INTRODUCTION

OBJECTIVE:
To understand the information contained in financial statements with a view to k
now 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 differ
ent decisions regarding the operations of the firm.
RATIO ANALYSIS:
Fundamental Analysis has a very broad scope. One aspect looks at the general (qu
alitative) factors of a company. The other side considers tangible and measurabl
e factors (quantitative). This means crunching and analyzing numbers from the fi
nancial statements. If used in conjunction with other methods, quantitative anal
ysis can produce excellent results. Ratio analysis isn't just comparing differen
t 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 individua
l values and relate them to how a company has performed in the past, and might p
erform in the future.
MEANING OF RATIO:
A ratio is one figure express in terms of another figure. It is a mathematical y
ardstick that measures the relationship two figures, which are related to each o
ther 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 anot
her. 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 “ so many times”. As accounting ratio is an expr
ession relating two figures or accounts or two sets of account heads or group co
ntain 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 gr
oup 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 d
isposal of an annalist but their group of ratio he would prefer depends on the p
urpose and the objective of analysis. While a detailed explanation of ratio anal
ysis 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 ra
tio 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. B
y comparing the leverage ratios of two companies, you can determine which compan
y uses greater debt in the conduct of its business. A company whose leverage rat
io is higher than a competitor's has more debt per equity. You can use this info
rmation to make a judgment as to which company is a better investment risk. Howe
ver, you must be careful not to place too much importance on one ratio. You obta
in a better indication of the direction in which a company is moving when severa
l ratios are taken as a group.
OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organizationA) So
lvency1) Long term 2) Short term 3) Immediate B) Stability
C) Profitability D) Operational efficiency E) Credit standing F) Structural anal
ysis G) Effective utilization of resources H) Leverage or external financing
FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more variables / acco
unting figures, such relationship can be expressed in different ways as follows
– A] As a pure ratio: For example the equity share capital of a company is Rs. 2
0,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity sha
re 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 descr
ibed 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. sothe ratio of credit
sales to cash sales can be described as 2.5 [30,00,000/12,00,000] or simply by s
aying 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 item.
For example, net sales of the firm are Rs.50,00,000 & the amount of the gross pr
ofit 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] Com
paring the ratio with some predetermined standards. The standard ratio may be th
e past ratio of the same firm or industry’s average ratio or a projected ratio o
r the ratio of the most successful firm in the industry. In interpreting the rat
io 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.
TYPES OF COMPARISONS
The ratio can be compared in three different ways – 1] Cross section analysis: O
ne of the way of comparing the ratio or ratios of the firm is to compare them wi
th the ratio or ratios of some other selected firm in the same industry at the s
ame 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 t
o find out as to how a particular firm has performed in relation to its competit
ors. The firms performance may be compared with the performance of the leader in
the industry in order to uncover the major operational inefficiencies. The cros
s section analysis is easy to be undertaken as most of the data required for thi
s 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 ev
aluated over a period of time. By comparing the present performance of a firm wi
th the performance of the same firm over the last few years, an assessment can b
e 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 i
s 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 be
havior & pattern of ratio, then meaningful & comprehensive evaluation of the per
formance 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 exa
mple, the ratio of operating expenses to net sales for firm may be higher than t
he 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.
PRE-REQUISITIES TO RATIO ANALYSIS
In order to use the ratio analysis as device to make purposeful conclusions, the
re are certain pre-requisites, which must be taken care of. It may be noted that
these prerequisites are not conditions for calculations for meaningful conclusi
ons. 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 statem
ents from where data is taken must be same. 2) If possible, only audited financi
al statements should be considered, otherwise there must be sufficient evidence
that the data is correct. 3) Accounting policies followed by different firms mus
t be same in case of cross section analysis otherwise the results of the ratio a
nalysis 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 conduc
tive 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 purpo
se of calculating a ratio.
CLASSIFICATION OF RATIO
CLASSIFICATION OF RATIO
BASED ON FINANCIAL STATEMENT
BASED ON FUNCTION
BASED ON USER
1] BALANCE SHEET RATIO 2] REVENUE STATEMENT RATIO 3] COMPOSITE RATIO
1] LIQUIDITY RATIO 2] LEVERAGE RATIO 3] ACTIVITY RATIO 4] PROFITABILITY RATIO 5]
COVERAGE RATIO
1] RATIOS FOR SHORT TERM CREDITORS 2] RATIO FOR SHAREHOLDER 3] RATIOS FOR MANAGE
MENT 4] RATIO FOR LONG TERM CREDITORS
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 d
ebt 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, Liqui
d ratio, and Proprietory ratio, Capital gearing ratio, Debt equity ratio, and St
ock working capital ratio. 2] Revenue ratio: Ratio based on the figures from the
revenue statement is called revenue statement ratios. These ratio study the rel
ationship between the profitability & the sales of the concern. Revenue ratios a
re Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net ope
rating profit ratio, Stock turnover ratio. 3] Composite ratio: These ratios indi
cate the relationship between two items, of which one is found in the balance sh
eet & other in revenue statement. There are two types of composite ratiosa) Some
composite ratios study the relationship between the profits & the investments o
f the concern. E.g. return on capital employed, return on proprietors fund, retu
rn 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 liqu
idity ratios, leverage ratios, activity ratios, profitability ratios & turnover
ratios. 1] Liquidity ratios: It shows the relationship between the current asset
s & 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 eq
uity ratios, & Proprietory ratios. 3] Activity ratios: It shows relationship bet
ween the sales & the assets. It is also known as Turnover ratios & productivity
ratios e.g. stock turnover ratios, debtors turnover ratios. 4] Profitability rat
ios: a) It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios b) It shows t
he relationship between profit & investment e.g. return on investment, return on
equity capital. 5] Coverage ratios: It shows the relationship between the profi
t 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, retu
rn on equity capital 3] Ratios for management: Return on capital employed, turno
ver 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-ter
m (usually up to 1 year) obligations. The ratios, which indicate the liquidity o
f a company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These rat
ios are discussed below
CURRENT RATIO
Meaning: This ratio compares the current assests with the current liabilities. I
t 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 assets Current ratio = Cur
rent 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 peri
od time, normally not exceeding one year. The current liabilities defined as lia
bilities which are short term maturing obligations to be met, as originally cont
emplated, with in a year. Current ratio (CR) is the ratio of total current asset
s (CA) to total current liabilities (CL). Current assets include cash and bank b
alances; inventory of raw materials, semifinished and finished goods; marketable
securities; debtors (net of provision for bad and
doubtful debts); bills receivable; and prepaid expenses. Current liabilities con
sist of trade creditors, bills payable, bank credit, provision for taxation, div
idends payable and outstanding expenses. This ratio measures the liquidity of th
e current assets and the ability of a company to meet its short-term debt obliga
tion. CR measures the ability of the company to meet its CL, i.e., CA gets conve
rted 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 mon
ths with liabilities, which will be due for payment in the same period and is in
tended to indicate whether there are sufficient short-term assets to meet the sh
ort- term liabilities. Recommended current ratio is 2: 1. Any ratio below indica
tes 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 asset
s.
LIQUID RATIO:
Meaning: Liquid ratio is also known as acid test ratio or quick ratio. Liquid ra
tio compare 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, whi
ch can be converted into, cash immediately or at a short notice without diminuti
on of value. Formula: 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 imme
diately without any value strength. QA includes cash and bank balances, short-te
rm 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 witho
ut relying on the sale of inventory. This is a fairly stringent measure of liqui
dity because it is based on those current assets, which are highly liquid. Inven
tories 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 co
nsidered 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 s
ecurities Cash ratio = Total current liabilities
Since cash and bank balances and short term marketable securities are the most l
iquid 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 af
fect the profitability of the firm.
INVESTMENT / SHAREHOLDER
EARNING PER SAHRE:Meaning: 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 numb
er of equity shares. EPS measures the profits available to the equity shareholde
rs on each share held.
Formula: NPAT Earning per share = Number of equity share The higher EPS will att
ract more investors to acquire shares in the company as it indicates that the bu
siness 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 retai
ns some profits for the business
DIVIDEND PER SHARE:Meaning:
DPS shows how much is paid as dividend to the shareholders on each share held. F
ormula: Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Or
dinary Shares
DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship bet
ween the dividend paid to equity shareholders out of the profit available to the
equity shareholders.
Formula: Dividend per share
Dividend Pay out ratio =
Earning per share
*100
D/P ratio shows the percentage share of net profits after taxes and after prefer
ence dividend has been paid to the preference equity holders.
GEARING
CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equit
y shareholders return through the use of debt. Equity shareholders earn more whe
n the rate of the return on total capital is more than the rate of interest on d
ebts. This is also known as leverage or trading on equity. The Capital-gearing r
atio 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 & eq
uity 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 oper
ating expenses and provide more returns to its shareholders. The relationship be
tween 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 p
rofit 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 a
fter the manufacturing costs have been met. It measures the efficiency of produc
tion 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 i
s 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 NET PROFIT RATIO:Meaning: N
et 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 rati
o = * 100 * 100
Net sales This ratio shows the net earnings (to be distributed to both equity an
d preference shareholders) as a percentage of net sales. It measures the overall
efficiency of production, administration, selling, financing, pricing and tax m
anagement. Jointly considered, the gross and net profit margin ratios provide an
understanding of the cost and profit structure of a firm. RETURN ON CAPITAL EMP
LOYED: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 th
e capital employed comprises of shareholder funds plus long-term debts. Alternat
ively it can also be defined as fixed assets plus net working capital. Capital e
mployed refers to the long-term funds invested by the creditors and the owners o
f a firm. It is the sum of long-term liabilities and owner s equity. ROCE indica
tes the efficiency with which the long-term funds of a firm are utilized.
Formula: NPAT Return on capital employed = Capital employed *100
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 g
oods sold and levels of investment in various assets. The important turnover rat
ios are debtors turnover ratio, average collection period, inventory/stock turno
ver ratio, fixed assets turnover ratio, and total assets turnover ratio. These a
re described below:
DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net cred
it sales by average debtors outstanding during the year. It measures the liquidi
ty 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 begin
ning and at the end of the year. This ratio shows how rapidly debts are collecte
d. The higher the DTO, the better it is for the organization. Formula: Credit sa
les Debtors turnover ratio = Average debtors
INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of tim
es the inventory is sold and replaced during the accounting period. Formula: COG
S Stock Turnover Ratio = Average stock
ITR reflects the efficiency of inventory management. The higher the ratio, the m
ore 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 tak
en. In general, averages may be used when a flow figure (in this case, cost of g
oods sold) is related to a stock figure (inventories).
FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of in
vestment in fixed assets. Formula: Net sales Fixed assets turnover = Net fixed a
ssets 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 l
ow ratio reflects an inefficient use of assets. However, this ratio should be us
ed with caution because when the fixed assets of a firm are old and substantiall
y depreciated, the fixed assets turnover ratio tends to be high (because the den
ominator of the ratio is very low).
PROPRIETORS RATIO: Meaning: Proprietary ratio is a test of financial & credit st
rength 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, P
roprietary ratio determines as to what extent the owner’s interest & expectation
s are fulfilled from the total investment made in the business operation. Propri
etary ratio compares the proprietor fund with total liabilities. It is usually e
xpressed in the form of percentage. Total assets also know it as net worth. Form
ula: Proprietary fund Proprietary ratio = OR
Total fund
Shareholders fund Proprietary ratio = Fixed assets + current liabilities
STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between
the closing stock & the working capital. It helps to judge the quantum of invent
ories in relation to the working capital of the business. The purpose of this ra
tio is to show the extent to which working capital is blocked in inventories. Th
e ratio highlights the predominance of stocks in the current financial position
of the company. It is expressed as a percentage. Formula: Stock Stock working ca
pital 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 bl
ocked in stock. If investment in stock is higher it means that the amount of liq
uid assets is lower.
DEBT EQUITY RATIO: MEANING: This ratio compares the long-term debts with shareho
lders fund. The relationship between borrowed funds & owners capital is a popula
r measure of the long term financial solvency of a firm. This relationship is sh
own by debt equity ratio. Alternatively,
this ratio indicates the relative proportion of debt & equity in financing the a
ssets 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
Debt equity ratio is also called as leverage ratio. Leverage means the process o
f the increasing the equity shareholders return through the use of debt. Leverag
e 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 ‘ inves
tment ratio’. This ratio indicates the relationship between net profit earned &
total proprietors funds. Return on proprietors fund is a profitability ratio, wh
ich the relationship between profit & investment by the proprietors in the conce
rn. Its purpose is to measure the rate of return on the total fund made availabl
e by the owners. This ratio helps to judge how efficient the concern is in manag
ing the owner’s fund at disposal. This ratio is of practical importance to prosp
ective investors & shareholders. Formula: NPAT Return on proprietors fund = Prop
rietors fund * 100
CREDITORS TURNOVER RATIO: It is same as debtors turnover ratio. It shows the spe
ed 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 purchas
e Credit turnover ratio = Average creditors
Months in a year Average age of accounts payable = Credit turnover ratio
Both the ratios indicate promptness in payment of creditor purchases. Higher cre
ditors turnover ratio or a lower credit period enjoyed signifies that the credit
ors are being paid promptly. It enhances credit worthiness of the company. A ver
y 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 impor
tance 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 o
f the following aspects:
1] Liquidity position, 2] Long-term solvency, 3] Operating efficiency, 4] Overal
l profitability, 5] Inter firm comparison 6] Trend analysis.
1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn r
egarding the liquidity position of a firm. The liquidity position of a firm woul
d 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 i
f 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 reflect
ed in the liquidity ratio of a firm. The liquidity ratio are particularly useful
in credit analysis by bank & other suppliers of short term loans.
2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-t
erm financial viability of a firm. This respect of the financial position of a b
orrower 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 lev
erage/ capital structure & profitability ratio Ratio analysis s that focus on ea
rning power & operating efficiency. Ratio analysis reveals the strength & weakne
sses 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 t
he 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 vie
wpoint of management, is that it throws light on the degree of efficiency in man
agement & utilization of its assets. The various activity ratios measures this k
ind of operational efficiency. In fact, the solvency of a firm is, in the ultima
te analysis, dependent upon the sales revenues generated by the use of its asset
s- total as well as its components. 4] OVERALL PROFITABILITY: Unlike the outside
s parties, which are interested in one aspect of the financial position of a fir
m, the management is constantly concerned about overall profitability of the ent
erprise. 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 reason
able 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 considere
d 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 m
easures. This is made possible due to inter firm comparison & comparison with th
e 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 com
pare the ratios of a firm with the industry average. It should be reasonably exp
ected 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 eithe
r with the industry average or with the those of the competitors, the firm can s
eek to identify the probable reasons & in light, take remedial measures. 6] TREN
D ANALYSIS: Finally, ratio analysis enables a firm to take the time dimension in
to account. In other words, whether the financial position of a firm is improvin
g or deteriorating over the years. This is made possible by the use of trend ana
lysis. 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 f
avorable or unfavorable. For example, the ratio may be low as compared to the no
rm but the trend may be upward. On the other
hand, though the present level may be satisfactory but the trend may be a declin
ing one.
ADVANTAGES OF RATIO ANALYSIS
Financial ratios are essentially concerned with the identification of significan
t accounting data relationships, which give the decision-maker insights into the
financial performance of a company. The advantages of ratio analysis can be sum
marized as follows: Ratios facilitate conducting trend analysis, which is impo
rtant for decision making and forecasting. Ratio analysis helps in the assessm
ent of the liquidity, operating efficiency, profitability and solvency of a firm
. Ratio analysis provides a basis for both intra-firm as well as inter-firm co
mparisons. The comparison of actual ratios with base year ratios or standard r
atios helps the management analyze the financial performance of the firm.
LIMITATIONS OF RATIO ANALYSIS
Ratio analysis has its limitations. These limitations are described below: 1] In
formation problems
Ratios require quantitative information for analysis but it is not decisive ab
out analytical output . The figures in a set of accounts are likely to be at l
east several months out of date, and so might not give a proper indication of th
e company’s current financial position. Where historical cost convention is us
ed, asset valuations in the balance sheet could be misleading. Ratios based on t
his 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.
When comparing performance over time, there is need to consider the changes i
n technology. The movement in performance should be in line with the changes in
technology. Changes in accounting policy may affect the comparison of results
between different accounting years as misleading.
3] Inter-firm comparison Companies may have different capital structures and t
o make comparison of performance when one is all equity financed and another is
a geared company it may not be a good analysis. Selective application of gover
nment incentives to various companies may also distort intercompany comparison.
comparing the performance of two enterprises may be misleading. Inter-firm com
parison may not be useful unless the firms compared are of the same size and age
, and employ similar production methods and accounting practices. Even within
a company, comparisons can be distorted by changes in the price level. Ratios
provide only quantitative information, not qualitative information. Ratios are
calculated on the basis of past financial statements. They do not indicate futu
re trends and they do not consider economic conditions.
PURPOSE OF RATIO ANLYSIS: 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: Liquidity – the ability of the firm to
pay its way Investment/shareholders – information to enable decisions to be m
ade on the extent of the risk and the earning potential of a business investment
Gearing – information on the relationship between the exposure of the busines
s to loans as opposed to share capital Profitability – how effective the firm
is at generating profits given sales and or its capital assets Financial – the
rate at which the company sells its stock and the efficiency with which it uses
its assets
ROLE OF RATIO ANALYSIS:
It is true that the technique of ratio analysis is not a creative technique in t
he 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 achiev
ed 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 t
heir profitability & efficiency of performance, either individually or in relati
on to those of other firms in the same industry. The process of this appraisal i
s not complete until the ratio so computed can be compared with something, as th
e 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 managemen
t to impart the basic functions like planning & control. As the future is
closely related to the immediate past, ratio calculated on the basis of historic
al financial statements may be of good assistance to predict the future. Ratio a
nalysis also helps to locate & point out the various areas, which need the manag
ement attention in order to improve the situation. As the ratio analysis is conc
erned with all the aspect of a firms financial analysis i.e. liquidity, solvency
, activity, profitability & overall performance, it enables the interested perso
ns to know the financial & operational characteristics of an organisation & take
the suitable decision.
EVALUATION OF APLAB LIMITED THROUGH RATIO
COMPANY PROFILE THE COMPANY –
APLAB Limited is a professionally managed Public Limited company quoted on the B
ombay Stock Exchange. Since its inception in 1962, APLAB has been serving the gl
obal market with wide range of electronic products meeting the international sta
ndards for safety and reliability such as UL, VDE etc. They specialize in Test a
nd Measurement Equipment, Power Conversion and UPS Systems, Self-Service Termina
ls for Banking
Sector and Fuel Dispensers for Petroleum Sector. APLAB enjoys worldwide recognit
ion for the quality of its products, business integrity and innovative engineeri
ng skills.
ABOUT APLAB: Aplab started its operation in October 1962. It is a profession
ally managed 40 years old public limited company. It is quoted on BOMBAY STOCK
EXCHANGE. It serves customer global customer par excellence. It specialized
in Test & measurement instruments, power conversion, & UPS & fuel dispensers fo
r petroleum sector. It enjoys worldwide recognition for the quality of its bus
iness integrity & innovative engineering skills.
MISSION: To deliver high quality, carefully, engineered products, on time, wit
h in budget, as per the customer specification in a manner profitable to both, o
ur customers & so to us.
VISION: To be a global player, recognized for quality & integrity. To be the
TOP INDIAN COMPANY as conceived by our customers. To be “ THE BEST ” company
to work for, as rated by our employees.
GOAL: Goal at Aplab is extract ordinary customer service as we provide our cus
tomer needs in the personal service industry.
CORPORATE MISSION – 1] To achieve healthy and profitable growth of the company i
n the interest of our customers & the shareholders.
2] To encourage teamwork, reward innovation and maintain healthy interpersonal r
elations 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.
VALUES & BELIEFS: Their values & beliefs required that they -
 Treat employees with respect & give them an opportunity for input on how to co
ntinuously improve their service goals. Offer opportunities for growth, profes
sional development & recognition. Provide most effective & corrective action,
to resolve customer service issues, to ensure customer satisfaction. Foster an
open door policy, which encourages interaction, discussion & ideas to improve w
ork environment & increase productivity. “ Do it right the first time & 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 health
y 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 sol
ution provider. After completing three years in the new era, we can say with pri
de that we have been delivering our promises to our customers and the shareholde
rs. APLAB has entered the field of Professional Services starting with the Banki
ng and the Petroleum Industry. Focus on developing embedded system software has
been also enhanced. We believe that professional services sector is poised to gr
ow at a very rapid pace.
QUALITY IS OUR WORK CULTURE - ISO 9001:2000
Quality at APLAB is a part of our people’s attitude. Entire organization is comm
itted to create an environment that encourages individual excellence and a perso
nal commitment to quality. In APLAB, “Quality is everybody’s 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: Aplab will deliver to its customer products & services that co
nsistently meet or exceed their requirement. Aplab will achieve this by total
commitment & involvement of every individual. Aplab will encourage its employe
es & suppliers to develop quality products prevent defects & make continual impr
ovement in all processes.
QUALITY OBJECTIVE: Aplab is an ISO 9001:2000 certifies company. 100% custome
r satisfaction. On time delivery every time reduction is out going PPM to 10,0
00 [4 sigma]
RESEARCH AND DEVELOPMENT
Developing innovative products with the latest technology is the core strength o
f 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 eng
ineers 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 compa
ny revenue in Research & Development activities. Specific areas in which the com
pany carries out R&D
1. Development of new product especially hi-tech intelligent product & electroni
c transaction control system. 2. Improvement in the existing products & producti
on processes, import substitution. 3. Development of products to suit exports ma
rkets. 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 stro
ng grip of technology. Almost all the products manufactured by the company are i
mport 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 pr
ocess. The ministry of science & technology, Government of India, recognizes the
company’s R&D. Through a continuous interaction with production& Quality Assura
nce
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 performanc
e / cost ratio.
FUTURE PLAN OF ACTION Major R&D activity is concentrated around up gradation of
product design & realignment of production processes to bring about improved qua
lity 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 & U
SA. Over 30 million U.S. Dollars worth of Power Systems and Test Instruments fro
m APLAB are today operational in UK, Germany, France, Sweden, Belgium, Canada, a
nd USA & Australia.
APLAB’S ORGANISATION CHART EXECUTIVE CHAIRMAN
MANAGING DIRECTOR
DIRECTOR [TECHNICAL - PE]
MAEKETING DIRECTOR
GENERAL MANAGER
FINANCE MANAGER
G.M PROD. & DESIGN
G.M. MARKETING
MATERIAL MANAGER
G.M. ELTRAC PROD.
G.M. DESIGN & DEVLOPMENT
OFFICERS
STAFF
WORKERS
PRODUCTS OF APLAB: a. TEST & MEASUREMENT INSTRUMENTS b. HIGH POWER AC SYSTEMS (U
PS, Frequency Converter, Inverter, Isolation Transformer) c. HIGH POWER DC SYSTE
MS (DC Power Supply, DC Uninterruptible Power Supply) d. ATM INSTACASH e. POWER
SUPPLIES, AC-DC POWER SUPPLY, DC/DC CONVERTERS, SMPS, INVERTERS, TRANSFORMER ATM
INSTACASH The Banking Automation Division of APLAB was launched in 1993, when w
e introduced INSTACASHIndia’s first indigenously manufactured ATM INSTACASH demo
nstrated APLAB’s skills in design, hardware manufacturing and software integrati
ons. 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 Del
ivery Systems, MICR Cheque Processing and Smart Card based solutions. The latest
is STABILIZER, LINE CONDITIONER, ISOLATION
IMAGEENABLED Cheque Processing solution- QUICKCLEAR.
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