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A

PROJECT REPORT

ON

ANALYSIS OF FINANCIAL STATEMENTS

Project Report Submitted


To
Delhi Institute of Advanced Studies
For the Partial fulfillment of the degree of MBA (2006-08)

Submitted by: Under the Supervision of:


PALKA Mr. Kamal Ahuja
ROLL NO.- 0551233906
MBA (A)- 3rd Sem.

DELHI INSTITUTE OF ADVANCE STUDIES


GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY
NEW DELHI
ACKNOWLEDGEMENT

I would like to express my deep sense of gratitude to my project guide Mr. Kamal
Abuja, my mentor at Indiabulls for his immerse support, help & cooperation at every
step of my project. Without his support this project would not have taken in present
form in reality.

I would like to thank all the faculty members of Delhi Institute of Advanced
Studies (DIAS) for extending time to time to help for the fulfillment of this project.
Their invaluable guidance all through this project has enabled me to complete project
work in systematic manner.

I also want to extend my deep sense of gratitude to all the members of Accounts
payable team who helped me to understand the intricacies of working of the
organisation & lent full cooperation & guidance, which was necessary for successful
completion of project.

I thank especially my parents for giving me monumental support and inspiration


during the course of this project. Last but not the least to all my friends who helped
me in every possible manner during the course of my project.

Palka

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Executive Summary

In any country; more so far a developing country like India; there is a great need for
capital formation through saving & investments. To achieve this objective individuals
as well as groups savings and investments are to be properly planned, promoted &
channeled.
When an individual or group saves some money and decides to invest the same in
various schemes provided by the financial institutions /companies, they directly
participate in economic development.

On the other hand Financial Institutions/ Companies fulfills the credit needs of a large
percentage of population in India. They offer consumer loans, personal loans,
securities, brokerage and other financial products and services to the customers and
helps to fulfill their dreams.
With the rapid growth and maturation of Indian financial markets provide a unique
opportunity to create a leader in diversified financial services, who is able to offer a
one stop shop for all investment & credit needs of retail clients and builds a long term
relationship with customers. It is believed that ultimately a hand full of big players
will emerge as winners as the credits and securities business continue to grow and
consolidate, and barriers to entry & scale advantages dominate the business.
Technology, analytics and national scale provide unique advantage to a business
model when combined with strong sales & marketing and local presence. Only a
handful of financial institutions are building a national brand & serving the customer
across product needs. With the power of information, technology and strong local
presence Indiabulls Financial Services Ltd. group, have built as winning national
scale credit and securities business.

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Indiabulls has built one of the largest customer franchises in India with almost
3,00,000 customers as of March 2006. It is leading financial services and Real estate
company having presences over 414 locations in more then 124 cities.

It serves the customers with wide range of financial services and products from
securities, derivatives, trading, depository services, research & advisory services,
insurance, consumer secured and unsecured credit, loans against share & mortgage
and housing finance.
The project has been undertaken to study the financial position of the company, with a
view to understand the functioning & the whole ambit of the Indiabulls Financial
Services Ltd. Group including the Analysis of Financial Statements of four
subsidiaries viz. Indiabulls Financial Services Limited, Indiabulls Credit Services
Limited, Indiabulls Securities Limited & Indiabulls housing Finance Limited.

The project has been divided into 4 chapters. First chapter deals with the theoretical
aspects of the ‘Analysis of Financial statements’ including the Types of financial
statements, Types of financial analysis, Steps involved in financial statement analysis,
Nature & limitations of financial statements, Tools of Financial Analysis.

Second Chapter explains the theoretical aspect of ‘Ratio Analysis ‘, the tool that has
been used for the analysis of financial statements in the project including the
Definition of ratios, Classification of ratios, explanation of ratios covered by each
category, Advantages & Limitations of Ratio Analysis.

Third Chapter has exclusively been devoted to Calculation, analysis & interpratation
of ratios of four companies namely Indiabulls Financial Services Limited, Indiabulls
Credit Services Limited, Indiabulls Securities Limited & Indiabulls housing Finance
Limited for last 3 years.

Chapter 4 exclusively deals with the inter-firm comparisons. The ratios of the four
companies have been compared.

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PALKA

Table of Contents

Acknowledgement………………………………………………. 2
Executive Summary…………………………………………….. 3-4
1. Introduction………………………………………….….6

2. Company Profile………………………………………..7-13

3. Analysis of Financial statements-An overview……... .14-22


3.1 Meaning of Financial statements.……………….……14
3.2 Different types of financial statements………….……14-16
3.3 Nature of Financial Statements………………………16-17
3.4 Limitations of financial statements…………………..17-18
3.5 Various Techniques of Financial Analysis…………...18-21
3.6 Types of Financial Analysis………………………….21-22
4. Ratio Analysis – An overview………………………….23-34
4.1 Introduction…………………………………………..23
4.2 Categories of Ratio…………………………………..23-32
4.3 Advantages of Ratio Analysis………………………. 32-33
4.4 Limitation of Ratio Analysis.………………………...33-34

5. Analysis & Interpretation of Ratios…………………..35-77


5.1 Ratio Analysis of Indiabulls Financial Services………35-43
5.2 Ratio Analysis of Indiabulls Securities Limited………43-53
5.3 Ratio Analysis of Indiabulls Credit Services Limited…53-63
5.4 Ratio Analysis of Indiabulls Housing Finance Limited.63-72
5.5 Inter-firm comparison………………………………….72-78
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6. Bibliography ...……………………………………………79

INTRODUCTION

Every country in the world tries to attain the economic development irrespective of
the degree of development. The economic development is influenced by economic
and non-economic factors. The economic factors include capital stocks and its role of
accumulation, capital output ratio in various sectors. Of course non-economic factors
include political freedom social organizations, general education etc. So among all the
economic developments finance has its key importance. It helps in economic
development, which is necessary for the growth of all economies. Adequate finance is
absolutely necessary to lubricate industrial machines to insure its smooth working.

On going discussion led us to visualize the growth & development of companies


involved or engaged in providing financial services. Indiabulls Financial Services Ltd.
is one of the companies actively engaged in providing financial services. The
company has 8 subsidiary companies, which are engaged in various areas of financial
services sector and real estate.

Indiabulls has emerged as one of the leading and fastest growing in less than two
years since its initial public offering in September 2004. It has a market capitalization
of around US $ 800 million and consolidated net worth of around US $500 million.
Indiabulls has an extra ordinary financial performance as its revenues more than
tripled to Rs. 613.15 crores & it’s net profit after tax more than quadrupled to
Rs.253.36 crores.

The project has been undertaken in order to understand the changes in financial
position of the organisation over the last three years, brief explanation of the financial
services provided by the Financial Services Limited Group and real estate arm of the
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oraganisation.. An effort has been made through this study to look into the growth
story of the organisation Indiabulls Financial Services Ltd. & also through its
subsidiaries over last 3 years

Company Profile
Indiabulls is India’s leading Financial Services and Real Estate company having
15000 employees with presence over 414 locations in more than 124 cities. Indiabulls
serves the financial needs of more than 3,00,000 customers with its wide range of
financial services and products from securities, derivatives trading, depositary
services, research & advisory services, insurance, consumer secured & unsecured
credit, loan against shares and mortgage & housing finance. With around 5000
Relationship Managers, Indiabulls helps its clients to satisfy their customized financial
goals. Indiabulls through its group companies has entered Indian Real Estate business
in 2005. It is currently evaluating several large-scale projects worth several hundred
million dollars.

Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay
Stock Exchange, Luxembourg Stock Exchange and London Stock Exchange. The
market capitalization of Indiabulls is around USD 800 million, and the consolidated
net worth of the company is around USD 500 million. Indiabulls and its group
companies have attracted USD 300 million of equity capital in Foreign Direct
Investment (FDI) since March 2000. Some of the large shareholders of Indiabulls are
the largest financial institutions of the world such as Fidelity Funds, Capital
International, Goldman Sachs, Merrill Lynch, Lloyd George and Farallon Capital.

Indiabulls is ranked 82nd in the list of most valuable companies in India in BT500.
Business of the company has grown in leaps and bounds since its inception. It hass
been rated as ‘Fastest Growing Large Cap Company’ in India in a report by
Business Today magazine in April, 2006 as revenue of the company grew at a CAGR
of 184% from FY03 to FY06. During the same period, profits of the company grew at
a CAGR of 268%.
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Indiabulls became the first company to bring FDI in Indian Real Estate through a Joint
Venture with Farallon Capital Management LLC, a respected US based investment
firm. Indiabulls has demonstrated deep understanding and commitment to

Indian Real Estate market by winning competitive bids for landmark properties in
Mumbai and Delhi. In April 2006, Indiabulls announced demerger of its real estate
division to a separate entity.

Financial year 2006 was a transformational year for Indiabulls as the company
executed on its vision to be a leader in diversified financial services and branch out
beyond their heritage in securities business. It has launched its Housing Finance
Company, Indiabulls Housing Finance Limited, strengthened the position of
Indiabulls Credit Services Limited, and continued to show its leadership and
momentum in Securities business.

Indiabulls Retail brokerage and securities business continued to generate exceptional


results. Every business metric exceeded expectations and delivered record revenues
and profits in each quarter of the year. Indiabulls client acquisition strategy has been
bearing fruit as it ramped up its monthly consumer adds from few thousands to over
25000 per month by the end of the fiscal year, providing fastest growing & most
valuable customer franchise in India.
Indiabulls consumer credit and housing loan products have been well established in
the market place and are now offered out over 165 locations. It has strong credit sales
team in place across the country and its sales volume and credit performance has been
ahead of business expectations.

Indiabulls entered into real estate development through its associate companies 2005
to exploit the huge opportunity in an unconsolidated industry with fat margins and
huge market opportunities, where they can bring its strong execution skills and create
a national leader. Indiabulls partnered with strong international investors to acquire
projects in Delhi and Mumbai and have seen significant appreciation in the value of
holdings. Company kicked off strategic diversification by foraying onto booming real
estate sector by:

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• Winning bids for Jupiter and Elphinstone mills in Mumbai as part of the NTC
Mills auction
• Forming joint venture with DLF Universal to acquire 35.8 acres of prime land
in south Delhi by putting in the highest bid of 450 crore in the auction carried
out by Delhi Development Authority
• Acquiring over 150 acres of land in Sonepat in national Capital Region
( NCR) to develop prime residential housing complex

Milestones of Indiabulls

2000-01 • Indiabulls Financial Services Ltd. established


India’s one of the first trading platforms with
the development of an in house team
2001-03 • Indiabulls expands its service offerings to
include Equity, F&O, Wholesale Debt, Mutual
fund, IPO distribution and Equity Research.

2003-04 • Indiabulls ventured into Insurance distribution


and commodities trading.

• Company focused on brand building and


franchise model.
2004-05 • Indiabulls came out with its initial public offer
(IPO) in September 2004.
• Indiabulls started its consumer finance business.
• Indiabulls entered the Indian Real Estate market
and became the first company to bring FDI in
Indian Real Estate.
• Indiabulls won bids for landmark properties in
Mumbai

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2005-06 • Indiabulls has acquired over 115 acres of land in
Sonepat for residential home site development.
• Merrill Lynch and Goldman sac, one of the
renowned investment banks in the world have
increased their shareholding in Indiabulls.
• Indiabulls is a market leader in securities
brokerage industry, With around 31% share in
online trading,
• Farallon Capital and its affiliates, the world’s
largest hedge fund committed Rs. 2000 million
for Indiabulls subsidiaries Viz. Indiabulls Credit
Services Ltd. and Indiabulls Housing Finance
Ltd.
• Steel Tycoon Mr. LN Mittal promoted LNM
India Internet venture Ltd. acquired 8.2% stake
in Indiabulls Credit Services Ltd.

2006-07 • Indiabulls entered in a 50/50 joint venture with


DLF, Kenneth Builders & Developers (KBD).
KBD has acquired 35.8 acres of land from Delhi
Development Authority through a competitive
bidding process for Rs 450 crore to develop
residential apartments.
• Indiabulls Financial Services Ltd. is included in
the prestigious Morgan Stanley Capital
International Index (MSCI).
• Farallon Capital has agreed to invest Rs. 6,440
million in Indiabulls Financial Services Ltd.
• Indiabulls ventured into commodity
brokerage business.
• Indiabulls has received an “in principle

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approval” from Government of India for
development of multi product SEZ in the state
of Maharashtra.
• Dev Property Development plc., has subscribed
to new shares and has also acquired a minority
shareholding from the Company.

Indiabulls Financial Services Ltd. Board resolves to


Amalgamate Indiabulls Credit Services Limited and
demerge Indiabulls Securities Limited.

CORPORATE STRUCTURE

INDIABULLS

Financial
Real Estate
Services
Group
Group-1

Indiabu Indiabu Indiabu Indiabu


Indiabu Indiabu
lls lls lls Indiabu lls Real
lls Indiabu lls
Credit Housin Finance lls Estate
Securiti lls Infrastr
Service g Compa Properti Compa
es Estate ucture
s Finance ny es Pvt. ny
Ltd. Ltd. Limited
Ltd. Private Ltd. Private
Limited 40% 40%
66.66% Ltd. 40% Ltd.
100% 53.02% 57.50% 40%

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PRODUCT PORTFOLIO

Financial Services Group

1. Indiabulls Securities Limted(ISBL): It is India’s largest retail brokerage and


securities related company with a client base of over 2,36,000 customers & the
market share of 6.73% in calendar 2005 on the cash segment of NSE. ISBL
provides various types of brokerage accounts & services related to purchase
and sale of securities such as equity, debt, and derivatives listed on BSE &
NSE.
2. Indiabulls Credit Services Ltd. (IBCSL): It provides secured and unsecured
consumer loans to the individuals in the middle-income sector of Indian
consumer credit market. It operates many credit products including direct
consumer loans, loans for two wheelers and cars, loans for commercial trucks,
loan against property and home equity products.
3. Indiabulls Housing Finance Limited (IBHFL): It provides housing loans to
middle income segment under the national housing bank guidelines. The
company is focused on middle income segment and finances both primary
purchase of property & refinancing of existing propertied to provide access to
liquidity and credit to its customers base.
4. Indiabulls Finance Company Private Limited (IBFCPL): It provides financing
loans to retail customers.
Real Estate Group:

1. Indiabulls Estate Ltd.: The real estate sector has been extremely fragmented
with local developers dominating the market. In March 2005 govt. opened real
estate sector to FDI. Indiabulls has positioned its real estates business to
benefit the national scale players who have the relationships with financers and
large corporate customers on one hand and have deep local market knowledge.
7 expertise to execute the projects in time and under the budget on the other
hand.Company has three major projects under development.

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2. Indiabulls Properties Private Ltd. (IBPPL): This Company has acquired
successfully 11-acre site of Jupiter Mills auctioned by NTC in Mumbai. It is
currently developing a world class IT office complex at the acquired place.
3. Indiabulls Real Estate Company Private Ltd. (IBRECPL): This company
successfully acquired 8 acres site of Elphinstone Mills auctioned by NTC in
Mumbai and currently developing a world class IT office complex on the site
with an expected lea sable square footage of around 1.5 million square feet.

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Chapter 3
Analysis of Financial statements-An overview

3.1 MEANING OF FINANCIAL STATEMENTS


According to Himpton John, “ A financial statement is an organized collection
of data according to logical & consistent accounting procedures. Its purpose is to
convey an understanding of some financial aspects of a business firm. It may
show a position at a moment of time as in the case of balance sheet, or may
reveal a series of activities over a given period of time, as in the case of an
income statement”.
On the basis of the information provided in the financial statements, management
makes review of the progress of the company and decides the future course of
action. The term financial statements refers to two basic statements:
(i) The income statement and (ii) the Balance Sheet. Of course, a business
may also prepare (iii) Statement of Retained earnings, and (iv) a statement of
change in financial Position.
3.2 DIFFERENT TYPES OF FINANCIAL STATEMENTS
3.2.1 Income Statement: The income statement or profit & loss account is considered
as a very useful statement of all financial statements. It depicts the expanses
incurred on production, sales and distribution and sales revenue and the net
profit or loss for particular period. It shows whether the operations of the firm
resulted in profit or loss at the end of a particular period.

3.2.2 Balance Sheet: Accounting Standards Board, India has defined balance sheets
as, “ a statement of financial position of an enterprise as at a given date which
exhibits its assets, liabilities, capital reserves and other account balances at their
respective book values”. Balance sheet is a statement, which shows the financial
position of a business as on a particular date. It represents the assets owned by
the business and the claims of the owners and creditors against the assets in the
form of liabilities as on the date of statement. According to Harry G. Guthmann,
“ the balance sheets might be described as financial cross section taken at certain

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intervals and earning statements as condensed history of the growth and decay
between the cross sections”.

3.2.3 Statement of Retained Earnings: The statement of retained earnings is also


called profit & loss appropriation account. It is a link between income statement
& balance sheet. Retained earnings are the accumulated excess of earnings over
losses and dividends. The balance shown by the income statements is transferred
to the balance sheet through this statement after making the necessary
appropriations.

3.2.4 Fund Flow Statement: According to Anthony,” The funds Flow Statement
described the sources from which the additional funds were derived and the use
to which these funds were put”. Funds flow statements help the financial analyst
in having amore detailed analysis and understanding the changes in the
distribution of resources between two balance sheet periods. The statement
reveals the sources of funds and their application for different purposes.

3.2.5 Cash Flow Statements: A cash flow statement depicts the changes in cash
position from one period to another. It shows the inflow and outflow of cash and
helps the management in making plans for immediate future. An estimated cash
flow statement enables the management to ascertain the availability of cash to
meet business obligations. This statement is useful for short term planning by
management.

3.2.6 Schedules & Note to Financial Statements: Schedules are the statements, which
explains the items given in the income statement and balance sheet. Schedules
are a part of financial statement, which give detailed information about the
financial position of a business organisation. Certain notes are often used to
supplement the information comprised in basic financial statements. These are
virtually a part of financial statements.
3.2.7 Annual Reports / Corporate reports: Apart from the financial statements annual
report contains other relevant information such as Management discussion &

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analysis, Reports on corporate Governance, Director’s report, details of the
subsidiary companies. These reports play as important role as financial
statements of the company in understanding of the complete financial position.

3.3 NATURE OF FINANCIAL STATEMENTS


According to the American Institute of Certified Public Accountants, financial
statements reflect “ a combination of recorded facts, accounting conventions and
personal judgments and conventions applied affect them materially”. It means
that data presented in financial statements is affected by recorded facts,
accounting concepts & conventions and personal judgments.
a) Recorded facts: The term-recorded facts refer to the figures, which are
shown in the book of accounts. The figures, which are not recorded in the
books, are not depicted in financial statements, no matter how important
or unimportant those facts are.
b) Accounting policies, Assumptions, concepts & conventions:
Accounting policies encompasses the principles, bases, conventions, rules
and procedures adopted by in preparing and presenting financial
statements. Accounting policies of the organisation are consistently
followed over along period of time and are reported as schedule to
financial statements or as notes to financial statements in the annual
report.
As per accounting standards Board, India, fundamental accounting
assumptions mean “ basic accounting assumptions which underline the
preparation & presentation of financial statements. Usually, they are not
specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed”. Some fundamental
accounting assumptions are Going concern concept, consistency, accrual
etc.
Accounting concepts are basic framework on the basis of which
accounting work is carried out. Some accounting concepts are Business
entity concept, Money measurement concept, going concern concept, cost
concept, matching concept, Dual aspect concept etc.

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Accounting conventions are the principles, which enjoy the sanctity of
application on account of long usage, are termed as accounting
conventions. E.g. consistency, conservatism, materiality, full disclosure.

c) Personal Judgments: Personal judgments of the accountant are of


importance despite of properly laid down concepts, conventions, policies
and assumptions. The judgment needs to be exercised in proper
classification of assets, classification of expenditure into capital &
revenue, creation of provisions and reserves.

3.4 LIMITATIONS OF FINANCIAL STATEMENTS


i) Financial statements disclose only monetary facts. There are certain assets
and liabilities, which are not disclosed in the balance sheets. For example
the most tangible assets of the company is its management force and its
dissatisfied labor force is its liability which are not disclosed in the
balance sheet.
ii) The financial statements are generally prepared with from the point of
view of shareholders and their use is limited in the decision making by the
management, investors and creditors.
iii) An investor likes to analyze the present and future prospects of the
business while the balance sheet show the past position. As such the use of
balance sheet is limited.
iv) Even the audited financial statement does not provide complete accuracy.
v) The net income is the result of personal judgment and bias of accountants
cannot be removed in the matters of depreciation and stock valuation. .
vi) Profit arrived at by profit & loss account is interim in nature. Actual
profits can be ascertained only after the firm achieves the maximum
capacity.
vii) The profit & loss account does not disclose the factors like quality of
product and efficiency of management.

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viii) The accounting year may be fixed to show a favorable picture of
business. In case of sugar industry a balance sheet prepared in off-season
depicts a better liquidity than in the crushing season.

3.5 VARIOUS TECHNIQUES OF FINANCIAL ANALYSIS


3.5.1 Comparative Financial Statements: Comparative financial statements are
statements of financial position of a business designed to provide time
perspective to the to the consideration of various elements of financial position
embodied in such statements. Comparative statements reveal the following:
(i) Absolute data (Money value or rupee amounts)
(ii) Increase or reduction in absolute data (in terms of money values)
(iii) Increase or reduction in absolute data (in terms of percentage)
(iv) Comparison (in terms of ratios)
(v) Percentage of totals
Comparative balance sheets, comparative income statements and comparative
statements of changes in financial position can be prepared. American Institute
of Certified Public accountants have explained the utility of preparing the
comparative statements, thus:
“ The presentation of comparative statements is annual and other reports enhance the
usefulness of such reports and brings out more clearly the nature and trend of current
changes affecting the enterprise. Such presentation emphasis the fact that statements
for a series of period are far more significant that those of a single period and that the
accounts of one period are but an installment of what is essentially a continuous
history. In any one year, it is ordinarily desired that the balance sheet, the Income
statement and the surplus statement be given for one or more preceding years as well
as for the current years”.

3.5.2 Common size Statements: The figures shown in financial statements viz. Profit
& loss account and balance sheet are converted to percentages so as to
establish each element to the total figure of the statement and theses statement
are called common size statements. These statements are useful in analysis of
the performance of the company by analyzing each individual element to the

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total figure of the statement. Theses statements will also assist in analyzing the
performance over years and also with the figures of the competitive firm in the
industry for making analysis of relative efficiency.

3.5.3 Trend Analysis: In trend analysis ratios different items are calculated for
various periods for comparison purposes. Trend analysis can be done by trend
percentages, trend ratios and graphic and diagrammatic representation. The
trend analysis is a simple technique and does not involve tedious calculations.
However, comparisons would be meaningful only when accounting policies
are uniform and price level changes do not present a distorted picture of
phenomenon. The trend analysis conveys a better understanding of
management’s philosophies, policies and motivations, which have bought
about the changes revealed over the years. Thus method is a useful analytical
device for the management since by substitution of percentages for large
amounts, the brevity and readability are achieved. However trend percentages
are not calculated only for major items since the purpose is to highlight
important changes.

3.5.4 Fund flow analysis: Fund Flow Statement: Fund flow analysis reveals the
changes in working capital position. Working capital is of paramount
importance in any business so this kind of a analysis proves to be very useful.
According to Anthony,” The funds Flow Statement described the sources from
which the additional funds were derived and the use to which these funds were
put”. Funds flow statements help the financial analyst in having amore detailed
analysis and understanding the changes in the distribution of resources between
two balance sheet periods. The statement reveals the sources of funds and their
application for different purposes. Fund flow analysis has become an important
tool for any financial analyst; credit granting institutions and financial
managers.

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3.5.5 Cash Flow Analysis: A cash flow statement depicts the changes in cash position
from one period to another. It shows the inflow and outflow of cash and helps
the management in making plans for immediate future. An estimated cash flow
statement enables the management to ascertain the availability of cash to meet
business obligations. This statement is useful for short term planning by
management.

3.5.6 Ratio Analysis: Ratio analysis is very important analytical tool to measure
performance of an organisation .The ratio analysis concentrates on the
interrelationship among the figures appearing in the financial statements. The
ratio analysis helps the management to analyze the past performance of the firm
and to make further projections. Ratio analysis allows interested parties like
shareholders, investors, creditors, government and analysts to make an
evaluation of certain aspects of firm’s performance. It is a process of
comparison of one figure against another, which make a ratio, and the appraisal
of the ratios to make proper analysis about the strength and weakness of firm’s
operations. This tool of financial has been discussed in detail in next chapter.

3.5.7 Value Added Analysis: ‘Value Added’ is a basic and important measurement to
judge the performance of an enterprise. It indicates the net value or wealth
created by the manufacturer during a specified period. No enterprise can survive
or grow if it fails to generate wealth. An enterprise can survive without making
profits but cannot survive without adding value.
‘Value added’ is described as “ the wealth created by the reporting entity by its
own and its employees’ efforts and comprises salary, wages, fringe benefits,
interest, dividend, tax, depreciation and net profit (Retained).
Value added is the increase in the market value brought by an alteration in the
form, location or availability of a product or service excluding the cost of
bought in material or services used in that product or service. To carry out the
Value added analysis, a typical statement of added value is prepared as routine

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part of management information system. The value added statement is basically
rearrangement of information given in income statement.

3.6 Types of Financial Analysis


(i) On the basis of Material Used: The analysis can be of following types:
(a) Internal Analysis: It indicates the analysis carried out by those parties
who have the access to the book and records of the company.
Naturally, it indicates basically the analysis carried out by
management of the company to enable the decision making process.
This may also indicate the analysis carried out in legal or statutory
matters where the parties which are not a part of management of the
company may have the access to the books and records of the
company.
(b) External Analysis: It indicates the analysis carried out by those parties
who do not have the access the books an\d records of the company.
This may involve the analysis carried out by creditors, prospective
investors, and other outsiders. Naturally, those outsiders are required
to depend upon the published financial statements. As such, the depth
& correctness of the external analysis is restricted, though some of the
recent amendments of the statutes like Companies Act, 1956 have
made it mandatory for the companies to reveal maximum information
relating to the operations & financial position, in order to facilitate the
correct & proper analysis & interpretation of the Financial statements
by the readers.
(ii) On the basis of Modus Operandi: The analysis can be of following types:
(a) Horizontal Analysis: The horizontal analysis consists of the study of
the behavior of each of the item in the financial statement- that is, its
increase & decrease with the passage if time. It is also known as
dynamic type of analysis since it shows the changes, which have
taken palace. The comparison of the items is made across the year, ,
the eyes look at the comparative analysis is at the horizontal level ,
hence the analysis id termed as horizontal analysis.

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(b) Vertical Analysis: In vertical analysis a study is made of the
quantitative relationship between he various items in the financial
statements on a particular date. It’s a static type of analysis or study of
position. Such an analysis is useful in comparing the performance of
several companies in the same group or divisions or department in the
same company. Since this analysis depends on the data for one period,
this is not very conducive to a proper analysis of the company’s
financial position. It is also called ‘ Static’ analysis as it is frequently
used for referring to ratio developed on the date or for one accounting
period.

Analysis can be done both horizontally and vertically. As a matter of fact one
type of analysis is incomplete in itself. Both are complementary to each other.
Both these analysis form the backbone of the technique of financial statement
analysis.

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Chapter 4
Ratio Analysis – An overview

4.1 DEFINITION
The term ratio implies arithmetical relationship between two related figures. The
technique of ‘Ratio Analysis’ as technique for interpretation of financial statements
deals with the computation of various ratios, by grouping or regrouping the various
figures and/or information appearing on the financial statements (either profitability
statements or balance sheet or both) with the intention to draw the fruitful conclusion
thereform. Ratios, depending on the nature of ratio, may be expressed in either of the
following ways:
(a) Percentage for example, Net Profit as 10% of Sales
(b) Fractions for example, retained earnings as 1/3 rd of share capital
(c) Stated comparison between numbers for example, Current assets as twice the
current liabilities.
The ratio can be defined as the qualitative or mathematical relationship that persists
between two similar variables. In other words it is the precise relationship between
two comparative variables in terms of quantitative figures (either in percentage or
proportion). Comparative variable should have the same unit of measurement.
This technique is based on the premise that a single accounting figure by itself does
not communicate any meaningful information but expressed as a relative to some
other figure. It may definitely give some significant information.

4.2 CLASSIFICATION OF RATIOS


Ratios are classified into different categories depending upon the basis of
classification.
1. Structural Classification/ Traditional Classification: The classification on the
basis of items in the financial statements to which the determinant of a ratio
belongs is known as structural classification. The ratios are classified as:
(a) Balance Sheet ratio: The ratio which are calculated by using the figures
given in the balance sheet only are known as balance sheet ratios.

23
(b) Income Statement Ratio: The ratio, which are computed by using the
figures in the income statements i.e. profit & loss account only are
called income statement ratios.
(c) Inter-statement Ratio: The ratios which are computed by using the
figures given in balance sheet as well as income statement both at a
time are regarded as inter-statement or composite ratios.
The above classification can be put as under also:
(a) Financial ratios: Ratios which are derived from comparisons of balance sheet items, or
of balance \sheet items with profit & loss items are known as financial ratios.
(b) Operating ratios: Ratios, which are derived from comparisons of items of income &
expanse, are termed as operating ratios.
2. Functional Classification: The classification according to the purpose of
computing the ratio is known as functional classification. On this basis, the
ratio may be classified in the following categories:
(a) Profitability Ratio: Ratio, which measures the profitability of a
business, is termed as profitability ratio. These highlight the
significance of end results of business activities. The main objective is
to judge the efficiency of the business.
(b) Turnover or Activity ratio: It is used to measure the effectiveness of
the use of capital/ assetsRATIOS
are termed as turnover or activity ratio.
(c) Solvency ratio: The ratio which test the financial position / status of an
enterprise are called solvency ratio. They can be further subdivided
into two parts:
--Short term Solvency Ratio
--Long term Solvency Ratio
Profitability Turnover Solvency
Ratios Ratios Ratios

1.Fixed Asset
1.Operating 1.Debt- Equity
Turnover
Ratio Ratio
Ratio
2. Net Profit 2. Proprietary
2. Current
Ratio Ratio
Assets
3. ROI (Return 3. Current Ratio
Ratio
on
3. Working
Investment) 24 Turn-
Capital
over Ratio
4. Capital
Turnover
Ratio
Functional Classification of Ratios

I Profitability Ratios:
The purpose of study & analysis of profitability ratio are to help assess the
adequacy of profits earned by the company & also to discover whether profitability is
increasing or decreasing. The profitability of the firm is the net result of a large
number of policies & decisions. The profitability ratios show the combined effects of
liquidity, asset management & debt management on operating results. Profitability
ratio are measured with reference to sale, capital employed, total assets employed,
shareholders fund etc. The major profitability ratios are following:

25
(a) Operating Ratio: The ratio of all operating expanses (i.e. material used, labor,
factory overheads, administration & selling expanses) to sales is the operating
ratio. A comparison of the operating ratio would indicate whether the cost
content is high or low in the figure of sales. If an annual comparison show that
the sales has increased the management would be naturally interested &
concerned to know as to which element of the cost has gone up. It is not
necessary that the management should be concerned only when the operating
ratio goes up. If the operating ratio has fallen, through the unit selling price has
remained the same. Still the position needs analysis, as it may be the some
total of efficiency in certain departments & in efficiency in others. A dynamic
management should be interested in making a complete analysis.
Significance: The ratio is the test of operational efficiency with which the
business being carried. The operating ratio should be low enough to leave a
portion of sales to give affair return to investors. A comparison of operating
ratio will indicate whether the cost component is high or low in the figure of
sales. In case the comparison shows that there is increase in this ratio, the
reason for such increase should be found out & management be advised to
check the increase.
(b) Net Profit ratio: Net profit ratio relates net profit to net sales. Net profit is
“the excess of revenue over expanses during a particular accounting period”.
It is the net result of the working of a company during a period. The ratio may
be computed on the basis of net profit after tax or before tax or both.

Net Profit Ratio = Net Profit x 100


Net Sales

This ratio could be compared with that of the previous years and with that of
competitors to determine the trend in Net profit Margins of the company & its
performance in the industry. This measure will depict the correct trend of
performance where there are erratic fluctuations in the tax provisions from year to
year. It is to be observed that majority of the cost debited to the profit & loss
account are fixed in nature & many increase in sales will cause the cost per unit to

26
decline because of the spread of same fixed cost over the increased number of
units sold.
Significance: This ratio help in determining the efficiency with which affairs of
the business are being managed. An increase in the ratio over the previous period
indicates the improvement in the operational efficiency of the business provided
the gross profit ratio is constant. The ratio is thus an effective measure to check
the probability of business.

( c) ROI (Return on Investment): The main objective of a business enterprise is to


earn a return on capital employed. The rate of return on investment is determined by
dividing net profit or income by the capital employed or investment made to achieve
the profit. Capital employed includes all the long-term funds in the balance sheet that
is shareholders’ funds plus long-term loans plus miscellaneous long-term funds. The
ROI is calculated as:

ROI = Net profit before Interest & taxes


Capital Employed

Return on investment analysis provides a strong incentive for optimal utilization of


the assets of the company. This encourages managers to obtain assets that will provide
a satisfactory return on investment and to dispose of assets that are not providing an
acceptable return. Thus ROI provides a suitable measure for assessment of
profitability of each proposal.
Significance: The return on Capital Employed invested is a concept that measures the
profit, which a firm earns on investing a unit of capital. ‘Yield on capital’ is another
term employed to present the same concept. It is advised to ascertain it periodically.
The profit being the net result of all the operations, the return on capital expresses all
efficiencies or inefficiencies of the business collectively and thus is a dependable
basis for judging its overall efficiency or inefficiency. The business can survive only
when the return on capital employed is more than the cost of capital employed in the
business.

27
II. Turnover Ratios:
Turnover ratios are used to measure the effectiveness of the employment of
resources are termed as activity ratios. Since they relate to the use of assets for
generation of income through turnover, they are known as turnover ratios. How many
times the assets turnover during business operations – is to be measured by these
ratios. The greater the rotation of assets to generate sales, the better it is for the
business. The business would be more profitable if greater turnover is achieved with
lesser use of funds. Hence it is an indirect measure of profitability. More efficient the
operations of an undertaking, the quicker and more number of times the rotation is.
The rate of rotation of capital employed is a significant contributor of to the
profitability of an enterprise.

(a) Fixed Assets Turnover Ratio: This measures the company’s ability to
generate sales revenue in relation to fixed asset investment. In other words it
indicates the extent to which the investment in fixed assets contribute towards
sales. A low asset turnover may be remedied by increasing sales or by
disposing of certain assets or both. This is a difficult set of ratios to interpret as
asset values are based on historic cost. An increase in the fixed asset figure
may result from the replacement of an asset at an increased price. Or the
purchase of an additional asset intended to increase production capacity. The
later transaction might be expected to result in increased sales whereas the
former would more probably be reflected in reduced operating cost.
It is calculated as:
Fixed Assets Turnover = Net Sales
Fixed Assets

Significance:
A high fixed asset turnover ratio indicates the capability of the organisation to
achieve maximum sales with minimum investment in fixed assets. It in
indicates that the fixed assets are turned over in the form of sales more number
of times. So higher the fixed asset turnover ratio better will be the situation.

28
(b) Current Asset Turnover Ratio:
The way fixed asset turnover ratio is calculated, similarly Current Assets
turnover Ratio is computed, since the total assets can be divided into two
major parts- fixed assets & current assets. Current assets are composed of
broadly Receivables (Debtors + B/R), stock and cash. The turnover of even
these three can be calculated separately to analyze which part of the working
capital or current assets is efficiently put to operations and which part not.
Net sales includes sales after returns, if any, both cash as well as credit.
Current asset ratio is calculated as:

Current asset Turnover Ratio = Net Sales


Current Assets

Significance: A high current Asset turnover ratio indicates the capability of


the organization to achieve minimum sales with the minimum investment in
current assets. It indicates that the current assets are turned over in the form of
sales more number of times. As such higher the current asset turnover ratio
better will be the situation.

(c) Working Capital Turnover Ratio:


Working Capital turnover ratio indicates the extent of working capital turned
over in achieving sales of the firm. It tells the management of the
oraganisation that to what extent the working capital funds have been
fruitfully employed in the business towards sales. The decline in the number
of times of working capital turnover means that either the working capital is in
excess of the requirements or there have been operational inefficiencies. It is
calculated as:

Working Capital Turnover Ratio = Net Sales


Working Capital

Significance: A high working capital turnover ratio indicates the capability of the
organisation to achieve maximum sales with the minimum investment in working

29
capital. It indicates that working capital is turned over in the form of sales more
number of times. As such, higher the ratio, better will be the situation.
(d) Capital Turnover Ratio:
Capital turnover ratio indicates, efficiency in utilization of capital employed in
generating revenue. This ratio indicates the efficiency with which the capital
employed is being utilized. It is calculated as:

Capital turnover Ratio = Sales


Capital Employed

Significance: As this ratio the management of the organisation about the


efficiency or inefficiency in the utilization of capital, a high capital turnover
indicates the capacity of the organisation to achieve maximum sales with
minimum amount of capital employed. It indicates that the capital employed is
turned over in the form of sales more number of times. As such higher the
capital turnover ratio, better will be the situation.

III. Solvency Ratio:


(i) Long term Solvency Ratios: The long-term financial stability of the firm
may be considered dependent upon its ability to meet all its liabilities,
including those not currently payable. The ratios which are important in
measuring the long term solvency are:
(a) Debt Equity Ratio: The debt-equity ratio is determined to ascertain the
soundness of the long-term financial policies of the company. It is also
known as “External-Internal” Equity ratio. The ratio indicates the pattern
of financing of the business. The ratio can be computed by putting long-
term debt in relation to shareholder’s fund. A proper proportion must be
maintained

between proprietors’ (owners’) funds and long-term loans. It is calculated as


follows:

Debt- Equity Ratio = External Equity


Internal Equity
30
The ratio may be 2:1. It implies that outside long-term loans may be twice the
shareholder’s fund. If the ratio is more than two, the business would become
risky. The ideal ratio may be 0.67. However, if the business is flourishing and
there is high profitability ever after repayment of interest and liquidity position
is not adversely affected by repayment of interest & principal sum, it is
definitely advisable to have greater debt-equity ratio.
Significance: Debt-Equity ratio indicates the stake of shareholders or owners
in the oraganisation vis-à-vis that of the creditors. It indicates the cushion
available to the creditors on liquidation of the organizations. A high debt-
equity ratio may indicate that the financial stake of the creditors is more than
that of the owners. A very high debt-equity ratio may make the proposition of
investment in the oraganisation very risky one. On the other hand, a very low
debt-equity ratio may mean that the borrowing capacity of the organisation is
being underutilized.

(b) Proprietary Ratio: Proprietary ratio indicates the relationship between


the owners’ fund and total assets. It is a slight variant of the debt-equity
ratio. The general financial strength or the weakness of the concern is
reflected by this ratio as this ration as it shows the proportion of
proprietor’s fund invested in assets employed in the business. The ratio
can be calculated as:
Proprietary Ratio = Owners’ Fund
Total Assets

Significance: The ratio indicates the extent to which the owners’ funds are sunk in
different kinds of assets. The high ratio is indicative of the sound financial status of
the company and the creditors are relatively at a comfortable position. Financing of
assets to the extent of more than 50% through the use of outside funds may be
dangerous for the enterprise.

31
(ii) Short term Solvency Ratios
(a) Current Ratio: Current ratio measures the solvency of the company in the
short term. Current assets are those assets, which can be converted into
cash with in one year. Current Liabilities and provisions are those
liabilities that are payable within a year. A current ratio of 2:1 indicates a
highly solvent position. A current ratio of 1.33:1 is considered by banks as
the minimum acceptable level for providing working capital finance. A
very high current ratio will have adverse impact on the profitability of the
organisation. A high current ratio may be due to the piling up of inventory,
inefficiency in collection of debtors, high balances in cash and bank
accounts without proper investment. It can be calculated as:

Current Ratio = Current Assets, Loans & Advances


Current Liabilities & Provisions

Significance:
It indicates the backing available to current liabilities in the form of current
assets. In other words, a higher current ratio indicates that there are
sufficient assets available with the organisation, which can be converted
into cash, without any reduction in value, in a short span of time, i.e.
current assets, to pay off the liabilities, which are to be paid off in the
short span of time, i.e. current liabilities. As such higher the current ratio ,
better will be the situation.
4.3 ADVANTAGES OF RATIO ANALYSIS
‘Ratio Analysis is to a business what a score board is to a game’. The ratios
are useful in the following ways:
(i) Assessment of Financial health & operational efficiency: Ratios reveal
useful trends for assessment of financial strength and operational efficiency
of an enterprise.
(ii) Facilitates inter-firm Comparison: For inter-firm comparison, ratio analysis
is of immense importance. Suitable relationships can be established between

32
various relevant factors in a concern and these can be compared with the
same in other units in the industry or average for the industry as a whole.
(iii)Intra firm comparison possible: The performance of different divisions of
the enterprise can also be compared suitably with the help of ratio analysis.
The departmental efficiency can be judged and appropriate decisions taken
in several directions.
(iv) Planning & Forecasting: Ratios not only perform post mortem operations,
but also serve as barometers for future. Ratios have predatory value and they
are very helpful in forecasting and planning the business activities for a
future period.
The ratio analysis is one of the most popular techniques employed to diagnose the
financial edifice and flow of funds of a firm. The ratios are used to locate symptoms
of problems.

4.4 LIMITATIONS OF RATIO ANALYSIS


It is said “ ratios like statistics have an air of precision and finality about them
which at times may be misleading.” Ratios can at times be quite deceptive since they
are precise in numbers mathematically. Therefore, the limitations of ratio analysis
must be kept in mind, which are as under:
(i) Only Indicators: Ratios are simply indicators, too much reliance should not be
put on figures. Ratios are at best only symptoms and there is always a need to
investigate the facts revealed by them further, since the malady may be deep seated.
(iii) Dependence of financial statements: The base of ratio analysis is financial
statement. Whatever limitations financial statements have, those automatically
apply to ratio analysis too. There may be differing accounting policies pursued
in different years or different firms. Comparisons, horizontal or vertical, will
become vicious, in case, say, valuation of inventories or charge of
depreciation is on different basis. Careful examination of the statements
disclosing accounting policies, if any, is necessary. Suitable adjustments
should be made in the financial statements before attempting ratio analysis.
(iv) No precise terminology: Accounting ratios and terms used to calculate such
ratios have no standard and precise definitions as yet. For example, net profit

33
ratio is calculated on the basis of operating profit by one and net profit before
tax by the other and the net profit after tax by the third.
(v) Effect of inflation: Comparisons become meaningless since, on account of
change in the level of prices, the values shown in the financial statements
loose their significance. Adjustment in the values is required before
undertaking ratio analysis.
(vi) Accuracy of accounts: If the accounts have not been correctly prepared, the
ratio cannot be correctly computed. Ratios are only as accurate as the
accounts on the basis of which these are established. The effect of window
dressing should be eliminated after proper adjustments in case the ratio
analysis is to serve any useful purpose.
(vii) Cause-and-Effect Relation missing: The relationship of cause & effect is
necessary to be established before relating two variables. If ratios of not
significantly related figures are calculated, these will give misleading results.
The exact cause & the exact effect should also be very clear at the outset.
(viii) Correct Interpretation: Ratio computation leads us nowhere; accept to some
summarized figures only after studying the realities behind the financial
statements, the ratio can be correctly interpreted.
(ix) No suitable standards: Suitable standards for comparison are missing. In the
absence of a single standard, it becomes very difficult to apply the technique
to serve any effective purpose.

Chapter 5
Analysis & Interpretation of Ratios

34
5.1 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS
FINANCIAL SERVICES LIMITED

I. Profitability Ratios

(i) Operating Ratio


(ii) Net Profit Ratio
(ii) ROI (Return on investment)

Operating Ratio

Formula: Operating Costs X 100


Net Sales

Calculation:

For 2004-05 43,384,674 = 0.0836


518,906,568

For 2005-06 382,572,697 = 0.1858


2,058,627,680

For 2006-07 584,297,562 = 0.1659


3,521,811,800

Operating Profit
0.2
0.1659
0.1858
0.15
Ratios

0.0836
0.1
0.05
0
2005 2006 2007
Years

Interpretation: From the above bar graph, it can be concluded that the operating ratio
of the company has increased to a great extent in the year 2006 & 2007 as compared
to 2005. From the figures it can be interpreted that the company’s operating expanses
has gone up considerably in the year 2005-06, which can be because of business

35
expansion spree. Increase in the operating expanses in 2005-06 was 781.8% while
increase in the sales was mere 296.72%. The operating expanses increased to 52.72%
in 2006-07 while sales increased to a higher proportion of 71%, indicating a better
operational efficiency achieved in 2006-07.

(i) Net Profit Ratio

Formula = Net Profit after tax x100


Net sales

Calculation:

For year 2004-05 236,057,575 = 0.4549


518,906,568

For 2005-06 742,569,096 = 0.3607


2,058,627,680

For 2006-07 1,531,031,869 = 0.4347


3,521,811,800

Net Profit Ratio


0.5
0.4549 0.4347
0.4 0.3607

0.3
Ratio

0.2

0.1

0
2005 2006 2007
Years

Interpretation: From the bar graph showing the Net profit ratio, it can be very well
concluded that the net profit ratio is showing almost same trend as operating cost
ratio. The figure for net profit has obviously gone up by 214.57 % in the year 2005-06
but it was not proportionate to increase in sales that were approx. 296.72%, resulting
in a decrease in Net profit ratio. This decrease can again be apportioned to increase
36
operating costs in the same year. While situation has been improved to in the year
2006-07 as an increase of 71 % in sales has bought about 106.18 % increase in Net
profits making the picture better. But Net profit ratio for the year 2006-07 has not yet
crossed the 2004-05 mark. But if the trend continues, 2007-08 will see an improving
figure.
(ii) Returns on Capital Employed:

Formula = Net profit before Interest & Taxes


Total Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities -
(Non-Business Assets +Fictitious Assets)
Calculation:

For 2004-05 = 479,915,565 = 0.0586


8,177,880,088

For 2005-06 = 1,730,199,899 = 0.085


20,242,008,142

For 2006-07 = 2,940,626,689 = 0.1408

R.O.C.
0.1408
0.15

0.1 0.0850
Ratios

0.0586
0.05

0
2005 2006 2007
Years
20,873,998,850

Interpretation: From the figure shown above, the increasing trend of Return on
capital employed in clearly visible, which is obviously a good sign. In the year 2005-
06, 149.74 % increase in capital employed bought about 260.52 % increase in net

37
profit. While in year 2006-07 a mere 3.09% increase in capital employed bought
69.95 % increase in Net profit. It shows better fund management by the company &
overall increase in the efficiency of the business. It shows that borrowing policy of the
company was wise & economic and capital has been employed fruitfully.

II. Turnover Ratios

(i) Fixed Assets Ratio


(ii) Current Assets Ratio
(iii) Working Capital Turnover Ratio.
(iv) Capital Turnover ratio

(i) Fixed Assets Ratio:

Formula = Net Sales


Fixed Assets (net)

Calculation:

For 2004-05 = 518906568 = 455.708 times


1,138,680

For 2005-06 = 2,058,627,680 = 12.862 times


160,052,625

For 2006-07 = 3,521,811,800 = 18.750 times


187,828,422

Fixed asset turnover ratio


500
455.708
400
Ratios

300
200
100 18.75
12.862
0
2005 2006 2007
Years

38
Interpretation: A high fixed asset turnover ratio indicates the capability of the
organisation to achieve maximum sales with minimum investment in fixed assets and
vice-versa. A high fixed asset turnover in year 2004-05 shows better utilization of
fixed assets. But in year 2006-07, 13.956 % increase in fixed assets could bring about
an increase of mere 296.72 % in sales reducing the ratio to a great extent. It could be
because of high investment made by the organisation for business expansion. The
situation has slightly improved in the year 2006-07 as an increase of 17% in fixed
assets caused 71.07 % increase in sales. Hence the figures are moving to a better end.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Formula = Net Sales


Current Assets

Calculation:

For 2004-05 = 518,906,568 = 0.0662


7,832,695,451

For 2005-06 = 2,058,627,680 = 0.1407


14,622,116,651

For 2006-07 = 3,521,811,800 = 0.2198


16,015,707,358

Current assets turnover ratio


0.25
0.2198
0.2
0.1407
Ratios

0.15
0.1 0.0662
0.05
0
2005 2006 2007
Years

Interpretation: The current ratio figures are showing an increasing trend over the
years. A high & increasing current ratio figure indicates capability of the organisation
to achieve maximum sales with minimum investment in current assets. Here current

39
assets include Interest accrued, sundry debtors, cash & bank balances, Loans &
advances. In year 2005-06, an increase in 86.68 % in current assets resulted in
296.72% increase in sales. While an increase of 9.53 % in current assets in
year 2006-07, increased the sales to 71%. It shows a better current assets management
i.e efficient cash management & debtors management by the company.

(iii) Working Capital Turnover Ratio

Formula = Net Sales


Working Capital

Calculation:

For 2004-05 = 518,906,568 = 0.0679


7,635,103,324

For 2005-06 = 2,058,627,680 = 0.1499


13,726,337,642

For 2006-07 = 3,521,811,800 = 0.2378


14,809,844,853

Working Capital Turnover Ratio


0.2378
0.25
0.2 0.1499
Ratios

0.15
0.1 0.0679
0.05
0
2005 2006 2007
Years

Interpretation: Working capital ratio is also showing an upward trend over three
years. It indicates the higher increase in sales with less than proportionate increase in
working capital. Hence an increasing working capital turnover ratio shows better
efficiency in utilizing working capital for achieving maximum sales. In year 2005-06,
40
an increase of 79.77 % in working capital showed approx. 292% increase in sales.
While in 2006-07 increase in working capital brought about almost proportional
increase in sales. The situation on this front is improving year by year.

(iii)Capital Turnover ratio: This is calculated as:

Formula = Sales
Capital Employed

Calculation:

For 2004-05 = 518,906,568 = 0.0634


8,177,880,088

For 2005-06 = 2,058,627,680 = 0.1017


20,242,008,142

For 2006-07 = 3,521,811,800 = 0.1687


20,873,998,850

Capital Turnover Ratio


0.2
0.15 0.1687
0.1017
Ratios

0.1 0.0634
0.05
0
2005 2006 2007
Years

Interpretation: Capital turnover ratio indicates the efficiency of the organisation with
which the capital employed is being utilized. A high turnover ratio indicates the
capability of the organisation to achieve maximum sales with minimum amount of
capital employed. From the above figure, it is clearly visible that the capital turnover
ratio is showing an increasing trend. In the year 2005-06,the ratio has increase 60% as
compared to year 2004-05, while the increase in approx. 65 % in the year 2006-.07.

41
As in year 2005-06, 147.52 % increase in capital employed, increased the sales to
296.72%. While in year 2006-07 a mere 3.122% increase in capital employed caused
71% increase in sales.

III. Solvency Ratios

(i) Debt-Equity Ratio


(ii) Proprietory Ratio
(iii)Current Ratio

(i) Debt-Equity Ratio:

Formula = Long term Liabilities


Shareholders’ funds

Calculation:

For 2004-05 = 4,673,428,516 = 1.333


3,504,451,572

For 2005-06 = 10,242,900,000 = 1.024


9,999,108,142

For 2006-07 = 8,803,895,386 = 0.6486


13,572,959,124

Debt Equity Ratio


1.400
1.200 1.333
1.024
1.000
Ratio

0.800
0.6486
0.600
0.400
0.200
0.000
2005 2006 2007
Years
Interpretation: Debt-Equity ratio indicates the stake of shareholders in the
organisation vis-à-vis that of creditors. The debt-equity ratio of the company is
showing a decreasing trend over the years. The ratio is very near to ideal figure in

42
2006. Further the decrease in 2007 to .64 indicates debt repayment or decreased
dependence on external liabilities while there is an increase in the shareholder’s fund.

(ii) Proprietary Ratio

Formula = Total assets


Owners fund

Calculation:

For 2004-05= 3,504,451,572 = 0.4184


8,375,478,888

For 2005-06 = 9,999,108,142 = 0.4730


21,137,787,151

For 2006-07 = 13,572,959,124 = 0.5755


23,582,717,015

Proprietory Ratio

0.8
0.5755
0.6
0.473
Ratios

0.4184
0.4
0.2
0
2005 2006 2007
Years

Interpretation: The above figure shows an increasing trend of proprietary ratio over
the years. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio has shown an increase of 13% in the year 2005-06 as compared to 2004-05.
While the ratio increased by 22 % in 2006-07. The increasing proprietary ratio is a
satisfactory indication of organization’s financial health.

43
(iii) Current Ratio:

Current ratio = Current assets


Current Liabilities

Calculation:

For 2004-05= 7,832,615,451 = 157.855


49,619,014

For 2005-06 = 14,622,116,651= 50.39


290,166,741

For 2006-07 = 16,015,707,358 = 86.869


184,364,862

Current Ratio

200
157.855
150
Ratio

100 86.869
50.39
50
0
2005 2006 2007
Years

Interpretation: Current ratio measures the short-term solvency of the business.


Current ratio indicates the backing available to current liabilities in the form of current
assets. The ideal current ratio is 2:1. The current ratio figure is very high in all the
three years, which indicates that the current liabilities are very less as compared to
current assets. The company needs to lower down its current ratio as it indicates poor
utilization of current assets.

44
5.2 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS
SECURITIES LIMITED

Profitability Ratios

(i) Operating Ratio


(ii) Net Profit Ratio
(iii) ROI (Return on investment)

(i) Operating Ratio


Operating Costs X 100
Net Sales

For 2004-05= 586,059,770 = 0.5126


1,143,112,652

For 2005-06= 1,244,234,043 = 0.3914


3,178,627,596

For 2006-07= 2,182,119,545 = 0.5160


4,228,287,659
Operating Ratio
0.6 0.5160
0.5126
0.5 0.3914
0.4
Ratios

0.3
0.2
0.1
0
2005 2006 2007
Years

Interpretation: From the figure give above, it can be seen that operating ratio has
decreased in the year 2005-06 & showed again an increasing trend in year 2006-07 &
reached a figure even more than year 2004-05. In the year 2005-06, 112.30 % increase
in operating cost resulted in 178.06% increase in sales, thus reducing the ratio.
Although the ratio decreased but it was high in absolute terms. In year 2006-07, 33%
increase in sales was bought about by 75.38 % increase in operating cost.

45
(ii) Net Profit Ratio:

Net Profit after tax x100


Net sales

Calculation:

For year 2004-05 = 312,272,496 = 0.2731


1,143,112,652

For year 2005-06 = 1,192,219,615 = 0.3750


3,178,627,596

For year 2006-07 = 1,380,887,469 = 0.3265


4,228,287,659

Net Profit Ratio


0.4
0.3750 0.3265
0.3 0.2731
Ratios

0.2

0.1
0
2005 2006 2007
Years

Interpretation: Net profit ratio is showing a trend almost similar to operating cost
ratio. In year 2005-06, increase in sales was 178.06%, while there was more than
proportionate increase in net profit i.e. 281.78%, resulting in a maximum net profit
ratio of 37.50% over three years. However during the year 2006-07, due to increase in
operating expanses as shown by operating cost ratio, profits increased to mere 15.82
% while sales increased to 33%. Hence it can be concluded that the heavy operating
expanses in the 2006-07, resulted in a high operating cost ratio & lower net profit
ratio.
(iii) ROI (Return on investment)

It is calculated as:
46
Net profit before Interest & Taxes
Total Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities -
(Non-Business Assets +Fictitious Assets)
Calculation:

For 2004-05= 541,152,367 = 0.2782


1,945,224,984

For 2005-06 = 1,869,955,267 = 0.3502


5,339,804,196

For 2006-07 = 2,136,627,267 = 0.5956


3,587,133,659

Returns on Capital Employed


0.8
0.5956
0.6
Ratios

0.4 0.3502
0.2782
0.2
0
2005 2006 2007
Years

Interpretation: Return on capital employed ratio is showing an increasing trend,


depicting a positive situation. The return on capital employed increased by 25.88% in
the year 2005-06 while increase was approx. 70% in 2006-07. The capital employed
increased by 174.51 % in year 2005-06 while increase in profits was more than
proportionate i.e. 245.55%. Though the capital employed decreased in year 2006-07
because of repayment of secured loans, net profit increased by 14.26%. The
organisation has managed to earn increasing returns over the years.

II. Turnover Ratios


(i) Fixed Assets Ratio
(ii) Current Assets Ratio
(iii) Working Capital Turnover Ratio.
47
(iv) Capital Turnover ratio

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales
Fixed Assets (net)

Calculation:

For 2004-05= 1,143,112,652 = 5.5159 times


207,236,343

For 2005-06= 3,178,627,596 = 6.1815 times


514,215,779

For 2006-07 = 4,228,287,659 = 3.8913 times


1,086,579,538

Fixed Assets Turnover Ratio

8
5.5159 6.1815
6
Ratios

3.8913
4
2
0
2005 2006 2007
Years

Interpretation: Fixed asset ratio indicates efficiency of using the fixed assets by the
organisation. Higher the fixed asset ratio better will be the position. In year 2005-06,
148.13 % increase in fixed assets resulted in more than proportionate increase in sales
i.e. 178.06%. While in year 2006-07, an increase of 111.3 % in fixed assets bought
only 33% increase in sales. It can be because of investment in fixed assets, which
could not bring immediate increase in the sales.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net Sales
Current Assets

48
Calculation:

For 2004-05= 1,143,112,652 = 0.3581


3,191,843,980

For 2005-06= 3,179,725,601 = 0.3477


5,339,804,196

For 2006-07 = 4,228,287,659 = 0.7542


5,606,212,698

Current Assets Turnover Ratio


0.8
0.7542
0.6
Ratios

0.4 0.3581 0.3477

0.2
0
2005 2006 2007
Years

.
Interpretation: This ratio tests the efficiency or inefficiency in utilizing the
investment in current assets made by the organization. Higher ratio indicates the better
efficiency of firm investment i.e. the company can able to utilize their current assets
effectively for generating more sales/revenue. In 2005-06 the ratio decreased by
approx 3% while in 2006-07 the ratio again increased to 0.7542. It indicates that the
current assets utilization is done efficiently in the year 2006-07 as compared to
2005-06. The current assets increase by 33% in year by 2006-07, resulting in a
proportionate increase in sales i.e. 33%. As the current ratio has improved in the
recent years, the figures are showing appositive movement.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net Sales
Working Capital

Calculation:

For 2004-05= 1,148,763,391 = 1.3559

49
847,182,769

For 2005-06= 3,179,855,601 = 0.6726


4,727,410,061

For 2006-07 = 4,466,135,091 = 1.8945


2,357,336,042

Working Capital Turnover Ratio


2
1.8945
1.5 1.3559
Ratios

1
0.6726
0.5

0
2005 2006 2007
Years

Interpretation: Working Capital turn over ratios indicates the efficiency in


utilization of working capital. In the year 2005-06 the increase in working capital was
5.6 times, which resulted in 2.8 times increase in sales. While in year 2006-07, in spite
of 50% decrease in working capital, there is 3% increase in sales. It indicates that
organization has managed to achieve increased sales in spite of a decrease in working
capital. It shows a better working capital management by the company in year 2006-
07.

(iv) Capital Turnover ratio: It is calculated as:

Sales
Capital Employed

Calculation:

For 2004-05= 1,143,112,652 = 0.5876


1,945,224,984

For 2005-06= 3,179,725,601 = 0.5954

50
5,339,804,196

For 2006-07 = 4,228,287,659 = 1.1787


3,587,133,659

Capital Turnover Ratio


1.4
1.2 1.1787
1
Ratios

0.8 0.5954
0.5876
0.6
0.4
0.2
0
0.5876 0.5954 1.1787
Years

Interpretation: Capital turnover ratio indicates the amount of capital turned over to
achieve the sales/ revenues. In year 2005-06 capital employed increased to 2.74 times
which resulted in almost proportionate increase in sales i.e. 2.78times. While in year
2006-07 capital employed decreased, but sales increase by 33%, resulting in approx 2
times increase in Capital employed turnover ratio. It indicates the efficiency of
organisation in utilizing the capital resources. Capital employed ratio is increasing
over the years, indicating the improving situation, as higher the ratio better will be the
position.

III. Solvency Ratio

(i) Debt-Equity Ratio


(ii) Proprietary Ratio
(iii) Current Ratio

(i) Debt-Equity Ratio: It is calculated as

External Liabilities
Shareholders’ funds

51
Calculation:

For 2004-05= 860,893,605 = 0.7939


1,084,331,379

For 2005-06= 3,522,114,194 = 1.9376


1,817,690,002

For 2006-07 = 395,501,234 = 0.1239


3,191,632,425

Debt-Equity Ratio
2.5
1.9376
2
Ratios

1.5
1 0.7939
0.5 0.1239
0
2005 2006 2007
Years

Interpretation: Debt-Equity ratio indicates the stake of shareholders in the


organisation vis-à-vis that of creditors. The debt-equity ratio of the company is has
increased in ear 2005-06 while again decreased in year 2007. External liabilities
increased to 4 times in 2005-06 while shareholder’s funds increased by only 1.6 times,
resulting in a 2time increase in Debt-equity ratio. In year 2006-07 external liabilities
again decreased due to repayment of loans while shareholder’s fund increased almost
by 1.75 times resulting in improving the debt-equity mix situation.

(ii) Proprietary Ratio: This ratio is calculated as:

Shareholders’ / Owner’s fund


Total assets

* Here we have considered F.A.+C.A. = Total Assets.

Calculation:

For year 2004-05 = 1,084,331,379 = 0.3190


3,399,080,323

52
For year 2005-06 = 1,817,690,002 = 0.1881
9,659,152,087

For year 2006-07 = 3,191,632,425 = 0.4768


6,692,792,236

Proprietary Ratio

0.6000
0.4768
0.5000
0.4000 0.3190
Ratios

0.3000 0.1881
0.2000
0.1000
0.0000
2005 2006 2007
Years

Interpretation: An increasing Proprietary ratio is indicative of strong financial


position of the business. However a ratio below 50% is regarded as alarming for the
creditors. Although in all the three years, the proprietary ratio is below 50% mark, but
it has improved in year 2006-07 & the figure is quite near to satisfactory level. In year
2007 total assets have decreased by 1.44 times while shareholders funds have
increased to 1.75 times, thus increasing the proprietary ratio, but this figure is required
to be improved further.

(iii) Current Ratio: It is calculated as:

Current ratio = Current assets


Current Liabilities

* C.A. include C.A.’s + loans and advances.


* C.L. includes C.L.’s + Provisions.

Calculation:

For year 2004-05 = 3,191,843,980 = 2.2245


1,434,832,894

53
For year 2005-06 = 9,144,936,308 = 2.1372
4,278,809,843

For year 2006-07 = 5,606,212,698 = 1.8622


3,010,384,947

Current Ratio

2.4
2.2245 2.1372
2.2
Ratios

2 1.8622
1.8
1.6
2005 2006 2007
Years

Interpretation: Current ratio measures the short-term solvency of the business.


Current ratio indicates the backing available to current liabilities in the form of current
assets. The ideal current ratio is 2:1. The current ratio figure is showing a decreasing
trend over the years & figure is very near to the satisfactory level. It indicates that the
organisation is maintaining a proper balance between the current liabilities & current
assets. The current ratio has decreased by 4% in year 2005-06, while it decreased by
12.86 % in year 2006-07.

5.3 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS CREDIT


SERVICES LIMITED

Profitability Ratios

(i) Operating Ratio


(ii) Net Profit Ratio
(iv) ROI (Return on investment)

54
(i) Operating Ratio
Operating Costs X 100
Net Sales

For 2005 = 198,467 = 0.0158


12,483,090

For 2006 = 357,966,291 = 0.4582


781,143,954

For 2007 = 1,842,446,409 = 0.5902


3,121,564,463

Opertaing Ratio
0.8
0.5902
0.6 0.4582
Ratios

0.4
0.2
0.0158
0
2005 2006 2007
Years

Interpretation: The operating ratio indicates the operational efficiency of the


business. The operating cost ratio is showing an upward trend over the years, which is
not a positive sign. In the years 2005-06 operating costs became 1804 times the 2004-
05 figure, while increase in sales was mere 62.57 times. In the year 2006-07, the an
increase of 51.22 times was seen in operating cost resulting in an increase of 3.996
times in sales. Increase is operating cost is more steep during the year 2005-06 as
compared to year 2006-07.This huge increase in operating costs can be attributed to
initial investments required to be made in business.

(ii) Net Profit Ratio: It can be calculated as:

Net Profit after tax x100


Net sales

Calculation:

For year 2004-05 = 14,179,477 = 1.1358


55
12,483,090

For year 2005-06 = 281,077,091= 0.3598


781,143,954

For year 2006-07 = 797,914,368 = 0.2556


3,121,564,463

Net Profit Ratio


1.5

1 1.1358
Ratios

0.5 0.3598 0.2556

0
2005 2006 2007
Years

Interpretation: Net profit ratio is reflecting the increasing trend of operating cost. As
operating costs are increasing, net profit figure is decreasing resulting in a decrease in
Net profit ratio, which is also not a positive sign for the organisation. Sales increased
62.57 times in year 2005-06 while increase in profit was less than proportionate i.e.
19.82 times. While in year 2006-07, sales increase to 3.996 times, making net profits
increase to 2.84 times, which was very near to proportionate. But increase is sales was
lesser than the last year. The net profit ratio is required to increase in the coming
years, as decreasing ratio is reflecting inefficiencies in business operations.

ii) ROI (Return on investment): It is calculated as:

Net profit before Interest & Taxes


Total Capital Employed
Capital Employed = Share capital + Reserves and surplus + Long term liabilities
(Non-Business Assets +Fictitious Assets)
Calculation:
For 2004-05 = 22,339,445 = 0.0168
1,327,914,843

56
For 2006-07 = 425,490,819 = 0.0902
4,716,634,402

For 2006-07 = 1,270,764,665 = 0.1737


7,315,454,695

Return on investment
0.2
0.1737
0.15
Ratios

0.1 0.0902

0.05 0.0168
0
2005 2006 2007
Years

Interpretation: Return on Investment indicates the Net profit earned on the total
capital employed. Return on capital employed is showing an increasing trend over the
years. In year 2005-06 increase in capital employed was 3.55 times which resulted in
more than proportionate increase in net profit before interest & taxes i.e. 19.07 times.
In year 2006-07, Capital employed increased to 1.55 times of previous year, while
sales increased to 2.98 times. The increase has been steeper in year 2005-06 as
compared to year 2006-07. It is good indicator for the organisation because in spite
of increasing operating costs, it is able to give increasing returns on capital employed.

II. Turnover Ratios

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales
Fixed Assets (net)
Calculation:

For 2004-05 = 12,483,090 = Nil


Nil

For 2005-06 = 781,143,954 = 18.18


42,949,828

57
For 2006-07 = 3,121,564,463 = 15.675
199,133,425

Fixed Assets Turnover Ratio


19
18.18
18
Ratios

17
15.675
16
15
14
2006 2007
Years

Interpretation: It indicates the efficiency of utilizing fixed assets to attain the


sales/revenues, hence higher the ratio better the position is. The available financial
information shows that the company didn’t own any fixed assets in the year of its
inception. The fixed asset ratio decreased in the year 2006-07 as fixed assets increased
by 4.64 times as compared to 2005-06 while increase in sales is slightly less than
proportionate i.e. 3.996, keeping the fixed assets ratio low. It can be because of
investment in fixed assets, which could not bring immediate increase in the sales.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net Sales
Current Assets

Calculation:

For 2004-05 = 12,483,090 = 0.00934


1,336,200,011

For 2005-06 = 781,143,954 = 0.1559


5,009,014,889

For 2006-07 = 3,121,564,463 = 0.3693


8,450,405,011

58
Current Assets Turnover Ratio
0.4
0.3693
Ratios 0.3
0.2 0.1559

0.1
0.00934
0
2005 2006 2007
Years

Interpretation: It indicates the efficiency in utilizing the current assets to achieve the
sales/ revenue. The current assets turnover ratio is showing an increasing trend,
showing that company is improving in utilizing its current assets. In year 2005-06, the
current assets had increased by 3.75 times while the increase in sales was more than
proportionate i.e. 62.57 times. In year 2006-07, an increase of 1.69 times sin current
assets bought about 3.996 times increase in sales. It can be concluded that the
company in improving upon the current asset utilization & managing them in efficient
manner.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net Sales
Working Capital

Calculation:

For 2004-05 = 12,483,090 = 0.0094


1,327,849,811

For 2005-06 = 781,143,954 = 0.1637


4,770,479,328

For 2006-07 = 3,121,564,463 = 0.5148


6,062,813,229

59
Working Capital Turnover Ratio
0.6
0.5148
Ratios 0.4
0.2 0.1637
0.0094
0
2005 2006 2007
Years

Interpretation: Working capital Turnover ratio indicates the efficiency in utilizing


the working capital in increasing sales/ revenues. This ratio is also showing an
increasing trend, which is again a positive sign for the organisation. An increase of 3.5
times in working capital had brought about an increase of 62.57 times in sales, in year
2005-06. While the increase in working capital turnover ratio is steeper in year 2006-
07 than in year 2005-06.In year 2006-07, 1.27 times increase in working capital
resulted in3.996 times increase in working capital.

(iv) Capital Turnover ratio: It is calculated as:

Sales
Capital Employed
Calculation:

For 2004-05 = 12,483,090 = 0.0094


1,327,914,843

For 2005-06 = 781,143,954 = 0.1656


4,716,634,402

For 2006-07 = 3,121,564,463 = 0.4267


7,315,454,695

60
Capital Turnover Ratio
0.5
0.4267
0.4
Ratio 0.3
0.1656
0.2
0.1 0.0094
0
2005 2006 2007
Years

Interpretation: Capital turnover ratio indicates the amount of capital turned over to
achieve the sales/ revenues. In year 2005-06 capital employed increased to 3.552
times, which resulted in more than proportionate increase in sales i.e. 62.57 times.
While in year 2006-07 capital employed increased by 1.55 times while sales increase
by 3.996 times resulting in approx 2.5 times increase in Capital turnover ratio. It
indicates the efficiency of organisation in utilizing the capital resources. Capital
employed ratio is increasing over the years, indicating the improving situation, as
higher the ratio better will be the position.

III. Solvency Ratio

(i) Debt-Equity Ratio: It is calculated as:

External Liabilities
Shareholders’ funds

Calculation:

For 2004-05 = Nil = Nil


1,327,914,843

For 2005-06 = 568,748 = 0.00012


4,716,065,654

For 2006-07 = 1,809,564,673 = 0.32865


5,505,890,022

61
Debt-Equity Ratio
0.4
0.32865
0.3

Ratios 0.2
0.1
0.00012
0
2006 Years 2007

Interpretation: The leverage reflects the company’s capital structure, which is a very
important financial decision take by company. From the above information we can say
that in the year 2005 company had no debt in their total capital employed whereas in
year 2006 it had increased it to Rs. 568,748 out of the total capital employed. In year
2006-07, external liabilities increased 3182 times while shareholders funds increased
only by 1.17 times resulting in a high debt-equity ratio.

(ii) Proprietary Ratio: It is calculated as

Shareholders’ / Owner’s fund


Total assets

Calculation:

For year 2004-05 = 1,327,914,843 = 0.9937


1,336,200,011

For year 2005-06 = 4,716,065,654 = 0.9335


5,051,964,717

For year 2006-07 = 5,505,890,022 = 0.5477


10,050,963,114

62
Proprietary Ratio
1.5
0.9937 0.9335
1
Ratios 0.5477
0.5

0
2005 2006 2007
Years

Interpretation: This ratio indicates the relationship between the owners’ fund and
total assets. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio is showing a decreasing trend over the years with minimum ratio in 2006-07,
however the ratio in more than 50%, reflecting a satisfactory position. The decrease in
proprietary ratio had been steeper in year 2006-07,as shareholder’s wealth increased
0.85 times while, total assets became 2 times of previous year.

(iii) Current Ratio: It is calculated as:

Current ratio = Current assets


Current Liabilities
NOTE: C.A. include C.A.’s + loans and advances.
C.L. includes C.L.’s + Provisions.
Calculation:

For year 2004-05 = 1,336,200,011 = 160.02


8,350,200

For year 2005-06 = 5,009,014,889 = 20.999


238,535,561

For year 2006-07 = 8,450,405,011 = 3.539


2,387,591,782

63
Current Ratio
200
160.02
150
Ratio
100
50 20.999
3.539
0
2005 2006 2007
Years

Interpretation:
The current ratio indicates the short-term solvency position of a company. The ideal
ratio is 2:1 for current ratio. The ratio of company is showing a decreasing trend and
moving towards ideal figure. In the initial year i.e. 2005 & 2006 the ratio had been
very high indicating improper balance between current assets & current liabilities. The
ratio is required to be further lowered down by financing current liabilities from
current assets.

5.4 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS HOUSING


FINANCE LIMITED

I. Profitability Ratios

Operating Ratio: It is calculated as:

Operating Costs X 100


Net Sales

For 2005-06 = 1,835,382 = 0.0544


33,726,534

For 2006-07 = 303,549,376 = 0.2850


1,065,237,712

64
Operating Ratio
0.3
0.2850
0.2

Ratio 0.1 0.0544

0
2006 2007
Years

Interpretation: Operating ratio has become 5 times in year 2006-07 as compared to


year 2005-06. Operating costs have increased 165.38 times while corresponding
increase in Net sales is less than proportionate i.e. only 31.6 times. Increasing
operating ratio is not appositive indicator. The reason behind such increase could be
the initial investment required in the beginning of the business.
(ii) Net Profit Ratio: It is calculated as:

Net Profit after tax x100


Net sales

Calculation:

For Year 2005-06 = 23,783,546 = 0.7052


33,726,534

For Year 2006-07 = 539,737,692 = 0.5066


1,065,237,712

Net Profit Ratio


0.8
0.7052
0.6 0.5066
Ratios

0.4
0.2
0
2006 2007
Years

65
Interpretation: The Net profit ratio is reflecting the trend showed by operating
cost ratio. As Operating cost is increasing over the years, Net profit ratio is
showing a decreasing trend, which is not a good indicator. In year 2006-07, the net
sales have gone up by 31.6 times, while corresponding Net Profit after Tax figure
increased less than proportionate i.e. 23 times.

(iii) ROI (Return on investment): It is calculated as:

Net profit before Interest & Taxes


Total Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities
(Non-Business Assets +Fictitious Assets)
Calculation:

For 2005-06 = 31,891,152 = 0.0156


2,039,654,198

For 2006-07 = 826,991,568 = 0.3206


2,579,236,690

Return on Investment
0.4 0.3206
0.3
Ratios

0.2
0.1 0.0156
0
2006 2007
Years

66
Interpretation: Return on Investment is showing an increasing trend, which is
positive sign. It shows that in spite of decreasing Net profit ratio & increasing
Operating cost ratio, company’s Return on Investment is increasing. In the year 2006-
07, Total Capital Employed increased only 1.26 times, while Net Profit before interest
& Taxes increased to 26 times the net profit figure of 2005-06.

II. Turnover Ratios

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales
Fixed Assets (net)

Calculation:

For 2005-06 = 33,726,534 = Nil


Nil

For 2006-07 = 1,065,237,712 = 19.38 times.


4,955,396

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net Sales
Current Assets

Calculation:

For 2005-06 = 33,726,534 = 0.0165


2,049,514,715

For 2006-07 = 1,065,237,712 = 0.3162


3,368,499,830

67
Current Ratio
0.4 0.3162
Ratios 0.3
0.2
0.1 0.0165
0
2006 2007
Years
.

Interpretation: As we know that current ratio indicates the efficiency of current asset
utilization, an increasing current assets turnover ratio reflects a positive picture.
Current assets have increased to 1.64 times in year 2006-07, while sales have
increased to 31.6 times which is very high as compared to increase in current assets.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net Sales
Working Capital

Calculation:

For 2005-06 = 33,726,534 = 0.0165


2,039,574,952

For 2006-07 = 1,065,237,712 = 0.3862


2,758,118,387

Working Capital Turnover Ratio


0.5
0.4 0.3862
Ratios

0.3
0.2
0.1 0.0165
0
2006 2007
Years

68
Interpretation: It indicates the efficiency in working capital utilization in making
sales/Revenues. Working capital turnover ratio is showing an increasing trend.
Working Capital is showing an increase of 1.35 times, while sales have increased by
31.6 times.

(iii) Capital Turnover ratio: It is calculated as:

Sales
Capital Employed

Calculation:

For 2005-06 = 33,726,534 = 0.1653


2,039,654,198

For 2006-07 = 1,065,237,712 = 0.4130


2,579,236,690

Capital Turnover Ratio


0.5
0.4130
0.4
Ratios

0.3
0.1653
0.2
0.1
0
2006 Years 2007

Interpretation: It indicates the efficiency in utilization of capital employed in


achieving the sales/revenue targets of the organisation. Capital turnover ratio is
showing an increasing trend. Capital Employed is showing an increase of 1.35 times,
while sales have increased by 31.6 times.

69
III Solvency Ratio

(i) Proprietary Ratio: It can be calculated as:

Shareholders’ / Owner’s fund


Total assets

Calculation:

For Year 2005-06 = 2,039,654,198 = 0.9952


2,049,514,715

For Year 2006-07 = 2,579,236,690 = 0.7534


3,423,455,226

Proprietary Ratio
1.2
0.9952
1
0.7534
0.8
Ratios

0.6
0.4
0.2
0
2006 Years 2007

Interpretation: The above figure shows a decreasing trend of proprietary ratio over
the years. An increasing Proprietary ratio is indicative of strong financial position of
the business. However a ratio below 50% is regarded as alarming for the creditors.
The ratio has shown a decrease of 24% in the year 2006-07 as compared to 2005-06.
Shareholder’s wealth increased to 1.26 times, while the total assets increased to 1.67
times.

(ii) Current Ratio: It is calculated as:

Current ratio = Current assets


Current Liabilities

NOTE:
C.A. include C.A.’s + loans and advances.
C.L. includes C.L.’s + Provisions.

70
Calculation:

For year 2005-06 = 2,049,514,715 = 20.62


9,939,763

For year 2006-07 = 3,368,499,830 = 5.520


610,381,443

Current Ratio
25
20.62
20
Ratios

15
10 5.52
5
0
2006 2007
Years

Interpretation: Current ratio measures the short-term solvency of the business.


Current ratio indicates the backing available to current liabilities in the form of current
assets. The ideal current ratio is 2:1. The current ratio figure is very high in both the
years, which indicates that the current liabilities are very less as compared to current
assets. The company needs to lower down its current ratio as it indicates poor
utilization of current assets.

71
5.5 INTER-FIRM COMPARISON

I. Operating Cost Ratio

Years IFSL ISL ICSL IHFL


2005 8.36 51.25 1.58 (Min) NIL
2006 18.58 39.14 45.82 5.44
2007 16.59 51.6 59.02 (Max.) 28.5

Operating Cost Ratio


80
Ratio (in %)

59.02
60 51.25 45.82 51.6
39.14
40
28.5
20 18.58 16.59
8.36 5.44
1.58 0
0
2005 2006 2007
IFSL ISL Years
ICSL IHFL

Net Profit Ratio:

Years IFSL ISL ICSL IHFL


2005 45.49 27.31 113.58 (Max) NIL
2006 36.07 37.5 35.98 70.52
2007 43.47 32.65 25.56 (Min) 50.66

72
Net Profit Ratio
120
100 113.58
Ratio (in%)

80 70.52

60 50.66
45.49 35.98 43.47
40 37.5 32.65
27.31 36.07
25.56
20
0
0
2005 2006 2007
IFSL Years
ISL ICSL IHFL

I. Return on Investment

Years IFSL ISL ICSL IHFL


2005 5.86 27.82 1.68 Nil
2006 8.5 35.02 9.02 1.56 (Min)
2007 14.08 59.56 (Max) 17.37 32.06

Return on Investment
80
59.56
Ratios (in %)

60
40 35.02 32.06
27.82
20 14.08 17.37
5.86 8.5 9.02
1.68 1.56
0 0

2005 2006 2007


IFSL ISLYears
ICSL IHFL

73
IV. Fixed Assets Turnover Ratios

Years IFSL ISL ICSL IHFL


2005 455.71(Max) 5.52 Nil Nil
2006 12.86 6.18 18.18 Nil
2007 18.75 3.89 (Min) 15.68 19.38

Fixed Assets Turnover Ratio


500.00
455.71
Ratio (times)

400.00
300.00
200.00
100.00
5.52 6.18 18.18 15.68 19.38
0.00 0 0 12.86 0 18.75 3.89
2005 2006 2007
IFSL ISL Years
ICSL IHFL

Current Assets Turnover Ratio

Years IFSL ISL ICSL IHFL


2005 6.62 35.81 0.93 (Min) Nil
2006 14.07 34.77 15.59 1.65
2007 21.98 75.42 (Max) 36.93 31.62

Current Asset Turnover Ratio


80.00 75.42
Ratio (in%)

60.00
35.81 36.93
40.00 34.77 31.62
14.07 15.59 21.98
20.00 6.62
0.93 1.65
0.00 0

2005 2006 2007


IFSL ISLYears
ICSL IHFL

74
Working Capital Turnover Ratio

Years IFSL ISL ICSL IHFL


2005 6.79 135.59 0.94 (Min) Nil
2006 14.99 67.26 16.37 1.65
2007 23.78 189.45 (Max) 51.48 38.62

Working Capital Turnover Ratio


200.00
189.45
Ratio (in %)

150.00 135.59

100.00
67.26 51.48
50.00 23.78 38.62
6.79 14.99 16.37
0.94 0 1.65
0.00
2005 2006 2007
IFSL ISL Years
ICSL IHFL

VII Capital Employed Turnover Ratio

Years IFSL ISL ICSL IHFL


2005 6.34 58.76 0.94 (Min) Nil
2006 10.17 59.54 16.56 16.53
2007 16.87 117.87 (Max) 42.67 41.30

Capital Turnover Ratio


140.00
117.87
120.00
Ratio (in %)

100.00
80.00 59.54
58.76
60.00 42.6741.30
40.00 16.56
20.00 6.34 0.94
10.17 16.53 16.87
0.00 0
2005 2006 2007
IFSL ISL Years
ICSL IHFL

75
II. Debt-Equity Ratio

Years IFSL ISL ICSL


2005 133.33 79.39 0.00 (Min)
2006 102.40 193.76 (Max) 0.012
2007 64.86 12.39 32.86

Debt-Equity Ratio
250.00
193.76
Ratio (in %)

200.00
150.00 133.33 102.40
100.00 79.39 64.86
50.00 12.39 32.86
0.00 0.012
0.00
2005 2006 2007
IFSL Years
ISL ICSL

oprietary Ratio

Years IFSL ISL ICSL IHFL


2005 41.84 31.90 99.37 Nil
2006 47.30 18.81(Min) 93.35 99.52 (Max)
2007 57.55 47.68 54.77 75.34

Properietary Ratio
120.00
99.37
100.00 93.35 99.52
Ratio (in %)

80.00 75.34
54.77
60.00 57.55 47.68
41.84 47.30
40.00 31.90
18.81
20.00
0
0.00
2005 2006 2007
IFSL Years
ISL ICSL IHFL

76
Current Ratio

Years IFSL ISL ICSL IHFL


2005 157.86 2.22 160.02 (Max) Nil
2006 50.39 2.14 20.99 20.62
2007 86.87 1.86 (Min) 3.54 5.52

Current Ratio
200.00
157.86
Ratio (times)

160.02
150.00

100.00 86.87

50.00 50.39
20.99
2.22 0 2.14 20.62 3.54 5.52
1.86
0.00
2005 2006 2007
IFSL ISL ICSL
Years IHFL

77
Bibliography

(i) Walsh, Ciaran, “Key Management Ratios-How to Analyze, Compare and


Control the figures that Drive the Company Value”, Macmillan India
Limited, 1997

(ii) Mittal, S.N., “Management Accounting and Financial Management”,


Mahavir Publication, 4th Edition, pp. 576-693

(iii) Mahesgwari, S.N., “ Management Accounting and Financial Control”,


Sultan Chand & Sons, 1999, pp. B.1-B.96

(iv) Kishore, Ravi M., “ Cost & Management Accounting” Taxmann’s


Paublication, 2nd Edition, pp.2.537-2.545

Website
http://www.indiabnulls.com/
www.nseindia.com
www.investopedia.com

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