A STUDY ON CONDUCTED AT OSRAM INDIA PVT. LTD. SONEPAT SUBMITTED IN THE PARTIAL FULFILMENT OF THE REQUIREMENT OF TWOYEARS DEGREE COURSE 2006-2008 MASTER OF BUSINESS ADMINISTRATION SUBMITTED TO :- SUBMITTED BY :- MISS SHIWANI ARORA SANJEEV (MBA FACULTY ) ROLL NO : 50 HINDU INSTITUTE OF MANAGEMENT SONEPAT (Affiliated to M.D. University, Rohtak ) DECLARATION I, SANJEEV, Roll No. 50, MBA-2 nd Year, of Hindu Institute Of Management, Sonepat, hereby declare that the Summer Training Report
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A STUDYON
CONDUCTED ATOSRAM INDIA PVT. LTD.
SONEPAT
SUBMITTED IN THE PARTIAL FULFILMENT OF THE REQUIREMENT OF TWOYEARS DEGREE COURSE 2006-2008
MASTER OF BUSINESS ADMINISTRATION SUBMITTED TO :- SUBMITTED BY :- MISS SHIWANI ARORA SANJEEV (MBA FACULTY ) ROLL NO : 50
HINDU INSTITUTE OF MANAGEMENTSONEPAT
(Affiliated to M.D. University, Rohtak )
DECLARATION
I, SANJEEV, Roll No. 50, MBA-2nd Year, of Hindu Institute Of Management,
Sonepat, hereby declare that the Summer Training Report
Entitled “ A Study on RatioAnalysis ” is an original work and the same has not been
submitted to any other institute for the award of any other degree.
A seminar presentation of the Training Report was made on
------------------- and the suggestion as approved by the faculty were duly
incorporated.
Presentation Incharge SANJEEVMISS SHIWANI ARORA (Faculty) MBA – 2nd Year
HIM,
Sonepat.
Countersigned
Director of HIM
ACKNOWLEDGEMENTS
“Perseverance, inspiriting and motivation has always
played a key role in the success of any venture.”
The successful completion of the project would have been far from
reality without mentioning the people who made an indelible impression
while making the project.
I wish to convey my sincere thanks to Osram India Pvt. Ltd. Sonepat
and the members for instructing me and giving me an opportunity to work
for them.
I express my sincere and special thanks to Mr. V.D. BANSAL . It is a matter of
great pleasure for me to place on record my gratitude for their competent and perfect
guidance, valuable opinion and healthy criticism, which have gone a long way in
enabling me to complete this project successfully.
This opportunity to express out gratitude and profoundest regard to
the guide of this project, Mr. ANANT SHARMA, is very inadequate to match
her adroitness and magnanimity. Expression fall short to elucidate her
incomparable guidance under which the project reared and blossomed
and without her it would have been in consummate.
I am also thankful to all my teachers and friends who helped me
directly & indirectly in the completion of the project.
TABLE OF CONTENTS
Preface
Objective of Study
Scope of Study
Focus of the Problem
Introduction
a) Osram Worldwide
b) Quality Policy
c) Certification
d) Quality Objectives
e) Environment Health Safety & Social Policy
f) Our Vision
g) Our Mission
h) Our Values
Company Profile
a) History
b) New Markets
c) Innovations
d) Employees
e) Worldwide Sales by Market
f) Oscar from Osram
g) Description of Products
SWOT Analysis
Research Methodology
a) Research Objective
b) Research Design
c) Data Collection Method
Project Profile
I. Project : An overview
a) Necessity of Project
b) Advantages of Project
c) Meaning of Project
d) Inference
II. Prelusion to Ratio Analysis
III. Significance of Ratio Analysis
IV. Limitation of Ratio Analysis
V. Parameter considered for measuring Financial performance.
Financial Analysis
Analysis & Interpretation
Suggestions
Limitations
Conclusion
Bibliography
PREFACE
PERFORM THOU RIGHT ACTION, FOR ACTION IS SUPERIOR
TO INACTION AND INACTIVE, AND WITHOUT IT EVEN THE
MAINTENANCE OF BODY WOULD NOT BE POSSIBLE.
GITA,III,8
In the two year full time MBA course, there is provision for summer training of eight
weeks. The essential purpose for this training is to give an exposure to student of day-to-
day working of business, which will facilitate identification of opportunities or problems
and deciding best course of action when some difficulty is encountered. I have done my
summer training at OSRAM INDIA PVT. LTD. SONEPAT.
The succeeding pages contain report undergone by me on “ A Study on Ratio
Analysis “ Of the above said company.
OBJECTIVE OF THE STUDY
The project entitled Ratio Analysis, which was undertaken at Osram India Pvt. Ltd.,
Sonepat , is related to study each and every type of ratio of the company. The main
objective of the study are :-
To analyzing the financial statement.
To simplifies and summarizes a long array of accounting
data and makes them understandable.
To forecasting and preparing the plans for the future.
To will reveal the trend of costs, sales, profits and other important
facts.
To establish ideal standards of the different items of the business.
To discloses the liquidity , solvency and profitability of business
enterprise.
To provide useful information to the management.
SCOPE OF THE STUDY
It become quite difficult rather impossible to make judgment about the position of any
business by way of analyzing the financial statements of one year.
To get a view about the business happiness, the past data of some year relating
to the problem are studied and trend is determined. The present study covers a period of
years from 2004 – 2007. A large period may prove inconvenient while a short period
would not give desired results. A period of four to six years is to be considered to be the
optimum one.
The present study has been undertaken to analyze the Ratio analysis is being
managed in the company and how far it contributes to the overall objective of
maximization of shareholders wealth and the organization wealth.
FOCUS OF THE PROBLEM
Any type of research study suffers from certain limitation relating to either the
research itself or to the topic thought. The degree and nature of the limitation varies with
the topic.
The present study has been undertaken to analyze the Ratio analysis is being
managed in the company and how far it contributes to the overall objective of
maximization of shareholders wealth and the organization wealth.
It become quite difficult rather impossible to make judgment about the position of any
business by way of analyzing the financial statements of one year.
SIGNIFICANCE OF THE STUDY
It is useful for the management.
It gives information to the investors about the earning capacity of the
business.
With the help of Ratio Analysis comparison of profitability and
Financial soundness can be made between one firm and another.
Current year's ratios are compared with those of previous years and if some weak spots are thus located remedial measures are taken to correct them.
It gives information to the financial institution for providing the finance
to the company.
It gives information to the taxation authorities.
It gives information to the researchers for conducting research in
respect of profitability , efficiency , financial soundness and growth of
that company.
INTRODUCTION
INTRODUCTION
OSRAM India Pvt. Ltd. Sonepat
The plant of OSRAM India Pvt. Ltd. Sonepat was established by Birla Group of
company as ECE Industries Sonepat in the year 1973 in collaboration with M/s
Tungsram, Hungary. It is situated 45 km from Delhi, in industries-oriented
environment of Sonepat (Haryana).
In Oct. 1998, ECE Industries Ltd. Sonepat was taken over by OSRAM India
Pvt. Limited a wholly owned subsidiary of OSRAM GmbH. OSRAM India Pvt. Ltd.
having its registered at New Delhi, was Primarily formed for sales and marketing
operations in India. The company has got three regional offices at Bombay, Calcutta
and Banglore in addition to 14 other distribution centers. The total turnover of
OSRAM India pvt. Ltd. were worth Rs.42 crore in acquisition, innovation and
expansion
has been regular feature of this plant. Currently a high speed CFL manufacturer
line and slim tube manufacture line have been brought from
(Germany). With this new induction, total investment at this to approximately Rs.100
crore.
OSRAM India Pvt. Ltd. has Government's approval for manufacturing and
trading of the following lamps :-
Metal Halide and High Intensity discharge lamps.
Tri phosphor and energy efficient fluorescent tubes.
automotive Halogen and Discharge lamps.
Photo-Optic lamps for films, TV, Theatre, etc.
Other high technology, innovation lamps for Medical, Germicidal,
UV lamps.
Incandescent Lamps.
OSRAM WORDWIDE
58 Subsidiaries and Sales Offices for 91 Countries.
54 Countries supported by local
agents or OSRAM Grubh Munich.
54 Production Plants in
18 Countries.
QUALITY POLICY
Management is committed to :-
Customer Orientation :-
To fulfill the requirement of our & external customer.
PROCESS ORIENTATION :-
To optimize and harmonize interrelated process
rather than individual functions.
PREVENTIVE BEHAVIOUR :-
To prevent the mistakes to happen.
CERTIFICATION
OSRAM has been certified for Quality Management system by :-
Iqnet
(Www.iqnet-cetification.com)
Rina
(Www.Rina.org)
CISQ
(Www.cisq.com)
QUALITY OBJECTIVE
To achieve customer satisfaction index of 60% with in 3 years.
To conform with the budgetary plan for production , shrinkage
and efficiency.
To confirm with " annual PPM plan ".
To upgrade three raw & packing material supplies each year
to a quality score 57/60.
To bring down number of accidents by 20% every year by
following the safety norms.
To maintain training index of 0.5%
ENVIRONMENT, HEALTH SAFETY
& SOCIAL POLICY
To ensure health & safety of its employees, prevent pollution and protect the
environment by complying with relevant legal requirement.
Prevent behavior which is integral to the quality policy shall be the guiding principle for implementation.
To conserve natural resources by optimum utilization minimization
wastage of Raw Material , water energy & other associated factors
affecting the environment.
This policy shall be deployed at all level of the orgn. and interested
parties through awareness / training about EHS aspect and hazards
and motivate them for active participation.
The management shall review EHS performance at regular interval for continual
improvement.
Our Vision :
The expectations and targets of company are reflected
in its policy and continuous efforts for expanding its
share in the market. The OSRAM India Vision 2007
proves to be the statement of its goals and would shape
its future in India. The highlights of OSRAM India
Vision 2007 are -----
OSRAM No.2 in lamps business in India.
OSRAM India sales over INR 3 billion.
OSRAM India leader in CFL, FO and ECG.
OSRAM the most respected brand name in the
country.
OSRAM products available in all parts of
India.
Cost leadership in halogen, T8 Luminux, CFL, NAV Super and HQI.
Our Mission :
Better Technology
Better Quality
Better Tomorrow
Our Values :
Customer Satisfaction.
Commitment to Total Quality.
Cost and Time consciousness.
Innovation and Creativity
Trust and Team Spirit.
Respect for Individual Integrity.
COMPANY PROFILE
COMPANY PROFILE
OSRAM GmbH is one of the three leading lamp manufacturers in the word with its
headquarter at Munich (Germany). It is a company working with strong international
outlook, competent & farsighted management, and team spirit working, among 3000
employees throughout the world.
The world wide sales for the year 1998-99 amounts to approximately 16,000 crore
of Rupees. Of this huge amount, 88% was earned outside Germany, which
emphasizes the company’s strong international existence.
Today OSRAM is 81 years young the history of this world present giant can be
traced back to year 1919 , when three companies - AEG, Siemens & Halske AG, and
Duetsche Gasgluhlicht (Auer Gasellschaft)-pooled their resources for producing filament
lamps.
Today , Siemens AG is the sole stakeholder in OSRAM GmbH. The
OSRAM trademark was registered back in 1906,making it one of the oldest
internationally recognized trade names. The name 'OSRAM' had been derived from
"OSMIUM" and "WOLFRAM" the two German words for metals required for
manufacturing the filaments.
The division with largest turnover is general Lighting. Innovation products as
halogen lamps, compact fluorescent lamps, and metal halide lamps continue to show
healthy growth. OSRAM is today world's largest manufacturer of automotive lamps. It
has also an excellent
position in the field of photo optic lamps. Company has a considerable market share in electronic control gear sector by offering systems that
integrate lamps with an electronic ballast.
As an ISO – 9002 certified company, OSRAM has got 51production facilities
in 18 countries, catering the needs of customers in 146 countries. The company was
awarded the technical Oscar in march 1988 by the academy of motion picture arts and
science for the invention and continuous improvement in HMI lamps for the
professional motion pictures. Currently, company is spending 4%of its turnover R&D
activities. It is at top in Europe and second largest lamp producer in North America (as
OSRAM SYLVANIA). In addition to
Europe and North America, Asia is one of the most important growth
center for OSRAM's innovation products. Specially, in 1994 Indian subcontinent
become a potential market for energy efficient lighting products. So, due to strong
urge to explore the market here, OSRAM GmbH set up OSRAM India Pvt. Ltd. in 1994
for sales & marketing operations. The company has 100% foreign equity.
HISTORY
The history of OSRAM is bound up closely with the rapid development of
lighting engineering. It was this company that in 1919 under one roof the
scientific expertise and decades-long experience of the top three lamp
producers in Germany. Only 1, 1919 a limited partnership, OSRAM GmbH,
was called into existence in Berlin by the manager of Allgemeine
Elektricitats - Gesellschaft , Deutsche Gasgluhlicht - Aktiengesellschaft
( Auergesellschaft ), and the electric lamp production facilities of Sieman
& Halske.
The Auergesellschafthad already in 1906 Registered the name OSRAM with
the Imperial Patent Office as the official trademark forits incandescent and arc lamps.
1906 was thus the birth date of a trade name that was destined to win world renown :
OSRAM. The origin of the OSRAM name came about thus : OS - (OS)MIUM which
is a lamp making metal.
The history of electric light and the history of OSRAM are inextricably
intertwined. Again and again , new developments from OSRAM have
changed the way we live.
As early as 1925, for example, OSRAM made night time driving much
safer with the development of the first twin filament headlight lamp worth
high and low beams. These BILUX lamps became famous throughout the
world. From filaments to fluorescents - In 1936, OSRAM launched the
first fluorescent lamp. Its economical light revolutionized artificial lighting
in offices, shops, factories and public buildings. Halogen light, a brilliant
idea - By including halogens in the filler gas, lighting specialists as
OSRAM set the incandescent lamp on a completely new course in 1960.
OSRAM has made constant improvements to the range. We have been
able; for example to reduce the tube diameter of fluorescent lamps from
38 mm to 26 mm and less, which saves glass and fluorescent material
and at the same time increases luminous efficacy.
NEW MARKETS
In addition to Europe & North America , two bases where OSRAM is
particularly strong , Asia is one of the most important growth markets for
OSRAM's innovative products. In 1994 the Indian sub-continent became
a potential growth center for the energy efficient lightning products.
OSRAM India Pvt. Ltd. became quite strong & with the acquisition of E.C.E.
Lamps , division the projected sale was projected to be in excess of Rs.100 crore. In
1997 and achieved the same the far east joint ventures were established in Taiwan &
Indonesia & a new factory was started in Foshan ( China ). OSRAM continually
improves it's market presence in Eastern Europe.
INNOVATIONS
About 4% of turnover is being spent every year on research &
development. OSRAM is an innovative company. Around 30% of the
lamp sale achieved with products, which are less than 5 years old.
EMPLOYEES
As of Sept. 30, 1997, the OSRAM company world wide employed about
26,800 people. In Germany 8000 people were employed & outside
Germany 18,800, which is 70% of the employees worldwide
WORLD WIDE SALES BY MARKET
In fiscal year 2006/2007 the world wide sales were DM 6.3 billion , up
12% on the previous year . OSRAM is one of the three leading
manufacturer in the world.
The company's strong international focus is reflected by the fact that 88%
of sales were generated outside of Germany. Nearly half of OSRAM's
global sales are made in North America, where OSRAM SYLVANIA is
the region's second largest lamp producer . In Europe OSRAM is also
the market's second largest supplier. In Germany OSRAM is the market
leader.
Emphasis is also being placed on Latin America as well as on East & South East Asia.
OSRAM has 51 manufacturing units in 18 countries with most of the production is being
realized in the North America & Germany. Similar good growth in the sales has been
marked by the OSRAM INDIA Pvt. Ltd. The graph depicting the growth of the
company has been displayed below.
OSCAR FROM OSRAM
OSRAM was awarded the technical OSCAR in March 1998 by the
ACADEMY OF MOTION PICTURE ARTS & SCIENCE for the invention
& continuous improvement of H.M.I. lamps for professional motion
pictures.
DESCRIPTION OF PRODUCT
Product offerings from OSRAM India
The range of products which osram has to offer can be broadly classified
in to four groups:-
GROUPS DESCRIPTION
AB General automotive lamps
AM Automotive lamps
FQ Photo optic lamps
PL Ballats* and luminanes
*In India BL will most probably be electonics ballasts.
The main area of concentration so far has been on AB ( general lighting )
and on FO (photo optics). The entire range of product brochures specifying
design feature are available at osram offices in India.
3.) Osram India Pvt. Ltd. has taken over lamp division of ECE industries limited satiated
at Sonepat ( Haryana ) on Oct 1998. Osram India Pvt. Limited is now owner of the
factory. Here different luminary products are manufactured in the following plants :-
1. GLASS PLANT.
2. LAMP PLANT.
3. COIL PLANT.
4. GLS PLANT.
PRODUCT OF GLASS PLANT :-
1. glass shells 60 mm round 60 mm mushroom
60 mm elliptical 60 mm egg type
45 mm round 75 mm elliptical
80 mm round 90 mm mushroom
110 mm round
2. tubular shells 36.2 mm to 38 mm diameter.
PRODUCT OF LAMP PLANT:-
fluorescent tubes 02feet
04 feet
PRODUCT OF COIL PLANT :-
filament and lead in wire
Now total production of fluorescent of fluorescent tubes is about 900000
tubes per month and different kinds of GLS production is about 3100000
bulbs per month. we have renovation plans for improvement in production
and quality of these two products.
PRODUCTS OF GLS PLANT :-
BC, CC, GLS 25W, 100W (230 volts)
BC,SC,GLS,MW 150W, 200W (250 volts)
ES,SC,GLS,HW 300W, 500W (250 volts)
RESEARCH METHODOLOGY
RESEARCH METHODOLOGY
Research Methodology is a way to systematically solve the research
problem. In it, step-by-step methods are followed to solve a particular problem. It refers
to a search for knowledge. It can also be defined as a scientific and systematic search for
pertinent information on a specific topic. In fact, research is an art of scientific
investigation.
Redman & Mory defines research as “systematized effort to gain new knowledge.”
RESEACH DESIGNS:
Research Design is the way in which the research is carried out. It works as a
blue print. Research Design is the arrangement of conditions for the collection and
analysis of data in a manner that aims to combine relevance to the research purpose with
economy in procedure.
TYPES OF RESEARCH DESIGN:
Basically, there are three types of Research Designs. These are:
Exploratory Research Design:
In it , a problem is formulate for precise investigation and working
hypothesis are developed.
D escriptive & Diagnostic Research Design:
In Descriptive Research Design, those studies are taken which are
concerned with describing the characteristics of a particular individual
or a group.
In Diagnostic Research Design, those frequency are determined with
which something occurs or its association with something else.
Experimental Research Design:
In it, casual relationships between the variables are tested. It is also
known as Hypothesis Testing Research Design.
The present project is descriptive in nature. The major purpose of
descriptive research is the description of state of affairs, as it exists at
present. The main characteristic of this method is that the researcher has no control
over the variables; he can only report what has happened or what is happening.
Exploratory Research Design
Descriptive & Diagnostic Research Design
ExperimentalResearch Design
DATA COLLECTION:
The data can be of two types:
Primary Data
Secondary Data
The study is based on both primary and secondary data.
Primary Data: Primary data are those data , which is originally
collected afresh.
In this project, Questionnaire Method has been used for gathering required
information. However, some assistance was provided to respondents in filling it.
Secondary Data: Secondary Data are those data which are already
collected and stored and which has been passed through statistical research.
In this project, secondary data has been collected from following
sources :-
Annual Report
Articles in Journal, Magazines.
Books
Other material and report published by company
PROJECT PROFILE
PROJECT : AN OVERVIEW
Managerial persons have vital role in this new management era. Industry's
growth is depend upon these managerial personnel’s because the
production field is depend upon these personnel’s. This industrial training
project gives the pre idea about planning of the industries and deals with
various field of industry. By this project persons get the opportunity to face
the problems that will come ahead in his path. Before making the project
planning of requirement is necessary , by this we can improve our quality of estimation. After planning, execution, completion and evaluation are the
futer process of the project. In general words " Project is scheme of work
to be completed with in stimulated time by an adequate men & machine. "
complete or proper information can be grasp by trainee on the pre -
assigned project's subject.
Necessity of PROJECT :- It is well known that practice makes a men
Perfect , probably for industrious profession what so ever the knowledge
of book without practical knowledge they are like as a room without light.
So for this problem industrial training is a optimum way. Credit of the
profession may achieved by a manager when he process the good
knowledge of theory along with better wisdom of practical hand. By this
way we get an approximity for planning, designing and estimating a given
project. It is very essential before starting in any industry to make a good
project.
Advantages of PROJECT:-This training project is a process of stimulating
the skill of personal, increasing the aptitude and abilities to perform specific
job. The following important advantage are responsible for making a
project report and to proposed job.
1. Project gives the sufficient idea of proposed job.
2. It gives the sufficient knowledge for the type of material which is
required for the job.
3. If the project for a job designed then no wastage of money and material
takes place.
4. Project helps to work systematically.
5. Project develops the mind and our area of knowledge.
6. If we have the project of any proposed job then there is great easiness
in the installation.
7. Modern and scientific arrangement and management can be employed.
Meaning of PROJECT :- The work project has generate significance role
in the field of management. It is essentially required for management work
as delailed scene in order to give the practical form of work as indicated.
Before starting the project , we should fully aware about the meaning of project. It's each word or letter has it own meaning.
P : Planning :- In planning stage all the aspect has regards to types of
work to be carried out is taken into consideration estimate with full details
of requirement cost and probable activity of the project is prepared.
R : Resources :- These are guided to promote the function of a plan
from which the way problem will be solved and the matter will be select.
O : Organization :- It is way of performing different type of works in
a systematic way of procedure.
J : Joint efforts :- The work which has been planned, is done by the
help of co - operation of labour. It means that the effort of jointing to all
these procedures which come in the work is known as joint effort.
E : Execution / Engineering junction :- As per estimate man and
material are arranged and work is organized according to the time
schedule.
A well educated engineer which is related , to do this working better way
to find out the better result. Hence the project is an engineering junction.
C : Construction :- Each of the activity in accordance with the plan is
completed. When all the activity are completed , the project as whole is
considered to be completed.
OR
: Co-operation :- This tells about the phenomenon of construction
which is the most essential for doing the work.
T : Technique :- The technique of working with due to co-operation of
working project and then controlled the body.
The general form of conclusion , the project is an systematic
consideration discussed and proposed on a particular subject.
As the mater of fact project is the work which used for construction
purpose before work planned and performed.
In general form of conclusion , the project is systematic and
consideration subject.
INFERENCE :- Project method is used by many Indian Management
Institution for their student trainees : A student is assigned a certain
problem of an organization , collect the data , conduct analysis and
prepare a proposal giving his conclusion and investigation and prepare
a proposal giving his conclusion and recommendation. They prepare the
project with the help of this coach guide. Oral examination is given to test
of dept of understanding of the student and provide him an opportunity to
explain the conclusion and solution given in his report.
PRELUSION TO RATIO ANALYSIS
PRELUSION TO RATIO ANALYSIS
Absolute figures expressed in monetary terms in financial statement by themselves are
meaningless. these figure often do not convey much meaning unless expressed in relation
to other figures.
A Ratio is simply one number expressed in term of another. It is found by dividing one
number into the other.
Ratio may be expressed in the following three ways :
Pure Ratio or Simple Ratio :- It is expressed by the simple division
of one number by another.
Rate or So Many Times :- It is calculated how many times a figure
is, in comparison to another figure.
SIGNIFICANCE OF RATIO ANALYSIS
Ratio Analysis is an extremely useful device for analyzing the
financial statement.
Ratio Analysis simplifies and summarizes a long array of accounting data and
makes them understandable.
With the help of Ratio Analysis comparison of profitability and
Financial soundness can be made between one firm and another.
Current year's ratios are compared with those of previous years and if
some weak spots are thus located remedial measures are taken to
correct them.
Ratio analysis is very helpful in forecasting and preparing the plan
for the future.
If Ratio analysis is prepared for a number of years, they will reveal the trend of
costs, sales, profits and other important facts.
Ratios help us in establishing ideal standards of the different items of
the business.
Ratio analysis discloses the liquidity , solvency and profitability of the business
enterprise. Such information enables management to assess the changes in
comparison to another figure.
Percentage: - It is the relation between two figures expressed
in hundredth.
LIMITATION OF RATIO ANALYSIS
False accounting data gives false ratios.
Comparison not possible if different firms adopt different accounting
policies regarding depriciation, creation of provision for doubtful debts method of valuation of closing stock etc.
Ratio Analysis become less effective due to price level changes.
Ratio may be misleading in the absence of absolute data.
Limited use of a single ratio.
Some companies in order to cover up their bad financial position to
Window dressing i.e., showing a better position than the one which
really exists.
Circumstances differ from firm to firm hence no single ratio can be
fixed for all firms against which the actual ratio may compared.
Ratio derived from analysis of statement alone are not sure indicator
of good or bad financial position and profitability of a firm. Effect of
personal ability and bias of analyst.
PARAMETER CONSIDERED FOR MEASURING RATIO ANALYSIS
Profitability
Liquidity
Solvency
Operating Efficiency
PROFITABILITY
Every enterprise operate with an objective to earning profit , and profit is
must for the survival and growth of every business enterprise. profit serves
the following three purposes :-
Measures net effectiveness and soundness of business efforts.
Covers the costs of staying in business, replacement, market and
technical risks.
Ensure a supply of future capital for innovation and expansion.
Profits can be related to various parameters like sales, owner equity
( net worth ) , capital employed to as certain the profitability of sales or the
capital employed. Owner are interested in profitability ratio , as profits
reflects the return on fund invested.
Basically , the main profitability ratio are as follows :-
1. NET PROFIT MARGIN = NET PROFIT AFTER ------------------------------- NET SALES
2. RETUREN ON INVESTMENT (ROI) = PBIT ----------- * 100 CE
3. RETUREN ON EQUITY = PROFIT AFTER TAX ---------------------------- NET WORTH
4. RETUREN ON ASSETS = NET PROFIT ------------------- * 100
TCE
LIQUIDITY
The liquidity of an enterprise refers to its ability to honor its commitment
or obligations arising over a short period of time of say, one year. Liquidity
is reflected by current assets and current liabilities and liquidity ratio are
expressed by comparing the current assets with current liabilities. Liquidity ratios are very useful to various parties having interest
in the enterprise over a short period .
Some of the liquidity ratios are as follows: -
1. CURRENT RATIO :- It is a quantitative relationship between current
assets and current liabilities and indicate an enterprise ability to meet the current
obligation as expressed in terms of current liabilities.
Current assets refers to liquidity resources and must be sufficient enough
to pay current liabilities as and when they mature. This ratio is calculated
as follows :-
CURRENT RATIO = CURRENT ASSETS ------------------------------- CURRENT LIABILITIES
The current ratio of 2 : 1 is the standard ratio. It means the current assets
are twice as comparison to the current liabilities and they are sufficient to meet the short term obligation.
2. ACID TEST RATIO OR QUICK RATIO :- A distinction is made between
quick current assets and current assets.
Quick current assets are those current assets which are convertible into cash rather
early. As inventory is not likely to be realized early, the some is not treated as quick
assets.
QUICK RATIO = QUICK ASSETS -------------------------------- CURRENT LIABILITIES
QUICK ASSETS = CURRENT ASSETS -(INVENTORIES+PREPAID EXP)
The quick ratio is 1 : 1 is considered as good for the business organization.
The current assets includes cash, debtors , bills receivable, stock, bank
balance etc. and the current liability includes creditors, bills payable,
outstanding expenses etc.
SOLVENCY
The solvency ratio reveal that ability of the firm to meet its long run obligation. Solvency
ratio indicate long term liquidity. Lenders like Bank , Financial institution, debenture
holders who gives long term loans to the enterprise. are interested in ascertaining the
solvency of the enterprise.
The important solvency ratio are :-
1. INTEREST COVERAGE RATIO :- This ratio relates the interest obligation
with the profits available for the period and indicates the number of times the interest
obligation is covered by the profit for the period.
INTEREST COVERAGE RATIO = PBIT --------------- INTEREST
PBIT means profit before interest and taxes. This ratio must be greater than 1 , otherwise
the profit available being less than the interest payable , the enterprise would not be able
to discharge its interest obligation.
2. LEVERAGE RATIO :- This ratio relates debt to equity or owners fund. Equity
here is used in broader sense as net worth (i.e. capital plus retained earnings ) ,while debt
normally used as a long term interest bear in loans. This ratio is calculated as under :-
LEVERAGE OR DEBT EQUITY RATIO = DEBT ------------ EQUITY
The debt equity ratio thus , the ratio of total outside liabilities
to owner's total funds. It is ratio of the amount invested by outsiders to the
amount invested by the owners of business.
RATIO ANALYSIS
A. PROFITABILITY
I. GROSS PROFIT RATIO= GROSS PROFIT * 100 NET SALES