ratio analisys
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EXECUTIVE SUMMERY
I work out study on Ratio Analysis in the FLAMINGO INDUSTRIES
LIMITED, Khed.
It is a crucial topic to me to study the procedure, methods, merit, demerit of the ratio
analysis under study I referred various resource persons like Mr. C. A. Pujari (Sr.
Executive Accounts ) & I got lot of information on the topic. Familiar with the
working environment in an organization, deal with at least some of the problem or
aspects practically and tackle them or at least understand and analyze them. This of
course paves a road for the where they have to lead later.
Customers are satisfied with the performance of the company and expect the
after sales service to be more efficient.
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Company Profile
Flamingo Industries Limited has come a long way since its origin in a
kitchen laboratory in 1941.
Over the years, Flamingo came to be known as an industry leader in the
area of agro-chemicals and agro-chemical intermediates. Using its
expertise in Chemistry and Chemical technology, Flamingo also expanded
its chemicals manufacturing range to include Water treatment chemicals
and Polymer Additives and few other speciality chemicals.
Flamingo¶s commitment to sustainable development led us to venture into
the field of Environment and Bio-technology. Flamingo is a Pioneer and
Technology leader in rapid conversion of Municipal Solid Waste to
organic compost. Our organic plant protection and soil/crop productivity
enhancers are well accepted in the market.
In order to ensure focused attention to the expanded range of activities, the
agro business division was spun off as a separate company, Flamingo
Crop Care Limited in 2003. Today, Flamingo is organized into two
divisions i.e. a. Chemicals, b. Environment and Biotech.
Ever since our inception, we have built up a solid history and reputation of
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developing, manufacturing and exporting chemicals. We have achieved
over 100 product and process breakthroughs that even now are serving the
specific needs of various clients.
We have excellent research facilities in Mumbai and at our manufacturing
locations. During the last six decades, we have received numerous awards
in recognition of our dedication and excellence in the field of chemicals.
From the very beginning, in 1941, when our founder Mr. C. C. Shroff
established Flamingo, we have believed that in every interaction we have
with our clients, our individual as well as our corporate character, integrity
and professionalism is under scrutiny.
We have always kept the virtues of high quality, cost effectiveness,
consumer need fulfillment, fair prices and fair trade practices uppermost in
our minds.
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VISION
We the Members of Flamingo Parivaar Visualise Flamingo as a Responsible,
Respected and Sound Corporate Citizen Serving India and World through Its
knowledge, Services, Products and Solutions Through holistic approach
Integrating chemistry, Chemical Technology, Pharma Technology, Biology, Soil
Management, Water Management, City and Farm Waste Management To serve
Industry, Agriculture and Horticulture With Growth, Value Addition, Wealth
Generation, Customer Joy, Investor fulfillment, Society Satisfaction and
Enrichment of its people.
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Quality Policy
We at Flamingo Industries Limited, manufacturer and
supplier of Industrial Chemicals, Intermediates and Crop
Protection Chemicals are committed to :
1 Enhance customer satisfaction by providing
Quality Products, Information, and Services;
2 Comply with applicable regulatory requirements;
3 Continual improvement of the Quality
Management System;
4 Establish and review the Quality objectives;
5 Be a preferred alliance partner for development of
new products;
6 Work intensely on new business developments;
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Board Of Dire ctors
K. C. Shroff
Chairman Emeritus
G. Narayana
Chairman Emeritus
A. C. Shroff
Chairman & MD
Usha A Shroff
Vice-Chairperson
Other Board Members
Setumadhav Rangrao Potdar - Executive Director
Dipesh K. Shroff - Director
Ramchandra N. Bhogale - Director
Atul G. Shroff - Director
Harish Narendra Motiwalla - Director
Priyam S Jhaveri - Director
Madhukar Balvantray Parekh - Director
Nilesh Bhaskar Sathe - Director
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Awards
2004 National Energy Conservation Award (Second Prize) in
chemical sector for the year 2004 from Ministry of Power, New
Delhi. (For Roha Site)
2004 International Spirit at work award for nurturing the human spirit
at work and inspiring others by your example.
2004 ICMA Award for Excellence in Management of Health, Safety
and Environment.
2004 Greentech Safety Silver Award by Greentech Foundation, New
Delhi.
2003 National Safety Council ± Maharashtra Chapter ± Maharashtra
Safety Award for achieving Lowest Accident Frequency Rate
During The Year 2003 in Chemicals and Fertilizers Sector. (For
Lote Parshuram, Ratnagiri).
1998-99 GPFA Prestige Award for outstanding contribution in
developing indigenous technology for manufacture of pesticides
and winning recognition in domestic as well as international
market and giving thrust to India¶s Export contribution
1995-96 The Chartered Financial Analyst is pleased to present the
Certificate of Honour
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OBJECTIVES OF THE STUDY
y To understand the importance and use of different types of ratios in business.
y To assess the liquidity of the company.
y To evaluate the financial condition and profitability of the company.
y To know the working capital requirement of the company.
y To compare the past performance of the company systematically.
y To identify the financial strengths and weakness of the company.
y To find out the utility of financial ratios in credit analysis and determining the
financial Capacity.
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RESEARHCH METHODOLOGY:-
A research design is the detailed blue print used to guide a research study towards its
objective. It helps to collect, measure and analysis of data. The study undertaken is of
Descriptive Historical Research Method. Descriptive research is those which are
connected with The focus of this chapter is on the methodology used for the collection
of data for research. Data constitutes the subject matter of the analyst. The primary
sources of the collection of sources of the collection of data are observations,
Interviews and the questionnaire technique. The secondary sources are collections of
data are from the printed and annually published materials. A questionnaire form is
prepared to secure responses to certain questions. It is device for securing answers to
questions by using a form. The questionnaire technique is economical and time saving
and is an important tool of collecting information.
Research Design:
describing the characteristics of the particular topic.
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Secondary data:
Secondary data highlights the contextual familiarities for primary data collection. It
provides rich insights into the research process.
Secondary data is collected through magazine, reference books, journal, articles,
websites etc. Secondary data like balance sheet and profit and loss account and cash
flow statement collected through company and company websites and part of theory
from reference book.
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Introduction to Ratio Analys is :-
Meaning of Ratio:-
Ratios are relationships expressed in mathematical terms between figures which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures which are not at all connected with each other.
Moreover, absolute figures are also unfit for comparison.
Ratio can be expressed in two ways:
(1). Times: - When one value is divided by another, the unit used to express the
quotient is termed as ³Times´. For example, if out of 100 students in a class, 80 are
present, the attendance ratio can be expressed as follows:
= 80 / 100 = .8 Times
(2). Percentage: - If the quotient obtained is multiplied by 100, the unit of expression
is termed as ³Percentage´. For instance, in the above example, the attendance ratio as
a percentage of the total number of students is as follows: = .8 X 100 = 80%
Accounting ratio are, therefore mathematical relationships expressed between inter-
connected accounting figures.
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Following are the objectives of ratio analysis technique:
y A financial ratio is a relationship between two financial variables. It helps to
ascertain the financial condition of a firm.
y In ratio analysis, the liquidity ratio measures the firm¶s ability to meet current
obligations and is calculated by establishing relationships between current
assets and current liabilities.
y The profitability ratio measure the overall performance of the firm by
determining the effectiveness of the firm in generating profit and are
calculated by establishing relationship between profit figures on the one hand
and sales and assets on the other.
y The main objective of using this technique to judge the performance of the
business. Ratio throws light on the profitability of the business, solvency
position of the business, liquidity of the business etc.
y Comparisons of ratios of a business enterprise either with ratios of the same
concern for past periods or with ratio of the concern for same period or both,
reveals the weakness of the business and the point of its strengths. Points of
weakness are further investigated and corrective action is taken. Thus, ratios
are useful and perhaps the indispensable part of financial analysis. They
provide the analyst of underlying conditions.
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Ratio analysis is relevant in assessing the performance of a firm in
respect of the following aspects:
y Liquidity position
y Long term solvency
y Operating efficiency
y Overall profitability
y Inter firm comparison
y Trend analysis We can use ratio analysis to try to tell us whether the business
is profitable
y has enough money to pay its bills
y could be paying its employees higher wages
y is paying its share of tax
y is using its assets efficiently
y has a gearing problem
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Importance of RatioA
nalys is :-
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 and
enables the drawing of inferences regarding the performance of a firm. Ratio analysis
is relevant in assessing the performance of a firm in respect of the following aspects:
y Liquidity Position:-
With the help of ratio analysis conclusions 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 obligations 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 is reflected in the liquidity ratios of a firm. The liquidity ratios
are particularly useful in credit analysis by banks and other suppliers of short-term
loans.
y Long-term Solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability of a
firm. This aspect of the financial position of a borrower is of concern to the long-term
creditors, security analyst and the present and potential owners of a business. The
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long-term solvency is measured by the leverage or capital structure and profitability
ratios which focus on earning power and operating efficiency. Ratio analysis reveals
the strengths and 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.
y Operating Efficiency:-
Yet another dimension of the usefulness of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of efficiency in the
management and utilization of its assets. The various activity ratios measure 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.
y Overall Profitability:-
Unlike the outside parties which are interested in one aspect of the financial position
of a firm, the management is constantly concerned about the overall profitability of
the enterprise. That is, they are concerned about the ability of the firm to meet its
short-term as well as long-term obligations to its creditors, to ensure a reasonable
return to its owners and secure optimum utilization of the assets of the firm. This is
possible if an integrated view is taken and all the ratios are considered together.
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y Inter-firm Comparison:-
Ratio analysis not only throws light on the financial position of a firm but also serves
as a stepping stone to remedial measures. This is made possible due to inter-firm
comparison and comparison with industry averages. A single figure of a particular
ratio is meaningless unless it is related to some standard or norm. One of the popular
techniques is to compare the ratios of a firm with 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 firm¶s position vis-a-vis 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 and in that light, take remedial measures. Ratio analysis
provides data for inter-firm comparison. Ratios highlight the factors associated with
successful and unsuccessful firms. They also reveal strong firms and weak firms,
over-valued and under-valued firms.
y Make Intra-firm Comparison Possible:-
Ratio analysis also makes possible comparison of the performance of the different
division of the firm. The ratios are helpful in deciding about their efficiency or
otherwise in the past and likely performance in the future.
y Trend Analysis:-
Finally, ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of affirm is improving or deteriorating over the
years. This is made possible by the use of trend analysis. The significance of trend
analysis of ratio lies in the fact that the analysts can know the direction of movement,
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that is, whether the movement is favourable or unfavourable. 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.
y Simplifies Financial Statements:-
Ratio analysis simplifies the comprehension of financial statements. Ratios tell the
whole story of change in the financial condition of the business.
y Help in Planning:-
Ratio analysis helps in planning and forecasting. Over a period of time a firm or
industry develops certain norms that may indicate future success or failure. If
relationship changes in firm¶s data over different time periods, the ratios may provide
clues on trends and future problems.
Thus, ³ratios can assist management it its basic function of forecasting, planning,
coordination, control and communication´.
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Limitation of the Ratio Analys is :-
Ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various
limitations. The operational implication of this is that while using ratios, the
conclusions should not be taken on their face value. Some of the limitations which
characterise ratio analysis are as follows:
y Difficulty in Comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated with their
comparability. One technique that is employed is inter-firm comparison. But such
comparisons are vitiated by different procedures adopted by various firms. The
differences may relate to:
y Differences in the basis of inventory valuation
y Different depreciation methods
y Estimated working life of assets, particularly of plant and equipments
y Amortization of intangible assets like goodwill, patents and so on
y Amortization of deferred revenue expenditure such as preliminary
expenditure and discount on issue of shares
y Capitalization of lease
y Treatment of extraordinary items of income and expenditure and so on.
Secondly, apart from different accounting procedures, companies may have different
accounting periods, implying differences in the composition of the assets particularly
current assets. For these reasons, the ratios of two firms may not be strictly
comparable.
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Another basis of comparison is the industry average. This presupposes the
availability, on a comprehensive scale, of various ratios for each industry group over a
period of time. If, however, as is likely, such information is not compiled and
available, the utility of ratio analysis would be limited.
y Impact of Inflation:-
The second major limitation of the ratio analysis as a tool of financial analysis is
associated with price level changes. This, in fact, is a weakness of the traditional
financial statements which are based on historical costs. And implication of the is
feature of the financial statements as regards ratio analysis is that assets acquired at
different periods are, in effect, shown at different prices in the balance sheet, as they
are not adjusted for changes in the price level. As a result, ratio analysis will not yield
strictly comparable and therefore dependable results. To illustrate, there are two firms
which have identical rates of returns on investments, say 15 per cent. But one of these
had acquired its fixed assets when prices were relatively low, while the other one had
purchased them when prices were high. As a result the book value of the fixed assets
of the former type of firm would be lower, while that of the latter higher. From the
point of view of profitability, the return on the investment of the firm with a lower
book value would be over-stated. Obviously, identical rates of returns on investment
are not indicative of equal profitability of the two firms. This is a limitation of ratios.
y Conceptual Diversity:-
Yet another factor which influences the usefulness of ratios is that there is difference
of opinion regarding the various concepts used to compute the ratios. There is always
room for diversity of opinion as to what constitutes shareholders¶ equity, debt, assets,
and profit and so on. Different firms may use these terms in different senses or the
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same firm may use them to mean different things at different times.
Reliance on a single ratio for a particular purpose may not be a conclusive indicator.
For instance, the current ratio alone is not an adequate measure of short-term financial
strength; it should be supplemented by the acid-test ratio, debtor turnover ratio and
inventory turnover ratio to have a real insight into the liquidity aspect.
y Limitation of Financial Statements:-
Ratios are based only on the information which has been recorded in the financial
statements. Financial statements suffer from a number of limitations, the ratios
derived there from, therefore, are also subject to those limitations. For example,
nonfinancial changes through important for the business are not revealed by the
financial statements. If the management of the company changes, it may have
ultimately adverse effects on the future profitability of the company but this cannot be
judged by having a glance at the financial statements of the company.
Similarly, the management has a choice about the accounting policies. Different
accounting policies may be adopted by management of different companies regarding
valuation of inventories, depreciation, research and development expenditure and
treatment of deferred revenue expenditure, etc. The comparison of one firm with
another on the basis of ratio analysis without taking into account the fact of
companies having different accounting policies, will be misleading and meaningless.
Moreover, the management of the firm itself may change its accounting policies form
one period to another. It is, therefore, absolutely necessary that financial statements
are they subjected to close scrutiny before an analysis attempted on the basis of
accounting ratio. The financial analyst must carefully examine the financial
statements and make necessary adjustments in the financial statements on the basis of
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disclosure made regarding the accounting policies before undertaking financial
analysis.
The growing realization among accountants all over the world, that the accounting
policies should be standardized, has resulted in the establishment of International
Accounting Standards Committee which has issued a number of International
Accounting Standards. In our country, the Institute of Chartered Accountants of India
has established Accounting Standards Board for formulation of requisite accounting
standards. The accounting Standards Board had already issued nineteen standards
including AS-1: Disclosure of accounting Policies. The standard AS-1 has been made
mandatory in respect of accounting periods beginning on or after 1.4.1991. It is hoped
that in the years to come, with the progressive standardization of accounting policies,
this problem will be solved to a great extent.
y Ratio alone are not adequate:-
Ratios are only indicators; they cannot be taken as final regarding good or bad
financial position of the business. Other things have also to be seen. For example, a
high current ratio does not necessarily mean that the concern has a good liquid
position in case current assets mostly comprise outdated stocks. It has been correctly
observed, ³Ratio must be used for what they are ± financial fools. Too often they are
looked upon as ends in themselves rather than as a means to an end. The value of a
ratio should not be regarded as good or bad inter se. It may be an indication that a
firm is weak or strong in a particular area, but it must never be taken as proof´. Ratios
may be linked to railroads. They tell the analyst, ³Stop, look, and listen´.
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y Window Dressing:-
The term window dressing means manipulation of accounts in a way so as to conceal
vital facts and present the financial statement in a way to show a better position that
what is actually is. On account of such a situation, presence of a particular ratio may
not be a definite indicator of good or bad management. For example, a high stock
turnover ratio is generally considered to be an indication of operational efficiency of
the business. But this might have been achieved by unwarranted price reductions or
failure to maintain proper stock of goods.
Similarly, the current ratio may be improved just before the Balance Sheet date by
postponing replenishment of inventory. For example, if a company has got current
assets of Rs. 4000 and current liabilities of Rs. 2000, the current ratio is 2, which is
quite satisfactory. In case the company purchases goods of Rs. 2000 on credit, the
current assets would go up to Rs. 6000 and current liabilities to Rs. 4000. Thus,
reducing the current ratio to 1.5. The company may, therefore, postpone the purchases
for the early next year so that its current ratio continues to remain at 2 on the Balance
Sheet date. Similarly, in order to improve the current ratio, the company may pay off
certain pressing current liabilities before the Balance Sheet date. For example, if in
the above case the company pays current liabilities of Rs. 1000, the current liabilities
would stand reduced to Rs. 1000, current assets would stand reduced to Rs. 3000 but
the current ratio would go up to 3.
y No Fixed Standards:-
No fixed standards can be laid down for ideal ratios. For example, current ratio is
generally considered to be ideal if current assets are twice the current liabilities.
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However, in case of those concerns which have adequate arrangements with their
bankers for providing funds when they require, it may be perfectly ideal if current
assets are equal to slightly more than current liabilities.
It is, therefore, necessary to avoid many rules of thumb. Financial analysis is an
individual matter and value for a ratio which is perfectly acceptable for one company
or one industry may not be at all acceptable in case of another.
y Ratios are a Composite of Many Figures:-
Ratios are a composite of many different figures. Some cover a time period, others are
at an instant of time while still others are only averages. It has been said that, a man
who has his head in the oven and his feet in the ice-box is on the average,
comfortable´! Many of the figures used in the ratio analysis are no more meaningful
than the average temperature of the room in which this man sits. A balance sheet
figure shows the balance of the account at one moment of one day. It certainly may
not be representative of typical balance during the year.
It may, therefore, be concluded that ratio analysis, if done mechanically, is not only
misleading but also dangerous. It is indeed a double edged sword which requires a
great deal of understanding and sensitivity of the management process rather than
mechanical financial skill. It has rightly been observed: ³The ratio analysis is an aid to
management in taking correct decisions, but as a mechanical substitute for thinking
and judgment, it is worse than useless. The ratio if discriminately calculated and
wisely interpreted can be a useful tool of financial analysis´.
Finally, ratios are only a post-mortem analysis of what has happened between two
balance sheet dates. For one thing, the position in the interim period is not revealed
by ratio analysis. Moreover, they give no clue about the future.
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In brief, ratio analysis suffers from some serious limitations. The analyst should not
be carried away by its oversimplified nature, easy computation with a high degree of
precision.
The reliability and significance attached to ratios will largely depend upon the quality
of data on which they are based. They are as good as the data itself. Nevertheless,
they are an important tool of financial analysis.
Financial Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived
from the information in a company's financial statements. 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.
Financial ratios are calculated from one or more pieces of information from a
company's financial statements. For example, the "gross margin" is the gross profit
from operations divided by the total sales or revenues of a company, expressed in
percentage terms. In isolation, a financial ratio is a useless piece of information. In
context, however, a financial ratio can give a financial analyst an excellent picture of
a company's situation and the trends that are developing.
A ratio gains utility by comparison to other data and standards. Taking our example, a
gross profit margin for a company of 25% is meaningless by itself. If we know that
this company's competitors have profit margins of 10%, we know that it is more
profitable than its industry peers which are quite favourable. If we also know that the
historical trend is upwards, for example has been increasing steadily for the last few
years, this would also be a favourable sign that management is implementing effective
business policies and strategies.
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Financial ratio analysis groups the ratios into categories which tell us about different
facets of a company's finances and operations. An overview of some of the categories
of ratios is given below.
y Leverage Ratios which show the extent that debt is used in a company's
capital structure.
y Liquidity Ratios which give a picture of a company's short term financial
situation or solvency.
y Operational Ratios which use turnover measures to show how efficient a
company is in its operations and use of assets.
y Profitability Ratios which use margin analysis and show the return on sales
and capital employed.
y Solvency Ratios which give a picture of a company's ability to generate cash
flow and pay it financial obligations.
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Types of Ratios :-
Liquidity Ratios
y Liquidity refers to the ability of a firm to meet its short-term financial
obligation when and as they fall due.
y The main concern of liquidity ratio is to measure the ability of the firms to
meet their short-term maturing obligations. Failure to do this will result in the
total failure of the business, as it would be forced into liquidation.
Current Ratio
The Current Ratio expresses the relationship between the firm¶s current assets and its
current liabilities. Current assets normally include cash, marketable securities,
accounts receivable and inventories. Current liabilities consist of accounts payable,
short term notes payable, short-term loans, current maturities of long term debt,
accrued income taxes and other accrued expenses (wages).
Current Ratio = Current Assets / Current Liabilities
The rule of thumb says that the current ratio should be at least 2 that are the current
assets should meet current liabilities at least twice.
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Quick Ratio
Measures assets that are quickly converted into cash and they are compared with
current liabilities. This ratio realizes that some of current assets are not easily
convertible to cash e.g. inventories.
The quick ratio, also referred to as acid test ratio, examines the ability of the business
to cover its short-term obligations from its ³quick´ assets only (i.e. it ignores stock).
The quick ratio is calculated as follows
Quick Ratio / Acid-test Ratio = Quick Assets / Current Liabilities
Clearly this ratio will be lower than the current ratio, but the difference between the
two (the gap) will indicate the extent to which current assets consist of stock.
Turnover Ratio
The liquidity ratios discussed so far relate to the liquidity of a firm as a whole.
Another way of examining the liquidity is to determine how quickly certain current
assets are converted into cash. The ratios to measure these are referred to as turnover
ratios. In fact, liquidity ratios are not independent of activity ratios. Poor debtor or
inventory turnover ratios limit the usefulness of the current and acid-test ratios. Both
obsolete / unsalable inventory and uncollectible debtors are unlikely to be sources of
cash. Therefore, the liquidity ratios should be examined in conjunction with relevant
turnover ratios affecting liquidity.
Inventory Turnover Ratio
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It is computed by dividing the cost of goods sold by the average inventory. Thus,
Inventory Turnover Ratio = Cost of Goods sold / Average Inventory. This ratio
measures the stock in relation to turnover in order to determine how often the stock
turns over in the business. It indicates the efficiency of the firm in selling its product.
It is calculated by dividing the cost of goods sold by the average inventory. The ratio
shows a relatively high stock turnover which would seem to suggest that the business
deals in fast moving consumer goods.
y The trend shows a marginal increase in days which indicates a slowdown of
stock turnover.
y The high stock turnover ratio would also tend to indicate that there was little
chance of the firm holding damaged or obsolete stock.
Debtors Turnover Ratio
It is determined by dividing the net credit sales by average debtors outstanding during
the year. Thus,
Debtors turnover ratio = Net credit sales / Average debtors
Net credit sales consist of gross credit sales minus returns, if any, from customers.
Average debtors are the simple average of debtors including bills receivable at the
beginning and at the end of the year. The analysis of the debtors¶ turnover ratio
supplements the information regarding the liquidity of one item of current assets of
the firm. The ratio measures how rapidly receivables are collected. A high ratio is
indicative of shorter time-lag between credit sales and cash collection.
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Creditors Turnover Ratio
It is a ratio between net credit purchases and the average amount of creditors
outstanding during the year. It is calculated as follows:
Creditors Turnover Ratio = Net credit purchases / Average Creditors
A low turnover ratio reflects liberal credit terms granted by suppliers, while a high
ratio shows that accounts are to be settled rapidly. The creditor¶s turnover ratio is an
important tool of analysis as a firm can reduce its requirement of current assets by
relying on supplier¶s credit. The extent to which trade creditors are willing to wait for
payment can be approximated by the creditors¶ turnover ratio.
Financial Leverage Ratios
y The ratios indicate the degree to which the activities of a firm are supported
by creditors¶ funds as opposed to owners.
y The relationship of owner¶s equity to borrowed funds is an important
indicator of financial strength.
y The debt requires fixed interest payments and repayment of the loan and legal
action can be taken if any amounts due are not paid at the appointed time. A
relatively high proportion of funds contributed by the owners indicate a
cushion (surplus) which shields creditors against possible losses from default
in payment.
y The greater the proportion of equity funds, the greater the degree of financial
strength.
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Financial leverage will be to the advantage of the ordinary shareholders as long as the
rate of earnings on capital employed is greater than the rate payable on borrowed
funds.
Debt to Equity ratio
This ratio indicates the extent to which debt is covered by shareholders¶ funds. It
reflects the relative position of the equity holders and the lenders and indicates the
company¶s policy on the mix of capital funds. The debt to equity ratio is calculated as
follows:
Debt±Equity Ratio = Long-term Debt / Shareholders¶ Equity
Debt to Total Capital Ratio
The relationship between creditors¶ funds and owner¶s capital can also be expressed
in terms of another leverage ratio. This is the debt to total capital ratio. Here, the
outside liabilities are related to the total capitalization of the firm and not merely to
the shareholder¶s equity.
Essentially, this type of capital structure ratio is a variant of the D/E, ratio described
above. In can be calculated as follows:
Debt to Total Capital Ratio = Total Debt / Total Assets
Profitability Ratios
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Profitability is the ability of a business to earn profit over a period of time. Although
the profit figure is the starting point for any calculation of cash flow, as already
pointed out, profitable companies can still fail for a lack of cash.
y A company should earn profits to survive and grow over a long period of
time.
y Profits are essential, but it would be wrong to assume that every action
initiated by management of a company should be aimed at maximising profits,
irrespective of social consequences.
The ratios examined previously have tendered to measure management efficiency and
risk. Profitability is a result of a larger number of policies and decisions. The
profitability ratios show the combined effects of liquidity, asset management
(activity) and debt management (gearing) on operating results. The overall measure of
success of a business is the profitability which results from the effective use of its
resources.
Gross Profit Margin
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y Normally the gross profit has to rise proportionately with sales.
y It can also be useful to compare the gross profit margin across similar
businesses although there will often be good reasons for any disparity.
y This indicates that the rate in increase in cost of goods sold are less than rate
of increase in sales, hence the increased efficiency.
Gross Profit Margin = Gross Profit / Sales X 100
Net Profit Margin
This is a widely used measure of performance and is comparable across companies in
similar industries. The fact that a business works on a very low margin need not cause
alarm because there are some sectors in the industry that work on a basis of high
turnover and low margins, for examples supermarkets and motorcar dealers.
What is more important in any trend is the margin and whether it compares well with
similar businesses. However, to know how well the firm is performing one has to
compare this ratio with the industry average or a firm dealing in a similar business.
Net Profit Margin = Net Profit / Sales X 100
Earnings per Share (EPS)
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Whatever income remains in the business after all prior claims, other than owners
claims (i.e.ordinary dividends) have been paid, will belong to the ordinary
shareholders who can then make a decision as to how much of this income they wish
to remove from the business in the form of a dividend, and how much they wish to
retain in the business. The shareholders are particularly interested in knowing how
much has been earned during the financial year on each of the shares held by them.
For this reason, earnings per share figure must be calculated. Clearly then, the earning
per share calculation will be:
EPS = Net Profit available to Equity ± holders / Number of ordinary shares
outstanding
Dividend Pay-out Ratio
D/P ratio is also known as pay-out ratio. It measures the relationship between the
earnings belonging to the ordinary shareholders and the dividend paid to them. In
other words, the D/P ratio shows what percentage share of the net profits after taxes
and preference dividend is paid out as dividend to the equity-holders. It can be
calculated by dividing the total dividend paid to the owners by the total profits /
earnings available to them. Alternatively, it can be found out by dividing the DPS by
the EPS. Thus,
D/P Ratio = Dividend per ordinary Share (DPS) / Earnings per share (EPS) X
100
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Activity Ratios
If a business does not use its assets effectively, investors in the business would rather
take their money and place it somewhere else. In order for the assets to be used
effectively, the business needs a high turnover. Unless the business continues to
generate high turnover, assets will be idle as it is impossible to buy and sell fixed
assets continuously as turnover changes. Activity ratios are therefore used to assess
how active various assets are in the business.
Total Assets Turnover
Asset turnover is the relationship between sales and assets
y The firm should manage its assets efficiently to maximise sales.
y The total asset turnover indicates the efficiency with which the firm uses all
its assets to generate sales.
y It is calculated by dividing the firm¶s sales by its total assets.
y Generally, the higher the firm¶s total asset turnover, the more efficiently its
assets have been utilized.
Total Assets Turnover Ratio = Cost of Goods Sold / Average Total Assets
Fixed Asset Turnover
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The fixed assets turnover ratio measures the efficiency with which the firm has been
using its fixed assets to generate sales.
y Generally, high fixed assets turnovers are preferred since they indicate a
better efficiency in fixed assets utilization.
y It appears that the activity of the business is relatively constant, with a slight
upward trend.
y The ratio also confirms that the business places a much greater reliance on
working capital than it does on the fixed assets as the fixed assets (2001 and
2002) turned over more quickly than stock turnover.
Fixed Assets Turnover = Cost of Goods Sold / Average Fixed Assets
.
METHODOLOGY FOR ANALYSIS:-
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The methodology opted for carrying out project was by way of collection of data
from the company s annual reports for the past three years i.e. from 2006-2007 to
2008-2009, for the calculation of ratios. The theory related to ratios was gathered
from various financial management books, which served the purpose of calculation
and analysis of ratios. Further based on the above statements ratios related to
liquidity, turnover, solvency, profitability and over profitability groups and
miscellaneous groups have been calculated and interpreted in an intra firm
comparison method. Similarly the ratios have been presented in graphical format to
have clear understanding of it during three financial years and changes in it. ( we are
taking all figurers in lack )
LIQUIDITY GR OUP
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This ratio is calculated for knowing short term solvency of the organization.
This ratio indicates the solvency of the business i.e. ability to meet the liabilities of
the business as and when they fall due. The Current Assets are the sources from
which the current liabilities are to be met. Certain authorities have suggested that in
order to ensure solvency of a concern current assets should be twice the current
liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon the
nature of industry. The standard Current Ratio applicable to the Indian industries is
1.33:1. Here the Current Ratio of Flamingo industries Ltd indicates that it has got
sufficient assets to pay off short term liabilities as and when they fall due. The
company has maintained its short term solvency through out the years and it is
improving its short term solvency status which is appreciable
2) Acid Test Ratio: -
Formula 2006 - 07 2007 - 08 2008 - 09
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Li ui Assets/Li ui
Liabilities
1.20 1.20 1.20
Li ui Assets 33417.87 37054.04 37021.73
Li ui
Liabilities
28336.31 31618.92 29869.33
nterpretation: -
Thi rati serves as a realisti gui e t the shor t term solvency of the
0
0.2
0.4
0.6
0.8
1
1.2
2006 - 07 2007 - 08 2008 - 09
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company. It is a measure of the extent to which liquid resources are immediately
available to meet current obligation.In so far as it eliminates inventories as part
ofcurrent ratio, this is a more rigorous test of liquidity than the Current Asset Ratio
and when used in conjunction with it, gives a better picture of the firms ability to
meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is
considered to be ideal and standard. Here the Acid Ratios of Flamingo industries Ltd
through out the years considered in dicates that it has adequate assets which can be
converted in the form of cash almost immediately to pay off those liabilities which are
to be paid off immediately. It must be remembered that the company is improving its
Acid Test Ratio year by year at a constant rate which is appreciable as such higher
liquid ratio better the situation.
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T R VER GR UP
1) Fi ed Assets Turnover Group:- ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
et ales/Fi ed
Assets
12.83 10 8
et sales
58761.14 68370.32 62372.01
Fi ed Asset 4578.72 6833.47 7894.69
nterpretation: -
This ratio measures the eff iciency in the utili ation of f i ed assets. This ratio
0
2
4
6
8
10
12
14
2006 - 07 2007 - 08 2008 - 09
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indicates whether the fixed assets are being fully utilized. It is an important measure
of the efficient and profit earning capacity of the business. Normally standard ratio
is taken as five times.
The financial year 2009 had not so good fixed asset turnover ratio. The financial year
2008 had an appreciable fixed assets turnover ratio indicating fixed assets are turned
over more number of times. This was due to around 72% growth in sales. This shows
better asset management policy as compared to the past year. The same ratio came
raised in the financial year 2007 due to increasing in sells.
2) Working Capital Turnover Ratio: - ( on sales )
Formula 2006 - 07 2007 - 08 2008 - 09
Net Sales/Working
Capital
5.60 5.80 4.30
Net Sales 58761.14 68370.32 62372.01
Working capital 9968.66 11861.68 14446.46
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nterpretation: -
This ratio signif ies achievement of maximum sales with less investment in work ing
capital. As such higher the ratio better will be the situation. In present situation
company¶s work ing capital ratio is decreasing in 2008 ± 09.
0
1
2
3
4
5
6
2006 - 07 2007 - 08 2008 - 09
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3) Current Asset Turnover Ratio: -
Formula 2006 - 07 2007 - 08 2008 -09
et ales/Current
Assets
1.50 1.57 1.40
et sales 58761.14 68370.32 62372.01
Current Assets 38304.97 43480.60 44315.79
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
This ratio indicates capability of the organization in efficient use of current assets.
This ratio indicates whether current assets are fully utilized. It indicates the sales
generated per rupee of investment in current asset.
The financial year 2007-08 had good current asset turnover ratio because it had
excellent sales in that year. It must remembered that investments in current assets
are increasing year by year at constant rate but the company failed to register
growth in sales and its sales fell down by year 2008 ± 09 .
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4) Capital Turnover Ratio: -
Formula 2006 - 07 2007 - 08 2008 - 09
ales/Capital
Employed
3.61 3.22 2.57
ales 58761.14 68370.32 62372.01
Capital
Employed
16269.11 21189.24 24237.32
0
0.5
1
1.5
2
2.5
3
3.5
4
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
This ratio indicates whether capital employed is turned over in the form of
sales more number of times. As such higher the capital turnover better will be
situation. The financial year 2006-07 had acceptable ratio because it had better sales
as compared to other two years. Due to addition or purchase of fixed assets and heavy
investments in working capital due to rise in activity, the capital turnover ratio for
2008-09 came down as compared previous years.
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5) Finished goods or stock turnover ratio :- ( days cost sale )
Formula 2006 -07 2007 - 08 2008 - 09
Cost of goods sold
/ Average stock
3.70 3.80 5.00
Interpretation: -
Indicates how fast inventory is used / sold. A higher turnover ratio generally
indicates fast moving mater ial while low ratio may mean dead or excessive stock.
In 2008 ± 09 company¶s ratio is high as compare 2006 ± 07 & 2007 ± 08.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2006 - 07 2007 - 08 2008 - 09
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6) Interest Coverage : -
Formula 2006 - 07 2007 - 08 2008 - 09
Earning before
Interest & Tax /
Interest
25 21 41
Earning before
Interest & Tax
6429.23 7374.85 4804.54
Interest 256.24 346.60 117.09
0
10
15
20
25
30
35
40
45
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
Indicates ability to meet interest obligation of the current year should be generally
greater than 1. Company have good position to meet interest obligation.
7) Creditor turnover :- ( days cost of sale )
Formula 2006 - 07 2007 - 08 2008 - 09
Credit purchases /
Average accountpayable
112.50 108.10 105.70
0
20
40
60
80
100
120
2006 - 0¡
200¡
- 08 2008 - 09
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Interpretation: -
Indicates velocity of debt payment. Company¶s. Higher creditor turnover ratio or a
lower credit period enjoyed signifies that the trade 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 creditor.
Profitability ratio
1) Gross profit :- ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
Gross profit /
sales
18.70 18.77 18.13
Gross Profit 11005.50 12839.02 11313.20
Sales 58761.14 68370.32 62372.01
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Interpretation: -
This ratio indicates the degree to which selling pr ices of goods per unit may
decline without resulting in losses on operations for the f irm. A high gross prof it ratio
as compared with that of the other f irm in the same industry implied that the f irm in
question produces its products at lower cost. It is a sign of good management. A low
gross prof it ratio may indicate unfavorable purchasing and make-up policies, the
inability of management to develop sales volume, thef t, damage, badmaintenance,
market reduction in selling pr ices not accompanied by propor tionatedecrease in the
cost of goods etc.
The company is growing at a constant rate as far as gross prof it is concernedwhich is
appreciable indicating eff iciency in production of goods at relatively lower costs.
0
2
4
6
8
10
12
14
16
18
20
2006 - 07 2007 - 08 2008 - 09
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2) Net prof it margin :- ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
Net prof it / sales 8.40 8.00 5.7
Net prof it 4916.69 5474.13 3546.39
ales 58761.14 68370.32 62372.01
Interpretation: -
This ratio differs from the ratio of operating prof its to net sales in as much as it is
calculated af ter adding non-operating incomes, like interest, dividends on investments
0
1
2
3
4
5
6
7
8
9
2006 - 07 2007 - 08 2008 - 09
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etc to operating profits and deducting non-operating expenses such as loss on sale of
old assets, provisions for legal damage etc. from such profits. The ratio is widely used
as a measure of over-all profitability and is very useful to the proprietors. Reading
along with the operating ratio it gives an idea of the efficiency as well as profitability
of the business to a limited extent. The company has decrease its net profits by the
year 2008-09 from the 2006-07 which is not appreciable which shows not
considerable proportion of net sales to the owners and shareholders after all costs,
charges and expenses including income tax, have been deducted. Company ratio
decreasing contunasoly.
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3) Operating prof it ratio :- ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
Operating
prof it /
ales
9.20 9.20 9.40
Operating prof it 53844.45 62896.19 58825.62
ales 58761.14 68370.32 62372.01
0
1
2
3
4
5
6
7
8
9
10
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
Indicator of operating performance of business. It is a test of the efficiency of
the management or in other words, operating efficiency of the business is
assessed by this ratio. operating profit ratio of the company is a satisfactory
level.
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OVER PR OFITABILIT GR OUP
1) Return on Assets: - ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
Net
Prof it*100/Assets
10.60 10 6.40
Net prof it after
tax
4916.69 5474.13 3546.39
Assets 46390.25 54442.98 55557.09
0
2
4
6
8
10
12
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
The ratio is a measure of the return on the total resources of the business
enterprise. It shows how efficiently management has used the funds provided be the
creditors and the owners. It can be referred that the financial year 2008-09 had not so
good ratio because of high operating expenses. However the company is decrease
year by year at a constant rate. The financial year 2006-07 had good as returns on its
various resources which is appreciable.
2) Return on Capital Employed: - ( % )
Formula 2006 - 07 2007 - 08 2008 - 09
PAT+Int*100/Capital
Employed
63.50 54.40 30
PAT + Interest10329.53 11537.35 7257.84
Capital Employed 16269.11 21189.24 24237.32
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Interpretation: -
R eturn on capital employed measures the prof itability of the capital employed
in the business. A high business return on capital employed indicates better and
prof itable use of long term funds of owners and creditors. As such a high return
capital employed will always be preferred.
The company has not r ising trend of return on capital employed indicating not
eff icient use of funds of the creditors and owners by the management which isnot
appreciable.
0
10
20
30
40
50
60
70
2006 - 07 2007 - 08 2008 - 09
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3) Earning per share :- ( Rs )
Formula 2006 - 07 2007 - 08 2008 - 09
( PTA ±
Preference
dividend ) /
Number of
E uity shares
17.84 19.66 12.44
PTA 7564.56 8332.44 5274.00
No. of equity
shares
423.82 423.82 423.82
0
5
10
15
20
25
30
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
Earning per share represent earning of the company whether or not dividends are
decaled. R eturn or income per share, whether or not distr i buted as dividends. In
2007 ± 08 company gave good return on his stock holder.
4) Dividend per share :- (Rs )
Formula 2006 - 07 2007 - 08 2008 - 09
Dividend /
Number of
Equity shares
2.20 2.20 2.00
0
0.5
1
1.5
2
2.5
2006 - 07 2007 - 08 2008 - 09
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Interpretation: -
Higher ratio signifies that the company has utilized larger portion of its earning for
payment of dividend to equity share holders. Lower ratio indicates that smaller
portion of earning has been utilized for payment of dividend and large portion has
been retain. Amount of dividend distributed per share. in 2007 & 2008 company
paid Rs.2.20 as dividend. 2009 company paid Rs. 2 as a dividend. Comparatively less
to 2007 & 2008.
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Findings
y As Company¶s current ratio is satisfactory so it is a good balance of current
assets and current liabilities.
y As company¶s fixed assets turnover ratio is continuously decreasing it means
it has under utilization of available resources. So it can expand its activity
level without any additional capital investment.
y Liquid ratio is satisfactory it may result in easy to meeting current obligation.
y Company utilized its resources efficiently having high inventory turnover ratio
and operating with reduced cost.
y working capital by availing credit period from suppliers. Period of working
capital is satisfactory not changes in previous 3 years.
y Company is not making optimum utilization of fixed assets as its fixed assets
turnover ratio is continuously decreasing.
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LIMITATIONS
Limitations:
While doing the project I was unable to collect the data from primary source
which restricted me in developing various outcomes from this study. Through
interviews with the concerned authorities, I could have got first hand information
about the company and this could have certainly given me a broader perspective
on the company¶s future plans.
Future changes are largely unpredictable; more so when the economic and
business environment is buffeted by frequent winds of change. In an environment
characterized by discontinuities, the past record proves to be a poor guide to future
performance.
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BIBLIOGRAPHY
Following books were referred for carrying out the project: -
Financial Management M Y Khan/ P K Jain
Financial Management I M Pandey
Financial Management S M Inamdar
Management Accounting M G Patkar
Annual Reports from 2007-2008 to 2009 of Flamingo Industry Ltd
Following websites were referred: -
www.Flamingo ind.com
www.moneycontrol.com
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Income Statement [TOP]
31-Dec-09(12)
31-Dec-
08(12)
31-Dec-
07(12)
Profit / Loss A/C Rs mn Rs mn Rs mn
Net Sales (OI) 62372.01 68370.32 58761.14
Material Cost 321.28 338.60 42920.33
Increase Decrease Inventories 0.00 0.00 0.00
Personnel Expenses 3892.35 4029.64 3060.68
Manufacturing Expenses 46845.18 51163.07 1774.62
Gross Profit 11313.20 12839.02 11005.50
Administration Selling and
Distribution Expenses6023.60 5097.36 4252.21
EBITDA 5289.60 7741.66 6753.29
Depreciation Depletion and
Amortisation485.06 366.81 324.06
EBIT 4804.54 7374.85 6429.23
Interest Expense 256.24 346.60 117.09
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Other Income 725.70 1304.19 1252.42
Pretax Income 5274.00 8332.44 7564.56
Provision for Tax 1727.60 2858.31 2647.88
Extra Ordinary and Prior
Period Items Net
0.00 0.00 0.00
Net Profit 3546.39 5474.13 4916.69
Adjusted Net Profit 3546.39 5474.13 4916.69
Dividend - Preference 0.00 0.00 0.00
Dividend - Equity 423.82 466.20 466.20
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Balance Sheet [TOP]
31-Dec-
09
31-Dec-
08
31-Dec-
07
Equity Capital 423.82 423.82 423.82
Preference Capital 0.00 0.00 0.00
Share Capital 423.82 423.82 423.82
Reserves and Surplus 23813.51 20765.72 15839.63
Loan Funds 0.00 0.20 5.66
Current Liabilities 29869.33 31618.92 28336.31
Provisions 1450.44 1596.28 1656.81
Current Liabilities and
Provisions
31319.76 33215.21 29993.11
Total Liabilities and
Stockholders Equity
(BT)
55557.09 54442.98 46390.25
Tangible Assets Net 6623.92 5349.81 3358.04
Intangible Assets Net 107.38 108.52 137.23
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Net Block 6731.30 5458.32 3519.30
Capital Work In Progress
Net
1163.39 1375.14 1059.42
Fixed Assets 7894.69 6833.47 4578.72
Investments 168¢
79 611.24 704.55
Inventories 7294.06 6426.53 4887.10
Accounts Receivable 28577.30 29758.87 24235.63
Cash and Cash Equivalents 5241.40 3482.31 6428.64
Other Current Assets 3203.03 3812.88 2753.60
Current Assets 44315.79 43480.60 38304.97
Loans & Advances 3176.86 3517.66 2802.02
Miscellaneous Expenditure
Other Assets
0.00 0.00 0.00
Total Assets (BT) 55557.09 54442.98 46390.25