duke plasto ratio report
DESCRIPTION
Ratio analysis of duke plasto techniquies pvt. ltd.Badarpura, Palanpur, Gujrat, IndaiTRANSCRIPT
1. INTRODUCTION
1.1 HISTORY
Duke is promoted and managed by Shri Prabhubhai Patel, Shri S.N.Patel, Shri
D.K.Patel, and Shri R.P.Patel. All the founders of Duke are quality conscious.
Technology serving the nation since 1989 by providing quality pumping solution to
pump industry.
India’s 2/3 population about 66% is mainly dependent on rain water. Now rapid
changing of modernization is experienced in ruler villages are now days becoming
changing its ground water.
It start up for catering in form of small submersible pumps repairing workshop.
Today’s company has sound financial position powerful management skill and
motivated staff. It is having production of producing pumps sets per day company is
square over 41000 sq. Feet there strong building in 225000 sq. Feet land area.
Duke Plasto Technique Pvt. Ltd. synonymous for manufacturing quality consistent
and reliable products and as its name Duke itself speaks king in pumping solution
industries and winners of national quality award in 2007 from government of India.
1.2 VISION
To be eminent global brand providing complete, innovative, invincible quality
pumping paraphernalia under one roof.
1.3 MISSION
1
We are committed to manufacture products complying with the best quality standards
of the world.
We strive to create an environment that nurtures youth and nourishes the experienced.
On the bedrock of ethics, Duke is instituted by amalgamating the best practices and
technologies of the world.
1.4 VALUES
The values that guide us are trust, ethics, integrity, discipline and performance.
1.5 COMPANY PROFILE
Name of Company :
Duke Plasto Technique Pvt. Ltd.
Location :
Corporate Office :
401, 4th floor, Ankit Building,
Near Shilp, C.G.Road,
Navarangpura, Ahmedabad-09
Phone : +91 -79 -26405782
Fax : +91 – 79 – 26403428
Works :
N.H.14, Deesa Highway,
Opp. Hotel Green Wood,
Badarpura, Palanpur – 385510
(N.Gujarat, India.)
2
Size of the Unit :
Medium Scale Industry
Form of Organization :
Partnership Firm
Name of the Product :
1. Submersible Pumps
2. Motors
3. Monoblock Pumps
4. Centrifugal Pumps
5. Pressure Booster Pumps
Existing Management Body :
Designation Name
Managing Director Mr. P.P.Patel
Executive Director Mr. S.N.Patel
Executive Director Mr. D.K.Patel
Executive Director Mr. R.P.Patel
Chief Accountant Mr. Manubhai Patel
Bankers (1) Bank of Baroda
(2) State Bank of India
HR Manager Mr. Bharatbhai Joshi
Managing Partner Mr. K.B.Solanki
3
1.6 ORGANIZATION STRUCTURE
1.7 CERTIFICATION
Recognized by the Best Certification
1. Duke Plato Technique Pvt. Ltd. has received ISI certification for IS 4985 in
the year 1999.
2. Received ISI certification for ISI 12818, and ISO 9001:2000 from ABS in the
year 2000.
3. Approval from GWSSB, Gujarat in the year 2001.
4. Approval from UP Jal Nigam in the year 2002.
4
Managing Director
Manager Production Department
Manager Marketing Department
Manager HR Department
Manager Finance Department
Accountants Head
Ex. Accountants Cash & Bank
Ex. Accountants Sales
Ex. Accountants Purchase
Ex. Accountants Other Works
5. Approval from PHED, Rajasthan in the year 2003.
6. Supplied to UNISEF & WHO, South Africa in the year 2004.
7. Approval from Karnataka water Supply Board in the year 2005.
8. Received National Quality Award for Quality Product in 2006.
9. ISO 9001:2000 certification from TUV:SUD South Asia for quality
Management System in 2008.
10. CE certification from TUV:SUD for Outsource/Export to European Countries.
11. NSIC-CRISIL rating of “CRISIL SE28” for high Performance Capability
certification in year 2008.
12. Received ISI certification for IS 8034 in the year 2008.
13. Applied for BEE Star rating in the year 2008.
5
1.8 ORGANIZATION CHART - HR & ADMIN. DEPARTMENT
6
Managing DirectorShri P.P.Patel
Dy. Manager HR & System
Mr. P.M.Dalwadi
Asst. Executive-HRShubham Chandel
Security GuardDineshSabbir
BabubhaiGanpatlal
Director–Admin. & Purchase
Shri R.P.Patel
Asst. Executive-Admin.
Bharat Joshi
Canteen In chargeRamesh Loh
ReceptionistMrs.Sunita Prajapati
DriverHarchandMafatlal
SweeperBabubhaiPunjabhaiMaganbha
i
PA to MDThakor Dhanji
2. WORKING CAPITAL MANAGEMENT
2.1 Introduction
Working Capital management is a significant fact of financial management due to the
fact that it plays a pivotal role in keeping the wheels of a business enterprise running.
Working Capital management is concern with short term financial decisions have
been relatively neglected in the literature of finance. Shortage of funds for working
capital has caused many businesses to fail and in many cases, has recorded their
growth, Lack of efficient and effective utilization of working capital leads to earn low
rate of return on capital employed or even compels to sustain losses.
Working Capital to a company is like the blood of human body. It is the most vital
ingredient of a business. Working Capital management if carried out effectively,
efficiently and consistently, will assure the health of the organization.
An Executive function of Finance for taking Liquidity decisions. Signifies money
required for day-to-day operations of an organization. Business cannot run without
adequate working capital (WC). Requirements of WC may differ from organization to
organization.
2.2 Meaning
Working Capital management is the administration of the firm’s current assets and the
financing needed to support the current assets.
Current assets are those assets, which will be converted into cash within the current
accounting period or within the next year as a result of the ordinary operation of the
business. They are cash or nearly converted cash resources. These include Cash and
Bank Balances, Receivables, Inventory, Prepaid expenses, Short Term advances,
Temporary Investments. The value represented by these assets circulates among
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several items. Cash is used to buy raw materials, to pay wages and to meet other
manufacturing expenses. Finished goods are produced further held as inventories and
when inventories are sold account receivables are created. Then the collection of
account receivables brings cash into the firm and the cycle starts again.
Current Liabilities are the debts of the firm that have to be paid during the current
accounting period or within a year. This includes creditors for goods purchased,
outstanding expenses, short term borrowing, advances received against sales, taxes
and dividends payable and other liabilities maturing within a year. Working Capital is
also known as circulation capital, fluctuating capital and revolving capital.
2.3 Goals of Working Capital Management
Manage Firm’s Current Assets And Current Liabilities:
Main goal of WCM is to provide cash whenever there arise any liability. It is not easy
to convert fixed assets into cash quickly so current assets are used for WCM. If the
firm maintains very high level of current assets then it will not able to invest in fixed
asset, this will tend to high level of block up of cash in current assets and firm will not
be able to increase its wealth, this in turn can create problems at the time of
liquidation. If the firm will maintain low level of current assets then it will not able to
8
Cash
Inventories
Receivables
Circulation of Current Assets
meet its current obligations. So to manage current asset according to the current
liabilities is very essential for any company.
Maintain Level Of Working Capital:
Working Capital is important for any firm whether big or small. Working Capital
helps to maintain liquidity in the firm. Not only liquidity but also to pay day-to-day
expenses. If firm does not maintain a specific level of working capital, then it can
create problems for the firm. Sometimes due to lack of working capital even firm can
face solvency or bankruptcy.
Trade Off Between Liquidity And Profitability:
One of the objectives of working capital management is balancing the “liquidity” and
“profitability” criteria while taking into consideration the attitude of management
towards risk.
2.4 Working Capital Cycle
Collection of Purchase of
Receivable Raw material
Sales Issue of material production
And incurring expenses
Cash flows in a cycle into, around and out of a business. It is the business’s lifeblood
and every manager’s primary task to help keep it flowing and to use the cash flow to
9
Cash
Raw materialInventory
Work in processFinishedGoods
AccountsReceivable
generate profits. If a business is operating profitably, then it should, in theory,
generate cash surpluses. If it doesn’t generate surpluses, the business will eventually
run out of cash and expire. The faster a business expands the more cash it will need
for working capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working capital will
generate cash, will help improve profits and reduce risks. Bear in mind that the cost of
providing credit to customers and holding stocks can represent a substantial
proportion of a firm’s total profits.
There are two elements in the business cycle that absorb cash-Inventory (stocks and
work-in-progress) and Receivables (debtors owing company’s money). The main
sources of cash are Payables (company’s creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has
two dimensions TIME and MONEY. When it comes to managing working capital –
“TIME IS MONEY”. If company can get money to move faster around the cycle (e.g.
collect payments from debtors more quickly) or reduce the amount of money tied up
(e.g. reduce inventory levels relative to sales), the business will generate more cash or
it will need to borrow less money to fund working capital. As a consequence,
company could reduce the cost of bank interest or company will have additional free
money available to support additional sales growth or investment. Similarly, if
company can negotiate improved terms with suppliers e.g. get longer credit or an
increased credit limit, company effectively create free finance to help fund future
sales.
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5. RATIO ANALYSIS
5.1 Introduction to Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the
information in a company’s financial statements. The level and historical trends of these ratios can
be used to make inferences about a company’s financial condition, its operations and attractiveness
as an investment.
The financial statements as prepared and presented annually are of little use for the guidance of
prospective investors, creditors and even management. If relationships between various related
items in these financial statements are established, they can provide useful clues to gauge
accurately the financial health and ability of business to make profit. This relationship between two
related items of financial statements is known as ratio. A ratio is thus, one number expressed in
terms of another. A ratio is expressed either as a proportion between two figures or in form of
percentage or as rates.
It is very interesting to know that the use of ratios has become popular during the last few years
only. Originally the bankers used the Current Ratio to judge the capacity of the borrowing business
enterprises to repay the loan and make regular interest payments. But today, it has assumed such an
importance that anybody connected with business turns to ratio for measuring the financial strength
and earning capacity of the business. A supplier of funds in the form of share capital would like to
analyze the accounts to ascertain its earning capacity and future prospects. A banker or other
creditor will measure the repaying capacity and financial strength on the basis of financial ratios.
Only calculating ratio is of no use unless it is interpreted so as to be useful to management in
making policy decisions. Interpretation of ratios can be done either by comparing it with the
ideal/past ratios or by taking help of some related ratios or by comparing with the ratios of other
firms.
In short, business results and situations can understood properly only through ratios. Thus ratio
analysis is an important technique of financial analysis as it is a means of judging the financial
health of the company.
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5.2 Liquidity Ratio
Liquidity ratios measure the ability of the firm to meet its current obligations. A firm should ensure
that it does not suffer from lack of liquidity, and also that it does not have excess liquidity. The
failure of a company to meet its obligations due to lack of lack of sufficient liquidity, will result in
poor creditworthiness, loss of creditors’ confidence, or even in legal tangles resulting in the closure
of the company. A very high degree of liquidity is also bad; idle assets earn nothing. Therefore, it
is necessary to strike a proper balance between high liquidity and lack of liquidity.
1. Current Ratio:
Meaning & Objective:
Current ratio is also known as ‘Working Capital Ratio’ as it is a measure of working capital
available at a particular time. Current Ratio establishes relationship between current assets and
current liabilities. Current Ratio of the firm measures its short-term solvency, which indicates the
rupees of current assets available for each rupee of current liability. The current ratio represents a
margin of safety for creditors. It is generally believed that 2:1 ratio shows a comfortable working
capital position.
Formula:
Current Ratio=Current Assets/Current Liabilities
Current assets:
(Rs.) Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Inventories 913869561732112
415298939 13355265
1328246
0
Debtors 900104543890128
026136734 24394603
2193766
5
Cash / bank balance 2249399 6406755 2413365 654352 489525
Loans / Adv. 12670651 3637734 2227512 3495698 2100366
Total Current Assets19631746
0
6626689
346076550 41899918
3781001
6
12
Current liabilities:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Liabilities &
Provisions99489259 22984930 15812495 19328289 13121717
Current Ratio:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Current Assets 196317460 66266893 46076550 41899918 37810016
Current Liabilities 99489259 22984930 15812495 19328289 13121717
Ratio(Times) 1.97 2.88 2.91 2.17 2.88
Current Ratio
1.97
2.88 2.91
2.17
2.88
0
0.5
1
1.5
2
2.5
3
3.5
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
Here we can see that the current ratio is above 2:1, without current year. As per the current ratio,
value of ratio should be 2:1 which standard ratio is. Compared to previous year there is increase in
the current liability in the year 2007-08. It means that the company might be able to meet its current
obligations by decreasing liability in future also .In short, Higher the current ratio, greater the
margin of safety.
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Recommendation: Company’s condition is not good and there is need to decrease the liability by
using reserve and surplus if the functions are not affected.
2. Quick Ratio:
Meaning & Objective:
Quick ratio establishes a relationship between quick assets and quick liabilities. This ratio used to
check whether the company has adequate cash or cash equivalent to meet its current obligation
without having to liquidate non-cash assets. From the current assets categories, inventory being
least liquid and it normally requires some time for realizing in to cash therefore it is excluded while
calculating quick ratio.
Formula:
Quick Ratio = Quick assets/ Total Quick Liabilities
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Total Current Assets 196317460 66266893 46076550 41899918 37810016
Inventories 91386956 17321124 15298939 13355265 13282460
Quick Assets 104930504 48945769 30777611 28544653 24527556
Quick liabilities:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Total Quick Liabilities 99489259 22984930 15812495 193282891312171
7
Quick Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Quick assets 104930504 48945769 30777611 28544653 24527556
Quick liabilities 99489259 22984930 15812495 19328289 13121717
Ratio(Times) 1.05 2.13 1.95 1.48 1.87
14
Ouick Ratio
1.05
2.131.95
1.48
1.87
0
0.5
1
1.5
2
2.5
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
Standard quick ratio is 1:1 & is considered to represent a satisfactory current financial condition.
The decrease in the quick ratio shows the weak liquidity strength of the company. From the graph,
we came to know that in the quick ratio is less than 1 it means that our firm is not capable to pay all
its current liabilities. Here company’s condition is quiet good as its quick ratio is above 1:1.
Recommendation: company’s condition is quiet good and there is need to decrease the liability by
using reserve and surplus if the functions are not affected.
3. Cash Ratio:
Meaning & Objective:
Cash Ratio establishes a relationship between liquid assets and current liabilities. Cash is the most
stringent measure of liquidity. It generally measures the liquidity of the firm. A high ratio shows
the high liquidity of the firm. In other words we can also say that how much cash a company holds
in hand to pay its liabilities.
Formula: Cash + Marketable Securities/Current Liabilities
15
Total Liquid Assets:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Cash & Bank Bal. 2249399 6406755 2413365 654352 489525
Current Liabilities:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Provisions 99489259 22984930 15812495 19328289 13121717
Cash Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Cash & Bank
Bal.2249399 6406755 2413365 654352 489525
Total C.L. 99489259 22984930 15812495 19328289 13121717
Ratio(Times) 0.023 0.279 0.153 0.034 0.037
Cash Ratio
0.023
0.279
0.153
0.034 0.037
0
0.05
0.1
0.15
0.2
0.25
0.3
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
16
From the data we can see cash ratio for the years 2003-04, 2004-05, 2005-06, 2006-07, 2007-08 are
0.023, 0.279, 0.153, 0.034, 0.037 From the graph we can interpret that in 2006-07 cash ratio is
highest and in 2007-08 cash ratio is lowest. In 2006-07 cash ratio is highest because the portion of
cash is good.
Recommendation: Company should compare the growth rate and inventory rate. The inventory is
more than required for appropriate growth for the company.
5.3 Leverage Ratios
To judge the long-term financial position of the firm, financial leverage, or capital structure,
ratios are calculated. The ratios indicate mix of debt and owner’s equity in financing the firm’s
assets. The leverage ratios may be defined as financial ratios that throw light on the long-term
solvency of a firm as reflected in its ability to assure the long-term creditors with regard to
Periodic payment of interest during the period of the loan.
Repayment of principal on maturity or in predetermined installments at due dates.
Accordingly, there are two different, but mutually dependent and interrelated, types of leverage
ratios.
Ratios that are based on the relationship between borrowed funds and owner’s capital. These
ratios are computed from balance sheet.
Capital structure ratios, popularly called coverage ratios, are calculated from the profit and loss
account.
17
1. Debt Ratio:
Meaning & Objective:
Debt Ratio may be used to analyze the long-term solvency of a firm. The firm may be interested in
knowing the proportion of the interest-bearing debt (also called funded debt) in the capital
structure.
Formula: Total debt/Capital Employed
Capital employed = Share Holders’ Funds + Total Debt
Total Debts:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Secured Loans 82406819 32673410 22564754 18553980 18455464
Unsecured
Loans39966203 16986557 15143179 10144058 13413610
Total Debts 122373022 49659967 37707933 28698038 31869074
Capital Employed:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Share Holders’ funds 32475584 14731306 12862110 11743228 10193415
Total Debts 122373022 49659967 37707933 28698038 31869074
Capital Employed 154848606 64391273 50570043 40441266 42062489
Debt Ratio:
(Rs.)Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
TD 122373022 49659967 37707933 28698038 31869074
CE 154848606 64391273 50570043 40441266 42062489
Ratio(Times) 0.790 0.771 0.746 0.710 0.758
18
Debt Ratio
0.79
0.771
0.746
0.71
0.758
0.66
0.68
0.7
0.72
0.74
0.76
0.78
0.8
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
The ratio is continuously increasing from 2005-06 to 2007-08 because increase in CE more then
total debt. The ratio is increasing from 0.746 to 0.790.
Recommendation: The forgone income of the company’s own assets should be considered and
than company should decide the level of debts. If company can earn more than paid to debtor, than
in that condition company should go for higher debt ratio. Liquidity should be also considered in
this matter.
2. Debt-Equity Ratio:
Meaning & Objective:
The ratio establishes a relationship between long term debts and shareholders’ funds. It reflects the
relative claims of creditors and shareholders against the assets of the firm and in other terms it
indicates the relative proportion of debt and equity in financing the assets of the firm.
Formula: Long term Debt/Shareholders’ funds
19
Long-Term Debt:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Secured Loans 82406819 32673410 22564754 185539801845546
4
Unsecured
Loans39966203 16986557 15143179 10144058
1341361
0
Total 122373022 49659967 37707933 286980383186907
4
Shareholders Fund:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Share Capital 31475584 13731306 11862110 10743228 9193415
Reserves and
Surplus1000000 1000000 1000000 1000000 1000000
Total 32475584 14731306 12862110 117432281019341
5
Debt-Equity Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Total Long-term Debt 122373022 49659967 37707933 28698038 31869074
Total Share holders
Fund32475584 14731306 12862110 11743228 10193415
Ratio(Times) 3.77 3.37 2.93 2.44 3.13
20
Debt-Equity Ratio
3.773.37
2.93
2.44
3.13
0
0.5
1
1.5
2
2.5
3
3.5
4
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
This ratio shows the ratio of borrowed to owned funds of the company. From the above chart it can
be seen that over the five years the ratio has increase from 3.13 to 3.77. This indicates that the
amount of debt is increasing as compared to the owner’s equity in the company.
Recommendation: The ratio should not be more than 1 due to decrease the burden level. Company
should try to decrease the level of debts as it can affect the share prices as well as the wealth of
share holders. Company should try to keep the ratio around 1.
3. Capital Employed to Net worth Ratio:
Meaning & Objective:
There is yet another alternative way of expressing the basic relationship between debt and equity.
One may want to know: How much funds are being contributed together by lenders and owners for
each rupee of the owners’ contribution?
Formula: Capital Employed (C.E.)/Net worth (N.W.)
21
Capital Employed:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Share Holders’ funds 32475584 14731306 12862110 11743228 10193415
Total Debts 122373022 49659967 37707933 28698038 31869074
C.E. 154848606 64391273 50570043 40441266 42062489
Net Worth:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Share Capital 31475584 13731306 11862110 10743228 9193415
Reserves and
Surplus1000000 1000000 1000000 1000000 1000000
Total 32475584 14731306 12862110 117432281019341
5
Capital Employed to Net worth Ratio:
(Rs.)
Particu
lars2007-08 2006-07 2005-06 2004-05 2003-04
C.E. 154848606 64391273 50570043 40441266 42062489
NW 32475584 14731306 12862110 11743228 10193415
Ratio(Times) 4.77 4.37 3.93 3.44 4.13
22
Capital Employed to Net worth Ratio
4.774.37
3.933.44
4.13
0
1
2
3
4
5
6
2007-08 2006-07 2005-06 2004-05 2003-04
year
Analysis:
From the above graph, we can say that in the company, total external contribution is increasing year
by year. This ratio was 4.13 in 2003-04 and declined to 3.44 in 2004-05. The ratio increases after
the year by year from 3.93 to 4.77 due to increase in C.E.
Recommendation: The ratio less than 1 is good for the company. So company should try to
decrease the liability. Company should use reserves and surplus rather than expanding liability. It
will reduce the ratio.
4. Total Liabilities to Total Assets Ratio:
Meaning & Objective:
Current liabilities are generally excluded from the computation of leverage ratios. One may like to
include them on the ground that they are important determinants of the firm’s financial risk since
they represent obligations and expert pressure on the firm and restrict its activities.
Formula: Total liabilities (TL)/ Total Assets (TA)
23
Total Liabilities:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Current
Liabilities99489259 22984930 15812495 19328289 13121717
Secured Loans 82406819 32673410 22564754 18553980 18455464
Unsecured
Loans39966203 16986557 15143179 10144058 13413610
Total 221862281 72644897 53520428 48026327 44990791
Total Assets:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Fixed Assets 58020404 21109310 20305988 178696361737419
0
Current Assets 196317460 66266893 46076550 418999183781001
6
Total 254337864 87376203 66382538 597695545518420
6
Total Liabilities to Total Assets Ratio:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
TL 221862281 72644897 53520428 48026327 44990791
TA 254337864 87376203 66382538 59769554 55184206
Ratio(Times) 0.872 0.831 0.806 0.804 0.815
24
Total Liabilities to Total Assets Ratio
0.872
0.831
0.806 0.8040.815
0.76
0.78
0.8
0.82
0.84
0.86
0.88
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
In the year 2003-04 the ratio was 0.815, it was declining in the year 2004-05 and after that it
increase year by year. The ratio increases because of the total liabilities increases compare to total
assets. It is negative and harmful for the firm.
Recommendation: Company should try to reduce the ratio by increasing the current assets portion,
which will further help to the company to expand their business. Company should also see whether
the liquidity is affected or not.
5.4 Activity Ratios
Activity ratios are concerned with measuring the efficiency in asset management. Funds of
creditors and owners are invested in various assets to generate sales and profits. If the management
of assets is better, the amount of sales is large. Activity ratios are employed to evaluate the
efficiency with which the firm managers and utilizes its assets.
These ratios are also called efficiency ratios or asset utilization ratios. The efficiency with which
the assets are used would be reflected in the speed and rapidity with which assets are converted into
sales. The greater is the rate of turnover or conversion, the more efficient is the
utilization/management, other things being equal. For this reason, such ratios are designated as
turnover ratios. An activity ratio may, therefore, be defined as test of the relationship between
sales and the various assets of a firm.
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Activity ratios, thus, involve a relationship between sales and assets. A proper balance between
sales and assets are generally reflects that assets are managed well.
1. Inventory Turnover Ratio:
Meaning & Objective:
Inventory turnover ratio reflects the efficiency of inventory management. It indicates the number of
times inventory is replaced during the year. The higher ratio, efficient the management of inventory
and vice versa in the organization.
Formula: Cost of Goods sold/ Average inventory
Cost of Goods Sold (COGS):
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 1571711398638851
3
Gross Profit 7256850 7197696 3675383 3285812 2531177
COGS 263715550 186074435 154147321 1538853278385733
6
Average Inventory:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Opening Stock 17321124 15298939 133552651328246
07284361
Closing Stock 91386956 17321124 152989391335526
5
1328246
0
Average Inventory 54354040 16310032 143271021331886
3
1028341
1
26
Inventory Turnover Ratio:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
COGS 263715550 186074435 154147321 153885327 83857336
Avg. Inventory 54354040 16310032 14327102 13318863 10283411
Ratio(Times) 4.85 11.41 10.76 11.55 8.15
Inventory Turnover Ratio
4.85
11.41 10.7611.55
8.15
0
2
4
6
8
10
12
14
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
The inventory turnover ratio is decreasing in the year 2007-08 which indicates that its performance
in terms of generating cash flow is decreasing in this year because the companies’ cash flow has
blocked in inventories. However, in 2006-07 the ratio increased by 11.41 times, which is a positive
sign
Recommendation: Company should compare the cogs with the net sales and try to reduce the cost
as it decreases the profits and net income for the company. Growth rate and inventory rate should
be also compared in order to decide the level of inventory.
2. Debtors Turnover Ratio:
27
Meaning & Objective:
Debtor’s turnover indicates the number of times debtor’s turnover each year. Generally, the higher
the value of debtor’s turnover, the more efficient is the management of credit.
Formula: Credit Sales/ Average Debtors
Credit Sales:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Credit Sales 270972400 193272131 15782270415717113
9
8638851
3
Average Debtors:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Opening Debtors 38901280 26136734 243946032193766
5
1144489
5
Closing
Debtors90010454 38901280 26136734
2439460
3
2193766
5
Average Debtors 64455867 32519007 252656692316613
4
1669128
0
Debtors Turnover Ratio:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Credit Sales 270972400 193272131 157822704 157171139 86388513
Average
Debtors64455867 32519007 25265669 23166134 16691280
Ratio(Times) 4.20 5.94 6.25 6.78 5.18
28
Debtors Turnover Ratio
4.2
5.94 6.256.78
5.18
0
1
2
3
4
5
6
7
8
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
The debtor turn over ratio is 4.20 in current year which is lower then the previous years. In 2003-04
it was 5.18 and next year it was 6.78 in 2004-05 and then in 2005-06 it again decreased and reached
to 6.25 and than in 2006-07, it was 5.95. This indicates that credit management team’s efficiency of
the company is reducing. The reason behind this is the company is following a strict collection or
credit policy because as compared to increase in sales, the increase in debtors is low.
Recommendation: Now-a-days the competition is tougher. Credit period should be expanded to
have more liquidity in business. More credit period can provide the chance to grow for the
company.
3. Assets Turnover Ratio:
Meaning & objective:
A firm’s ability to produce a large volume of sales for a given amount of net assets is the most
important aspect of its operating performance. Unutilized assets increase the firm’s need for costly
financing as well as expenses for maintenance and upkeep. The net assets turnover should be
interpreted cautiously.
Formula: Sales/ Net Assets
29
Sales:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Net Sales 270972400 193272131 157822704 157171139 86388513
Net Assets:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Fixed Assets 58020404 21109310 20305988 178696361737419
0
Net Current Assets 96828202 43281963 30264055 225716302468829
9
Net Assets 154848606 64391273 50570043 404412664206248
9
Assets Turnover Ratio:
(Rs.)
Particular 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 157171139 86388513
N.A. 154848606 64391273 50570043 40441266 42062489
Ratio(Times) 1.75 3.00 3.12 3.89 2.05
Assets Turnover Ratio
1.75
3 3.12
3.89
2.05
00.51
1.52
2.53
3.54
4.5
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
30
Asset turnover ratio for the year 2007-08 is 1.75 lower then the previous years due to increase in
net assets than sales of the firm and it is not good for the company. The ratios for the previous years
are 3, 3.12, 3.89 and 2.05 respectively for 2006-07, 2005-06, 2004-05 and 2003-04. Net Assets
Turnover Ratio is lower, so it is not favorable for the firm.
Recommendation: The ratio should be increase consecutively over the period of the years to have
better condition in the company. The sales should be more than net assets of the company.
4. Total Assets Turnover Ratio:
Meaning & objective:
Total assets turnover ratio indicates productivity ratio, which measures the output produced from
the given input deployed. Assets are inputs, which are deployed to generate production. Higher the
asset turnover ratio, the higher the efficiency or productivity use of inputs.
Formula: Sales/Total Assets
Sales:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 157171139 86388513
Total Assets (T.A.):
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Fixed Assets 58020404 21109310 20305988 17869636 17374190
Current Assets 196317460 66266893 46076550 41899918 37810016
Total 254337864 87376203 66382538 59769554 55184206
Total Assets Turnover Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 157171139 86388513
T.A. 254337864 87376203 66382538 59769554 55184206
Ratio(Times) 1.07 2.21 2.38 2.63 1.57
31
Total Assets Turnover Ratio
1.07
2.212.38
2.63
1.57
0
0.5
1
1.5
2
2.5
3
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
From the above graph, we can say that in the year 2003-04 the ratio is 1.57 while in the year 2004-
05 it increase and reaches to 2.63 which is due to increase in firm’s sales than the total assets while
in year 2005-06 ratio decreases as compared to the year 2004-05 and reaches to 2.38 which is due
to increase in total assets more than the sales. Generally the total assets turnover ratio stand 1:1 is
better. So the year 2007-08 our firm’s ratio is 1.07 means firms’ sales of Rupees 1.07 for 1 Rupees
Investment in fixed and current assets together.
Recommendation: company should try to increase consecutively over the period of the years to
have better condition in the company. The sales should be more than total assets of the company.
5. Fixed Assets Turnover Ratio:
Meaning and Objective:
Company's effectiveness in generating net sales revenue from investments back into the
company. However, the Fixed Asset Turnover ratio evaluates only the Net Property, Plant, and
Equipment investments. Manufacturing and other industries requiring major-investments will often
spend heavily on properties, manufacturing plants, and equipment to push them ahead of the
competition.
Formula: Sales/Net Fixed Assets
Sales:
32
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 15782270415717113
9
8638851
3
Net Fixed Assets:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Fixed Assets 58020404 21109310 20305988 178696361737419
0
Fixed Assets Turnover Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 15782270415717113
986388513
N.F.A. 58020404 21109310 20305988 17869636 17374190
Ratio(Times) 4.67 9.16 7.77 8.80 4.97
Fixed Assets Turnover Ratio
4.67
9.16
7.778.8
4.97
0
2
4
6
8
10
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
The higher the Fixed Asset Turnover ratio, the more effective the company's investments in Net
Property, Plant, and Equipment have become. From the above graph we can say that in the year
2003-04 the ratio was 4.97 while in the year 2004-05 it increase and reaches to 8.80 which is due to
33
increase in firm’s net sales compared to net fixed assets while in year 2007-08 ratio decreases
compared to the year 2003-04 and reaches to 4.67. So our company’s fixed Assets turnover isn’t
favorable compared to the general fixed assets turnover ratio.
Recommendation: Ratio isn’t getting higher, which is bad for the company. Company should keep
growing sales along with remaining fixed assets.
6. Current Assets Turnover:
Meaning & Objective:
Current assets turnover ratio indicates productivity ratio, which measures the output, produced from
the given input employed. Current Assets are inputs, which can be converted in to cash quickly.
Higher the current assets turnover ratio, higher the liquidity of the firm.
Formula: Sales / Current Assets
Current Assets Turnover:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 157171139 86388513
C.A. 196317460 66266893 46076550 41899918 37810016
Ratio(Times) 1.38 2.92 3.43 3.75 2.28
Current Assets Turnover
1.38
2.92
3.433.75
2.28
0
0.5
1
1.5
2
2.5
3
3.5
4
2007-08 2006-07 2005-06 2004-05 2003-04
Year
34
Analysis:
From the above graph, we can say that in the year 2004-05 the ratio is 3.75 while in the year 2005-
06 it decreases and reaches to 3.43 which is due to increase in firm’s current assets than sales while
in year 2006-07 it is again decreased and reaches to 2.92 and also decreases in 2007-08 which is
due to increase in current assets is more than the firms sales. So the current Assets turnover is
unfavorable for this year.
Recommendation: Ratio is decreasing which is not good for the company. Company should find
the reasons for decreasing the sales over the period of the year compare to increase in the current
assets. Company should keep growing sales.
7. Working Capital Turnover Ratio:
Meaning & Objective:
The Working Capital Turnover ratio measures the company's Net Sales from the Working Capital
generated. A company uses working capital (current assets - current liabilities) to fund operations
and purchase inventory. These operations and inventory are then converted into sales revenue for
the company. The working capital turnover ratio is used to analyze the relationship between the
money used to fund operations and the sales generated from these operations.
Formula: Net Sales/Working Capital
Working Capital = total current Assets –total current Liabilities
Net sales:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 15782270415717113
9
8638851
3
35
Working capital:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Total Current
Assets
196317460 66266893 46076550 41899918 37810016
Total Current
Liabilities
99489259 22984930 15812495 19328289 13121717
Working Capital 96828202 43281963 30264055 22571630 24688299
Working Capital Turnover Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Sales 270972400 193272131 157822704 157171139 86388513
Working Capital 96828202 43281963 30264055 22571630 24688299
Ratio(Times) 2.80 4.47 5.21 6.96 3.50
Working Capital Turnover Ratio
2.8
4.475.21
6.96
3.5
0
1
2
3
4
5
6
7
8
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
36
A high or increasing Working Capital Turnover is usually a positive sign, showing the company is
better able to generate sales from its Working Capital. Either the company has been able to gain
more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce
its Working Capital while being able to maintain its sales. But the ratio decrease year by year, and
2.8 in year 2007-08.
Recommendation: The sale has increased in given period of time, but the working capital has
increased more than it in the period of four years. This shows mismanagement to some extent.
Marketing department as well as the financial department should take steps to increase the sales
and decrease the working capital.
5.5 Profitability Ratios
A company should earn profits to survive and grow over a long period of time. Profit is the
difference between revenues and expenses over a period of time. The financial manager should
continuously evaluate the efficiency of company in term of profits. The profitability ratio is
calculated to measure the operating efficiency of the company. Besides management of the
company, creditors and owners are also interested in the profitability of the firm. This is possible
only when the company earns enough profits.
Generally, two major types of profitability ratios are calculated:
Profitability in relation to sales.
Profitability in relation to investment.
1. Gross Profit Ratio:
Meaning & Objective:
The gross profit margin reflects the efficiency with which management produces each unit of
product. This ratio indicates the average spread between the cost of good sold and the sales
revenue.
Formula: Gross Profit * 100/Sales
37
Gross Profit Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
Gross Profit 7256850 7197696 3675383 3285812 2531177
Sales 270972400 193272131 157822704 157171139 86388513
Ratio (%) 2.68 3.72 2.32 2.09 2.93
Gross Profit Ratio
2.68
3.72
2.322.09
2.93
0
0.5
1
1.5
2
2.5
3
3.5
4
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
Gross profit is the difference between sales and cost of good sold. Cost of good sold include
consumption, excise duty, process charges. From the above data we get Gross Profit of 2003-04,
2004-05, 2005-06, 2006-07, 2007-08 are 2.93, 2.09, 2.32, 3.72 and 2.68. In 2005-06 gross profit
ratio is increase from 2.09 to 2.32 In 2006-07, gross profit ratio is increase from 2.32 to 3.72. In
2007-08, gross profit ratio decrease from 3.72 to 2.68.
Recommendation: Company should work on cost cutting activity, lean production, either increase
the margins, if possible, or increase the overall sale by proper marketing strategy.
2. Net Profit Ratio:
Meaning & Objective:
38
It indicates the management’s ability to operate the business with sufficient success not only to
recover from revenues of the current period the cost of merchandise or services but also the
expenses of compensation to the owners for providing their capital at risk. This ratio shows that the
earnings left for shareholders as a percentage of net sales.
Formula: Net Profit * 100/Sales
Net Profit Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
N.P. 6093850 4887696 2875383 2685812 2131177
Sales 270972400 193272131 157822704 1571711398638851
3
Ratio (%) 2.25 2.53 1.82 1.71 2.47
Net Profit Ratio
2.252.53
1.82 1.71
2.47
0
0.5
1
1.5
2
2.5
3
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
By looking the above graph we can say that in the year 2004-05 the ratio was 1.71% as compared
to 1.82 in the year 2005-06. It increase and reaches to 2.53 which is due to more increase in profit
after tax than the sales. There after ratio decrease to the 2.25 in 2007-08. A high Net Profit Ratio is
showing good indication of company’s efficiency at its business and the company is also on the
path of growth. For year 2007-08, ratio isn’t showing good indication of company’s efficiency at its
business.
39
Recommendation: This shows decrease in profit margins or increase in expenses to some extent.
Marketing department should take steps to increase the sales and the financial department should
try to increase the investing activity and decrease the costs in order to increase the net profit.
3. Return on Investment Ratio:
Meaning & Objective:
Return on investment is a very good performance measure. Different companies calculate this
return with different formula and call it also with different name like return on invested capital,
Return on Capital Employed, Return on Net Assets etc.
Formula: PAT/Total Assets
Return on Investment Ratio:
(Rs.)
Particulars 2007-08 2006-07 2005-06 2004-05 2003-04
PAT 6093850 4887696 2875383 2685812 2131177
T.A 254337864 87376203 66382538 597695545518420
6
Ratio (Times) 0.02 0.06 0.04 0.05 0.04
Return on Investment Ratio
0.02
0.06
0.04
0.05
0.04
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
2007-08 2006-07 2005-06 2004-05 2003-04
Year
Analysis:
40
From the above graph, we can interpret that in year 2003-04 the ratio was 0.04 times and which
was increased in year 2004-05 and reaches to 0.05 times. In year 2006-07 ratio was increased to
0.06 due to increase in sales and increase in total assets. But in 2007-08, the ratio was decreased to
0.02
Recommendation: IN the year 2007-08, ratio decrease too much. This could be because of
expansion planning of the company or due to mismanagement to some extent.
6. Findings
Current assets is 1.97 times from the Current liabilities in the current year .we see that current assets is increasing constantly and quick assets is growing more than the other year.
In the year 2007-08 inventory turn over ratio is 4.85 Times. It is decrease from the last year due to inventory increasing fast from the cost of goods sold.
In the year 2007-08 cash ratio is 0.023 Times. It is decrease from the last year due to stock
increasing fast in the company.
41
7. Recommendations
Working Capital
The Company has high internal accruals. Hence it should not go for working capital loan. It should try to reduce it inventory consumption period and Debtors collection period. It should try to reduce it Current Asset.
Inventory Management
The Company should implement inventory management technique efficiently as there working capital amount is mostly blocked in inventory. If inventory holding is reduce there will be more Working Capital.
Receivable Management
The Company has to maintain against schedule in order to keep a proper track of the receivables. This schedule helps in finding out the payment which have gone beyond the credit limit. It would also help the management in taking proper action to recover the payments.
42
8. LIMITATIONS OF THE ANALYSIS
This financial analysis carried out does not consider the effect of the opportunity cost of money. It
ignores the present value and the future value of money.
No information related to the effects of the external factors on the business conditions and the
company policy can be obtained through the analysis.
The analysis carried out is based only on the past information. No one can successfully predict the
future conditions and strategies based on this data.
The standards for comparison data of the other companies are not available easily. So an overall
view of the analysis cannot be brought about through this analysis,
Moreover at times there exists a confusion to record some of the expenses or financial terms into
both different categories. So one cannot be 100% accurate in such analysis.
43
44