Ratio

MBA Programme

A

PROJECT REPORTON

“A STUDY OF RATIO ANALYSIS”

WITH SPECIAL REFERENCE TO

GHATAGE PATIL INDUSTRIES LTD.UCHGAON, KOLHAPUR.

SUBMITTED TO

“SIBER SCHOOL OF MANAGEMENT”KOLHAPUR.

(AN AUTONOMOUS INSTITUTE)

IN PARTIAL FULFILLMENT OF THE REQUIREMENTFOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BYMS. TRUPTI V. KAMBUJ.

(B. Com.)

UNDER THE GUIDANCE OF

MR. G. HARESH. (M.A, Ph. D)

THROUGH THE DIRECTOR CHH. SHAHU INSTITUTE OF BUSINESS EDUCATION

AND RESEARCH, KOLHAPUR. 416 004(AN AUTONOMOUS INSTITUTE)

(2008-2010)

SIBER School of Management

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CONTENTS:

Chapter. No. Title of the Chapter Page no.

I Introduction and Research Design.

II Company Profile.

III Conceptual Background.

IV Data Analysis And Interpretation.

V Findings and suggestions.

Bibliography.


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CHAPTER I

INTRODUCTION

AND

RESEARCH DESIGN


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CHAPTER: 1

INTRODUCTION AND RESEARCH DESIGN:

Any successful business owner is constantly evaluating the performance of his/her company, comparing it with the company’s historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of company’s effectiveness, however need to look at more than just easily attainable numbers like sales, profits, and total assets.

Ratios are highly important profit tools in financial analysis that help financial analyst implement plans that helps to improve profitability, liquidity, financial structure, reordering, leverage and interest coverage. Although ratios reports are mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses. Therefore, researcher has selected the topic for study relating to Ratio Analysis.

STATEMENT OF PROBLEM:- The present study is carried out in GHATGE PATIL INDUSTRIES LTD. (KOLHAPUR). The focus of the study was related to Ratio Analysis. The Balance Sheet and Income Statement are essential, but they are only the starting point for successful financial management. Financial Ratio Analysis and Financial Statement to analysis is related to the success, failure, financial trends and progress of company.

OBJECTIVES OF THE STUDY:-

The present study has been undertaken with the following objectives.

To study the previous Five years Balance Sheet and Financial Statements of company.


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To make comparative analysis of company’s Financial Statements over a certain period of time.

To compare ratios from various fiscal periods of the company, inquire about the types of accounting policies used.

To suggest suitable policy measures, whenever necessary.

To study Financial Trends, Financial position and earning capacity of GHATGE PATIL INDUSTRIES LTD. (KOLHAPUR).

METHODOLOGY OF THE STUDY:-

To attain certain set of objective regarding study of ratio analysis, the researcher has taken into consideration various ratios for analyzing the financial performance of the GHATGE PATIL INDUSTRIES LTD. (KOLHAPUR). The following are the ratios used:

CLASSIFICATION OF RATIOSI. LIQUIDITY RATIO:

a) Working Capital.b) Current Ratio.c) Quick Ratio.

Turnover Ratios:a) Inventory Turnover Ratiob) Debtors Turnover Ratioc) Creditors Turnover Ratiod) Working Capital Turnover Ratio e) Fixed Asset Turnover Ratiof) Total Asset Turnover Ratio

II. CAPITAL STRUCTURE RATIOS 1. Leverage Ratios a) Equity Ratiob) Debt to Equity Ratioc) Debt to Total Assets Ratiod) Proprietary Ratio


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2. Coverage Ratioa) Interest Coverage Ratio

III. PROFITABILITY RATIOS:

1. Related to the SalesA. Profit Margin Ratioa) Gross Profit Ratios.b) Net Profit Ratios.

B. Expenses Ratiosa) Cost of Goods Sold Ratiob) Return on Capital Employed Ratioc) Return on Shareholders Equity Ratiod) Earning Per share Ratio

DATA COLLECTION:The data have been collected at the following two levels.

1) Primary Data2) Secondary Data.

1) Primary Data: -

The Study of Ratio Analysis deals with various aspects related to financial Ratio Analysis. It is a widely used tool to financial analysis.

Researcher collected the primary data through the following sources.

a) Personal Discussion:

In this source of data collection researcher has discussed with account department managers and employees. The direct conversation with company management is also giving primary information.

b) Observation:


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The researcher has observed the actual work of the company related to the financial statements and got major information about different policies of the company.

2) Secondary data:

The secondary data on the other hand are those which have already been collected by someone else and which have already been analyzed through the statistical process. This constituted the major part of the study.

The various sources, which were referred, are as follows:a) Published Annual Reports.b) Internetc) Reference Booksd) Periodicals e) Journals and f) News Papers etc

SCOPE OF THE STUDY: -

The study of Ratio Analysis and interpretation of financial statements covers the finance department area of GHATGE PATIL INDUSTRIES Ltd, Kolhapur.

The time period covered to study this topic is from 2003-04 to 2007-08.

LIMITATIONS OF THE STUDY: -

Researcher could not refer some of the financial documents as they were of confidential in nature from the company point of view.

Study is limited to only five years i.e. 2003-04 to 2007-08.

Study is limited to Ghatge Patil Industries only.


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CHAPTER II

COMPANY

PROFILE


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CHAPTER: II

COMPANY PROFILE

HISTORY AND DEVELOPMENT OF THE COMPANY

1. HISTORY:

Mr. J.B.Patil and Mr. V.M.Ghatage found Ghatge Patil Industries in

1960 as an industrial unit with modest beginning. It was started with a small

foundry and machine shop to cater to the needs of the casting for

Automobile and Tractor industry and for the needs of agricultural

equipment’s, marine gearboxes etc.

Mr. Patil and Mr. Ghatage got assistance from noted industrialists Mr.

S.L.Kirloskar and Mr. Gujar. The authorized capital of the firm was Rs.25

lakhs. Commercial production first commenced in 1961 with the

employment of 12 workers.

The only customer of the company was Kirloskar Group. The

company supplied gray-iron components to Kirloskar Brothers Ltd. To be

used in the production of pumps and tolls. The turnover achieved in the first

phase, completed in the year 1960-61 was Rs. 36,757.

Over the past three decades, the company has grown to be one of the

largest industrial units in Kolhapur district, with fully automated foundry

and well equipped production unit with precision and sophisticated

machines.


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A pool of talented and qualified professionals drawn from various

parts of the country has been groomed with necessary technical and

managerial competence. High standards of quality have been set up right

from the beginning which has been appreciated by companies valued

customers. In 1996, Bureau Verties Quality international (BVAI of U.K.

certified the company) as ISO 9001 and 9002

COMPANY PROFILE:

Name : Ghatage Patil Industries Ltd.

Kolhapur.

Location : At Post: Uchgaon, Dist: Kolhapur

Area : 93384 sq meters

Built Up Area : 32590sq. meters

Date of Commencement : July 21, 1960

Present Annual Turnover : Rs. 177 Crores (avg.)

Ghatage Patil Industries is very well known and established company in

western Maharashtra.

2. HUMAN RESOURCE / MANPOWER STRENGTH:

At the top management level there are three dignitaries, namely

vice president, associate vice president, and senior manager.

At the middle level management there are six dignitaries, namely

deputy manager, assistant manager, senior superintendent, junior

superintendent, and senior engineer/senior officer.


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At the lower level management, there are six dignitaries, namely

engineer/officer, junior engineer/junior officer, supervisor

I/technician I, supervisor I / technician I, supervisor II / technician

II, supervisor III/ technician III, and supervisor IV.

And rests are workers. There are all together 810 workers.

In GPI all together there are 1146 employees.

There is no qualified Company Secretary in GPI hence the

control over the various returns as required by the Companies Act is

not streamlined.

3. A brief look at the Company’s History .

1960 Mr. J.B.Patil and Mr.V.M.Ghatage established the

company as a partnership firm with a machine

shop for jobbing work.

1962 Small foundry unit was established with hand

machine molding facilities.

1966 Workshop enlarged to manufacture clutches and

powers take off in technical collaboration with

Twin Disc – U.S.A.

1967 Manufacture of Marine Gearboxes in collaboration

with M/S Parsons – U.K.

1971 Automatic power take off assemblies in

collaboration with M/S Dana Corporation – U.S.A.

1978 Development of earthmoving equipment

assemblies of Komatsu, Japan and Dressers

U.S.A., licensed for manufacture by Bharat Earth

Movers Ltd. Such as Torque Converters, steering,


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clutches, main clutches, break assembles etc.

Pneumatic clutches and breaks in collaboration

with M/S Bradfield – Italy

Electro magnetic clutches and break assembly’s

collaboration with M/S ZF – Germany.

Export of PTO’s main clutches etc to Kuwait,

Mexico, Indonesia, Iran etc.

1979 S.G. Iron Converters installed in collaboration

with George Fischer +GF+Switzerland

1980 Foundry was modernized with installation of a

fully automatic High Pressure Molding Line

supplied by M/S Kunkel Wagner.

1986 Achieved 1000 Tons/month production and

ancillary machine shop for matching castings was

established.

1987 Small Aluminum Foundry for production of

intricate castings was established.

1992 High Pressure Gate and Globe Valves

manufactured for American Petroleum Industries.

1995 Phase – wise expansion program was started.

1996 1400 Tons/month production achieved and

installation of HMC + Vertical Turret Lathe at

Plant V and ISO 9001, 9002 certification from

BVRI, U.K.

1997 2400 Tone/month production was achieved.

1998 Medium Frequency Induction Furnace in place of


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main Frequency Furnace.

2000 Shot Blasting machine (VP18) to increase capacity

2001 Cold box core making machine 80 liters was

installed.

2001 HMC-4, VMC-1, VTL – 1, was installed.

4. PRESENT STATUS OF THE CAPACITY

GPI foundry has production capacity of 2500 tons/month. Fully

automated Molding Line and sand plant warm blast cupolas, medium

frequency converter and fully fledged resting and quality control

equipment’s, together have enabled the foundry in achieving the status of

one of the largest jobbing foundries in the country.

Well equipped machine shop; CNC machine centers, CNC turning

centers and various testing units constitute the strength of the products like

forque converters, break boosters, fluid couplings, marine gearboxes etc.

PRODUCT LICENCING ARRANGEMENT

WITH

A. Mechanical Clutches

and

Power take off

Twin Disc Inc. U.S.A.

[Agreement expired ]

B. Automotive PTO Units Dana Corporation U.S.A.

[Agreement expired]

C. Marine Gear Boxes Parsons Engineering Company,

U.K.

[Agreement expired]


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D. Fluid Couplings Trans Fluid Srl, Italy

[Agreement expired]

E. Electromagnetic

Clutches

& Breaks

Zahnrad Fabric Friendrichshafen

Germany.

F. Industrial Valves -

F. Mechanical / Hydraulic

transmission, Break

System.

Supplied to Bharat Earth Movers as

per design of M/S Komatsu, Japan

H. High Pressure Gate

Valves

Under API 6A certification.

5. EQUIPMENTS IN PRODUCTS DIVISION

JIG Boring Machine

CNC Lathes

Induction Harding Machine

Gear Cutting Machine

Horizontal Machining Center

Broaching Machine

Heat treatment Equipment

6. ESTEEMED CUSTOMERS FOR PRODUCT DIVISION

I .Overseas Market

AAREY Products Co. USA.

Funk, USA

UIS System (M) SDN BHD

MEGA Grouplnc. USA


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Trras Fuid Srl, Italy

II. Domestic Market.

Ashok Leyland Ltd.

Bharat Earth Movers Ltd.

Consolidate Pneumatic (India) Ltd.

HMT Ltd.

INGERSOLL RAND (IND) Ltd.

ONGC

Oil India Ltd.

7. THE QUALITY POLICY OF THE COMPANY

To provide products and services to achieve increasing level of customer

satisfaction.

To earn and enhance reputation as leader in line of product.

8. VISION OF THE COMPANY

India is country with an ever-increasing marketing potential for

automobiles, tractors and earth moving equipment’s, marine engines among

other. Kolhapur has one of the largest networks of ancillary industries in

Maharashtra.

GPI is one of the biggest units among them. Looking into the future,

the company sees as increasing demand for its line products.

In view of such growth potential, the company has planned to enhance

its capacity in foundry and product division for increases qualitative and

quantitative demand.

The expansion will.

1. Production of more intrinsic and value added castings.


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2. Growing export requirements

3. Additional sophisticated machines for higher production and quality

reliability.

Simultaneously latest quality control and testing equipment will be

added for increasing quality demands.

The company foresees great opportunities in the area of construction

equipment’s and earth moving equipment. It plans to set up facilities for

manufacture of such equipment’s in coming years.

For the realization of these objectives, the company is taking steps in

Human Resource Planning and Development programs to generate a

dedicated and talented human energy which will enable the organization to

achieve its desired level in all fronts of its activities and for this purpose

various welfare and social services are provided by GPI to its employees.

8. Turnover of the Company since 1993-94

YEAR RUPEES (crores )

1993-1994 44.99

1994-1995 56.84

1995-1996 74.66

1996-1997 84.02

1997-1998 60.58

1998-1999 52.88

1999-2000 64.27

2000-2001 94.68

2001-2002 35.41

2002-2003 69.30

2003-2004 110.20


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2004-2005 177.07

CHAPTER III

CONCEPTUAL

BACKGROUND


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CHAPTER: III

CONCEPTUAL BACKGROUND

Introduction:-

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 (quantities). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.

Balance sheet gives the financial position on a particular date in terms of the structure of the assets, liabilities and owners equity and so on and the profit and loss account shows the results of the operation during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about a firm from a careful examination of its financial statements is, thus an important aid to financial analysis.

The focus of financial analysis is on Key figures in the financial statements and the significant relationship that exist between them. The analysis of financial statement is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the company’s position and performance.

Ratio analysis is the most widely used technique of financial statement analysis. The Balance Sheet and the Income Statement are essential, but they are only the Income statement are essential, but they are only the starting point for successful financial management. Ratio analysis enables the business manager to spot trends in a company and to compare its performance of similar company.

Ratio analysis isn’t just comparing different numbers from the balance sheet, income statement, and cash flow statement. It’s comparing the number


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Against previous years, others 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 future.

Various parties interested in them devote the purpose of this chapter to an in –depth analysis of financial statements and its use for decision-making. The focus of the chapter is on the ratio analysis as the most widely used technique of financial statement analysis.

FINANCIAL RATIO ANALYSIS:

Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a company’s financial statements. Financial ratios are calculated from one or more pieces of information from a company’s financial statement. For example, the “Gross Margin” is the gross profit from operations divided from the total assets or revenues of accompany, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however a financial ratio can give a financial analyst an excellent picture of a company’s situation and the trends that are developing.

Ratio Analysis is a widely used tool of financial analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as a systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. Ratio Analysis enables analyst to draw conclusion regarding financial operations. The use of ratios as a tool of financial analysis, involves their comparison, for a single ratio, like absolute figures, fails to reveal the true position. If we also know that the historical trends are upwards, for example it has been steadily for the last few years, and this would also been favorable sign that management is implementing effective business policies and strategies.

Financial Ratio Analysis groups the ratios in the categories, which tell us about different facets of a company’s finance and operations. Some of the categories of ratios: -

Leverage Ratios: - Which show the extent that debt is used in a company’s capital structure


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Liquidity Ratios: - Which gave a picture of a company’s financial situation or solvency.

Operational Ratios: - Which use turnover measures to show how efficient a company is in its operations and use of assets.

Profitability Ratios: - Which use margin analysis and show the return on sales and capital employed.

Solvency Ratios: - Which give a picture of a company’s ability to generate cash flow and pay its financial obligations.

Using historical data independent of fundamental changes in company’s situation and prospectus would predict very little about future trends. For example, the historical ratios of accompany that has undergone a merger and had a substantive change in its technology and market position would tell very little about the prospects for this company.

Credit analyst, those interpreting the financial ratios from the prospects of a lender, focus on the “downside” risk since they gain none of the upside from an improvement in operations. They pay great attention to liquidity and leverage ratios to ascertain a company’s financial risk. Equity analysts look more to the operational and profitability ratios, to determine the future profits that will accrue to the shareholders.


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A) LIQUIDITY RATIOS:-

The liquidity ratio measures the ability of a firm to meet its short-term (1 year) obligations and reflect the short-term financial strength of a firm. While liquidity ratios are most helpful for short-term creditors /suppliers and bankers, they are also important to financial managers who must meets obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weakness in the financial position of your business.

1) Current Ratio : -

Current ratio is very popular liquidity ratio. It is calculated by dividing current assets by current liability.

Current Assets Current Ratio = Current Liabilities The current ratio will disclosed balance sheet changes that net working capital not.


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LIQUIDITY RATIOS: • Working capital • Current Ratio• Quick RatioTurnover Ratios:• Inventory Turnover• Debtors Turnover

Ratio• Creditors Turnover

Ratio• Working Capital Turnover Ratio • Fixed Asset Turnover Ratio• Total Asset Turnover Ratio

PROFITABILITY RATIOS:• Related to the Sales• Profit Margin Ratio• Gross Profit Ratios.• Net Profit Ratios b) Expenses Ratios:

Cost of Goods Sold Ratio

Return on Capital Employed Ratio

Return on Shareholders Equity Ratio

Earning Per share Ratio

CAPITAL STRUCTURE RATIOS:

• Leverage Ratios• Equity Ratio• Debt to Equity Ratio• Debt to Total Assets Ratio• Proprietary Ratio • Coverage Ratio: • Interest Coverage Ratio

TYPES OF RATIOS

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The current ratio reveals business’s ability to meet its current obligations. Generally the acceptable current ratio is 2:1. The firm with the higher current ratio has better liquidity/short term solvency. 2) Quick/Acid Test Ratio:-

The acid test ratio is the ratio between quick current assets current liability. It is defined as: Quick AssetsAcid Test Ratio= Current Liabilities Also known as the “acid test,” this ratio specifies whether current assets that could be quickly converted into cash are sufficient to cover current liabilities. Generally an acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. Turnover Ratios: -

The liquidity ratios discussed so far related to the liquidity firm as a whole. Another way of examining the liquidity is to determine how quickly certain current assets are converted in to cash. The ratios to measure these are referred to as turnover ratios:

1) Inventory turnover ratios: -

The ratio indicates the number of times inventory is replaced during the year. The inventory turnover ratio measures how fast stock is sold. It is defined as: COST OF GOODS SOLD = AVERAGE INVENTORY

It is a test of efficient inventory management. A high ratio implies a good inventory management. A very low level of inventory has serious implications. 2) Debtors Turnover Ratio:-


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It is determined by dividing the net credit sales by average debtors outstanding during the year. NET CREDIT SALES = AVERAGE DEBTORS

The ratio measures how rapidly receivables are collected. A high ratio is indicative of shorter time lag between credit sales and cash collection. A low ratio shows that debts are not being collected rapidly.

2) Creditors turnover ratio :

It is a ratio between net credit purchases and the average amount of creditors outstanding during the year.

NET CRADIT PURCHASES = AVERAGE CREDITORS

Net credit Purchases= Gross credit purchases less returns to suppliers.Average Creditors= Average of creditors (including bills payable) Outstanding at the beginning and the end of the year.

A low turnover ratio reflects liberal credit granted by suppliers, while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as affirm can reduce its requirement of current asset by replying on current credit.

4) Working capital turnover ratio: -

Working capital turnover is another important ratio in turnover ratio. It is defined as under:

NET SALES = WORKING CAPITAL

This ratio shows net sales in relation to working capital. Greater the ratio better will be the efficiency.


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5) Fixed asset Turnover Ratio: -

This ratio measures the net sales per rupee of investment in fixed assets. It is defined as, NET SALES =

FIXED ASSETS

This ratio shows the net sales in relation to fixed assets. Greater the ratio better will be the efficiency. This ratio is supposed to measure the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in assets utilization.

6) Total Assets Turnover Ratio: -

The total assets turnover ratio measures the efficiency of a firm in managing and utilizing its assets. It is defined as:

NET SALES = TOTAL ASETS This ratio shows net sales in relation to total assets. Greater the ratio higher will be the efficiency.

B) CAPITAL STRUCTURE LEVERAGE RATIOS: - This group of ratios calculates the proportionate contributions of owners and creditors to a business, sometimes a point of connection between the two parties. Creditors like owners to participate to secure their margin of safety, while management enjoys the greater opportunities for risk shifting and multiplying return on equity that debt offers.

Leverage Ratios: - The second category of financial ratios is leverage or capital structure ratios. The long-term solvency of a company can be examined by using leverage or capital structure ratios.1) Equity Ratios: -


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The ratio measures the relationship between common stockholders’ equity to total capital of the company.

COMMON STOCKHOLDERS EQUITY = TOTAL CAPITAL EMPLOYED

The ratio of common stockholders equity to total capital of business shows how much of the total capitalization actually comes from the owners.

2) Debt to Equity Ratio: -

The ratio indicates the long-term solvency position of a company. The relationship between borrowed funds and shareholders funds is a popular measure of the long-term financial position of a company.

LONG TERM DEBTS (Outsiders funds) = SHAREHOLDERS EQUITY

The ratio shows Long-term debts (outsider’s funds) divided by shareholders equity. Shareholders equity consists of equity, preference share capital, reserves and surplus, past accumulated losses and deferred expenditure is excluded from shareholders equity. A high here means the less protection for the creditors.

2) Proprietary Ratio: -

The ratio indicates the proportion of total assets financed by owners. It is defined as under SHAREHOLDERS FUNDS (Equity) = TOTAL ASSETS

Greater the ratio better will be the financial position good and lower the ratio lower will be the financial position and increase in the liabilities.

Profitability Ratio: -


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Profit Margin Ratio : -

The profit margin ratio measures the relationship between profit and sales. Here profit may be gross or net.

1) Gross Profit Ratio:

This ratio is percentage of sales left subtracting the cost of goods sold from net sales. It is also known as gross profit margin ratio

GROSS PROFIT = X 100 NET SALES

Gross Profit = Sales – Cost of Goods Sold

It is calculated by dividing gross profit by net sales. A high ratio of gross profit implies that the cost of production is low and vice versa. A high ratio reduces the profit earning capacity. 2) Net Profit Ratio: -

This ratio provides a primary appraisal of net profits related to investment. Net Profit is the percentage of sales left subtracting the cost of goods sold and all expenses, except income tax from net sales.

NET PROFIT (EAT) = X 100 NET SALES

This ratio shows the net profit in relation to sales and shows profit earning capacity or net margin. Greater the ratio better will be the profit earning capacity and lower this ratio means decreasing the profit earning capacity.

Expenses Ratio: -


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This is another type of profitability ratio related to sales. It computed by dividing expenses by net sales.

a) Cost of Goods Sold: - It is defined as: COST OF GOODS SOLD = X 100

NET SALES

The cost of goods sold ratio shows that percentage shares of sale is consumed by cost of goods sold. The low ratio is favorable and high ratio is unfavorable.

b) Operating Expenses Ratio: -

This ratio is defined as under: ADMINISTRATIVE +SELLING EXPENSES = X 100 NET SALES

This ratio shows the administration expenses and selling expenses in relation to net sales and this ratio is calculated in percentage. Lower the ratio better will be the operating efficiency and greater the ratio lower will be the efficiency.

c) Profitability Ratios related to Investment: -

1) Return on Total Assets: -

The ratio may also be called profit-to-asset ratio. It is defined as under: NET PROFIT (EAT) = X 100 TOTAL ASSETS

This ratio shows the net profit (EAT) in relation to total assets of the company. This ratio indicates the profit earning capacity of assets in company. High percentage of return on assets shows the efficient utilization of assets and the efficiency of the management.


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2) Return on Capital Employed: -

Return on capital employed is similar to the Return on Asset expect in one respect. Here the profits are related to the total capital employed. It is defined as: NET PROFIT (EAT) = X 100 CAPITAL EMPLOYED

The ratio measured the relationship between net profit (EAT) and capital employed. The higher the ratio, the more efficient is the use of capital employed.

3) Return on Shareholders Equity: -

This ratio reveals how the firm has utilized profitably the owner’s funds. It is defined as under: NET PROFIT after Tax and Interest = X 100 SHAREHOLDERS FUNDS

According to this ratio profitability is measured by dividing the net profit after tax and interest by shareholders funds. This ratio indicates the net profit or earning capacity and equity funds invested in the firm.

4) Earning Per Share: -

Earning per share is the most widely used ratio. Earning per share is important as a measure of profitability of a firm from the owner’s point of view.

NET PROFIT available to equity shareholders (EAT) = NUMBER OF EQUITY

It is calculated by dividing the profits available to the equity shareholders (EAT) by number of equity shares. It measures the profit available to the equity shareholder on a per share basis that is the amount that they can get on every share held.


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LIMITATIONS OF FINANCIAL RATIO ANALYSIS: -

1. Accounting Information: -

Different Accounting Policies: - The choices of accounting policies may distort inter company comparisons. E.g. different companies use different accounting policies.

Creative Accounting: - The businesses apply creative accounting in trying to show the better financial performance or position, which can be misleading to the users of financial accounting.

2. Information Problems: -

Ratios Are Not Definite Measures: - Ratios are to be interpreted carefully. They can provide clues to the company’s performance or financial situation. But on their own, they can show whether performance is good or bad. Ratios require some quantitative information for an informed analysis to be made.

Outdated Information in Financial Statements: - The figures in the set of accounts are likely to be at least several months out of date, and so might not give proper indication of the company’s current financial position

Historical Cost Not Suitable For Decision Making: IASB conceptual framework recommends business to use historical cost of accounting. W here historical cost convention is used, asset valuations is balance sheet could be misleading. Ratios based this on information will not be very useful for decision-making.

Financial Ratio Analysis: - Ratios are based on financial statements, which are summaries of the accounting records. Through the summarization some information may leave out which could have been of relevance to the users of accounts. The


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ratios are based on the summarized year-end information, which may not be a true reflection of the overall years result.

Interpretation of the ratio It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash, which is bad. Similarly Non current assets turnover ratio may denote either a firm that uses its assets efficiently or one that is under capitalized and cannot afford to buy enough assets.

4. Comparison of performance over time: -

Price changes: - Inflation renders comparisons of results over time misleading, as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture.

Technology changes: - While 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. For ratios to be more meaningful the enterprise should compare its results with another of the same level of technology, as this will be a good basis measurement of efficiency.

Changes in Accounting policy: - Changes in accounting policy may affect the comparison of results between different accounting years as misleading. The problem with this situation is that the directors may be able to manipulate the results through the changes in accounting policy. This would be done to avoid the effects of an old accounting policy or gain the effects of a new one. It is likely to be done in a sensitive period, perhaps when the business profit is low.

Changes in Accounting standard: - Accounting standards offers standard way of recognizing, measuring and presenting financial transaction. Any change in standard will


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affect the reporting of an enterprise and its comparison of results over a number of years.

4 . Inter firm compariso n : -

Different financial and business risk profile: - No two companies are the same, even when they are competitors in the same industry or market. Using ratios to compare one company with another could provide misleading information. One company may be able to obtain bank loans at reduced rates and may show high gearing levels while as another may not be successful in obtaining cheap rates and it may show that it is operating at low gearing level

Different capital structure and size: - Companies may have different capital structures and to make comparison of when one is all equity financed and another is a geared company it may not be a good analysis.

Impact on Government Influence: Selective applications of government incentives to various companies may also distort inter company comparison.


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CHAPTER IV

DATA ANALYSIS

&

INTERPRETATIONS


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CHAPTER: IV

DATA ANALYSIS AND INTERPRETATION:

1. Liquidity ratios : -

a). Current Ratio : - Current Ratio is also known as working capital ratio. This expresses the relationship between the current assets and current liabilities. Following current ratio is in study period i.e. 2003-04 to 2007-08.

= Current Assets Current Liabilities

TABLE No 4.1: - Statement showing current ratio analysis (In ‘000) Years Current Assets Current Liabilities Ratios2003-04 535,880.1 190,466.0 2.812004-05 715,135.1 309,414.6 2.312005-06 895,498.9 363,749.9 2.462006-07 1,248,894.7 693,813.5 1.952007-08 1,630,857.3 863,731.3 1.89

GRAPH No. 4.1 Graphical Representation of Current Ratio


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INTERPRETATION: -From the above graph and calculation, it is found that the

current ratio of Ghatge Patil Industries is fluctuating. For the years 2003-04 to 2005-06 it is satisfactory as per standard norm i.e. 2:1 because in these years the ratio has given the above the standard norm. But after 2005-06 it is decreasing.

b) QUICK RATIO : -

This ratio measures the liquidity and emphasis on the ability of immediate conversion of assets into cash. Following table shows quick ratio in study period 2003-04 to 2007-08. QUICK ASSETS= CURRENT LIABILITY

TABLE NO. 4.2 Statement showing the Quick Ratio Analysis. (In ‘000) YEARS QUICK ASSETS CURRENT LIABILITY RATIOS

(In times)2003-04 401537.9 190446 2.102004-05 513913.4 780515.8 1.662005-06 694261.8 815759.6 1.902006-07 951728.9 851003.4 1.482007-08 1191088 886247.1 1.38

GRAPH NO 4.2 Graphical Representation of Quick Ratio

INTERPRETATION: -


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The acid test ratio of GPI is nearly satisfactory as per standard norm 1:1 i.e. which is desirable. It means GPI could meet its some short-term obligations out of its current assets.

TURNOVER RATIOS: -

a ) Debtor’s turnover Ratio :-

The liquidity position of a company depends upon the quality debtors to a great extent. This ratio is calculated as under.

NET SALES= DEBTORS

TABLE NO. 4.3 Statement showing the Debtors Turnover Ratio (In ‘000)YEARS NET SALES DEBTORS RATIOS(In times)2003-04 1102002.9 257443.8 4.282004-05 1770721.3 322166.4 5.492005-06 1772911.2 437305.7 4.052006-07 2214747.9 595076.9 3.722007-08 2695932.3 769278.2 3.50

GRAPH4.3 Graphical Representation of Debtors Turnover Ratio

INTERPRETATION: -


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The Debtor’s turnover Ratio of GPI implies that the management is efficient to manage its debtors efficiently. The debtors are more liquid. In the years 2004-05 it shows the highest ratio i.e. 5.49.

b) WORKING CAPITAL TURNOVER RATIO: -

This ratio shows net sales in relation to working capital. Greater the ratio better will be the efficiency. This ratio is calculated as under. NET SALES = WORKING CAPITAL

TABLE NO 4.4 Statement showing the Working Capital Turnover Ratio (In ‘000)YEARS NET SALES WORKING CAPITAL RATIO

(In times)

2003-04 1,102,002.9 345,414.1 0.292004-05 1,770,721.3 405,720.4 0.422005-06 1,772,911.2 531,749 0.272006-07 2,214,747.9 609,081.3 0.272007-08 2,695,932.3 767,126 0.12

GRAPH NO 4.4 Graphical Representation of Working Capital Turnover Ratio

INTERPRETATION: -


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Working capital turnover ratio indicates the velocity of the utilization of net working capital. This indicates the number of times the working capital is turned over in the course of a year. The high ratio indicates the efficiency in utilization of working capital. In the year 2004-05 ratio is highest and in year 2007-08 it is lowest one.

c) FIXED ASSET TURNOVER RATIO : -

This ratio measures net sales per rupee of investment in fixed asset. The high ratio indicates efficiency in assets utilization. This ratio is calculated as under. NET SALES = FIXED ASSETS

TABLE NO 4.5 Statement showing the Fixed Asset Turnover Ratio (In ‘000)YEARS NET SALES FIXED ASSETS RATIOS

(In times)2003-04 1,102,002.9 203,312.5 5.4202004-05 1,770,721.3 289,006.4 6.1272005-06 1,772,911.2 327,184.1 5.4192006-07 2,214,747.9 473,048 4.6822007-08 2,695,932.3 576,473.7 4.677

GRAPH 4.5 Graphical Representation of Fixed Asset Turnover Ratio

INTERPRETATION: -


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The fixed asset turnover ratio of GPI is high it indicates that the one rupee of investment in fixed is able to generate five rupees for year 2003-04 likewise six, five, four, four for the next concerned years.

d) TOTAL ASSETS TURNOVER RATIO: -

The total assets turnover ratio measures the efficiency of firms in managing and utilization of its assets. This ratio is calculated as under. COST OF GOODS SOLD = TOTAL ASSETS

TABLE NO 4.6 Statement showing the Total Assets Turnover Ratio (In ‘000)YEARS COST OF GOODS

SOLDTOTAL ASSETS

RATIOS(In times)

2003-04 958,157.9 634,591.1 1.512004-05 155,2950 711,429.4 2.182005-06 1,571,907.5 884,432.7 1.782006-07 1,984,081.9 1,128,549.8 1.762007-08 2,464,800.5 1,381,155 1.78

RAPH NO 4.6 Graphical Representation of Total Assets Turnover Ratio

INTERPRETATION: -


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From the above graph and calculation, it is found that the total assets turnover ratio of GPI is satisfactory. The company is efficient to manage and utilize its assets.

IV) CAPITAL STRUCTURE RATIOS

a) Debt to Equity Ratio :

This ratio measures the financial strength of a company for a long period of a time. This ratio is calculated as under.

OUTSIDERS FUNDS =

SHARE HOLDERS FUNDS

TABLE 4.7 Statement showing the Debt to Equity Ratio (In ‘000)YEARS OUTSIDERS

FUNDSSHARE HOLDERS FUNDS

RATIOS

2003-04 501,083.2 129,250.2 3.882004-05 499,349.2 199,452.2 2.502005-06 626,564.9 255,133 2.462006-07 799,618.8 328,246.6 2.442007-08 1,008,417 355,526.7 2.84

GRAPH 4.7 Graphical Representation of Debt to Equity Ratio

INTERPRETATION: -


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After considering the above table and graph, it is noted that total debt (outsider’s funds) are more than the shareholders funds. So every year ratio is high. In the year 2003-04 the ratio is high i.e. 3.88 further its shows the decreasing ratio comparatively.

b) Proprietary Ratio: -

This ratio establishes relationship between shareholders funds to total assets of firm. This is important ratio to determining long term solvency position of a firm. This ratio is calculated as under

SHAREHOLDERS FUNDS = X 100 TOTAL ASSETS TABLE NO 4.8 Statement showing the Proprietary Ratio (In ‘000) YEARS SHAREHOLDERS

FUNDSTOTAL ASSETS

RATIOS( IN % )

2003-04 129,250.2 634,591.1 20.362004-05 199,452.2 711,429.4 28.032005-06 255,133 884,432.7 28.852006-07 328,246.6 1,128,549.8 29.082007-08 355,526.7 1,381,155 25.74GRAPH NO 4.8 Graphical Representation of Proprietary Ratio

INTERPRETATION: -The company is having good long term solvency position.

The ratio is slightly fluctuating. It shows that the share of shareholders in total capital of company.III.PROFITABILITY RATIO: -


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1. Related to the sales:

A. Profit Margin Ratios:

a) Gross Profit Ratio:This ratio shows the gross profit percentage with the sales

and this calculated as under

GROSS PROFIT = X 100 NET SALESTABLE NO 4.9 Statement showing the Gross Profit Ratio (In ‘000) YEARS GROSS PROFIT NET SALES RATIOS2003-04 143,845.1 1,102,002.9 13.05%2004-05 217,771.3 1,770,721.3 12.29%2005-06 201,003.7 1,772,911.2 11.34%2006-07 230,666.0 2,214,747.9 10.41%2007-08 231131.8 2,695,932.3 8.57%

GRAPH NO 4.9 Graphical Representation of Gross Profit Ratio

INTERPRETATION: -The gross profit indicates the extent to which the selling

price of goods per unit may decline without resulting in losses on operation of firm. It reflects the efficiency with which a firm produces its products. There is no standard norm for gross profits. A low gross profit ratio generally indicates high cost of goods sold due to unfavorable purchasing


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policies. For the years taken here for the study i.e. 2003-04 to 2007-08 the ratio is constantly decreasing.

b) Net Profit Ratio:

The Net Profit ratio indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. This ratio is overall measure of firm’s profitability. This is calculated as under. Net Profit after tax = X 100 Net Sales

TABLE NO 4.10 Statement showing the Net Profit Ratio (In ‘000)YEARS NET PROFIT NET SALES RATIOS2003-04 38098.5 1,102,002.9 3.46%2004-05 84476.2 1,770,721.3 4.77%2005-06 69955 1,772,911.2 3.95%2006-07 89959.7 2,214,747.9 4.06%2007-08 41926.1 2,695,932.3 1.56%

GRAPH NO 4.10 Graphical Representation of Net Profit Ratio

INTERPRETATION: -The Net Profit is obtained after deducting tax. Higher the

ratio better is the profitability. But, while interpreting the ratio, it must be kept in mind that the performance of the profit must also be seen with relation to investment of capital of firm and not only relation with sales. The Net Profit ratio of Company for years 2003-04 to 2006-07 is fluctuating but in year 2007-08 the ratio is decreased from 4.06 to 1.56.


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B. EXPENSES RATIO: -

A) Cost of Goods Sold Ratio: -

The ratio shows the cost of goods sold in relation with net sales, calculated as below. COST OF GOODS SOLD = X 100 NET SALESTABLE 4.11 Statement showing the Cost of Goods Sold Ratio (In ‘000)

YEARS COST OF GOODS SOLD

NET SALES RATIO

2003-04 958,157.9 1,102,002.9 86.95%2004-05 1,552,950 1,770,721.3 87.70%2005-06 1,571,907.5 1,772,911.2 88.66%2006-07 1,984,081.9 2,214,747.9 89.59%2007-08 2,464,800.5 2,695,932.3 91.43%

GRAPH 4.11 Graphical Representation of Cost of Goods Sold Ratio

INTERPRETATION: -From the above calculation and graph, it is the found that

the Cost of Goods Sold Ratio is constantly increasing. For the year 2007-08 it is the highest one i.e. 91.43%. This ratio shows the relationship between costs of goods sold to net sales. Higher the ratio, lower is the profitability.


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B) Operating Expenses Ratio: -

The ratio shows the operating expenses in relation with net sales, and it is calculated as below, OPERATING EXPENSES = X 100 NET SALESTABLE NO 4.12 Statement showing the Operating Expenses Ratio (In ‘000) YEARS OPERATING

EXPENSESNET SALES RATIO

2003-04 358,978.2 1,102,002.9 32.57%2004-05 538,642.8 1,770,721.3 30.42%2005-06 609,092.8 1,772,911.2 34.35%2006-07 799,812.6 2,214,747.9 36.11%2007-08 821,142.8 2,695,932.3 30.46%

GRAPH NO 4.12 Graphical Representation of Operating Expenses Ratio

INTERPRETATION: - The above graph and calculation shows that the operating expenses ratio of GPI is fluctuating. In the year 2006-07 is very high i.e. 36.11% and in year 2007-08 it was decreased from 36.1% to 30.46%.


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2. RELATED TO INVESTMENT: -

a) Return on Capital Employed Ratio : -

The return on capital employed is the relationship between net profit and capital employed. This ratio is defined as under: NET PROFIT (EAT) = X 100 CAPITAL EMPLOYED

TABLE NO 4.13 Statement showing the Return on Capital Employed Ratio (In ‘000)YEARS NET PROFIT CAPITAL

EMPLOYEDRATIO

2003-04 38098.5 609,942.6 6.252004-05 84476.2 706,754.8 11.952005-06 69955 879,635.1 7.952006-07 89959.7 1,125,952.1 7.992007-08 41926.1 1,378,783.6 3.04

GRAPH NO 4.13 Graphical Representation of Return on Capital Employed Ratio

INTERPRETATION : -

The ratio measures the relationship between net profit after tax and capital employed. Higher the ratio, the more efficient is the use of capital employed. In above graph indicates the higher ratio for the year 2004-05, and lowest one for the year 2007-08.


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b) Return on Equity Capital: -

This ratio reveals how the firm has utilized profitably the owner’s funds. It is defined as: NET PROFIT AFTER TAX – PREFERENCE SH. DIVIDEND = X 100 EQUITY SHARE CAPITAL (Paid up)

TABLE NO 4.14 Statement showing the Return on Equity Capital (In ‘000)YEARS NET PROFIT EQUITY SHARE

CAPITALRATIO

2003-04 38098.5 129,250.2 30%2004-05 84476.2 199,452.2 67%2005-06 69955 255,133 56%2006-07 89959.7 328,246.6 72%2007-08 41926.1 355,526.7 33%

GRAPH NO 4.14 Graphical Representation of Return on Equity Capital

INTERPRETATION: - The ordinary shareholders are the real owners of the company. Thus, ordinary shareholders are more interested in the profitability of the company and the performance of the company should be judged on the basis of return on equity capital. In the year 2006-07 the graph shows the highest return on equity share capital i.e. 72% but in the year 2007-08 it is decreased up to 33%.


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b) Earning Per Share Ratio: -

Earning per share ratio is a good measure of profitability of a firm from the owner’s point of view. It is defined as: NET PROFIT AFTER TAX – PREFERENCE SH. DIVIDEND = NO. OF EQUITY SHARES

TABLE NO 4.15 Statement showing the Earning per Share Ratio (In ‘000) YEARS NET PROFIT NO. OF EQUITY

SHARESRATIO

2003-04 38098.5 12,518.5 3.042004-05 84476.2 12,518.5 6.752005-06 69955 12,518.5 5.592006-07 89959.7 12,518.5 7.192007-08 41926.1 12,518.5 3.35

GRAPH NO 4.15 Graphical Representation of Earning per Share Ratio

INTERPRETATION: - This ratio gives the comparative earning power of a firm. The Earning per share ratio is used to compare with ratio of other companies. It indicates whether the firm has increased its earnings or not. The above graph shoes the highest earning per share in the year 2006-07 i.e. 7.19, but in year 2007-08 it is decreased up to 3.35.


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CHAPTER V

FINDINGS

AND

SUGGESTIONS


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CHAPTER V

A) FINDINGS: - This chapter deals with findings and suggestions of the study. The following are the major findings and suggestions:

It is found that, the current ratio of Ghatge Patil Industries is satisfactory. For the years 2003-04 to 2005-06 it is as per standard norm i.e. 2:1 because in these years the ratio has given the above the standard norm.

It is noted that, in Debt to equity ratio, total debt (outsider’s funds) are more than the shareholders funds. So every year ratio is high whereas the lower ratio is the sign of the liquidity of the firm. In the year 2003-04 the ratio is high i.e. 3.88 further its shows the decreasing ratio comparatively.

For the years taken here for the study i.e. 2003-04 to 2007-08 the gross profit ratio of Ghatge Patil Industries is declining constantly, in the years 2003-04 to 2006-07 there was slight decline but in 2007-08 its decline up to 8.57% from 10.41%. It shows the oscillation in the sales as well as expenses.

The Net Profit ratio of Company for years 2003-04 to 2006-07 is fluctuating but in year 2007-08 the ratio is decreased from 4.06% to 1.56%.

It is the found that the Cost of Goods Sold Ratio is constantly increasing. For the year 2007-08 it is the highest one i.e. 91.43% and in the year 2003-04 the ratio was lowest one i.e. 86.95%.

The earning per share ratio gives the comparative earning power of a firm. The highest earning per share ratio is in the year 2006-07 i.e. 7.19 and it decline in year 2007-08 up to 3.35.


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B) SUGGESTIONS:

I. The profit can be increased by controlling the expenses like Cost of Goods Sold, Administrative Expenses etc.

II. The debt collection can be reduced further by taking extra efforts.

III. Company should adopt favorable purchasing policies and extra effort should be maintained to increase the Gross Profit Ratio which would lead to increase the profitability.


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BIBLIOGRAPHY


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BOOK REFERENCES:

1) Financial Management Khan and Jain.

2) Fundamental of Financial Management by Prasanna Chandra.

3) Financial Management by P. V. Kulkarni.

WEB REFERENCES:

1) www.google.com2) www.altavista.com


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http://www.altavista.com/

http://www.google.com/

Ratio

Economy & Finance

bharat earth

ghatge patil

common stockholders

sales left

ghatage patil

tax preference

decreasing

acid test