Mba Aman Proj

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Lc- Code:- 422 Page 1

ACKNOWLEDGMENT

I take this opportunity to express my profound gratitude and deep
regards to my guide for his exemplary guidance, monitoring and
constant encouragement throughout the course of this thesis. The
blessing, help and guidance given by him time to time shall carry me a
long way in the journey of life on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to
Company Mentor, for his/her cordial support, valuable information and
guidance, which helped me in completing this task through various
stages. I am obliged to the members for the valuable information
provided by them in their respective fields. I am grateful for their
cooperation during the period of my assignment.
Lastly, I thank almighty, my parents, brother, sisters and friends for their
constant encouragement without which this assignment would not be
possible.

Amandeep Singh

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INDEX

S.no

Name of Topic

Page No.
1. Objective 4
2. Meaning Of Ratio Analysis 5-6
3. Type Of Comparisions 7-8
4. Classifications of Ratios 9-21
5. Importance of Ration
Analysis
22-23
6. Limitations of Ratio
Analysis
25-26
7. Role of Ratio Analysis 27-47
8. Company Profile(Aplab
Ltd)
48-67
9 Conclusion 68
10. Bibliography 69

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OBJECTIVE:

To understand the information contained in financial statements with a
view to know the strength or weaknesses of the firm and to make
forecast about the future prospects of the firm and thereby enabling the
financial analyst to take different decisions regarding the operations of
the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the
general (qualitative) factors of a company. The other side considers
tangible and measurable factors (quantitative). This means crunching
and analyzing numbers from the financial statements. If used in
conjunction with other methods, quantitative analysis can produce
excellent results.

Ratio analysis isn't just comparing different numbers from the balance
sheet, income statement, and cash flow statement. It's comparing the
number against previous years, other companies, the industry, or even
the economy in general. Ratios look at the relationships between
individual values and relate them to how a company has performed in
the past, and might perform in the future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a
mathematical yardstick that measures the relationship two figures, which
are related to each other and mutually interdependent. Ratio is express
by dividing one figure by the other related figure. Thus a ratio is an
cexpression relating one number to another. It is simply the quotient of
two numbers. It can be expressed as a fraction or as a decimal or as a
pure ratio or in absolute figures . As accounting ratio is an expression
relating two figures or accounts or two sets of account heads or group
contain in the financial statements.

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MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of
items or group of items in the financial statement are computed,
determined and presented.
Ratio analysis is an attempt to derive quantitative measure or guides
concerning the financial health and profitability of business enterprises.
Ratio analysis can be used both in trend and static analysis. There are
several ratios at the disposal of an analyst but their group of ratio he
would prefer depends on the purpose and the objective of analysis.
While a detailed explanation of ratio analysis is beyond the scope of this
section, we will focus on a technique, which is easy to use. It can
provide you with a valuable investment analysis tool. This technique is
called cross-sectional analysis. Cross-sectional analysis
compares financial ratios of several companies from the same industry.
Ratio analysis can provide valuable information about a company's
financial health. A financial ratio measures a company's performance in
a specific area. For example, you could use a ratio of a company's debt
to its equity to measure a company's leverage. By comparing the
leverage ratios of two companies, you can determine which company
uses greater debt in the conduct of its business. A company whose
leverage ratio is higher than a competitor's has more debt per equity.
You can use this information to make a judgment as to which company
is a better investment risk. However, you must be careful not to place
too much importance on one ratio. You obtain a better indication of the
direction in which a company is moving when several ratios are taken as
a group.

OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business
organization-

A) Solvency-
1) Long term
2) Short term
3) Immediate
B) Stability
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C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) Effective utilization of resources
H) Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between two or more
variables / accounting figures, such relationship can can be expressed in
different ways as follows
A] As a pure ratio:
For example the equity share capital of a company is Rs. 20,00,000 &
the preference share capital is Rs. 5,00,000, the ratio of equity share
capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1.
B] As a rate of times:
In the above case the equity share capital may also be described as 4
times that of preference share capital. Similarly, the cash sales of a firm
are
Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit
sales to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or
simply by saying that the credit sales are 2.5 times that of cash sales.
C] As a percentage:
In such a case, one item may be expressed as a percentage of some
other items. For example, net sales of the firm are Rs.50,00,000 & the
amount of the gross profit is Rs. 10,00,000, then the gross profit may be
described as :-
20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:
1] Calculation of ratio
2] Comparing the ratio with some predetermined standards. The
standard ratio may be the past ratio of the same firm or industrys
average ratio or a projected ratio or the ratio of the most successful firm
in the industry. In interpreting the ratio of a particular firm, the analyst
cannot reach any fruitful conclusion unless the calculated ratio is
compared with some predetermined standard. The importance of a
correct standard is oblivious as the conclusion is going to be based on
the standard itself.
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TYPES OF COMPARISONS
The ratio can be compared in three different ways
1] Cross section analysis:
One of the way of comparing the ratio or ratios of the firm is to compare
them with the ratio or ratios of some other selected firm in the same
industry at the same point of time. So it involves the comparison of two
or more firms financial ratio at the same point of time. The cross section
analysis helps the analyst to find out as to how a particular firm has
performed in relation to its competitors. The firms performance may be
compared with the performance of the leader in the industry in order to
uncover the major operational inefficiencies. The cross section analysis
is easy to be undertaken as most of the data required for this may be
available in financial statement of the firm.
2] Time series analysis:
The analysis is called Time series analysis when the performance of a
firm is evaluated over a period of time. By comparing the present
performance of a firm with the performance of the same firm over the
last few years, an assessment can be made about the trend in progress
of the firm, about the direction of progress of the firm. Time series
analysis helps to the firm to assess whether the firm is approaching the
long-term goals or not. The Time series analysis looks for (1) important
trends in financial performance (2) shift in trend over the years (3)
significant deviation if any from the other set of data\
3] Combined analysis

If the cross section & time analysis, both are combined together to study
the behavior & pattern of ratio, then meaningful & comprehensive
evaluation of the performance of the firm can definitely be made. A trend
of ratio of a firm compared with the trend of the ratio of the standard firm
can give good results. For example, the ratio of operating expenses to
net sales for firm may be higher than the industry average however, over
the years it has been declining for the
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firm, whereas the industry average has not shown any significant
changes. The combined analysis as depicted in the above diagram,
which clearly shows that the ratio of the firm is above the industry
average, but it is decreasing over the years & is approaching the
industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful
conclusions, there are certain pre-requisites, which must be taken care
of. It may be noted that these prerequisites are not conditions for
calculations for meaningful conclusions. The accounting figures are
inactive in them & can be used for any ratio but meaningful & correct
interpretation &conclusion can be arrived at only if the following points
are well considered.
1) The dates of different financial statements from where data is taken
must be same.
2) If possible, only audited financial statements should be considered,
otherwise there must be sufficient evidence that the data is correct.
3) Accounting policies followed by different firms must be same in case
of cross section analysis otherwise the results of the ratio analysis would
be distorted.
4) One ratio may not throw light on any performance of the firm.
Therefore, a group of ratios must be preferred. This will be conductive to
counter checks.
5) Last but not least, the analyst must find out that the two figures being
used to calculate a ratiomust be related to each other, otherwise there is
no purpose of calculating a ratio.

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CLASSIFICATION OF RATIO

BASED ON FINANCIAL BASED ON FUNCTION BASED
ON USER STATEMENT

1. BALANCE SHEET
2. LIQUIDITY RATIO
3. LEVERAGE RATIO SHORT TERM
4. ACTIVITY RATIO CREDITORS STATEMENT
5. PROFITABILITY
6. RATIO FOR SHAREHOLDER
7. COMPOSITE
8. COVERAGE

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from
financial statements. Figures may be taken from Balance Sheet, P& P
A/C, or both. One-way of classification of ratios is based upon the
sources from which are taken.
1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called
Balance Sheet Ratios. E.g.ratio of current assets to current liabilities or
ratio of debt to equity. While calculating these ratios, there is no need to
refer to the Revenue statement. These ratios study the relationship
between the assets & the liabilities, of the concern. These ratio help to
judge the liquidity, solvency & capital structure of the concern. Balance
sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital
gearing ratio, Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called
revenue statement ratios. These ratios study the relationship between
the profitability & the sales of the concern. Revenue ratios are Gross
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profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating
profit ratio, Stock turnover ratio.

3] Composite ratio:
These ratios indicate the relationship between two items, of which one
is found in the balance sheet & other in revenue statement.
There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits &
the investments of the concern. E.g. return on capital employed, return
on proprietors fund, return on equity capital etc.
b) Other composite ratios e.g. debtors turnover ratios, creditors turnover
ratios, dividend payout ratios, & debt service ratios.

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to
liquidity ratios, leverage ratios, activity ratios, profitability ratios &
turnover ratios.

1] Liquidity ratios:
It shows the relationship between the current assets & current liabilities
of the concern e.g. liquid ratios & current ratios.

2] Leverage ratios:
It shows the relationship between proprietors funds & debts used in
financing the assets of the concern e.g. capital gearing ratios, debt
equity ratios, & Proprietary ratios.

3] Activity ratios:
It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors
turnover ratios.

4] Profitability ratios:
a) It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios
b) It shows the relationship between profit & investment e.g. return on
investment, return on equity capital.

5] Coverage ratios:
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It shows the relationship between the profit on the one hand & the
claims of the outsiders to be paid out of such profit e.g. dividend payout
ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors: Current ratios, liquid ratios, stock
working capital ratios

2] Ratios for the shareholders: Return on proprietors fund, return on
equity capital

3] Ratios for management: Return on capital employed, turnover ratios,
operating ratios, expenses ratios

4] Ratios for long-term creditors: Debt equity ratios, return on capital
employed, proprietor ratios.

LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to
1 year) obligations. The ratios, which indicate the liquidity of a company,
are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are
discussed below

CURRENT RATIO

Meaning: This ratio compares the current assets with the current
liabilities. It is also known as working capital ratio or solvency ratio. It
is expressed in the form of pure ratio.

E.g. 2:1
Formula:
Current ratio = Current assets/ Current liabilities

The current assets of a firm represents those assets which can be, in
the ordinary course of business, converted into cash within a short
period time, normally not exceeding one year. The current liabilities
defined as liabilities which are short term maturing obligations to be met,
as originally contemplated, within a year.

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Current ratio (CR) is the ratio of total current assets (CA) to total current
liabilities (CL). Current assets include cash and bank balances; inventory
of raw materials, semi-finished and finished goods; marketable
securities; debtors (net of provision for bad and doubtful debts); bills
receivable; and prepaid expenses. Current liabilities consist of trade
creditors, bills payable, bank credit, and provision for taxation, dividends
payable and outstanding expenses. This ratio measures the liquidity of
the current assets and the ability of a company to meet its short-term
debt obligation.
CR measures the ability of the company to meet its CL, i.e., CA gets
converted into cash in the operating cycle of the firm and provides the
funds needed to pay for CL. The higher the current ratio, the greater the
short-term solvency. This compares assets, which will become liquid
within approximately twelve months with liabilities, which will be due for
payment in the same period and is intended to indicate whether there
are sufficient short-term assets to meet the
short- term liabilities. Recommended current ratio is 2: 1. Any ratio below
indicates that the entity may face liquidity problem but also Ratio over 2:
1 as above indicates over trading, that is the entityis under utilizing its
current assets.

LIQUID RATIO:

Meaning:
Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio
compares
the quick assets with the quick liabilities. It is expressed in the form of
pure
ratio. E.g. 1:1.
The term quick assets refer to current assets, which can be converted
into,
cash immediately or at a short notice without diminution of value.
Formula:
Quick assets
Liquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL.
QA
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refers to those current assets that can be converted into cash
immediately
without any value strength. QA includes cash and bank balances, short-
term
marketable securities, and sundry debtors. Inventory and prepaid
expenses are
excluded since these cannot be turned into cash as and when required.
QR indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. This is a fairly stringent measure
of
liquidity because it is based on those current assets, which are highly
liquid.
Inventories are excluded from the numerator of this ratio because they
are
deemed the least liquid component of current assets. Generally, a quick
ratio of
1:1 is considered good. One drawback of the quick ratio is that it ignores
the
timing of receipts and payments.

CASH RATIO

Meaning:

This is also called as super quick ratio. This ratio considers only the
absolute
liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities
Cash ratio =
Total current liabilities

Since cash and bank balances and short term marketable securities are
the
most liquid assets of a firm, financial analysts look at the cash ratio. If
the super
liquid assets are too much in relation to the current liabilities then it may
affect
the profitability of the firm.
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INVESTMENT / SHAREHOLDER

EARNING PER SAHRE:-

Meaning:
Earnings per Share are calculated to find out overall profitability of the
organization. Earnings per Share represent earning of the company
whether or not dividends are declared. If there is only oneclass of
shares, the earning per share are determined by dividing net profit by
the number of equity shares. EPS measures the profits available to the
equity shareholders on each share
held.

Formula:
NPAT
Earnings per share =
Number of equity share

The higher EPS will attract more investors to acquire shares in the
company as it indicates that the business is more profitable enough to
pay the dividends in time. But remember not all profit earned is going to
be distributed as dividends the company also retains some profits for the
business

DIVIDEND PER SHARE:-

Meaning:
DPS shows how much is paid as dividend to the shareholders on each
share held.
Formula:

Dividend Paid to Ordinary Shareholders
Dividend per Share =
Number of Ordinary Shares

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DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividends
paid to equity shareholders out of the profit available to the equity
shareholders.

Formula:
Dividend per share
Dividend Payout ratio = *100
Earning per share
D/P ratio shows the percentage share of net profits after taxes and after
preference dividend has been paid to the preference equity holders.

GEARING

CAPITAL GEARING RATIO:-
Meaning:
Gearing means the process of increasing the equity shareholders return
through the use of debt. Equity shareholders earn more when the rate of
the return on total capital is more than the rate of interest on debts. This
is also known as leverage or trading on equity. The Capital-gearing ratio
shows the relationship between two types of capital viz: - equity capital &
preference
capital & long term borrowings. It is expressed as a pure ratio.

Formula:
Preference capital+ secured loan
Capital gearing ratio =
Equity capital & reserve & surplus
Capital gearing ratio indicates the proportion of debt & equity in the
financing of
assets of a concern.

PROFITABILITY
These ratios help measure the profitability of a firm. A firm, which
generates a substantial amount of profits per rupee of sales, can
comfortably meet its operating expenses and provide more returns to its
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shareholders. The relationship between profit and sales is measured by
profitability ratios. There
are two types of profitability ratios: Gross Profit Margin and Net Profit
Margin.

GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is
defined as the excess of the net sales over cost of goods sold or excess
of revenue over cost. This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of
production as well as pricing. This ratio helps to judge how efficient the
concern is I managing its production,
purchase, selling & inventory, how good its control is over the direct
cost, how productive the concern , how much amount is left to meet
other expenses & earn net profit.

Formula:

Gross profit
Gross profit ratio = * 100
Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the
sales it is usually expressed in the form of a percentage.
Formula:
NPAT
Net profit ratio = * 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures the
overall efficiency of production, administration, selling,financing, pricing
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and tax management. Jointly considered, the gross and net profit margin
ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of
the total funds employed in the firm. The term fund employed or the
capital employed refers to the total long-term source of funds. It means
that the capital employed comprises of shareholder funds plus long-term
debts. Alternatively it can also be defined as fixed assets plus net
working capital.Capital employed refers to the long-term funds invested
by the creditors and the owners of a firm. It is the sum of long-term
liabilities and owner's equity. ROCE indicates the efficiency with which
the long-term funds of a firm are utilized.

Formula:

NPAT
Return on capital employed = *100
Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be
converted into cash. They are also called efficiency ratios or asset
utilization ratios as they measure the efficiency of a firm in managing
assets. These ratios are based on the relationship between the level of
activity represented by sales or cost of goods sold and levels of
investment in various assets. The important turnover ratios are debtors
turnover ratio, average collection period, inventory/stock turnover ratio,
fixed assets turnover ratio, and total assets turnover ratio. These are
described below:

DEBTORS TURNOVER RATIO (DTO)

Meaning:

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DTO is calculated by dividing the net credit sales by average debtors
outstanding during the year. It measures the liquidity of a firm's debts.
Net credit sales are the gross credit sales minus returns, if any, from
customers. Average debtors are the average of debtors at the beginning
and at the end of the year. This ratio shows how rapidly debts are
collected. The higher the DTO, the better it is for the organization.

Formula:

Credit sales
Debtors turnover ratio =
Average debtors

INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:

ITR refers to the number of times the inventory is sold and replaced
during the accounting period.

Formula:

COGS
Stock Turnover Ratio =
Average stock

ITR reflects the efficiency of inventory management. The higher the
ratio, the more efficient is the management of inventories, and vice
versa. However, a high inventory turnover may also result from a low
level of inventory, which may lead to frequent stock outs and loss of
sales and customer goodwill. For calculating ITR, the average of
inventories at the beginning and the end of the
year is taken. In general, averages may be used when a flow figure (in
this
case, cost of goods sold) is related to a stock figure (inventories).

FIXED ASSETS TURNOVER (FAT)

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The FAT ratio measures the net sales per rupee of investment in fixed
assets.
Formula:
Net sales
Fixed assets turnover =
Net fixed assets

This ratio measures the efficiency with which fixed assets are employed.
A high ratio indicates a high degree of efficiency in asset utilization while
a low ratio reflects an inefficient use of assets. However, this ratio should
be used with caution because when the fixed assets of a firm are old
and substantially depreciated, the fixed assets turnover ratio tends to be
high (because the
denominator of the ratio is very low).

PROPRIETORS RATIO:

Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It
relates shareholders fund to total assets. This ratio determines the long
term or ultimate solvency of the company.
In other words, Proprietary ratio determines as to what extent the
owners
interest & expectations are fulfilled from the total investment made in the
business operation.
Proprietary ratio compares the proprietor fund with total liabilities. It is
usually expressed in theform of percentage. Total assets also know it as
net worth.

Formula:

Proprietary fund
Proprietary ratio = OR

Total fund

Shareholders fund

Proprietary ratio =
Fixed assets + current liabilities
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STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the
working capital. It helps to judge the quantum of inventories in relation to
the working capital of the business. The purpose of this ratio is to show
the extent to which working capital is blocked in inventories. The ratio
highlights the predominance of stocks in the current financial position of
the company. It is expressed as a
percentage.

Formula:
Stock
Stock working capital ratio =
Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition
& quality of the working capital. This ratio also helps to study the
solvency of a concern. It is a qualitative test of solvency. It shows the
extent of funds blocked in stock. If investment in stock is higher it means
that the amount of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

This ratio compares the long-term debts with shareholders fund. The
relationship betweenborrowed funds & owners capital is a popular
measure of the long term financial solvency of a firm. This relationship is
shown by debt equity ratio. Alternatively, this ratio indicates the relative
proportion of debt & equity in financing the assets of the firm. It is usually
expressed as a pure ratio.
E.g. 2:1

Formula:

Total long-term debt

Debt equity ratio =
Total shareholders fund
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Debt equity ratio is also called as leverage ratio. Leverage means the
process of the increasing the equity shareholders return through the use
of debt. Leverage is also known as gearing or trading on equity. Debt
equity ratio shows the margin of safety for long-term creditors & the
balance between debt & equity.

RETURN ON PROPRIETOR FUND:

Meaning:

Return on proprietors fund is also known as return on proprietors
equity or return on shareholders investment or investment ratio. This
ratio indicates the relationship between net profits earned & total
proprietors funds. Return on proprietors fund is a profitability ratio,
whichthe relationship between profit & investment by the proprietors in
the concern. Its purpose is to measure the rate of return on the total fund
made available by the owners. This ratio helps to judge how efficient the
concern is in managing the owners fund at disposal. This ratio is of
practical importance to prospective investors & shareholders.

Formula:
NPAT
Return on proprietors fund = * 100
Proprietors fund

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which
payments are made to the supplier for purchase made from them. It is a
relation between net credit purchase and average creditors

Net credit purchase
Credit turnover ratio =
Average creditors

Months in a year
Average age of accounts payable =
Credit turnover ratio

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Both the ratios indicate promptness in payment of creditor purchases.
Higher creditors turnover ratio or a lower credit period enjoyed signifies
that the creditors are being paid promptly. It enhances credit worthiness
of the company. A very low ratio indicates that the company is not taking
full benefit of the credit period allowed by the creditors.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that it presents facts on a
comparative basis & enables the drawing of interference regarding the
performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:

1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION: -
With the help of Ratio analysis conclusion can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligation when they become
due. A firm can be said to have the ability to meet its short-term liabilities
if it has sufficient liquid funds to pay the interest on its short maturing
debt usually within a year as well as to repay the principal. This ability is
reflected in the liquidity ratio of a firm. The liquidity ratio is particularly
useful in credit analysis by bank & other suppliers of short term loans.

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2] LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial
viability of a firm. This respect of the financial position of a borrower is of
concern to the long-term creditors, security analyst & the present &
potential owners of a business. The long-term solvency is measured by
the leverage/
capital structure & profitability ratio Ratio analysis s that focus on earning
power & operating efficiency. Ratio analysis reveals the strength &
weaknesses of a firm in this respect. The leverage ratios, for instance,
will indicate whether a firm has a reasonable proportion of various
sources of finance or if it is heavily loaded with debt in which case its
solvency is exposed to serious strain. Similarly the various profitability
ratios would reveal whether or not the firm is able to offer adequate
return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:
Yet another dimension of the useful of the ratio analysis, relevant from
the viewpoint of management, is that it throws light on the degree of
efficiency in management & utilization of its assets. The various activity
ratios measure this kind of operational efficiency. In fact, the solvency of
a firm is ultimate analysis, dependent upon the sales revenues
generated by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:
Unlike the outsides parties, which are interested in one aspect of the
financial position of a firm, the management is constantly concerned
about overall profitability of the enterprise. That is, they are concerned
about the ability of the firm to meets its short term as well as long term
obligations to its
creditors, to ensure a reasonable return to its owners & secure optimum
utilization of the assets of the firm. This is possible if an integrated view
is taken & all the ratios are considered together.

5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but
also serves as a stepping-stone to remedial measures. This is made
possible due to inter firm comparison & comparison with the industry
averages. A single figure of a particular ratio is meaningless unless it is
related to some standard or norm. One of the popular techniques is to
compare the ratios of a firm with the industry average. It should be
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reasonably expected that the performance of a firm should be in broad
conformity with that of the industry to which it belongs. An inter firm
comparison would demonstrate the firms position vice-versa its
competitors. If the results are at variance either with the industry
average or with the those of the competitors, the firm can seek to identify
the probable reasons & in light, take remedial measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into
account. In other words, whether the financial position of a firm is
improving or deteriorating over the years. This is made possible by the
use of trend analysis. The significance of the trend analysis of ratio lies
in the fact that the analysts can know the direction of movement, that is,
whether the movement is favorable
or unfavorable. For example, the ratio may be low as compared to the
norm but the trend may be upward. On the other hand, though the
present level may be satisfactory but the trend may be a declining one.

ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of
significant accounting data relationships, which give the decision-maker
insights into the financial performance of a company. The advantages of
ratio analysis can be summarized as follows:

decision making and forecasting.

alysis helps in the assessment of the liquidity, operating
efficiency, profitability and solvency of a firm.

-firm as well as inter-firm
comparisons.

s or standard
ratios helps the management analyze the financial performance of
the firm.

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LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:
1] Information problems

about analytical output.

out of date, and so might not give a proper indication of the companys
current financial position.

balance sheet could be misleading. Ratios based on this information will
not be very useful for decision-making.

2] Comparison of performance over time

When comparing performance over time, there is need to consider the
changes in price. The movement in performance should be in line with
the changes in price.

changes in technology. The movement in performance should be in line
with the changes in technology.

between different accounting years as misleading.

3] Inter-firm comparison

nt capital structures and to make
comparison of performance when one is all equity financed and another
is a geared company it may not be a good analysis.

may also distort intercompany comparison. Comparing the performance
of two enterprises may be misleading.

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-firm comparison may not be useful unless the firms compared
are of the same size and age, and employ similar production methods
and accounting practices.

a company, comparisons can be distorted by changes in
the price level.
information.

do not indicate future trends and they do not consider economic
conditions.

PURPOSE OF RATIO ANLYSIS:

1] To identify aspects of a businesss performance to aid decision
making
2] Quantitative process may need to be supplemented by qualitative

Factors to get a complete picture.

3] 5 main areas:-
the ability of the firm to pay its way

information to enable decisions to be made
on the extent of the risk and the earning potential of a business
investment

information on the relationship between the exposure of the
business to loans as opposed to share capital

how effective the firm is at generating profits given sales
and or its capital assets

the rate at which the company sells its stock and the
efficiency with which it uses its assets
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ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creatRETURN ON
CAPITAL EMPLOYED:-

Meaning:

working capital. Capital employed refers to the long-term funds invested

Formula:
NPAT
Capital employed

FINANCIAL

described below:

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Meaning:


Formula:

Credit sales
Average debtors


Meaning:

during the
accounting period.

Formula:
COGS
Average stock

this


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assets.

Formula:
Net sales
Net fixed assets
a low ratio reflects an inefficient use of assets.However, this ratio should
high (because the

PROPRIETORS RATIO:

Meaning:

term or ultimate solvency of the company. In other words, Proprietary
ratio determines as to what extent the owners interest & expectations
are fulfilled from the total investment made in the business operation.
usually expressed in the form of percentage. Total assets also know it as
net worth.

Formula:

Proprietary fund

Total fund

Shareholders fund

Proprietary ratio =
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Meaning:
the company. It is expressed as a percentage.

Formula:

Stock
Working Capital

extent of funds blocked in stock. If investment in stock is higher it means
that the amount of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

relationship between borrowed funds & owners capital is a popular
E.g. 2:1

Formula:
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Debt equity ratio =



Meaning:

which the relationship between profit & investment by the proprietors in
made available by the owners. This ratio helps to
judge how efficient the concern is in managing the owners fund at
disposal. This ratio is of practical importance to prospective investors &
shareholders.

Formula:

NPAT
Proprietors fund


relation between net credit purchase and average creditors

Net credit purchase
Average creditors

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Months in a year



performance of a firm in respect of the following aspects:






6] Trend analysis.


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debt usually within a year as well
as to repay the principal. This ability is reflected in the liquidity ratio of a
firm. The liquidity ratio is particularly useful in credit analysis by bank &
other suppliers of short term loans.


the leverage/
power
& operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this
respect. The leverage ratios, for instance, will indicate whether a firm
has a reasonable proportion of various sources of finance or if it is
heavily loaded with debt in which case its solvency is exposed to serious
strain. Similarly the
various profitability ratios would reveal whether or not the firm is able to
offer adequate return to its owners consistent with the risk involved.


a firm isultimate analysis, dependent upon the sales revenues generated
by the use of its assets- total as well as its components.


obligations to its
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compare the ratios of a firm with the industry average. It should be
reasonably expected that the performance of a firm should be in broad
conformity with that of the industry to which it belongs. An inter firm
comparison would demonstrate the firms position vice-versa its
competitors. If the results are at variance either with the industry
average or with the those of the competitors, the firm can seek to identify
the probable
reasons & in light, take remedial measures.

6] TREND ANALYSIS:



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a basis for both intra-firm as well as inter-firm
comparisons.

ratios helps the management analyze the financial performance of the
firm.




several months



changes in price. The
movement in performance should be in line with the changes in price.



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lective application of government incentives to various companies


the price level.

information.

s are calculated on the basis of past financial statements. They
conditions.


making



3] 5 main areas:-


investment

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It is true that the technique of ratio analysis is not a creatRETURN ON
CAPITAL EMPLOYED:-

Meaning:

working capital. Capital employed refers to the long-term funds invested

Formula:
NPAT
Capital employed.

FINANCIAL

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described below:


Meaning:


Formula:
Credit sales
Average debtors


Meaning:

during the accounting period.

Formula:

COGS
Average stock

this
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assets.

Formula:
Net sales
Net fixed assets

a low ratio reflects an inefficient use of assets. However, this ratio should
high (because the

PROPRIETORS RATIO:

Meaning:

term or ultimate solvency of the company. In other words, Proprietary
ratio determines as to what extent the owners interest & expectations
are fulfilled from the total investment made in the business operation.
usually expressed in the form of percentage. Total assets also know it as
net worth.

Formula:
Proprietary fund

Total fund

Shareholders fund

Proprietary ratio =
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Meaning:

the company. It is expressed as a
percentage.

Formula:

Stock
Working Capital

extent of funds blocked
in stock. If investment in stock is higher it means that the amount of
liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:

relationship between borrowed funds & owners capital is a popular
E.g. 2:1

Formula:

Debt equity ratio =
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Meaning:

which the relationship between profit & investment by the proprietors in
made available by the owners. This ratio helps to judge how efficient the
concern is in managing the owners fund at disposal. This ratio is of
practical importance to prospective investors & shareholders.

Formula:

NPAT
Proprietors fund


relation between net credit purchase and average creditors .

Net credit purchase

Average creditors

Months in a year
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performance
of a firm in respect of the following aspects:






6] Trend analysis.


debt usually within a year as well
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as to repay the principal. This ability is reflected in the liquidity ratio of a
firm. The liquidity ratio is particularly useful in credit analysis by bank &
other suppliers of short term loans.


the leverage/
power & operating efficiency. Ratio analysis reveals the strength &
weaknesses of a firm in this respect. The leverage ratios, for instance,
will indicate whether a firm has a reasonable proportion of various
sources of finance or if it is heavily loaded with debt in which case its
solvency is exposed to serious strain. Similarly the various profitability
ratios would reveal whether or not the firm is able to offer adequate
return to its owners consistent with the risk involved.


a firm is,ultimate analysis, dependent upon the sales revenues
generated by the use of its assets- total as well as its components.


obligations to its


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compare the ratios of a firm with
the industry average. It should be reasonably expected that the
performance of a firm should be in broad conformity with that of the
industry to which it belongs. An inter firm comparison would demonstrate
the firms position vice-versa its competitors. If the results are at variance
either with the industry average or with the those of the competitors, the
firm can seek to identify the probable
reasons & in light, take remedial measures.

6] TREND ANALYSIS:





ps in the assessment of the liquidity, operating

-firm as well as inter-firm
comparisons.
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rd
ratios helps the management analyze the financial performance of the
firm.



n for analysis but it is not decisive


orical cost convention is used, asset valuations in the


ere is need to consider the
changes in price. The movement in performance should be in line with
the changes in price.





lective application of government incentives to various companies
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the price level.

information.
e calculated on the basis of past financial statements. They
conditions.


making



3] 5 main areas:-

investment




It is true that the technique of ratio analysis is not a creative technique
in the sense that it uses the same figure & information, which is already
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appearing in the financial statement. At the same time, it is true that
what can be achieved by the technique of ratio analysis cannot be
achieved by the mere preparation of financial statement. Ratio analysis
helps to appraise the firm in terms of their profitability & efficiency of
performance, either individually or in relation to those of other firms
in the same industry. The process of this appraisal is not complete until
the ratio so computed can be compared with something, as the ratio all
by them do not mean anything. This comparison may be in the form of
intra firm comparison, inter firm comparison or comparison with standard
ratios. Thus proper comparison of ratios may reveal where a firm is
placed as compared with earlier
period or in comparison with the other firms in the same industry. Ratio
analysis is one of the best possible techniques available to the
management to impart the basic functions like planning & control. As the
future is closely related to the immediate past, ratio calculated on the
basis of
historical financial statements may be of good assistance to predict the
future. Ratio analysis also helps to locate & point out the various areas,
which need the management attention in order to improve the situation.
As the ratio analysis is concerned with all the aspect of a firms financial
analysis i.e. liquidity, solvency, activity, profitability & overall
performance, it enables the interested persons to know the financial &
operational characteristics of an organisation & take the suitable
decision.

EVALUATION OF APLAB LIMITED THROUGH RATIO

COMPANY PROFILE

ABOUT COMPANY

APLAB Limited is a professionally managed Public Limited company
quoted on the Bombay Stock Exchange. Since its inception in 1962,
APLAB has been serving the global market with wide range of electronic
products meeting the international standards for safety and reliability
such as UL, VDE etc. They specialize in Test and Measurement
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Equipment, Power Conversion and UPS Systems, Self-Service
Terminals for Banking Sector and Fuel Dispensers for Petroleum Sector.
APLAB enjoys worldwide recognition for the quality of its products,
business integrity and innovative engineering skills.

ABOUT APLAB:

&
UPS & fuel dispensers for petroleum sector.

&
innovative engineering skills.

MISSION:

budget, as per the customer specification in a manner profitable to both,
our customers & so to us.

VISION:
recognized for quality & integrity.

GOAL:

customer needs in the personal service industry.

CORPORATE MISSION
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1] To achieve healthy and profitable growth of the company in the
interest of our customers & the shareholders.

2] To encourage teamwork, reward innovation and maintain healthy
interpersonal relations within the organization.

3] To expand knowledge and remain at the leading edge in technology
to serve the global market.

4] To understand the customers needs and provide solutions than
merely selling products.

5] To create intellectual capital by investing in hardware and embedded
software development.

VALUES & BELIEFS:

Their values & beliefs required that they -
ve them an opportunity for input on
how to continuously improve their service goals.

recognition.

issues, to ensure customer satisfaction.

& ideas to improve work environment & increase productivity.

every time is their team commitment * our
way of doing business, it ensures as growth & prosperity.

THE 21ST
CENTURY SUCCESS

APLAB had planned to enter the 21st Century with a program for a fast
and healthy growth in the global market based on companys high
technology foundation and the reputation of four decades for prompt
customer service and as a reliable solution provider. After completing
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three years in the new era, we can say with pride that we have been
delivering our promises to our customers and the shareholders.

APLAB has entered the field of Professional Services starting with the
Banking and the Petroleum Industry. Focus on developing embedded
system software has been also enhanced. We believe that professional
services sector is poised to grow at a very rapid pace.

QUALITY IS OUR WORK CULTURE - ISO 9001:2000

Quality at APLAB is a part of our peoples attitude. Entire organization
is committed to create an environment that encourages individual
excellence and a personal commitment to quality. In APLAB, Quality is
everybodys responsibility and all strive to do it right the first time. It is
therefore natural that APLAB Limited is certified for quality with ISO
9001:2000 registration.

QUALITY POLICY:
ver to its customer products & services that consistently
meet or exceed their requirement.

individual.

products prevent defects & make continual improvement in all
processes.

QUALITY OBJECTIVE:

CALCULATIONS AND INTERPRETATION OF RATIOS

1] CURRENT RATIO:

Formula:
Current assets
Current ratio =
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Current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Current assets 46,70,80 51,08,39 53,98,08 58,28,21
Current liabilities 15,93,66 21,62,32 21,28,19 21,36,02
Current ratio 2.93 2.36 2.53 2.72

COMMENTS:
In Aplab company the current ratio is 2.72:1 in 2004-2005. it means that
for one rupee of current liabilities, the current assets are 2.72 rupee are
available to the them. In other words the current assets are 2.72 times
the current liabilities. Almost 4 years current ratio is same but current
ratio in 2004-2005 is bit higher, which makes company more sound. The
consistency increase in the value of current assets will increase the
ability of the company to meets its obligations & therefore from the point
of view of creditors the company is less risky.

The available working capital with the company is in increasing order.
2001-2002 - 30,77,14
2002-2003 - 29,46,07
2003-2004 - 32,69,89
2004-2005 - 36,92,19
The company has sufficient working capital to meets its urgency/
obligations. A company has a high percentage of its current assets in the
form of working capital, cash that would be more liquid in the sense of
being able to meet obligations as & when they become due. From this
working capital, the company meets its day-to-day financial obligation.
Thus, the current ratio throws light on the companys ability to pay its
current liabilities out of its current assets. The Aplab Companys has a
very good liquidity position of company.

2] LIQUID RATIO:

Formula:
Quick assets
Liquid ratio =

Quick liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Quick assets 21,80,67 23,01,01 24,01,30 29,11,31
Quick liabilities 15,93,66 21,62,32 21,28,19 21,36,02
Liquid ratio 1.36 1.06 1.12 1.36
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COMMENTS:
The liquid or quick ratio indicates the liquid financial position of an
enterprise. Almost in all 4 years the liquid ratio is same, which is better
for the company to meet the urgency. The liquid ratio of the Aplab
Company has increased from 1.12 to 1.36 in 2004-2005. Day to day
solvency is more sound
for company in 2004-2005 over the year 2003-2004. This indicates that
the dependence on the short-term liabilities & creditors are less & the
company is following a conservative working capital
policy. Liquid ratio of Company is favorable because the quick assets of
the company are more than the quick liabilities. The liquid ratio shows
the companys ability to meet its immediate obligations promptly.

3] PROPRIETORY RATIO:

Formula:
Proprietary fund

Total fund

Shareholders fund
Proprietary ratio =

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Proprietary fund 21,29,69 21,55,19 22,42,59 24,14,91
Total fund 52,82,53 57,38,17 66,14,92 66,70,05
Proprietary ratio 40 37.55 33.90 36.20

COMMENTS:
The Proprietary ratio of the company is 36.20% in the year 2004-2005. It
means that the for every one rupee of total assets contribution of 36
paise has come from owners fund & remaining balance 66 paise is
contributed by the outside creditors. This shows that the contribution by
outside to total assets is more than the owners fund. This Proprietary
ratio of the Company shows a downward trend for the last 4 years. As
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the Proprietary ratio is not favorable the Companys long-term solvency
position is not sound.

4] STOCK WORKING CAPITAL RATIO:

Formula:
Stock
Working Capital

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Stock 19,09,77 19,02,79 21,46,20 19,32,88
Working Capital 30,77,14 29,46,07 32,69,89 37,12,19
Stock working
capital ratio
62.06 64.58 65.63 52.06

COMMENTS:
This ratio shows that extend of funds blocked in stock. The amount of
stock is increasing from the year 2001-2002 to 2003-2004. However in
the year 2004-2005 it has declined to 52%. In the year 2004-2005 the
sale is increased which affects decrease in stock that effected in
increase in working capital in 2004-2005.
It shows that the solvency position of the company is sound.

5] CAPITAL GEARING RATIO:

Formula:
Preference capital+ secured loan
Capital gearing ratio =
Equity capital & reserve & surplus

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Secured loan 12,13,48 10,27,56 11,38,86 1,72,312
Equity capital &
reserves &
surplus
21,29,69 21,55,19 22,42,59 2,41,491
Capital gearing
ratio
56.97 47.67 50.78 71
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Gearing means the process of increasing the equity shareholders return
through the use of debt. Capital gearing ratio is a leverage ratio, which
indicates
the proportion of debt & equity in the financing of assets of a company.
For the last 3 years [i.e.2001-2002 TO 2003-2004] Capital gearing ratio
is all most same which indicates, near about 50% of the fund covering
the secured loan position. But in the year 2004-2005 the Capital-gearing
ratio is 71%. It means that during the year 2004-2005 company has
borrowed more secured loans for the companys expansion.

6] DEBT EQUITY RATIO:

Formula:
Total long term debt

Debt equity ratio =

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Long term debt 15,81,47 14,80,70 16,97,15 22,60,01
Shareholders
fund
21,29,69 21,55,19

22,42,59 24,14,91
Debt Equity Ratio 0.74 0.68 0.75 0.93

COMMENTS:
The debt equity ratio is important tool of financial analysis to appraise
the financial structure of the company. It expresses the relation between
the external equities & internal equities. This ratio is very important from
the point of view of creditors & owners. The rate of debt equity ratio is
increased from 0.74 to 0.93 during the year 2001-2002 to 2004-2005.
This shows that with the increase in debt, the shareholders fund also
increased. This shows long-term capital structure. The
lower ratio viewed as favorable from long term creditors point of view.

7] GROSS PROFIT RATIO:

Formula:
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Gross profit
Gross profit ratio = * 100
Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Gross profit 24,54,48 37,65,90 45,57,45 42,37,52
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Gross profit Ratio 56.48 73.80 66.27

COMMENTS:

The gross profit is the profit made on sale of goods. It is the profit on
turnover. In the year 2001-2002 the gross profit ratio is 56.48%. It has
increased to 73.80% in the year 2002-2003 due to increase in sales
without
corresponding increase in cost of goods sold. However the gross profit
ratio
decreased to 66.27% in the year 2003-2004.
It is further declined to 62.22% in the year 2004-2005, due to high cost
of
purchases & overheads. Although the gross profit ratio is declined during
the
year 2002-2003 to 2004-2005. The net sales and gross profit is
continuously
increasing from the year 2001-2002 to 2004-2005.

8] OPERATING RATIO:
Formula:
COGS+ operating expenses
Operating ratio = *100
Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
COGS +
Operating
expenses
18,90,98 +
2,21,37 +
5,76,71
21,96,32 +
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2,69,98 +
7,62,23
28,33,02 +
3,07,51 +
9,17,94
2,57,226+
27,141+
84,478
Net sales 43,45,46 51,02,37 68,76,89 6,80,978
Operating ratio 61.88% 63.27% 59% 54.16%

COMMENTS:
The operating ratio shows the relationship between costs of activities &
net sales. Operating ratio over a period of 4 years when compared that
indicate the change in the operational efficiency of the company. The
operating ratio of the company has decreased in all 4 year. This is due
to increase in the cost of goods sold, which in 2001-2002 was 61.88%,
in 2002-2003 was 63.27%, in 2003-2004 was 59% & in 2004-2005 it is
54.16%. though the cost has increased in 2002-2003 as compared to
2001-2002, reducing continuously over the next two years, indicate
downward trend in cost
but upward / positive trend in operational performance.

9] EXPENSE RATIO:

The ratio of each item of expense or each group of expense to net sales
is known as Expense ratio. The expense ratio brings out the
relationship between various elements of operating cost & net sales.
Expense ratio analyzes each individual item of expense or group of
expense& expresses them
as a percentage in relation to net sales.

A] MANUFACTURING EXPENSES:
Formula:
Manufacturing expenses
Manufacturing expense ratio = *100
Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Manufacturing
expenses
2,21,37 2,69,98 3,07,51 2,71,41
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Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Manufacturing
expenses ratio
5% 5.29% 4.47% 3.98%

COMMENTS:
The manufacturing expense is shows the downward trend. During the
year 20012002 to 2002-2003 the manufacturing expense increased
because there is increase in the charges like labour, rent , power &
electricity, repair to plant & machinery & miscellaneous works expenses.
The manufacturing expense during the year 2001-2002 to 2004-2005 is
decreased from 5% to 3.96%. This indicates that the company has
control over the manufacturing expense.

B] OTHER EXPENSES:
Formula:
Other expenses
Other expense ratio = *100
Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Other expenses 5,76,71 7,62,23 9,17,94 8,44,78
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Other expenses
ratio
13.2% 14.93% 13.34% 12.40%

COMMENTS:
The other expense of company is increased during the 2001-2002 to
2003-2004, because increase in the charges of rent of office, equipment
lease rental, printing & stationary, advertisement & publicity, transport
outward & other charges. But during the year 2004-2005 the other
expenses is decrease from 13.34% to 12.40%. Because decrease in
equipment lease rental, advertisement
& publicity, transport charges, commission & discount, sales tax &
purchase tax .This indicates that the company also controlling the other
expenses.

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10) NET PROFIT RATIO
Formula:
NPAT
Net profit ratio = * 100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,98 82,94 1,72,94 2,75,78
Net sales 434546 51,02,37 68,76,89 68,09,78
Net profit ratio 0.48 1.6 2.5 4.04

COMMENTS:
The net profit ratio of the company is low in all year but the net profit is
increasing order from this ratio of 4 year it has been observe that the
from 2001-2002 to 2004-2005 the net profit is increased i.e. in 2003 it is
increased by 1.12 in 2003-2004 by 0.9 & in 2004-2005 by 1.54.
Profitability ratio of company shows considerable increase. Companys
sales have increased in all 4 years & at the same time company has
been successful in controlling the expenses i.e. manufacturing & other
expenses.
It is a clear index of cost control, managerial efficiency & sales
promotion.
0
1
2
3
4
5
2001-2002 2002-2003 2003-2004 2004-2005

11] STOCK TURNOVER RATIO:

Formula:
COGS
Average stock

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
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COGS 18,90,98 21,96,32 28,33,02 25,72,26
Average stock 5,49,90 5,97,58 6,73,11 6,89,30
Stock Turnover
Ratio
3.4 3.6 4.20 3.73

COMMENTS:
Stock turnover ratio shows the relationship between the sales & stock it
means how stock is being turned over into sales.
The stock turnover ratio is 2001-2002 was 3.4 times which indicate that
the stock is being turned into sales 3.4 times during the year. The
inventory
cycle makes 3.4 round during the year. It helps to work out the stock
holding
period, it means the stock turnover ratio is 3.4 times then the stock
holding
period is 3.5 months [12/3.4=3.5months]. This indicates that it takes 3.5
months
for stock to be sold out after it is produced.
For the last 4 years stock turnover ratio is lower than the standard but it
is in increasing order. In the year 2001-2002 to 2004-2005 the stock
turnover
ratio has improved from 3.4 to 3.73 times, it means with lower inventory
the
company has achieved greater sales. Thus, the stock of the company is
moving
fast in the market.

12] RETURN ON CAPITAL EMPLOYED:

Formula:
NPAT
Capital employed
YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,68 82,94 1,72,94 2,75,78
Capital employed 38,18,01 37,23,11 40,35,07 47,66,93
Return on capital
employed
0.54 2.23 4.28 5.79

COMMENTS:
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The return on capital employed shows the relationship between profit &
investment. Its purpose is to measure the overall profitability from the
total funds made available by the owner & lenders.
The return on capital employed of Rs.5 indicate that net return of Rs.5 is
earned on a capital employed of Rs.100. this amount of Rs.5 is available
to take care of interest, tax,& appropriation.
The return on capital employed is show-increasing trend, i.e. from 0.54
to 5.79. All of sudden in 2001-2002 the return on capital employed
increased from 0.54 to 5.79. This indicates a very high profitability on
each rupee of investment & has a great scope to attract large amount of
fresh fund.

13] EARNING PER SHARE:

Formula:
NPAT
Earning per share =
Number of equity share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,98,000 82,94,000 1,72,94,000 2,75,78,000
No.ofequity share 50,00,000 50,00,000 50,00,000 50,00,000
Earning per share 0.41 1.66 3.46 5.52

COMMENTS:
Earnings per share are calculated to find out overall profitability of the
company. Earning per share represents the earning of the company
whether or not dividends are declared.
The Earning per share is 5.52 means shareholder gets Rs. 5.52 for each
share of Rs. 10/-. In other words the shareholder earned Rs. 5.52 per
share. The net profit after tax of the company is increasing in all years.
Therefore the shareholders earning per share is increased continuously
from
2001-2002 to 2004-2005 by 0.41 to 05.52. This shows it is continuous
capital appreciation per unit share by 0.41 to 05.52.

The above diagram shows the Earning per share and Dividend per
share
is increasing rapidly. It is beneficial to the shareholders and prospective
investor
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to invest the money in this company.

14] DIVIDEND PAYOUT RATIO:

Formula:

Dividend per share
Dividend Pay out ratio = * 100
Earning per share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Dividend per
share
- 1 1.50 1.80
Earning per share 0.41 1.66 3.46 5.52
Dividend payout
ratio
- 60.24 43.35 32.60

COMMENTS:
In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is 60.24
and 43.35 respectively. In the year 2002-2003 the company has
declared the dividend 60.24 and the balance 39.76 is retained with them
for the expansion. The company has not earned more profit in the year
2001-2002 hence the company has not declared dividend in the year
2001-2002. However the company has declared more dividends in the
year 2002-2003 as the company has sufficient profit. In the year 2004
the company has declared 1.50 dividends per share hence the earning
per share has doubled. From this one can say that the company is more
conservative for expansion.

15] COST OF GOODS SOLD:

Formula:
COGS
Cost of goods sold Ratio = * 100
Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
COGS 18,90,98 21,96,32 28,33,02 25,72,26
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Cost of goods
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sold ratio
43.51 43.04 41.19 37.77

COMMENTS:
This ratio shows the rate of consumption of raw material in the process
of production. In the year 2001-2002 the cost of goods sold ratio is
43.51% so the gross profit is 56.49%. it indicates that in 2001-2002, the
43% of raw material is consumed in the process of production. During
the last 4 years the rate of cost of goods sold ratio is continuously
decreasing however the gross profit & sales is increased during the
same period.

16] CASH RATIO:

Formula:
Cash + Bank + Marketable securities

Cash ratio =
Total current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Cash + Bank +
Marketable
securities
3,31,32 3,95,25 4,49,74 6,04,64
Total current
liabilities
15,93,66 21,62,32

21,28,19 21,36,02
Cash ratio 0.20 0.18 0.21 0.28

COMMENTS:
This ratio is called as super quick ratio or absolute liquidity ratio. In the
year 2001-2002 the cash ratio is 0.20 & then it is decreased to 0.18 in
the year 2002-2003. Then again it is increased to 0.21 in the year 2003-
2004 & 0.28 in the year 2004-2005. This shows that the company has
sufficient cash, bank balance, & marketable securities to meet any
contingency.

17] RETURN ON PROPRIETORS FUND:
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Formula:
NPAT
Proprietors fund

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,68 82,94 1,72,94 2,75,78
Proprietors fund 21,29,69 21,55,19 22,42,59 24,14,91
Return on
proprietors fund
0.97 3.84 7.71 11.41

COMMENTS:
Return on proprietors fund shows the relationship between profits &
investments by proprietors in the company. In the year 2002-2003 the
return on
proprietors fund is 3.84% it means the net return of Rs. 3 approximately
is
earned on the each Rs. 100 of funds contributed by the owners. Visit
www.mbahotspot.com for more
66 | P a g e

During the last 4 years the rate of return on proprietors fund is in
increasing order. The return on proprietors fund during the year 2001-
2002 to 2004-2005 is increased from 0.97% to 11.41%.
It shows that the company has a very large returns available to take care
of high dividends, large transfers to reserve etc. & has a great scope to
attract large amount of fresh fund from owners.

18] RETURN ON EQUITY:

Formula:
NPAT
Return on equity share capital = * 100
No. of equity share
YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,68 82,94 1,72,94 2,75,78
No. of equity
share
50,000 50,000 50,000 50,000
Return on equity
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share capital
4.13 16.5 34.58 55

COMMENTS:
This ratio shows the relationship between profit & equity shareholders
fund in the company. It is used by the present / prospective investor for
deciding whether to purchase, keep or sell the equity shares. In the year
2002-2003 the return on proprietors fund is 16.5%, which means the net
return of Rs. 16, is earned on the each Rs.100 of the funds contributed
by the equity shareholders.
The rate of return on equity share capital is increased from4.13% to 55%
during the year 2001-2002 to 2004-2005. This shows that the company
has a very large returns available to take care of high equity dividend,
large transfers to reserve, & also company has a great scope to attract
large amount to fresh funds by issue of equity share & also company
has a very good price for equity shares in the BSE.

19] OPERATING PROFIT RATIO:

Formula:
Operating profit
Operating profit ratio = *100
Net sales

COMMENTS:
Operating profit ratio shows the relationship between operating profit &
the sales. The operating profit is equal to gross profit minus all operating
expenses or sales less cost of goods sold and operating expenses.
The operating profit ratio of 7.11% indicates that average operating
margin of Rs.7 is earned on sale of Rs. 100. this amount of Rs. 7 is
available for meeting non operating expenses. In the other words
operating profit ratio 7.11% means that 7.11% of net sales remains as
operating profit after meeting all operating expenses. During the last 4
years the operating profit ratio is increased from 7.11%
to 9.38%. It indicates that the company has great efficiency in managing
all its operations of production, purchase, inventory, selling and
distribution and also has control over the direct and indirect costs. Thus,
company has a large margin is available to meet non-operating
expenses and earn net profi

20] CREDITORS TURNOVER RATIO:

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Formula:

Net credit purchase
Average creditors

Months in a year

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Net credit
purchase
21,21,43 22,71,80 29,08,61 25,29,04
Average creditors 5,88,42 7,91,21 6,96,86 7,80,39
Credit turnover
ratio
3.6 times 3.6 times 4 times 3 times
Average age of
accounts payable
3.3 months 3.3 months 3 months 4 months

COMMENTS:

The creditors turnover ratio shows the relationship between the credit
purchase and average trade creditors. It shows the speed with which the
payments are made to the suppliers for the purchase made from them.
The credit turnover ratio of 4, indicate that the creditors are being turned
over 4 times during the year. It indicates the number of rounds taken by
the credit cycle of payables during the year. There is no standard ratio in
absolute term. The creditors ratio for the year 2001-2002 and 2002-2003
as good as the same, but it is increased by 3.6 to 4 in 2003-2004.this
means the company has settled the creditors dues very fastly than the
previous year.

DEBTORS TURNOVER RATIO:

Formula:
Credit sales
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Average debtors

Days in a year
Debt collection period =
Debtors turnover

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
Credit sales 47,77,48 55,21,33 74,87,36 68,09,78
Average debtors 18,49,35 19,05,76 19,51,56 23,06,67
Debtors turnover
ratio
2.5 times 2.8 times 3.8 times 2.9 times
Debt collection
period
146 days 130 days 96 days 125 days

COMMENTS:

Debtors turnover ratio is alternative known as Accounts Receivable
Turnover Ratio. This ratio measures the collectibility of debtors & other
accounts receivable, it means the rate at which the trade debts are being
collected. The Debtors turnover ratio of 2.5 indicates that the debtors are
being turned over 2.5 times during the year. It means that the credit
cycle of debtors makes 2.5 rounds during the year. It helps to workout
the debt collection period i.e. 146 days [365/ 2.5 = 146]. This indicates
that it take146 days on an average for the debtors to be settled. Debt
collection period indicates the duration of the
credit cycle of the debtors. The Debtors turnover ratio is almost same
during the year 2001-2002 to
2004-2005, which indicates that the debts are being collected at a fast
speed during the year? The operating cycle of the debtors is short. In
other words the debts collection period is short which result into less
chance of bad debts.

SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED
After going through the various ratios, I would like to state that:

-term solvency of the company is quite satisfactory.

ate solvency position of the company is also quite satisfactory.
The company can meet its urgent obligations immediately.
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fast
in the market.

The management should take care of inventory management and speed
up the movement of stock. Effective selling technique or product
modification may be adopted to face the competitors and toimprove the
financial position of the company by taking appropriate decisions.

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CONCLUSION:

The focus of financial analysis is on key figures contained in the financial
statements and the significant relationship that exits. The reliability and
significance attach to the ratios will largely on hinge upon the quality of
data on which they are best. They are as good for as bad as the data it
self.

Financial ratios are a useful by product of financial statement and
provide standardized measures of firms financial position, profitability
and riskiness. It is an important and powerful tool in the hands of
financial analyst. By calculating one or other ratio or group of ratios he
can analyze the performance of a firm from the different point of view.
The ratio analysis can help in understanding the liquidity and short-term
solvency of the firm, particularly for the trade creditors and banks. Long-
term solvency position as measured by different debt ratios can help a
debt investor or financial institutions to evaluate the degree of financial
risk. The operational efficiency of the firm in utilizing its assets to
generate profits can be assessed on the basis of different turnover
ratios. The profitability of the firm can be analyzed with the help of
profitability ratios. However the ratio analysis suffers from different
limitations also. The ratios need not be taken for granted and accepted
at face values. These ratios are numerous and there are wide spread
variations in the same measure. Ratios generally do the work of
diagnosing a problem only and failed to provide
the solution to the problem.

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BIBLIOGRAPHY

REFERENCE BOOKS

Theory, Concepts & problems
R.P.RUSTAGI

Text and problems

M.Y. KHAN AND P. K. JAIN

AINAPURE

L.N. CHOPDE
D.N. CHOUDHARI
S.L. CHOPDE

ANAUAL REPORTS OF APLAB LIMITED

-2002
-2003
-2004
-2005

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