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# Financial Ratio Analysis

Introduction:
Financial statements are prepared primarily for decision making. They play a dominant role in setting the frame work of managerial decisions. But information provided in the financial statements is not analysis end in itself as no meaning full conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of the immense use in making decisions through analysis and interpretation of financial statements. Financial ratio analysis is the process of identifying of financial strength and the weakness of the firm by properly establishing a relationship between the items of the balance sheet and the profit and loss account. There are various methods used in analyzing financial statements such as comparative statements, schedules of changes in working capital, common size percentages, funds analysis and the ratio analysis. The ratio analysis is the most powerful tool of financial analysis. We performed the ratio analysis BATA PAKISTAN LIMITED which is a listed company

## ANALYSIS OF ACCOUNTING RATIOS:

Now we shall analyze some important factors like liquidity, profitability, long term solvency and activities of firm with the help of ratios which are usually brought under observation by the creditors, investors, management and other stake holders.

##  Liquidity Ratios  Leverage Ratios  Profitability Ratios

Liquidity Ratios:
These are the most important ratios from the lenders point of view. These are the ratios which measure the short term solvency or financial position of firm. These ratios are calculated to comment upon the short-term paying capacity of a concern or a firm s ability to meet its current obligations. The various liquidity ratios are current ratio, liquid ratio (Acid Test Ratio) and absolute liquid ratio.

Current Ratio:
Current ratio measures general liquidity and is widely used to make the analysis for a short term financial position or liquidity of a firm. Current ratio is basically a relationship between current assets and current liabilities. Current Assets Current Ratio = Current Liabilitie s 2009 (Rs. 000) = = 2.24:1 2010 (Rs.000) = = 2.65:1

Interpretation:
The current ratio of Bata Pakistan Ltd. up to 2009 shows that it has the ability to meet all its obligations in respect of financial debts. But the ratio up to 2010 is the indication that the enterprise has been in good liquid position since last one year. It is an attractive sign for the stakeholders to keep full confidence in the operations and policies of the enterprise. The company can avail easily short term borrowing facility from banks and financial institutions with more reliably than the previous year as its current position is better than the previous year. We will find the company pay the tax refunds due from government.

## Liquid Ratio (Acid Test Ratio):

This ratio shows better liquidity than the current ratio as it is a relationship between liquid assets and current liabilities. Liquid assets include all current assets except prepayments and stock because prepayments usually are not converted into cash and stock takes much time to be converted into cash.

## Acid Test Ratio 2009 (Rs. 000) =

Liquid Assets Current Liabilitie s

2010 (Rs.000) =
Liquid Assets Current Liabilitie s

## Current Assets - (Stock + Prepayments +Stores and Spares)

= 1.16:1

Interpretation:
The liquid ratio of Bata Pakistan Ltd. is showing its better liquidity position and its liquid ratio is better than the requirement that is usually observed by the banks and other financial institutions .Bata Pakistan Ltd 2010 year ration is 1.16 that is good sign for the company and provisos year 2009 ration is 0.92The stake holders especially creditors can rely on the company because Bata Pakistan Ltd. has liquid assets to pay the short term liabilities in time or when they will become due. The liquidity of the enterprise has been increased from the last year which is an indication of the better business operations and policies.

## Analysis of Profitability: (profitability Ratios)

Profit earning is considered essential for the survival of the business and it is primary motive of any business. A business needs profit not only for its existence but also for expansion and diversification. The investors want adequate return on their investments creditors want higher security for their interest and loan and so on. A business enterprise can discharge its obligations to the various segments of the society only

thorough earning profits. Profit is a useful measure of overall efficiency of a business. Profitability ratios are measured by the investors and share holders to assess the management in order to assess how efficiently the business operations are being carried out. Profitability is the main base for liquidity as well solvency. Creditors, bankers and financial institutions are interested in profitability ratios since they indicate liquidity of the business to meet interest obligations and regular improved profits to enhance the long term solvency of the business. Owners are interested in profitability to indicate the growth and also the rate of return on their investments. Generally profitability ratios are calculated with respect to sales and with respect to investments. Following ratios are calculated with respect to sales.

## Gross Profit Ratio (Gross Profit Margin):

Gross Profit ratio is a ratio of Gross Profit to Net Sales expressed as percentage. It expresses the relationship directly between gross profit and sales and indirectly between cost of goods sold and sales.

2009 (Rs. 000)

## Gross Pr ofit v 100 Net Sales

2010 (Rs.000)




= 41.56%


= 40%

Interpretation:
The gross profit percentage of BATA Pakistan Ltd. has been reduced from year 2010

ratio is 40% and 2009 ratio is 41.56%.in this case of the company the exceptional case We can say that enjoy the monopoly in the market Management should assess that why their cost has been increased. However this GP Margin is still up to the mark GP margin can be made by increasing sales, by decreasing cost and adopting better purchase policies.

## Net Profit Ratio:

This is the ratio of net profit (before tax) to net sales expresses as percentage:

## Net Pr ofit aftere Taxation v 100 Net Sales

2010 (Rs.000) =

= 10.45%

Interpretation:
Net profit ratio of the BATA Pakistan Ltd is increased from year 2010 ratio is 10.45% and year 2009 ratio is 9.1%. There is good sign for the company How ever the expenses incurred in the running of the business are also increase but at a faster rate then profit. Which is shoe the company very strong position

## Profitability Ratios with respect to Investment:

Following ratios are important to find out the profitability of a company with respect to investment. As investors demand adequate returns to their investments so with the help of these ratios they can realize and analyze about the security and returns of their investments

## Earnings per Share:

Earnings per share is a small variation of return on equity capital and it is calculated by net profit after tax and preference dividend dived by the total number of equity shares. It determines the per share earnings in Rupees.

## 2009 (Rs. 000) = = Rs. 7.74/Share =

Interpretation:
Earnings per share of Bata Pakistan Ltd. is relative increased from the previous years and is satisfactory for the share holders with respect to their return on the shares

## Earning fter ax o.Of Ordinary Shares

2010 (Rs.000)

= Rs. 11.5/Share

purchased by them. As this ratio describes the rate of dividend so it can be assumed company is distributing high dividends. This year ration is 11.5 share that is good sign for the company and 2009 year ratio is 7.74

## Inventory 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. Thus, it is very essential to keep sufficient stocks in business. Inventory turnover ratio, also known as stock turnover, is the relationship between the cost of goods sold during a particular period of time and the cost of average inventory during that period. It is expressed in number of times. Inventory Turnover Ratio = 2009 (Rs. 000) = = 2.9 times
Cost f Goods Sold Avg . Clo sin g Stock

Interpretation:
Bata Pakistan Ltd. stock turn over ration company show this year ratio 2010 is 3.55 good sign for the company and generally a high inventory ratio means that company is efficiently managing and selling its inventory and control the sound sale policies, trading in quality good reputation in the market. The year 2009 ratio is2.9 is good but the company 2010year is good increase the ratio

## Average Collection Period Ratio:

The debtors/Receivables Turnover Ratio when calculated in terms of days known as average collection period or debtor s collection period ratio. The average collection

## 2010 (Rs.000) = = 3.55 times

period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. It can be calculated as follows: No. of Days (average collection Period Debtor Turnover Ratio) = 2009 (Rs. 000) = = 14days = = 9 days

2010 (Rs.000)

Interpretation:
Bata Pakistan Ltd. is working on relatively better debtor turnover ratio and average debtors collection period showing that debtors are more liquid and company is much efficient in the management of its debtors. The year 2010 ratio is 9 days that is very excellent debtor collection period as compare 2009 year ratio is 14 days .The Bata company is much efficiently and effectively to complete the bill receivable for the client

## Creditors/Payables Turnover ratio:

This ratio is similar to Debtors/Receivable turnover ratio. It compares the creditors with total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtor s turnover ratio, creditor s turnover ratio can be calculated in two forms.

## 2010 (Rs.000) = = 151 Days

Interpretation:
Bata Pakistan Ltd payable period is excellent has improved its creditors payable from the previous year in creditor. Creditors were paid in the span of 205 days has been reduced in the current year to 151 days it is clear indication that company has enhanced its creditor worthiness. Although the volume of purchase and creditor decreased during the year 2010

Leverage Ratios
This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditor money versus owner's equity): Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit.

Equity Ratio
Shareholder's funds include equity share capital plus all reserves and surpluses items. Total assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In that case the total shareholder's funds are to be divided by total tangible assets. As the total assets are always equal to total liabilities., the total liability

 



## 2010 (Rs.000) =  = 65:35

=60:40

Interpretation:
The equity ratio of BATA Pakistan Ltd. This is not good sign for the company because the profit of the company is the owner and share holder. The 2009 year ratio is 60% of the investor share in this company and only 40% share is the owner of the Bata as compare to 2010 year ratio is 65% of the investor in this company and only 35% share is the owner of the company is also decrease for the year 2009 ratio is very bad condition for the company owner

## Capital Gearing Ratio

Gearing is a comparison between the amount of borrowings a company has to its shareholders funds (net worth). The result of the calculation will show as a percentage the proportion of capital available within the company in relation to that owed to sources outside the company. Lower figures are more acceptable, showing that the company is predominantly financed by equity whilst high gearing shows an over reliance on borrowings for a significant proportion of the company's capital requirements

Gearing Ratio
Long Term Liabilities Ordinary Share capital



## 2010 (Rs.000) = =0.014:1

=0.019:1

Interpretation:
Capital gearing ratio is just reciprocal of debt to equity ratio. Bata Pakistan Ltd. Capital gearing ratio for the Bata Company is excellent. The year 2010 ratio is 0.014:1 is a efficiently and effectively for good sign for the company as compare to the year 2009 ratio is 0.019:1