FINANCIAL RATIOS ANALYSIS OF

ABC INDUSTRIES Pvt Ltd, (2008 v/s 2009)

CURRENT RATIO
The current ratio financial ratio used to test a company's liquidity (also referred to
as its current or working capital position) by deriving the proportion of current
assets available to cover current liabilities.

2008: 2.33 times

2009: 1.80 times

Interpretation
Current ratio of ABC Corporation for the year 2008-2009 shows that there is a
gradual decrease in the ratio. It means there is some problem with the current
assets, while the ratio is lower because of a slower increase in current liabilities
as well. Keeping in mind the fact that current ratio show the immediate liquidity
position of an organization, they must have to focus on the utilization of their
current assets and should try to reduce their current liabilities at the same time.
By reducing their current liabilities they will be able to have less to pay and more
to invest somewhere else.

Debt-Service Coverage Ratio

The debt service coverage ratio (DSCR) is a financial ratio that measures the
company's ability to pay their debts. In broad terms the debt service coverage
ratio is defined as the cash flow of the company divided by the total debt service.

A debt service coverage ratio (DSCR) > 1.0 indicates that the company is
generating sufficient cash flow to pay their debts. A debt service coverage ratio
(DSCR) < 1.0 should be a cause for concern because it indicates that the
company is negatively cash flowing.
DSCR = EBIT / ( Principal + i + Rental Payment)

2008: 0.443 times

2009: 0.177 times

Interpretation
In both the years, DSCR is less than 1 indicating that the ABC Corp. is not
generating enough cash to pay its debts. But when we compare 2008 and 2009,
we find that DSCR of ABC Corp. has further decreased to 0.177 from o.443
which is a bad signal. Comparatively, company was in better position to pay its
debts in 2008 than in 2009.

Debt to Equity Ratio

The debt to equity ratio is defined as “simply dividing the total debt of the firm by
its shareholders equity.
Mathematically, Debt to equity ratio = Total debt / Shareholders’ Equity

2008: 12.1%
2009: 48.3%

Interpretation
Debt to Equity ratio shows the extent to which the firm is financed by creditors
and shareholders. According to the tools and principles of analysis the lower the
debt to equity ratio the better it is for the organization. The ratio moves from
12.1% to 48.3% over the two years showing that the organization is financed by
creditors more than its equity holders.

Days Payable
The days payable outstanding (DPO) calculates the total time it takes a business
to pay back its creditors. The days payable outstanding formula is a fairly simple
financial ratio and is calculated by taking the accounts payable divided by the
cost of sales and then multiply that number by the total number of days.
2008: 10 days
2009: 6 days

Interpreatation
The larger the days payable outstanding, the better, as in 2008. This is because
the larger the number, the more interest the company is able to earn by placing
the money in the bank or investing somewhere else. Remember, this is only a
positive if the company is able at some point to actually pay their creditors. But in
2008, DP has fallen from 10 days to 6 days which will be perceived negative
movement.

Times interest earned:

Time interest earned ratio (TIE), also known as interest coverage ratio, indicates
how well a company can cover its interest payments on a pretax basis. The
larger the time interest earned, the more capable the company is at paying the
interest on its debt. The times interest earned ratio indicates how well the firm's
earnings can cover the interest payments on its debt. This ratio also is known as
the interest coverage and is calculated as follows:

Interest Coverage = EBIT / Interest Charges

2008: 4.65 times

2009: 1.53 times

Interpretation
In comparison, in 2008, ABC corp. was in better position to pay the interest on its
debts. But, in 2009, this ratio has fallen very badly indicating that in this year of
2009, the corp. is not in good position to pay the interest on its taken debts.In
2009, either the sales volume has shrinked or the corp. has taken more
debts/bank loans.

Day Receivable (DAY SALES

OUTSTANDING)
A measure of the average number of days that a company takes to collect
revenue after a sale has been made. A low DSO number means that it takes a
company fewer days to collect its accounts receivable. A high DSO
number shows that a company is selling its product to customers on credit and
taking longer to collect money.

Day’s sales outstanding are calculated as:

2008: 57 days
2009: 58 days

Interpretation
As obvious, There is not any marked change has occurred in Days Receivable.
This shows that the company is taking almost the period of two months to take
the cash from its credit sales.

Gearing Ratio
A general term describing a financial ratio that compares some form of owner's
equity (or capital) to borrowed funds. Gearing is a measure of financial leverage,
demonstrating the degree to which a firm's activities are funded by owner's funds
versus creditor's funds.

Gearing = Long Term Liabilities / Equity Shareholders' Funds

2008: 478%
2009: 774%
Interpretation
A shareholder of the ABC will not be happy with these results. In 2008 when the
ratio was relatively low at 478% they probably were worried because their other
ratios were not fine.

But in 2009 the gearing ratio further reaches to almost double indicating that the
business much prefers debt fundings to equity fundings. This maximizes the
interest payment problems and the control problems of having a dangerously
high level of long-term debt on the balance sheet.

Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced over
a period. The reporting period can be any time interval you select—monthly,
quarterly, or annually.

Inventory Turnover = COGS / Average Inventory

2008: 4.55 times

2009: 2.67 times

Interpretation
A low turnover ratio in 2009 implies poor sales and therefore excess inventory. A
high ratio in 2008 implies either strong sales or less
purchasing/manufacturing/keeping of inventory. High inventory levels in 2009 are
unhealthy because they represent an investment with a rate of return of zero.
This also opens up the company to trouble if prices begin to fall.

TOTAL ASSET TURNOVER

The amount of sales generated for every dollar's worth of assets. It is calculated
by dividing sales in dollars by assets in dollars.
Formula:

Asset turnover measures a firm's efficiency at using its assets in generating sales
or revenue - the higher the number the better. It also indicates pricing strategy:
companies with low profit margins tend to have high asset turnover, while those
with high profit margins have low asset turnover.
2008: 1.6 times
2009: 1.04 times

Interpretation
The ABC Corporation has a little bit deccrease in asset turnover in 2009. In 2008,
either the sales were comparatively better or less investment was made on the
assets side. But in 2009, it looks as if the sales volume has faced a little set back
or the ABC corp. has made investment on its assets.

Gross Profit Margin

This ratio shows gross profit as percentage of net sales. This can be computed
by dividing gross profit on net sales.
Mathematically, Gross profit margin = Gross Profit x 100
Net Sales
Gross profit margin is affected by cost of goods, which were sold. If cost of goods
is controlled and minimized, gross profit will be higher.
This ratio tells the profit of the firm relation on sales, after deduction of the cost of
producing goods. It is a measure of the efficiency of the firm’s operation, as well
as an indication of how products are priced.

2008: 11.2%
2009: 12%

Interpretation
Gross profit margin ratio show the profit of the organization after deducting the
cost incurred. Gross profit margin ratio of ABC corporation for the years 2008-
2009 shows that they have a reasonable and handsome profit after the over all
cost incurred to generate this profit. The ratio has moved from 11.2% to 12%
meaning that ABC will have favorable net income at the end after paying the
expenses required for generating the income. But as the nature of Business they
have to increase their gross profit in order to have as much as possible. After this
activity they will be able to pay their liabilities and the organization too will have
maximum for re-investment and other heads of expenses.

EBIT
EBIT is an acronym for Earnings Before Interest and Taxes. It is commonly used
by investors to compare companies. EBIT is a measure of the profitability of the
company. The larger the EBIT value, the more profitable the company is likely to
be.

EBIT is used by investors because the tax structure and financing structure of the
companies being compared may be very different. These accounting techniques
could possibly affect the final profit amount and mask the actual operating
efficiency of the firm. EBIT is used to find the most profitable company in terms of
the efficiency of its operation.

2008: Rs. 9692473

2009: Rs. 7011186

Interpretation
ABC Corp. had good performance in 2008 as compared to 2009 as the EBIT in
2008 is greater in amount than that of in 2009.i.e, Rs. 9692473 > Rs. 7011186.

Net Profit Margin

A more specific measure of sales profitability is the net profit margin.

Net profit margin = Net Income after taxes * 100 / Net Sales
The net profit margin is a measure of the firms’ profitability of sales after taking
account of all expenses and Taxes. It tells a firm’s net income per Rupee of
sales.

2008: 5.7%
2009: 1.8%

Interpretation
Net profit margin ratio shows the ability of the organization to generate maximum
net income after the overall business activities. Net profit margin ratio of ABC
Corp. for the years 2008-2009 shows that not enough and un-favorable net
income is generated after the year-end activities. Less net income for ABC Corp.
means that the policyholders will have their payments at delayed time, the
organization will have a too less budget for the marketing and promotional
activities. On the other hand in current arena of competition, they cannot have
modern and new tools and equipments to provide every type of services to the
customers.

Return on Investment
The second group of profitability ratios relates profits to investment. One of these
measures is the rate of return on investment (ROI), or return on assets.
This ratio measures the profitability of assets regardless of the Capital structure.
Mathematically, ROI = Net Income after Taxes
Total assets

2008: 9.1%
2009: 1.9%

Interpretation
Return on investment show the extent to which an organization get back in
access of what they had invested. Return on investment ratio of ABC Corp. for
the years 2008-2009 shows that the return they are getting back on their
investment has significantly decreased in 2009.

Return on Equity
Indicates the earning power of equity, return on equity compares net profit after
taxes to the equity that shareholders have invested in the firm.
ROE = Net Income after Taxes x 100
Shareholder’s Equity
This ratio tells the earning power on shareholders’ book value investment and is
frequently used. A high return on equity often reflects the firm’s effective expense
management.

2008: 136%
2009: 35%

Interpretation
Return on equity ratio show the extent to which an organization get back through
the investment of equity. Return on equity ratio of ABC Corp. for the years 2008-
2009 shows that they have got an un-favorable position in 2009. It is a bad sign
for ABC Corp. because on one hand the shareholders will be getting less and it
will also negatively affect to the net income of the organization as well.