smriti project report

RATIO ANALYSIS

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INTRODUCTION

TO

VARDHMAN

GROUP

RATIO ANALYSIS

ESTABLISHMENT OF VARDHMAN

The industrial city of Ludhiana, located in the fertile Malwa region of Central Punjab is otherwise known as the “MANCHESTER OF INDIA”.

Within the precincts of this city is located the Corporate Headquarters of the Vardhman Group, a

household name in Northern India has carved out a niche for itself in textile industry. The Vardhman

Group, born in 1965, under the entrepreneurship of Late Lala Rattan Chand Oswal has today

blossomed into one of the largest Textile Bussiness houses in India. Father of present chairman cum

managing director, SH. S.P.OSWAL.

BRIEF HISTORY

At its inception, Vardhman had an installed capacity of 14,000 spindles, today; its capacity has

increased manifold to over 5.5 lacs spindles. Perhaps the largest conglomerate in India. Since then

Vardhman Group has not looked back and it is scaling ever-new heights. The Group has 19 operational

plants with installed spinning capacity of about 5,00,000 spindles, 216 shuttle less looms and about 45

tons per day dyeing capacity, capable of processing variety of raw materials available world wide.In

1973, the company acquired Oswal Steels (now known as Vardhman Special Steels) at Faridabad. It

manufactured alloy steel and had a capacity of 50,000 metric TPA. Another steel unit was added to the

bandwagon in 1986 and today the group vaunts of a combined steel melting capacity of 1,25,000 tpa

and rolling mills capacity of 65,000 tpa.

In 1986, itself the Group witnessed forward integration as it acquired sewing thread brand in the

country. Today with 10 Mt. Per day processing capacity, Vardhman threads at Hoshiarpur, is the second

largest selling brand in the country. In 1992, it undertook yet another forward leap into the weaving

business. The Grey fabric weaving division at Baddi (Himachal Pradesh), commissioned in 1996 with a

capacity of 20,000 metres per day, has already made its mark as a quality markets. Presently, Vardhman

is exporting about 90% of its production.

The Group has recently added another feather to its cap with the setting up of Vardhman Acrylic Ltd.,

Bharuch (Gujarat), keeping in line with its expansion spree. The company also has strong presence in

various countries like Japan, Hong-Kong, Korea, and U.K in addition to the domestic market.

Vardhman is earning laurels by exporting Yarn and Fabric of International Quality to several countries

in the West, Africa and Far East earning valuable foreign currency for the country. Vardhman is the first

company among the Textile industry to receive the ISO 9002 / ISO 14002 quality awards in India.

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RATIO ANALYSIS

The uniqueness of the Vardhman Group lies in the fact that not only has it excelled in all it’s

endeavors but has also established a firm footing through its deep rooted culture that imparts the

group an unassailable strength and confidence to face the future.

HIGHLIGHTS OF THE GROUP

Largest Spinning capacity in India.

First Indian Textile Company to get ISO-9002 & ISO 14002 certification in 1992-93.

Largest manufacturing exporter of cotton yarn in the country.

Exports to high quality conscious countries like Japan, Hong-Kong, Korea, Italy, Germany,

U.K and Switzerland.

Winner of ‘OUTSTANDING EXPORT ACHIEVEMENT AWARD ‘ of the year 1996-97.

Recipient of ‘TRADING HOUSE STATUS’ IN 1994.

Recipient of ‘STATE EXPORT AWARD’ for five successive years.

Largest producer of hosiery yarns.

Largest producer and exporter of cotton yarn.

Largest producer of dyed yarns.

Largest producer of hand knitted yarns.

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RATIO ANALYSIS

MISSION STATEMENT

Vardhman aims to be the world class Textile organization producing diverse range of products for the

global Textile market. Vardhman seeks to achieve customer delight through excellence in

manufacturing and customer service based on creative combination of state of the art technology and

human resources. Vardhman is committed to be a responsible corporate citizen.

The mission of the Vardhman Group can be summed up in a single line i.e.

“BEING WORLD CLASS SPINNERS BY PROVIDING HIGHEST

QUALITY PRODUCTS WITHIN MINIMUM COST”.

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RATIO ANALYSIS

LOGO OF VARDHMAN

The “FLAME” signifies growth i.e. Growth the company along with the

growth of each and every individual associated with it whether he/she is a\

worker, an employee, employer, shareholders and customers.

The “STICK” symbolizes cotton that is the basic raw material of the core

product of Vardhman.

The “V” stands for the Vardhman Group

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RATIO ANALYSIS

CULTURE AND ITS ASPECTS

Professionalism

System Approach

Commitment To Quality

Excellence With Economy

Cost Consciousness

Human Resource Regarded As Valuable Asset

Emphasis On Teaching and Development

Preference To Human Value

Management By Participation

Open Door Policy In Sharing Ideas And Suggestions

Group Synergy

Emphasis on effective communication and coordination

Managerial strength and acceptance to change

Cordial Environment

Customer Focus

Honor And Reward

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RATIO ANALYSIS

GROUP PHILOSOPHY

The Vardhman Group has always emphasized on total customer focus in all operational areas. It

has continuously monitored and nurtured relationships with all the customers and business

associates.

VARDHMAN BELIEVES IN:

The fact that ‘change ‘ is a way of life.

Absolute market orientation for a quick and positive response to the customer’s needs.

An uncompromising commitment to a flexible, professional and personalized service from

within a stimulating result oriented environment.

Delivery to a constant standard and on time.

Response approach to the benefits of R&D and the modern technology.

Having faith in individual potential and respect for human values.

Being a responsible corporate citizen with due respect to the laws of the land and its

environment.

Product to be the best available quality for premium market segment.

These underline the corporate philosophy which has shaped VARDHMAN OF YESTER

YEARS into VARDHMAN OF TODAY.

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RATIO ANALYSIS

HUMAN RESOURCE PHILOSOPHY

Across the boundaries of time and space, the best transmission and perseverance of culture, values and

philosophy is only through the hearts of people. With manpower strength of 3,100 offices and staff and

about 15,000 workers, the Vardhman Group is well aware of the importance of human assets and this is

evident in its human resource philosophy which is

Woven around the following principles:

Employees in Vardhman are its most valuable resource and development of business and of

employees must go hand in hand.

Every employee is special and unique in his own field and has infinite potential to make

contribution to the organization.

Merit is the most important criteria for recruitment and reward.

Creativity and innovation in technology and management through our people is our

competitive edge.

HR processes facilitate consistent improvement in performance, productivity and effectiveness

through mutually agreed stretched targets.

Continuously strive to improve quality of work-life for total job satisfaction and social

harmony for the employees.

HR prepares people to accept and adapt to change and learning as a way of life.

HR promotes high standards of discipline at the workplace and compliance with the law of

land.

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RATIO ANALYSIS

LOCATION OF VARDHMAN

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RATIO ANALYSIS

TRAINING AND DEVELOPMENT

To face the challenge of New World order, Vardhman attaches great importance to the development of

its main resource- People. At its core lies the recognition and respect for individual dignity and human

values. It is the caliber and professionalism of its people that has helped Vardhman maintain in

leadership in competitive environment.

At Vardhman people understand the market expectations and competitive challenges. The emphasis is

on fostering innovation and creativity at work so that the employees can translate uncertainties into

opportunities and opportunities into accomplishments.

With a view to enhance their skills, Vardhman continuously train its people across all functions, levels

and disciplines of the organization. It has designed elaborate training and development programmes that

encompass the technical, managerial, behavioral and spiritual growth of its employees. A full fledged

training center- Vardhman Training and Development Center (VTDC)- at Ludhiana has been set up

for this purpose. Apart from this, managers participate in training programmes at some of the best

institutes like HARWARD BUSINESS SCHOOL, IMD SWITERLAND AND IIMS IN INDIA.

Vardhman sincerely believes that when technology converges, people, make all the difference.

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RATIO ANALYSIS

GROUP QUALITY POLICY

The quality shall be built into the company’s product to not only meet the customer’s requirements

continuously but also exceed them. The company shall achieve through an interface with the market

place access to state of art technology, research and development and addition of innovating

manufacturing and market strategies.

The quality policy shall be implemented through a network of system and procedure understood and

followed throughout the company.

1. The quality policy shall be integrated with the company is main objective.

2. To remain market leaders in quality.

3. Increase market share with focus on niche segment.

4. Improve productivity.

5. Cost reduction.

6. Reduction in percentage of seconds.

The management shall be committed to provide capital and human resources to achieve above

objectives through training and motivation to people at all levels in the organizations.

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RATIO ANALYSIS

GROUP UNITS AND PRODUCTS

1. VARDHMAN TEXTILES LTD

UNIT LOCATION PRODUCT RANGE

MAHAVIR SPINNING MILLS LTD. (UNIT-I)

HOSHIARPUR (PB.)

SEWING THREAD AND INDUSTRIAL THREAD

ARIHANT SPINNING MILLS MALERKOTLA (PB.)

COTTON, BLENDED, MELANGE YARNS

ARISHT SPINNING MILLS BADDI (H.P.) COTTON, BLENDED YARN

ARISHT SPINNING MILLS

(100%EOU)

BADDI (H.P.) COTTON, BLENDED YARN

ANANT SPINNING MILLS MANDIDEEP (PB.) COTTON, BLENDED YARN

VARDHMAN SPECIAL

STEELS

LUDHIANA (PB.) SPECIAL STEEL, ALLOY STEEL, LOW CARBON STEEL

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VARDHMAN SPINNING AND GENEWRAL MILLS LTD. (UNITS- I, II, III)

LUDHIANA (PB.) COTTON, BLENDED, ACRYLIC, HAND KNITTING, INDUSTRIAL YARNS

AURO SPINNING MILLS BADDI (H.P.) COTTON, BLENDED, FIBRE DYED YARNS

AURO DYEING MILLS BADDI (H.P.) YARNS AND FIBER DYEING

AURO WEAVING MILLS BADDI (H.P.) GREY POPLIN, SHEETING, SHIRTING

AURO TEXTILE MILLS BADDI (H.P.) FABRIC PROCESSING

VSGM (100%EOU) BADDI (H.P.) COTTON YARN

RATIO ANALYSIS

2. VARDHMAN ACRYLIC LTD .


VARDHMAN ACRYLIC LTD. BHARUCH (GUJ.) ACRYLIC FIBRE

VARDHMAN

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RATIO ANALYSIS

GLOBAL INTERNATIONAL ALLIANCE

PRODUCT/PROCESS GLOBAL PARTNER

FABRIC DYEING AND FINISHING TAKAI, SENKO, JAPAN

FIBRE AND YARN DYEING NIHON SANMO DYEING CORPORATION LTD., JAPAN

GASSED MERCERIZED YARNS KYUNG BANG, SOUTH KOREA

SEWING THREAD AMERICAN & EFRID INC., USA

ACRYIC FIBRE MARUBENI CORPORATION & JAPAN EXLAN, JAPAN

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RATIO ANALYSIS

ACHIEVEMENTS AND AWARDS

1989-90: State award for outstanding performance in export

1990-91: Bronze trophy for third largest mill yarn exporter

1991-92:

Bronze trophy for third largest mill yarn exporter

Government of India award for outstanding export performance

1993-94:

Gold trophy for largest merchant exporter of yarn

Gold trophy for largest merchant of yarn to non-quota markets

Bronze trophy for third largest merchant of grey woven fabric

1994-95:

Gold trophy for largest merchant exporter of yarn

Bronze trophy for third largest merchant of grey woven fabrics

Government of India award for outstanding export performance

1995-96: Outstanding Export Performance Award

1996-97: Silver Trophy for Outstanding Performance in Export

1997-98: TEXCPROCIL Bronze Trophy for Third Highest Export in

100% EOU

1998-99:

TEXPROCIL Silver Trophy for Second Highest Export in

EOU

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RATIO ANALYSIS

SWOT ANALYSIS

An assessment of the long term financial health of an enterprise is an important task for its strategy and

for the investors and lenders who provide funds to the enterprise in different forms. SWOT analysis is a

qualitative tool which by identifying the strengths and the weaknesses, opportunities and threats to the

organization makes an overall assessment of the financial strengths.

STRENGTHS

Good Brand Equity

Good technological base with Foreign Collaboration

High Quality Standards

High Production Capacity

Own Research and Development department

Commitment for growth

Human Capital

Zero Defect and optimum production with zero wastage

Its culture and philosophy

WEAKNESSES

Comparatively high prices

Lesser degree of promotional activity

Long Hierarchy

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RATIO ANALYSIS

OPPORTUNITIES

As quality is good and prices are comparatively high, Vardhman can always easily liquidate

stock pressure by slight reduction in prices.

As brand image is very good and production is too wide, Vardhman can have some good

customers with whom direct business can be established. With this Vardhman will have better

Quantity and Regularity of sales.

Strict payments are strengths at times as well as weakness. If a moderate policy, as per present

conditions are adopted, the dealers and customers shall be attracted to buy more and

regularly.

Shortened hierarchy shall provide hope for better customer service.

THREATS

Smaller players in the market are using Vardhman’s process as a shield to push their product

at lower prices.

Companies from south are entering into Ludhiana market.

Capacity of Yarn Spinning is increasing rapidly in comparison to increase in market size, resulting

into the addition of new players. This would result in price cuts, liberalization of payment, terms and

conditions etc.of the various functional areas. The other facilities at the corporate office include

meeting rooms, boardrooms, and conference halls.

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RATIO ANALYSIS

VARDHAN TRXTILED LTD FORMELY KNOWN AS

VARDHMAN SPINNING AND GENERAL MILLS LTD.

COMPANY PROFILE

Registered office/ corporate office Chandigarh Road, Ludhiana (PB.)

Date of incorporation 27 December, 1962

Listings on Stock Exchange

Bombay Stock Exchange, Bombay Delhi Stock Exchange Association Ltd. New Delhi Ludhiana Stock Exchange Association Ltd. Ludhiana

VSGM LTD. INCLUDES:

VSGM UNIT I

VSGM UNIT II

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RATIO ANALYSIS

AURO SPINNING MILL

AURO WEAVING MILL

AURO DYEING, BADDI

AURO TEXTILES, BADDI

BOARD OF DIRECTORS

SHRI PAUL OSWAL

SH. BAL KRISHAN BATRA

SH. SURINDER KUMAR BANSAL

SH. SURINDER SINGH BAGII

AIR MARSHAL K.S.BHATIA (RTD.)

SH. CHAMAN LAL JAIN

SH. S.K. BIJALANI

SH. RAJENDRA

CHAIRMAN CUM MANAGING DIRECTOR

NOMINEE OF IDBI LTD.

NOMINEE OF IFCI LTD.

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RATIO ANALYSIS

SH. BAL KRISHAN CHOWDARY

SH. SUCHIT JAIN

SMT. SUCHITA JAIN

EXECUTIVE DIRECTOR

EXECUTIVE DIRECTOR

COMPANY SECRETARY

MRS. SHAKTI JINDAL

AUDITORS

M/S S.C. VASUDEVA & CO. NEW DELHI

BANKERS

ALLLAHABAD BANK STATE BANK OF INDIA BANK OF AMERICA ICICI BANK LTD. CANARA BANK STATE BANK OF PATIALA STANDARD CHARTERED BANK DEUTSCHE BANK

CORPORATE GEN. MANAGER (FINANCE, ACCOUNTS & MIS ):

MR. NEERAJ JAIN

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RATIO ANALYSIS

DIFFERENT DEPARTMENTS OF VSGM

COMMERCIAL DEPARTMENT Marketing Costing Finance Material

ADMINISTRATIVE DEPARTMENT Industrial relations Personnel department Transport Security Establishment (dispatch & issue) Electronic data process

PRODUCTION DEPARTMENT Spinning I Spinning II Post Spinning I Post Spinning Worsted I, II Hand Knitting section Research & Development Dye house – unit- II

ENGINEERING DEPARTMENT Electronic department Civil department Mechanical department

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RATIO ANALYSIS

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INTRODUCTION T0

VARDHMAN

SPECIAL

STEELS

RATIO ANALYSIS

Vardhman Special Steel A Unit of Vardhman Textiles Ltd was established in the year of 1972 to

manufacture Special and Alloy Steel. The true impetus came with the upgrading of the plant located in

Ludhiana (north India) to an ultra modern plant. Today it has an installed capacity of 1, 00,000 MT per

annum.

The state-of –the-art steel mill has one UHP 30MT electric arc furnace, ladle furnace, vacuum

degassing station, 9/16 meters bloom caster and a bar mill to roll a large range of shapes and sizes. The

contemporary technologies like electro magnetic stirrers, auto mould level control and auto controlled

cooling etc. in the bloom caster have been deployed to produce high & consistent quality special &

alloy steels. These quality products find application in automotive components, forging, ball bearing,

engineering application, railway, defense etc.

Continuous research and development efforts, focused on customer satisfaction, have enabled

Vardhman Special Steels to meet the stringent quality requirement of producers of all types of

commercial vehicles, tractor, car, two wheelers, defense application, railway components, bearing,

capital good and other engineering products. The company has received approval for its products from

leading OEMs like Telco, Ashok Leyland, Maruti, Hindustan Motors, Yamaha, LML, Kinetic,

Mahindra & Mahindra, Punjab Tractors and Escorts among others.

Vardhman Special Steel focuses entirely on the requirement of its customers. This is one of the main

strengths of VSS becoming a preferred OE supplier to large corporates.

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RATIO ANALYSIS

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RATIO ANALYSIS

VARDHMAN SPECIAL STEELS, LUDHIANA

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RATIO ANALYSIS

MANUFACTURING PROCESS OF STEELS

The liquid steel will be made by melting dry and scrap in the proportion in an electric arc furnace. The

Arc Furnace will be used mainly as a fast melting unit. After melting, the carbon and phosphorus in the

metallic charge will be brought down to the desired level and the bath temperature suitably raised. The

semi finished liquid steel will then be tapped slag- free as far as practicable in to a preheated ladle,

depending on the steel grade aimed, the liquid steel will then be subjected to suitable secondary refining

and finishing treatment. The finished liquid steel will then be continuously cast in to Billets.

The number & capacity of electric arc furnace are usually determined on the basis of production

programmed and the average Tap-To-Tap Time.

The Tap-To-Tap Time will depend on several factors, such as the type of charge materials, level of

power input, grades of steel and their quality requirements and provision for secondary refining facility

etc. The tap-to-tap time is the sum total of the time consumed for various operations such as feting, tap

holes maintenance, electrode adjustment, scrap charging and melting, DRI feeding, refining & tapping.

As the furnace charge consists of about 30% of DRI and small amount of cast iron scrap, both having

higher contents of phosphorus input in to the furnace will be high necessitating slightly longer refining

in the EAF itself under an oxidizing slag. All other refining and finishing activities can be transferred to

the ladle furnace unit. During this period of dephosphorization, bath carbon will also come down to the

desired level.

Based on the average tap-to-tap time for the EAF its production capability will be 10-12 heats per day.

This will be feasible with good quality raw materials, efficient operating practice and experienced

operating and maintenance personnel, considering utilization factor as 90%, expected average

production will be 12 heats per day.

The product mix includes carbon steels, alloy steels and spring steels. The secondary refining unit

consists of ladle refining furnace & vacuum degassing plant. The billets produced from the concast

machine are preheated after cutting in to the desired length for the purpose of rolling in the round shape.

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RATIO ANALYSIS

The rolled product is cut into desired length and laid on cooling bed in order to ensure that it can be

handled both manually & mechanically for further inspection, end cutting, pressing and storing in the

store yard. Some lots of rolled bars peeled/machined into smaller diameter to have zero surface defects

and centreless grinding of some lots done to have very close dimensional control after peeling.

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RATIO ANALYSIS

VARDHMAN SPECIAL STEELS

PRODUCTS Plain Carbon SteelCase Hardening SteelThrough Hardening SteelFree/Semi Free Cutting SteelSpring SteelBall Bearing SteelRound Corner SquaresRound Bars

PRODUCT-MIX

CATEGORY OF STEELS BLOOMSIZES

* LOW ALLOY AND CARBON 220 X 220 MM

* FREE AND SEMI FREE CUTTING 200 X 200 MM

* BEARING, BORON & MICRO-ALLOYED 160 X 160 MM

ROLLED PRODUCTS SUPPLYCONDITIONS

* ROUNDS: 25– 90 mm dia. HOTROLLED

*SQUARES: 45-110mm rcs. HOTROLLED AND

ANNEALED.

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RATIO ANALYSIS

VARDHMAN SPECIAL STEELS

MANUFACTURING FACILITIES

LOCATION OPERATIONS CAPACITY

LUDHIANA STEEL MAKING 1, 00, 000 Mt / pa

ROLLING 50,000 Mt / pa

FARIDABAD ROLLING 25,000 Mt / pa

CAPACITY

Unit Installed Capacity As at 31.03.03 As at 31.03.02

1. Steel Ingots/Billets MT 100,000 100,000

2. Rolled Products MT 40,000 40,000

3. Oxygen Gas Cu.M 2,450,000 2,450,000

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RATIO ANALYSIS

VARDHMAN SPECIAL STEELMAJOR CUSTOMERS &

OEM’S APPROVALS

MAJOR OEM’S APPROVALS MAJOR CUSTOMERS

TELCO GNA GROUP

ASHOK LEYLANDS HAPPY FORGINGS

MAHINDRA & MAHINDRA HIM- TECHNO FORCE

ESCORTS SANDHU FORGINGS

BAJAJ TEMPO UMASHANKAR KHANDELWAL& CO

EICHER AMFORGE INDUSTRIES

PUNJAB TRACTORS VELTECH FORGINGS

HMT AHMEDNAGAR FORGINGS

RAILWAYS (RDSO) BRAKES INDIA LTD.

LML UNITY FORGE LTD.

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RATIO ANALYSIS

RESEARCH

DESIGN

AND

METHODOLOGY

RESEARCH METHODOLOGY

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RATIO ANALYSIS

RESEARCH

Research in common parlance refers to a search for knowledge. One can also define research as a

scientific and systematic search for pertinent information on a specific topic.

Research is an academic activity as such the term should be used in a technical sense. Research refers

to:

Defining and redefining problem

Formulating hypothesis or suggested solutions

Collecting, organizing and evaluating data

Making deductions and reaching conclusions

At last carefully testing the conclusions to determine whether they fit the formulating

hypothesis.

RESEARCH PROCESS

Research process consists of series of action or steps necessary to effectively carry out research. These

steps are to be followed in the same sequence. These steps are as follows:

Specifying research objective

Preparing a list of needed information

Designing the data collection project

Select a sample size

Organizing and carrying data and reporting the findings.

OBJECTIVES

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RATIO ANALYSIS

One must obtain the answer of these questions, “what is the purpose of this study” and “What are the

objectives of the research”. If these questions are not properly answered, the study is likely to be

misleading and the result will not be valid.

This research project has been undertaken to fulfill the following objectives:

To study the financial position of the company

To study the profitability position of the company.

To study the liquidity position of the company , that is whether company is able to generate

enough cash to settle its liability

To study the efficiency ratios which give information about management ability to control

expenses and earn a return on the resources committed to the business

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RATIO ANALYSIS

SOURCES OF DATA

The sources of data means from where we have to get data . There are mainly two sources of data.

These are:

PRIMARY DATA: The Primary data are those which are collected a fresh and for the first time and

thus happens to be original in character. We collect primary data by observation method, interview

method through questionnaires & through schedules.

SECONDARY DATA: The secondary data are those data which have already been collected by

someone else and which have already been passed through statistics process. We get published data as

maintained by various departments like Personnel department, EDP department etc. of a concern or

other publications like Annual report, Magazines etc.

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RATIO ANALYSIS

Meaning of Ratio

The ratio analysis is one of the most power full tools of financial analysis. a ratio is a simple

arithmetical expression of the relation ship of one number to another . It may be define as the indicated

of two mathematical expression. In simple language ratio is one no. expressed in term of another and

can be worked out by dividing one no. into another.

Ratio analysis is a technique of analysis and interpretation of financial statements. it is

the process of establishing and interpreting various ratio for helping in making certain decisions.

However, ratio analysis is not an end in itself. It is only a means of better understanding of financial

strengths & weaknesses of a firm.The following are the four steps involved in the ratio analysis

i) Selection of relevant data from the financial statements depending upon the objective of the

analysis.

ii) Calculation of appropriate ratio from the above data.

iii) Comparison of the calculated ratios with the ratios of the same firm in the past or the ratio

developed from projected financial statements or the ratio of some other firms or the

comparison with ratio of the industry to which the firm belongs.

iv) Interpretation of the ratios

I. Purposes and Considerations of Ratios and Ratio Analysis

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans

that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage.

Although ratios report mostly on past performances, they can be predictive too, and provide lead

indications of potential problem areas. Ratio analysis is primarily used to compare a company's

financial figures over a period of time, a method sometimes called trend analysis. Through trend

analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can

also see how your ratios stack up against other businesses, both in and out of your industryThere are

several considerations you must be aware of when comparing ratios from one financial period to

another or when comparing the financial ratios of two or more companies

If you are making a comparative analysis of a company's financial statements over a certain

period of time, make an appropriate allowance for any changes in accounting policies that

occurred during the same time span.

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RATIO ANALYSIS

When comparing your business with others in your industry, allow for any material differences

in accounting policies between your company and industry norms.

When comparing ratios from various fiscal periods or companies, inquire about the types of

accounting policies used. Different accounting methods can result in a wide variety of reported

figures.

Determine whether ratios were calculated before or after adjustments were made to the balance

sheet or income statement, such as non-recurring items and inventory or pro forma adjustments.

In many cases, these adjustments can significantly affect the ratios.

Carefully examine any departures from industry norms.

RESEARCH DESIGN AND METHODOLOGY

Chapter Overview:

This chapter includes the research design description and the

Various assumptions and limitations related with the study.

Restatement of problem and hypothesis:

The problem and hypothesis are clearly defined in the first chapter so there is no need for

restatement of the same.

Description of research design:

Research design is the plan; structure and the strategy of the investigative process which

sets out to obtain answers to research questions.Diffrent types of research designs are

possible depending on the nature of subject, availability of time, money and circumstances.

Generally research is considered under four heads:

(i) The sample Design: It deals with the method of selecting a sample to be

surveyed or observed.

(ii) The statistical Design: This decides sizes of samples to

Surveyed and tools to be used for analysis.

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RATIO ANALYSIS

(ii) The Observation Design: This relates to the conditions under which the

observation is conducted.

(iii) The Operational Design: This describes the techniques by which the above

designs are to be administered.

The statistical design is done here and the tool used is Ratio analysis.

Methodological Assumptions and limitations.

The research is based on following assumptions;

(I) In activity ratio the numbers of working days taken are 360 days.

(ii) In Inventory-Turnover Ratio the closing stock of inventory

taken because closing stock is given more importance.

(iii) For Working Capital turn over Ratio net working capital figure is used.

(iv) For Solvency Ratio the total assets including fixed assets after depreciation are

taken.

(v)In capital turnover ratio gross capital employed is taken

(vi) In fixed assets turn over ratio fixed assets after depreciation are taken.

The research suffers from the following limitations: a) Lack of time was the main limitation.

b) As the study is carried out in a unit (of Vardhman Textiles Ltd) and not the

company itself the following ratios can not be calculated because the shares are

issued by the Head Office.

c) Debt-Equity Ratio.

d) Funded Debts to total Capitalization Ratio.

e) Equity Ratio

f) Fixed Assets to Net Worth Ratio

g) Dividend Coverage Ratio

h) Return on Equity Capital.

i) Return on Share Holder Investments.

j) Earning Per Share.

k) Dividend per Share.

l) Total Assets to long term funds ratio.

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RATIO ANALYSIS

CLASSIFICATION OF VARIOUS RATIOS ACCORING TO TESTS

Liquidity Ratio Long-term Activity Profitability

Solvency & Ratio Ratio

Leverage Ratio

A)

1. Current Ratio Financial 1.Inventry turnover A) in

2. Liquidity Ratio Operating ratio relation

(Acid) Composite 2.debtor turnover to sales

Test or quick 1.Debt equity 3.Fixed assets 1.Gross Profit

(Ratio) ratio turnover ratio Ratio

3. Absolute 2. Debt to total 4.Total assets 2.Operating

Liquid ratio capital ratio turnover ratio Ratio

3. Interest Coverage 5.Woring capital 3.Operating

4. Cash turnover ratio profit raito

Flow/debt 6.Payables 4.Net profit

5. Capital gearing turnover ratio ratio

7. Capital employed 5.Expense

Turnover ratio Ratio

B)

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RATIO ANALYSIS

In Relation to Investment

1. Debtors Turnover ratio 1.Retrun on investment

2. Creditors Turnover ratio 2.Return on capital

3. Inventory Turnover ratio 3.Return on Equity Capital

4. Return on total resources

5. Earning Per Share

6. Price-Earning Rate

CURRENT RATIO

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RATIO ANALYSIS

Current ratio is also termed as’ working capital ratio’. It may be defined as

The relationship between current assets and current liabilities. it is a measure of

general liquidity and is most widely used to make the analysis of short term

Financial position of a firm .it is calculated as:

Current ratio= Current assets

Current liabilities

Or Current assets: Current liabilities

The two basic components of this ratio are: current assets and current

Liabilities. Current assets include cash and those assets which can be easily

Converted into cash within a short period of time generally, one year, current

Liabilities are those obligations which are payable within a short period of

generally one year.

INTERPRETATION OF CURRENT RATIO IN GENERAL

The current ratio of a firm measures its short-term solvency. The higher the current ratio, the larger the

amount of rupees available per rupee of current liability, the more the firm’s ability to meet current

obligation and greater the safety of funds of creditors.

As a convention of minimum of `two is to one ratio’ (2:1) is referred to as a banker’s rule of thumb. The

idea of having doubled the current assets as compared to current liabilities is to provide for delays and

losses in realization of current assets. The rule of thumb cannot, however, be applied mechanically.

CURRENT RATIOS OF VSS

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RATIO ANALYSIS

YEAR 2005 2006 2007 2008

CURRENT ASSETS 91914.22 131222.36 147591.8 269756.4

CURRENT LIABILITIES 22483.08 19940.4 27965.95 45768.92

CURRENT RATIO 4.09 6.58 5.28 5.89

INTERPETATION OF VSS

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RATIO ANALYSIS

The Current ratio for VSS is showing erratic trend. It is not consistent. The ratio was 4.09:1 in the year

2005. It increased marginally to 6.58:1 in 2006. In 2007 the ratio goes down to 5.28:1 and in 2008 it is

5.89:1. The “Rule of Thumb” for this ratio 2:1.

So the ratio for the year 2005, 2006 and 2007,2008 is still higher than the norms. The ratio decreased in

2007and 2008 is due to increase in current liabilities. The higher ratio indicates that the unit’s liquidity

position is good and it has the ability to pay its current obligation in time and as when they become due.

QUICK OR ACID TEST OR LIQUID RATIO

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RATIO ANALYSIS

Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid

liabilities. Cash in hand and cash at bank are the most liquid assets. Inventories cannot be termed as

liquid assets because they cannot be converted into cash immediately without a sufficient loss of value.

In the same manner, prepared expenses are also excluded from the list of quick assets. The term quick

assets refers to current assets which can be converted into cash immediately or at a short notice without

diminutions of value. The quick ratio can be calculated by dividing the total of the quick assets by the

total current liabilities.

Quick Ratio = Quick or liquid assets

Current Liabilities

INTERPRETATION OF QUICK RATIO IN GENERAL

It is a rigorous measure of a firm’s ability to service short term liabilities and is the best available test of

liquidity position usually quick ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time and on the other hand allow quick ratio represent that firm’s liquidity position

is not good.

As a rule of thumb quick ratio of 1:1 is considered satisfactory. If is generally thought that if quick

assets are equal to current liabilities than the concern may be able to met its current obligation. But this

ratio should be used continuously

QUICK RATIO OF VSS

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RATIO ANALYSIS

Interpretation of ratio of vss

As a “Rule of Thumb” the quick ratio of 1:1 is considered satisfactory. In case of VSS the proportion of

quick assets to current liabilities is quite satisfactory. In the year 2005 the ratio is 1.63 and 2006 the

ratio is 3.58 and 2007 the ratio is 2.67 and in 2008 is 2.77. The decrease in ratio in 2007 is because of

Quick Assets and increase in current liabilities as compared to last year. The ratio in total period to

study is above the norm and the 2007-08 ratio shows that the immediate liquid position of concern is

good.

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YEAR 2005 2006 2007 2008

QUICK / LIQUID ASSETS 36661.02 71345.19 74557.48 126578.6

CURRENT LIABILITIES 22483.08 19940.4 27965.95 45768.92

QUICK / LIQUID RATIO 1.63 3.58 2.67 2.77

RATIO ANALYSIS

ABSOLUTE LIQUID RATIOS

This ratio relates super quick assets to the total current liabilities. This is the variation of acid-test ratio

and is also called as super quick ratio. Although receivables, debtors and bills receivable are more liquid

than inventories, yet, there may be doubts regarding their realization into cash immediately. To find

absolute liquid assets even receivable are excluded from the current assets. It is calculated as:

Absolute Liquid Ratio = Absolute Liquid Assets

Current liabilities

INTERPRETATION OF ABSOLUTE LIQUID RATIO IN GENERAL

Absolute liquid assets include cash in hand and cash at bank and marketable securities or temporary

investments. The rule of thumb for this ratio is 50% or 0:5:1 or 1:2 that is Rs.1 worth liquid assets are

considered adequate to pay Rs, 2 worth current liabilities in time as all the creditors are not accepted to

demand cash at the same time and then cash may be realized from debtors and inventories.

YEAR 2005 2006 2007 2008

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RATIO ANALYSIS

ABSOLUTE

LIQUID ASSETS

2722.81 27400.77 22284.32 33457.22

CURRENT

LIABILITIES

22483.08 19940.4 27965.95 45768.92

ABSOLUTE

LIQUID RATIO

0.12 1.37 0.79 0.73

Interpretation of Ratio:

The ratio is ranging between 0.12 to 1.37. It was maximum in the year 2006.But it decreased to 0.79

in 2007 and then again decreased in 2008 to 0.73.The norm for this ratio is 0.5:1. According to the

concern, this ratio is sufficient because they can not keep much of the cash idle.

CURRENT ASSETS MOVEMENT OR EFFICIENCY/ACTIVITY RATIOS

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RATIO ANALYSIS

Funds are invested assets in business to make sales and earn profits. The efficiency with which assets

are managed directly affects the volume of sales. The better the management of assets, the larger is the

amount of sales and profits. Activity ratio measures the efficiency or effectiveness with which the firm

manages its resources or assets. These are also called turnover ratio because they indicate the speed with

which assets are converted or turned over into sales. The current ratio and assets-test ratio give

misleading results if current assets include high amount of debtors or slow moving inventories.

So its important to calculate the following turnover or efficiency ratio:

1) Inventory turnover ratio

2) Debtors turnover ratio

3) Working capital turnover ratio

INVENTORY TURNOVER RATIO

Every firm has to maintain a certain level of inventory to finished good so as to be able to meet the

requirement of the business. But the level of inventory should neither be too high not too low-

Inventory turnover ratio also known as a stock velocity is normally calculated as sales/average

inventory or cost of goods sold/average inventory it would indicate whether inventory has been

efficiently used or not. Inventory turnover ratio (I.T.R) indicates the number of times the stock has

been turned over during the period and evaluates the efficiency with which a firm is able to manage its

inventory.

The ratio is calculated by dividing cost of goods sold by the amount of average inventory at cost:

Inventory turnover ratio = Cost of goods sold /Net sales

Average inventory at cost/Inventory at the end

INTERPRETATION OF INVENTORY TURNOVER RATIO IN GENERAL

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RATIO ANALYSIS

Inventory turn over ratio measures the velocity of conversion of stock into sales. Usually, a high

turnover/stock velocity indicates efficient management of inventory. Because more frequently the

stocks are sold, the lesser amount of money is required to Finance the inventory. A low inventory

turnover ratio indicates inefficient management of inventory. A low inventory turnover implies over-

investments in inventories, dull business, Poor quality of goods, etc. a too high turnover of inventory

may not necessarily always imply a favorable situation. A high inventory turnover may be the result of a

very low level of inventory which results in shortage of goods in relation to demand.

The ratio may be high due to a conservative method of valuing the inventories at lower values or the

policy of the firm being to buy frequently in small lots. Hence, in cases of too high or too low inventory

turnover further Investigation should be made before interpreting the final result. There is not rule of

thumb or standard inventory turnover ratio for interpreting the inventory turnover ratio. However, a

study of comparative or trend analysis inventory over is useful for financial analysis.

YEAPPPPR 2005 2006 2007 2008

COST OF

GOODS SOLD

129395.75 128562.59 137744.69 266934.56

AVERAGE

STOCK

55253.2 57565.19 66455.745 124567.07

INVENTORY

TURNOVER

RATIO

2.34 2.23 2.07 2.14

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RATIO ANALYSIS

Interpretation of Ratio Of VSS

Inventory turnover ratio measure the velocity of conversion of stock into sales. The ratio of VSS is

showing improving trend over the years. The ratio in the year 2005 is 2.34, in 2006 is 2.23, in 2007 is

2.07,and in 2008 it is 2.14. In the year 2007-08 ratio shows that concern turnover its inventory nearly

three times which is an indication of efficient management of stock and more frequent sales

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RATIO ANALYSIS

DEBTOR TURNOVER RATIO

A concern may sell goods on cash as well as credit. Selling of goods on credit may result in tying up

substantial funds of a firm in the form of trade debtors. Two kinds of ratio can be computed to evaluate

the quality of debtors.

Debtor’s turnover ratio indicates the velocity of debt collection of a firm. In Simple words, it indicates

the number of times receivables are turned over during a year, thus:

Debtors Turnover ratio= Net credit annual sales

Average trade debtors

= No. of Time

INTERPRETATION OF DEBTORS TURNOVER RATIO/VELOCITY

Debtor velocity indicates the number of times the debtors are turned over during a year. Generally,

higher the value of debtor’s turnover the more efficient is the management of debtors/sales or more

liquid are the debtors. Similarly low debtor’s turnover implies inefficient management of debtors/sales

or less liquid debtors. But, a precaution is needed while interpreting a very high debtors turnover ratio

because a very high ratio may imply a firm’s ability due to lack of resource of sell on credit thereby

loosing sales and profit. There is no rule of thumb which may be used as a norm to interpret the ratio.

This ratio should be compared with ratio of other firms doing similar business.

YEAR 2005 2006 2007 2008

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RATIO ANALYSIS

CREDIT SALE 190211.62 194810.75 215228.83 387603.28

AVERAGE

DEBTORS

21706.2 22344.46 24585.06 44757.88

DEBTORS

TURNOVER

RATIO

8.76 8.72 8.75 8.66

Interpretation of Ratio Of VSS

Debtor’s turnover or velocity indicates the no. of times the debtors are turned over during a year. The

ratio in 2005 is 8.76; in 2006 it is 8.72, in 2007 it is 8.75 and in 2008 it is 8.66. The debtors turnover

ratio is almost constant and high in case of VSS which represents, management is efficient to manage

debtors.

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RATIO ANALYSIS

Average Collection Period Ratio

The average collection period represents the average number of days for which a firm has to wait

before its receivables are converted into cash.

A.C.P= No. of working days

Debtor’s turnover ratio

= No. of day’s

Further to find out sale per day the sale figure should be divided by the no. of working days given in a

year, the no. of working days may be assumed to be 360 or 365 days in a year

.

YEAR 2005 2006 2007 2008

NO. OF WORKING DAY'S 365 365 365 366

DEBTORS TURNOVER

RATIO

8.76 8.72 8.75 8.66

DEBTORS COLLECTION

PERIOD (DAY’S)

42 42 42 42

INTERPETATION OF RATIO

There is no standard or rule of thumb which may be used as norm while interpreting this ratio as ratio may be different from firm to firm depending upon its credit policy , nature of the business , business conditions . In VSS collection period is almost same in all the financial years from 2005 to 2008 that is 42, which shows that VSS has been able to maintain its credit policy inspite of the fact that customers always demand for extended credit period.

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RATIO ANALYSIS

CREDITORS/PAYABLES TURNOVER RATIO

In creditor’s turnover ratio is naturally interested in finding out how much time the firm is likely to take

in repaying its trade creditors. The analysis for creditor’s turnover is basically the same of

debtor’s turnover ratio except in place of trade debtors, the trade creditors are taken as one of the

component of the ratio.

Creditors Turnover Ratio = Net Credit annual purchase

Average trade Creditor’s

= No. of times

YEAR 2005 2006 2007 2008

CREDIT ANNUAL PURCHASE

89538.67 82127.96 98314.22 156945.35

AVERAGE TRADE CREDITORS

4179.59 4586.36 8100.46 12674.75

CREDITORS TURNOVER RATIO

21.42 17.91 12.14 12.38

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RATIO ANALYSIS

INTERPETATION OF CREDITOR’S RATIO

In VSS Creditor turnover ratio is very fluctuating , it is following decreasing trend , in 2005 it was 21.42 and decreased to 17.19 in 2006 ,then further decrease in 2007 and 2008 , in 2007 it was 12.41 and in 2008 it was 12.38 . Generally higher the creditor velocity better it is . but here the condition is reverse and creditor ratio is decreasing in VSS the ratio is not favourable.VSS should try to increase the credit terms with suppliers.

CREDITORS TURNOVER VELOCITY

There is no ‘rule of thumb’ or ‘standard ‘. This ratio indicates the velocity with which the creditors are

turned over in relation to purchase. Generally, higher the creditor’s velocities better it is or otherwise

lower the creditor’s velocity, less favorable are the results.

Average payment period= No. of working day

Creditor’s turnover ratio

= No. of day’s

YEAR 2005 2006 2007 2008

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RATIO ANALYSIS

NO.OF WORKING DAY'S 365 365 365 366

CREDITORS TURNOVER RATIO 21.42 17.91 12.14 12.38

CREDITORS TURNOVER

RATIO(DAY'S)

17 20 30 30

INTERPETATION OF RATIO

In VSS the trend of ratio is increasing . In year 2005 it was 17days then it was increased to 20 in 2006 and 30 in 2007 and remained same in 2008 .This shows that VSS has been able to improve upon credit terms with their suppliers. However the same can be improved further.

WORKING CAPITAL TURNOVER RATIO

Working capital of a concern is directly related to sales. The working capital is taken as:

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RATIO ANALYSIS

Working capital is= Current assets – Current liabilities

Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio

indicates the number of times the working capital is turned over in the course of a year. This ratio can

be calculated as:

Working capital turnover ratio= Cost of sales

Average working capital

= No. of times

INTERPRETATION OF WORKING CAPITAL TURNOVER RATIO

This ratio indicates the number of time the working capital is turned over in the course of a year this

ratio measures the efficiency with high the working capital is being used by the firm. A higher ratio

indicates efficient utilization of working capital .

But a very high working turn over ratio is not a good situation for any firm and hence care must be

taken while interpreting the ratio can at best be used by making of comparative and trend analysis for

different firms in the same industry and for various periods.

= No. of times


YEAR 2005 2006 2007 2008

COST OF SALE 129395.8 128562.6 137744.7 266934.56

AVERAGE WORKING 69431.14 90356.55 115453.9 223987.48

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RATIO ANALYSIS

CAPITAL


1.86 1.42 1.19 1.19

Interpretation of Ratio

Working capital turnover ratio indicates the velocity of utilization of working capital. The ratio for VSS

has decreased from the 2005 to 2008.In 2005 it was 1.86 , in 2006 it was decreased to 1.42 ,in 2007 it

was further decreased to 1.19 and remain same in 2008 it was 1.19.This indicates that the working

capital is turned over less number of times as compared to previous years. This shows inefficient

utilization of working capital in VSS.

ANALYASIS OF LONG-TERM FINANCIAL POSITION ORTESTS OF

SOLVENCY

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RATIO ANALYSIS

The term solvency refers to the ability of a concern to meet its long term obligation the long-term

indebtedness of a firm includes debenture holders, Financial institutions providing medium and long-

term loans and other creditors selling goods on installment basis. The long- term creditor of a firm are

primarily interested in knowing the firm’s ability pay regulatory interest on long term borrowing,

repayment of the principal amount at the maturity and the security of their loans.

The Following ratio serves the purpose of determining the solvency of the concern:

1) Debt equity ratio

2) Solvency ratio or ratio of total liabilities to total assets.

3) Debt service ratio or Interest coverage ratio

DEBT EQUITY RATIO (LONG-TERM DEBT TO SHAREHOLDER FUNDS RATIO

Debt-equity ratio also known as External – Internal equity ratio is calculated to measure the relative

claims of outsider and the owner against the firm assets. The outsider funds include all debts/liabilities

to outsider. The shareholder funds consist of equity share capital, preference share capital, capital

reserve, revenue reserve etc. The accumulated losses and deferred expenses if any should be deducted

from the total to find out shareholders fund.

Long term debt to shareholder funds (Debt-Equity Ratio) = Long term debt

Share Holder’s Fund

INTERPRETATION OF DEBT EQUITY RATIO

The ratio indicates the proportionate claims of owners and the outsiders against the firm assets. The

purpose is to get an idea of the available to outsiders on the liquidation of the firm. As the general rule,

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RATIO ANALYSIS

there should be an approxipriate mix of owners fund and outsiders fund in financing the firms assets.

Therefore, interpretation of this ratio depends primarily upon the financial policy of the firm and upon

the firm’s nature of business. A ratio of 1:1 may be usually considered to be a satisfactory ratio.

Although, there cannot be any ‘rule of thumb’ or standard for all type of business. In some business a

high ratio 2:1 or even more may be considered satisfactory.

YEAR 2005 2006 2007 2008

LONG TERM DEBT 68561.12 85441.33 151091.63 194865.57

SHARE HOLDER'S FUND 82990.98 100647.59 115044.31 140856.22

DEBT/EQUITY RATIO 0.83 0.85 1.31 1.38

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RATIO ANALYSIS


In 2005 debt equity ratio was 0.83 and increased slightly in 2006 that is 0.85 and in 2007 there is

increase in ratio to 1.31 and finally in 2008 it was 1.38.

In VSS debt equity ratio has been improving since 2005 and has been better than 1:1 since 2007 which

is considered to be a healthy sign for an organization .

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RATIO ANALYSIS

SOLVENCY RATIO OR RATIO OF TOTAL LIABILITES TO TOTAL ASSETS

This is also called as the ratio if total liabilities to total assets and is a very small variant of equity ratio

and can be simply calculated as 100 – Equity ratio. The ratio indicates the relationships between the

total liabilities to outsiders to total assets of a company and can be calculated as follow

Solvency ratio = Total liabilities to outsiders

Total assets

INTERPRETATION OF SOLVENCY RATIO

Generally, lower the ratio of total liabilities to total assets, more satisfactory or stable is the long-term

solvency position of a firm

SOLVENCY RATIO

YEAR 2005 2006 2007 2008

TOTAL LIABILITIES TO OUTSIDER'S

75974.97 112220.54 177189.6 267982.37

TOTAL ASSETS 185997.5 243409.18 331490.74 331490.74

SOLVENCY RATIO 0.41 0.46 0.53 0.57

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RATIO ANALYSIS


The ratio of VSS is showing increasing trend of the years. The ratio ranges between 0.41 to 0.57 in the

period of study . The ratio indicates that the total liabilities to outsiders have increased .Generally, lower

the ratio more satisfactory it is for the long –term solvency position of the concern. So the solvency

ratio of VSS is not good.

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RATIO ANALYSIS

INTEREST COVERAGE RATIO OR DEBT SERVICE RATIO

Net income to debt service ratio or simply debt service ratio used to test the debt servicing capacity of

the firm. The ratio is also known as interest coverage ratio or fixed charges coverage ratio.

Debt service ratio or interest coverage = net profit before interest and tax(EBIT)

Fixed interest charges

INTERPRETATION OF INTEREST COVERAGE RATIO

Interest coverage ratio indicates the number of times interest is covered by the profits available to pay

the interest charges. Generally higher the ratio more safe are the long-term creditors because even if

earning of the firm’s fall, the firm shall be able to meet its commitment of fixed interest charges. But a

too high interest coverage ratio may not be good for the firm because it may imply that form is not using

debt as source of a finance so as to increase the earning per share.

YEAR 2005 2006 2007 2008

EBIT 23364.88 30104.86 28433.03 38692.56

FIXED INTEREST

CHARGES

5494.84 3587.31 3460.74 4112.50

INTEREST

COVERAGE RATIO

4.25 8.39 8.21 9.41

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RATIO ANALYSIS

INTERPETATION OF RATIO OF VSS

In VSS the interest coverage ratio has increasing trend .In 2005 it was 4.25 , and in 2006 it increased to 8.39 and in 2007 it slightly decreased to 8.21 and in 2008 it again improved to 9.41. Overall there has been improvement since 2005 which will increase the confidence of creditors in VSS as VSS shall be able to meet its commitment of fixed interest charges in a better way.

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RATIO ANALYSIS

ANALYSIS OF PROFITABILITY OR PROFITABILITY RATIOS

Apart from the creditors, both short –term and long-term, also, interested in the financial soundness of

a firm are the owners and the management or the company itself. The management of a firm is naturally

eager to measure its operating efficiency. The operating efficiency of a firm and its ability to ensure

adequate return to its share holders depends ultimately on the profits earned by it. Profitability is a

measure of efficiency. Profitability also indicates public acceptance of the product and shows that the

firms can produced competitively. Moreover, profits provide the money for the repaying the debt. In the

words of Lord Keynes “Profit is the engine that drive the business enterprise” profitability of a firm can

be measure by its profitability ratio. Profitability ratio can be determined on the basis of either sales or

investments. The various profitability ratios are discussed below:

1) Gross profit ratio

2) Operating ratio

3) Administration Expenses Ratio

4) Selling and distribution expenses ratio

5) Manufacturing expenses ratio

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RATIO ANALYSIS

1) GROSS PROFIT RATIO

Gross profit ratio measure the relationship of gross profit to net sales and is usually represented as a

percentage. Thus, it is calculated by dividing the gross profit by sales:

Gross Profit Ratio = Gross Profit * 100

Net Sales

INTERPRETATION OF GROSS PROFIT RATIO

The gross profit ratio indicates the extent to which the selling prices of the goods Per unit may decline

without resulting in losses on operations of a firm. It reflects the efficiency with which a firm produces

its products. Higher the gross profit ratio (G/P ratio) better the result and is a sign of good management,

low cost of production and Higher sales price. A relatively low ratio is a danger signal. There is no

standard norm for gross profit ratio but it should be adequate to cover the operating expenses and to

provide for fixed charges. A low gross profit ratio, generally, indicates high cost of goods sold. A

Comparison of gross profit ratio over time or for different firms in the same industry is a good measure

of profitability.

YEAR 2005 2006 2007 2008

GROSS PROFIT 60815.87 66248.16 77484.14 120668.72

NET SALE 190211.62 194810.75 215228.83 387603.28

GROSS PROFIT

RATIO (%)

32 34 36 31

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RATIO ANALYSIS


The Gross Profit Ratio indicate the extent to which selling price of goods may decline without resulting in losses on operation of a firm. It reflects the efficiency with which the firm produced its products. The ratio decreased in the year 2005 and increased in the year 2006, again increase in 2007 and slightly decrease in 2008 , mainly on account of less sale realization on account of decrease in prices during 2008 because of recessionary trend in world economy.

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RATIO ANALYSIS

2) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit (after tax) and sales and indicates the

efficiency of the management in manufacturing, selling, administration and other activities of the firm.

Net profit ratio= net profit (after tax)*100

Net sales

INTERPETATION IN GENERAL

This ratio is very useful as if the profit is not sufficient, the firm shall not be able to achieve a

satisfactory return on its investment, this ratio also indicates the firm capacity to face adverse economic

condition such as price competition, low demand, etc. Higher the ratio shows the better profitability of

the concern.

YEAR 2005 2006 2007 2008

NET PROFIT (AFTER TAX) 13444.6 20424.79 18997.3 25935.04

NET SALE 190211.62 194810.75 215228.83 387603.28

NET PROFIT RATIO (%) 7.1 10.48 8.83 6.69

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RATIO ANALYSIS


The ratio decreased in the year 2005 and increased in the year 2006 from 7.1 to 10.48, but however again decreased in 2007 and further decreased in 2008 to 6.69, mainly on account of less sale realization on account of decrease in prices during 2008 because of recessionary trend in world economy.

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RATIO ANALYSIS

OPERATING RATIO

Operating ratio establishes the relationship between cost of goods sold and other operating expenses on

the one hand and the sales on the other .In other words, it measures the cost of operations per rupee of

sales. The ratio is calculated by dividing operating costs with net sales and it’s generally represented as

a percentage.

Operating ratio = Operating Cost *100

Net Sales

= Cost of Goods Sold + Operating Expenses *100

Net Sales

The two basic elements of this ratio are operating cost and net sales. Operating cost can be found by

adding operating expenses to the cost of goods. Operating expenses consist of administrative and office

expenses and selling and distribution expenses.

INTERPRETATION OF OPERATING RATIO

Operating ratio indicates the percentage of net sales that is consumed by operating cost. Obviously,

higher the operating ratio, the less favorable it is because, it would have small margin to cover interest,

tax dividend and reserves. There is no rule of thumb for this ratio .However,75 and 80% may be

considered to be a good ratio’s comparison of operating ratio over time or for different firms in the same

industry may give a better idea. This ratio is considered to be the yardstick of operating efficiency but it

should be used cautiously.

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RATIO ANALYSIS

OPERATING RATIO

YEAR 2005 2006 2007 2008

OPERATING COST

158111.43 160418.69 168067.51 305872.23

NET SALE 190211.62 194810.75 215228.83 387603.28

OPERATING RATIO (%)

83.12 82.35 78.08 78.91


The operating ratio indicates the percentage of sales consumed by operating cost. Obviously, higher the

ratio, the less favorable it is. The operating ratio above said concern has 83.12 increased in 2005.It

dropped to 82.35 in 2006 and again decrease in 2007 to 78.08 and in 2008 it is 78.91. This decreased

ratio is a good indication that the concern having more margin to cover interest and income tax.

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RATIO ANALYSIS

EXPENSES RATIO

Expenses ratio indicate the relationship of various expenses to net sales. The operating ratio reveals the

average total variation in the expenses. Expenses ratios are calculated by dividing each item of expenses

of groups of expenses with net sales to analysis the causes of variation of the operating ratio. The ratio

can be calculated for each individual item of expenses. There are different variants of expenses ratio.

That is

a. Cost of goods sold ratio = cost of goods sold *100

Net sales

b. Operating expense ratio = Administrative expenses +SellingExpenses

Net Sales

INTERPRETATION OF EXPENSES RATIO

The expenses ratio is, in a way, reciprocal of the profit margin, gross as well as net. For intence, if the

profit margin is deducted from 100%, the resultant is the operating ratio. Alternatively, when the

operating ratio is subtracted from 100%, we get the profit margin. The expenses ratio is very important

for analyzing the profitability of a firm. It should be compared over a period of time with the industry

average as well as firms of similar type. As a working a proposition, a low ratio is favorable while a

high one is unfavorable. The implication of a high expenses ratio is that only a relatively small

percentage share of sales is available for meeting financial liabilities like interest, tax and dividends, etc.

A low operating ratio is by the large a test of operational efficiency. In case of firms whose major

source of income and expenses are non-operating, the operating ratio, however, can not be used as yard

stick of profitability. To conclude, the profitability ratio based on sales are an important indicator of the

operational efficiency a manufacturing enterprise. However, they suffer from a serious limitation in that

they are not useful from the viewpoint of the owners of the firm.

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RATIO ANALYSIS

Expenses ratios indicate the relationship of various expenses to sales. The ratio is calculated for each

individual item of expenses.

Cost of Goods Sold to Sales Ratio = 100 – Gross Profit Ratio %

a) Interpretation of Administrative and Expenses Ratio = Particular Expenses *100

Sales

ADMINISRATION EXPENSE RATIO

YEAR 2005 2006 2007 2008

ADMINISTRATION

EXPENSES 4620.89 5166.77 5969.58 9801.27

NET SALES 190214.02 194810.75 215228.83 245364.51

ADMINISTRATION

EXPENSE RATIO 2.43 2.65 2.77 3.99

Administrative and office expenses to sales ratio for VSS was in 2005 it is 2.43 ,in 2006 it was 2.65

and it increased in 2007 to 2.77 and maximum in year 2008 i.e 399. The ratio has been continuously

increasing over the years this has been because of the increase in administrative expenses as a

proportion of sales.

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RATIO ANALYSIS

b) Selling & Distribution Exp. Ratio = Selling & Distribution Exp.*100

Sales

SELLING AND DISTRIBUTION EXPENSES RATIO

YEAR 2005 2006 2007 2008

SELLING AND

DISTRIBUTION

EXPENSES 13711.39 15208.38 11104.22 8371.14

NET SALES 190214.02 194810.75 215228.83 245364.51

SELLING AND

DISTRRIBUTION

EXPENSE RATIO 7.21 7.81 5.16 3.411

Interpretation of ratio

Selling and distribution expenses ratio for VSS increased in 2006 to 7.81% as compared to 2005 ,

2007,2008 is 7.21% ,5.16% and 3.14% respectively. The decrease in the ratio shows that less

expenses selling and distribution have been incurred to generate the sales as compared to previous

year.

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RATIO ANALYSIS

c) Manufacturing Expenses to Sales Rate

=Manufacturing Exp.*100

Sales

MANUFACTURING EXPENSES RATIO

YEAR 2005 2006 2007 2008

MANUFACTURING

EXPENSES 39857.08 46434.63 52587.62 55070.63

NET SALES 190214.02 194810.75 215228.83 245364.51

MANUFACTURING

EXPENSE RATIO 20.95 23.84 24.43 22.44


Manufacturing expenses ratio for VSS increased in 2006 as compare to 2005, 2007and 2008. In year

2005 the ratio is 20.95% but in 2006 this ratio was increase to 23.84 and again decreases to 21.43%in

2007 and in 2008 it is 22.44% . The decrease in the ratio shows that less expenses manufacturing and

distribution have been incurred to generate the sales as compared to previous years.

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RATIO ANALYSIS

LIMITATIONS

1. The data collected for ratio analysis is jut for last four years. i.e. 2005-08

2. The effect of price level changes has not been reflected in the study.

3. The analysis is based on historical data.

4. As the study is carried out in a unit (of Vardhman Textiles Ltd) and not the company itself the following ratios can not be calculated because the shares are issued by the Head Office.

Debt-Equity Ratio.

Funded Debts to total Capitalization Ratio.

Equity Ratio

Fixed Assets to Net Worth Ratio

Dividend Coverage Ratio

Return on Equity Capital.

Return on Share Holder Investments.

Earning Per Share.

Dividend per Share.

Total Assets to long term funds ratio

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RATIO ANALYSIS

CONCLUSION

VSS is known as performance oriented and customer oriented concern. Quality of its products and

services to customer has made that Vardhman enjoys a dominant position in domestic market. The

financial position of the concern can be concluded as :

Company’s short-term and long-term financial position is good. Its liquidity position can be said

favorable. The liquid ratio although show decline but it is good from concern’s point of view ,The

concern would like to invest the cash in other investment opportunities and for repayment of loans

instead of keeping it idle which is not going to earn anything for the concern.

Improved W.C turnover ratio indicates that the concern is utilizing it W.C to optimum level. Assets

are also efficiently utilized to generate more sales. The long – term solvency position needs

improvement as the solvency ratio is increasing. The profitability of the concern is improving as the

gross and net profit have increased the expenses have decreased.

The return on assets and capital employed has also increased. Also the capital turnover ratio has

shown and upward movement. This means that the concern is performing better to get more returns

by efficient utilization of its resources.

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RATIO ANALYSIS

RECOMMENDATIONS

Although, overall financial position of VSS is very strong but there are some fields which require

further improvement.

In today, scenario every debtor’s wants to purchase goods on credit basis. But liberal credit policies

create a difficulty to organization. The collection of debts should be improved and the concern must

revise its credit policies.

The total liabilities of the concern are also increasing while the total assets are decreasing which is not

a good signal for long-term solvency. The increase in non operating expenses is also not a good

indication for concern profitability as less will be the expenses more will be the profits. So concern

should try to remove such expenses.

The working capital turn over ratio can be further improved by efficiency management of debt. As

large part of W.C is involved in debtors and it is affecting the financial position of the concern.

The turn over of creditors has decreased still it is very high as compared to debtors turn over. This

means concern is selling more on credit basis and availing less credit facilities for purchase. This affects

the liquidity position of the concern. If the creditor are paid less frequently these funds can be utilized in

some other investment opportunities to get more profits.

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RATIO ANALYSIS

BIBILIOGRAPHY

1) DR.O.P.Gupta, Bhawna Gupta – ‘Financial Management’-Rekha Prakashan Delhi, 1997.

2) M.Y.Khan and S.K.Jain – ‘Management Accounting’-1997.

3) Panday I.M-‘Financial Management’ N.D. - Vikas Publishing House, 1997.

4) R.K.Sharma and Shash K.Gupta ‘Management Accounting Principles and Practices’-Kalyani

Publisher, 1997.

5) S.N.Maheshwari-‘Management Accounting and Principles’.

.

6) S.P.Gupta – ‘Statistical Methods’ – Sultan chand and Sons Publishers N.D.1991.

7) Annual Reports of VSS.

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