MBA Project on Financial Ratios

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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.

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

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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.

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.

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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-

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 industry’s 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 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:

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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 firm’s

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 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 the firm, 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 declining for the

firm, whereas the industry average has not shown any significant changes.

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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 & 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.

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3) Accounting policies followed by different firms must be same in case of

cross section analysis otherwise the results 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 the two 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

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] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR LONG TERM

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CREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be 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 relationship between 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:

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.

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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:

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:

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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.

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 capital

3] 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

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:

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Current assetsCurrent 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-finished and 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, 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:

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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.

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.

CASH RATIO

Meaning:

This is also called as super quick ratio. This ratio considers only the absolute

liquidity available with the firm.

Formula:

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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

EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the

organization. An earnings per Share represents earning 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

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shares.

EPS measures the profits available to the equity shareholders on each share

held.

Formula:

NPAT

Earning per share =

Number of equity share

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 Ordinary Shareholders

Dividend per Share =Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to

equity shareholders out of the profit available to the equity shareholders.

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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

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

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return on total capital is more than the rate of interest on debts. This is also

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

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 Profit Margin and Net Profit Margin.

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GROSS PROFIT RATIO:-

Meaning:

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.

Formula:

NPAT Net profit ratio = * 100

Net sales

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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.

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

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turnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These

are described below:

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 the DTO, the

better it is for the organization.

Formula:

Credit salesDebtors turnover ratio =

Average debtors

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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).

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 of efficiency 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

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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.

In other words, Proprietary ratio determines as to what extent the owner’s

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 fundProprietary ratio = OR

Total fund

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 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

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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

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 is also known as ‘gearing’ or ‘trading on equity’. Debt equity ratio

shows the margin of safety for long-term creditors & the balance between debt

& equity.

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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 owner’s 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 year Average age of accounts payable = Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher

creditors turnover ratio or a lower credit period enjoyed signifies that the

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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 the drawing 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 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: -

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Ratio analysis is equally useful for assessing the long-term financial

viability of a firm. This respect of the financial position 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:

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:

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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 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.

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.

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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 are described below:

1] Information problems

Ratios require quantitative information for analysis but it is not decisive

about analytical output .

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 company’s

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.

28


Changes in accounting policy may affect the comparison of results

between different accounting years as misleading.

3] Inter-firm comparison

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:

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.

29


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 its stock 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.

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 comparison with 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.

30


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.

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 recognition for the

quality of its products, business integrity and innovative engineering skills.

31


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.

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.

32


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.

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 customer’s needs and provide solutions than merely

selling products.

5] To create intellectual capital by investing in hardware and 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.

“ Do it right the first time & every time” is their team commitment * our

way of doing business, it ensures as growth & prosperity.

33


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 company’s high technology

foundation and the reputation of four decades for prompt customer service and

as 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 people’s attitude. Entire organization is

committed to create an environment that encourages individual excellence and

a personal commitment to quality. In APLAB, “Quality is everybody’s

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.

34


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

[4 sigma]

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 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 customer’s 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

35


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 company’s 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 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.

36


APLAB’S 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. &

37

REGIOALHEAD:MUMBAINEWDELHISECUNDA-RABADBANGLORECHENNAI


DESIGN

DEVLOP-

MENT

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 INSTACASH

e. 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 INSTACASH-

India’s first indigenously

manufactured ATM

INSTACASH demonstrated

38


APLAB’s 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.

APLAB LIMITED

BALANCE SHEET AS AT 31ST MARCH 2002(RS.’000)

AS AT 31ST 2002 AS AT 31ST 2002SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 16,29,69

21,29,69LOANSSecured 12,13,48Unsecured 3,67,99

15,81,47DEFFERED TAX LIABILITY (NET) 1,06,85TOTAL 38,18,01

APPLICATION OF FUNDSFIXED ASSETSGross block 15,90,33Less: depreciation 10,32,96Net block 5,57,37Capital work in progress 54,36

6,11,73INVESTMENT 1,22,32CURRENT ASSESTS, LOANS & ADVANCESInventories 19,09,77 Sundary debtors 18,49,35Cash & bank balances 3,31,32Loan & advances 5,80,36

46,70,80CURRENT LIABLITIES & PROVISIONS

39


Current liabilities 15,36,09Provisions 57,57

15,93,66NET CURRENT ASSESTS 30,77,14MISCELLANEOUS EXPENDITURE 6,84Total 3818,01

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2002

(RS.’000)

AS AT 31-3- 2002 AS AT 31-3-2002INCOME:Sales and operating earnings 48,19,19Other income 80,50Variation in stock 1,31,07

50,30,76EXPENCES: Materials consumed 18,97,28Purchase of trading goods 8,61,75 Payments to & provision for 9,95,04 employeesManufacturing expenses 2,21,37Excise duty 65,05Other expenses 5,76,71Interest & finance charges 2,60,22Depreciation 1,05,37Less: transferred to revaluation 1,15 1,04,22

49,81,64PROFIT BEFORE TAX 49,12PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 24,42Deferred tax liability / (Assets) 4,02PROFIT AFTER TAX 20,68Balance brought forward from previous year 1Balance available for appropriation 20,69

Appropriations:General reserve 20,68Surplus / (loss) carried to B/S 1Proposed dividend

40


Tax on proposed dividend20,69

Basic earning per share (rupee)0.41

0.41


AS AT 31-3- 2003 AS AT 31-3- 2003SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 16,55,19


14,80,71DEFFERED TAX LIABILITY (NET) 87,21TOTAL 37,23,11



51,02,42CURRENT LIABLITIES & PROVISIONSCurrent liabilities 20,41,56Provisions 1,20,76

41


21,62,32NET CURRENT ASSESTS 29,40,10MISCELLANEOUS EXPENDITURE 5,97TOTAL 37,23,11


(RS.’000)

AS AT 31-3- 2003 AS AT 31-3- 2003INCOME:Sales and operating earnings 59,62,22Other income 15,04Variation in stock (59,27)

59,17,99EXPENCES: Materials consumed 22,41,60Purchase of trading goods 10,37,52 Payments to & provision for 10,63,96 EmployeesManufacturing expenses 2,69,99Excise duty 72,69Other expenses 7,62,23Interest & finance charges 2,36,57Depreciation 1,07,97Less: transferred to revaluation 1,03 1,06,94

57,91,50PROFIT BEFORE TAX 1,26,49PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 63,19Deferred tax liability / (Assets) (19,64)PROFIT AFTER TAX 82,94Balance brought forward from previous year 1Balance available for appropriation 82,95

Appropriations:General reserve 26,50Surplus / (loss) carried to B/S 4Proposed dividend 50,00Tax on proposed dividend 6,41

82,95

42


Basic earning per share (rupee) 1.66




16,97.15DEFFERED TAX LIABILITY (NET) 95,33TOTAL 40,35,07


6,16,84INVESTMENT 1,48,34CURRENT ASSESTS, LOANS & ADVANCESInventories 21,46,20 Sundary debtors 19,51,56Cash & bank balances 4,49,74Loan & advances 850,58


21,28,19NET CURRENT ASSESTS 32,69,89TOTAL 40,35,07

43



(RS.’000)

AS AT 31-3- 2004 AS AT 31-3-2004INCOME:Sales and operating earnings 73,90,47Other income 31,39Variation in stock 53,99

74,75,85EXPENCES: Materials consumed 28,51,40Purchase of trading goods 14,03,33 Payments to & provision for 12,94,47 employeesManufacturing expenses 3,07,51Excise duty 70,08Other expenses 9,17,94Interest & finance charges 2,46,30Depreciation 1,10,89Less: transferred to revaluation 93 1,09,96

72,00,99PROFIT BEFORE TAX 2,74,86PRIOR YEAR ADJUSTMENT (NET) 25,71PROVISION FOR TAXATIONCurrent tax 1,19,50Deferred tax liability / (Assets) 8,13PROFIT AFTER TAX 17294Balance brought forward from previous year 4Balance available for appropriation 1,72,98

Appropriations:General reserve 88,30Surplus / (loss) carried to B/S 7Proposed dividend 75,00Tax on proposed divident 9,61

1,72,98Basic earning per share (rupee) 3.46

44





22,60,01DEFFERED TAX LIABILITY (NET) 92,02TOTAL 47,66,94

APPLICATION OF FUNDSFIXED ASSETSGross block 21,64,89Less: depreciation 13,43,05Net block 8,21,84Capital work in progress -



21,36,02NET CURRENT ASSESTS 37,12,19TOTAL 47,66,19


45


(RS.’000)AS AT 31-3- 2005 AS AT 31-3 2005

INCOME:Sales and operating earnings 74,20,31Other income 41,69Variation in stock (38,45)

74,23,55EXPENCES: Materials consumed 25,91,83Purchase of trading goods 15,21,00 Payments to & provision for 13,54,15 employeesManufacturing expenses 2,71,41Excise duty 75,41Other expenses 8,44,78Interest & finance charges 2,15,82Depreciation 1,26,68Less: transferred to revaluation 84 1,25,84

70,00,24PROFIT BEFORE TAX 4,23,31PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 1,50,84Deferred tax liability / (Assets) (3,31)PROFIT AFTER TAX 2,75,78Balance brought forward from previous year 7Balance available for appropriation 2,75,85

Appropriations:General reserve 1,73,20Surplus / (loss) carried to B/S 3Proposed dividend 90,00

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

CALCULATIONS AND INTERPRETATION OF RATIO’S

46


1] CURRENT RATIO:

Formula:

Current assets

Current ratio = Current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Current assets 46,70,80 51,08,39 53,98,08 58,28,21Current liabilities 15,93,66 21,62,32 21,28,19 21,36,02Current ratio 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.

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 - 30,77,14

2002-2003 - 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 company’s ability to pay its

current liabilities out of its current assets. The Aplab Company’s has a very

good liquidity position of company.

47


2] LIQUID RATIO:

Formula:

Quick assetsLiquid ratio =

Quick liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Quick 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 a conservative working capital

policy.

Liquid ratio of Company is favorable because the quick assets of the

company are more than the quick liabilities. The liquid ratio shows the

company’s ability to meet its immediate obligations promptly.

3] PROPRIETORY RATIO:

Formula:

Proprietary fundProprietary ratio = OR

Total fund

Shareholders fund

48


Proprietary ratio = Fixed assets + current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Proprietary fund 21,29,69 21,55,19 22,42,59 24,14,91Total fund 52,82,53 57,38,17 66,14,92 66,70,05Proprietary ratio 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 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

Company’s 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 19,32,88Working Capital 30,77,14 29,46,07 32,69,89 37,12,19Stock working capital 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

49


which affects decrease in stock that effected in increase in working capital in

2004-2005.

It shows that the solvency position of the company is sound.

5] CAPITAL GEARING RATIO:

Formula:

Preference capital+ secured loanCapital gearing ratio =

Equity capital & reserve & surplus

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Secured loan 12,13,48 10,27,56 11,38,86 1,72,312Equity capital & reserves & surplus

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

Capital gearing ratio

56.97 47.67 50.78 71

COMMENTS:

Gearing means the process of increasing the equity shareholders return

through the use of debt. Capital 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 company’s expansion.

6] DEBT EQUITY RATIO:

Formula:

Total long term debt

Debt equity ratio = Total shareholders fund

50


YEAR 2001-2002 2002-2003 2003-2004 2004 -2005 Long term debt 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:

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 of view.

7] GROSS PROFIT RATIO:

Formula:

Gross profitGross profit ratio = * 100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Gross 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 profit Ratio 56.48 73.80 66.27 62.22

51


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 profit ratio

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: COGS+ operating expenses

Operating ratio = *100 Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005COGS + Operating expenses

18,90,98 +2,21,37 +5,76,71

21,96,32 +2,69,98 +7,62,23

28,33,02 +3,07,51 +9,17,94

2,57,226+27,141+84,478

Net sales 43,45,46 51,02,37 68,76,89 6,80,978Operating ratio 61.88% 63.27% 59% 54.16%

52


COMMENTS:

The operating ratio shows the relationship between costs of activities &

net sales. Operating ratio over a period of 4 years when compared that indicate

the change in the operational efficiency of the company.

The operating ratio of the company has decreased in all 4 year. This is

due to increase in the cost of goods sold, which in 2001-2002 was 61.88%, in

2002-2003 was 63.27%, in 2003-2004 was 59% & in 2004-2005 it is 54.16%.

though the cost has increased in 2002-2003 as compared to 2001-2002, it is

reducing continuously over the next two years, indicate downward trend in cost

but upward / positive trend in operational performance.

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 expenses

Manufacturing expense ratio = *100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Manufacturing expenses

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

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

5% 5.29% 4.47% 3.98%

53


COMMENTS:

The manufacturing expense is shows the downward trend. During the year

2001–2002 to 2002-2003 the manufacturing expense increased because there

is increase in the charges like 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 -2005Other expenses 5,76,71 7,62,23 9,17,94 8,44,78Net sales 43,45,46 51,02,37 68,76,89 68,09,78Other expenses ratio

13.2% 14.93% 13.34% 12.40%

COMMENTS:

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.

54


10) NET PROFIT RATIO

Formula:

NPAT Net profit ratio = * 100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,98 82,94 1,72,94 2,75,78Net sales 434546 51,02,37 68,76,89 68,09,78Net profit ratio 0.48 1.6 2.5 4.04

COMMENTS:

The net profit ratio of the company is low in all year but 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. Company’s

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.

55


11] STOCK TURNOVER RATIO:

Formula:

COGS Stock Turnover Ratio = Average stock

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005COGS 18,90,98 21,96,32 28,33,02 25,72,26Average stock 5,49,90 5,97,58 6,73,11 6,89,30Stock Turnover Ratio

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 then the 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.

12] RETURN ON CAPITAL EMPLOYED:

Formula:

NPATReturn on capital employed = *100

Capital employed

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YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,68 82,94 1,72,94 2,75,78Capital employed 38,18,01 37,23,11 40,35,07 47,66,93Return on capital employed

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 that net 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.

13] EARNING PER SHARE:

Formula: NPAT

Earning per share = Number of equity share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,98,000 82,94,000 1,72,94,000 2,75,78,000No.ofequity share 50,00,000 50,00,000 50,00,000 50,00,000Earning 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.

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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.

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 = * 100 Earning per share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Dividend per share

- 1 1.50 1.80

Earning per share 0.41 1.66 3.46 5.52Dividend payout 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 the company

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 = * 100 Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005COGS 18,90,98 21,96,32 28,33,02 25,72,26Net sales 43,45,46 51,02,37 68,76,89 68,09,78Cost of goods sold ratio

43.51 43.04 41.19 37.77

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 sold ratio is continuously

decreasing however the gross profit & sales is increased during the same

period.

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16] CASH RATIO:

Formula:

Cash + Bank + Marketable securities

Cash ratio = Total current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Cash + Bank + Marketable securities

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

Total current liabilities

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

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 2,75,78Proprietors fund 21,29,69 21,55,19 22,42,59 24,14,91Return on proprietors fund

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 on proprietors 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 -2005NPAT 20,68 82,94 1,72,94 2,75,78No. of equity share

50,000 50,000 50,000 50,000

Return on equity share capital

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

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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

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 as operating 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 purchase Credit turnover ratio =

Average creditors

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Months in a year

Average age of accounts payable = Credit turnover ratio

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Net credit purchase

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

Average creditors 5,88,42 7,91,21 6,96,86 7,80,39Credit turnover ratio

3.6 times 3.6 times 4 times 3 times

Average age of accounts payable

3.3 months 3.3 months 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 2003-2004.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 =

Debtor’s turnover

63


YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Credit sales 47,77,48 55,21,33 74,87,36 68,09,78Average debtors 18,49,35 19,05,76 19,51,56 23,06,67Debtors turnover ratio

2.5 times 2.8 times 3.8 times 2.9 times

Debt collection period

146 days 130 days 96 days 125 days

COMMENTS:

Debtor’s turnover ratio is alternative known as “ Accounts Receivable

Turnover Ratio”. This ratio measures the collectibility of debtors & other

accounts receivable, it means the rate at which the trade debts are being

collected.

The Debtors turnover ratio of 2.5 indicates that the debtors are being

turned over 2.5 times during the year. It means that the credit cycle of debtors

makes 2.5 rounds during the year. It helps to workout the debt collection period

i.e. 146 days [365/ 2.5 = 146]. This indicates that it take146 days on an average

for the debtors to be settled. Debt collection period indicates the duration of the

credit cycle of the debtors.

The Debtors turnover ratio is almost same during the year 2001-2002 to

2004-2005, which indicates that the debts are being collected at a fast speed

during the year. The operating cycle of the debtors is short. In other words the

debts collection period is short which result into less chance of bad debts.

64


SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED

After going through the various ratios, I would like to state that:

The short-term solvency of the company is quite satisfactory.

Immediate solvency position of the company is also quite satisfactory.

The company can meet its urgent obligations immediately.

Credit policies are effective.

Over all profitability position of the company is quite satisfactory.

Stock turnover rate is satisfactory. Stock of the company is moving fast

in the market.

The company is paying promptly to the suppliers.

The return on capital employed is satisfactory.

The management should take care of inventory management and speed up the

movement of stock. Effective selling technique or product modification may be

adopted to face the competitors and to improve the financial position of the

company by taking appropriate decisions.

65


CONCLUSION:

The focus of financial analysis is on key figures contained in the financial

statements and the significant relationship that exits. The reliability and

significance attach to the ratios will largely on hinge upon the quality of data on

which they are best. They are as good for as bad as the data it self.

Financial ratios are a useful by product of financial statement and

provide standardized measures of firms financial position, profitability and

riskiness. It is an important and powerful tool in the hands of financial analyst.

By calculating one or other ratio or group of ratios he can analyze the

performance of a firm from the different point of view.

The ratio analysis can help in understanding the liquidity and short-term

solvency of the firm, particularly for the trade creditors and banks. Long-term

solvency position as measured by different debt ratios can help a debt investor

or financial institutions to evaluate the degree of financial risk. The operational

efficiency of the firm in utilizing its assets to generate profits can be assessed

on the basis of different turnover ratios. The profitability of the firm can be

analyzed with the help of profitability ratios.

However the ratio analyses suffers from different limitations also. The

ratios need not be taken for granted and accepted at face values. These ratios

are numerous and there are wide spread variations in the same measure.

Ratios generally do the work of diagnosing a problem only and failed to provide

the solution to the problem.

66


BIBLIOGRAPHY

REFERENCE BOOKS –

FINANCIAL MANAGEMENT

Theory, Concepts & problems

R.P.RUSTAGI


Text and problems

M.Y. KHAN AND P. K. JAIN

MANAGEMENT ACCOUNTING

AINAPURE


L.N. CHOPDE D.N. CHOUDHARI S.L. CHOPDE

ANAUAL REPORTS OF APLAB LIMITED

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

WEBSIDES -

www.bizd.ac.uk/compfact/ratio

www.cecunc.org.com/business/financial

www.zeromillion.com.business/financial

67

http://www.zeromillion.com.business/financial

http://www.cecunc.org.com/business/financial

http://www.bizd.ac.uk/compfact/ratio

MBA Project on Financial Ratios

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