accounts final ratio

8/8/2019 Accounts Final Ratio

http://slidepdf.com/reader/full/accounts-final-ratio 1/16



A PROJECT REPORT ON

Financial Accounting.

SUBMITTED BY.

Tasslim Shaikh.

ROLL NO

S-224

SEM-III

Second Year in Batchelor of

Management Studies

Khar Education Society,

College of Commerce & Economics.

Khar (W),

Mumbai-400052.



DECLARATION.

I, Tasslim Shaikh, STUDENT OF

KHAR EDUCATION SOCIETY, COLLEGE OF

COMMERCE & ECONOMICS, KHAR(W),

MUMBAI-400052. OF S.Y.B.M.S, S-224

SEMESTER III,

HEREBY DECLARE THAT, I HAVE COMPLETED

THIS PROJECT ON Ratio Analysis IN THE ACADEMIC YEAR 2010-2011. THE

INFORMATION SUBMITTED IS TRUE &

ORIGINAL BEST OF MY KNOWLEDGE.

DATE: PLACE: MUMBAI.

(Tasslim Shaikh)



CERTIFICATE.

This is to certify that Tasslim Shaikh a student of

KHAR EDUCATION SOCIETY’S COLLEGE OF

COMMERCE AND ECONOMICS of S.Y.BMS SEM (III)

ROLL NO: S-224 has successfully carried out the project

On Ratio Analysis. In the academic

year 2010 under my supervision and guidance and

the information submitted is true and original to the best of

my knowledge.



ACKNOWLEDGEMENT.

I, Express my sincere thanks to PROF.Manish for her valuable guidance in doing this project. I wish to takethe opportunity to express my sense & gratitude toPRINCIPAL. Mrs. NANDINI DESHMUKH &PROF.Manish for their valuable guidance & support inthis endeavor. They have been a constant source of inspiration finally, it is the foremost duty to thanks all

my response to family & friends & librarian for helping me finding the correct information who have helped me directly or indirectly in completing my project without which this work would not have beensuccessful.

(Tasslim Shaikh).



The LaLiT - A Bharat Hotels Limited Enterprise

Bharat Hotels Limited is known as India’s largest privately owned hotel company

and also the fastest growing hospitality group.

Headquartered in New Delhi, the company started its first hotel in 1988 under the

dynamic leadership of Founder Chairman Mr Lalit Suri, who had spearheaded the

Group’s unprecedented expansion plans, till he passed away in 2006. Rapid

expansion and consolidation of its leadership position continues under the equally

dynamic stewardship of Dr. Jyotsna Suri, Chairperson & Managing Director.

All hotels were operated under the brand of The Grand Hotels, Palaces & Resorts

till November 19, 2008, when the company re-branded as ‘The LaLiT’ for its top

line hotels, under The LaLiT Suri Hospitality Group which has seventeen luxurious

hotels, 3600 rooms in the five-star deluxe segment - Eight Operating hotels and nineunder development.

The Growth of Bharat Hotels Limited

Established in 1982, the company opened its first and flagship hotel in 1988 – a 457

room 5-star deluxe hotel at Barakhamba Avenue, Connaught Place, New Delhi. The

complex also has two prestigious commercial offerings, The World Trade Centre

and World Trade Tower.

Known as India’s largest privately owned hotel company and also the fastest

growing hospitality group, Bharat Hotels now has Seventeen luxurious hotels, 3600rooms in the five-star deluxe segment - with Eight operating hotels and Nine under

development.

All hotels were operated under the Grand Hotels, Palaces & Resorts till November

19, 2008, when the company re-branded as ‘The LaLiT’ for its top line hotels, under

The LaLiT Suri Hospitality Group.

The company has also been associated with internationally renowned hospitality

groups like Holiday Inn Hotels (opening Asia-Pacific’s first Crowne Plaza Hotel),

The Hilton Hotels and Intercontinental Hotels Group - IHG (with whom it still

operates its Mumbai and Goa hotels). The experience gained from theseinternational companies, has been consolidated into its unique service offerings -

which provide ‘Limitless Hospitality’ with a distinctive Indian feel. Today, not only

does Bharat Hotels have an enviable bouquet of destination properties in India but

now exports its expertise overseas (with projects under development in Dubai and

Thailand).

Bharat Hotels second property started in 1998 with the opening of the 115-room the

‘Grand Palace’ in Srinagar, which is a spectacular heritage hotel and the former



residence of the Maharajas.

On November 30, 2001, the company signed a deal to operate and manage the 186-

room, Hotel Ashok in Bangalore on a management contract from ITDC, under

approval of the CCD (Cabinet Committee on Disinvestment, Government of India).

The hotel now wears a contemporary new look and is know as The LaLiT Ashok Bangalore. In early 2002, Bharat Hotels successfully bid for two more ITDC

properties – The 55-room Laxmi Vilas Palace in Udaipur, which now operates as

The LaLiT Laxmi Vilas Palace Udaipur, along with the 47-room property in the

temple town of Khajuraho, Madhya Pradesh - The LaLiT Temple View Khajuraho,

which has also been completely renovated as a top line boutique hotel.

In 2003, two hotels were opened, as new builds - in Mumbai and Goa. The 255 ‘all

suites’ super luxury resort, with its very own golf course - Intercontinental The

LaLiT Goa Resort and the 368 room InterContinental The LaLiT Mumbai, in

India’s commercial capital Mumbai, which boasts of Asia’s largest atrium lobby.

In November 2005, the Company successfully bid for the prestigious 168-year-old

‘Great Eastern Kolkata’. Built in 1840, during the Britsh Era – is presently under

careful restoration and will re-open shortly as - The LaLiT Great Eastern Kolkata.

In April, 2007, work commenced on the company’s properties in Jaipur and Bekal.

The LaLiT Resort & Spa Bekal is operational since November 2009, while projects

Chandigarh, Ahmedabad and Noida are developing on schedule.

On May 02, 2007, Bharat Hotels announced its first overseas project – The LaLiT

Grand Fort Dubai, in collaboration with Nakheel of UAE; the ground breaking

ceremony for which has taken place on October 26, 2008.

In early 2008 – an existing resort was taken over in Koh Samui (Thailand). The

resort is presently undergoing a complete renovation, and expected to open for

guests over the next year. In September 2008 Bharat Hotels Limited also announced

properties in Amritsar and Dehradoon.

Bharat Hotels added another feather in its cap in 2010 by being the first hotel

company to launch a 5 Star Deluxe hotel in God’s Own Country - Kerala. The

Group’s eighth hotel The LaLiT Spa and Resort Bekal is a 44 room property - a top

of the line luxury beach resort set up on 26 acres of virgin stretch of northern Kerala

in the lap of Arabian Sea.

Board of Directors

* Dr. Jyotsna Suri

* Mr. Ramesh Suri

* Mr. Lalit Bhasin

* Mr. Hanuwant Singh

* Mr. Vinod Khanna

* Mr. M Yusuf Khan



RATIO ANALYSIS

A balance sheet represents the financial affairs of the company and is also referred

to as “Assets and Liabilities” statement and is always as on a particular date and notfor a period.

A profit and loss account represents the summary of financial transactions during a

particular period and depicts the profit or loss for the period along with income tax

paid on the profit and how the profit has been allocated (appropriated).

Net worth means total of share capital and reserves and surplus. This includes

preference share capital unlike in Accounts preference share capital is treated as a

debt. For the purpose of debt to equity ratio, the necessary adjustment has to be

done by reducing preference share capital from net worth and adding it to the debt

in the numerator.

Reserves and surplus represent the profit retained in business since inception of

business. “Surplus” indicates the figure carried forward from the profit and loss

appropriation account to the balance sheet, without allocating the same to any

specific reserve. Hence, it is mostly called “unallocated surplus”. The company

wants to keep a portion of profit in the free form so that it is available during the

next year for appropriation without any problem. In the absence of this

arrangement during the year of inadequate profits, the company may have to write

back a part of the general reserves for which approval from the board and the

general members would be required.

Secured loans represent loans taken from banks, financial institutions, debentures

(either from public or through private placement), bonds etc. for which the company

has mortgaged immovable fixed assets (land and building) and/or hypothecated

movable fixed assets (at times even working capital assets with the explicit

permission of the working capital banks)

Usually, debentures, bonds and loans for fixed assets are secured by fixed assets, while

loans from banks for working capital, i.e., current assets are secured by current assets.

These loans enjoy priority over unsecured loans for settlement of claims against the

company.

Unsecured loans represent fixed deposits taken from public (if any) as per the

provisions of Section 58 (A) of The Companies Act, 1956 and in accordance with the

provisions of Acceptance of Deposit Rules, 1975 and loans, if any, from promoters,

friends, relatives etc. for which no security has been offered.



Such unsecured loans rank second and subsequent to secured loans for settlement of

claims against the company. There are other unsecured creditors also, forming part of

current liabilities, like, creditors for purchase of materials, provisions etc

Gross block = gross fixed assets mean the cost price of the fixed assets.

Cumulative depreciation in the books is as per the provisions of The Companies

Act, 1956, Schedule XIV. It is last cumulative depreciation till last year+depreciation claimed during the current year. Net block = net fixed assets mean the

depreciated value of fixed assets.

Capital work-in-progress – This represents advances, if any, given to building

contractors, value of building yet to be completed, advances, if any, given to

equipment suppliers etc. Once the equipment is received and the building is

complete, the fixed assets are capitalized in the books, for claiming depreciation

from that year onwards. Till then, it is reflected in the form of capital work in

progress.

Investments – Investment made in shares/bonds/units of Unit Trust of India etc.This type of investment should be ideally from the profits of the organization and

not from any other funds, which are required either for working capital or capital

expenditure. They are bifurcated in the schedule, into “quoted and traded” and

“unquoted and not traded” depending upon the nature of the investment, as to

whether they can be liquidated in the secondary market or not.

Current assets – Both gross and net current assets (net of current liabilities) are

given in the balance sheet.

Miscellaneous expenditure not written off can be one of the following –

Company incorporation expenses or public issue of share capital, debenture etc.

together known as “preliminary expenses” written off over a period of 5 years as per

provisions of Income Tax. Misc. expense could also be other deferred revenue

expense like product launch expenses.

Other income in the profit and loss account includes income from dividend on share

investment made in other companies, interest on fixed deposits/debentures, sale

proceeds of special import licenses, profit on sale of fixed assets and any other

sundry receipts.

Provision for tax could include short provision made for the earlier years.

Provision for tax is made after making all adjustments for the following:

• Carried forward loss, if any;

• Book depreciation and depreciation as per income tax and

• Concessions available to a business entity, depending upon their activity (export

business, S.S.I. etc.) and location in a backward area (like Goa etc.)



As per the provisions of The Companies Act, 1956, in the event of a limited company

declaring dividend, a fixed percentage of the profit after tax has to be transferred to

the General Reserves of the Company and entire PAT cannot be given as dividend.

With effect from 01/04/02, dividend tax on dividends paid by the company has been

withdrawn. From that date, the shareholders are liable to pay tax on dividend

income. Thus for a period of 5 years, the position was different in the sense that thecompany was bearing the additional tax on dividend.

Other parts of annual statements –

1. The Directors’ Report on the year passed and the future plans;

2. Annexure to the Directors’ Report containing particulars regarding conservation

of energy etc;

3. Auditors’ Report as per the Manufacturing and Other Companies (Auditors’

Report) Order, 1998) along with Annexure;

4. Schedules to Balance Sheet and Profit and Loss Account;

5. Accounting policies adopted by the company and notes on accounts giving detailsabout changes if any, in method of valuation of stocks, fixed assets, method of

depreciation on fixed assets, contingent liabilities, like guarantees given by the banks

on behalf of the company, guarantees given by the company, quantitative details

regarding performance of the year passed, foreign exchange inflow and outflow etc.

and

6. Statement of cash flows for the same period for which final accounts have been

presented

There is a significant difference between the way in which the statements of accounts

are prepared as per Schedule VI of the Companies Act and the manner in which

these statements, especially, balance sheet is analyzed by a finance person or ananalyst.

For example, in the Schedule VI, the current liabilities are netted off against current

assets and only net current assets are shown. This is not so in the case of financial

statement analysis. Both are shown fully and separately without any netting off.

At the end of any financial year, there are certain adjustments to be made in the

books of accounts to get the proper picture of profit or loss, as the case may be, for

that particular period. For example, if stocks of raw materials are outstanding at the

end of the period, the value of the same has to be deducted from the total of the

opening stock (closing stock of the previous year) and the current year’s purchases.

This alone would show the correct picture of materials consumed during the currentyear.



The principal tools of analysis are –

♦ Ratio analysis – i.e. to determine the relationship between any set of two

parameters and compare it with the past trend. In the statements of accounts,

there are several such pairs of parameters and hence ratio analysis assumes

great significance. The most important thing to remember in the case of ratio

analysis is that you can compare two units in the same industry only and other

factors like the relative ages of the units, the scales of operation etc come into play.

♦ Funds flow analysis – this is to understand the movement of funds (please note

the difference between cash and fund – cash means only physical cash while funds

include cash and credit) during any given period and mostly this period is 1 year.

This means that during the course of the year, we study the sources and uses of funds, starting from the funds generated from activity during the period under

review.

Let us see some of the important types of ratios and their significance:

♦ Liquidity ratios;

♦ Turnover ratios;

♦ Profitability ratios;

♦ Investment on capital/return ratios;

♦ Leverage ratios and

♦ Coverage ratios

Liquidity ratios:

Current ratio: Formula = Current assets/Current liabilities.

Min. Expected even for a new unit in India = 1.33:1.

Significance = Net working capital should always be positive. In short, the higher the

net working capital, the greater is the degree of overall short-term liquidity. Means

current ratio does indicate liquidity of the enterprise. Too much liquidity is also not

good, as opportunity cost is very high of holding such liquidity. This means that we

are carrying either cash in large quantities or inventory in large quantities or

receivables are getting delayed. All these indicate higher costs. Hence, if you are tooliquid, you compromise with profits and if your liquidity is very thin, you run the

risk of inadequacy of working capital.



What is working capital gap?

The difference between all the current assets known as “Gross working capital” andall the current liabilities other than “bank borrowing”. This gap is met from one of

the two sources, namely, net working capital and bank borrowing. Net working

capital is hence defined as medium and long-term funds invested in current assets.

Turn over ratios:

Generally, turn over ratios indicate the operating efficiency. The higher the ratio,

the higher the degree of efficiency and hence these assume significance. Further,

depending upon the type of turn over ratio, indication would either be about

liquidity or profitability also. For example, inventory or stocks turn over would give

us a measure of the profitability of the operations, while receivables turn over ratiowould indicate the liquidity in the system.

Debtors turn over ratio – this indicates the efficiency of collection of receivables

and contributes to the liquidity of the system. Formula = Total credit sales/Average

debtors outstanding during the year. Hence the minimum would be 3 to 4 times, but

this depends upon so many factors such as, type of industry like capital goods,

consumer goods – capital goods, this would be less and consumer goods, this would

be significantly higher; Conditions of the market – monopolistic or competitive –

monopolistic, this would be higher and competitive it would be less as you are forced

to give credit; Whether new enterprise or established – new enterprise would be

required to give higher credit in the initial stages while an existing business wouldhave a more fixed credit policy evolved over the years of business; Hence any

deterioration over a period of time assumes significance for an existing business –

this indicates change in the market conditions to the business and this could happen

due to general recession in the economy or the industry specifically due to very high

capacity or could be this unit employs outmoded technology, which is forcing them

to dump stocks on its distributors and hence realization is coming in late etc.

Average collection period = inversely related to debtors turn over ratio. For

example debtors turn over ratio is 4. Then considering 360 days in a year, the

average collection period would be 90 days. In case the debtors turn over ratio

increases, the average collection period would reduce, indicating improvement inliquidity. Formula for average collection period = 360/receivables turn over ratio.

The above points for debtors turn over ratio hold good for this also. Any significant

deviation from the past trend is of greater significance here than the absolute

numbers. No minimum and no maximum.



Inventory turn over ratio – as said earlier, this directly contributes to theprofitability of the organization.

Formula = Cost of goods sold/Average inventory held during the year.

The inventory should turn over at least 4 times in a year, even for a capital goods

industry. But there are capital goods industries with a very long production cycle

and in such cases, the ratio would be low. While receivables turn over contributes to

liquidity, this contributes to profitability due to higher turn over. The production

cycle and the corporate policy of keeping high stocks affect this ratio. The less the

production cycle, the better the ratio and vice-versa. The higher the level of stocks,

the lower would be the ratio and vice-versa. Cost of goods sold = Sales – profit – Interest charges.

Current assets turn over ratio – not much of significance as the entire current

assets are involved. However, this could indicate deterioration or improvement over

a period of time. Indicates operating efficiency.

Formula =Cost of goods sold/Average current assets held in business

during the year.

There is no min. Or maximum. Again this depends upon the type of industry,market conditions, management’s policy towards working capital etc.

Fixed assets turn over ratio

Not much of significance as fixed assets cannot contribute directly either to liquidity

or profitability. This is used as a very broad parameter to compare two units in the

same industry and especially when the scales of operations are quite significant.

Formula = Cost of goods sold/Average value of fixed assets in the period

(book value).

Profitability ratios -Profit in relation to sales and profit in relation to assets:

Profit in relation to sales – this indicates the margin available on sales;

Profit in relation to assets – this indicates the degree of return on the capital

employed in business that means the earning efficiency. Please appreciate that these

two are totally different.



Net profit/sales ratio – net profit means profit after tax but before distribution in

any form = Formula = Net profit/net sales. Tax rate being the same, this ratio

indicates operating efficiency directly in the sense that a unit having higher net

profitability percentage means that it has a higher operating efficiency. In case thereare tax concessions due to location in a backward area, export activity etc. available

to one unit and not available to another unit, then this comparison would not hold

well.

Investment on capital ratios/Earnings ratios:

Return on net worthProfit After Tax (PAT) / Net worth. This is the return on the shareholders’ funds

including Preference Share capital. Hence Preference Share capital is not deducted.

There is no standard range for this ratio. If it reduces it indicates less return on the

net worth.

Return on equityProfit After Tax (PAT) – Dividend on Preference Share Capital / Net worth –

Preference share capital. Although reference is equity here, all equity shareholders’

funds are taken in the denominator. Hence Preference dividend and Preference

share capital are excluded. There is no standard range for this ratio. If it comes

down over a period it means that the profitability of the organization is suffering a

setback.

Return on capital employed (pre-tax)

Earnings Before Interest and Tax (EBIT) / Net worth + Medium and long-termliabilities. This gives return on long-term funds employed in business in pretax

terms. Again there is no standard range for this ratio. If it reduces, it is a cause for

concern.

Earning per share (EPS)Dividend per share (DPS) + Retained earnings per share (REPS). Here the share

refers to equity share and not preference share. The formula is = Profit after tax (-)

Preference dividend (-) Dividend tax both on preference and equity dividend /

number of equity shares. This is an important indicator about the return to equity

shareholder. In fact P/E ratio is related to this, as P/E ratio is the relationship

between “Market value” of the share and the EPS. The higher the PE the stronger isthe recommendation to sell the share and the lower the PE, the stronger is the

recommendation to buy the share. This is only indicative and by and large followed.

There is something known as industry average EPS. If the P/E ratio of the unit

whose shares we contemplate to purchase is less than industry average and growth

prospects are quite good, it is the time for buying the shares, unless we know for

certain that the price is going to come down further. If on the other hand, the P/E



ratio of the unit is more than industry average P/E, it is time for us to sell unless we

expect further increase in the near future.

Some of the limitations of the financial statements are given below.

Analysis and understanding of financial statements is only one of the tools in

understanding of the company

The annual statements do have great limitations in their value, as they do not

speak about the following-

Management, its strength, inadequacy etc.

Key personnel behind the activity and human resources in the organization.

Average key ratios in the industry in the country, of which the company is an

integral part. This information has to be obtained separately.

Balance sheet is as on a particular date and hence it does not indicate about

the average for the entire year. Hence it cannot indicate the position with

100% reliability. (Link it with fundamental analysis.)

The auditors’ report is based more on information given by the management,

company personnel etc.

To an extent at least, there can be manipulation in the level of expenditure,

level of closing stocks and sales income to manipulate profits of the

organization, depending upon the requirement of the management during a

particular year.

One cannot come to know from study of financial statements about the tax

planning of the company or the basis on which the company pays tax, as it is

not mandatory under the provisions of The Companies’ Act, 1956, to furnish

details of tax paid in the annual statement of accounts.

Notwithstanding all the above, continuous study of financial statements relating to

an industry can provide the reader and analyst with an in-depth knowledge of the

industry and the trend over a period of time. This may prove invaluable as a tool in

investment decision or sale decision of shares/debentures/fixed deposits etc.

accounts final ratio

Documents