c

c 





c


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.


c c

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.

c 
c
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 expression 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 ³ so
many times´. As accounting ratio is an expression relating two figures or
accounts or two sets of account heads or group contain in the financial
statements.

c 
c c
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 annalist 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-sectionalanalysis. 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.
?



c

c
Ratio is work out to analyze the following aspects of business organization-
A) Solvency-
1) Long term
2) Short term
3) Immediate
B) Stability
C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) Effective utilization of resources
H) Leverage or external financing

c
Since a ratio is a mathematical relationship between to or more variables
/ accounting figures, such relationship can be expressed in different ways as
follows ±
 sareratio
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.
 sarateoftimes
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.
 saercentage
In such a case, one item may be expressed as a percentage of some
other item. 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]


c 
c c
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 industry¶s 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.


 c 
The ratio can be compared in three different ways ±
rosssectionanalysis
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 firm¶s
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.

imeseriesanalysis
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\
ombinedanalysis
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
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.

-
cc
c


c c
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 ratio must be related to each other, otherwise there is
no purpose of calculating a ratio.

?
 cc
c 
c

 cc
c 
c

BASED ON FINANCIAL BASED ON FUNCTION BASED ON
USER 1] LIQUIDITY RATIO 1} RATIOS FOR SHORT
STATEMENT 2] LEVERAGE RATIO TERM CREDITERS
1] BALANCE SHEET 3] ACTIVITY RATIO 2] RATIO FOR
2] REVENUE 4] PROFITABILITY RATIO SHAREHOLDER
STATEMENT 5] COVERAGE RATIO? 3}RATIO FOR
MANAGEMENT
3] COMPOSITE 4] RATIO FOR
RATIO ? LONG TERM
CREDITORS

 
 c c 





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.
alancesheetratio
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 Proprietory ratio, Capital gearing ratio, Debt equity ratio, and Stock
working capital ratio.
eveneratio
Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratio study the relationship between the profitability &
the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio,
Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio.
omositeratio
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 ratiosa)
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
 
  
c 
Accounting ratios can also be classified according to their functions in to
liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover
ratios.
iqidityratios
It shows the relationship between the current assets & current liabilities
of the concern e.g. liquid ratios & current ratios.
everageratios
It shows the relationship between proprietors funds & debts used in
financing the assets of the concern e.g. capital gearing ratios, debt equity ratios,
& Proprietory ratios.
 ctivityratios
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.
rofitabilityratios
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.
overageratios
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.
?

 
 

atiosforshort-termcreditors
Current ratios, liquid ratios, stock working capital ratios
atiosfortheshareholders
Return on proprietors fund, return on equity capital
atiosformanagement
Return on capital employed, turnover ratios, operating ratios, expenses
ratios
atiosforlong-termcreditors
Debt equity ratios, return on capital employed, proprietor ratios.
?
 ?

ccc

c-

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

?



c 
eaning
This ratio compares the current assests with the current liabilities. It is also
known as µworking capital ratio¶ or µ solvency ratio¶. It is expressed in the form of
pure ratio

CURRENT RATIO = CURRENT ASSETS /CURRENT LIABILITIES

The current assests 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,
with in a year.
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, 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 shortterm
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 entity is under utilizing its current
assets.
cc
c
eaning
Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare
the quick assets with the quick liabilities. It is expressed in the form of pure
ratio.
The term quick assets refer to current assets, which can be converted into,
cash immediately or at a short notice without diminution of value.
QUICK ASSETS

LIQUID RATIO = ________________

QUICK LIABILITIES
Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA
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.
 
c
eaning
This is also called as super quick ratio. This ratio considers only the absolute
liquidity available with the firm.

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.

c 



 





 c 
 
-
eaning
Earnings per Share are calculated to find out overall profitability of the
organization. An earnings per Share represents earning of the company
whether or not dividends are declared. If there is only one class 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.

FORMULAS,
NPAT

EARNING PER SHARE = ____________________________

NUMBER OF EQUITY SHARES

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
cc

 
-
eaning
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 SHAREHOLDERS

cc
 

c-
eaning
Dividend Pay-out Ratio shows the relationship between the dividend 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.


c 
 c

c 
c-
eaning
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.

c
cc

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 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.
c

c-
eaning
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 =______________
NET SALES * 100

c

c-
eaning
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 and tax
management. Jointly considered, the gross and net profit margin ratios provide
an understanding of the cost and profit structure of a firm.



   c


-
eaning
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.

ormla
 



   c


 !!!!!!!!!!!!!!!!!!!"##

 c




c c 
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:




 

c$
%
eaning
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.

ormla

c
 




 

c !!!!!!!!!!!!!!!!
 
 




c 


&
 

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

ormla


&
 

c !!!!!!!!!!!!!!!!
 
 

&

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).


c'
 


 
$
%
The FAT ratio measures the net sales per rupee of investment in fixed assets.

ormla


 

c'
 


 
 !!!!!!!!!!!!!!!!!


c'
 



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).

c


c
eaning
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 owner¶s
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 the form of percentage. Total assets also know it as net worth.

ormla
c

 
c


c !!!!!!!!!!!!!!!!!!!


 

 

 
c


c !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
c'
 

(

c cc
c



&)&c  c

c
eaning
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.

ormla

&

&)&c  c

c !!!!!!!!!!!!!!!!!
)&c  c


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.




c

c

c 
This ratio compares the long-term debts with shareholders fund. The
relationship between borrowed 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.
ormla


 -







c

c !!!!!!!!!!!!!!!!!!!!!!!!!!!


 

 

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 µgearing¶ or µtrading on equity¶. Debt equity ratio
shows the margin of safety for long-term creditors & the balance between debt
& equity.



  c

 
eaning
Return on proprietors fund is also known as µreturn on proprietors equity¶ or
µreturn on shareholders investment¶ or µ investment ratio¶. This ratio indicates
the relationship between net profit earned & total proprietors funds. Return on
proprietors fund is a profitability ratio, which the 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 owner¶s fund at disposal.
This ratio is of practical importance to prospective investors & shareholders.

ormla
 



  c

  !!!!!!!!!!!!!!!!!!!"##
c

 


c

 

c
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

FORMULA
NET CREDIT PURCHES
CREDIT TURNOVER RATIO =_____________________
AVERAGE CREDITORS

MONTHS IN YEAR
AVERAGE AGE OF ACCOUNTS PAYABLE =________________________
CREDIT TURNOVER RATIO

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.
c


c c
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.
ccc
c
c -
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 are particularly useful in credit analysis by bank & other
suppliers of short term loans.
 


-
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.


c 
cc

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 measures
this kind of operational efficiency. In fact, the solvency of a firm is, in the
ultimate analysis, dependent upon the sales revenues generated by the use of
its assets- total as well as its components.

 c
cc

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.
c

*c c 
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 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.
+

 c
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.




c c
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:
6?Ratios facilitate conducting trend analysis, which is important for
decision making and forecasting.
6?Ratio analysis helps in the assessment of the liquidity, operating
efficiency, profitability and solvency of a firm.
6?Ratio analysis provides a basis for both intra-firm as well as inter-firm
comparisons.
6?The comparison of actual ratios with base year ratios or standard
ratios helps the management analyze the financial performance of
the firm.

cc

c 
c c

Ratio analysis has its limitations. These limitations are described below:
cnformationroblems
6?Ratios require quantitative information for analysis but it is not decisive
about analytical output .
6?The figures in a set of accounts are likely to be at least several months
out of date, and so might not give a proper indication of the company¶s
current financial position.
6?Where historical cost convention is used, asset valuations in the balance
sheet could be misleading. Ratios based on this information will not be
very useful for decision-making.
omarisonoferformanceovertime
6?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.
6?When comparing performance over time, there is need to consider the
changes in technology. The movement in performance should be in line
with the changes in technology.
6?Changes in accounting policy may affect the comparison of results
between different accounting years as misleading.

cnter-firmcomarison
6?Companies may have different 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.
6?Selective application of government incentives to various companies
may also distort intercompany comparison. comparing the performance
of two enterprises may be misleading.
6?Inter-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.
6?Even within a company, comparisons can be distorted by changes in the
price level.
6?Ratios provide only quantitative information, not qualitative information.
6?Ratios are calculated on the basis of past financial statements. They do
not indicate future trends and they do not consider economic conditions.



c c
1] To identify aspects of a businesses 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:-
6?iqidity± the ability of the firm to pay its way
6?cnvestmentshareholders± information to enable decisions to be made
on the extent of the risk and the earning potential of a business
investment
6?earing± information on the relationship between the exposure of the
business to loans as opposed to share capital
6?rofitability± how effective the firm is at generating profits given sales
and or its capital assets
6?inancial± the rate at which the company sells its stock and the
efficiency with which it uses its assets



c c
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 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.

 
c   cc



c


 


COMPANY PROFILE


 *
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 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.





  
6?Aplab started its operation in October 1962.
6?It is a professionally managed 40 years old public limited company.
6?It is quoted on BOMBAY STOCK EXCHANGE.
6?It serves customer global customer par excellence.
6?It specialized in Test & measurement instruments, power conversion, &
UPS & fuel dispensers for petroleum sector.
6?It enjoys worldwide recognition for the quality of its business integrity &
innovative engineering skills.
cc 
6?To deliver high quality, carefully, engineered products, on time, with in
budget, as per the customer specification in a manner profitable to both,
our customers & so to us.
cc 
6?To be a global player, recognized for quality & integrity.
6?To be the TOP INDIAN COMPANY as conceived by our customers.
6?To be ³ THE BEST ´ company to work for, as rated by our employees.
 
6?Goal at Aplab is extract ordinary customer service as we provide our
customer needs in the personal service industry.


cc *
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 customer¶s needs and provide solutions than merely
selling products.
5] To create intellectual capital by investing in hardware and embedded
software development.
 
,
c

Their values & beliefs required that they -
6?Treat employees with respect & give them an opportunity for input on
how to continuously improve their service goals.
6?Offer opportunities for growth, professional development & recognition.
6?Provide most effective & corrective action, to resolve customer service
issues, to ensure customer satisfaction.
6?Foster an open door policy, which encourages interaction, discussion &
ideas to improve work environment & increase productivity.
6?³ Do it right the first time & every time´ is their team commitment * our
way of doing business, it ensures as growth & prosperity.






*
APLAB had planned to enter the 21st Century with a program for a fast
and healthy growth in the global market based on company¶s high technology
foundation and the reputation of four decades for prompt customer service and
as a reliable solution provider. After completing 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.
 c
c)&

-c-#####
Quality at APLAB is a part of our people¶s attitude. Entire organization is
committed to create an environment that encourages individual excellence and
a personal commitment to quality. In APLAB, ³Quality is everybody¶s
responsibility´ and all strive to ³do it right the first time´. It is therefore natural
that APLAB Limited is certified for quality with ISO 9001:2000 registration.
 c
c
6?Aplab will deliver to its customer products & services that consistently
meet or exceed their requirement.
6?Aplab will achieve this by total commitment & involvement of every
individual.
6?Aplab will encourage its employees & suppliers to develop quality
products prevent defects & make continual improvement in all
processes.

 c


c

6?Aplab is an ISO 9001:2000 certifies company.
6?100% customer satisfaction.
6?On time delivery every time reduction is out going PPM to 10,000
[4 sigma]

RESEARCH AND DEVELOPMENT

Developing innovative products with the latest technology is the core
strength of APLAB. The Science & Technology Ministry of the Govt. of India
accredits our R&D Laboratories. We have a large team of dedicated, highly
qualified skilled engineers who excel in the latest state-of-the-art-technology.
APLAB is recognized not only for manufacturing standard products but also in
providing solutions and services as per the customer specifications. We spend
more than 4% of the company revenue in Research & Development activities.
Specific areas in which the company carries out R&D
1. Development of new product especially hi-tech intelligent product &
electronic transaction control system.
2. Improvement in the existing products & production processes, import
substitution.
3. Development of products to suit exports markets.
4. Customizing the products to the customer¶s specifications & adaptation
of imported technology.
The company has achieved its position of leadership in the Indian
instrumentation industry & continuous to maintain it through its strong grip of
technology. Almost all the products manufactured by the company are import
substitution items, which are fully developed in house. It has resulted in
considerable saving of foreign exchange. With the company, R&D is an ongoing
process. The ministry of science & technology, Government of India, recognizes
the company¶s R&D.
Through a continuous interaction with production& Quality Assurance
Department takes up redesign of existing products. This is done to achieve
state of the art in our design & to bring about improvement to get maximum
performance / cost ratio.



  
c 
Major R&D activity is concentrated around up gradation of product
design & re-alignment of production processes to bring about improved quality
at lower cost. This will greatly help the company in facing competition in local
markets from foreign companies.
EXPORT
APLAB currently exports over 25% of its production to Western Europe,
Canada & USA. Over 30 million U.S. Dollars worth of Power Systems and Test
Instruments from APLAB are today operational in UK, Germany, France,
Sweden, Belgium, Canada, and USA & Australia.
36

  
a. TEST & MEASUREMENT INSTRUMENTS
b. HIGH POWER AC SYSTEMS (UPS, Frequency Converter,
Inverter, Isolation Transformer)
c. HIGH POWER DC SYSTEMS (DC Power Supply, DC
Uninterruptible Power Supply)
d. ATM INSTACASH
e. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC
CONVERTERS, SMPS, INVERTERS, STABILIZER, LINE
CONDITIONER, ISOLATION TRANSFORMER

c 
 
The Banking Automation Division of APLAB was launched in 1993, when we introduced
INSTACASHIndia¶s first indigenously manufactured ATM INSTACASH demonstrated
APLAB¶s skills in design,hardware manufacturing and software integrations.
Our in house R&D group is constantly striving to scan the rapidly changing
technology and offer suitable end to end solutions. We are into Self Service
Delivery Systems, MICR Cheque Processing and Smart Card based solutions.
The latest is IMAGEENABLED Cheque Processing solution- QUICKCLEAR.

 cc








  


 

 ##

s.$.###%
 
st##

 
 

 
harecaital####
eserve,rls+-+-
!!!!!!!-+-
 
ecred/
nsecred+0--
!!!!!!!/0




'c cc
c
$

%#+/
!!!!!!!!


//#

c
c  
c'
 


rossblock-#
ess*dereciation#-+
etblock!!!!!!!00
aital1orkinrogress+
!!!!!!!
+0
c 






 

, 
,  

cnventories-#-00
ndrydebtors/-
ash,bankbalance
oan,advances/#+
!!!!!!
+0#/#


c cc
c
,
cc 
rrentliabilities+#-
rovisions00
!!!!!!!!




 

#00
c


'
c

+/
!!!!!!


//#
!!!!!!







  


 

 ##
s.$.###%
--##--##

 
 

 
harecaital####
eserve,srls+-
!!!!!!!!-
 
ecred#0
nsecred+
!!!!!!!!/#0




'c cc
c
$

%/0
!!!!!!!!


0

c
c  
c'
 


rossblock0#-0
ess*dereciation#-
!!!!!!!!
etblock+###
aital1orkinrogress-0
+-0/
c 



0+



 

2 ,
 

cnventories-#0-
ndrydebtors-#0+
ash,bankbalances-+
oan,advances/-/+
!!!!!!!!
#


c cc
c
,
cc 
rrentliabilities#+
rovision#0+
!!!!!!!!
+
etcrrentassets-##
iscellaneosexenditre-0
!!!!!!!


0


c
, 





 ##
s.$###%
--##--##
c 

ales,oeratingearning-+
therincome#
ariationinstock$-0%


'


aterialconsmed+#
rchaseoftradinggoods#0
aymentsto,rovisionfor

mloyees#+-+
anfactringexences+---

xcisedty0+-
therexences0+
cnterest,finance+0
ereciation#0-0
ess-transferredtorevalation#
!!!!!!#+-
!!!!!!
0-#
c



'+-
c
  


$

%
cc 
'
c 
rrenttax+-
eferredtaxliabilities$assets%$-+%
!!!!!!
c
 


'/-
alancebroghtfor1ord
romreviosyear!!!!!!
alanceavailableforaroriation/-
roriations
eneralreserve+#
rls$loss%carriedtos
rooseddividend###

axonrooseddividend+
!!!!!!!
/-
alanceearningershare$ree%.++





BALANCE SHEET AS AT 31ST MARCH 2004

Rs.(µ000)
31-3-2004 31-3-2004
SOURCES OF FUNDS
SHAREHOLDERS FUNDS
Share capital 50000
Reserve & surplus 174259
________ 224259
LOAN
Secured 113886
Unsecured 55829
________ 169715
DEFERRED TAX LIABILITIES(NET) 9533
______
TOTAL 403507
APPLICATION OF FUNDS
FIXED ASSETS
Gross block 184158
Less- depreciation 124003
_______
Net block 60155
Capital working in progress 2529
_____
61684
INVESTMENT 14834

CURRENT ASSETS , LOANS

&ADVANCES
Inventories 214620
Sundry debtors 195156
Cash & bank balance 44957
Loan & advances 85058
________
539808
CREDIT LIABITIES & PROVISION
Credit liabilities 181617
Provisions 31202
_________
212819
NET CURRENT ASSETS 326989
______
TOTAL 403507

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2004
Rs.(µ000)
31-3-2004 31-3-2004
INCOME
Sales & operating earning 739047
Other income 3139
Variation in stock 5399
_______
747585
EXPENCESS
Material cosummed 285140
Purchase of trading goods 140333
Payment to & provision for
Employees 129447
Manufacturing expences 30751
Excise duty 7008
Other expences 91794
Interest & finance charges 24630
Depreciation 11089
Less-transferred to revaluation 93
_______ 10996
720099
PROBIT BEFORE TAX 27486
PRIOR YEAR ADJUSTMENT (NET) 2571
PROVISION FOR TAXATION
Current tax 11950
Deferred tax liabilities /assets 813
PROFIT AFTER TAX 17294
Balance brought forword from
Previous year 4
Balance available for appropriation 17298
Appropriation
General reserve 8830
Surplus 7
Proposed dividend 7500
Tax on proposed dividend 961
17298
Basic earning per share (rupee) 3.46

CALCULATION AND INTERPRETATION OF RATIO¶S

1- CURRENT RATIO
 FORMULA
CURRENT ASSETS
CURRENT RATIO = ____________________
CURRENT LIABILITIES


 ##-## ##-## ##-## ##-##

rrentassets 46,70,80 51,08,39 53,98,08 53,98,08

rrent 15,93,66 21,62,32 21,28,19 21,36,02

liabilities
rrentratio 2.93 2.36 2.53 2.72




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 obligations.
Thus, the current ratio throws light on the company¶s ability to pay its
current liabilities out of its current assets. The Aplab Company¶s has a very
good liquidity position of company.

cc
c

ormla

c& 


cc
c !!!!!!!!!!!!!!!!!
c&c cc
c


YEAR 2001-2002 2002-2003 2003-2004 2004-2005
ickassets 218067 230101 270130 291131
QUICK 159366 216232 212819 213602
LIABILITIES
LIQUID RATIO 1.36 1.06 1.12 1.36




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
company¶s ability to meet its immediate obligations promptly.

c


c

ormla
c

 
c


c !!!!!!!!!!!!!!!!!!!!


 
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
Proprietary 212969 215519 224255 241491
fund
Total fund 528253 573817 661492 667005
Proprietary 40 37.55 33.90 36.20
ratio




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 the Proprietary ratio is not favorable the
Company¶s long-term solvency position is not sound.


&)&c  c

c

ormla
STOCK
STOCK WORKING CAPITAL RATIO =_________________
WORKING CAPITAL
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
STOCK 190977 190279 214620 193288
WORKING 307714 294607 326989 371219
CAPITAL
STOCK WCR 62.06 64.58 65.63 52.06




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.

 c


c 
c

ormla




 c
(

 
 c

c 
c !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

c
 c
,


,
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
SECURED LOAN 121248 102756 113886 172312
EQUITY CAPITAL& 212969 215519 224259 241491
RESERVES&SURPLUS
CAPITAL GEARING 56.97 47.67 50.78 71
RATIO




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 company¶s expansion.

+


c

c
ormla


 -







c

c !!!!!!!!!!!!!!!!!!!!!!!!!!!


 

 
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
LONG TERM 158147 148070 169715 226001
DEBT
SHAREHOLDERS 212969 215519 224259 221499
FUND
DEBT EQUITY 0.74 0.68 0.75 0.93
RATIO




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.

0c

c

ormla
c

c

c !!!!!!!!!!!!!!!"##


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
GROSS 245448 376590 455745 423752
PROFIT
NET SALES 435446 510237 687689 680978
GROSS 56.48 73.80 66.27 62.22
PROFIT RATIO




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.

/

c 
c

ormla
(

c 
'




c 
c !!!!!!!!!!!!!!!!!!!!!!!!!!!!!"##


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
COGS+OPERATING 18,90,98 + 21,96,32 + 28,33,02 + 2,57,226+
EXPENSES 2,21,37 + 2,69,98 + 3,07,51 + 27,141+
5,76,71 7,62,23 9,17,94 84,478

NET SALES 434546 510237 687689 680978

OPERATING RATIO 61.88% 63.27% 59% 54.16%





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, it is
reducing continuously over the next two years, indicate downward trend in cost
but upward / positive trend in operational performance.

-
'


c
The ratio of each item of expense or each group of expense to net sales is
known as µExpense 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.

  
c 
'



ormla
  
c 
'


  
c 
'

 !!!!!!!!!!!!!!!!!!!!!!!!!!!!"##


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
MANUFACTURING 22137 26998 30751 27141
EXPENCES
NET SALES 435446 510237 687689 680978
anfactring 5% 5.29% 4.47% 3.98%
exensesratio





The manufacturing expense is shows the downward trend. During the year
2001±2002 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.




'



ormla



'





'

 !!!!!!!!!!!!!!!!!!"##


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
OTHER 57671 76223 91794 84478
EXPENCES
NET SALES 434546 510237 687689 680978
OTHER 13.2% 14.93% 13.34% 12.40%
EXPENCES
RATIO





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.

#%

c

c

ormla
 



c

c !!!!!!!!!!!


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NPAT 2098 8294 17294 27578
NET SALES 434546 510237 687689 680978
NET PROFIT 0.48 1.6 2.5 4.04
RATIO




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. Company¶s
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.


&
 

c

ormla


&
 

c !!!!!!!!!!!!!!!!!
 
 

&
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
COGS 189098 219632 283302 257226
AVERAGE 5490 59758 67311 68930
STOCK
STOCK 3.4 3.6 4.20 3.73
TURNOVER
RATIO




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.



   c




ormla
 



  c


 !!!!!!!!!!!!!!!!!!!"##
 c



YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NPAT 2068 8294 17294 27578
CAPITAL 381801 372311 403507 476693
EMPLOYED
RETURN ON 0.54 2.23 4.28 5.79
CAPITAL
EMPLOYED




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.


 c 
 



 


 c 
 
 !!!!!!!!!!!!!!!!!!!!!
 o.
c
 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NPAT 2098000 8294000 17294000 27578000
NUMER OF 5000000 5000000 5000000 5000000
EQUITY
SHARE
EARNING PER 0.41 1.66 3.46 5.52
SHARE






Earning per share is 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
to invest the money in this company.

cc
 

c

ormla
cc

 

cc
 

c !!!!!!!!!!!!!!!!!!!!!"##

 c 
 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
DIVIDEND - 1 1.50 1.80
PER SHARE
EARNING PER 0.41 1.66 3.46 5.52
SHARE
DIVIDEND - 60.24 43.35 32.60
PAYOUT
RATIO





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.




ormla


c !!!!!!!!!!!"##


 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
COGS 189098 219632 283302 257226
NET SALES 434546 510237 687689 680978
COGS RATIO 43.51 43.04 41.19 37.77




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.

+ 
c


ormla
 ( &( &



c
c

 
c !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!




c cc
c

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
CASH+BANK+MARKETABLE 33132 39525 44974 60464
SECURITIES
TOTAL CURRENT 159366 216232 212819 213602
LIABILITIES
CASH RATIO 0.20 0.18 0.21 0.28





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.

0

  c

 

ormla
 



  c

  !!!!!!!!!!!!!!!!!!!"##
c

 
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NPAT 2068 8294 17294 27578
PROPRIETORS 212969 215519 224259 241491
FUND
RETURN ON 0.97 3.84 7.71 11.41
PROPRIETORS
FUND




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.
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.

/

  
c


ormla
 



  
c
 
 c
 !!!!!!!!!!!!!!!!!!!!"##
 o.
c
 

YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NPAT 2068 8294 17294 27578
NO. OF 50000 50000 50000 50000
EQUITY
SHARE
RETURN ON 4.13 16.5 34.58 55
EQUITY
SHARE
CAPITAL





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.

-

c c

c

ormla


c c



c c

c !!!!!!!!!!!!!!!!!!!"##


 





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 profit.

#
c

 

c

ormla



c
 


c

 

c !!!!!!!!!!!!!!!!!!!!!!
 
 

c


c  


 
 
 
  
 !!!!!!!!!!!!!!!!!!!!!!!!

c

 

c
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
NET CREDIT 212143 227180 290861 252904
PURCHASE
AVERAGE 58842 79121 69686 78039
CREDITORS
CREDIOT 3.6 times 3.6 times 4 times 3 times
TURNOVER
RATIO
AVERAGE 3.3months 3.3months 3months 4months
AGE OF
ACCOUNT
PAYABLE





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 4times 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.




 

c

ormla

c
 



3
 

c !!!!!!!!!!!!!!!!!!!
 
 




 c  




c 
c !!!!!!!!!!!!!!!!!!!!!!!!!!


3
 

c
YEAR 2001-2002 2002-2003 2003-2004 2004-2005
CREDIT 477748 552133 748736 680978
SALES
AVERAGE 184935 190576 195156 230667
DEBTORS
DEBTORS 2.5times 2.8times 3.8times 2.9times
TURNOVER
RATIO
DEBT 146 days 130 days 96 days 125 days
COLLECTION
PERIOD





Debtor¶s turnover ratio is alternative known as ³ 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.
 c c c
c   cc


After going through the various ratios, I would like to state that:
 The short-term solvency of the company is quite satisfactory.
 Immediate solvency position of the company is also quite satisfactory.
The company can meet its urgent obligations immediately.
 Credit policies are effective.
 Over all profitability position of the company is quite satisfactory.
 Stock turnover rate is satisfactory. Stock of the company is moving fast
in the market.
 The company is paying promptly to the suppliers.
 The return on capital employed is satisfactory.
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 to improve the financial position of the
company by taking appropriate decisions.

 c 
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 analyses 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.

cc 




&*
6?c c  



Theory, Concepts & problems
..
c
6?c c  



Text and problems
..&  .&. c 
6? 


 
c 
c 

6?c c  



. .

. . c
..

 

  cc


6?##-##
6?##-##
6?##-##
6?##-##
)
c
-
6?111.bizd.ac.kcomfactratio
6?111.cecnc.org.combsinessfinancial
6?111.zeromillion.com.bsinessfinancial