analysis of financial ratios

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A PROJECT ON

ANALYSIS OF FINANCIAL RATIOS

SUBMITTED BY

HITESH.U.BANGERA

T.Y.B.M.S (2009-10)ROLL.NO.03

PROJECT GUIDE

PROF. PRADEEP.N.HATHI

VIVEK COLLEGE OF COMMERCE

GOREGAON (WEST), MUMBAI-400 062

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DECLARATION

I, Hitesh.U.Bangera of T.Y.B.M.S, Roll no-03, Vivek College ofcommerce, hereby declare that I have completed the project titled

Analysis of Financial Ratios in the academic year 2009-10.The

information submitted is true and original to the best of my

knowledge.

---------------

Hitesh.U.Bangera

T.Y.BMS, Vivek College Of commerce

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CERTIFICATE

This is to certify that Hitesh.U.Bangera , T.Y.BMS, Roll No.03 of

Vivek College of commerce has submitted the project titled

ANALYSIS OF FINANCIAL RATIOS on _____________.

The information submitted is true and original to the best of my

knowledge.

------------------- ------------------- ----------------

Project guide BMS coordinator PRINCIPAL

Prof. Savina Bhat Prof. Savina Bhat Vivek College of

Vivek College of Commerce Vivek College of Commerce Commerce

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ACKNOWLEDGEMENT

This project would not have been possible without the co operation

of a number of people to whom I would like extend my heartfelt

thanks and gratitude.

I would like to thank the University of Mumbai & Management of Vivek

College for giving me the opportunity to complete this project.

I would also like to thank my I/C Principal Prof.Dr .Nandita Roy for her

encouragement.

I would like to thank my coordinator Prof.Savina Bhat for her support and

guidance throughout the project.

I would heartily take the opportunity to express my sincere gratitude

towards my project guide Prof.Pradeep.N.Hathi whose guidance & care has

made this project successful.

I would also like to thank my college librarian Mrs.Bindu Verma and the

library staff members who helped me in the completion of the project.

I am ending this acknowledgement to all my friends and my parents who

have helped me directly/indirectly in the completion of my project.

Hitesh.U.Bangera

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INDEX

TOPIC

NO.

TITLE PAGE

--- Declaration 2

--- Certificate 3

---Acknowledgement 4

--- Executive Summary 6

1 Introduction 7-13

2 Classification of Ratios 14-16

3 Types of Ratios 17-34

4 Importance of Ratios 35-37

5 Advantages of Ratio Analysis 38

6 Limitations of Ratio Analysis 39-40

7 Purpose of Ratio Analysis 41

8 Role of Ratio Analysis 42

9 Evaluation of APLAB ltd

through Ratio Analysis

43-74

10 Conclusion 7511 Bibliography

&Webliography

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EXECUTIVE SUMMARY

Financial Ratio Analysis represents a fast and simple way of gaining a

snapshot of the financial health of an organization. They range from the

very simple to the complex, and the relevance of many of the ratiosdepends on the nature of the organization and therefore should only be

compared with similar companies.

This project gives an overview of some of the most popular ratios and their

objectives, purposes and importance in the analysis of an organizations

financial health.

Also this project shows how you can use them in an analyzing financial

performance of an organization along with its limitations.

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CHAPTER 1

INTRODUCTION

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the

general (qualitative) factors of a company. The other side considers

tangible and measurable factors (quantitative). This means crunching andanalyzing numbers from the financial statements.

Ratio analysis isn't just comparing different numbers

from the balance sheet, income statement, and cash flow statement. It's

comparing the number against previous years, other companies, the

industry, or even the economy in general. Ratios look at the relationships

between individual values and relate them to how a company has

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

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MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical

yardstick that measures the relationship two figures, which are related toeach other and mutually interdependent. Ratio is express by dividing one

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

number to another. It is simply the quotient of two numbers. It can be

expressed as a fraction or as a decimal or as a pure ratio or in absolute

figures as so many times. As accounting ratio is an expression relating

two figures or accounts or two sets of account heads or group contain in the

financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items

or group of items in the financial statement are computed, determined and

presented.

Ratio analysis is an attempt to derive quantitative measure or guides

concerning the financial health and profitability of business enterprises.

Ratio analysis can be used both in trend and static analysis. There are

several ratios at the disposal of an annalist but their group of ratio he would

prefer depends on the purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of this

section, we will focus on a technique, which is easy to use. It can provide

you with a valuable investment analysis tool.

Ratio analysis can provide valuable information about a company's

financial health. A financial ratio measures a company's performance in a

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specific area. For example, you could use a ratio of a company's debt to its

equity to measure a company's leverage. By comparing the leverage ratios

of two companies, you can determine which company uses greater debt in

the conduct of its business. A company whose leverage ratio is higher than

a competitor's has more debt per equity. You can use this information to

make a judgment as to which company is a better investment risk.

OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A) Solvency-

1) Long term

2) Short term

3) Immediate

B) Stability

C) Profitability

D) Operational efficiency

E) Credit standing

F) Structural analysis

G) Effective utilization of resources

H) Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more

variables / accounting figures, such relationship can be expressed in

different ways as follows

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A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000

& the preference share capital is Rs. 5,00,000, the ratio of equity share

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

B] As a rate of times:

In the above case the equity share capital may also be described as 4

times that of preference share capital. Similarly, the cash sales of a firm are

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

to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or simply by

saying that the credit sales are 2.5 times that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some

other items. For example, net sales of the firm are Rs.50,00,000 & theamount of the gross profit is Rs. 10,00,000, then the gross profit may be

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

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard

ratio may be the past ratio of the same firm or industrys average ratio or a

projected ratio or the ratio of the most successful firm in the industry. In

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interpreting the ratio of a particular firm, the analyst cannot reach any

fruitful conclusion unless the calculated ratio is compared with some

predetermined standard. The importance of a correct standard is oblivious

as the conclusion is going to be based on the standard itself.

TYPES OF COMPARISONS

The ratio can be compared in three different ways

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to

compare them with the ratio or ratios of some other selected firm in the

same industry at the same point of time. So it involves the comparison of

two or more firms financial ratio at the same point of time. The cross

section analysis helps the analyst to find out as to how a particular firm has

performed in relation to its competitors. The firms performance may be

compared with the performance of the leader in the industry in order to

uncover the major operational inefficiencies. The cross section analysis is

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

in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of

a firm is evaluated over a period of time. By comparing the present

performance of a firm with the performance of the same firm over the last

few years, an assessment can be made about the trend in progress of the

firm, about the direction of progress of the firm. Time series analysis helps

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to the firm to assess whether the firm is approaching the long-term goals or

not. The Time series analysis looks for (1) important trends in financial

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

from the other set of data\

3] Combined analysis:

If the cross section & time analysis, both are combined together to

study the behavior & pattern of ratio, then meaningful & comprehensive

evaluation of the performance of the firm can definitely be made. A trend

of ratio of a firm compared with the trend of the ratio of the standard firmcan give good results. For example, the ratio of operating expenses to net

sales for firm may be higher than the industry average however, over the

years it has been declining for the firm, whereas the industry average has

not shown any significant changes.

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The combined analysis as depicted in the above diagram, which clearly

shows that the ratio of the firm is above the industry average, but it is

decreasing over the years & is approaching the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful

conclusions, there are certain pre-requisites, which must be taken care of. It

may be noted that these prerequisites are not conditions for calculations for

meaningful conclusions. The accounting figures are inactive in them & can

be used for any ratio but meaningful & correct interpretation & conclusioncan be arrived at only if the following points are well considered.

1) The dates of different financial statements from where data is taken

must be same.

2) If possible, only audited financial statements should be considered,

otherwise there must be sufficient evidence that the data is correct.

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

case of cross section analysis otherwise the results of the ratio

analysis would be distorted.

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

Therefore, a group of ratios must be preferred. This will be

conductive to counter checks.

5) Last but not least, the analyst must find out that the two figures beingused to calculate a ratio must be related to each other, otherwise

there is no purpose of calculating a ratio.

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CHAPTER 2

CLASSIFICATION OF RATIOS

CLASSIFICATION OF RATIO

BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY RATIO CREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR

LONG TERM

CREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet, P& P A/C,

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or both. One-way of classification of ratios is based upon the sources from

which are taken.

1] Balance sheet ratio:

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

Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or

ratio of debt to equity. While calculating these ratios, there is no need to

refer to the Revenue statement. These ratios study the relationship between

the assets & the liabilities, of the concern. These ratio help to judge the

liquidity, solvency & capital structure of the concern. Balance sheet ratios

are Current ratio, Liquid ratio, and Proprietory ratio, Capital gearing ratio,

Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called

revenue statement ratios. These ratios study the relationship between the

profitability & the sales of the concern. Revenue ratios are Gross profit

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

ratio, Stock turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which

one is found in the balance sheet & other in revenue statement.

There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits &

the investments of the concern. E.g. return on capital employed,

return on proprietors fund, return on equity capital etc.

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

ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions

in to liquidity ratios, leverage ratios, activity ratios, profitability ratios &

turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current

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

2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in

financing the assets of the concern e.g. capital gearing ratios, debt equity

ratios, & Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known

as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors

turnover ratios.

4] Profitability ratios:

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

ratios, gross profit ratios, operating net profit ratios, expenses ratios

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b) It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the

claims of the outsiders to be paid out of such profit e.g. dividend payout

ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios,

expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

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CHAPTER 3

TYPES OF RATIOS

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LIQUIDITY RATIO: -

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

1 year) obligations. The ratios, which indicate the liquidity of a company,

are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are

discussed below

CURRENT RATIO

Meaning:

This ratio compares the current assests with the current liabilities. It is also

known as working capital ratio or solvency ratio. It is expressed in the

form of pure ratio.

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Formula:

Current assets

Current ratio =

Current liabilities

The current assets of a firm represents those assets which can be, in the

ordinary course of business, converted into cash within a short period time,

normally not exceeding one year. The current liabilities defined as

liabilities which are short term maturing obligations to be met, as originally

contemplated, with in a year.

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

liabilities (CL). Current assets include cash and bank balances; inventory of

raw materials, semi-finished and finished goods; marketable securities;

debtors (net of provision for bad and doubtful debts); bills receivable; and

prepaid expenses. Current liabilities consist of trade creditors, bills payable,

bank credit, and provision for taxation, dividends payable and outstanding

expenses. This ratio measures the liquidity of the current assets and the

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

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

converted into cash in the operating cycle of the firm and provides the

funds needed to pay for CL. The higher the current ratio, the greater the

short-term solvency. Recommended current ratio is 2: 1. Any ratio below

indicates that the entity may face liquidity problem but also Ratio over 2: 1

as above indicates over trading, that is the entity is under utilizing its

current assets.

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LIQUID RATIO:

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

Liquid ratio compares the quick assets with the quick liabilities. It is

expressed in the form of pure ratio.

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

cash immediately or at a short notice without diminution of value.

Formula:

Quick assetsLiquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL.

QA refers to those current assets that can be converted into cash

immediately without any value strength. QA includes cash and bankbalances, short-term marketable securities, and sundry debtors. Inventory

and prepaid expenses are excluded since these cannot be turned into cash as

and when required.

QR indicates the extent to which a company can pay its current liabilities

without relying on the sale of inventory. Inventories are excluded from the

numerator of this ratio because they are deemed the least liquid component

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

drawback of the quick ratio is that it ignores the timing of receipts and

payments.

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CASH RATIO

Meaning:

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

absolute liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

Since cash and bank balances and short term marketable securities are the

most liquid assets of a firm, financial analysts look at the cash ratio. If the

super liquid assets are too much in relation to the current liabilities then it

may affect the profitability of the firm.

INVESTMENT / SHAREHOLDER

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EARNING PER SHARE:-

Meaning: Earnings per Share are calculated to find out overall profitability

of the organization. Earnings per Share represents earning of the company

whether or not dividends are declared. EPS measures the profits available

to the equity shareholders on each share held.

Formula:

NPAT

Earning per share =

Number of equity share

The higher EPS will attract more investors to acquire shares in the

company as it indicates that the business is more profitable enough to pay

the dividends in time. But remember not all profit earned is going to be

distributed as dividends the company also retains some profits for the

business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share

held.

Dividend Paid to Ordinary shareholders

Dividend per Share =

Number of Ordinary Shares

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DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividends paid

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

Formula:

Dividend per share

Dividend Pay out ratio = *100

Earning per share

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

preference dividend has been paid to the preference equity holders.

GEARING

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CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders return

through the use of debt. Equity shareholders earn more when the rate of the

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

known as leverage or trading on equity. The Capital-gearing ratio shows

the relationship between two types of capital viz: - equity capital &

preference capital & long term borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loan

Capital gearing ratio =

Equity capital & reserve & surplus

Capital gearing ratio indicates the proportion of debt & equity in the

financing of assets of a concern.

PROFITABILITY

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

generates a substantial amount of profits per rupee of sales, can

comfortably meet its operating expenses and provide more returns to its

shareholders. The relationship between profit and sales is measured by

profitability ratios. There are two types of profitability ratios: Gross Profit

Margin and Net Profit Margin.

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GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is

defined as the excess of the net sales over cost of goods sold or excess of

revenue over cost. This ratio shows the profit that remains after the

manufacturing costs have been met. It measures the efficiency of

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

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concern is I managing its production, purchase, selling & inventory, how

good its control is over the direct cost, how productive the concern , how

much amount is left to meet other expenses & earn net profit.

Formula:

Gross profit

Gross profit ratio = * 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales

it is usually expressed in the form of a percentage.

Formula:

NPAT

Net profit ratio = * 100

Net sales

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

preference shareholders) as a percentage of net sales. It measures the

overall efficiency of production, administration, selling, financing, pricing

and tax management. Jointly considered, the gross and net profit margin

ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

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Meaning:

The profitability of the firm can also be analyzed from the point of view of

the total funds employed in the firm. The term fund employed or the capital

employed refers to the total long-term source of funds. It means that the

capital employed comprises of shareholder funds plus long-term debts.

Alternatively it can also be defined as fixed assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors

and the owners of a firm. It is the sum of long-term liabilities and owner's

equity. ROCE indicates the efficiency with which the long-term funds of a

firm are utilized.

Formula:

NPAT

Return on capital employed = *100

Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted

into cash. They are also called efficiency ratios or asset utilization ratios as

they measure the efficiency of a firm in managing assets. These ratios are

based on the relationship between the level of activity represented by sales

or cost of goods sold and levels of investment in various assets. The

important turnover ratios are debtors turnover ratio, average collection

period, inventory/stock turnover ratio, fixed assets turnover ratio, and total

assets turnover ratio. These are described below:

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DEBTORS TURNOVER RATIO (DTO)

Meaning:

DTO is calculated by dividing the net credit sales by average debtorsoutstanding during the year. It measures the liquidity of a firm's debts.

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

customers. Average debtors are the average of debtors at the

beginning and at the end of the year. This ratio shows how rapidly

debts are collected. The higher the DTO, the better it is for the

organization.

Formula:

Credit sales

Debtors turnover ratio =

Average debtors

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INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:

ITR refers to the number of times the inventory is sold and replaced during

the accounting period.

Formula:

COGS

Stock Turnover Ratio =

Average stock

ITR reflects the efficiency of inventory management. The higher the ratio,

the more efficient is the management of inventories, and vice versa.

However, a high inventory turnover may also result from a low level of

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

customer goodwill. For calculating ITR, the average of inventories at the

beginning and the end of the year is taken. In general, averages may be

used when a flow figure (in this case, cost of goods sold) is related to a

stock figure (inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed

assets.

Formula:

Net sales

Fixed assets turnover =

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Net fixed assets

This ratio measures the efficiency with which fixed assets are employed. A

high ratio indicates a high degree of efficiency in asset utilization while a

low ratio reflects an inefficient use of assets. However, this ratio should be

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

substantially depreciated, the fixed assets turnover ratio tends to be high

(because the denominator of the ratio is very low).

PROPRIETORS RATIO:

Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It

relates shareholders fund to total assets. This ratio determines the long term

or ultimate solvency of the company.

In other words, Proprietary ratio determines as to what extent the owners

interest & expectations are fulfilled from the total investment made in the

business operation.

Proprietary ratio compares the proprietor fund with total liabilities. It is

usually expressed in the form of percentage. Total assets also know it as net

worth.

Formula:

Proprietary fund

Proprietary ratio = OR

Total fund

Shareholders fund

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Proprietary ratio =

Fixed assets + current liabilities

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the working

capital. It helps to judge the quantum of inventories in relation to the

working capital of the business. The purpose of this ratio is to show the

extent to which working capital is blocked in inventories. The ratio

highlights the predominance of stocks in the current financial position of

the company. It is expressed as a percentage.

Formula:

Stock

Stock working capital ratio =

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition

& quality of the working capital. This ratio also helps to study the solvency

of a concern. It is a qualitative test of solvency. It shows the extent of funds

blocked in stock. If investment in stock is higher it means that the amount

of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

This ratio compares the long-term debts with shareholders fund. The

relationship between borrowed funds & owners capital is a popular

measure of the long term financial solvency of a firm. This relationship is

shown by debt equity ratio. Alternatively, this ratio indicates the relative

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proportion of debt & equity in financing the assets of the firm. It is usually

expressed as a pure ratio.

Formula:

Total long-term debt

Debt equity ratio =

Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the

process of the increasing the equity shareholders return through the use of

debt. Leverage is also known as gearing or trading on equity. Debt

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

balance between debt & equity.

RETURN ON PROPRIETOR FUND:

Meaning:

Return on proprietors fund is also known as return on proprietors equity

or return on shareholders investment or investment ratio. This ratio

indicates the relationship between net profit earned & total proprietors

funds.. Its purpose is to measure the rate of return on the total fund made

available by the owners. This ratio helps to judge how efficient the concern

is in managing the owners fund at disposal.

Formula:

NPAT

Return on proprietors fund = * 100

Proprietors fund

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CREDITORS TURNOVER RATIO:

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

are made to the supplier for purchase made from them. It is a relation

between net credit purchase and average creditors

Net credit purchase

Credit turnover ratio =

Average creditors

Months in a year

Average age of accounts payable =

Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases.

Higher creditors turnover ratio or a lower credit period enjoyed signifies

that the creditors are being paid promptly. It enhances credit worthiness of

the company. A very low ratio indicates that the company is not taking full

benefit of the credit period allowed by the creditors.

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CHAPTER 4

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial significance. The

importance of ratio analysis lies in the fact that it presents facts on a

comparative basis & enables the drawing of interference regarding the

performance of a firm. Ratio analysis is relevant in assessing the

performance of a firm in respect of the following aspects:

1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion can be drawn regarding

the liquidity position of a firm. The liquidity position of a firm would be

satisfactory if it is able to meet its current obligation when they become

due. A firm can be said to have the ability to meet its short-term liabilities

if it has sufficient liquid funds to pay the interest on its short maturing debt

usually within a year as well as to repay the principal. This ability isreflected in the liquidity ratio of a firm. The liquidity ratio are particularly

useful in credit analysis by bank & other suppliers of short term loans.

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2] LONG TERM SOLVENCY: -

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

viability of a firm. This respect of the financial position of a borrower is of

concern to the long-term creditors, security analyst & the present &

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

leverage/ capital structure & profitability ratio .Ratio analysis s that focus

on earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this

respect. The leverage ratios, for instance, will indicate whether a firm has a

reasonable proportion of various sources of finance or if it is heavily loaded

with debt in which case its solvency is exposed to serious strain. Similarly

the various profitability ratios would reveal whether or not the firm is able

to offer adequate return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant

from the viewpoint of management, is that it throws light on the degree of

efficiency in management & utilization of its assets. The various activity

ratios measures this kind of operational efficiency. In fact, the solvency of

a firm is, in the ultimate analysis, dependent upon the sales revenues

generated by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the

financial position of a firm, the management is constantly concerned about

overall profitability of the enterprise. That is, they are concerned about the

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ability of the firm to meets its short term as well as long term obligations to

its creditors, to ensure a reasonable return to its owners & secure optimum

utilization of the assets of the firm. This is possible if an integrated view is

taken & all the ratios are considered together.

5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm

but also serves as a stepping-stone to remedial measures. This is made

possible due to inter firm comparison & comparison with the industry

averages. One of the popular techniques is to compare the ratios of a firmwith the industry average. It should be reasonably expected that the

performance of a firm should be in broad conformity with that of the

industry to which it belongs. An inter firm comparison would demonstrate

the firms position vice-versa its competitors. If the results are at variance

either with the industry average or with those of the competitors, the firm

can seek to identify the probable reasons & in light, take remedial

measures.

6] TREND ANALYSIS: Finally, ratio analysis enables a firm to take the

time dimension into account. In other words, whether the financial position

of a firm is improving or deteriorating over the years. This is made

possible by the use of trend analysis. The significance of the trend analysis

of ratio lies in the fact that the analysts can know the direction ofmovement, that is, whether the movement is favorable or unfavorable. For

example, the ratio may be low as compared to the norm but the trend may

be upward. On the other hand, though the present level may be satisfactory

but the trend may be a declining one.

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CHAPTER 5

ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of

significant accounting data relationships, which give the decision-

maker insights into the financial performance of a company.

The advantages of ratio analysis can be summarized as follows:

Ratios facilitate conducting trend analysis, which is important for

decision making and forecasting.

Ratio analysis helps in the assessment of the liquidity, operating

efficiency, profitability and solvency of a firm.

Ratio analysis provides a basis for both intra-firm as well as inter-firm

comparisons.

The comparison of actual ratios with base year ratios or standard ratios

helps the management analyze the financial performance of the firm.

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CHAPTER 6

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

1] Information problems

Ratios require quantitative information for analysis but it is notdecisive about analytical output.

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

months out of date, and so might not give a proper indication of the

companys current financial position.

Where historical cost convention is used, asset valuations in the

balance sheet could be misleading. Ratios based on this information

will not be very useful for decision-making.

2] Comparison of performance over time

When comparing performance over time, there is need to consider

the changes in price. The movement in performance should be in line

with the changes in price.

When comparing performance over time, there is need to consider

the changes in technology. The movement in performance should be

in line with the changes in technology.

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Changes in accounting policy may affect the comparison of results

between different accounting years as misleading.

3] Inter-firm comparison

Companies may have different capital structures and to make

comparison of performance when one is all equity financed and

another is a geared company it may not be a good analysis.

Selective application of government incentives to various companies

may also distort intercompany comparison. Comparing the

performance of two enterprises may be misleading.

Inter-firm comparison may not be useful unless the firms compared

are of the same size and age, and employ similar production methods

and accounting practices.

Even within a company, comparisons can be distorted by changes in

the price level.

Ratios provide only quantitative information, not qualitative

information.

Ratios are calculated on the basis of past financial statements. They

do not indicate future trends and they do not consider economic

conditions.

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CHAPTER 7

PURPOSE OF RATIO ANLYSIS

Purposes of ratio analysis are as foll:

1] To identify aspects of a businesses performance to aid decision making

2] Quantitative process may need to be supplemented by qualitative

factors to get a complete picture.

3] 5 main areas:-

Liquidity the ability of the firm to pay its way

Investment/shareholders information to enable decisions to bemade on the extent of the risk and the earning potential of a business

investment.

Gearing information on the relationship between the exposure of

the business to loans as opposed to share capital

Profitability how effective the firm is at generating profits given

sales and or its capital assets

Financial the rate at which the company sells its stock and the

efficiency with which it uses its assets

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CHAPTER 8

ROLE OF RATIO ANALYSIS

It is true that what can be achieved by the technique of ratio analysis cannot

be achieved by the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability

& efficiency of performance, either individually or in relation to those of

other firms in the same industry. The process of this appraisal is not

complete until the ratio so computed can be compared with something, as

the ratio all by them do not mean anything. This comparison may be in the

form of intra firm comparison, inter firm comparison or comparison with

standard ratios. Thus proper comparison of ratios may reveal where a firm

is placed as compared with earlier period or in comparison with the other

firms in the same industry.

Ratio analysis is one of the best possible techniques available to the

management to impart the basic functions like planning & control. As the

future is closely related to the immediate past, ratio calculated on the basis

of historical financial statements may be of good assistance to predict the

future. Ratio analysis also helps to locate & point out the various areas,

which need the management attention in order to improve the situation.

As the ratio analysis is concerned with all the aspect of a firms

financial analysis i.e. liquidity, solvency, activity, profitability & overall

performance, it enables the interested persons to know the financial &

operational characteristics of an organisation & take the suitable decision.

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CHAPTER 9

EVALUATION OF APLAB LIMITED THROUGH RATIO

COMPANY PROFILE

THE COMPANY

APLAB Limited is a professionally managed Public Limited company

quoted on the Bombay Stock Exchange. Since its inception in 1962,

APLAB has been serving the global market with wide range of electronic

products meeting the international standards for safety and reliability such

as UL, VDE etc. They specialize in Test and Measurement Equipment,

Power Conversion and UPS Systems, Self-Service Terminals for Banking

Sector and Fuel Dispensers for Petroleum Sector. APLAB enjoys

worldwide recognition for the quality of its products, business integrity and

innovative engineering skills.

ABOUT APLAB:

Aplab started its operation in October 1962.

It is a professionally managed 40 years old public limited company.

It is quoted on BOMBAY STOCK EXCHANGE.

It serves customer global customer par excellence.

It specialized in Test & measurement instruments, power conversion,

& UPS & fuel dispensers for petroleum sector.

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It enjoys worldwide recognition for the quality of its business

integrity & innovative engineering skills.

CORPORATE MISSION

1] To achieve healthy and profitable growth of the company in the interest

of our customers & the shareholders.

2] To encourage teamwork, reward innovation and maintain healthy

interpersonal relations within the organization.

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

serve the global market.

4] To create intellectual capital by investing in hardware and embeddedsoftware development.

THE 21ST CENTURY SUCCESS

APLAB had planned to enter the 21st Century with a program for a fast

and healthy growth in the global market based on companys high

technology foundation and the reputation of four decades for prompt

customer service and as a reliable solution provider. After completing three

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

our promises to our customers and the shareholders.

APLAB has entered the field of Professional Services starting with

the Banking and the Petroleum Industry. Focus on developing embedded

system software has been also enhanced. We believe that professional

services sector is poised to grow at a very rapid pace.

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RESEARCH AND DEVELOPMENT

Developing innovative products with the latest technology is the core

strength of APLAB. The Science & Technology Ministry of the Govt. of

India accredits our R&D Laboratories. We have a large team of dedicated,

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

technology. APLAB is recognized not only for manufacturing standard

products but also in providing solutions and services as per the customer

specifications. We spend more than 4% of the company revenue in

Research & Development activities.

Specific areas in which the company carries out R&D

1. Development of new product especially hi-tech intelligent product &

electronic transaction control system.

2. Improvement in the existing products & production processes,

import substitution.

3. Development of products to suit exports markets.

4. Customizing the products to the customers specifications &

adaptation of imported technology.

Through a continuous interaction with production& Quality Assurance

Department takes up redesign of existing products. This is done to achieve

state of the art in our design & to bring about improvement to get

maximum performance / cost ratio.

EXPORT

APLAB currently exports over 25% of its production to Western Europe,

Canada & USA. Over 30 million U.S. Dollars worth of Power Systems and

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Test Instruments from APLAB are today operational in UK, Germany,

France, Sweden, Belgium, Canada, and USA & Australia.

APLABS ORGANISATION CHART

EXECUTIVE

CHAIRMAN

MANAGING

DIRECTOR

DIRECTOR MAEKETING

[TECHNICAL DIRECTOR

- PE]

GENERAL

MANAGER

FINANCE G.M G.M. MATERIAL G.M. G.M.

MANAGER PROD. MARKETING MANAGER ELTRAC DESIGN

&

DESIGN

46

REGIOAL

HEAD:

MUMBAINEWDELHI

SECUNDA-

RABADBANGLORE

CHENNAI


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OFFICERS

STAFF

WORKERS

APLAB LIMITED

BALANCE SHEET AS AT 31ST MARCH 2002

(RS.000)

AS AT 31ST 2002 AS AT 31ST 2002

SOURCES OF FUNDS

SHAREHOLDERS FUND

Share capital 5,00,00

Reserves and surplus 16,29,69

21,29,69

LOANS

Secured 12,13,48

Unsecured 3,67,99

15,81,47

DEFFERED TAX LIABILITY (NET) 1,06,85

TOTAL 38,18,01

APPLICATION OF FUNDS

FIXED ASSETS

Gross block 15,90,33

Less: depreciation 10,32,96

Net block 5,57,37

Capital work in progress 54,36

6,11,73

INVESTMENT 1,22,32

CURRENT ASSESTS, LOANS &

ADVANCES

Inventories 19,09,77

Sundary debtors 18,49,35

Cash & bank balances 3,31,32

Loan & advances 5,80,36

46,70,80

CURRENT LIABLITIES &

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PROVISIONS

Current liabilities 15,36,09

Provisions 57,57

15,93,66

NET CURRENT ASSESTS 30,77,14

MISCELLANEOUS EXPENDITURE 6,84

Total 3818,01

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2002

(RS.000)

AS AT 31-3- 2002 AS AT 31-3-2002

INCOME:

Sales and operating earnings 48,19,19

Other income 80,50

Variation in stock 1,31,07

50,30,76

EXPENCES:

Materials consumed 18,97,28

Purchase of trading goods 8,61,75

Payments to & provision for 9,95,04

employees

Manufacturing expenses 2,21,37

Excise duty 65,05

Other expenses 5,76,71

Interest & finance charges 2,60,22

Depreciation 1,05,37

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

49,81,64

PROFIT BEFORE TAX 49,12

PRIOR YEAR ADJUSTMENT (NET)

PROVISION FOR TAXATION

Current tax 24,42

Deferred tax liability / (Assets) 4,02

PROFIT AFTER TAX 20,68

Balance brought forward from previous year 1

Balance available for appropriation 20,69

Appropriations:

General reserve 20,68

Surplus / (loss) carried to B/S 1

Proposed dividend

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Tax on proposed dividend

20,69

Basic earning per share (rupee) 0.41

0.41


(RS.000)

AS AT 31-3- 2003 AS AT 31-3- 2003

SOURCES OF FUNDS

SHAREHOLDERS FUND



21,55,19

LOANS

Secured 10,27,55

Unsecured 4,53,16

14,80,71

DEFFERED TAX LIABILITY (NET) 87,21

TOTAL 37,23,11


FIXED ASSETS



Net block 6,00,04


6,29,78

INVESTMENT 1,47,26


ADVANCES





51,02,42


PROVISIONS


Provisions 1,20,76

21,62,32

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MISCELLANEOUS EXPENDITURE 5,97

TOTAL 37,23,11


(RS.000)

AS AT 31-3- 2003 AS AT 31-3- 2003

INCOME:


Other income 15,04

Variation in stock (59,27)

59,17,99

EXPENCES:

Materials consumed 22,41,60Purchase of trading goods 10,37,52


Employees


Excise duty 72,69




Less: transferred to revaluation 1,03 1,06,94

57,91,50

PROFIT BEFORE TAX 1,26,49



Current tax 63,19

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

PROFIT AFTER TAX 82,94


Balance available for appropriation 82,95

Appropriations:General reserve 26,50


Proposed dividend 50,00

Tax on proposed dividend 6,41

82,95


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(RS.000)

AS AT 31-3- 2004 AS AT 31-3- 2004SOURCES OF FUNDS

SHAREHOLDERS FUND



22,42,59

LOANS

Secured 11,38,86

Unsecured 5,58,29

16,97.15

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


FIXED ASSETS



Net block 6,01,55


6,16,84

INVESTMENT 1,48,34CURRENT ASSESTS, LOANS &

ADVANCES




Loan & advances 850,58

53,98,08


PROVISIONS

Current liabilities 18,16,17Provisions 3,12,02

21,28,19


TOTAL 40,35,07

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(RS.000)

AS AT 31-3- 2004 AS AT 31-3-2004INCOME:


Other income 31,39

Variation in stock 53,99

74,75,85

EXPENCES:




employeesManufacturing expenses 3,07,51

Excise duty 70,08




Less: transferred to revaluation 93 1,09,96

72,00,99


PRIOR YEAR ADJUSTMENT (NET) 25,71

PROVISION FOR TAXATIONCurrent tax 1,19,50

Deferred tax liability / (Assets) 8,13

PROFIT AFTER TAX 17294


Balance available for appropriation 1,72,98

Appropriations:

General reserve 88,30



Tax on proposed divident 9,61

1,72,98



(RS.000)

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AS AT 31-3- 2005 AS AT 31-3- 2005

SOURCES OF FUNDS

SHAREHOLDERS FUND


Reserves and surplus 19,14,9124,14,91

LOANS

Secured 17,23,12

Unsecured 5,36,89

22,60,01

DEFFERED TAX LIABILITY (NET) 92,02

TOTAL 47,66,94


FIXED ASSETSGross block 21,64,89


Net block 8,21,84

Capital work in progress -

8,21,84

INVESTMENT 2,32,91


ADVANCES


Sundary debtors 23,06,67Cash & bank balances 6,04,64


58,48,21


PROVISIONS


Provisions 4,80,87

21,36,02


TOTAL 47,66,19


(RS.000)

AS AT 31-3- 2005 AS AT 31-3 2005

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INCOME:


Other income 41,69

Variation in stock (38,45)

74,23,55

EXPENCES:




employees


Excise duty 75,41




Less: transferred to revaluation 84 1,25,8470,00,24




Current tax 1,50,84

Deferred tax liability / (Assets) (3,31)

PROFIT AFTER TAX 2,75,78


Balance available for appropriation 2,75,85

Appropriations:

General reserve 1,73,20



2,75,85


CALCULATIONS AND INTERPRETATION OF RATIOS

1] CURRENT RATIO:

Formula:

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Current assets

Current ratio =

Current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Current assets 46,70,80 51,08,39 53,98,08 58,28,21

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

Current ratio 2.93 2.36 2.53 2.72

COMMENTS:

In Aplab company the current ratio is 2.72:1 in 2004-2005. it means

that for one rupee of current liabilities, the current assets are 2.72 rupee are

available to the them. In other words the current assets are 2.72 times the

current liabilities.

Almost 4 years current ratio is same but current ratio in 2004-2005 is

bit higher, which makes company more sound.

The available working capital with the company is in increasing

order.The company has sufficient working capital to meets its urgency/

obligations. A company has a high percentage of its current assets in the

form of working capital, cash that would be more liquid in the sense of

being able to meet obligations as & when they become due. From this

working capital, the company meets its day-to-day financial obligations.

Thus, the current ratio throws light on the companys ability to pay

its current liabilities out of its current assets. The Aplab Companys has a

very good liquidity position of company.

2] LIQUID RATIO:

Formula:

Quick assets

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Liquid ratio =

Quick liabilities

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

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

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

Liquid ratio 1.36 1.06 1.12 1.36

COMMENTS:

The liquid or quick ratio indicates the liquid financial position of an

enterprise. Almost in all 4 years the liquid ratio is same, which is better for

the company to meet the urgency. The liquid ratio of the Aplab Company

has increased from 1.12 to 1.36 in 2004-2005. Day to day solvency is more

sound for company in 2004-2005 over the year 2003-2004.

This indicates that the dependence on the short-term liabilities &

creditors are less .Liquid ratio of Company is favorable because the quick

assets of the company are more than the quick liabilities. The liquid ratio

shows the companys ability to meet its immediate obligations promptly.

3] PROPRIETORY RATIO:

Formula:

Proprietary fund

Proprietary ratio = OR

Total fund

Shareholders fund

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Proprietary ratio =

Fixed assets + current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Proprietary fund 21,29,69 21,55,19 22,42,59 24,14,91

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

Proprietary ratio 40 37.55 33.90 36.20

COMMENTS:

The Proprietary ratio of the company is 36.20% in the year 2004-

2005. It means that the for every one rupee of total assets contribution of

36 paise has come from owners fund & remaining balance 66 paise is

contributed by the outside creditors. This shows that the contribution by

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

of the Company shows a downward trend for the last 4 years. As the

Proprietary ratio is not favorable the Companys long-term solvency

position is not sound.

4] STOCK WORKING CAPITAL RATIO:

Formula:

Stock

Stock working capital ratio =

Working Capital

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

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

Working Capital 30,77,14 29,46,07 32,69,89 37,12,19Stock working

capital ratio

62.06 64.58 65.63 52.06

COMMENTS: This ratio shows that extend of funds blocked in stock. The

amount of stock is increasing from the year 2001-2002 to 2003-2004.

However in the year 2004-2005 it has declined to 52%. In the year 2004-

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2005 the sale is increased which affects decrease in stock that effected in

increase in working capital in 2004-2005.

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

5] CAPITAL GEARING RATIO:

Formula:

Preference capital+ secured loan

Capital gearing ratio =

Equity capital & reserve & surplus

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

Equity capital &

reserves & surplus

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

Capital gearing

ratio

56.97 47.67 50.78 71

COMMENTS: Gearing means the process of increasing the equity

shareholders return through the use of debt. Capital gearing ratio is a

leverage ratio, which indicates the proportion of debt & equity in the

financing of assets of a company. For the last 3 years [i.e.2001-2002 TO

2003-2004] Capital gearing ratio is all most same which indicates, near

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

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

2004-2005 company has borrowed more secured loans for the companys

expansion.

6] DEBT EQUITY RATIO:

Formula:

Total long term debt

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Debt equity ratio =

Total shareholders fund

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

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

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

Debt Equity Ratio 0.74 0.68 0.75 0.93

COMMENTS:

The debt equity ratio is important tool of financial analysis to

appraise the financial structure of the company. It expresses the relation

between the external equities & internal equities. This ratio is very

important from the point of view of creditors & owners.The rate of debt

equity ratio is increased from 0.74 to 0.93 during the year 2001-2002 to

2004-2005. This shows that with the increase in debt, the shareholders

fund also increased. This shows long-term capital structure. The lower ratio

viewed as favorable from long term creditors point of view.

7] GROSS PROFIT RATIO:

Formula:

Gross profit

Gross profit ratio = * 100

Net sales

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

Gross profit 24,54,48 37,65,90 45,57,45 42,37,52

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

Gross profit Ratio 56.48 73.80 66.27 62.22

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

profit on turnover. In the year 2001-2002 the gross profit ratio is 56.48%. It

has increased to 73.80% in the year 2002-2003 due to increase in saleswithout corresponding increase in cost of goods sold. However the gross

profit ratio decreased to 66.27% in the year 2003-2004.It is further declined

to 62.22% in the year 2004-2005, due to high cost of purchases &

overheads. Although the gross profit ratio is declined during the year 2002-

2003 to 2004-2005. The net sales and gross profit is continuously

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

8] OPERATING RATIO:

Formula:

COGS+ operating expenses

Operating ratio = *100

Net sales

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

COGS +

Operating

expenses

18,90,98 +

2,21,37 +

5,76,71

21,96,32 +

2,69,98 +

7,62,23

28,33,02 +

3,07,51 +

9,17,94

2,57,226+

27,141+

84,478

Net sales 43,45,46 51,02,37 68,76,89 6,80,978

Operating ratio 61.88% 63.27% 59% 54.16%

COMMENTS: The operating ratio shows the relationship between costs of

activities & net sales. Operating ratio over a period of 4 years when

compared that indicate the change in the operational efficiency of the

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

This is due to increase in the cost of goods sold, which in 2001-2002 was

61.88%, in 2002-2003 was 63.27%, in 2003-2004 was 59% & in 2004-

2005 it is 54.16%. Though the cost has increased in 2002-2003 as

compared to 2001-2002, it is reducing continuously over the next two

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years, indicate downward trend in cost but upward / positive trend in

operational performance.

9] EXPENSE RATIO:

The ratio of each item of expense or each group of expense to net sales is

known as Expense ratio. The expense ratio brings out the relationship

between various elements of operating cost & net sales. Expense ratio

analyzes each individual item of expense or group of expense& expresses

them as a percentage in relation to net sales.

A] MANUFACTURING EXPENSES:

Formula:

Manufacturing expenses

Manufacturing expense ratio = *100

Net sales

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

Manufacturing

expenses

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

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

Manufacturing

expenses ratio

5% 5.29% 4.47% 3.98%

COMMENTS: The manufacturing expense is shows the downward trend.

During the year20012002 to 2002-2003 the manufacturing expense

increased because there is increase in the charges like labour, rent , power

& electricity, repair to plant & machinery & miscellaneous works

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expenses. The manufacturing expense during the year 2001-2002 to 2004-

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

control over the manufacturing expense.

B] OTHER EXPENSES:

Formula:

Other expenses

Other expense ratio = *100

Net sales

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

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

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

Other expenses

ratio

13.2% 14.93% 13.34% 12.40%

COMMENTS: The other expense of company is increased during the

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

equipment lease rental, printing & stationary, advertisement & publicity,

transport outward & other charges. But during the year 2004-2005 the other

expenses is decrease from 13.34% to 12.40%. Because decrease in

equipment lease rental, advertisement & publicity, transport charges,

commission & discount, sales tax & purchase tax. This indicates that the

company also controlling the other expenses.

10) NET PROFIT RATIO

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Formula:

NPAT

Net profit ratio = * 100

Net sales

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

NPAT 20,98 82,94 1,72,94 2,75,78

Net sales 434546 51,02,37 68,76,89 68,09,78

Net profit ratio 0.48 1.6 2.5 4.04

0

1

2

3

4

5

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

NET PROFIT

COMMENTS:

The net profit ratio of the company is low in all year but the net profit is

increasing order from this ratio of 4 year it has been observe that the from

2001-2002 to 2004-2005 the net profit is increased i.e. in 2003 it is

increased by 1.12 in 2003-2004 by 0.9 & in 2004-2005 by

1.54.Profitability ratio of company shows considerable increase.

Companys sales have increased in all 4 years & at the same time company

has been successful in controlling the expenses i.e. manufacturing & other

expenses. It is a clear index of cost control, managerial efficiency & sales

promotion.

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11] STOCK TURNOVER RATIO:

Formula:

COGS

Stock Turnover Ratio =

Average stock

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

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

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

Stock Turnover

Ratio

3.4 3.6 4.20 3.73

COMMENTS:

Stock turnover ratio shows the relationship between the sales & stock it

means how stock is being turned over into sales.The stock turnover ratio is

2001-2002 was 3.4 times which indicate that the stock is being turned into

sales 3.4 times during the year. The inventory cycle makes 3.4 rounds

during the year. It helps to work out the stock holding period; it means the

stock turnover ratio is 3.4 times then the stock holding period is 3.5 months

[12/3.4=3.5months]. This indicates that it takes 3.5 months for stock to be

sold out after it is produced.

For the last 4 years stock turnover ratio is lower than the standard but

it is in increasing order. In the year 2001-2002 to 2004-2005 the stock

turnover ratio has improved from 3.4 to 3.73 times, it means with lower

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

company is moving fast in the market.

12] RETURN ON CAPITAL EMPLOYED:

Formula:

NPAT

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Return on capital employed = *100

Capital employedYEAR 2001-2002 2002-2003 2003-2004 2004 -2005

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

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

Return on capitalemployed

0.54 2.23 4.28 5.79

COMMENTS:

The return on capital employed shows the relationship between profit &

investment. Its purpose is to measure the overall profitability from the total

funds made available by the owner & lenders.

The return on capital employed of Rs.5 indicate that net return of

Rs.5 is earned on a capital employed of Rs.100. this amount of Rs.5 is

available to take care of interest, tax,& appropriation.

The return on capital employed is show-increasing trend, i.e. from 0.54 to

5.79. All of sudden in 2001-2002 the return on capital employed increased

from 0.54 to 5.79. This indicates a very high profitability on each rupee of

investment & has a great scope to attract large amount of fresh fund.

13] EARNING PER SHARE:

Formula:

NPAT

Earning per share=

Number of equity share

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

NPAT 20,98,000 82,94,000 1,72,94,000 2,75,78,000No.ofequity share 50,00,000 50,00,000 50,00,000 50,00,000

Earning per share 0.41 1.66 3.46 5.52

COMMENTS:

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Earning per share is calculated to find out overall profitability of the

company. Earning per share represents the earning of the company whether

or not dividends are declared.The Earning per share is 5.52 means

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

shareholder earned Rs. 5.52 per share.

The net profit after tax of the company is increasing in all years. Therefore

the shareholders earning per share is increased continuously from 2001-

2002 to 2004-2005 by 0.41 to 05.52. This shows it is continuous capital

appreciation per unit share by 0.41 to 05.52.

The above diagram shows the Earning per share and Dividend per

share is increasing rapidly. It is beneficial to the shareholders and

prospective investor to invest the money in this company.

14] DIVIDEND PAYOUT RATIO:

Formula:

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Dividend per share

Dividend Pay out ratio = * 100

Earning per share

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

Dividend per share - 1 1.50 1.80

Earning per share 0.41 1.66 3.46 5.52

Dividend payout

ratio

- 60.24 43.35 32.60

COMMENTS:

In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is

60.24 and 43.35 respectively. In the year 2002-2003 the company has

declared the dividend 60.24 and the balance 39.76 is retained with them for

the expansion. The company has not earned more profit in the year 2001-

2002 hence the company has not declared dividend in the year 2001-2002.

However the company has declared more dividends in the year 2002-2003

as the company has sufficient profit. In the year 2004 the company has

declared 1.50 dividends per share hence the earning per share has doubled.

From this one can say that the company is more conservative forexpansion.

15] COST OF GOODS SOLD:

Formula:

COGS

Cost of goods sold Ratio = * 100

Net sales

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

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

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

Cost of goods sold

ratio

43.51 43.04 41.19 37.77

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COMMENTS: This ratio shows the rate of consumption of raw material in

the process of production. In the year 2001-2002 the cost of goods sold

ratio is 43.51% so the gross profit is 56.49%. it indicates that in 2001-2002,

the 43% of raw material is consumed in the process of production.

During the last 4 years the rate of cost of goods sold ratio is

continuously decreasing however the gross profit & sales is increased

during the same period.

16] CASH RATIO:

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

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

Cash + Bank +

Marketable

securities

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

Total current

liabilities

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

Cash ratio 0.20 0.18 0.21 0.28

COMMENTS:

This ratio is called as super quick ratio or absolute liquidity ratio. In the

year 2001-2002 the cash ratio is 0.20 & then it is decreased to 0.18 in the

year 2002-2003. Then again it is increased to 0.21 in the year 2003-2004 &

0.28 in the year 2004-2005.

This shows that the company has sufficient cash, bank balance, &

marketable securities to meet any contingency.

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17] RETURN ON PROPRIETORS FUND:

Formula:

NPAT

Return on proprietors fund = * 100

Proprietors fund

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

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

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

Return on

proprietors fund

0.97 3.84 7.71 11.41

COMMENTS:

Return on proprietors fund shows the relationship between profits &

investments by proprietors in the company. In the year 2002-2003 the

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

approximately is earned on the each Rs. 100 of funds contributed by the

owners.

During the last 4 years the rate of return on proprietors fund is in

increasing order. The return on proprietors fund during the year 2001-2002

to 2004-2005 is increased from 0.97% to 11.41%.It shows that the

company has a very large returns available to take care of high dividends,

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

fresh fund from owners.

18] RETURN ON EQUITY:

Formula:

NPAT

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Return on equity share capital = * 100

No. of equity share

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

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

No. of equity share 50,000 50,000 50,000 50,000Return on equity

share capital

4.13 16.5 34.58 55

COMMENTS:

This ratio shows the relationship between profit & equity

shareholders fund in the company. It is used by the present / prospective

investor for deciding whether to purchase, keep or sell the equity shares.

In the year 2002-2003 the return on proprietors fund is 16.5%, which

means the net return of Rs. 16, is earned on the each Rs.100 of the funds

contributed by the equity shareholders.

The rate of return on equity share capital is increased from4.13% to

55% during the year 2001-2002 to 2004-2005. This shows that the

company has very large returns available to take care of high equity

dividend, large transfers to reserve, & also company has a great scope toattract large amount to fresh funds by issue of equity share & also company

has a very good price for equity shares in the BSE.

19] OPERATING PROFIT RATIO:

Formula:

Operating profit

Operating profit ratio = *100Net sales

COMMENTS: Operating profit ratio shows the relationship between

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

minus all operating expenses or sales less cost of goods sold and operating

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expenses.The operating profit ratio of 7.11% indicates that average

operating margin of Rs.7 is earned on sale of Rs. 100. This amount of Rs. 7

is available for meeting non operating expenses. In the other words

operating profit ratio 7.11% means that 7.11% of net sales remains as

operating profit after meeting all operating expenses.

During the last 4 years the operating profit ratio is increased from

7.11% to 9.38%. It indicates that the company has great efficiency in

managing all its operations of production, purchase, inventory, selling and

distribution and also has control over the direct and indirect costs. Thus,

company has a large margin is available to meet non-operating expenses

and earn net profit.

20] CREDITORS TURNOVER RATIO:

Formula:

Net credit purchase

Credit turnover ratio =Average creditors

Months in a year

Average age of accounts payable =

Credit turnover ratio

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Net credit purchase 21,21,43 22,71,80 29,08,61 25,29,04

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

Credit turnover

ratio

3.6 times 3.6 times 4 times 3 times

Average age of

accounts payable

3.3 months 3.3 months 3 months 4 months

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COMMENTS:

The creditors turnover ratio shows the relationship between the credit

purchase and average trade creditors. It shows the speed with which the

payments are made to the suppliers for the purchase made from them.The credit turnover ratio of 4, indicate that the creditors are being

turned over 4times during the year. It indicates the number of rounds taken

by the credit cycle of payables during the year.

There is no standard ratio in absolute term. The creditors ratio for the

year 2001-2002 and 2002-2003 as good as the same, but it is increased by

3.6 to 4 in 2003-2004.this means the company has settled the creditors dues

very fastly than the previous year.

21] DEBTORS TURNOVER RATIO:

Formula:

Credit sales

Debtors turnover ratio =

Average debtors

Days in a year

Debt collection period =

Debtors turnover

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

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

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

Debtors turnover

ratio

2.5 times 2.8 times 3.8 times 2.9 times

Debt collection 146 days 130 days 96 days 125 days

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period

COMMENTS:

Debtors turnover ratio is alternative known as Accounts

Receivable Turnover Ratio. This ratio measures the collectibility of

debtors & other accounts receivable; it means the rate at which the trade

debts are being collected.

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

turned over 2.5 times during the year. It means that the credit cycle ofdebtors makes 2.5 rounds during the year. It helps to workout the debt

collection period i.e. 146 days [365/ 2.5 = 146]. This indicates that it

take146 days on an average for the debtors to be settled. Debt collection

period indicates the duration of the credit cycle of the debtors.

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

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

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

words the debts collection period is short which result into less chance of

bad debts.

SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED

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

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

Immediate solvency position of the company is also quite

satisfactory. The company can meet its urgent obligations

immediately.

Credit policies are effective.

Over all profitability position of the company is quite satisfactory.

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

fast in the market.

The company is paying promptly to the suppliers.

The return on capital employed is satisfactory.

The management should take care of inventory management and speed up

the movement of stock. Effective selling technique or product modification

may be adopted to face the competitors and to improve the financialposition of the company by taking appropriate decisions.

CONCLUSION

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

financial statements and the significant relationship that exits. The

reliability and significance attach to the ratios will largely on hinge upon

the quality of data on which they are best. They are as good for as bad as

the data it self.

Financial ratios are a useful by product of financial statement and

provide standardized measures of firms financial position, profitability and

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

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

the performance of a firm from the different point of view.

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

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

Long-term solvency position as measured by different debt ratios can help

a debt investor or financial institutions to evaluate the degree of financial

risk. The operational efficiency of the firm in utilizing its assets to generate

profits can be assessed on the basis of different turnover ratios. The

profitability of the firm can be analyzed with the help of profitability ratios.

However the ratio analyses suffer from different limitations also. The

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

ratios are numerous and there are wide spread variations in the same

measure. Ratios generally do the work of diagnosing a problem only and

failed to provide the solution to the problem.

BIBLIOGRAPHY

REFERENCE BOOKS

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FINANCIAL MANAGEMENT

Theory, Concepts & problems

R.P.RUSTAGI


Text and problems

M.Y. KHAN AND P. K. JAIN

MANAGEMENT ACCOUNTING

AINAPURE


L.N. CHOPDE

D.N. CHOUDHARI

S.L. CHOPDE

ANAUAL REPORTS OF APLAB LIMITED

2001-2002

2002-2003

2003-2004

2004-2005

WEBSITES -

www.bizd.ac.uk/compfact/ratio

www.cecunc.org.com/business/financial
http://www.bizd.ac.uk/compfact/ratiohttp://www.cecunc.org.com/business/financialhttp://www.bizd.ac.uk/compfact/ratiohttp://www.cecunc.org.com/business/financialhttp://www.zeromillion.com.business/financial

analysis of financial ratios

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