratio, then

meaningful & comprehensive evaluation of the performance

of the firm can definitely be made. A trend of ratio of a firm

compared with the trend of the ratio of the standard firm

can give good results. For example, the ratio of operating

expenses to net sales for firm may be higher than the

industry average however, over the years it has been

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declining for the firm, whereas the industry average has not

shown any significant changes.

The combined analysis as depicted in the above diagram,

which clearly shows that the ratio of the firm is above the

industry average, but it is decreasing over the years & is

approaching the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make

purposeful conclusions, there are certain pre-requisites,

which must be taken care of. It may be noted that these

prerequisites are not conditions for calculations for

meaningful conclusions. The accounting figures are inactive

in them & can be used for any ratio but meaningful &

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correct interpretation & conclusion can be arrived at only if

the following points are well considered.

1) The dates of different financial statements from where

data is taken must be same.

2) If possible, only audited financial statements should be

considered, otherwise there must be sufficient

evidence that the data is correct.

3) Accounting policies followed by different firms must be

same in case of cross section analysis otherwise theresults of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of

the firm. Therefore, a group of ratios must be

preferred. This will be conductive to counter checks.

5) Last but not least, the analyst must find out that thetwo figures being used to calculate a ratio must be

related to each other, otherwise there is no purpose of

calculating a ratio.

CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO

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BASED ON FINANCIAL BASED ON FUNCTION

BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1]

RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY RATIO CREDITORS

STATEMENT 4] PROFITABILITY 2] RATIOFOR

RATIO RATIOSHAREHOLDER

3] COMPOSITE 5] COVERAGE 3]RATIOS FOR

RATIO RATIO

MANAGEMENT

4] RATIO FOR

LONG TERMCREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between

figures taken from financial statements. Figures may be

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taken from Balance Sheet , P& P A/C, or both. One-way of

classification of ratios is based upon the sources from which

are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet,

they are called Balance Sheet Ratios. E.g. ratio of current

assets to current liabilities or ratio of debt to equity. While

calculating these ratios, there is no need to refer to the

Revenue statement. These ratios study the relationshipbetween the assets & the liabilities, of the concern. These

ratio help to judge the liquidity, solvency & capital structure

of the concern. Balance sheet ratios are Current ratio,

Liquid ratio, and Proprietory ratio, Capital gearing ratio,

Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement

is called revenue statement ratios. These ratio study the

relationship between the profitability & the sales of the

concern. Revenue ratios are Gross profit ratio, Operating

ratio, Expense ratio, Net profit ratio, Net operating profit

ratio, Stock turnover ratio.

3] Composite ratio:

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These ratios indicate the relationship between two items, of

which one is found in the balance sheet & other in revenue

statement.

There are two types of composite ratios-

a) Some composite ratios study the relationship between

the profits & the investments of the concern. E.g.

return on capital employed, return on proprietors fund,

return on equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios,creditors turnover ratios, dividend payout ratios, &

debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to

their functions in to liquidity ratios, leverage ratios, activity

ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets &

current liabilities of the concern e.g. liquid ratios & current

ratios.

2] Leverage ratios:

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It shows the relationship between proprietors funds &

debts used in financing the assets of the concern e.g.

capital gearing ratios, debt equity ratios, & Proprietory

ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It

is also known as Turnover ratios & productivity ratios e.g.

stock turnover ratios, debtors turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g.

operating ratios, gross profit ratios, operating net

profit ratios, expenses ratios

b) It shows the relationship between profit & investment

e.g. return on investment, return on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one

hand & the claims of the outsiders to be paid out of such

profit e.g. dividend payout ratios & debt service ratios.

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BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital

ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital3] Ratios for management:

Return on capital employed, turnover ratios, operating

ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed,

proprietor ratios.

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LIQUIDITY RATIO: -

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

(usually up to 1 year) obligations. The ratios, which indicate

the liquidity of a company, are Current ratio, Quick/Acid-

Test ratio, and Cash ratio. These ratios are discussed below

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CURRENT RATIO

Meaning:

This ratio compares the current assests with the current

liabilities. It is also known as working capital ratio or

solvency ratio. It is expressed in the form of pure ratio.

E.g. 2:1

Formula:Current assets

Current ratio =

Current liabilities

The current assests of a firm represents those assets which

can be, in the ordinary course of business, converted into

cash within a short period time, normally not exceeding one

year. The current liabilities defined as liabilities which are

short term maturing obligations to be met, as originally

contemplated, with in a year.

Current ratio (CR) is the ratio of total current assets (CA) to

total current liabilities (CL). Current assets include cash and

bank balances; inventory of raw materials, semi-finishedand finished goods; marketable securities; debtors (net of

provision for bad and doubtful debts); bills receivable; and

prepaid expenses. Current liabilities consist of trade

creditors, bills payable, bank credit, provision for taxation,

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dividends payable and outstanding expenses. This ratio

measures the liquidity of the current assets and the ability

of a company to meet its short-term debt obligation.

CR measures the ability of the company to meet its CL, i.e.,

CA gets converted into cash in the operating cycle of the

firm and provides the funds needed to pay for CL. The

higher the current ratio, the greater the short-term

solvency. This compares assets, which will become liquid

within approximately twelve months with liabilities, which

will be due for payment in the same period and is intended

to indicate whether there are sufficient short-term assets to

meet the short- term liabilities. Recommended current ratio

is 2: 1. Any ratio below indicates that the entity may face

liquidity problem but also Ratio over 2: 1 as above indicates

over trading, that is the entity is under utilizing its current

assets.

LIQUID RATIO:

Meaning:

Liquid ratio is also known as acid test ratio or quick ratio.

Liquid ratio compare the quick assets with the quick

liabilities. It is expressed in the form of pure ratio. E.g. 1:1.

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The term quick assets refer to current assets, which can be

converted into, cash immediately or at a short notice

without diminution of value.

Formula:

Quick assetsLiquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets

(QA) and CL. QA refers to those current assets that can be

converted into cash immediately without any value

strength. QA includes cash and bank balances, short-term

marketable securities, and sundry debtors. Inventory and

prepaid expenses are excluded since these cannot be

turned into cash as and when required.

QR indicates the extent to which a company can pay its

current liabilities without relying on the sale of inventory.

This is a fairly stringent measure of liquidity because it is

based on those current assets, which are highly liquid.

Inventories are excluded from the numerator of this ratio

because they are deemed the least liquid component of

current assets. Generally, a quick ratio of 1:1 is considered

good. One drawback of the quick ratio is that it ignores the

timing of receipts and payments.

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CASH RATIO

Meaning:

This is also called as super quick ratio. This ratio considers

only the absolute liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

Since cash and bank balances and short term marketable

securities are the most liquid assets of a firm, financial

analysts look at the cash ratio. If the super liquid assets are

too much in relation to the current liabilities then it may

affect the profitability of the firm.

INVESTMENT / SHAREHOLDER

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EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall

profitability of the organization. An earnings per Share

representsearning of the company whether or not

dividends are declared. If there is only one class of shares,

the earning per share are determined by dividing net profit

by the number of equity shares.

EPS measures the profits available to the equity

shareholders on each share held.

Formula:

NPAT

Earning per share =

Number of equity share

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The higher EPS will attract more investors to acquire shares

in the company as it indicates that the business is more

profitable enough to pay the dividends in time. But

remember not all profit earned is going to be distributed as

dividends the company also retains some profits for the

business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the

shareholders on each share held.

Formula:

Dividend Paid to OrdinaryShareholders

Dividend per Share =Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Meaning:

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Dividend Pay-out Ratio shows the relationship between the

dividend paid to equity shareholders out of the profit

available to the equity shareholders.

Formula:

Dividend per shareDividend Pay out ratio = *100

Earning per share

D/P ratio shows the percentage share of net profits after

taxes and after preference dividend has been paid to the

preference equity holders.

GEARING

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CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity

shareholders return through the use of debt. Equity

shareholders earn more when the rate of the return on total

capital is more than the rate of interest on debts. This isalso known as leverage or trading on equity. The Capital-

gearing ratio shows the relationship between two types of

capital viz: - equity capital & preference capital & long term

borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loanCapital gearing ratio =

Equity capital & reserve & surplus

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Capital gearing ratio indicates the proportion of debt &

equity in the financing of assets of a concern.

PROFITABILITY

These ratios help measure the profitability of a firm. A firm,

which generates a substantial amount of profits per rupee

of sales, can comfortably meet its operating expenses and

provide more returns to its shareholders. The relationship

between profit and sales is measured by profitability ratios.

There are two types of profitability ratios: Gross ProfitMargin and Net Profit Margin.

GROSS PROFIT RATIO:-

Meaning:

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This ratio measures the relationship between gross profit

and sales. It is defined as the excess of the net sales over

cost of goods sold or excess of revenue over cost. This ratio

shows the profit that remains after the manufacturing costs

have been met. It measures the efficiency of production as

well as pricing. This ratio helps to judge how efficient the

concern is I managing its production, purchase, selling &

inventory, how good its control is over the direct cost, how

productive the concern , how much amount is left to meet

other expenses & earn net profit.

Formula:

Gross profitGross profit ratio =* 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net

profit & the sales it is usually expressed in the form of a

percentage.

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Formula:

NPATNet profit ratio = * 100

Net sales

This ratio shows the net earnings (to be distributed to both

equity and preference shareholders) as a percentage of net

sales. It measures the overall efficiency of production,

administration, selling, financing, pricing and tax

management. Jointly considered, the gross and net profit

margin ratios provide an understanding of the cost and

profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the

point of view of the total funds employed in the firm. The

term fund employed or the capital employed refers to the

total long-term source of funds. It means that the capital

employed comprises of shareholder funds plus long-term

debts. Alternatively it can also be defined as fixed assets

plus net working capital.

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Capital employed refers to the long-term funds invested by

the creditors and the owners of a firm. It is the sum of long-

term liabilities and owner's equity. ROCE indicates the

efficiency with which the long-term funds of a firm are

utilized.

Formula:

NPAT

Return on capital employed = *100

Capital employed

FINANCIAL

These ratios determine how quickly certain current assets

can be converted into cash. They are also called efficiency

ratios or asset utilization ratios as they measure the

efficiency of a firm in managing assets. These ratios are

based on the relationship between the level of activity

represented by sales or cost of goods sold and levels of

investment in various assets. The important turnover ratios

are debtors turnover ratio, average collection period,

inventory/stock turnover ratio, fixed assets turnover ratio,

and total assets turnover ratio. These are described below:

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DEBTORS TURNOVER RATIO (DTO)

Meaning:

DTO is calculated by dividing the net credit sales by

average debtors outstanding during the year. It

measures the liquidity of a firm's debts. Net credit sales

are the gross credit sales minus returns, if any, from

customers. Average debtors are the average of debtors

at the beginning and at the end of the year. This ratio

shows how rapidly debts are collected. The higher theDTO, the better it is for the organization.

Formula:

Credit salesDebtors turnover ratio =

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Average debtors

INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:ITR refers to the number of times the inventory is sold and

replaced during the accounting period.

Formula:

COGS

Stock Turnover Ratio = Average stock

ITR reflects the efficiency of inventory management. The

higher the ratio, the more efficient is the management of

inventories, and vice versa. However, a high inventory

turnover may also result from a low level of inventory,

which may lead to frequent stock outs and loss of sales and

customer goodwill. For calculating ITR, the average of

inventories at the beginning and the end of the year is

taken. In general, averages may be used when a flow figure

(in this case, cost of goods sold) is related to a stock figure

(inventories).

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FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of

investment in fixed assets.

Formula:

Net sales

Fixed assets turnover =

Net fixed assets

This ratio measures the efficiency with which fixed assets

are employed. A high ratio indicates a high degree ofefficiency in asset utilization while a low ratio reflects an

inefficient use of assets. However, this ratio should be used

with caution because when the fixed assets of a firm are old

and substantially depreciated, the fixed assets turnover

ratio tends to be high (because the denominator of the ratio

is very low).

PROPRIETORS RATIO:

Meaning:

Proprietary ratio is a test of financial & credit strength of

the business. It relates shareholders fund to total assets.

This ratio determines the long term or ultimate solvency of

the company.

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In other words, Proprietary ratio determines as to what

extent the owners interest & expectations are fulfilled from

the total investment made in the business operation.

Proprietary ratio compares the proprietor fund with total

liabilities. It is usually expressed in the form of percentage.

Total assets also know it as net worth.

Formula:

Proprietary fund

Proprietary ratio =

Total fund

OR

Shareholders fund

Proprietary ratio = Fixed assets + current

liabilities

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock

& the working capital. It helps to judge the quantum of

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inventories in relation to the working capital of the

business. The purpose of this ratio is to show the extent to

which working capital is blocked in inventories. The ratio

highlights the predominance of stocks in the current

financial position of the company. It is expressed as a

percentage.

Formula:

StockStock working capital ratio =

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates

the composition & quality of the working capital. This ratio

also helps to study the solvency of a concern. It is a

qualitative test of solvency. It shows the extent of funds

blocked in stock. If investment in stock is higher it means

that the amount of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

This ratio compares the long-term debts with shareholders

fund. The relationship between borrowed funds & owners

capital is a popular measure of the long term financial

solvency of a firm. This relationship is shown by debt equity

ratio. Alternatively, this ratio indicates the relative

proportion of debt & equity in financing the assets of the

firm. It is usually expressed as a pure ratio. E.g. 2:1

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Formula:

Total long-term debt

Debt equity ratio = Total shareholders

fund

Debt equity ratio is also called as leverage ratio. Leverage

means the process of the increasing the equity

shareholders return through the use of debt. Leverage isalso known as gearing or trading on equity. Debt equity

ratio shows the margin of safety for long-term creditors &

the balance between debt & equity.

RETURN ON PROPRIETOR FUND:

Meaning:

Return on proprietors fund is also known as return on

proprietors equity or return on shareholders investment

or investment ratio. This ratio indicates the relationship

between net profit earned & total proprietors funds. Return

on proprietors fund is a profitability ratio, which the

relationship between profit & investment by the proprietors

in the concern. Its purpose is to measure the rate of return

on the total fund made available by the owners. This ratio

helps to judge how efficient the concern is in managing the

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owners fund at disposal. This ratio is of practical

importance to prospective investors & shareholders.

Formula:

NPATReturn on proprietors fund = * 100

Proprietors fund

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at

which payments are made to the supplier for purchase

made from them. It is a relation between net credit

purchase and average creditors

Net credit purchase

Credit turnover ratio =Average creditors

Months in a yearAverage age of accounts payable =

Credit turnoverratio

Both the ratios indicate promptness in payment of creditor

purchases. Higher creditors turnover ratio or a lower credit

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period enjoyed signifies that the 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 creditors.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial

significance. The importance of ratio analysis lies in the fact

that it presents facts on a comparative basis & enables thedrawing of interference regarding the performance of a

firm. Ratio analysis is relevant in assessing the performance

of a firm in respect of the following aspects:

1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion 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 obligation when they become due. A firm can be

said to have the ability to meet its short-term liabilities if it

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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 ratio of a

firm. The liquidity ratio are particularly useful in credit

analysis by bank & other suppliers of short term loans.

2] LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-

term financial viability of a firm. This respect of the financialposition of a borrower is of concern to the long-term

creditors, security analyst & the present & potential owners

of a business. The long-term solvency is measured by the

leverage/ capital structure & profitability ratio Ratio analysis

s that focus on earning power & operating efficiency.

Ratio analysis reveals the strength & 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.

3] OPERATING EFFICIENCY:

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Yet another dimension of the useful of the ratio

analysis, relevant from the viewpoint of management, is

that it throws light on the degree of efficiency in

management & utilization of its assets. The various activity

ratios measures 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.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one

aspect of the financial position of a firm, the management

is constantly concerned about overall profitability of the

enterprise. That is, they are concerned about the ability of

the firm to meets its short term as well as long term

obligations to its creditors, to ensure a reasonable return to

its owners & secure optimum utilization of the assets of the

firm. This is possible if an integrated view is taken & all the

ratios are considered together.

5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial

position of firm but also serves as a stepping-stone to

remedial measures. This is made possible due to inter firm

comparison & comparison with the industry averages. A

single figure of a particular ratio is meaningless unless it is

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related to some standard or norm. one of the popular

techniques is to compare the ratios of a firm with the

industry average. It should be reasonably expected that the

performance of a firm should be in broad conformity with

that of the industry to which it belongs. An inter firm

comparison would demonstrate the firms position vice-

versa its competitors. If the results are at variance either

with the industry average or with the those of the

competitors, the firm can seek to identify the probable

reasons & in light, take remedial measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time

dimension into account. In other words, whether the

financial position of a firm is improving or deteriorating over

the years. This is made possible by the use of trend

analysis. The significance of the trend analysis of ratio lies

in the fact that the analysts can know the direction of

movement, that is, whether the movement is favorable or

unfavorable. 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.

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ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the

identification of significant accounting data relationships,

which give the decision-maker insights into the financial

performance of a company. The advantages of ratio

analysis can be summarized as follows:

Ratios facilitate conducting trend analysis, which is

important for decision making and forecasting.

Ratio analysis helps in the assessment of the

liquidity, operating efficiency, profitability and

solvency of a firm.

Ratio analysis provides a basis for both intra-firm as

well as inter-firm comparisons.

The comparison of actual ratios with base year

ratios or standard ratios helps the management

analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations aredescribed below:

1] Information problems

Ratios require quantitative information for analysis but

it is not decisive about analytical output .

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The figures in a set of accounts are likely to be at least

several months out of date, and so might not give a

proper indication of the companys current financial

position.

Where historical cost convention is used, asset

valuations in the balance sheet could be misleading.

Ratios based on this information will not be very useful

for decision-making.

2] Comparison of performance over time

When comparing performance over time, there is need

to consider the changes in price. The movement in

performance should be in line with the changes in

price.

When comparing performance over time, there is need

to consider the changes in technology. The movement

in performance should be in line with the changes in

technology.

Changes in accounting policy may affect the

comparison of results between different accounting

years as misleading.

3] Inter-firm comparison

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Companies may have different capital structures and

to make comparison of performance when one is all

equity financed and another is a geared company it

may not be a good analysis.

Selective application of government incentives to

various companies may also distort intercompany

comparison. comparing the performance of two

enterprises may be misleading.

Inter-firm comparison may not be useful unless the

firms compared are of the same size and age, and

employ similar production methods and accounting

practices.

Even within a company, comparisons can be distorted

by changes in the price level.

Ratios provide only quantitative information, not

qualitative information.

Ratios are calculated on the basis of past financial

statements. They do not indicate future trends and

they do not consider economic conditions.

PURPOSE OF RATIO ANLYSIS:

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1] To identify aspects of a businesses performance to aid

decision making

2] Quantitative process may need to be supplemented by

qualitative

Factors to get a complete picture.

3] 5 main areas:-

Liquidity the ability of the firm to pay its way

Investment/shareholders information to enable

decisions to be made on the extent of the risk and the

earning potential of a business investment

Gearing information on the relationship between the

exposure of the business to loans as opposed to share

capital

Profitability how effective the firm is at generating

profits given sales and or its capital assets

Financial the rate at which the company sells itsstock and the efficiency with which it uses its assets

ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a

creative technique in the sense that it uses the same figure

& information, which is already appearing in the financial

statement. At the same time, it is true that what can be

achieved by the technique of ratio analysis cannot be

achieved by the mere preparation of financial statement.

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Ratio analysis helps to appraise the firm in terms of

their profitability & efficiency of performance, either

individually or in relation to those of other firms in the same

industry. The process of this appraisal is not complete until

the ratio so computed can be compared with something, as

the ratio all by them do not mean anything. This

comparison may be in the form of intra firm comparison,

inter firm comparison or comparison with standard ratios.

Thus proper comparison of ratios may reveal where a firm

is placed as compared with earlier period or in comparisonwith the other firms in the same industry.

Ratio analysis is one of the best possible techniques

available to the management to impart the basic functions

like planning & control. As the future is closely related to

the immediate past, ratio calculated on the basis of

historical financial statements may be of good assistance to

predict the future. Ratio analysis also helps to locate &

point out the various areas, which need the management

attention in order to improve the situation.

As the ratio analysis is concerned with all the aspect of

a firms financial analysis i.e. liquidity, solvency, activity,

profitability & overall performance, it enables the interested

persons to know the financial & operational characteristics

of an organisation & take the suitable decision.

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EVALUATION OF APLAB LIMITED THROUGH RATIO

COMPANY PROFILE

THE COMPANY

APLAB Limited is a professionally managed Public

Limited company quoted on the Bombay Stock Exchange.

Since its inception in 1962, APLAB has been serving the

global market with wide range of electronic products

meeting the international standards for safety and

reliability such as UL, VDE etc. They specialize in Test and

Measurement Equipment, Power Conversion and UPS

Systems, Self-Service Terminals for Banking Sector and Fuel

Dispensers for Petroleum Sector. APLAB enjoys worldwide

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recognition for the quality of its products, business integrity

and innovative engineering skills.

ABOUT APLAB:

Aplab started its operation in October 1962.

It is a professionally managed 40 years old public

limited company.

It is quoted on BOMBAY STOCK EXCHANGE.

It serves customer global customer par excellence.

It specialized in Test & measurement instruments,

power conversion, & UPS & fuel dispensers for

petroleum sector.

It enjoys worldwide recognition for the quality of its

business integrity & innovative engineering skills.

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MISSION:

To deliver high quality, carefully, engineered products,

on time, with in budget, as per the customer

specification in a manner profitable to both, our

customers & so to us.

VISION:

To be a global player, recognized for quality &integrity.

To be the TOP INDIAN COMPANY as conceived by our

customers.

To be THE BEST company to work for, as rated by

our employees.

GOAL:

Goal at Aplab is extract ordinary customer service as

we provide our customer needs in the personal service

industry.

CORPORATE MISSION

1] To achieve healthy and profitable growth of the company

in the interest of our customers & the shareholders.

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2] To encourage teamwork, reward innovation and maintain

healthy interpersonal relations within the organization.

3] To expand knowledge and remain at the leading edge in

technology to serve the global market.

4] To understand the customers needs and provide

solutions than merely selling products.

5] To create intellectual capital by investing in hardwareand embedded software development.

VALUES & BELIEFS:

Their values & beliefs required that they -

Treat employees with respect & give them an

opportunity for input on how to continuously improve

their service goals.

Offer opportunities for growth, professional

development & recognition.

Provide most effective & corrective action, to resolve

customer service issues, to ensure customer

satisfaction.

Foster an open door policy, which encourages

interaction, discussion & ideas to improve work

environment & increase productivity.

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Do it right the first time & every time is their team

commitment * our way of doing business, it ensures as

growth & prosperity.

THE 21ST CENTURY SUCCESS

APLAB had planned to enter the 21st Century with a

program for a fast and healthy growth in the global market

based on companys high technology foundation and the

reputation of four decades for prompt customer service andas a reliable solution provider. After completing three years

in the new era, we can say with pride that we have been

delivering our promises to our customers and the

shareholders.

APLAB has entered the field of Professional Services

starting with the Banking and the Petroleum Industry. Focus

on developing embedded system software has been also

enhanced. We believe that professional services sector is

poised to grow at a very rapid pace.

QUALITY IS OUR WORK CULTURE - ISO 9001:2000

Quality at APLAB is a part of our peoples attitude.

Entire organization is committed to create an environment

that encourages individual excellence and a personal

commitment to quality. In APLAB, Quality is everybodys

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responsibility and all strive to do it right the first time. It

is therefore natural that APLAB Limited is certified for

quality with ISO 9001:2000 registration.

QUALITY POLICY:

Aplab will deliver to its customer products & services

that consistently meet or exceed their requirement.

Aplab will achieve this by total commitment &

involvement of every individual.

Aplab will encourage its employees & suppliers to

develop quality products prevent defects & make

continual improvement in all processes.

QUALITY OBJECTIVE:

Aplab is an ISO 9001:2000 certifies company.

100% customer satisfaction.

On time delivery every time reduction is out going PPM

to 10,000

RESEARCH AND DEVELOPMENT

Developing innovative products with the latest

technology is the core strength of APLAB. The Science &

Technology Ministry of the Govt. of India accredits our R&D

Laboratories. We have a large team of dedicated, highly

qualified skilled engineers who excel in the latest state-of-

the-art-technology. APLAB is recognized not only for

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manufacturing standard products but also in providing

solutions and services as per the customer specifications.

We spend more than 4% of the company revenue in

Research & Development activities.

Specific areas in which the company carries out R&D

1. Development of new product especially hi-tech

intelligent product & electronic transaction control

system.

2. Improvement in the existing products & production

processes, import substitution.3. Development of products to suit exports markets.

4. Customizing the products to the customers

specifications & adaptation of imported technology.

The company has achieved its position of leadership in

the Indian instrumentation industry & continuous to

maintain it through its strong grip of technology. Almost all

the products manufactured by the company are import

substitution items, which are fully developed in house. It

has resulted in considerable saving of foreign exchange.

With the company, R&D is an ongoing process. The ministry

of science & technology, Government of India, recognizes

the companys R&D.

Through a continuous interaction with production&

Quality Assurance Department takes up redesign of existing

products. This is done to achieve state of the art in our

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design & to bring about improvement to get maximum

performance / cost ratio.

FUTURE PLAN OF ACTION

Major R&D activity is concentrated around up

gradation of product design & re-alignment of production

processes to bring about improved quality at lower cost.

This will greatly help the company in facing competition in

local markets from foreign companies.

EXPORT

APLAB currently exports over 25% of its production to

Western Europe, Canada & USA. Over 30 million U.S.

Dollars worth of Power Systems and Test Instruments from

APLAB are today operational in UK, Germany, France,

Sweden, Belgium, Canada, and USA & Australia.

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APLABS ORGANISATION CHART

EXECUTIVE

CHAIRMAN

MANAGING

DIRECTOR

DIRECTOR MAEKETING

[TECHNICAL DIRECTOR- PE]

GENERAL

MANAGER

FINANCE G.M G.M. MATERIAL

G.M. G.M.

MANAGER PROD. MARKETING MANAGER

ELTRAC DESIGN

&

PROD. &

DESIGN

DEVLOP-

MENT

52

REGIOAL

HEAD:

MUMBAI

NEWDELHI

SECUNDA-

RABAD

BANGLORE

CHENNAI


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OFFICERS

STAFF

WORKERS

PRODUCTS OF APLAB:

a. TEST & MEASUREMENT INSTRUMENTS

b. HIGH POWER AC SYSTEMS (UPS, Frequency

Converter, Inverter, Isolation Transformer)

c. HIGH POWER DC SYSTEMS (DC Power Supply, DC

Uninterruptible Power Supply)

d. ATM INSTACASHe. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC

CONVERTERS, SMPS, INVERTERS, STABILIZER,

LINE CONDITIONER, ISOLATION TRANSFORMER

ATM INSTACASH

The Banking

Automation Division

of APLAB was

launched in 1993,

when we introduced

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INSTACASH-Indias first indigenously manufactured ATM

INSTACASH demonstrated APLABs skills in design,

hardware manufacturing and software integrations. Our in

house R&D group is constantly striving to scan the rapidly

changing technology and offer suitable end to end

solutions. We are into Self Service Delivery Systems, MICR

Cheque Processing and Smart Card based solutions. The

latest is IMAGEENABLED Cheque Processing solution-

QUICKCLEAR.

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APLAB LIMITED

BALANCE SHEET AS AT 31ST MARCH 2002

(RS.000)AS AT 31ST2002

AS AT 31ST

2002

SOURCES OF FUNDS

SHAREHOLDERS FUNDShare capital 5,00,00

Reserves and surplus 16,29,69

21,29,69

LOANS

Secured 12,13,48Unsecured 3,67,99

15,81,47

DEFFERED TAX LIABILITY(NET) 1,06,85

TOTAL 38,18,01

APPLICATION OF FUNDS

FIXED ASSETS

Gross block 15,90,33Less: depreciation 10,32,96

Net block 5,57,37

Capital work in progress 54,36

6,11,73

INVESTMENT 1,22,32

CURRENT ASSESTS, LOANS&

ADVANCES

Inventories 19,09,77Sundary debtors 18,49,35

Cash & bank balances 3,31,32

Loan & advances 5,80,36

46,70,80

CURRENT LIABLITIES &

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PROVISIONSCurrent liabilities 15,36,09

Provisions 57,57

15,93,66

NET CURRENT ASSESTS 30,77,14MISCELLANEOUSEXPENDITURE 6,84

Total 3818,01

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PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST

MARCH 2002

(RS.000)

AS AT 31-3-2002

AS AT 31-3-2002

INCOME:

Sales and operating earnings 48,19,19

Other income 80,50

Variation in stock 1,31,07

50,30,76EXPENCES:Materials consumed 18,97,28

Purchase of trading goods 8,61,75

Payments to & provision for 9,95,04

Employees

Manufacturing expenses 2,21,37

Excise duty 65,05

Other expenses 5,76,71

Interest & finance charges 2,60,22Depreciation 1,05,37

Less: transferred to revaluation 1,15 1,04,22

49,81,64

PROFIT BEFORE TAX 49,12

PRIOR YEAR ADJUSTMENT(NET)

PROVISION FOR TAXATIONCurrent tax 24,42

Deferred tax liability / (Assets) 4,02PROFIT AFTER TAX 20,68

Balance brought forward fromprevious year 1

Balance available forappropriation 20,69

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Appropriations:General reserve 20,68

Surplus / (loss) carried to B/S 1

Proposed dividend

Tax on proposed dividend20,69

Basic earning per share(rupee) 0.41

0.41

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BALANCE SHEET AS AT 31ST MARCH 2003

(RS.000)

AS AT 31-3-2003

AS AT 31-3-2003

SOURCES OF FUNDS

SHAREHOLDERS FUNDShare capital 5,00,00


21,55,19

LOANSSecured 10,27,55

Unsecured 4,53,16

14,80,71

DEFFERED TAX LIABILITY(NET) 87,21

TOTAL 37,23,11


FIXED ASSETSGross block 17,40,97

Less: depreciation 11,40,93

Net block 6,00,04


6,29,78

INVESTMENT 1,47,26

CURRENT ASSESTS,LOANS &

ADVANCESInventories 19,02,79

Sundary debtors 19,05,76



51,02,42

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PROVISIONS

Current liabilities 20,41,56

Provisions 1,20,76

21,62,32NET CURRENT ASSESTS 29,40,10

MISCELLANEOUSEXPENDITURE 5,97

TOTAL 37,23,11


MARCH 2003

(RS.000)

AS AT 31-3-2003

AS AT 31-3-2003

INCOME:


Other income 15,04

Variation in stock (59,27)

59,17,99

EXPENCES:Materials consumed 22,41,60



Employees


Excise duty 72,69


Interest & finance charges 2,36,57

Depreciation 1,07,97Less: transferred to revaluation 1,03 1,06,94

57,91,50

PROFIT BEFORE TAX 1,26,49

PRIOR YEAR ADJUSTMENT(NET)

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PROVISION FOR TAXATIONCurrent tax 63,19

Deferred tax liability / (Assets) (19,64)

PROFIT AFTER TAX 82,94


Balance available forappropriation 82,95

Appropriations:General reserve 26,50


Proposed dividend 50,00

Tax on proposed dividend 6,4182,95


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BALANCE SHEET AS AT 31ST MARCH 2004(RS.000)

AS AT 31-3-2004

AS AT 31-3-2004

SOURCES OF FUNDS

SHAREHOLDERS FUND

Share capital 5,00,00


22,42,59

LOANS

Secured 11,38,86

Unsecured 5,58,29

16,97.15


TOTAL 40,35,07


FIXED ASSETS

Gross block 18,41,58


Net block 6,01,55


6,16,84INVESTMENT 1,48,34

CURRENT ASSESTS,LOANS &

ADVANCES

Inventories 21,46,20


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Loan & advances 850,58

53,98,08


PROVISIONSCurrent liabilities 18,16,17

Provisions 3,12,02

21,28,19

NET CURRENT ASSESTS 32,69,89

TOTAL 40,35,07

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MARCH 2004

(RS.000)

AS AT 31-3-2004

AS AT 31-3-2004

INCOME:Sales and operating earnings 73,90,47

Other income 31,39

Variation in stock 53,99

74,75,85

EXPENCES:

Materials consumed 28,51,40



Employees

Manufacturing expenses 3,07,51Excise duty 70,08


Interest & finance charges 2,46,30

Depreciation 1,10,89

Less: transferred to revaluation 93 1,09,96

72,00,99


PRIOR YEAR ADJUSTMENT

(NET) 25,71PROVISION FOR TAXATION

Current tax 1,19,50

Deferred tax liability / (Assets) 8,13

PROFIT AFTER TAX 17294


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Balance available forappropriation 1,72,98

Appropriations:

General reserve 88,30Surplus / (loss) carried to B/S 7


Tax on proposed dividend 9,61

1,72,98


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BALANCE SHEET AS AT 31ST MARCH 2005(RS.000)

AS AT 31-3-2005

AS AT 31-3-2005

SOURCES OF FUNDS

SHAREHOLDERS FUND

Share capital 5,00,00


24,14,91

LOANSSecured 17,23,12

Unsecured 5,36,89

22,60,01


TOTAL 47,66,94


FIXED ASSETS

Gross block 21,64,89


Net block 8,21,84

Capital work in progress -

8,21,84

INVESTMENT 2,32,91CURRENT ASSESTS,LOANS &

ADVANCES

Inventories 19,32,88



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58,48,21


PROVISIONS

Current liabilities 16,55,15Provisions 4,80,87

21,36,02

NET CURRENT ASSESTS 37,12,19

TOTAL 47,66,19

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PROFIT & LOSS ACCOUNT FOR THE ENDED 31

ST

MARCH 2005

(RS.000)

AS AT 31-3-2005

AS AT 31-32005

INCOME:


Other income 41,69

Variation in stock (38,45)

74,23,55

EXPENCES:Materials consumed 25,91,83



Employees


Excise duty 75,41

Other expenses 8,44,78Interest & finance charges 2,15,82

Depreciation 1,26,68

Less: transferred to revaluation 84 1,25,84

70,00,24


PRIOR YEAR ADJUSTMENT (NET)

PROVISION FOR TAXATIONCurrent tax 1,50,84

Deferred tax liability / (Assets) (3,31)PROFIT AFTER TAX 2,75,78


Balance available forappropriation 2,75,85

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Appropriations:General reserve 1,73,20



2,75,85Basic earning per share (rupee) 5.52

CALCULATIONS AND INTERPRETATION OF RATIOS

1] CURRENT RATIO:

Formula:

Current assets

Current ratio =Current liabilities

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Currentassets

46,70,80 51,08,39 53,98,08 58,28,21

Currentliabilities

15,93,66 21,62,32 21,28,19 21,36,02

Currentratio

2.93 2.36 2.53 2.72

COMMENTS:

In Aplab company the current ratio is 2.72:1 in 2004-

2005. it means that for one rupee of current liabilities, the

current assets are 2.72 rupee are available to the them. In

other words the current assets are 2.72 times the current

liabilities.

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Almost 4 years current ratio is same but current ratio in

2004-2005 is bit higher, which makes company more

sound. The consistency increase in the value of current

assets will increase the ability of the company to meets its

obligations & therefore from the point of view of creditors

the company is less risky.

The available working capital with the company is in

increasing order.

2001-2002 - 30,77,142002-2003 - 29,46,07

2003-2004 - 32,69,89

2004-2005 - 36,92,19

The company has sufficient working capital to meets

its urgency/ obligations. A company has a high percentage

of its current assets in the form of working capital, cash that

would be more liquid in the sense of being able to meet

obligations as & when they become due. From this working

capital, the company meets its day-to-day financial

obligations.

Thus, the current ratio throws light on the companys

ability to pay its current liabilities out of its current assets.

The Aplab Companys has a very good liquidity position of

company.

2] LIQUID RATIO:

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Formula:

Quick assetsLiquid ratio =

Quick liabilities

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Quick assets 21,80,67 23,01,01 24,01,30 29,11,31Quick

liabilities

15,93,66 21,62,32 21,28,19 21,36,02

Liquid ratio 1.36 1.06 1.12 1.36

COMMENTS:

The liquid or quick ratio indicates the liquid financial

position of an enterprise. Almost in all 4 years the liquid

ratio is same, which is better for the company to meet the

urgency. The liquid ratio of the Aplab Company has

increased from 1.12 to 1.36 in 2004-2005. Day to day

solvency is more sound for company in 2004-2005 over the

year 2003-2004.

This indicates that the dependence on the short-term

liabilities & creditors are less & the company is following aconservative working capital policy.

Liquid ratio of Company is favorable because the quick

assets of the company are more than the quick liabilities.

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The liquid ratio shows the companys ability to meet its

immediate obligations promptly.

3] PROPRIETORY RATIO:

Formula:

Proprietary fundProprietary ratio =

Total fund

OR

Shareholders fundProprietary ratio =

Fixed assets + currentliabilities

YEAR 2001-

2002

2002-

2003

2003-

2004

2004

-2005Proprietary

fund21,29,69 21,55,19 22,42,59 24,14,91

Total fund 52,82,53 57,38,17 66,14,92 66,70,05Proprietaryratio

40 37.55 33.90 36.20

COMMENTS:

The Proprietary ratio of the company is 36.20% in the

year 2004-2005. It means that the for every one rupee of

total assets contribution of 36 paise has come from owners

fund & remaining balance 66 paise is contributed by the

outside creditors. This shows that the contribution by

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outside to total assets is more than the owners fund. This

Proprietary ratio of the Company shows a downward trend

for the last 4 years. As the Proprietary ratio is not favorable

the Companys long-term solvency position is not sound.

4] STOCK WORKING CAPITAL RATIO:

Formula:

StockStock working capital ratio =

Working Capital

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Stock 19,09,77 19,02,79 21,46,20 19,32,88WorkingCapital

30,77,14 29,46,07 32,69,89 37,12,19

Stockworkingcapital ratio

62.06 64.58 65.63 52.06

COMMENTS:

This ratio shows that extend of funds blocked in stock.

The amount of stock is increasing from the year 2001-2002

to 2003-2004. However in the year 2004-2005 it has

declined to 52%. In the year 2004-2005 the sale is

increased which affects decrease in stock that effected in

increase in working capital in 2004-2005.

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It shows that the solvency position of the company is

sound.

5] CAPITAL GEARING RATIO:

Formula:

Preferencecapital+ secured loan

Capital gearing ratio =Equity capital & reserve &

surplus

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Securedloan

12,13,48 10,27,56 11,38,86 1,72,312

Equitycapital &

reserves &surplus

21,29,69 21,55,19 22,42,59 2,41,491

Capitalgearingratio

56.97 47.67 50.78 71

COMMENTS:

Gearing means the process of increasing the equity

shareholders return through the use of debt. Capital

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gearing ratio is a leverage ratio, which indicates the

proportion of debt & equity in the financing of assets of a

company.

For the last 3 years [i.e.2001-2002 TO 2003-2004] Capital

gearing ratio is all most same which indicates, near about

50% of the fund covering the secured loan position. But in

the year 2004-2005 the Capital-gearing ratio is 71%. It

means that during the year 2004-2005 company has

borrowed more secured loans for the companys expansion.

6] DEBT EQUITY RATIO:

Formula:

Total long term debt

Debt equity ratio = Total shareholders

fund

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Long termdebt

15,81,47 14,80,70 16,97,15 22,60,01

Shareholders fund

21,29,69 21,55,19 22,42,59 24,14,91

Debt Equity

Ratio

0.74 0.68 0.75 0.93

COMMENTS:

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The debt equity ratio is important tool of financial

analysis to appraise the financial structure of the company.

It expresses the relation between the external equities &

internal equities. This ratio is very important from the point

of view of creditors & owners.

The rate of debt equity ratio is increased from 0.74 to

0.93 during the year 2001-2002 to 2004-2005. This shows

that with the increase in debt, the shareholders fund also

increased. This shows long-term capital structure. The lower

ratio viewed as favorable from long term creditors point ofview.

7] GROSS PROFIT RATIO:

Formula:

Gross profitGross profit ratio =

* 100Net sales

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Gross profit 24,54,48 37,65,90 45,57,45 42,37,52Net sales 43,45,46 51,02,37 68,76,89 68,09,78Gross profitRatio

56.48 73.80 66.27 62.22

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Gross profit Ratio

0

20

40

60

80

2001-

2002

2002-

2003

2003-

2004

2004 -

2005

Gross profit Ratio

COMMENTS:

The gross profit is the profit made on sale of goods. It

is the profit on turnover. In the year 2001-2002 the gross

profit ratio is 56.48%. It has increased to 73.80% in the year

2002-2003 due to increase in sales without corresponding

increase in cost of goods sold. However the gross profitratio decreased to 66.27% in the year 2003-2004.

It is further declined to 62.22% in the year 2004-2005,

due to high cost of purchases & overheads. Although the

gross profit ratio is declined during the year 2002-2003 to

2004-2005. The net sales and gross profit is continuously

increasing from the year 2001-2002 to 2004-2005.

8] OPERATING RATIO:

Formula:

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9] EXPENSE RATIO:

The ratio of each item of expense or each group of expense

to net sales is known as Expense ratio. The expense ratio

brings out the relationship between various elements of

operating cost & net sales. Expense ratio analyzes each

individual item of expense or group of expense& expresses

them as a percentage in relation to net sales.

A] MANUFACTURING EXPENSES:

Formula:

Manufacturing expensesManufacturing expense ratio = *100

Net sales

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Manufacturing expenses

2,21,37 2,69,98 3,07,51 2,71,41

Net sales 43,45,46 51,02,37 68,76,89 68,09,78Manufacturing expensesratio

5% 5.29% 4.47% 3.98%

COMMENTS:

The manufacturing expense is shows the downward trend.

During the year

20012002 to 2002-2003 the manufacturing expense

increased because there is increase in the charges like

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labour, rent , power & electricity, repair to plant &

machinery & miscellaneous works expenses. The

manufacturing expense during the year 2001-2002 to 2004-

2005 is decreased from 5% to 3.96%. This indicates that

the company has control over the manufacturing expense.

B] OTHER EXPENSES:

Formula:

Other expenses

Other expense ratio = *100

Net sales

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Otherexpenses

5,76,71 7,62,23 9,17,94 8,44,78

Net sales 43,45,46 51,02,37 68,76,89 68,09,78Otherexpenses

ratio

13.2% 14.93% 13.34% 12.40%

COMMENTS:

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The other expense of company is increased during the

2001-2002 to 2003-2004, because increase in the charges

of rent of office, equipment lease rental, printing &

stationary, advertisement & publicity, transport outward &

other charges. But during the year 2004-2005 the other

expenses is decrease from 13.34% to 12.40%. Because

decrease in equipment lease rental, advertisement &

publicity, transport charges, commission & discount, sales

tax & purchase tax . This indicates that the company also

controlling the other expenses.

10) NET PROFIT RATIO

Formula:NPAT

Net profit ratio = * 100

Net sales

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

NPAT 20,98 82,94 1,72,94 2,75,78Net sales 434546 51,02,37 68,76,89 68,09,78Net profitratio

0.48 1.6 2.5 4.04

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0

1

2

3

4

5

2001-2002 2002-2003 2003-2004 2004-2005

NET PROFIT

COMMENTS:

The net profit ratio of the company is low in all yearbut the net profit is increasing order from this ratio of 4

year it has been observe that the from 2001-2002 to 2004-

2005 the net profit is increased i.e. in 2003 it is increased

by 1.12 in 2003-2004 by 0.9 & in 2004-2005 by 1.54.

Profitability ratio of company shows considerable

increase. Companys sales have increased in all 4 years &

at the same time company has been successful in

controlling the expenses i.e. manufacturing & other

expenses.

It is a clear index of cost control, managerial efficiency

& sales promotion.

11] STOCK TURNOVER RATIO:

Formula:

COGSStock Turnover Ratio =

Average stock

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YEAR 2001-2002

2002-2003

2003-2004

2004-2005

COGS 18,90,98 21,96,32 28,33,02 25,72,26

Averagestock

5,49,90 5,97,58 6,73,11 6,89,30

StockTurnoverRatio

3.4 3.6 4.20 3.73

COMMENTS:

Stock turnover ratio shows the relationship between

the sales & stock it means how stock is being turned over

into sales.

The stock turnover ratio is 2001-2002 was 3.4 times

which indicate that the stock is being turned into sales 3.4

times during the year. The inventory cycle makes 3.4

round during the year. It helps to work out the stock holding

period, it means the stock turnover ratio is 3.4 times thenthe stock holding period is 3.5 months [12/3.4=3.5months].

This indicates that it takes 3.5 months for stock to be sold

out after it is produced.

For the last 4 years stock turnover ratio is lower than

the standard but it is in increasing order. In the year 2001-

2002 to 2004-2005 the stock turnover ratio has improved

from 3.4 to 3.73 times, it means with lower inventory the

company has achieved greater sales. Thus, the stock of the

company is moving fast in the market.

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12] RETURN ON CAPITAL EMPLOYED:

Formula:

NPAT

Return on capital employed = *100Capital employedYEAR 2001-

20022002-2003

2003-2004

2004-2005

NPAT 20,68 82,94 1,72,94 2,75,78Capitalemployed

38,18,01 37,23,11 40,35,07 47,66,93

Return oncapitalemployed

0.54 2.23 4.28 5.79

COMMENTS:

The return on capital employed shows the relationship

between profit & investment. Its purpose is to measure the

overall profitability from the total funds made available by

the owner & lenders.

The return on capital employed of Rs.5 indicate thatnet return of Rs.5 is earned on a capital employed of

Rs.100. this amount of Rs.5 is available to take care of

interest, tax,& appropriation.

The return on capital employed is show-increasing trend,

i.e. from 0.54 to 5.79. All of sudden in 2001-2002 the

return on capital employed increased from 0.54 to 5.79.

This indicates a very high profitability on each rupee of

investment & has a great scope to attract large amount of

fresh fund.

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13] EARNING PER SHARE:

Formula:NPAT

Earning per share = Number of equity share

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

NPAT 20,98,000 82,94,000 1,72,94,000

2,75,78,000

No.ofequityshare

50,00,000 50,00,000 50,00,000

50,00,000

Earning per

share

0.41 1.66 3.46 5.52

COMMENTS:

Earning per share is calculated to find out overall

profitability of the company. Earning per share represents

the earning of the company whether or not dividends are

declared.

The Earning per share is 5.52 means shareholder gets

Rs. 5.52 for each share of Rs. 10/-. In other words the

shareholder earned Rs. 5.52 per share.

The net profit after tax of the company is increasing in

all years. Therefore the shareholders earning per share is

increased continuously from 2001-2002 to 2004-2005 by

0.41 to 05.52. This shows it is continuous capital

appreciation per unit share by 0.41 to 05.52.

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The above diagram shows the Earning per share and

Dividend per share is increasing rapidly. It is beneficial to

the shareholders and prospective investor to invest the

money in this company.

14] DIVIDEND PAYOUT RATIO:

Formula:Dividend per share

Dividend Pay out ratio = * 100Earning per share

YEAR 2001-

20022002-2003

2003-2004

2004-2005

Dividend pershare

- 1 1.50 1.80

Earning pershare

0.41 1.66 3.46 5.52

Dividendpayout ratio

- 60.24 43.35 32.60

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COMMENTS:

In the year 2002-2003 and 2003-2004 the Dividend

pay out ratio is 60.24 and 43.35 respectively. In the year

2002-2003 the company has declared the dividend 60.24

and the balance 39.76 is retained with them for the

expansion. The company has not earned more profit in the

year 2001-2002 hence the company has not declared

dividend in the year 2001-2002. However the company has

declared more dividends in the year 2002-2003 as thecompany has sufficient profit. In the year 2004 the

company has declared 1.50 dividends per share hence the

earning per share has doubled. From this one can say that

the company is more conservative for expansion.

15] COST OF GOODS SOLD:

Formula:

COGS

Cost of goods sold Ratio = * 100Net sales

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

COGS 18,90,98 21,96,32 28,33,02 25,72,26

Net sales 43,45,46 51,02,37 68,76,89 68,09,78Cost of goods soldratio

43.51 43.04 41.19 37.77

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COMMENTS:

This ratio shows the rate of consumption of raw

material in the process of production. In the year 2001-

2002 the cost of goods sold ratio is 43.51% so the gross

profit is 56.49%. it indicates that in 2001-2002, the 43% of

raw material is consumed in the process of production.

During the last 4 years the rate of cost of goods soldratio is continuously decreasing however the gross profit &

sales is increased during the same period.

16] CASH RATIO:

Formula:

Cash + Bank + Marketable securities

Cash ratio =Total current liabilities

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Cash + Bank+Marketablesecurities

3,31,32 3,95,25 4,49,74 6,04,64

Totalcurrentliabilities

15,93,66 21,62,32 21,28,19 21,36,02

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Cash ratio 0.20 0.18 0.21 0.28

COMMENTS:

This ratio is called as super quick ratio or absolute

liquidity ratio. In the year 2001-2002 the cash ratio is 0.20

& then it is decreased to 0.18 in the year 2002-2003. Then

again it is increased to 0.21 in the year 2003-2004 & 0.28 in

the year 2004-2005.

This shows that the company has sufficient cash, bank

balance, & marketable securities to meet any contingency.

17] RETURN ON PROPRIETORS FUND:

Formula:

NPATReturn on proprietors fund = * 100

Proprietors

fund

YEAR 2001-

2002

2002-

2003

2003-

2004

2004

-2005NPAT 20,68 82,94 1,72,94 2,75,78Proprietorsfund

21,29,69 21,55,19 22,42,59 24,14,91

Return onproprietorsfund

0.97 3.84 7.71 11.41

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COMMENTS:

Return on proprietors fund shows the relationship

between profits & investments by proprietors in the

company. In the year 2002-2003 the return on proprietors

fund is 3.84% it means the net return of Rs. 3

approximately is earned on the each Rs. 100 of funds

contributed by the owners.

During the last 4 years the rate of return onproprietors fund is in increasing order. The return on

proprietors fund during the year 2001-2002 to 2004-2005 is

increased from 0.97% to 11.41%.

It shows that the company has a very large returns

available to take care of high dividends, large transfers to

reserve etc. & has a great scope to attract large amount of

fresh fund from owners.

18] RETURN ON EQUITY:

Formula:

NPATReturn on equity share capital = * 100

No. of equity

share

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

NPAT 20,68 82,94 1,72,94 2,75,78No. of equity 50,000 50,000 50,000 50,000

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shareReturn onequity sharecapital

4.13 16.5 34.58 55

COMMENTS:

This ratio shows the relationship between profit &

equity shareholders fund in the company. It is used by the

present / prospective investor for deciding whether to

purchase, keep or sell the equity shares.

In the year 2002-2003 the return on proprietors fund is

16.5%, which means the net return of Rs. 16, is earned on

the each Rs.100 of the funds contributed by the equity

shareholders.

The rate of return on equity share capital is increased

from4.13% to 55% during the year 2001-2002 to 2004-

2005. This shows that the company has a very large returns

available to take care of high equity dividend, large

transfers to reserve, & also company has a great scope to

attract large amount to fresh funds by issue of equity share

& also company has a very good price for equity shares in

the BSE.

19] OPERATING PROFIT RATIO:

Formula:Operating profit

Operating profit ratio = *100Net sales

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COMMENTS:

Operating profit ratio shows the relationship between

operating profit & the sales. The operating profit is equal to

gross profit minus all operating expenses or sales less cost

of goods sold and operating expenses.

The operating profit ratio of 7.11% indicates that

average operating margin of Rs.7 is earned on sale of Rs.

100. this amount of Rs. 7 is available for meeting non

operating expenses. In the other words operating profit

ratio 7.11% means that 7.11% of net sales remains asoperating profit after meeting all operating expenses.

During the last 4 years the operating profit ratio is

increased from 7.11% to 9.38%. It indicates that the

company has great efficiency in managing all its operations

of production, purchase, inventory, selling and distribution

and also has control over the direct and indirect costs.

Thus, company has a large margin is available to meet non-

operating expenses and earn net profit.

20] CREDITORS TURNOVER RATIO:

Formula:

Net credit purchaseCredit turnover ratio =

Average creditors

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Months in a yearAverage age of accounts payable =

Credit turnoverratio

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Net creditpurchase

21,21,43 22,71,80 29,08,61 25,29,04

Averagecreditors

5,88,42 7,91,21 6,96,86 7,80,39

Creditturnover

ratio

3.6 times 3.6 times 4 times 3 times

Average ageof accountspayable

3.3months

3.3months

3 months 4 months

COMMENTS:

The creditors turnover ratio shows the relationship between

the credit purchase and average trade creditors. It shows

the speed with which the payments are made to the

suppliers for the purchase made from them.

The credit turnover ratio of 4, indicate that the

creditors are being turned over 4times during the year. It

indicates the number of rounds taken by the credit cycle of

payables during the year.

There is no standard ratio in absolute term. The

creditors ratio for the year 2001-2002 and 2002-2003 as

good as the same, but it is increased by 3.6 to 4 in 2003-

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2004.this means the company has settled the creditors

dues very fastly than the previous year.

DEBTORS TURNOVER RATIO:

Formula:

Credit sales

Debtors turnover ratio =

Average debtors

Days in a year

Debt collection period =Debtors turnover

YEAR 2001-2002

2002-2003

2003-2004

2004-2005

Credit sales 47,77,48 55,21,33 74,87,36 68,09,78Averagedebtors

18,49,35 19,05,76 19,51,56 23,06,67

Debtorsturnoverratio

2.5 times 2.8

Documents

Ratio Anaysis Intorduction Rahul