INTRODUCTION TO RATIO ANALYSIS and INTERPRETITION

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

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

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

MEANING OF RATIO:
A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one

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number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “ so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS:
Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an annalist but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk.

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However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group.

OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing

FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more variables / accounting figures, such relationship can be expressed in different ways as follows – A] As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times:

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For example. The standard ratio may be the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most successful firm in the industry. then the gross profit may be described as 20% of sales [ 10.000.000.000] or simply by saying that the credit sales are 2. the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. 10.5 [30.000] STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards.00. one item may be expressed as a percentage of some other item. 30.5 times that of cash sales.000/12.000 & the amount of the gross profit is Rs. 12. Similarly.00. so the ratio of credit sales to cash sales can be described as 2. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.00.00.50.00.000/50.000 & credit sales are Rs. TYPES OF COMPARISONS The ratio can be compared in three different ways – 1] Cross section analysis: 4 . C] As a percentage: In such a case.00. the cash sales of a firm are Rs.00. net sales of the firm are Rs. In interpreting the ratio of a particular firm.00.In the above case the equity share capital may also be described as 4 times that of preference share capital.

about the direction of progress of the firm. The firms performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. over the years it has been declining for the firm. By comparing the present performance of a firm with the performance of the same firm over the last few years. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. 2] Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time.One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. an assessment can be made about the trend in progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data\ 3] Combined analysis: If the cross section & time analysis. then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. So it involves the comparison of two or more firm’s financial ratio at the same point of time. whereas the industry average has not shown any significant changes. both are combined together to study the behavior & pattern of ratio. the ratio of operating expenses to net sales for firm may be higher than the industry average however. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. For example. 5 .

1) The dates of different financial statements from where data is taken must be same. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. 6 . which must be taken care of. 2) If possible.The combined analysis as depicted in the above diagram. there are certain pre-requisites. PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions. otherwise there must be sufficient evidence that the data is correct. but it is decreasing over the years & is approaching the industry average. only audited financial statements should be considered. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. which clearly shows that the ratio of the firm is above the industry average.

3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. Therefore. 5) Last but not least. This will be conductive to counter checks. CLASSIFICATION OF RATIO CLASSIFICATION OF RATIO BASED ON FINANCIAL USER STATEMENT BASED ON FUNCTION BASED ON 1] BALANCE SHEET RATIO 2] REVENUE STATEMENT RATIO 3] COMPOSITE RATIO 1] LIQUIDITY RATIO 2] LEVERAGE RATIO 3] ACTIVITY RATIO 4] PROFITABILITY RATIO 5] COVERAGE RATIO 1] RATIOS FOR SHORT TERM CREDITORS 2] RATIO FOR SHAREHOLDER 3] RATIOS FOR MANAGEMENT 4] RATIO FOR LONG TERM CREDITORS 7 . otherwise there is no purpose of calculating a ratio. a group of ratios must be preferred. 4) One ratio may not throw light on any performance of the firm. the analyst must find out that the two figures being used to calculate a ratio must be related to each other.

debtors turnover ratios. These ratio help to judge the liquidity. E. and Proprietory ratio. Revenue ratios are Gross profit ratio. There are two types of composite ratiosa) Some composite ratios study the relationship between the profits & the investments of the concern. These ratios study the relationship between the assets & the liabilities. and Stock working capital ratio. Expense ratio. 2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. Operating ratio. ratio of current assets to current liabilities or ratio of debt to equity. Figures may be taken from Balance Sheet . creditors turnover ratios. P& P A/C. return on equity capital etc.g. Net profit ratio. Stock turnover ratio. Capital gearing ratio. E. Liquid ratio. of which one is found in the balance sheet & other in revenue statement. return on proprietors fund. return on capital employed. One-way of classification of ratios is based upon the sources from which are taken.g. solvency & capital structure of the concern. Debt equity ratio. 3] Composite ratio: These ratios indicate the relationship between two items. Net operating profit ratio. dividend payout ratios. 1] Balance sheet ratio: If the ratios are based on the figures of balance sheet. Balance sheet ratios are Current ratio. & debt service ratios 8 . These ratio study the relationship between the profitability & the sales of the concern.g.BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. While calculating these ratios. or both. they are called Balance Sheet Ratios. of the concern. there is no need to refer to the Revenue statement. b) Other composite ratios e.

3] Activity ratios: It shows relationship between the sales & the assets. 2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e. stock turnover ratios.g. debt equity ratios.g. dividend payout ratios & debt service ratios. 1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. return on equity capital. profitability ratios & turnover ratios.g. liquid ratios & current ratios. operating net profit ratios. return on investment. 9 . expenses ratios b) It shows the relationship between profit & investment e. gross profit ratios. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e. It is also known as Turnover ratios & productivity ratios e.g. debtors turnover ratios. & Proprietory ratios. leverage ratios. operating ratios. activity ratios.BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios. 4] Profitability ratios: a) It shows the relationship between profits & sales e.g. capital gearing ratios.

turnover ratios. expenses ratios 4] Ratios for long-term creditors: Debt equity ratios. stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund.BASED ON USER: 1] Ratios for short-term creditors: Current ratios. return on capital employed. operating ratios. return on equity capital 3] Ratios for management: Return on capital employed. liquid ratios. proprietor ratios. 10 .

which indicate the liquidity of a company. It is expressed in the form of pure ratio. E. are Current ratio. The ratios. and Cash ratio. 2:1 Formula: Current assets Current ratio = Current liabilities 11 . It is also known as ‘working capital ratio’ or ‘ solvency ratio’.LIQUIDITY RATIO: Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations. These ratios are discussed below CURRENT RATIO Meaning: This ratio compares the current assests with the current liabilities. Quick/Acid-Test ratio.g.

marketable securities. Current assets include cash and bank balances. that is the entity is under utilizing its current assets. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL).term liabilities. The higher the current ratio. inventory of raw materials. Liquid ratio compare the quick assets with the quick liabilities. as originally contemplated. The current liabilities defined as liabilities which are short term maturing obligations to be met. which will be due for payment in the same period and is intended to indicate whether there are sufficient short-term assets to meet the short. E.g. LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. provision for taxation. which will become liquid within approximately twelve months with liabilities. i. This ratio measures the liquidity of the current assets and the ability of a company to meet its shortterm debt obligation. CR measures the ability of the company to meet its CL. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading. converted into cash within a short period time. Recommended current ratio is 2: 1.e. normally not exceeding one year. bills receivable. CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL. It is expressed in the form of pure ratio. semi-finished and finished goods. 1:1. Current liabilities consist of trade creditors.The current assests of a firm represents those assets which can be. in the ordinary course of business. debtors (net of provision for bad and doubtful debts). dividends payable and outstanding expenses. and prepaid expenses. the greater the short-term solvency. with in a year. bills payable. 12 . bank credit.. This compares assets.

CASH RATIO Meaning: This is also called as super quick ratio. which can be converted into. QR indicates the extent to which a company can pay its current liabilities without relying on the sale of inventory. a quick ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the timing of receipts and payments. Generally.The term quick assets refer to current assets. QA includes cash and bank balances. and sundry debtors. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. Formula: Cash + Bank + Marketable securities Cash ratio = Total current liabilities 13 . This ratio considers only the absolute liquidity available with the firm. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets. cash immediately or at a short notice without diminution of value. Formula: Quick assets Liquid ratio = Quick liabilities Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. short-term marketable securities. QA refers to those current assets that can be converted into cash immediately without any value strength. which are highly liquid. This is a fairly stringent measure of liquidity because it is based on those current assets.

14 . the earning per share are determined by dividing net profit by the number of equity shares.Since cash and bank balances and short term marketable securities are the most liquid assets of a firm. INVESTMENT / SHAREHOLDER EARNING PER SAHRE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization. If there is only one class of shares. An earnings per Share represents earning of the company whether or not dividends are declared. EPS measures the profits available to the equity shareholders on each share held. financial analysts look at the cash ratio. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm.

Formula: NPAT Earning per share = Number of equity share The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held. Formula: Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Ordinary Shares DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship between the dividend paid to equity shareholders out of the profit available to the equity shareholders. 15 .

It is expressed as a pure ratio. Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts. 16 . The Capital-gearing ratio shows the relationship between two types of capital viz: . GEARING CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt.equity capital & preference capital & long term borrowings.Formula: Dividend per share Dividend Pay out ratio = Earning per share *100 D/P ratio shows the percentage share of net profits after taxes and after preference dividend has been paid to the preference equity holders. This is also known as leverage or trading on equity.

There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin. can comfortably meet its operating expenses and provide more returns to its shareholders. 17 . A firm. PROFITABILITY These ratios help measure the profitability of a firm.Formula: Preference capital+ secured loan Capital gearing ratio = Equity capital & reserve & surplus Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a concern. The relationship between profit and sales is measured by profitability ratios. which generates a substantial amount of profits per rupee of sales.

selling. administration. This ratio shows the profit that remains after the manufacturing costs have been met. Formula: Gross profit Gross profit ratio = Net sales NET PROFIT RATIO:Meaning: Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage. Formula: NPAT Net profit ratio = Net sales This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. how much amount is left to meet other expenses & earn net profit. how productive the concern . purchase. financing. how good its control is over the direct cost. It measures the efficiency of production as well as pricing. pricing and tax 18 * 100 * 100 . It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. It measures the overall efficiency of production. selling & inventory.GROSS PROFIT RATIO:Meaning: This ratio measures the relationship between gross profit and sales. This ratio helps to judge how efficient the concern is I managing its production.

management. ROCE indicates the efficiency with which the long-term funds of a firm are utilized. These are described below: 19 . The term fund employed or the capital employed refers to the total long-term source of funds. Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. RETURN ON CAPITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The important turnover ratios are debtors turnover ratio. inventory/stock turnover ratio. Jointly considered. fixed assets turnover ratio. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of investment in various assets. the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm. average collection period. and total assets turnover ratio. It is the sum of long-term liabilities and owner's equity. Formula: NPAT Return on capital employed = Capital employed *100 FINANCIAL These ratios determine how quickly certain current assets can be converted into cash. Alternatively it can also be defined as fixed assets plus net working capital. They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. It means that the capital employed comprises of shareholder funds plus long-term debts.

Net credit sales are the gross credit sales minus returns. the better it is for the organization. The higher the DTO. This ratio shows how rapidly debts are collected. Average debtors are the average of debtors at the beginning and at the end of the year. if any.DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. It measures the liquidity of a firm's debts. Formula: Credit sales Debtors turnover ratio = Average debtors 20 . from customers.

INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period. The higher the ratio. averages may be used when a flow figure (in this case. a high inventory turnover may also result from a low level of inventory. 21 . In general. this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated. the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low). and vice versa. the more efficient is the management of inventories. Formula: Net sales Fixed assets turnover = Net fixed assets This ratio measures the efficiency with which fixed assets are employed. Formula: COGS Stock Turnover Ratio = Average stock ITR reflects the efficiency of inventory management. cost of goods sold) is related to a stock figure (inventories). A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. which may lead to frequent stock outs and loss of sales and customer goodwill. However. the average of inventories at the beginning and the end of the year is taken. For calculating ITR. However.

Proprietary ratio determines as to what extent the owner’s interest & expectations are fulfilled from the total investment made in the business operation. It helps to judge the quantum of inventories in relation to the working capital of the business. The ratio highlights the predominance of stocks in the current financial position of the company. In other words. It is expressed as a percentage. Total assets also know it as net worth. The purpose of this ratio is to show the extent to which working capital is blocked in inventories. This ratio determines the long term or ultimate solvency of the company. Proprietary ratio compares the proprietor fund with total liabilities. Formula: Stock Stock working capital ratio = Working Capital 22 . Formula: Proprietary fund Proprietary ratio = Total fund OR Shareholders fund Proprietary ratio = Fixed assets + current liabilities STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital.PROPRIETORS RATIO: Meaning: Proprietary ratio is a test of financial & credit strength of the business. It is usually expressed in the form of percentage. It relates shareholders fund to total assets.

Alternatively.Stock working capital ratio is a liquidity ratio. It is usually expressed as a pure ratio. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This ratio also helps to study the solvency of a concern. This ratio indicates 23 . RETURN ON PROPRIETOR FUND: Meaning: Return on proprietors fund is also known as ‘return on proprietors equity’ or ‘return on shareholders investment’ or ‘ investment ratio’. this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It indicates the composition & quality of the working capital. It is a qualitative test of solvency. 2:1 Formula: Total long-term debt Debt equity ratio = Total shareholders fund Debt equity ratio is also called as leverage ratio. It shows the extent of funds blocked in stock. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity.g. E. Leverage means the process of the increasing the equity shareholders return through the use of debt. DEBT EQUITY RATIO: MEANING: This ratio compares the long-term debts with shareholders fund. This relationship is shown by debt equity ratio. If investment in stock is higher it means that the amount of liquid assets is lower. Leverage is also known as ‘gearing’ or ‘trading on equity’.

the relationship between net profit earned & total proprietors funds. Return on proprietors fund is a profitability ratio, which the relationship between profit & investment by the proprietors in the concern. Its purpose is to measure the rate of return on the total fund made available by the owners. This ratio helps to judge how efficient the concern is in managing the owner’s fund at disposal. This ratio is of practical importance to prospective investors & shareholders. Formula: NPAT Return on proprietors fund = Proprietors fund * 100

CREDITORS TURNOVER RATIO: It is same as debtors turnover ratio. It shows the speed at which payments are made to the supplier for purchase made from them. It is a relation between net credit purchase and average creditors Net credit purchase Credit turnover ratio = Average creditors

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

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

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IMPORTANCE OF RATIO ANALYSIS:
As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] Liquidity position, 2] Long-term solvency, 3] Operating efficiency, 4] Overall profitability, 5] Inter firm comparison 6] Trend analysis. 1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of short term loans.

2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors, security analyst & the present & potential owners of a business. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency.

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Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. 3] OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measures this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets- total as well as its components. 4] OVERALL PROFITABILITY: Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together. 5] INTER – FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. one of the popular techniques is to compare the ratios of a firm with

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which is important for decision making and forecasting. 6] TREND ANALYSIS: Finally. profitability and solvency of a firm. For example. whether the movement is favorable or unfavorable. the firm can seek to identify the probable reasons & in light. whether the financial position of a firm is improving or deteriorating over the years. the ratio may be low as compared to the norm but the trend may be upward. 27 . that is. ratio analysis enables a firm to take the time dimension into account. On the other hand. An inter firm comparison would demonstrate the firms position vice-versa its competitors. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement. In other words.  Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. though the present level may be satisfactory but the trend may be a declining one. take remedial measures. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs.  Ratio analysis helps in the assessment of the liquidity. If the results are at variance either with the industry average or with the those of the competitors. operating efficiency. ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant accounting data relationships. The advantages of ratio analysis can be summarized as follows:  Ratios facilitate conducting trend analysis. This is made possible by the use of trend analysis. which give the decision-maker insights into the financial performance of a company.the industry average.

and so might not give a proper indication of the company’s current financial position. there is need to consider the changes in price.  The figures in a set of accounts are likely to be at least several months out of date. there is need to consider the changes in technology. LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations. asset valuations in the balance sheet could be misleading. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. 28 . The movement in performance should be in line with the changes in price. These limitations are described below: 1] Information problems  Ratios require quantitative information for analysis but it is not decisive about analytical output . 2] Comparison of performance over time  When comparing performance over time. The movement in performance should be in line with the changes in technology.  Where historical cost convention is used. Ratios based on this information will not be very useful for decision-making.  When comparing performance over time.  Changes in accounting policy may affect the comparison of results between different accounting years as misleading.

 Ratios are calculated on the basis of past financial statements. PURPOSE OF RATIO ANLYSIS: 1] To identify aspects of a businesses performance to aid decision making 2] Quantitative process – may need to be supplemented by qualitative Factors to get a complete picture.  Ratios provide only quantitative information.3] Inter-firm comparison  Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis. comparing the performance of two enterprises may be misleading.  Even within a company.  Inter-firm comparison may not be useful unless the firms compared are of the same size and age.  Selective application of government incentives to various companies may also distort intercompany comparison. and employ similar production methods and accounting practices. comparisons can be distorted by changes in the price level. 3] 5 main areas: Liquidity – the ability of the firm to pay its way  Investment/shareholders – information to enable decisions to be made on the extent of the risk and the earning potential of a business investment  Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital 29 . They do not indicate future trends and they do not consider economic conditions. not qualitative information.

Thus proper comparison of ratios may reveal where a firm is placed as compared with earlier period or in comparison with the other firms in the same industry. which need the management attention in order to improve the situation. ratio calculated on the basis of historical financial statements may be of good assistance to predict the future.e. which is already appearing in the financial statement. As the ratio analysis is concerned with all the aspect of a firms financial analysis i. At the same time. As the future is closely related to the immediate past. Ratio analysis is one of the best possible techniques available to the management to impart the basic functions like planning & control. This comparison may be in the form of intra firm comparison. The process of this appraisal is not complete until the ratio so computed can be compared with something. profitability & overall performance. as the ratio all by them do not mean anything. liquidity. Profitability – how effective the firm is at generating profits given sales and or its capital assets  Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets ROLE OF RATIO ANALYSIS: It is true that the technique of ratio analysis is not a creative technique in the sense that it uses the same figure & information. Ratio analysis also helps to locate & point out the various areas. activity. it enables the interested persons to know the financial & operational characteristics of an organisation & take the suitable decision. Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of performance. it is true that what can be achieved by the technique of ratio analysis cannot be achieved by the mere preparation of financial statement. 30 . either individually or in relation to those of other firms in the same industry. inter firm comparison or comparison with standard ratios. solvency.

 It is a professionally managed 40 years old public limited company. VDE etc. APLAB enjoys worldwide recognition for the quality of its products.  It serves customer global customer par excellence. power conversion.  It is quoted on BOMBAY STOCK EXCHANGE. Self-Service Terminals for Banking Sector and Fuel Dispensers for Petroleum Sector.EVALUATION OF APLAB LIMITED THROUGH RATIO COMPANY PROFILE THE COMPANY – APLAB Limited is a professionally managed Public Limited company quoted on the Bombay Stock Exchange. Since its inception in 1962. ABOUT APLAB:  Aplab started its operation in October 1962. 31 . They specialize in Test and Measurement Equipment. business integrity and innovative engineering skills. Power Conversion and UPS Systems. APLAB has been serving the global market with wide range of electronic products meeting the international standards for safety and reliability such as UL. & UPS & fuel dispensers for petroleum sector.  It specialized in Test & measurement instruments.  It enjoys worldwide recognition for the quality of its business integrity & innovative engineering skills.

GOAL:  Goal at Aplab is extract ordinary customer service as we provide our customer needs in the personal service industry. 4] To understand the customer’s needs and provide solutions than merely selling products. on time. our customers & so to us.  To be the TOP INDIAN COMPANY as conceived by our customers. VISION:  To be a global player.  To be “ THE BEST ” company to work for. with in budget.MISSION:  To deliver high quality. as per the customer specification in a manner profitable to both. 3] To expand knowledge and remain at the leading edge in technology to serve the global market. engineered products. carefully. 32 . CORPORATE MISSION – 1] To achieve healthy and profitable growth of the company in the interest of our customers & the shareholders. recognized for quality & integrity. reward innovation and maintain healthy interpersonal relations within the organization. as rated by our employees. 5] To create intellectual capital by investing in hardware and embedded software development. 2] To encourage teamwork.

which encourages interaction. Entire organization is committed to create an environment that encourages individual excellence and a personal commitment to quality. “Quality is everybody’s responsibility” and all strive to “do it right the first time”.  Foster an open door policy.  “ Do it right the first time & every time” is their team commitment * our way of doing business. We believe that professional services sector is poised to grow at a very rapid pace. it ensures as growth & prosperity. to resolve customer service issues. professional development & recognition. 33 . APLAB has entered the field of Professional Services starting with the Banking and the Petroleum Industry. It is therefore natural that APLAB Limited is certified for quality with ISO 9001:2000 registration.ISO 9001:2000 Quality at APLAB is a part of our people’s attitude. to ensure customer satisfaction. QUALITY IS OUR WORK CULTURE . Focus on developing embedded system software has been also enhanced.  Provide most effective & corrective action.  Offer opportunities for growth. In APLAB.VALUES & BELIEFS: Their values & beliefs required that they  Treat employees with respect & give them an opportunity for input on how to continuously improve their service goals. After completing three years in the new era. we can say with pride that we have been delivering our promises to our customers and the shareholders. discussion & ideas to improve work environment & increase productivity. THE 21ST CENTURY SUCCESS – APLAB had planned to enter the 21st Century with a program for a fast and healthy growth in the global market based on company’s high technology foundation and the reputation of four decades for prompt customer service and as a reliable solution provider.

The Science & Technology Ministry of the Govt.  Aplab will achieve this by total commitment & involvement of every individual. APLAB is recognized not only for manufacturing standard products but also in providing solutions and services as per the customer specifications. 3. Development of new product especially hi-tech intelligent product & electronic substitution. Improvement in the existing products & production processes.000 RESEARCH AND DEVELOPMENT Developing innovative products with the latest technology is the core strength of APLAB. of India accredits our R&D Laboratories. We have a large team of dedicated.  Aplab will encourage its employees & suppliers to develop quality products prevent defects & make continual improvement in all processes. import 34 . transaction control system. We spend more than 4% of the company revenue in Research & Development activities. QUALITY OBJECTIVE:  Aplab is an ISO 9001:2000 certifies company. highly qualified skilled engineers who excel in the latest state-of-the-art-technology.QUALITY POLICY:  Aplab will deliver to its customer products & services that consistently meet or exceed their requirement. Customizing the products to the customer’s specifications & adaptation of imported technology. Specific areas in which the company carries out R&D 1. 2.  On time delivery every time reduction is out going PPM to 10. 4. Development of products to suit exports markets.  100% customer satisfaction.

With the company. Canada & USA. Over 30 million U. which are fully developed in house. It has resulted in considerable saving of foreign exchange. France. EXPORT APLAB currently exports over 25% of its production to Western Europe. Germany. R&D is an ongoing process.S. Canada. and USA & Australia. Dollars worth of Power Systems and Test Instruments from APLAB are today operational in UK. Through a continuous interaction with production& Quality Assurance Department takes up redesign of existing products. 35 . Government of India. This is done to achieve state of the art in our design & to bring about improvement to get maximum performance / cost ratio. The ministry of science & technology. This will greatly help the company in facing competition in local markets from foreign companies. Almost all the products manufactured by the company are import substitution items. Sweden. FUTURE PLAN OF ACTION Major R&D activity is concentrated around up gradation of product design & re-alignment of production processes to bring about improved quality at lower cost. Belgium. recognizes the company’s R&D.The company has achieved its position of leadership in the Indian instrumentation industry & continuous to maintain it through its strong grip of technology.

M. DESIGN & DESIGN DEVLOPMENT OFFICERS STAFF WORKERS 36 . & G.APLAB’S ORGANISATION CHART EXECUTIVE CHAIRMAN MANAGING DIRECTOR DIRECTOR [TECHNICAL . G.M PROD.M. ELTRAC PROD.PE] GENERAL MANAGER MAEKETING DIRECTOR REGIOAL HEAD: MUMBAI NEWDELHI SECUNDARABAD BANGLORE CHENNAI FINANCE MANAGER G. MARKETING MATERIAL MANAGER G.M.

MICR Cheque Processing and Smart Card based solutions. AC-DC POWER SUPPLY. POWER SUPPLIES. We are into Self Service Delivery Systems. HIGH POWER AC SYSTEMS (UPS. DC Uninterruptible Power Supply) d. Our in house R&D group is constantly striving to scan the rapidly changing technology and offer suitable end to end solutions. Isolation Transformer) c.QUICKCLEAR. TEST & MEASUREMENT INSTRUMENTS b. Frequency Converter. ISOLATION TRANSFORMER ATM INSTACASH The Banking Automation Division of APLAB was launched in 1993. SMPS. Inverter. when we introduced INSTACASHIndia’s first indigenously manufactured ATM INSTACASH demonstrated APLAB’s skills in design. APLAB LIMITED 37 . CONDITIONER. hardware manufacturing and software integrations. HIGH POWER DC SYSTEMS (DC Power Supply. DC/DC LINE CONVERTERS. The latest is IMAGEENABLED Cheque Processing solution.PRODUCTS OF APLAB: a. ATM INSTACASH e. INVERTERS. STABILIZER.

00.48 3.36 46.47 1.81.80.29.90.01 PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2002 (RS.70.14 6.06.73 1.96 5.80 15.31.29.32.’000) AS AT 31ST 2002 AS AT 31ST 2002 SOURCES OF FUNDS SHAREHOLDERS FUND Share capital Reserves and surplus LOANS Secured Unsecured DEFFERED TAX LIABILITY (NET) TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross block Less: depreciation Net block Capital work in progress INVESTMENT CURRENT ASSESTS.69 21.49.22. LOANS & ADVANCES Inventories Sundary debtors Cash & bank balances Loan & advances CURRENT LIABLITIES & PROVISIONS Current liabilities Provisions NET CURRENT ASSESTS MISCELLANEOUS EXPENDITURE Total 5.09 57.93.84 3818.00 16.77.32 19.BALANCE SHEET AS AT 31ST MARCH 2002 (RS.11.77 18.13.’000) 38 .36 6.57.09.99 15.33 10.57 15.32 5.67.36.01 15.37 54.35 3.85 38.69 12.18.66 30.

37 1.69 BALANCE SHEET AS AT 31ST MARCH 2003 (RS.68 1 20.71 2.42 4.02 20.28 8.97.41 48.61.95.31.81.69 20.15 1.04 2.19.2002 AS AT 31-3-2002 INCOME: Sales and operating earnings Other income Variation in stock EXPENCES: Materials consumed Purchase of trading goods Payments to & provision for Employees Manufacturing expenses Excise duty Other expenses Interest & finance charges Depreciation Less: transferred to revaluation PROFIT BEFORE TAX PRIOR YEAR ADJUSTMENT (NET) PROVISION FOR TAXATION Current tax Deferred tax liability / (Assets) PROFIT AFTER TAX Balance brought forward from previous year Balance available for appropriation Appropriations: General reserve Surplus / (loss) carried to B/S Proposed dividend Tax on proposed dividend Basic earning per share (rupee) 0.60.’000) 39 .05.41 0.21.22 49.76.30.76 18.AS AT 31-3.64 49.12 24.04.07 50.68 1 20.75 9.19 80.37 65.22 1.50 1.05 5.

02.56 1.16 14.95.20.93 6.19 21.53.00.AS AT 31-3.19 10.27.29.97 37. LOANS & ADVANCES Inventories Sundary debtors Cash & bank balances Loan & advances CURRENT LIABLITIES & PROVISIONS Current liabilities Provisions NET CURRENT ASSESTS MISCELLANEOUS EXPENDITURE TOTAL 5.21 37.55.98.00.74 6.2003 INCOME: 40 .32 29.55 4.62 51.55.42 20.62.40.71 87.26 19.97 11.76 21.11 PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2003 (RS.00 16.40.10 5.47.2003 SOURCES OF FUNDS SHAREHOLDERS FUND Share capital Reserves and surplus LOANS Secured Unsecured DEFFERED TAX LIABILITY (NET) TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross block Less: depreciation Net block Capital work in progress INVESTMENT CURRENT ASSESTS.2003 AS AT 31-3.04 29.2003 AS AT 31-3.02.41.76 3.05.’000) AS AT 31-3.23.78 1.40.23.79 19.25 8.80.11 17.

26.22 15.17.96 2.64) 82.50 1.97 1.99 22.36.41 82.62.2004 SOURCES OF FUNDS SHAREHOLDERS FUND 41 .62.66 BALANCE SHEET AS AT 31ST MARCH 2004 (RS.07.00 6.99 72.69.06.Sales and operating earnings Other income Variation in stock EXPENCES: Materials consumed Purchase of trading goods Payments to & provision for Employees Manufacturing expenses Excise duty Other expenses Interest & finance charges Depreciation Less: transferred to revaluation PROFIT BEFORE TAX PRIOR YEAR ADJUSTMENT (NET) PROVISION FOR TAXATION Current tax Deferred tax liability / (Assets) PROFIT AFTER TAX Balance brought forward from previous year Balance available for appropriation Appropriations: General reserve Surplus / (loss) carried to B/S Proposed dividend Tax on proposed dividend Basic earning per share (rupee) 59.27) 59.2004 AS AT 31-3.23 2.49 63.95 26.57 1.60 10.91.95 1.41.04 (59.03 1.19 (19.52 10.’000) AS AT 31-3.94 1 82.94 57.37.50 4 50.69 7.63.

19 32.51.01.15 95.58 12.48.74 850.16.69.89 40.35.03 6.29 16.40.12.47 Other income 31.’000) AS AT 31-3.38.35.59 22.97.28.98.46.34 21.42.59 11.55 15. LOANS & ADVANCES Inventories Sundary debtors Cash & bank balances Loan & advances CURRENT LIABLITIES & PROVISIONS Current liabilities Provisions NET CURRENT ASSESTS TOTAL 5.07 PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2004 (RS.99 42 .00.17 3.33 40.41.07 18.39 Variation in stock 53.Share capital Reserves and surplus LOANS Secured Unsecured DEFFERED TAX LIABILITY (NET) TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross block Less: depreciation Net block Capital work in progress INVESTMENT CURRENT ASSESTS.58 53.29 6.00 17.20 19.02 21.2004 AS AT 31-3-2004 INCOME: Sales and operating earnings 73.16.58.56 4.08 18.49.90.42.86 5.84 1.

94.72.30 1.13 17294 4 1.74.86 25.14.71 1.72.30 7 75.00.14.46 BALANCE SHEET AS AT 31ST MARCH 2005 (RS.74.47 3.99 2.91 43 .94 2.00.07.08 9.96 72.19.09.51 70.2005 SOURCES OF FUNDS SHAREHOLDERS FUND Share capital Reserves and surplus 5.00 9.61 1.33 12.17.98 88.’000) AS AT 31-3.40 14.75.98 3.50 8.89 93 1.91 24.2005 AS AT 31-3.03.10.51.85 EXPENCES: Materials consumed Purchase of trading goods Payments to & provision for Employees Manufacturing expenses Excise duty Other expenses Interest & finance charges Depreciation Less: transferred to revaluation PROFIT BEFORE TAX PRIOR YEAR ADJUSTMENT (NET) PROVISION FOR TAXATION Current tax Deferred tax liability / (Assets) PROFIT AFTER TAX Balance brought forward from previous year Balance available for appropriation Appropriations: General reserve Surplus / (loss) carried to B/S Proposed dividend Tax on proposed dividend Basic earning per share (rupee) 28.00 19.46.

20.36.32.60.55 EXPENCES: Materials consumed 25.06.02 58.19 47.15 4.89 22.80.21.64. LOANS & ADVANCES Inventories Sundary debtors Cash & bank balances Loan & advances CURRENT LIABLITIES & PROVISIONS Current liabilities Provisions NET CURRENT ASSESTS TOTAL 17.32.87 21.31 Other income 41.91.23.’000) AS AT 31-3.66.88 23.36.04.83 44 .66.43.02 47.94 21.21 16.02 37.89 13.84 2.19 PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2005 (RS.12.64 10.67 6.04.21.2005 AS AT 31-3 2005 INCOME: Sales and operating earnings 74.91 19.LOANS Secured Unsecured DEFFERED TAX LIABILITY (NET) TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross block Less: depreciation Net block Capital work in progress INVESTMENT CURRENT ASSESTS.23.48.01 92.05 8.55.45) 74.84 8.69 Variation in stock (38.12 5.

71.00 13.50.24 4.41 75.15.20 3 90.75.52 CALCULATIONS AND INTERPRETATION OF RATIO’S 1] CURRENT RATIO: Formula: Current assets Current ratio = Current liabilities YEAR 2001-2002 2002-2003 2003-2004 2004 -2005 45 .31 1.Purchase of trading goods Payments to & provision for Employees Manufacturing expenses Excise duty Other expenses Interest & finance charges Depreciation Less: transferred to revaluation PROFIT BEFORE TAX PRIOR YEAR ADJUSTMENT (NET) PROVISION FOR TAXATION Current tax Deferred tax liability / (Assets) PROFIT AFTER TAX Balance brought forward from previous year Balance available for appropriation Appropriations: General reserve Surplus / (loss) carried to B/S Proposed dividend Basic earning per share (rupee) 15.73.75.54.68 84 1.00 2.31) 2.26.21.75.23.84 (3.84 70.82 1.41 8.00.44.85 1.78 7 2.25.85 5.78 2.15 2.

69. the current assets are 2.28.46.72:1 in 2004-2005.02 2.29.07 2003-2004 . which makes company more sound.08. 2001-2002 . Thus.93 51. cash that would be more liquid in the sense of being able to meet obligations as & when they become due.08 21. Almost 4 years current ratio is same but current ratio in 20042005 is bit higher.98.19 2.21 21. (The available working capital company is in increasing order. The Aplab Company’s has a very good liquidity position of company.92.28.36. In other words the current assets are 2.36.36 53.30. the company meets its day-to-day financial obligations.14 2002-2003 . it means that for one rupee of current liabilities.62.89 2004-2005 .39 21.32.70.66 2.93. The consistency increase in the value of current assets will increase the ability of the company to meets its obligations & therefore from the point of view of creditors the company is less risky.53 58.72 rupee are available to the them. From this working capital.72 In Aplab company the current ratio is 2. 2] LIQUID RATIO: Formula: Quick assets Liquid ratio = Quick liabilities YEAR 2001-2002 2002-2003 2003-2004 2004 -2005 46 .72 times the current liabilities.19 The company has sufficient working capital to meets its urgency/ obligations.80 15.77.Current assets Current liabilities Current ratio COMMENTS: 46. A company has a high percentage of its current assets in the form of working capital. the current ratio throws light on the company’s ability to pay its current liabilities out of its current assets.32 2.

42.01 21.Quick assets Quick liabilities Liquid ratio COMMENTS: 21.Liabilities YEAR Proprietary fund Total fund Proprietary ratio COMMENTS: 2001-2002 21. This indicates that the dependence on the short-term liabilities & creditors are less & the company is following a conservative working capital policy.31 21.80.14. Liquid ratio of Company is favorable because the quick assets of the company are more than the quick liabilities. Almost in all 4 years the liquid ratio is same.38.92 33.55 2003-2004 22.20% in the year 2004-2005.29.05 36.20 The Proprietary ratio of the company is 36.93. It means that the for every one rupee of total assets contribution of 36 paise has 47 .12 29.67 15.06 24. which is better for the company to meet the urgency.17 37. The liquid ratio shows the company’s ability to meet its immediate obligations promptly.59 66.62.36.55.91 66.36 23.01.11.70.90 2004 -2005 24.36 The liquid or quick ratio indicates the liquid financial position of an enterprise. The liquid ratio of the Aplab Company has increased from 1. 3] PROPRIETORY RATIO: Formula: Proprietary fund Proprietary Ratio=--------------------------Total Fund shareholders fund or = ---------------------------------------Fixed assets+curr.14.82.30 21.28.12 to 1.19 57.69 52.02 1.32 1.19 1.66 1.01.36 in 2004-2005.53 40 2002-2003 21. Day to day solvency is more sound for company in 2004-2005 over the year 2003-2004.

09.89 65.20 32.69. 2001-2002 19.12. As the Proprietary ratio is not favorable the Company’s long-term solvency position is not sound.79 29.77 30. The amount of stock is increasing from the year 2001-2002 to 2003-2004. It shows that the solvency position of the company is sound. 4] STOCK WORKING CAPITAL RATIO: Formula: Stock Stock working capital ratio = Working Capital YEAR Stock Working Capital Stock working capital ratio COMMENTS: This ratio shows that extend of funds blocked in stock.06 2002-2003 19.come from owners fund & remaining balance 66 paise is contributed by the outside creditors. This Proprietary ratio of the Company shows a downward trend for the last 4 years.14 62.07 64.06 5] CAPITAL GEARING RATIO: Formula: Preference capital+ secured loan Capital gearing ratio = Equity capital & reserve & surplus YEAR 2001-2002 2002-2003 2003-2004 2004 -2005 48 .46.63 2004 -2005 19.46.88 37.02.77.32.58 2003-2004 21. This shows that the contribution by outside to total assets is more than the owners fund. In the year 2004-2005 the sale is increased which affects decrease in stock that effected in increase in working capital in 2004-2005. However in the year 2004-2005 it has declined to 52%.19 52.

93 Shareholders 21.38.55.74 COMMENTS: The debt equity ratio is important tool of financial analysis to appraise the financial structure of the company.60.47 2002-2003 14.29.01 24. This ratio is very important from the point of view of creditors & owners.67 11.15 22.29.91 0.69 56.2001-2002 TO 2003-2004] Capital gearing ratio is all most same which indicates.14.13.27. Capital gearing ratio is a leverage ratio.86 22.69 fund Debt Equity Ratio 0.312 2. For the last 3 years [i.75 2004 -2005 22. which indicates the proportion of debt & equity in the financing of assets of a company.41.68 2003-2004 16.72. 49 .97 10. near about 50% of the fund covering the secured loan position.81.59 50. It means that during the year 2004-2005 company has borrowed more secured loans for the company’s expansion. But in the year 2004-2005 the Capital-gearing ratio is 71%.e.56 21.78 1.80.491 71 Gearing means the process of increasing the equity shareholders return through the use of debt.Secured loan Equity capital & reserves & surplus Capital gearing ratio COMMENTS: 12.19 0.48 21.59 0.42.19 47.70 21.97. 6] DEBT EQUITY RATIO: Formula: Total long term debt Debt equity ratio = Total shareholders fund YEAR Long term debt 2001-2002 15.42. It expresses the relation between the external equities & internal equities.55.

27 2004 -2005 42.78 62.74 to 0. It is the profit on turnover.46 56.52 68.48 43.48%.37. The lower ratio viewed as favorable from long term creditors point of view. 7] GROSS PROFIT RATIO: Formula: Gross profit Gross profit ratio = Net sales * 100 YEAR Gross profit Net sales Gross profit Ratio 2001-2002 24.57.65.37 73.The rate of debt equity ratio is increased from 0. It has 50 .80 2003-2004 45.90 51.45 68. This shows that with the increase in debt.93 during the year 2001-2002 to 2004-2005.54.22 Gross profit Ratio 80 60 40 20 0 20012002 20022003 20032004 2004 2005 Gross profit Ratio COMMENTS: The gross profit is the profit made on sale of goods. the shareholders fund also increased.48 2002-2003 37.02. In the year 2001-2002 the gross profit ratio is 56.76.89 66.09. This shows long-term capital structure.45.

02.226+ 27.96.89 59% 2004 -2005 2. in 2003-2004 was 59% & in 2004-2005 it is 54.32 + 2.increased to 73.80.22% in the year 2004-2005.62. due to high cost of purchases & overheads. It is further declined to 62.27% in the year 2003-2004. However the gross profit ratio decreased to 66. though the cost has increased in 2002-2003 as compared to 2001-2002.478 6.07.98 + 2.16% COMMENTS: The operating ratio shows the relationship between costs of activities & net sales.94 68.76. it is reducing continuously over the next two years.17. The operating ratio of the company has decreased in all 4 year.21.37 63.978 54.33.16%.69.23 51.98 + 7. Although the gross profit ratio is declined during the year 2002-2003 to 2004-2005.46 61. which in 2001-2002 was 61.57.45. in 2002-2003 was 63.80% in the year 2002-2003 due to increase in sales without corresponding increase in cost of goods sold. Operating ratio over a period of 4 years when compared that indicate the change in the operational efficiency of the company. This is due to increase in the cost of goods sold.141+ 84.27%.51 + 9. 8] OPERATING RATIO: Formula: COGS+ operating expenses Operating ratio = Net sales YEAR COGS + Operating expenses Net sales Operating ratio 2001-2002 18.88%.37 + 5.71 43.90.76.88% 2002-2003 21.02 + 3. 9] EXPENSE RATIO: 51 . indicate downward trend in cost but upward / positive trend in operational performance.27% *100 2003-2004 28. The net sales and gross profit is continuously increasing from the year 2001-2002 to 2004-2005.

The ratio of each item of expense or each group of expense to net sales is known as ‘Expense ratio’.41 68.51 68. During the year 2001–2002 to 2002-2003 the manufacturing expense increased because there is increase in the charges like labour. This indicates that the company has control over the manufacturing expense.45.89 4.98% *100 COMMENTS: The manufacturing expense is shows the downward trend.78 3.98 51.07.37 43.37 5.09.96%.69.47% 2004 -2005 2.76. power & electricity. A] MANUFACTURING EXPENSES: Formula: Manufacturing expenses Manufacturing expense ratio = Net sales YEAR Manufacturing expenses Net sales Manufacturing expenses ratio 2001-2002 2. The expense ratio brings out the relationship between various elements of operating cost & net sales. rent . B] OTHER EXPENSES: Formula: Other expenses Other expense ratio = *100 52 . repair to plant & machinery & miscellaneous works expenses.71.46 5% 2002-2003 2.21.29% 2003-2004 3.02. The manufacturing expense during the year 2001-2002 to 2004-2005 is decreased from 5% to 3. Expense ratio analyzes each individual item of expense or group of expense& expresses them as a percentage in relation to net sales.

78 4. Because decrease in equipment lease rental. because increase in the charges of rent of office.02.45.72.62.44.6 2003-2004 1.75.40% COMMENTS: The other expense of company is increased during the 2001-2002 to 20032004.89 2. transport outward & other charges. But during the year 2004-2005 the other expenses is decrease from 13.76.76.76. equipment lease rental.37 14. advertisement & publicity.78 68.93% 2003-2004 9. printing & stationary.Net sales YEAR Other expenses Net sales Other expenses ratio 2001-2002 5.34% to 12. transport charges.94 51.46 13.89 13.09.09.48 2002-2003 82.34% 2004 -2005 8.23 51.02.94 68.71 43.40%.78 68.94 68. 10) NET PROFIT RATIO Formula: NPAT Net profit ratio = Net sales YEAR NPAT Net sales Net profit ratio 2001-2002 20.5 2004 -2005 2.98 434546 0.78 12. advertisement & publicity. commission & discount.2% 2002-2003 7. sales tax & purchase tax . This indicates that the company also controlling the other expenses.37 1.04 * 100 53 .17.

32 5.54.58 3.e.90 3.33.12 in 2003-2004 by 0. Profitability ratio of company shows considerable increase.97.20 2004 -2005 25.4 2002-2003 21.9 & in 2004-2005 by 1.90.89. managerial efficiency & sales promotion.NET PROFIT 5 4 3 2 1 0 2001-2002 2002-2003 2003-2004 2004-2005 COMMENTS: The net profit ratio of the company is low in all year but the net profit is increasing order from this ratio of 4 year it has been observe that the from 2001-2002 to 2004-2005 the net profit is increased i.73 54 .72.26 6. manufacturing & other expenses. Company’s sales have increased in all 4 years & at the same time company has been successful in controlling the expenses i.73. It is a clear index of cost control. in 2003 it is increased by 1.6 2003-2004 28.49. 11] STOCK TURNOVER RATIO: Formula: COGS Stock Turnover Ratio = Average stock YEAR COGS Average stock Stock Turnover Ratio 2001-2002 18.96.02 6.11 4.30 3.98 5.e.

In the year 2001-2002 to 2004-2005 the stock turnover ratio has improved from 3.72. The inventory cycle makes 3. 55 . it means the stock turnover ratio is 3.5 months for stock to be sold out after it is produced.COMMENTS: Stock turnover ratio shows the relationship between the sales & stock it means how stock is being turned over into sales.4 times then the stock holding period is 3.07 2.4=3.23.94 1. it means with lower inventory the company has achieved greater sales.73 times.5 months [12/3.28 2004 -2005 2. This indicates that it takes 3.4 times which indicate that the stock is being turned into sales 3.75. Its purpose is to measure the overall profitability from the total funds made available by the owner & lenders.66.5months].4 times during the year.93 5.94 37.54 *100 Capital employed 2002-2003 2003-2004 82. the stock of the company is moving fast in the market.11 40.18.4 to 3. It helps to work out the stock holding period.78 47.68 38.79 The return on capital employed shows the relationship between profit & investment. 12] RETURN ON CAPITAL EMPLOYED: Formula: NPAT Return on capital employed = YEAR NPAT Capital employed Return on capital employed COMMENTS: 2001-2002 20. Thus.4 round during the year. The stock turnover ratio is 2001-2002 was 3.23 4.35. For the last 4 years stock turnover ratio is lower than the standard but it is in increasing order.01 0.

41 2002-2003 82. In other words the shareholder earned Rs. This shows it is continuous capital appreciation per unit share by 0. tax.5 is earned on a capital employed of Rs.00.5 indicate that net return of Rs. i. from 0.00.& appropriation.41 to 05.78. 5.79.000 50. This indicates a very high profitability on each rupee of investment & has a great scope to attract large amount of fresh fund.52 means shareholder gets Rs.54 to 5. 5.000 50.000 50.52 for each share of Rs.66 2003-2004 1.000 50. The net profit after tax of the company is increasing in all years. this amount of Rs.00. The Earning per share is 5.100. 13] EARNING PER SHARE: Formula: NPAT Earning per share = Number of equity share YEAR NPAT No.79.ofequity share Earning per share COMMENTS: Earning per share is calculated to find out overall profitability of the company.98.000 1.52. Earning per share represents the earning of the company whether or not dividends are declared.e.94.000 5.52 56 .75. 2001-2002 20. All of sudden in 2001-2002 the return on capital employed increased from 0.52 per share.The return on capital employed of Rs.72.000 3.00. 10/-.000 0.54 to 5.52. Therefore the shareholders earning per share is increased continuously from 2001-2002 to 2004-2005 by 0.41 to 05.5 is available to take care of interest.46 2004 -2005 2.94. The return on capital employed is show-increasing trend.

57 . 14] DIVIDEND PAYOUT RATIO: Formula: Dividend per share Dividend Pay out ratio = Earning per share YEAR Dividend per share Earning per share Dividend payout ratio COMMENTS: 2001-2002 0.80 5.76 is retained with them for the expansion. It is beneficial to the shareholders and prospective investor to invest the money in this company. In the year 2002-2003 the company has declared the dividend 60.52 32.24 and 43.66 60.60 In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is 60.24 * 100 2003-2004 1.41 2002-2003 1 1.35 respectively.35 2004 -2005 1.The above diagram shows the Earning per share and Dividend per share is increasing rapidly.46 43.50 3.24 and the balance 39.

76. However the company has declared more dividends in the year 2002-2003 as the company has sufficient profit.02 68.02. In the year 2001-2002 the cost of goods sold ratio is 43.32 51.50 dividends per share hence the earning per share has doubled. the 43% of raw material is consumed in the process of production.78 37.77 * 100 16] CASH RATIO: Formula: Cash + Bank + Marketable securities 58 .26 68. In the year 2004 the company has declared 1.90. 2001-2002 18.72.19 2004 -2005 25.37 43. 15] COST OF GOODS SOLD: Formula: COGS Cost of goods sold Ratio = Net sales YEAR COGS Net sales Cost of goods sold ratio COMMENTS: This ratio shows the rate of consumption of raw material in the process of production.33.51% so the gross profit is 56.89 41.98 43.46 43.The company has not earned more profit in the year 2001-2002 hence the company has not declared dividend in the year 2001-2002.49%.09. From this one can say that the company is more conservative for expansion.04 2003-2004 28.51 2002-2003 21. During the last 4 years the rate of cost of goods sold ratio is continuously decreasing however the gross profit & sales is increased during the same period. it indicates that in 2001-2002.45.96.

In the year 2001-2002 the cash ratio is 0.18 in the year 2002-2003.18 2003-2004 4.72.41 * 100 COMMENTS: Return on proprietors fund shows the relationship between profits & investments by proprietors in the company. 17] RETURN ON PROPRIETORS FUND: Formula: NPAT Return on proprietors fund = Proprietors fund YEAR NPAT Proprietors fund Return on proprietors fund 2001-2002 20.36.93. Then again it is increased to 0. This shows that the company has sufficient cash.19 3.95. In the year 2002-2003 the return on 59 .66 0.21 in the year 2003-2004 & 0.14.32 15.84 2003-2004 1.29.97 2002-2003 82.64 21.20 & then it is decreased to 0.28 This ratio is called as super quick ratio or absolute liquidity ratio.25 21.94 22.28.02 0.31.04.68 21.91 11.74 21.59 7.19 0.75. & marketable securities to meet any contingency.20 2002-2003 3.78 24.94 21.28 in the year 2004-2005.55.71 2004 -2005 2.21 2004 -2005 6.42.32 0.69 0.Cash ratio = Total current liabilities YEAR Cash + Bank + Marketable securities Total current liabilities Cash ratio COMMENTS: 2001-2002 3.49. bank balance.62.

000 4. & has a great scope to attract large amount of fresh fund from owners.000 55 * 100 . It shows that the company has a very large returns available to take care of high dividends. keep or sell the equity shares.13% to 55% during the year 2001-2002 to 2004-2005.5 2003-2004 1.68 50. 16. 60 2001-2002 20.13 2002-2003 82. This shows that the company has a very large returns available to take care of high equity dividend.000 34.100 of the funds contributed by the equity shareholders.58 2004 -2005 2. 3 approximately is earned on the each Rs. of equity share YEAR NPAT No.41%. 18] RETURN ON EQUITY: Formula: NPAT Return on equity share capital = No.94 50. is earned on the each Rs. which means the net return of Rs.97% to 11.000 16.78 50. 100 of funds contributed by the owners.proprietors fund is 3. & also company has a great scope to attract large amount to fresh funds by issue of equity share & also company has a very good price for equity shares in the BSE.75. The rate of return on equity share capital is increased from4. It is used by the present / prospective investor for deciding whether to purchase. During the last 4 years the rate of return on proprietors fund is in increasing order. In the year 2002-2003 the return on proprietors fund is 16.94 50.5%.84% it means the net return of Rs.72. large transfers to reserve. large transfers to reserve etc. of equity share Return on equity share capital COMMENTS: This ratio shows the relationship between profit & equity shareholders fund in the company. The return on proprietors fund during the year 2001-2002 to 2004-2005 is increased from 0.

purchase. Thus.19] OPERATING PROFIT RATIO: Formula: Operating profit Operating profit ratio = Net sales COMMENTS: Operating profit ratio shows the relationship between operating profit & the sales.11% indicates that average operating margin of Rs. *100 20] CREDITORS TURNOVER RATIO: Formula: Net credit purchase Credit turnover ratio = Average creditors Months in a year Average age of accounts payable = Credit turnover ratio 61 . 100. In the other words operating profit ratio 7.38%. It indicates that the company has great efficiency in managing all its operations of production. this amount of Rs. inventory. The operating profit is equal to gross profit minus all operating expenses or sales less cost of goods sold and operating expenses. 7 is available for meeting non operating expenses.7 is earned on sale of Rs.11% of net sales remains as operating profit after meeting all operating expenses. selling and distribution and also has control over the direct and indirect costs.11% means that 7. company has a large margin is available to meet non-operating expenses and earn net profit. During the last 4 years the operating profit ratio is increased from 7.11% to 9. The operating profit ratio of 7.

04 7.80.8 times 2003-2004 74.86 4 times 3 months 2004 -2005 25.56 3. DEBTORS TURNOVER RATIO: Formula: Credit sales Debtors turnover ratio = Average debtors Days in a year Debt collection period = Debtor’s turnover YEAR Credit sales Average debtors Debtors turnover 2001-2002 47.49.42 3.21 3.91.35 2. There is no standard ratio in absolute term.33 19.21.05. indicate that the creditors are being turned over 4times during the year.21. but it is increased by 3.6 times 3.48 18.61 6.36 19.3 months 2003-2004 29.8 times 2004 -2005 68.39 3 times 4 months The creditors turnover ratio shows the relationship between the credit purchase and average trade creditors.88.3 months 2002-2003 22.71. The credit turnover ratio of 4.9 times 62 .08.29.80 7.06.77.5 times 2002-2003 55. It indicates the number of rounds taken by the credit cycle of payables during the year.this means the company has settled the creditors dues very fastly than the previous year.09.6 to 4 in 2003-2004.76 2.87.96.78 23. It shows the speed with which the payments are made to the suppliers for the purchase made from them.67 2.43 5.51. The creditors ratio for the year 2001-2002 and 2002-2003 as good as the same.YEAR Net credit purchase Average creditors Credit turnover ratio Average age of accounts payable COMMENTS: 2001-2002 21.6 times 3.

It helps to workout the debt collection period i.ratio Debt collection period COMMENTS: 146 days 130 days 96 days 125 days Debtor’s turnover ratio is alternative known as “ Accounts Receivable Turnover Ratio”. Over all profitability position of the company is quite satisfactory.5 = 146]. The company is paying promptly to the suppliers. Stock turnover rate is satisfactory. I would like to state that: • • • • • • • The short-term solvency of the company is quite satisfactory. It means that the credit cycle of debtors makes 2. it means the rate at which the trade debts are being collected. Immediate solvency position of the company is also quite satisfactory. Credit policies are effective. 146 days [365/ 2. This ratio measures the collectibility of debtors & other accounts receivable. The Debtors turnover ratio is almost same during the year 2001-2002 to 2004-2005. The return on capital employed is satisfactory.5 times during the year. 63 . In other words the debts collection period is short which result into less chance of bad debts. SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED After going through the various ratios. The Debtors turnover ratio of 2. The company can meet its urgent obligations immediately. Stock of the company is moving fast in the market.5 indicates that the debtors are being turned over 2.5 rounds during the year.e. which indicates that the debts are being collected at a fast speed during the year. The operating cycle of the debtors is short. This indicates that it take146 days on an average for the debtors to be settled. Debt collection period indicates the duration of the credit cycle of the debtors.

The ratio analysis can help in understanding the liquidity and short-term solvency of the firm. The reliability and significance attach to the ratios will largely on hinge upon the quality of data on which they are best. Financial ratios are a useful by product of financial statement and provide standardized measures of firms financial position. profitability and riskiness. They are as good for as bad as the data it self. The operational efficiency of the firm in utilizing its assets to generate profits can be assessed on the basis of different turnover ratios. Long-term solvency position as measured by different debt ratios can help a debt investor or financial institutions to evaluate the degree of financial risk. By calculating one or other ratio or group of ratios he can analyze the performance of a firm from the different point of view. Effective selling technique or product modification may be adopted to face the competitors and to improve the financial position of the company by taking appropriate decisions.The management should take care of inventory management and speed up the movement of stock. However the ratio analyses suffers from different limitations also. These ratios are numerous and there are wide spread variations in the same measure. 64 . particularly for the trade creditors and banks. The profitability of the firm can be analyzed with the help of profitability ratios. It is an important and powerful tool in the hands of financial analyst. CONCLUSION: The focus of financial analysis is on key figures contained in the financial statements and the significant relationship that exits. Ratios generally do the work of diagnosing a problem only and failed to provide the solution to the problem. The ratios need not be taken for granted and accepted at face values.

RUSTAGI FINANCIAL MANAGEMENT Text and problems M.N.L. JAIN MANAGEMENT ACCOUNTING AINAPURE FINANCIAL MANAGEMENT L. CHOPDE D.BIBLIOGRAPHY REFERENCE BOOKS –  FINANCIAL MANAGEMENT Theory. K. CHOPDE ANAUAL REPORTS OF APLAB LIMITED   2001-2002 2002-2003    65 . KHAN AND P.N.Y. CHOUDHARI S. Concepts & problems R.P.

com.zeromillion.uk/compfact/ratio www.cecunc.com/business/financial www.bizd.org.ac.business/financial 66 .  2003-2004 2004-2005 WEBSIDES    www.

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