Report

On
Ratio Analysis
Jaipur Saras Dairy

Facility Guide Company

Guide
Prof. S.k.kapoor R. N.
Mittal

Dinesh Kumar Choudhary

JKBSchool, Gurgaon
Jkbs090417
 ACKNOWLEDGEMENT

I take the opportunity to express my sincere gratitude

and ineptness to Mr. L. K. Kaushik the managing director
of Jaipur Dairy who gave me the chance of doing my
summer training in Jaipur Dairy.

I would like to thanks Mr. D. C. MISHRA (sub M.D.) who

gave me this challenging project.
I am grateful to Mr. R. N. MITTAL DY. Manager (F&A),
Jaipur dairy for his valuable advice during the entire
project. He devote his valuable time regularly and always
become a good listener for my feedback. He suggested
me for better way. His friendly behavior and willingness
to help has done much of the work.

Finally I would like to thank the entire staff of Jaipur dairy

for their co-operation.

Dinesh Kumar Choudhary

MBA Part 1st year
JKBSchool, gurgoan
 PREFACE

Financial analysis of any organization is done through

analysis of its financial statement. Financial statement
provides valuable information of past performance and
present position of the company and is considered as
‘blue print of the company’.

In this study, a sincere attempt has been made to analyze

the working of Jaipur Dairy making use of different
financial appraisal technique like Ratio analysis, Trend
analysis, Common size balance sheet analysis etc; the
period of study was 2 year i.e. 2005-06 & 2006-07. The
date for the study obtained from published annual report
of the company. An effort has been made to appraise the
overall financial performance and efficiency of
management, but the scope and depth of study remained
limited due to limiting factors of time, and resources.
However, it is expected that the study will provide useful
information for the better and easier understanding of the
financial result of the company.

This study has been divided into 5 chapters. The first

chapter has been devoted to introduction and brief profile
and last to the summary of conclusion and
recommendation. The second chapter provides the tests
for the judging the profitability and analysis of working
result of the company. In the chapter three analysis of
company’s performance through ratio analysis and fourth
chapter deals with graphics presentation of financial
performance of Jaipur dairy.

PROJECT OBJECTIVE

CONCEPTUAL

 To prepare a report after analysis and interpretation

of finding from balance sheet as well profit and loss
account through applying various mathematical and
financial tool and techniques.
 To get the practical knowledge about all the things
and aspect which we learn during our MBA part one
in 1st Semester

FUNCTIONAL

 The present earning capacity or profitability of Jaipur

Dairy.

 The operational efficiency of Jaipur Dairy.

 The short term and long term solvency.

 The financial position of a business.

 The possibility of development in the future by
making forecast and preparing budget.

 To facilitates inter-firm and intra-firm comparison

 JAIPUR DAIRY AN OVERVIEW

BRIEF HISTORY
OBJECTIVES
ORGINISATION HISTORY
FINANCIAL ANALYSIS

FINANCIAL STATEMENT CONCEPT

BALANCE SHEET
INCOME STATEMENT
STATEMENT OF CHANGES IN FINANCIAL STATEMENT
PARTIES INTRESTED

FINANCIAL APPRAISAL
CONCEPT
NEED OF FINANCIAL APPRAISAL
TOOLS AND TECHNIQUE OF FINANCIAL APPRAISAL
ACCOUNTING TECHIQUES

INTRODUCATION
JAIPUR DAIRY AN OVERVIEW

BRIEF HISTORY
Dairy Development was initiated by the state Government in the
early seventies under the auspices of Rajasthan State Dairy
Development Corporation (RSDDC) registered in 1975. Two
years later RCDF assumed responsibility for the functions of
RSDD. It became the nodal agency for implementation of
operation flood in the state.

Rajasthan Cooperative Dairy Federation (FCDF) set up in

1977 as the implementing agency for dairy development
programmers in Rajasthan is registered as a society under the
Rajasthan co-operative societies act 1965.

Towards fulfillment of the national object of making India self

sufficient in milk production small step was taken in March 1975
and Jaipur Zila Dugdh Utpadak Sakhari Sangh Limited. (Jaipur
Dairy) was registered under the co-operative act 1965 to work in
Jaipur district. Initially this union did not have the processing
facilities. It started with a model beginning of procuring 250 ltr. Of
milk per day.
In June 1981, Jaipur dairy plant was commissioned as a unit of
Rajasthan co-operative dairy federation ltd. Jaipur for processing
and manufacturing milk and milk products. The initial handling
capacity of dairy plant was 1.5 lakh ltr per day with a powder
plant of 15 MT per day capacity. Processing facilities of dairy plant
presently include multifarious activates like chilling,
pasteurization, standardization, sterilion, production of ghee,
table butter, skimmed milk nankeen chach, lassie, pannier,
shrikhand, aseptic milk and powder.

The dairy procures milk through his network of more than 700
villages’ level dairy co-operative societies spread in Jaipur and
Dausa district. Dairy arranges transportation of milk from
doorsteps milk producers to the receiving points at a dairy plant
and its chilling centers. Payment of milk is distributed to the milk
producers on a ten day basis.
Procreant and input activities include farmers organization, input
services like animals health coverage and supply of balance cattle
feed and improved fodder seeds to the members, co-operative
development programme, training etc. in 1992, the Jaipur dairy
plant was handed over to Zila Dugdh Utpadak Sahakari Sangh
(Jaipur milk union) with the multiple increases in market of milk
and milk product and also in milk procurement. The capacity of
the plan was increased to 2.5 lakh ltr per day in 1998-99 to
improve the quality or raw milk the dairy has commissioned three
chilling centers at Kaladera, Dudu & Shahapura apart from
enhancing the capacity Dausa milk chilling center.

Over the year, there has been not looking back for Jaipur dairy
and the significant growth has been achieved during the year
1998-99 monthly average of milk sale has been 143000 Ltr per
day with peak milk procurement during besides the near by sale
milk unions like Sikar, Tonk, Swaimadhopur and Bharatpur also
send their milk to Jaipur dairy for processing during peak flush
season.
PRODUCTS

The “SARAS” range:

Fresh Milk Long shelf
life milk (UHT)

DTM Skimmed Milk

Toned Double Toned Milk

Standard Toned Milk (Taaza)

Full Cream Cow Milk

Skimmed

Camel Milk

Fresh Milk Products Long Shelf Life Milk

Products

Chaach Ghee

Lassi Cow Ghee

Dahi Table Butter

Paneer SMP

Shrikhand WMP

Icecream Cheese

Rasgulla Dairy Whitener

Flavored Milk White Butter

Mawa

Cattle Feed

Balanced feed
High energy

Mineral Mixture

Urea Molasses Brick (UMB)

Today Jaipur dairy provides liquid milk of four types name

• Toned

• Double toned

• Standard and Gold (Full cream) and

• Various products like Ghee, Paneer table butter, chach, lassi,

shrikhand in the district of Jaipur & Dausa and also contbutes
grid. Its sale tetra packs milk throughout the country.

The plant is managed and operated by will-qualified, competent

and experienced, managerial cadre and highly motivated work
force to provide highest quality of product and best of services to
its esteemed customers.

To further improve the efficiency and efficiency and effectiveness

of the plant performance, Jaipur Dairy (Jaipur Zila Dugdh Utpadak
Sahakari Sangh Ltd., Jaipur) had earlier obtained the Quality
Management Systems Certification as per ISO 9002:1994 in
combination with IS: 15000 (HACCP) in the year 2000. Now the
dairy has upgraded the system in accordance with ISO:9001:2000
in combination with (HACCP) as per IS: 15000:1998.
OBJECTIVES

The primary concern of Jaipur dairy is to provide best quality and

safe products and services, achieved this quality objectives of
Jaipur dairy are designed to

 Meet a well defined needs use and purpose of costumer.

 Satisfy customer’s expectation for good and safe milk and

milk products.

 Comply with applicable national and international standard.

 Make available milk and milk products at comparative price.

 Ensuring implementation of ISO 9002 quality management

system.

 Application ad adherence of HACCP principal for food safety.

 Motivates employees for professional excellence and

participation.
QUALITY POLICY

The Jaipur dairy believes that the delighted customer is the only
key for overall development of the organization

This is achieved by:-

 Educating milk products for clean milk production.

 Manufacturing and supplying milk and milk products and

services of consistent quality at comparative price.

 Adoptive innovate and modern technologies and system.

 Developing committed workforce.

 Adoption of safety and environment friendly standards with

help of application of HACCP principals.
 ORAGANIZATION MEMBERS
1) JAIPUR DAIRY jaipurdairy@jaipurdairy.com
2) Shri. Om Prakash Punia,
ompunia@jaipurdairy.com
Chairman
3) Sh. L.K Kaushik, Managing
lkkaushik@jaipurdairy.com
Director
4) Sh. Anil Shukla, Manager (QC) anilshukla@jaipurdairy.com
5) Sh. S. K. Mahajan, Manager
skmahajan@jaipurdairy.com
(Plant)
6) Sh.C.P. Mittal Manager (APS). cpmittal@jaipurdairy.com
7) Sh R.D Kaushik, Manager (FOP) rdkaushik@jaipurdairy.com
8) Sh H.P Sharma, Dy Manager ( HQ
hpsharma@jaipurdairy.com
& Computer)

9) Sh. Govind Gupta, Dy Manager

( Marketing)
10) Sh. R. N. Mittal, OIC (F & A)
11) Sh. Rakesh Gupta, OIC (F & A)
12) Dr. D.C. Mishra , OIC (Input)
13) Sh. HL Agrawal, OIC (Engg)
14) Sh. KC Kabra, Dy.Mgr(P&A)
15) Sh. Anil Gaur, Public Relation
Officer
govindgupta@jaipurdairy.com
rnmittal@jaipurdairy.com
rgupta@jaipurdairy.com
dcmishra@jaipurdairy.com
hlagrawal@jaipurdairy.com
kckabra@jaipurdairy.com
anilgaur@jaipurdairy.com
16) Sh. Vijay Gupta, OIC (Purchase) vijaygupta@jaipurdairy.com
17) Sh PS Chaudhary, OIC (Store) pschaudhary@jaipurdairy.com
18) Sh. H. S. Sharma, OIC (MIS) hssharma@jaipurdairy.com
19) Sh. Avinash Jain OIC( Powder
avinashjain@jaipurdairy.com
plant)
20) Sh. PK Satsangi OIC WDP pksatsangi@jaipurdairy.com
21) Sh. Sanjay Mehan OIC(APS) smehan@jaipurdairy.com
22) Sh. Bipin Sharma Dy. Mgr bipin@jaipurdairy.com
23) Sh. Mahesh Gurnani OIC ( Milk
maheshgurnani@jaipurdairy.com
Packing)
24) Sh. Sunil Kumar, OIC (Milk
sunilkumar@jaipurdairy.com
Processing)

As far as the organizational structure of RCDF (Saras) is

concerned we can say that the federation is a state Level Apex
co-operative Organization owned by its member unions each of
which, in turn, is owned the dairy co-operative societies in its area
of operation which are themselves owned by farmer members.

The federation has a board of directors which has overall

responsibility for the planning policies, financial resource
mobilization and management, member and public relations as
well as liaison with agencies of the state and central Government,
financing institutions etc. The federation has chief Executive
designed as Managing Director.
The organization operates on three tier system where in farmer
members own diary co-operative societies (DCS) which own
district milk producers union. The unions collectively own the
RCDF.

It is a vertically integrated structure that established a direct

linkage between those who produce the milk and those who
consume it.

Federation provides services and support to union. Marketing with

in and outside State. Liaison with government and NGO agencies,
mobilization of resources and co-ordination planning programmes
or project.
Union-develops village milk co-operatives networks procure milk
from DCS, process and markets. Sales of cattle feed and related
inputs, promotions of cross breeding through AI and NS promotion
of fodder development and general supports and supervision to
DCS.

DCS – provides input services (AH,AI) to its members and

procurement of milk.

SERVICES

Quality

Jaipur dairy has got a sophisticated quality Control Laboratory,

which is equipped to carry out almost all the chemical and
bacteriological tests related with milk and milk products. The QC
Lab also carries quality tests for various packaging material,
ingredients, and chemicals used in Jaipur Dairy. The service of the
quality control lab is also used for carrying our consumer
awareness programs like “Dudh ka Pani Ka Pani”. We also have
facility for general public for getting their milk or Ghee samples
tested in our quality control lab free of cost.

Engineering

The lifeline of Jaipur dairy i.e. steam, water and refrigeration is

provided and maintained by the Engineering section. Apart from
this section does regular maintenance both preventive and
corrective only. Considering the perishable nature of milk, the
engineering section has to be on its toes always.

The section is managed by will – qualified and experienced

manpower, which are at par with any professional organization.

Human Resource Development

Jaipur dairy has always considered its staff member as an asset.
Various programs are run on continuous basis for keeping the
morale of employees high. Without the positive support of the
employees, the success story of Jaipur Dairy would not have been
possible.

Yearly Get-together of all officers and employees is one of the

most important events of Jaipur Dairy.

For the last few years, more emphasis is being given on

employees ‘training in the field of Attitude, Customer Relations,
Positive Thinking, Time Management, Stress Management and
Team Building etc; apart from technical subjects. Employees are
being made aware of such subjects either by nominating them to
various training organizations and workshops and seminars. Also
experts are being invited to conduct in house workshops and
seminars. Jaipur Dairy has h HRD cell also, which circulate good
and readable articles to employees for self-development.
 ACTIVITIES

This Dairy procures milk through its strong network of over 1200
village level Dairy Co-operative spread in Jaipur and Dausa
district. Dairy arranges transportation of milk from doorsteps of
milk producers to the receiving point at daily plant and its chilling
centers. Payments of milk are disbursed to the milk producers on
ten day basis.

Procurement and input activities include Farmer’s Organization;

input Services like Animal Health Coverage, Animal breeding
Programme, Supply of balanced cattle feed and improved high
yielding fodder seeds to the members, Co-operative institution
building, Women Dairy co-operative Leadership programme and
Training of DCS manpower and its Managing committee members
etc.
Processing facilities of the dairy plant presently include
multidimensional activities like chilling, Pasteurization,
standardization, sterilization, production of Ghee, Butter (Salted /
Unsalted) Skimmed Milk Powder (SMP), Indigenous fresh Milk
Product (Paneer, Shrikhand, Chhach (Plain / Salted), Lassi, Mawa
(Khoa) and Dahi (Plain / Mishti), and Aseptic Milk (Which was
handed over to Jaipur Dairy only in 1997-98).

To improve the quality of raw milk, the Dairy has commissioned

chilling centers and installed Bulk Coolers at various places in the
milk shed.
 WOMEN EMPOWERMENT

We have entered in the 21st centaury; still Backbone of our Indian

economy is primarily agriculture and animal husbandry. Most of
the activities and related to there two fields are done by women
but have contribution is not recognized at any level.

In dairy and animal husbandry sector, she is playing very

important role. But behind the screen, Jaipur dairy also identified
the significance of her role and started emphasizing on
participate increasing women participation by increasing women
membership and no of women in D.C.S. management committee.
It could yield only a mild positive impact. Jaipur Dairy in 1991
started RAJASTHAN WOMEN DAIRY PROJECT, supported by
Ministry of HRD Government of India. Under this project
exclusively women dairy co-operative societies were organized,
where member, management committee member, chairperson
secretary etc, were all women. Object of these projects was
society economic development of rural women. This project had
following programming literacy programme, health and Sanitation
programme, Employment programme, Awareness Generation
programme. All these activities were to be performed on women
Dairy co-operative Society plate form.
This program yielded very good results. Beside considerable
increase in income, income in literary level better adoptability of
Health and Hygiene practices. There is tremendous increase in
her awareness. She is more confident, better decision maker, self
reliant, ambitious and vocal. All these features were observed and
felicitated by the them US President Mr. Bill Clinton during his visit
to NAILA (Jaipur) where are our dairy women demonstrated not
only the working of on automatic milk collection station with
computers but also discussed will him the story of their storage
and success.
To system this impact and feature strengthening women dairy co-
operative Jaipur dairy started women dairy co-operative
leadership development. Program and co-operative institution
building program with. The help and support of National Dairy
Development Board, Jaipur. Objective of this program is again
strengthening of WDES and its numbers by increasing women
participation in all activities of WDES. Modus apparent for
awareness is training at various levels. These peregrine facilitated
by local resource person who is again a women, Selected out the
same level onass, local, literate, vocal, acceptable locally, vibrant
and having leadership ability. This programme has also given
good result in the form of owning of organization role perception
and loyalty to D.C.S.

Women empowerment is continuous process. Only this we can

say is

“A promise to keep, A Dream to fulfill, And Miles to go”

FINANCIAL STATEMENTS ANALYSIS
Accounting process involves recording, classifying and
summarizing various business transactions. Financial statements
are the result of summarizing process. Their purpose is to
determine the profitability of the firm from operations and to
know about the financial position. Thus, financial statements
contain systematically collection summarized information about a
firm’s operating results and financial strength and are means to
communicate the information to various users. These financial
statements are prepared from the accounting records maintained
by the firm and the generally accepted accounting principles and
procedures are followed in preparing these statements.

MEANING OF FINANCIAL STATEMENTS

Financial statements are the end products of the financial
process. These statements are nothing but the presentation of
financial information about the firm in concise and capsule form.
The financial information is that information which relates to the
financial position at a moment in time and the results of a series
of activities over a period of time. Thus, “financial statements
refer to the statements that show the financial position
and result of business activities at the end of the
accounting period.” These statements reveal the gross and net
profits of the business carried on during a certain period ad the
financial position at the end of that period.

Financial statements from part of the process of financial

reporting. A complete set of financial statements normally
includes a balance sheet, a statement of profit and loss
(also known as income statement), a cash flow statement
and those notes and other statements and explanatory
material that are an integral part of the financial
statements. They may also include supplementary schedules
and information based on or derived from, and expected to be
real with such statements. Such schedules and supplementary
information may deal, for example, with financial information
about business and geographical segments, and disclosures about
the effects of changing prices. Financial statements do not,
however, include such items as reports by directors, statements
by the chairman, discussion and analysis by management and
similar items that may be included in financial or annual report.
 RATIO ANALYSIS

Ratio analysis has emerged as the principal technique of analysis

of financial statement. It is an attempt to present the information
of the information of the financial statements in simplified,
systematized and summarized form by establishing the
quantitative relationship of the items or group of items of financial
statements. The system of analysis of financial statements by
means of ratios was first made in 1919 by Alexander Wall. A
number of ratios are calculated in this technique.

MEANING OF RATIO ANALYSIS

Figures are mere symbols and one can understand them by
comparing them with same other relevant figures. Ratios are
therefore calculated to assess one figure in the light of another.
Thus, a ‘ratio’ is a simple arithmetical expression of the
relationship of one number to another and is obtained by dividing
the former by the later. In other words, ratios are simply a means
of highlighting, in arithmetical terms, the relationship between
figures drawn from financial statements; whereas ratio analysis is
the process of determining and presenting the relationship of
items or group of items in the financial statements. The
relationship may be of two types: (1) associate relationship; and
(2) cause/effect relationship. For example, there is an associate
relationship between cost of goods sold and cost of raw material,
whereas, there is cause/effect relationship between sales and
profits. Both the relationships are expressed in terms of ratios.
Thus, ratio analysis is a device by which the retroactive size and
importance of the relationship between strategic items or groups
of items in the balance sheet and income statement are
examined and compared by calculation of ratios.

EXPRESSION OF RATIOS: Normally, the ratios may be

expressed in any of the following ways:

1. Ratio as proportion: In this form, the relationship between

two figures is expressed in a common denominator. It is
obtained by the simple division of one number by another so
that the proportionate relationship because clear. For
example, if current assets are Rs. 16,000 and current
liabilities are Rs. 4000, the ratio between assets and current
liabilities i.e. current ratio will be 4:1 (16,000/4,000).

2. Ratio as Turnover: In this form, a ratio is calculated

between two numerical facts for which one item is divided by
another and the quotient so obtained is taken as unit of
expression. When ratio is expressed in this form, it is called
as ‘turnover’ and is written in ‘times’. For example, sales
for the year are Rs. 80,000 and fixed assets are Rs. 20,000;
it indicates that sales are 4 (80,000/20,000) times of fixed
assets.

3. Ratio as Percentage: In this form, the relationship

between two items is expressed in percentage for which one
item is divided by another and the quotient is multiplied by
100. For example, if sales are Rs. 80,000 and gross profit is
Rs. 20,000, then percentage of gross profit to sales i.e. gross
profit ratio will be 25% (20,000/80,000*100).

In financial analysis, these ratios highlight the financial position of

the business, and hence known as financial ratios. These are
also called accounting ratios, because they are based on the
data taken from financial accounts. Similarly, they measure the
relative importance of the items expressed in financial
statements, hence called structural ratios.

OBJECTIVES OR SIGNIFICANCE OF RATIO

ANALYSIS
Ratios are guides or short-cuts that are useful in evaluating the
financial position and operations of a company and in comparing
them to previous year or to other companies. In accounting and
financial management, ratios are regarded as the real test of
earning capacity, financial soundness and operating efficiency of
a business concern. That is why, a number of parties such as
shareholders, creditors, financial executives are interested in ratio
analysis with a view to take judicious decisions. As of J. Batty has
said, “Ratios can also assist management in its basic functions of
forecasting, planning, co-ordination, control and communication.”
The following points highlight the importance of ratio analysis:

1. Simplifies Accounting Figures

2. Measures Liquidity Position

3. Measures Long-term Solvency

4. Measures Operational Efficiency

5. Measures Profitability

6. Facilitates Inter-firm and Intra-firm Comparisons

7. Trend Analysis

8. Managerial uses:
 I. Aid in Planning and Forecasting

II. Aid in control

III. Aid in Communication

IV. Aid in Decision-making

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis, as already mentioned, is a useful tool of financial
evaluation of business firms. But, it should be kept in view that
ratios are only guide in analyzing the financial statements, and
not conclusive end in them. If these ratios are misused, the
results will be incorrect and misleading. Therefore, the analyst
should be aware of the weaknesses and limitations of ratio
analysis while analyzing financial statements and using
conclusions for decision-making on the basis of these ratios. The
important limitations are identified as follows:

1. Need of Comparative Analysis

2. Qualitative Factors Ignored

3. Possibility of Window-dressing

4. Inherent Limitations of Accounting

5. Difference in Accounting Methods and systems

6. No Substitute for Sound Judgment

7. Lack of Standard Ratios

8. Personal Bias

9. Effect of Price Level Changes

PRECAUTIONS IN USING RATIONS
Ratio analysis is a widely used technique in analyzing the financial
activities of a firm. If ratios are used in a wrong way or carelessly,
there is a possibility of conclusions being misleading. Therefore,
while using ratios, following precautions should be taken into
consideration.

1. Ability to Understand Accounting Data: The user must

be capable to understand the nature of accounting data
used in preparing financial statements, from which ratios are
calculated. It is much more essential when efficiency of one
firm is compared with that of another firm. In such a case,
the figures must have conceptual uniformity and be
comparable.

2. Speed Compilation: Speed compilation of ratios is

desirable, because the utility of these ratios depends upon
the timely availability to the person concerned. How speedy
these should not be computed and a equilibrium between
cost and benefit be maintained.

3. Cost-Benefit: There is a cost of calculating ratios.

Therefore, undesired or useless ratios should not be
computed and an equilibrium between cost and benefit be
maintained.
 4. Presentation: The utility of ratios, to a great extent,
depends upon their presentation. Only those ratios should be
presented before the concerned person whom is to be
considered. For example, ratios of productivity should be
presented before the production manager.

5. Incorporation of Changes: Ratios should be revised as per

changing business conditions and assumptions. In the
beginning, a few ratios are computed, but as business grows
or expands, new ratios should be incorporated.

CLASSIFICATION OF RATIOS
Each business entity has its own problems. Different ratios are
computed to analyses these problems. Ratio expert Spencer A.
Tricker P.E. has analyzed such 429 ratio in his book, ‘Successful
Management Control by Ratio Analysis”. Discussion of all these
ratios, here, is neither feasible nor desirable. Hence, significant
financial ratios based on balance sheet and profit and loss
account are classified on the following bases:

Structural Classification

This is a conventional mode of classifying ratios where the ratios

are classified on the basis of information given in the financial
statements, i.e. balance sheet and profit and loss account to
which the determinants of the ratios belong. On this basis, all
ratios are grouped as follows:

1. Balance Sheet Ratio: The components for computation of

these ratios are draws from balance sheet. These ratios are
called financial ratios. Examples of such ratios are: current
 ratio, liquid ratio, proprietary ratio, capital gear ratio, fixed
assets ratio etc.

2. Profit and Loss Account Ratios: The figures used for the
calculation of these ratios are usually taken out from the
profit and loss account. These ratios are also called ‘income
statement ratios’. Examples of such ratios are: gross profit
ratio, net profit ratio, operating ratio, expenses ratio, stock
turnover ratio etc.

3. Inter-Statement Ratios or Combined Ratio: The

information required for the computation of these ratios is
normally drawn from both the balance sheet and profit and
loss account. Examples of such ratios are: return on capital
employed, return on owners’ fund, return on total
investment, debtor’s turnover ratio, creditors turnover ratio,
fixed assets turnover ratio, working capital turnover ratio
etc.

FUNCTIONAL CLASSIFICATION
Now-a-days, it is the most popular mode of classifying the ratios.
Accordingly, the ratios may be grouped on the basis of certain
tests which satisfy the needs of the parties having financial
interest in the business concern. For example, creditors or banks
have interest in the liquidity of the firm, debenture holders in the
long-term solvency and shareholders in the profitability of the
firm. The ratios may be grouped as per different interests or
objectives as under:

1. Liquidity Ratios: These ratios are used to measure the

ability of the firm to meet its short-term obligations out of its
short-term resources. Such ratios highlight short-term
solvency of the firm. Examples of such ratios are:
 I. Current Ratio

II. Liquid or Quick Ratio

III. Absolute Liquidity Ratio

2. Activity or Efficiency Ratio: These ratios enable the

management to measure the effectiveness or the usages at
the command of the firm. Following ratios are included in
this category:

I. Stock Turnover Ratio

II. Debtors Turnover Ratio

III. Creditors Turnover Ratio

IV. Total Assets Turnover Ratio

V. Fixed Assets Turnover Ratio

VI. Current Assets Turnover Ratio

VII. Working Capital Turnover Ratio

VIII. Capital Turnover Ratio

3. Profitability Ratio: These ratios are intended to measure

the end result of business operations i.e. profitability.
Profitability is a measure of the ability to make a profit
expressed in relation to the sales or investments, and as
such the following ratios are computed in this category

 Based on Sales

I. Gross Profit Ratio

II. Operating Ratio

III. Expenses Ratio

IV. Operating Profit Ratio

 V. Net Profit Ratio

 Based on Capital or Investments

I. Return on Capital Employed

II. Return on Net Worth or Shareholders’ Fund

III. Return on Equity shareholders’ fund

IV. Return on Total Assets

4. Investment Analysis Ratios: These ratios are helpful to

the shareholders in analyzing the perspective investment in
the company. Shareholders are able to know the future
market price of their investment with the help of these
ratios. Following ratios are included in this category:

I. Earning per Share

II. Price-Earning Ratio

III. Dividend per Share

IV. Dividend Yield Ratio

V. Dividend payment Ratio

VI. Book Value per Share

5. Capital Structure or Leverage Ratio: These ratios help in

measuring the financial contribution of the owners as
compared to that of creditors and also the risk in debt
financing. The long-term solvency of the business can be
examined by using leverage ratios. Following are such
important ratios:

I. Debt-Equity Ratio

II. Proprietary Ratio

 III. Solvency or Debt to Total Assets Ratio

IV. Fixed Assets to Net Worth Ratio

V. Capital Gearing Ratio

VI. Interest Coverage or Debt-Service Ratio

VII. Dividend Coverage Ratio

Thus, ratios are classified with different point of views, but from
analytical point of view, the functional classification is more
appropriate as it highlights the utility of different ratios.

LIQUIDITY OR SHORT-TERM SOLVENCY

RATIOS
These ratios play a key role in analyzing the short-term financial
position of a business Liquidity refers to a firm’s ability to meet its
current financial obligations as they arise. Commercial banks and
other short-term creditors i.e. suppliers of goods and services are
generally interested in such ratios. However, the management
can use these ratios to ascertain how efficiently it has utilizing the
working capital. Some of the principal liquidity ratios are
described below:
A. Current ratio:

Current ratio is one of the important ratios used in testing

liquidity of a concern. This is a good measure of the ability of
accompany to maintain solvency over a short-run. This is
computed by dividing the total current assets by the total
current liabilities and is expressed as:

Current Assets

Current ratio= ------------------------------

Current Liabilities

The current assets of a firm represent those assets, which can

be in the ordinary course of business, converted into cash
within one accounting year. The current liabilities are defines
as obligation maturing within a short period (usually one
accounting year). Excess of current assets over current
liabilities is known as working capital and since these two
(Current assets and current Liabilities) are used in current ratio
therefore, this ratio is also know as working capital ratio.

With the help of this ratio the analyst can review the extent to
which the company can cover such liabilities with current
assets. The current ratio gives the analyst a general picture of
the adequacy of the working capital of a company and ability of
the company to meet its day-to-day payment obligation. “It
likewise measures the margin of safety provided for paying
current debts in the event of a reduction in the values of
current assets.”
 The current ratio is very useful as a measure of short-terms
debt prying ability but it is tricky to interpret this ratio. Experts
are of the view that the value of current assets should be at
least double the amount if current liabilities.

Walker and Bough have the same view they are a good current
ratio may mean a good umbrella for creditors against the rainy
days. But the management it reflects bad financial planning or
presence of idle assets or over capitalization.”

Idle Current Ratio: 2:1

If this ratio is higher than standards than it is assumed

 Very good short-term liquidity or solvency.

 Excess stock, bad debts and idle cash

 Under trading

If this ratio is lower than standards than it is assumed

 Unsatisfactory short-term liquidity

 Shortage of stocks, less credit sales, shortage of cash

 Over trading

CURRENT RATIO OF JAIPUR DAIRY LTD.

 DURING 2008 TO 2009

Year Current assets Current Current Ratio

Liabilities
(A) (B) (C) (B)/(C)
2008-2009 1159606169.4 586443314.8 1.92:1

INFERENCE
This table reveals that current ratio increased that is making
improvements in its short-term solvency. It is because of increase
in current assets as compared to current liabilities. Still this is
lower than standard current assets Ratio that shows a little bit
unsatisfactory liquidity position of the company.

(B) QUICK RATIO

The solvency of the company is better indicated by quick Ratio.

The fundamental object of calculating this Ratio is to enable the
financial management of a company to ascertain that would
happen if current creditors press for immediate payment and
either not possible to push up the sales of closing or it is sold; a
heavy loss is likely to be suffered. This problem arises because
closing stock is two steps away from the cash and their price is
more or less uncertain according to market demand.

The term quick assets includes all current assets expect

inventories and prepaid expenses. It shows the relationship of
quick assets and current liabilities. The Ratio is calculated as
following:

Quick Assets

Quick Ratio = -------------------------------

Current Liabilities

IDLE QUICK RATIO: 1:1

QUICK RATIO OF JAIPUR DAIRY LTD.

DURING 2007 TO 2009

Year Quick assets Current Quick Ratio

Liabilities
(A) (B) (C) (B)/(C)
2008-2009 446979434.8 586443314.8 0.72:1
INFERENCE: Although it is less idle ratio still it has increasing
trend that shows dairy improving condition of short term solvency
of Jaipur dairy.

ABSOLATE LIQUIDITY RATIO

The absolute liquid ratio is the ratio between absolute liquid

assets and current liabilities is calculated by dividing the liquid
assets and current liabilities. Expressed in formula, the ratio is:

Absolute liquidity Assets

Absolute liquidity Ratio: -------------------------------------------------

Current Liabilities

The term liquid assets include cash bank balance and marketable
securities, if current liabilities are to pay at once, only balance of
cash and bank and marketable securities will be utilized.
Therefore, to measure the absolute liquidity of a business, this
ratio is calculated.

IDLE RATIO: 0.5:1

The idle behind the norm is that if all creditors for demand for
payment, at least 50% of their claim should be satisfied at once.
The table shown on the next page reflects the absolute liquidity
ratio Jaipur Dairy Ltd.

ABSOLUTE LIQUIDITY RATIO OF JAIPUR DAIRY LTD.

DURING 2007 TO 2009

Year Absolute liquid Current Absolute liquid

assets Liabilities ratio
(A) (B) (C) (B)/(C)
2008-2009 40069631.19 586443314.8 0.068:1

INFERENCE: This ratio is very below from idle ratio. It is

making insecure creditors claim but it is getting increasing trend.
It is needed to maintain this trend.

ACTIVITY OR EFFICIENCY RATIOS

The funds of creditors and owners are invested in various assets
to generate sales and profit. The better the management of these
assets, the large the amount of sales. Activity ratios enable the
firm to know how efficiently these assets are employed by it.
These ratios indicate the speed with which assets are being
converted or turned over into sales. Hence, these ratios are also
known as ‘turnover ratios’ or ‘assets management ratios’.
While calculating these ratios, a comparison is made between
sales and investment in various assets (stock, debtors, fixed
assets etc.). As such, an activity ratio is the relationship
between sales or cost of goods sold and investment in
various assets of the firm. It is important to note that these
ratios are always expressed as turnover or in number of times
i.e. rate of turning over or rotation, also known as velocity.
Several activity ratios can be calculated to judge the
effectiveness of assets utilization. The following are the important
and widely used ratios:

STOCK TURNOVER RATIO

Every firm has to maintain a certain level of inventory of finished

goods so as to be able to meet the requirements of the business.
But the level of inventory should neither be too high nor too low.
A too high inventory means higher carrying costs and higher risk
of stocks becoming obsolete whereas too low inventory may
mean the loss of business opportunities. It is very essential to
keep sufficient stock in business.

It is expressed in number of times. Stock turn over ratio/inventory

turn over ratio indicates the number of time the stock has been
turned over during the period and evaluates the efficiency with
which a firm is able to manage its inventory. This ratio indicates
whether investment in stock is within proper limit or not.

Higher ratio indicates

 Stock is sold out fast

 Same volume of sales from less stock or more sales from

same stocks

 Too high ratio shows stock outs or over trading

 Less working capital requirement

Lower ratio reveals

 Stock is sold at a slow speed

 Same volume of sales from more stocks or less sales from

same stocks

 More working capital requirement

 Too low ratios show obsolete stocks or under trading

Cost of Goods Sold or

Sales

Inventory (stock) Turnover Ratio:

-----------------------------------------------

Average Inventory at cost

4953091928.7

=---------------------------------- = 8.41 Times

588328734.15

It is always better to calculate Turnover Ratios on the

basis of “Cost of Goods Sold”. If information regarding
cost of goods sold is not available, only there the “Sales”
figure should be used as base.

Debtors or Receivables Ratio:

Receivable normally include debtors and bills receivable and

represent the uncollected portion of credit sales. If a firm is not
able to collect its debtors within a reasonable time, its funds are
unnecessarily tied-up in receivables. Therefore, to know, how far
the firm is successful in realizing the credit. ‘Debtors or
receivables turnover ratio’ is calculated. This ratio establishes
the relationship between net credit sales and average
receivable of the year. The formula used for its calculation is as
follows:

Net Credit Sales

Debtors Turnover Ratio=---------------------------------------

Average Receivable

4953091928.7

=---------------------------------- = 15.36 Times

322356102.95

Components: Credit Sales means all credit sales minus sales

returns. If information about credit sales is not available, the
figures of total sales may be assumed to be the credit sales.
Debtors and bills receivable which arise out of credit sales should
only be considered. While calculating this ratio, the full amount of
bills discounted, which creates liabilities, should be included and
provision for bad and doubtful debts should not be deducted
because it may give an impression that some amount of
receivables has been collected. If the data relating to opening
and closing balance of debtors and receivables are not
available, the receivables at the end of the year may be
considered for computing this ratio.

Interpretation and Significance: This ratio indicates the

number of times the receivable are turned over in a year in
relation to sales. It shows how quickly debtors are converted into
cash. For example, in the above illustration a turnover of 13
signifies that debtors are converted into cash 13 times in a year.
A higher debtor’s turnover ratio shows the efficiency in collection
from debtors i.e. debtors are being collected more promptly. On
the contrary, lower ratio indicates inefficiency of management in
collection of payment against credit sales in time or payments by
debtors are delayed. It is difficult to set up a standard for this
ratio. It depends upon the policy of the management and the
nature of the industry. To judge the effectiveness of this ratio, it
should be compared with the ratio in the previous period or with
the ratio of other firms doing similar business.

Average Collection Period

This ratio is, inter-related with and dependent upon debtors’

turnover ratio. Average Collection period means the number
of days over which debtors and bills receivable remain
uncollected. This period can be calculated by any of the
following formulae:

Total or Average Receivables

(Drs. + B.R.)

1. Average Collection
period=----------------------------------------------------------------
 Credit sales per day

Net Credit Sales

Credit sales per day =-------------------------------------------------

365 days

Total or Average Receivables

No. of Months

2. Average Collection period =--------------------------------- *

-------------------------

Net Credit Sales

Days in a year

Interpretation and significance: An average collection period

or debtors velocity, say of two months, implies that debtors are
collected in 60 days. It measures the quality of debtors because it
indicates the rapidity to slowness in the collection process. A
shorter collection period implies prompt payment by the debtors
while a longer period reflects delay in payments by debtors. Fast
recovery is the indications of good debtors and less probability of
bad and unrecoverable debts. On the other hand, delay in
recovery of debts in a business indicates increase in the amount
of bad debts, negligence and inefficiency of management or
relaxation in credit terms. In order to measure the efficiency of
the credit collection department, this period should be compared
with the average of the industry or with the credit period normally
allowed by other firms.
CREDITORS OR PAYABLE TURNOVER RATIO:
Firm from whom goods and services are purchased on credit are
known ‘creditors’ and the bills accepted in lieu of credit
purchases are called ‘bills payable’. The creditors and bills
payable both are reckoned as ‘Total payables’. If these payables
remain out standing for a longer period, lesser will be the problem
of working capital to the firm. But, when the firm does not pay off
its creditors within time, it may face difficulties in procuring
further working capita. Therefore, it is essential to know in how
many days a firm can pay off its creditors. This requires
computation of creditor’s turnover and average payment period
or creditor’s velocity. Creditor’s turnover ratio shows the
relationship between net credit purchases for year and
total payables, whereas average payment period or
creditors’ velocity signifies the credit period enjoyed by
the firm in paying creditors. There are calculated by using the
following formulae:

Net Credit Purchases

1. Creditors or Payable Turnover =

----------------------------------------------

Total or Average
Payable (Crs. + B.P.)
 Total or Average Payables * No. of
months/days

2. Average Credit Purchases

=----------------------------------------------------------------

Net Credit Purchases

4114975103.10

=---------------------------------- = 10.045 Times

409632819.10

Components: Credit purchases means all credit purchases of

goods minus purchases returns. If information about credit
purchases is not available, the figure of total purchases may be
assumed to be credit purchases. Average payables refer to the
one half of opening and closing balances of trade creditors which
includes sundry creditors and bills payable. If opening and
closing balances of creditors are not known, the balance
of creditors given may be taken to find out the ratio. But,
the amount of ‘provision for discount on creditors’ will not be
deducted from the amount of creditors.

Interpretation and Significance: The creditors or payables

turnover ratio indicates the number of times the creditors are
turned over in relation to purchases. A high turnover ratio or
shorter payment period shows the availability of less credit or
early payments. This boosts up the credit worthiness of the firm.
On the other hand, a low turnover ratio or longer payment period
implies availability of more credit or delayed payments. Thus, the
lower the ratio, the better is the liquidity position of the firm, and
the higher the ratio, the lesser is the liquid position of the firm.
For meaningful analysis, a comparative analysis of different firms
in the same industry and the trend may be used for different
years.

TOTAL ASSETS TURNOVER RATIO:

This ratio expresses the relationship between costs of goods sold
or net sales and total assets or investments of a firm. It is also
called ‘Total Investment Turnover Ratio’ and is calculated by
using the following formulae:

Net Sales or Cost of Goods

Sold

Total Assets Turnover Ratio=

--------------------------------------------------------

Total Assets

4953091928.7

=---------------------------------- = 2.785 Times

 1778312405.96

Components: Total Assets means all fixed and current assets

but the provision for depreciation is adjusted in it. A few experts
exclude fictitious assets like preliminary expenses, underwriting
commission, discount on shares and debenture etc. but include
intangible assets such as goodwill, patents, trade mark etc. but in
practice, fictitious assets are excluded and intangible assets (If
they have Realizable Value) are included. The figure of net sales
can be used where information regarding cost of goods sold is not
available. According to Helfert only operating assets are
considered i.e. investments are also excluded.

Interpretation and Significance: This ratio indicates the

number of times the assets are turned over in a year in relation to
sales. A higher total assets turnover ratio indicates that assets are
not properly utilized in comparison to sales. Thus, there is an over
investment in assets. Extremely high ratio means over-trading in
the business.

FIXED ASSETS TURNOVER RATIO

This ratio expresses the relationship between fixed assets (less
depreciation) and net sales or cost of goods sold. Since
investment in fixed assets is made for the ultimate purpose of
efficient sales, the ratio is used to measure the fulfillment of that
objective. As such, investments are excluded from fixed assets as
they do not affect sales. It is calculated by using the following
formula:

Sales or Cost of Goods Sold

Fixed Assets Turnover

Ratio=-------------------------------------------------------------

Fixed Assets (less depreciation)

4953091928.7

=---------------------------------- = 16.947 Times

2992268779.5

Interpretation and Significance: This ratio measures the

efficiency and profit earning capacity of the firm. The higher the
ratio, the greater is the intensive utilization of fixed assets. Lower
ratio means under utilization of fixed asset and excessive
investment in these assets. As volume of sales depends on a
variety of factors such as price, quality of goods, salesmanship,
marketing etc. it is argued that no direct relationship can be
established between sales and fixed assets. Accordingly, it is not
recommended for general use.

CURRENT ASSETS TURNOVER RATIO

This ratio expresses the relationship between current assets and
net sales or cost of goods sold. It is calculated using the following
formula:
 Sales or Cost of Goods Sold

Current Assets Turnover

Ratio=-----------------------------------------------------

Current Assets

4953091928.7

=---------------------------------- = 4.27 Times

1159606169.4

Interpretation and Significance: This ratio reflects the

efficiency and capacity of working capital. It is a very useful
technique for non-factoring units or those manufacturing units
requiring lesser working capital. On the basis of this ratio,
efficiency or current assets and over or under investment in the
firm is examined.

WORKING CAPITAL TURNOVER RATIO

This ratio establishes the relationship between net working capital
and net sales or cost of goods sold. It is calculated by dividing the
net sales or cost of goods sold by net working capital. Expressed
as a formula:

Sales or Cost of Goods Sold

Working Capital Turnover

Ratio=--------------------------------------------------
 Net Working Capital

4953091928.7

=---------------------------------- = 8.64 Times

573162854.6

Interpretation and Significance: This ratio is used to assess

the efficiency with which the working capital is being used in
making sales. In other words it shows the number of times
working capital has been rotated in generating sales. A high
working ratio indicates efficient management of working capital or
over-trading i.e. low investment in working capital and more
profit. On the contrary, a low working capital turnover ratio
implies under-trading i.e. funds are not being utilized efficiently.
Higher sales in comparison to working capital means over-trading,
whereas lower sales in comparison to working capital means
under-trading.

CAPITAL TURNOVER RATIO

This ratio establishes the relationship between net sales or cost of
goods sold and capital employed. Capital employed is calculated
either by deducting current liabilities from total assets or by
adding long-term loans in shareholders’ funds (share capital +
reserves and surplus). Fictitious and non-trading assets are
excluded from assets. It is calculated using the following
formulae:

Sales or Cost of Goods Sold

Capital Turnover Ratio:
-------------------------------------------------------------

Capital Employed

4953091928.7

=---------------------------------- = 13.04 Times

379903765.46

Interpretation and Significance: The efficiency and

effectiveness of the operations are judged by comparing the sales
or cost of sales with the amount of capital employed in the
business and not with the assets held in the business. Therefore,
this ratio is a better measurement of efficient use of capital
employed. Efficient use of capital symbolizes profit earning
capacity and managerial efficiency of the business. A higher ratio
indicates the quicker rotation of capital to generate higher sales
which leads to higher profitability. On the contrary a lower ratio
will indicate that either the capital is not being used infinity to
generate enough sales.

No idle standard can be fixed for his ratio, as turnover is different

in different types of industries. In those industries where the
investment required in fixed assets is more, the capital turnover
ratio remains lower and where the investment is fixed assets is
less, the ratio remains higher. As such, higher ratio shows higher
profits and lower ratio shows lower profits.
PROFITABILITY RATIOS
The main objective of every business firm is to earn profit. It is
possible only when resources of the firm are effectively utilized.
The firm’s ability to earn maximum profit by the best utilization of
its resources is called profitability. Profit refers to the absolute
quantity of profit, whereas profitability refers to the ability to earn
profit. Profit is an absolute measure of earning capacity and
profitability is the relative measure of earning capacity.
Profitability depends on quantum of sales, cost of production and
use of financial resources etc. The profitability of a firm can easily
be measured by its profitability ratios. These ratios indicate
overall managerial efficiency. There are two types of profitability
ratios. First, profitability ratios based on sales: Second,
profitability ratios based on capital and assets.

PROFITABILITY RATIOS BASED ON SALES

From profit point of view, it is significant that adequate profit
should be earned on each unit of sales. If adequate profit is not
earned on sales, there will be difficulty in meeting the operating
expenses and nod dividend will be paid to the shareholders.
Therefore, following profitability ratios are calculated in relation to
sales. These are also called ‘General Profitability Ratios’.

Gross Profit Ratio

This ratio expresses the relationship of gross profit on sales to net
sales in terms of percentage. Expressed as a formula, the gross
profit ratio is:
 Gross Profit

Gross Profit Ratio=----------------------- * 100

Net Sales

Net Sales – Cost of Goods Sold

Gross Profit Ratio =------------------------------------------ * 100

Net Sales

334467118.68

=---------------------------------- *100 = 6.75%

4953091928.7

Components: According to Accounting Standard Board of India,

Gross Profit is the excess of the proceeds of goods sold and
services rendered during a period over their cost before taking
into account administration, selling, distribution and financial
expenses. It is calculated by deducting the cost of goods sold
from net sales. Cost of goods sold includes purchase price and
direct expenses relating to purchases such as carriage inward,
octori etc. Cost of goods sold, in case of manufacturing concern,
is the sum of cost of raw material used, wages, direct expenses
and all manufacturing expenses. Net sales mean total sales minus
sales returns.
Interpretation and Significance: This ratio measures the
trading effectiveness and basic profit earning potentiality of a
firm. The higher the ratio, the greater will be the margin and that
is why it is also called, ‘margin ratio’. An increase in the gross
profit ratio may be the result of one or all of the following:

 Higher selling price but cost of goods remaining the same

 Lower cost of goods sold but selling price remaining the

same

 Such combination of selling prices and costs where margin is

more

 Increase in items of excess margin

On the contrary, a low gross profit ratio is the indication of the

fact that – (1) profit are declining in comparison to sales, (2)
production costs are much more due to inability to purchases raw
material on reasonable terms, inefficient use of plant and
machinery and over investment. This low gross profit may also be
the result of reduction in selling price without a corresponding
decline in cost of production. Therefore, a relatively low gross
profit ratio is a danger signal and warrants a detailed analysis of
the factors responsible for it.

Operating Ratio
This ratio expresses the relationship between operating costs and
net sales. Operating costs refer to cost of goods sold plus
operating expenses. Expressed as a formula:
 Operating Costs

Operating Ratio =--------------------------- * 100

Net Sales

Cost of Goods Sold + Operating Expenses

Operating Ratio =--------------------------------------------------------- * 100

Net Sales

Components: Cost of goods sold is computed by adding

purchases and direct expenses (relating to purchase and
manufacturing) in opening stock and deducting the closing stock.
The operating expenses include office and administration
expenses (salary, rent, deprecation, director’s fee, electricity,
insurance etc.) and selling and distribution expenses. Financial
expenses such as interest, discount, provision for bad debts,
provision for taxation and abnormal expenses like preliminary
expenses, donations, share or debentures issue expenses etc. are
excluded from operating expenses.

Interpretation and Significance: this ratio indicates the

operational efficiency and profit earning capacity of the business.
It shows the percentage of net sales that is absorbed by cost of
goods sold and operating expenses. Therefore, the lower the
operating ratio, the higher the operating profit to recover
non-operating expenses such as interest, divided etc. and
vice-versa. While interpreting this ratio, it is important to note
that changing management decisions may create possible
variations in expenses from year to year or firm to firm. An
operating ratio ranging between 75% and 85% is generally
considered as standard for manufacturing firms.

Operating profit Ratio

This ratio is also called Operating Profit Margin. It establishes
the relationship between operating profits and net sales. It
is also defined as the ratio of profit before depreciation, interest
and tax to total turnover. Operating profit means the net profit
arising from the normal operations and activities of the business
without taking into account of extraneous transactions and
expenses of purely financial nature. In other words, operating
profit is calculated by sub-starting all direct and indirect
expenses relating to main business from net sales. This
ratio is calculated by using the following formulae:

Operating Profit

Operating profit Ratio =--------------------------- * 100

Net Sales

Gross Profit – Operating Expenses

Operating Profit Ratio =---------------------------------------------- * 100

Net Sales

Interpretation and Significance: This ratio indicates the net

profitability of the main business i.e. operating efficiency of a
firm. In some firms, the profit from main business is very low;
while the profit from secondary functions such as interest on bank
deposits and dividend on shares etc. is so much that the net profit
of the net profit of the firm at the end is enhanced. In such a case,
the operating profit ratio explains that the efficiency of the firm is
very low. Therefore, the higher the operating ratio, the better
would be the operational efficiency of the firm. A higher operating
profit ratio means that a firm has been able not only to increase
its sales but also been able to cut down its operating expenses.

Expenses ratio
Sometimes, it becomes imperative to analysis each component of
cost of goods sold and operating expenses to find out how far the
firm is able to save or over spend in respect of different items of
expenses. Therefore, to express the relationship of each item of
cost of goods and operating expenses with sales, the expenses
ratios are computed. These ratios reveal the relationship of
different expenses to net sales. Important expenses ratios are
calculated using the following formulae:

Material consumed

Material Consumed Ratio =------------------------------ * 100

Net Sales

Manufacturing Expenses

Manufacturing Expenses Ratio =----------------------------------------- *

100

Net Sales
 Administrative Expenses

Administrative Expenses Ratio =------------------------------------ * 100

Net Sales

Selling and Distribution

Expenses

Selling and Distribution Expenses Ratio

=--------------------------------------------- * 100

Net Sales

Finance Expenses

Finance Expenses Ratio =-------------------------------- * 100

Net Sales
 Non-operating Expenses

Non-operating Expenses Ratio =------------------------------------ * 100

Net Sales

Interpretation and Significance: Expenses ratios reveal the

managerial efficiency and profit earning capacity of the firm. If
these ratios are compared over a period of time with the ratios of
similar firm as well as with the previous ratios of the same firm,
the saving or over spending of each item can be ascertained.
While interpreting the expenses ratios, it should be kept in view
that certain fixed expenses would decrease as sales increase, but
variable expenses would remain constant.

Net Profit Ratio

This ratio measures the relationship between net profit
and sales of a firm. Net profit is the excess of revenue over
expenses during a particular accounting period. The net profit
ratio is determined by dividing the net profit by sales and
expressed as percentage. The formula used is as follows:

Net Profit (After tax)

Net Profit Ratio =---------------------------------------- * 100

Net Sales
 Net Profit (before tax)

Net Profit Ratio =------------------------------------ * 100

Net Sales

Interpretation and Significance: This ratio is the indication of

overall profitability and efficiency of the business. It not only
reveals the recovery of costs and expenses from to revenue of
the period, but also to leave a margin of reasonable
compensation to the owners for providing capital at their risk. A
high net profit ratio would only means adequate returns to the
owners. It also enables a firm to withstand in cut-throat
competition when the selling price is falling or cost of production
is rising. A low net profit ratio on the other hand, would only
indicate inadequate returns to the owners.

Profitability Ratios based on Capital

This efficiency of an enterprise is judged by the amount of profits.
But sometimes the conclusions drawn on the basis of profits to
sales ratio may be misleading, as the amount of profit depends to
a great extent upon the volume of investment in assets or capital
employed in the business. Therefore, the state of efficiency
cannot be judged by the volume of profits alone. This requires the
calculation of ratio with reference to capital and assets to
measure the real profitability. The important categories of such
ratios are discussed below:

Return on capital Employed

The primary objective of making investment in any business is to
obtain adequate return on capital. Therefore, to measure the
overall profitability of the firm, it is essential to compare profit
with capital employed. With this objective, return on capital
employed is calculated. It is also called` Return on investment’
(ROI).This ratio expresses the relationship between profit and
capital employed and is calculated in percentage by dividing the
net-profit by capital employed.

Net profit (PBIT)

Return on capital Employed=----------------------------------- * 100

Capital Employed

Alternatively, it can be calculated as:

Return on Capital Employed = Assets Turnover * Profit Margin

Sales Net Profit

=------------------- * ------------------------------ * 100

Total Sales Sales

Components: Net Profit means the profit earned by capital

employed. It is net profit before interest (on long-term loan) and
tax (PBIT) excluding- (1) non-trading incomes such as income
from investments, (2) non-recurring and abnormal profits, and (3)
non-trading and abnormal losses. If profit after interest is given,
then interest o long-term loans will be added back. It should be
remembered, while calculating return on capital employed, that
“profit before interest and tax” should be used for measuring
managerial efficiency and ‘profit after interest and tax’ should be
used for comparing two firms or computation for owners’ purpose.
Capital employed means gross capital employed and net capital
employed. Gross capital employed means the total assets used in
the business. Net capital employed means total assets minus
current liabilities. While calculating capital employed-(1) non-
trading investments, (2) idle assets, (3) intangible assets like
goodwill, patent, trademark whose realizable value is nil, (4)
factious assets like preliminary expenses, underwriting
commission, discount on issue of shares and debentures etc. (5)
abnormal debtors, obsolete stock and (6) cash or bank balance
more than requirements should be excluded from assets.

A few experts apply ‘average capital employed’ instead of capital

employed. The average capital employed may be calculated by
dividing the sum of the capital employed at the beginning and at
the end of the year by two or by deducting one half of current
year’s profit in the capital employed at the end of the year.

Interpretation and Significance: Since profit is the overall

objective of a business enterprise, this ratio is a barometer of the
overall performance of the enterprise. It measures how efficiently
the capital employed in the business is being used. In other
words, it is also a measure how efficiently the capital employed in
the business. Even the performance of two dissimilar firms may
be compared with the help of this ratio. Furthermore, the ratio
can be used to judge the borrowing policy of the enterprise. If an
enterprise having the ratio of return on investment 15% borrows
at 16%, it would indicate that it is borrowing at a rate higher than
its earning. The comparisons of this ratio with that of similar firms
and with industry average over a period of time would disclose as
to how effectively the long-term funds provided by owners and
creditors have been used.
Return on Net Worth or Shareholders’
Funds/Equity
This ratio expresses the percentage relationship between net
profit (after interest and tax) and net worth or shareholders’
funds. This is also known as ‘Return on Proprietors’ funds’ it is
used to ascertain the rate of return on resources provided by the
shareholders. The ratio is calculated by using the following
formula:

Net Profit (after tax and interest)

Return on Shareholders’ Fund =-----------------------------------------------

* 100

Shareholders’ Funds or Net Worth

Components: Net worth or shareholder’ funds include

preference share capital as well as equity shareholders’ funds
which in turn comprises equity share capital, share capital, share
premium and reserves and surplus (after adjusting the
accumulated losses and fictitious assets). The net profits are after
deducting interest and tax but before deducting dividend on
preference shares. It is the final income that is available for
distribution as dividends to shareholders.

Significance: This ratio measures the amount of earnings for

each rupee that the shareholders alive invested in the company.
The higher the ratio the more favorable is the interpretation of
the company’s use of its resources contributed by the
shareholders. This ratio can be composed with that of other units
engaged in similar activities as also with the industry on average.

Return on Equity Shareholders’ funds

Equity shareholders are the real owners of a company. Therefore,
the profitability of a company from the owners’ stand point should
be viewed in terms of return to equity shareholders. This ratio is
calculated by dividing the profit available for equity shareholders
by the equity shareholders’ funds. Expressed as a formula, the
ratio is:

Net Profit after tax – Preference

Dividend

Return on Equity Shareholders’ fund

=-------------------------------------------------- * 100

Equity Shareholders’ funds

Components: Net profit represents the residual profit left and

available for distribution to the equity shareholders after provision
has been made for all other financial obligations such as taxation,
interest and preference share dividend. Equity shareholders’
funds refer to equity share capital, revenue and capital reserves
and undistributed profits and surplus (after deducting
accumulated losses and fictitious assets, if any).
Interpretation and significance: This ratio is the best
measure of a company’s profit earning capacity. The higher the
ratio, the better the performance and prospectus of the company.
It provides adequate test to evaluate whether a company has
earned satisfactory return for its equity shareholders or not. The
adequacy of the return can be measured by comparing it with the
return of the previous year or of companies engaged in similar
business or with the overall industry average. The investors can
decide to invest or not to invest in the equity shares of a company
by comparing it with the normal rate of return in the market.

Due to issue of new shares or buy back of share during the year,
the equity capital and preference share capital of the company do
not remain the same throughout the year. Therefore, to calculate
the amount of average shareholders’ fund which is one half of the
opening and closing balance is used to calculate the – (1) Return
on Net worth and (2) Return on Equity shareholders’ Fund. In
absence of opening balance, closing balance is used.

Return on Total Assets

Profitability can also be measured by establishing relationship
between net profit and total assets. This ratio is computed by
dividing the net profits after tax by total and total assets. This
ratio is computed by dividing the net profits after tax by total
funds invested or total assets. Total assets means all net fixed
assets, current assets are included only when they have
realizable value. Expressed as formula, the ratio is
 Net Profit after Tax

Return on Total Assets =--------------------------------- * 100

Total Assets

Interpretation and significance: This ratio measures the

profitability of investments which reflects managerial efficiency.
The higher the ratio, the better is the profit earning capacity of
the firm or vice versa. But this ratio does not reveal the
profitability of different sources of funds used in purchasing the
total assets.

Technically, this ratio suffers from the drawback that the interest
paid to the creditors is excluded form the net profit, whereas the
real return on the total assets is the net operating earnings.
Therefore, to consider real earning, interest on long-term loans
should be added back to profit after tax. Thus, return on total
assets should be computed on the following revised formula:

Net Profit after tax + Interest

Return on Total Assets =---------------------------------------- * 100

Total Assets

Note: In any view profit is earned on total assets of the business

during the year and these assets may increase or decrease during
the year. Therefore, average amount of the total assets should be
used in calculating this ratio.
LEVERAGE OR CAPITAL STRUCTURE RATIO
Leverage or capital structure ratios are calculated to judge the
long-term solvency or financial position of the firm. Therefore,
these ratios are known as long-term solvency ratios. Capital
structure or leverage ratios may be defined as financial ratios
which highlight on the long-term solvency of a firm as reflected in
its ability to assure the long-term creditors with regards to (1)
periodic payment of interest during the period of the loan, and (2)
repayment of principal on maturity or in pre-determined
installments at due dates. Thus, there are two types of such
ratios. First, those capital structure ratios which are based on the
relationship of borrowed funds and owner’s funds. Such ratios are
calculated to know the ability of the firm to repay the principal
amount when due. Second, this capital structure ratios known as
‘coverage ratios’ are calculated to ascertain the firm’s capacity
for regular payment of interest and dividend. Therefore, leverage
ratios are also called, ‘debt management ratios’. All these ratios
are discussed below:

1. Debt-Equity Ratio
This ratio indicates the relative proportion of debt and equity in
financing the assets of a firm. In other words, debt-equity ratio
reveals the relationship between internal and external
sources of funds of a firm. Therefore, it is also known as
‘External-Internal Equity Ratio’. Expressed as a formula:

External Equities Total Debts

Debt-Equity Ratio =---------------------------- or
-------------------------------

Internal Equities Shareholder’s funds

Components: External equities refer to the total outsides

liabilities i.e. short-term and long-term loans. The logic behind
inclusion of current liabilities, like working capital, loans from
bank in outside liabilities is that these short-term loans are
renewed from year to year (barring exceptional circumstances)
more or less permanently. Moreover, a fixed amount of loan, by
and large, is always in use and available with the enterprise on a
long-term basis. Apart from this short-term loans are also not cost
free. Hence, inclusion of short-term loans in total liabilities would
be justified. Internal equities or shareholders’ funds means total
paid up amount of equity and preference share capital and
accumulated amount of reserves and surplus (after deducting
accumulated losses, factious assets and intangible assets having
no realizable value). There are differences of opinion about the
inclusion or exclusion of preference share capital in internal
equities and current liabilities in external equalities. In general,
however, long-term and short-term both types of debts are
included in external equities and both equity and preference
share capitals have been treated as the owners’ equity. When
current liabilities are not included in external funds, the ratio is
calculated by using the following formula:

Long-term Debts

Debt-Equity Ratio =-----------------------------------------------

Shareholders’ Fund or Net Worth

Interpretation and Significance: This ratio plays an
important role in analyzing the long-term solvency of a company.
It indicates the firm’s capacity to pay long-term debts and
procure additional loans and reveals whether the firm is
following the policy of trading on equity? This ratio indicates
the owners’ capital invested in total assets of the business. A
debt-equity ratio of 0.75:1 means that if owners’ capital invested
in total assets is equal to rupee one, than outsiders’ capital is
equal to 75 paisa only. Therefore, a low debt-equity ratio
provides sufficient safety margin to creditors due to high stake of
owners in the capital of the company. The servicing of debt
(interest) is less burdensome for the company and consequently
its ability to raise additional funds is not adversely affected. But,
the shareholders of the company are deprived of the benefits of
trading on equity. On the country, a high debt-equity ratio shows
that the claims of creditors are greater than those of owners.
Hence lesser safety. A high ratio is unfavorable from the firm’s
point of view because it increases inflexibility in firm’s operation
due to increasing interference and pressures from creditors.
Moreover, the firm clear that both high as well as low debt-equity
ratio are not desirable. It should be balanced and reasonable
which depends upon the circumstances and policies. Normally
debt-equity ratio of 1:1is reasonable.

Proprietory Ratio
This ratio is also called ‘Net Worth to Total Assets Ratio’.
Proprietory ratio establishes relationship between proprietors’ or
shareholders’ funds and total assets of the business i.e. to what
extent shareholders’ funds are invested in financing the total
assets of the business. Expressed as a formula, proprietary ratio
is:

Proprietors’ Funds
Proprietary Ratio =----------------------------------------

Total Assets

Components: Proprietors’ funds include share capital

(equity and preference), all reserves and surplus and
undistributed profits (after deducting accumulated losses). Total
assets in include all current and fixed assets expending
intangible assets are having no realizable value and fictitious
assets such as preliminary expenses, discount on shares and
debentures, underwriting commission etc.

Interpretation and significance: This ratio highlights the general

financial strength of the firm. It is of great importance to creditors
since it enables them to find out the proportion of shareholders’
funds in the total assets used in the business. Proprietary ratio
may be further analyzed as-(a) Ratio of fixed assets to
proprietors’ funds, and (b) Ratio of current assets to proprietors’
fund.

Fixed Assets to Proprietors’ Funds Ratio: This ratio

establishes the relationship between fixed assets (after
depreciation) and proprietary or shareholders’ funds. The purpose
of this ratio is to know the percentage of owners’ funds invested
in fixed assets. The ratio is:

Fixed assets (after

depreciation)

Ratio of Fixed Assets to Proprietors’ Funds

=--------------------------------------------

Proprietors’ Funds
Current Assets to Proprietors’ Funds Ratio:
This ratio expresses the relationship between current assets and
owners’ funds. The purpose of this ratio is to calculate the
percentage of owners’ funds invested in current assets. It is
calculated as follows:

Current Assets

Ratio of Current Assets to Proprietors’ Funds

=-----------------------------------

Proprietors’ Funds

3. Solvency or Debt to Total Assets Ratio

This ratio measures the long-term solvency of the business. It
reveals the relationship between total assets and total external
liabilities. External liabilities mean all long-term and short-term
liabilities. It is the difference of the 100 and proprietary ratio. It is
calculated as follows:

Total Liabilities

Solvency Ratio =--------------------------------

Total Assets
Interpretation and Significance: This ratio measures
the proportion of total assets provided by creditors (long-term) of
the firm i.e. what part should be financed from long-term funds
only. If total assets are more than external liabilities, the firm is
treated as solvent. So, the higher the ratio, the greater is the
amount of creditors that is being used to generate profits for the
owners of the firm.

4. Fixed Assets Ratio

This ratio is also called the ‘Fixed Assets to Capital Employed or
Long-term Funds. As per sound financial policy, acquisition of
fixed assets should be financed from long-term funds only. To test
whether this policy is properly followed or not, this ratio is
calculated. It expresses the relationship between fixed assets and
long-term funds or capital employed of the firm. Expressed as a
formula, the ratio is:

Fixed Assets Fixed Assets

Fixed Assets Ratio =------------------------ or

------------------------

Long-term Funds Capital

Employed

Components: Long-term funds include equity share capital,

preference share capital, all reserves and surplus and long-term
loans. Fixed assets means net fixed assets i.e. fixed assets after
deducting depreciation and long-term investments including
shares of subsidiary companies.

Interpretation and Significance: This ratio measures

the proportion of total assets provided by creditors (long-term) of
the firm i.e. what part of assets is being financed from loans. If
total assets are more than external liabilities, the firm is treated
as solvent. So, the higher the ratio, the greater is the amount of
creditors that is being used to generate profits for the owners of
the firm.

5. Capital Gearing Ratio

The capital gearing ratio is mainly used to analysis the capital
structure of a company. This ratio establishes the relationship
between cost bearing and fixed cost bearing capital in the capital
structure of a company. In the words of Howard and Brown, “the
word capital gearing is applied to express the proportion between
equity share capitals and fixed cost bearing securities of a
company”. This ratio is also known as ‘capitalization ratio’ or
‘leverage ratio’. The formula used in calculating the ratio is:

Variable Cost Bearing Capital

Capital Gearing Ratio =--------------------------------------------------------

Fixed Cost Bearing Capital

OR
 Equity to shareholders’ Funds

=-------------------------------------------------

Debentures + Preference shares

Components: fixed cost bearing capital includes funds

supplied by debenture holders and preference shareholders funds
including reserves and surplus i.e. net worth minus preference
share capital. A few experts include only equity shareholders
capital in variable cost bearing capital. In such case, the formula
will be as follows:

Equity share Capital

Capital Gearing Ratio =----------------------------------------

Fixed Cost Bearing Capital

Interpretation and Significance: The capital gearing

ratio indicates the proportion of equity share capital and fixed
income bearing securities to total employed in the business
securities to total capital employed in the business. A high gear
ratio (equity share capital is proportionately higher than fixed cost
bearing capital) is the indication of lesser fixed financial charges
i.e. interest and thus more profit to the business. Such situation is
known as low gearing. On the contrary, a low gear ratio (equity
capital is proportionately less than fixed cost bearing capital) is
the indication of over-burden of fixed financial charges, but the
equity shareholders will be benefited by ‘trading on equity’. This
situation is known as high gearing. The importance of gearing in
the capital structure of a company should start its business with
low gearing and on it grows and earn more profits, its may go in
high gearing.

6.Interest Coverage Ratio or Debt-Service

Ratio
This ratio measures the debt servicing capacity of a firm, and
particularly, where payment of fixed interest and tax is used for
the computation of this ratio since income tax is paid after the
deduction of fixed interest charges. It is calculated as follows:

Net Profit (before interest tax)

Debt-service Ratio =------------------------------------------------------

Fixed Interest Charges

Interpretation and Significance: The interest

coverage ratio is very significant from the lenders’ point of view.
It gives an idea of the number of times the fixed interest charges
are covered by net earning of the firm out of which they will be
paid. The higher the ratio, the more is the interest paying
capacity of the firm and safety margin available to long-term
creditors. But, too high a ratio may only indicate the unused
capacity of a firm which will reduce the profits from trading on
equity resulting in the reduction in shareholders’ income. On the
other hand, the low ratio indicates the firm is using excessive
debt. The investors can forecast the financial risk by comparing
interest coverage ratio with standard ratio of the industry. The
standard for this ratio should be about 6 or times.
Some experts prefer to use ‘Cash to Debt-Service Ratio’ or ‘Cash
Flow Coverage Ratio’ instead of debt service ratio, as debt-service
charges are to be paid in cash. Therefore, total cash inflows of
that period should be used in place of net income for the long-
term liquidity analysis of the firm. If redemption fund is created
for payment of debt, then yearly contribution to redemption fund
should also be added in the amount of interest. Following formula
is used to calculate this ratio:

Annual Cash Flow before Interest and

Tax

Cash to Debt-Service Ratio

=-----------------------------------------------------------

Sinking Fund Appropriations

Interest + -------------------------------------

1 – Tax Rate

7. Dividend Coverage Ratio

This ratio measures the ability of a firm to pay dividend on
preference shares which carry a fixed rate of dividend. It is
calculated by dividing the net profits after tax by the amount of
preference share dividend. The ratio is expressed in number of
times of net profits after taxes. Thus,

Net Profit after tax and interest

Preference Dividend Coverage Ratio
=----------------------------------------------

Preference Dividend

Interpretation and Significance: This ratio, like

interest coverage ratio, indicates the safety margin available to
preference shareholders. As a rule, the higher the dividend
coverage ratio, the better it is from the preference shareholders’
point of view.

INVESTMENT ANALYSIS OR MARKET VALUE

RATIOS
These ratios are helpful to the shareholders in analyzing their
present and perspective investment. With the help of these ratios,
the shareholders can also compare the value of their investment
with dividend, earnings and market price etc. these ratios also
enable them in forecasting the future market price of their
investments. Hence, also known as ‘Market Value Ratio’. The
following ratios fall in this category.

1. Earning Per Share – EPS

The rate of dividend on shares depends upon the amount of

profits earned by the firm. Whatever profit remains, after meeting
all expenses and paying preference share dividend, belong to
equity shareholders. These are the profits earned on equity
shareholders. These are the profits earned on equity share
capital. The earning per share (EPS) is calculated by dividing the
profit available to equity shareholders by the issued. The profit
available to the equity shareholders is represented by the net
profit after taxes and preference share dividend. Thus,

Profit after Tax – Preference Dividend

Earning per Share or EPS

=--------------------------------------------------------------

Number of Equity Shares

Interpretation and Significance: This is the most popular

ratio as it measures the profitability of a firm from the
shareholders’ point of view. The higher the ratio, the better are
the performance and prospects of the company and the greater
would be the market price of a company’s shares or vice-versa.
The higher earnings per share help the company in raising
additional capital without any difficulty. The comparison of this
ratio with that of similar companies and industry average over a
period of time is important from investment point of view.

2. Price-Earning Ratio – P/E Ratio

The price earning ratio expresses the relationship between
the market price of a share and earnings per share. In other
words, it indicates, how many times is the market price of a share
to its share to its earnings. Expressed as formula, the ratio is
calculated as:
 Market Price per Share

Price Earning Ratio =--------------------------------------

Earning per Share

Interpretation and Significance: Price earning ratio

helps in the assessment of the profitability of a firm from the
point of view of equity shareholders. It indicates the market
opinion of the earning capacity of a share and the future
prospects of the company. That is why, many investors while
purchasing share, do not consider any factor other than this. A
higher price-earning ratio is the indication of over valuation of
shares or vice-versa. This ratio is used in determining the future
market price and rate of capitalization of a share. By comparing
the price-earning ratio with that of similar firms or industry
average, one can know whether the shares is over valued or
under valued.

3. Dividend per Share – DPS

The EPS ratio represents to what extent the profits belong to the
owners of a firm. But, it is customary in all companies to retain a
part of profits in the business and distribute only the balance as
dividend among shareholders. Thus, DPS ratio represents the
dividend paid to the shareholders on per share basis. The DPS
ratio is calculated by dividing the dividend paid to the
shareholders by the number of equity shares issued. Expressed as
formula, the ratio is
 Dividend paid to Equity Shareholders

Dividend per Share =--------------------------------------------------------

No. of Equity Shares Outstanding

Interpretation and Significance:This ratio

represents to what extent the profits have been received by the
owners as dividend. An investor, desiring more income would like
to invest in the shares of a high dividend paying company. It
should be noted that dividend per share is not a measure of
profitability of a company, since retained earnings might have
been utilized for payment of dividend. This increases the
distributable amount without increasing the number of shares.

4. Dividend Yield Ratio

This ratio is yet another profitability ratio from the standpoint of
equity shareholders. The earning per share (EPS) and dividend
per share (DPS) are determined on the basis of book value of
shares, while this ratio is expressed in terms of market value per
share. The dividend yield ratio expresses the relationship
between the dividend per share and market value per share.
Thus,

Dividend per Share

Dividend Yield Ratio =---------------------------------- * 100

Market Price per Share

Interpretation and Significance: This ratio shows the
rate of return to shareholders in the form of dividend based on
the market price of the share i.e. actual rate of dividend on his
investment. The dividend yield ratio is also a popular ratio but its
adequacy can be measured only by a comparison with the ratio of
similar firms or industry average.

5. Dividend Pay-out (D/P) Ratio

The objective of this ratio is to ascertain, what percentage of net
profits after tax has been distributed among shareholders in the
form of cash dividend and what percentage is retained in the
business. Thus, dividend pay-out ratio gives the percentage. It is
calculated by that are distributed through dividends and is usually
expressed as a percentage. It is calculated by dividing the total
dividend paid to equity shareholders by the total profits belonging
to them or by dividing the DPS by the EPS as given below:

Dividend per Share

Dividend pay-out Ratio =---------------------------- * 100

Earning per share

Equity Dividend

=----------------------------------------- * 100

Profit after tax – Pref. Dividend

Interpretation and Significance: a dividend pay-out ratio
of 40 percentages indicates that 40 percent of the earnings have
been distributed as dividends and 60 percentages have been
retained by the company. A ratio of less than 100percentage
implies pouching back a portion of the profits into the business,
while a ratio of higher 100 percent indicates that distribution of a
portion of the reserves as dividends. Thus a company which
distributes a lower portion of its earnings in the form of dividends
will be financially stronger and is likely to expand and grow faster
rate. Such a action result in an increase in the reserves to capital
ratio that reveals sound financial position and the capacity. A
comparison of this ratio with that of similar companies and over a
period of year would reflect on the adequacy or otherwise of the
dividend paid to the equity shareholders.

6. Book Value per Share

This ratio indicates the net worth per equity share. It is calculated
as:

Equity Capital + Reserves – P&L (after

depreciation)

Book Value per Share

=----------------------------------------------------------------------

Total Number of Equity Shares

The book value is a reflection of past profits and dividend policy of
the company. A high book value indicates that a company has
higher resources and is a potential bonus candidate. A low book
value indicates a liberal dividend and bonus policy or a poor track
record of profitability. Book value is considered less relevant for
the market price as compared to earning per share.

RESEARCH METHODOLOGY

Research methodology is a systematically solve the research

problem. It has many dimensions and research methods
constitute a part of the research methodology.

Thus when we talk about research methodology, we don’t only

talk of research methods but also consider the logic behind the
methods. We use in context of out research study, so that
research results are capable of being evaluated by researcher
himself or by others.

To effectively carry out my research, I used following research

process, which consists of series of actions or steps.

Research comprises of following steps:-

1. Formulating the research problem

2. Research design & sample design

3. Analysis of data gathered

4. Data analysis comparison

5. Graphics and interpret

1. Formulating the research problem

This is the first step under which the problem is stated in general
way and then ambiguities i.e. understanding and rephrasing the
problem thoroughly and rephrasing the same into a meaningful
terms from an analysis point of view.

The research problem under the present project was to study

data of various funds. For this research process was to be
formulated and the execution of which would result in the desired
data.
2.PREPARING THE RESEARCH DESIGN

The function of research design is to provide for the collection of

relevant evidences with minimum expenditure of efforts, time and
money.

Research design

• Type of research

• Sample design

Type of research

The type of research under this project is an analytical research.

In analytical research, we use facts or information already and
analysis these to make a critical evaluation of the material. In this
project I had collected facts, data and information.

SAMPLING DESIGN

A sample deign is a definite plan determined before any data is

actually collected for obtaining a sample. Researcher must select
a sample design, which should be reliable and appropriate for his
report.

3. OBSERVATION DESIGN (COLLECTION OF

DATA)
Observational design relates to the condition under which the
observations are to be made. Observational design is respect to
descriptive research study. Data collection is an integral part of
marketing research. There are several ways of collecting the
appropriate data, which differ considerable in context of money,
time cost and other resources at the disposal of the researcher.

Data can be obtained from two important sources:

 Primary data

 Secondary data

PRIMARY DATA

Primary data is collected a fresh and for the first time. Thus
happens to be in character. Primary data can be collected by
various methods i.e.

1. Observation

2. Interview

3. Schedules

4. Questionnaires
Secondary Data
The sources of secondary data are:-

1. Corporative magazines

2. Manuals of various companies

3. Various publications

4. Books, magazines of particular clubs and newspapers

5. Employment exchange
SUMMARY OF CONSLUSION AND
RECOMMENDATION

Financial analysis is analysis of financial statements of and

enterprise. Financial statement reorganized collection of data
according to logical and constituent accounting procedures.
However, financial statements in their traditional from giving
historical data and information are of little us to these who use
them to draw certain conclusions.

Financial appraisal is scientific evaluation of profitability and

financial strength of any business concern. Financial appraisal
techniques include ratio analysis common size analysis trend
analysis, fund flow analysis etc. these techniques may be applied
in the financial appraisal of any entity and Jaipur Dairy Ltd. is no
exception to it.

After a careful and critical analysis of Jaipur Dairy Ltd. it is

convenient to look into the overall conclusions and suggestions.

THE PROLOGUE
Today India is a biggest milk producer in the Asia. After
independence and milk revelation the production of milk
increased manifolds. Milk is an essential utility in every body’s
life. It is one of the basic needs of human life. Now a day
production of milk and milk products is most important in India,
both in terms of generating employment opportunities and for
meeting the basic requirement of people. It yields manifold
returns. This industry has contributed in a significant manner to
the faster and quicker economic development of this members
and country. The plant of Jaipur Dairy Ltd. is located on Jawaharlal
Nehru Marg. This is the biggest milk supplier in Jaipur district

PROFITABLITY

The measurement of profitability is a tool of overall measurement

of efficiency. An overall study of profitability of Jaipur Dairy Ltd.
has been Dade in relation to sales, operating assets capital
employed and its net worth.

By analysis the working results i.e. profit and loss account of

Jaipur Dairy Ltd. it was found that, the net profit before interest
and tax of the dairy is showing an increasing trend. This is very
good for Jaipur Dairy Ltd. The increase in the profits is nearly
24%. More than the previous year the reason is good sales growth
between years.

For this following suggestion should be considered:

 Proper cost control is required and cost control techniques

should adopt for it.
  Operating expenses, Administrative expenses should be
especially considered to be reduced.

 Inventory is the biggest item of Balance sheet that must

have demanded a large amount of maintaining cost. So
efficient inventory management should be done.

 Inventory should be reduced to some extent that would help

to recover blocking money in inventory.

 The service staff should be given proper training and better

environment for work.

 Proper advertisement and sales promotion is required.

 Dairy has to pay large fixed interest charges. Hence long-

term borrowing should be reduced so that the earnings are
satisfactorily earmarked with them.

WORKING CAPITAL

The concept of working capital indicates the excess of current

assets over current liabilities. Working capital should be sufficient
for the company to conduct its business on the most economical
basis.

The working capital of Jaipur Dairy Ltd. shows as increasing trend

during 2007 to 2009. It means the Jaipur Dairy Ltd. has enough
fund to operate business after analysis different components of
current assets. It can be concluded that debtors and stock
constituted a major part of the current assets. It enable said that
the dairy was not having adequate control on debtors and stock.
In both years current liabilities were the major portion in all the
liabilities.

The current ratio of the company has been lower than the
generally accepted norm of 2:1. Throughout the period
understudy the quick ratio was below the norm for all the years.
This shows that Jaipur Dairy Ltd. with regard to meeting current
liabilities from creditor’s point of view is not perfectly sound in
both years. The absolute liquidity ratio has been below the norm
of 0.5:1 in all the years.

However, the Jaipur Dairy Ltd. has shortage of capacity to pay its
entire current liabilities at once. Inventory turnover ratio is very
good that reveals that dairy can increase its sales at lower profits.
Proper attention should be paid by management towards this side
to utilize funds blocked in stock. Number of days to collect
receivable requires improvement on the part of management. But
since milks are a seasonal crop type business, stocks do get
complied for a few months and that is why the funds get blocked.

It is suggested in this respect that the Jaipur Dairy Ltd. should try
to balance the proportion of cash and bank balance in current
assets. The management should take steps for proper utilization
dependence on equity capital, which shows bright prospects of
Jaipur Dairy Ltd.

It is suggested in this respect that the Jaipur Dairy Ltd. should try
to balance the proportion of cash and bank balance in current
assets. The management should take steps for proper utilization
dependence on equity capital that shows bright prospects of
Jaipur Dairy Ltd.

CAPITAL STRUCTURE

Capital structure means the financial plan of an organization. In

which the various sources of capital are mixed in such a
proportion that they provide a distinct capital set up more suited
to the requirement of that particular organization. Capital
structure of Jaipur Dairy Ltd. has been analyzed with the help of
various ratios.

The various source of finance in the dairy are share capital and
loan from different banks. These are:-

The bank of Rajasthan Ltd.

State Bank of Bikaner & Jaipur

Jaipur Central Co-operative Bank

Oriental Bank of Commerce

Government subsidies have been also good sources of funds

those are invested in expansion and development of members
and societies. Outsiders’ funds have a major portion with compare
to net worth that is risky from lenders points of view. It would
make difficult for getting more outsiders’ funds.

For this following suggestion should be considered:

  It is considered to reduce dependency on outsiders’ sources
of funds

 Unsubscribe capital should be called up for funds

requirements

During the last two years the amount of net worth increased from
20.20 cores to 21.02 cores. There was decrease in the amount of
reserve and surplus. Increase outsiders’ fund has been found
82.31 to 101.22 cores.

REFRENCES
 I.M.Pandey, (1978), financial management, Ninth
addition, UBS Publication New Delhi.
 S.P. Gupta, Management Accounting, Sahitya Bhawan
Publications, Agra
 Van Horn,(2002),Financial Management and Policy,12th
edition, Publisher Dorling Kindersley India ltd.
 Horne Wwachonicz, J.R.Bhaduri (2005), Fundamentals
and Financial management, 12th edition, Pearson
publisher.
 MY Khan, P.K.Jain (1981), Financial Management,5th
edition, Publisher Mc grew hill companies.
 Income statement and financial statement of 206-07 to
2008-09 as obtained from Jaipur Dairy.
 Financial dailies.
 Economic Times
 Business Standard

 Business Magazines
 Business India
 Business World

 Internet Portals:
 www.jaipurdairy.com
 www.dairyindia.com
 www.scribd.com