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CHAPTER-IV ANALYSIS AND INTERPRETATIONS 4.

1 INTRODUCTION Finance is needed for day-to-day operations it can be considered as the lifeblood for any business. No business can run successfully without adequate amount of financial resources. The management of finance has a definite effect on the liquidity efficiency and the continued existence of a business. Efficiency and the optimum utilization of assets, to which a greater importance is given, depend upon the availability of adequate finance. From time-to-time many questions relating to financial performance are asked. To answer such questions, a study of working capital management in necessary to evaluate the efficiency with which the finance is employed in a business. In order to examine the working capital management of the burn standard company limited, Salem, various tools of financial analysis such as ratio analysis such as ratio analysis, trend percentage, and schedule working capital management were employed. 4.2 RATIO ANALYSIS The ratio analysis is one of the most powerful tools of financial analysis. A ratio is an arithmetical relationship between two figures. Financial ratio analysis is a study of ratios between various items of groups of items in financial statements. Ratio analysis is defined as the systematic use of ratio to interpret the financial statements so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined. This relationship can be expressed as: (a) percentages, (b) fractions and (c) proportion of numbers. These alternative methods of expressing items, which are related to each other, are for the purpose of financial analysis, referred to as ratio analysis. The technique of the ratio analysis can be employed for

measuring profitability, efficiency and liquidity position of a firm. The various ratios which are directly connected with the financial performance are current ratio, quick ratio and absolute liquid ratio.
4.2.1 Current Ratio

Current ratio is the most common ratio for liquidity. Being related to working capital analysis, it is also called the working capital ratio, current ratio expresses relationship between current assets and current liabilities.
CURRENT ASSETS CURRENT RATIO = --------------------------------CURRENT LIABILITY

Table 4.2.1

Current assets Year 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012 (Rs.In crores)

Current liabilities (Rs.In crores) Current Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.1

CURRENT RATIO

4.2.2 Quick Ratio

Quick Ratio is also known as acid test or liquid ratio. The liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. Quick ratio is the relationship between liquid assets and liquid liabilities.usually,a high acid test ratio is an indication that the firm is liquid and has the ability to meet its liquid liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good. As a conversion quick ratio of 1:1 is considered to be satisfactory. The quick ratio is useful to measure the firms liquidity pay off current obligations immediately and is a more rigorous test at liquidity than the current ratio.
QUICK ASSETS QUICK RATIO = ------------------------QUICK LIABILITY

Table 4.2.2

Quick assets Year 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012 (Rs.In crores)

Quick liabilities (Rs.In crores) Quick Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.2

QUICK RATIO

4.2.3 Net profit Ratio Net profit ratio establishes a relationship between net profit and sales, and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. The net profits are obtained after deducting income tax and generally non-opening incomes and expenses are excluded from the net profits for calculating this ratio. Net profit ratio is very useful to the proprietors and prospective investors because it reveal the overall profitability of the company. Obviously, higher the ratio, the better is the profitability. In this respect, an attempt has been made to find out the net profit ratio of the Burn Standard Company limited, Salem.

Net Profit Net profit Ratio = Net Sales 100

TABLE 4.2.3

Net profit Year 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012 (Rs.In crores)

Sales (Rs.In crores) Net profit Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.3

NET PROFIT RATIO

4.2.4 Debtors turnover ratio Debtors turnover ratio is also known as receivable turnover ratio or debtors velocity. Debtor turnover ratio indicates the number of times the debtors are turned over during a year. Generally, the higher the ratio turnover the more efficient is the management of debtors. Similarly, low debtors turnover implies in efficient management of debtors. This ratio tells about how the credit policy of the company is being, enforced. There is no rule of thumb, which may be used as a norm to interpret the ratio, as it may be different from firm to firm, depending upon the nature of business. This ratio may be compared with ratios of other firms doing similar with ratios of other firms doing similar business. In this respect an attempt has need made to find out the efficiency of the receivable management of the Burn Standard Company limited. Salem.

Total sales Debtors turnover Ratio = Debtors 100

TABLE 4.2.4

Total sales Year (Rs.In crores)

Average Debtors (Rs.In crores) Net profit Ratio

2004 2005 2006 2003 2007 2008 2009 2010 2011 2012

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.4

DEBTORS TURNOVER RATIO

4.2.5 Inventory turnover ratio Stock turnover ratio is also known as inventory turnover ratio (or) stock velocity, it establishes relationship between cost of goods sold or sales during a given period and the average amount of times finished stock is turned over during accounting period. Usually, a high in venture turnover ratio indicates efficient management of inventory because more frequently the stocks are sold, the less or amount of money is required to finance the inventory. A low inventory turnover ratio indicates and inefficient management of inventory and it implies over investment in inventories, dull business, and poor quality of goods, stock accumulations, accumulation of absolute and slow moving goods. In this respect, an attempt has been made to find out the efficiency of the inventory management of burn standard company limited, Salem,

Cost of goods sold The inventory turnover ratio = Average inventor 100

(Or) Net Sales

Average inventory

TABLE 4.2.5

Net Sales Year (Rs.In crores)

Average Inventory (Rs.In crores) Inventory Ratio

2004 2005 2006 2003 2007 2008 2009 2010 2011 2012

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.5

INVENTORY TURNOVER RATIO

4.2.6 Working capital turnover ratio Working capital turnover ratio indicates that the velocity of the utilization of net working capital in the business operations. This ratio indicates the number of times the working capital is turned over in a year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization or working capital and a low ratio indicates otherwise. However a very high turnover of working capital is a sign put over trading and may put the concern into financial difficulties. In this respect, an attempt has been made to find out the efficiency of the working capital management of the burn standard company limited, Salem.

Total sales Working capital turnover ratio = Average working capital Average working capital = Current assets Current liabilities

TABLE 4.2.6

Total Sales Year (Rs.In crores)

Working Capital (Rs.In crores) Working capital Turnover Ratio

2004 2005 2006 2003 2007 2008 2009 2010 2011 2012

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.6

WORKING CAPITAL TURNOVER RATIO

4.2.7 Current Assets turnover assets Current assets are those, the amount of which can be realized with in a period of one year. That is the current assets of a firm represent those assets which can be in the ordinary course of business converted into cash with is a period not exceeding one year. Following are normally treated as current assets. 1. Cash in hand 2. Cash at Bank 3. Debtors Bills receivable 4. Prepaid expenses 5. Money at call short notice 6. Stock 7. Sundry supplies 8. Other amounts receivables within a year

Total sales Current assets turnover ratio = Current Assets

TABLE 4.2.7

Total Sales Year 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012 (Rs.In crores)

Current Assets (Rs.In crores)

Current Assets Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.7

CURRENT ASSETS TURNOVER RATIO

.2.8 Expenses ratios Expenses ratios indicate the relationship of various expenses to net sales of the organization. The expenses ratios are calculated by dividing each expense or group of expenses with the net sales to analysis for each individual item of expenses of a group of items of a particular type of expenses like, manufacturing expense ratio, material consumed ratio, other expenses ratio etc. The lower the ratio the greater is the profitability and higher the ratio, lower is the profitability. In this context an attempt has been made to find out the following expenses ratios of the burn standard company limited, Salem.

4.2.7.1 Material consumption Ratio

Material cost = Sales 100

TABLE 4.2.7.1

Material Cost Year 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012 (Rs.In crores)

Sales (Rs.In crores)

Material Consumption Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.7.1

MATERIAL CONSUMPTION RATIO

4.2.8 Manufacturing Expenses Ratio

Manufacturing expenses = Sales 100

TABLE 4.2.7.2

Manufacturing Year Expenses (Rs.In crores) 2004 2005 2006 2003 2007 2008 2009 2010 2011 2012

Sales (Rs.In crores)

Manufacturing Expenses Ratio

SOURCE: SECONDARY DATA

INTERPRETATION

CHART 4.2.7.2

MANUFACTURING EXPENSE RATIO

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