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Nishat Mills Nishat Mills Limited (“Nishat”) is the single largest textile composite unit in PAKISTAN and is public limited company, listed on all three Pakitstani stock exchanges. Business Description . The Group's principal activity is to manufacture spins, combs, weaves, bleaches, dyes, prints, stitches, buys and sells textiles. It deals in yarn, linen, cloth and other goods and fabrics made from raw cotton, synthetic fibre and cloth. The Group's plants are located at Faisalabad, Sheikhupura, Lahore and Feroze Watwan. The Company is engaged in the business of textile manufacturing and of spinning, combing, weaving, bleaching, dyeing printing, stitching, buying, selling and otherwise dealing in yarn, linen, cloth and other goods and fabrics made from raw cotton, synthetic fiber and cloth, and to generate, accumulate, distribute and supply electricity. To gain the goodwill and maintain efficiency in the eyes of stakeholders the company is providing quality products to its customers within the Pakistan and outside the Pakistan. Presently company is exporting its all kinds if apparel products.
To provide quality products to customers and explore new markets to promote/expand sales of the company through good governance and foster a sound and dynamic team, so as to achieve optimum prices of products of the company for sustainable and equitable growth and prosperity of the company.
To transform the company into a modern and dynamic yarn, cloth and processed cloth and finished product manufacturing company with highly professionals and fully equipped to play a meaningful role on sustain able basis in the economy of Pakistan. To transform the company into a modern and dynamic power generating company with highly professionals and fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.
Introduction to Industry
The Textile Industry:
Throughout the world especially in ASIA, Pakistan is said to be the single crop economy i.e. cotton and textile that claims the lion's share in terms of the contribution in the national economy of Pakistan. In Pakistan Textile Industry is dominant in contributing a huge share in the economy regarding National Income or GDP,. Despite efforts to bring in diversification in country's overall economic get-up the textile sector continues to be the most important segment of the national economy. Its share in the economy, in terms of GDP, exports, employment, foreign exchange earnings, investment and revenue generation altogether placed the textile industry as the single largest determinant of the economic growth of the country. In contrast to the great economic crunch throughout the world Nishat mills face uncertainty and the company is still going upward . During the year exports were controlled from falling and significant investment was made in value-added expansion and in Balancing-Modernization- Replacement (BMR). Besides fall out of the events of September 11, the implementation of WTO's agreement, various bilateral agreements have been signed and implemented. As a result global scenario has changed. Government and the corporate textile sector adjusted their policies to achieve maximum benefits of free trade. So, local structure of the corporate culture, investment pattern and fiscal and monetary policies were significantly changed.
This man of vision. This is story of success through sheer hard work and an undaunted spirit of enterprise. courage and integrity. Mian Mohammad Yahya was born in 1918 in Chiniot. leasing. cotton and jute textiles. He died in 1969. He is deemed to have made investments in many bourses. There is no stopping Mansha and he is still on the move! The history of Nishat Group dates back to 1951. chemicals and insurance. but then who doesn't have adversaries. Mansha is married to Yousaf Saigol's daughter. . at the age of 51 having achieved so much in so short time. Nishat Group of comprises of textiles. 6th in 1990 and Number 1 in 1997. Chinioti by clan. Mansha is on the board of nearly 50 companies. Mansha. his friends think he was compensated by Nawaz Sharif's denationalization programme to a very good effect. He could have bought the United Bank too. He has had his share of luck on many occasions in life and has recently been awarded Pakistan's highest civil award by President Musharraf. is now setting up a billion rupee ($ 17 m) paper sack project too. Beginning with a cotton export house. In 1947 when he was running leather business in Calcutta. He is one of the richest Pakistanis around.Introduction to Group (Nishat Group) *The Nishat Group* Mian Muhammad Mansha Yaha is the captain of this splendid ship having around 30 companies on board. he soon branched out in to ginning. insurance and management companies. If Mansha was bitten by Bhutto's nationalization stint of 1970. He was elected Chairman of all Pakistan Textile Mills Association. currency and metal exchanges both within and outside Pakistan. he witnessed by the momentous changes that swept the Indo-Pak subcontinent. who owns the Muslim Commercial Bank as well. Nishat Group was country's 15th richest family in 1970. when Mian Muhammad Yahya founded Nishat Mills Limited. cement.
Nishat Group ventured into the financial sector through the acquisition of Muslim commercial Bank. MCB has a network of over 1200 branches employing over 12. 740 looms and dyeing and finishing capacity of 5 million meters.000 new spindles. 100 new air jet looms and new dyeing plants has increased the existing capacity of 242. POWER GENERATION . MCB has grown ever since and is now the largest bank in the private sector. for more then decade! BANK In 1991.000 spindles. Nishat group is among the leading business houses of the country and ranks among the top 5 groups in terms of assets and sales revenue. The largest exporters of textile products from Pakistan.000 people. The group has its roots firmly planted into four core business namely Textiles Power Generation Banking Cement TEXTILES The textile business is further subdivided into 2-textile division: Nishat Chunian Nishat Faislabad The textile capacity of the group is the largest in the country.After almost half a century of undaunted success. An addition of 20.
G Khan Cement Company Limited (DGKCC) from the second largest project of the group and is ideally located in the heart of the country. DGKCC unit No. International Finance Corporation and common Wealth Development Corporation have financed this unit. Nishat Group acquired D.300 tons was setup in 1997. With the addition of unit No. The other side considers tangible and measurable factors (quantitative). If used in conjunction with other methods.200 tons per day. One aspect looks at the general (qualitative) factors of a company.2. 1 has a capacity of 2. INTRODUCTION 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.Nishat group has also been a pioneer in power generation in the private sector of the country. This means crunching and analyzing numbers from the financial statements. Nishat setup the first power generation unit in the private sector in 1995. . CEMENT In 1992. quantitative analysis can produce excellent results. A new unit heaving the capacity of 3. with easy access to transportation all over Pakistan. DGKCC has become the largest manufacturer of cement in Pakistan. RATIO ANALYSIS: Fundamental Analysis has a very broad scope.
income statement. It is simply the quotient of two numbers.com For Free Downloading of this report and for more projects.jimdo. . or even the economy in general.assignments. other companies. 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. Ratio is express by dividing one figure by the other related figure. MEANING OF RATIO: A ratio is one figure express in terms of another figure. which are related to each other and mutually interdependent. Thus a ratio is an expression relating one number to another.reports on Marketing. and might perform in the future.Management Marketing Management. the industry. Economics Human Resource.Ratio analysis isn't just comparing different numbers from the balance sheet. It's comparing the number against previous years. and cash flow statement. http://Pakistanmba. Ratios look at the relationships between individual values and relate them to how a company has performed in the past. Accounting. It is a mathematical yardstick that measures the relationship two figures.
By comparing the . A financial ratio measures a company's performance in a specific area. Ratio analysis can provide valuable information about a company's financial health.jimdo. you could use a ratio of a company's debt to its equity to measure a company's leverage. we will focus on a technique. This technique is called cross-sectional analysis.Organizational Behaviour. determined and presented. While a detailed explanation of ratio analysis is beyond the scope of this section.com 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. 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. 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. which is easy to use. Cross-sectional analysis compares financial ratios of several companies from the same industry. Financial Management Cost Accounting VISIT http://Pakistanmba. It can provide you with a valuable investment analysis tool. For example.
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. However. A company whose leverage ratio is higher than a competitor's has more debt per equity. you can determine which company uses greater debt in the conduct of its business.leverage ratios of two companies. you must be careful not to place too much importance on one ratio. such relationship can be expressed in different ways as follows – A] As a pure ratio: . You can use this information to make a judgment as to which company is a better investment risk.
000 & credit sales are Rs. 5.000] or simply by saying that the credit sales are 2.000/50.000.00. B] As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital.00. 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. the ratio of equity share capital to preference share capital is 20.000] 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. 10.000 or simply 4:1.50. Similarly.00. the cash sales of a firm are Rs. C] As a percentage: In such a case.5 times that of cash sales.00. net sales of the firm are Rs.000. 12. the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard.00. then the gross profit may be described as 20% of sales [ 10. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.00.000/12.00.For example the equity share capital of a company is Rs.00. For example.00.000: 5.000 & the amount of the gross profit is Rs. 30. so the ratio of credit sales to cash sales can be described as 2.00. TYPES OF COMPARISONS .5 [30. In interpreting the ratio of a particular firm.000 & the preference share capital is Rs.00. 20.000.
2] Time series analysis: The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. So it involves the comparison of two or more firm‟s financial ratio at the same point of time. 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. By comparing the present performance of a firm with the performance of the same firm over the last few years. then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. whereas the industry average has not shown any significant changes. . The firms performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies.The ratio can be compared in three different ways – 1] Cross section analysis: 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. the ratio of operating expenses to net sales for firm may be higher than the industry average however. 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. an assessment can be made about the trend in progress of the firm. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. over the years it has been declining for the firm. For example. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. about the direction of progress of the firm. both are combined together to study the behavior & pattern of ratio.
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. only audited financial statements should be considered. but it is decreasing over the years & is approaching the industry average. there are certain pre-requisites. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. 1) The dates of different financial statements from where data is taken must be same.The combined analysis as depicted in the above diagram. PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions. 2) If possible. 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. which clearly shows that the ratio of the firm is above the industry average. otherwise there must be sufficient evidence that the data is correct. which must be taken care of. .
One-way of classification of ratios is based upon the sources from which are taken. . Therefore. 5) Last but not least. Figures may be taken from Balance Sheet . P& P A/C. or both.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. otherwise there is no purpose of calculating a ratio. This will be conductive to counter checks. CLASSIFICATION OF RATIO CLASSIFICATION OF RATIO BASED ON FINANCIAL STATEMENT BASED ON FUNCTION BASED ON USER 1] BALANCE SHEET RATIO 2] REVENUE STATEMENT RATIO 3] COMPOSITE RATIO 1] LIQUIDITY RATIO 2] LEVERAGE RATIO 3] ACTIVITY RATIO 4] PROFITABILITY RATIO 5] COVERAGE RATIO 1] RATIOS FOR SHORT TERM CREDITORS 2] RATIO FOR SHAREHOLDER 3] RATIOS FOR MANAGEMENT 4] RATIO FOR LONG TERM CREDITORS BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. a group of ratios must be preferred.
While calculating these ratios. and Proprietory ratio. ratio of current assets to current liabilities or ratio of debt to equity.g. E. & debt service ratios BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios. and Stock working capital ratio. These ratio help to judge the liquidity. Capital gearing ratio. Balance sheet ratios are Current ratio.1] Balance sheet ratio: If the ratios are based on the figures of balance sheet. return on capital employed. debtors turnover ratios. there is no need to refer to the Revenue statement. Revenue ratios are Gross profit ratio. Expense ratio. Net operating profit ratio. E. These ratios study the relationship between the assets & the liabilities. they are called Balance Sheet Ratios. Liquid ratio. Debt equity ratio. leverage ratios. creditors turnover ratios. return on proprietors fund. 1] Liquidity ratios: . Net profit ratio.g. solvency & capital structure of the concern. 2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratio study the relationship between the profitability & the sales of the concern. Stock turnover ratio. profitability ratios & turnover ratios. return on equity capital etc. of which one is found in the balance sheet & other in revenue statement. Operating ratio. There are two types of composite ratiosa) Some composite ratios study the relationship between the profits & the investments of the concern. of the concern. dividend payout ratios. b) Other composite ratios e.g. activity ratios. 3] Composite ratio: These ratios indicate the relationship between two items.
operating net profit ratios. & Proprietory ratios. capital gearing ratios. return on capital employed.g. 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. gross profit ratios. expenses ratios 4] Ratios for long-term creditors: Debt equity ratios. stock turnover ratios. turnover ratios. .It shows the relationship between the current assets & current liabilities of the concern e.g. BASED ON USER: 1] Ratios for short-term creditors: Current ratios. 4] Profitability ratios: a) It shows the relationship between profits & sales e.g. It is also known as Turnover ratios & productivity ratios e. debt equity 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. dividend payout ratios & debt service ratios. liquid ratios & current ratios. return on equity capital. liquid ratios. operating ratios.g. expenses ratios b) It shows the relationship between profit & investment e. operating ratios. debtors turnover ratios.g. return on equity capital 3] Ratios for management: Return on capital employed.g. proprietor ratios. return on investment. stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund.
are Current ratio. The ratios. and Cash ratio. which indicate the liquidity of a company. Quick/Acid-Test ratio. These ratios are discussed below .LIQUIDITY RATIO: Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations.
converted into cash within a short period time. in the ordinary course of business. It is also known as „working capital ratio‟ or „ solvency ratio‟. provision for taxation. This ratio measures the liquidity of the current assets and the ability of a company to meet its short-term debt obligation. The current liabilities defined as liabilities which are short term maturing obligations to be met. normally not exceeding one year. dividends payable and outstanding expenses. 2:1 Formula: Current assets Current ratio = Current liabilities The current assests of a firm represents those assets which can be. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL). debtors (net of provision for bad and doubtful debts). bills receivable.g. It is expressed in the form of pure ratio. and prepaid expenses.CURRENT RATIO Meaning: This ratio compares the current assests with the current liabilities. as originally contemplated. inventory of raw materials. bank credit. semi-finished and finished goods. Current liabilities consist of trade creditors. E. . Current assets include cash and bank balances. bills payable. marketable securities. with in a year.
which can be converted into. which will become liquid within approximately twelve months with liabilities. The term quick assets refer to current assets. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading. LIQUID RATIO: Meaning: Liquid ratio is also known as acid test ratio or quick ratio. 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.CR measures the ability of the company to meet its CL. QA refers to those current assets that can be converted into cash immediately without any value strength. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. It is expressed in the form of pure ratio. Recommended current ratio is 2: 1. i. The higher the current ratio. short-term marketable securities. the greater the short-term solvency. Formula: Quick assets Liquid ratio = Quick liabilities Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. and sundry debtors.term liabilities. Liquid ratio compare the quick assets with the quick liabilities. 1:1. This compares assets.e. . CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL.g. cash immediately or at a short notice without diminution of value.. E. QA includes cash and bank balances. that is the entity is under utilizing its current assets.
which are highly liquid. INVESTMENT / SHAREHOLDER . Formula: Cash + Bank + Marketable securities Cash ratio = Total current liabilities Since cash and bank balances and short term marketable securities are the most liquid assets of a firm. CASH RATIO Meaning: This is also called as super quick ratio. This is a fairly stringent measure of liquidity because it is based on those current assets. If the super liquid assets are too much in relation to the current liabilities then it may affect the profitability of the firm. Generally. This ratio considers only the absolute liquidity available with the firm. One drawback of the quick ratio is that it ignores the timing of receipts and payments.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. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets. financial analysts look at the cash ratio.
EARNING PER SAHRE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization. the earning per share are determined by dividing net profit by the number of equity shares. An earnings per Share represents earning of the company whether or not dividends are declared. Formula: NPAT Earning per share = Number of equity share . If there is only one class of shares. EPS measures the profits available to the equity 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. 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.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. 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. GEARING .
This is also known as leverage or trading on equity. PROFITABILITY These ratios help measure the profitability of a firm. A firm. Equity shareholders earn more when the rate of the return on total capital is more than the rate of interest on debts.equity capital & preference capital & long term borrowings. can comfortably meet its operating expenses and provide more returns to its shareholders. There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin. 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.CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt. . The Capital-gearing ratio shows the relationship between two types of capital viz: . It is expressed as a pure ratio. which generates a substantial amount of profits per rupee of sales. The relationship between profit and sales is measured by profitability ratios.
how . It measures the efficiency of production as well as pricing. purchase. This ratio helps to judge how efficient the concern is I managing its production.GROSS PROFIT RATIO:Meaning: This ratio measures the relationship between gross profit and sales. This ratio shows the profit that remains after the manufacturing costs have been met. selling & inventory. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost.
good its control is over the direct cost. administration. It measures the overall efficiency of production. Jointly considered. how much amount is left to meet other expenses & earn net profit. pricing and tax management. financing. The term fund employed or the capital employed refers to the total . Formula: Gross profit Gross profit ratio = * 100 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. selling. the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm. how productive the concern . 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. Formula: NPAT Net profit ratio = * 100 Net sales This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales.
They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. ROCE indicates the efficiency with which the long-term funds of a firm are utilized. inventory/stock turnover ratio. average collection period. Formula: NPAT Return on capital employed = Capital employed *100 FINANCIAL These ratios determine how quickly certain current assets can be converted into cash. and total assets turnover ratio. Alternatively it can also be defined as fixed assets plus net working capital.long-term source of funds. 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. These are described below: . The important turnover ratios are debtors turnover ratio. It is the sum of long-term liabilities and owner's equity. fixed assets turnover ratio. It means that the capital employed comprises of shareholder funds plus long-term debts.
if any. Formula: Credit sales The higher the DTO.DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. Average debtors are the average of debtors at the beginning and at the end of the year. Net credit sales are the gross credit sales minus returns. from customers. the better it is for the organization. . It measures the liquidity of a firm's debts. This ratio shows how rapidly debts are collected.
However. cost of goods sold) is related to a stock figure (inventories).Debtors turnover ratio = Average debtors INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period. which may lead to frequent stock outs and loss of sales and customer goodwill. FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. In general. For calculating ITR. a high inventory turnover may also result from a low level of inventory. averages may be used when a flow figure (in this case. The higher the ratio. the average of inventories at the beginning and the end of the year is taken. Formula: Net sales Fixed assets turnover = Net fixed assets . Formula: COGS Stock Turnover Ratio = Average stock ITR reflects the efficiency of inventory management. the more efficient is the management of inventories. and vice versa.
Formula: Proprietary fund Proprietary ratio = Total fund OR Shareholders fund Proprietary ratio = Fixed assets + current liabilities . However. It is usually expressed in the form of percentage. the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low). It relates shareholders fund to total assets. this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated. Total assets also know it as net worth. PROPRIETORS RATIO: Meaning: Proprietary ratio is a test of financial & credit strength of the business.This ratio measures the efficiency with which fixed assets are employed. Proprietary ratio determines as to what extent the owner‟s interest & expectations are fulfilled from the total investment made in the business operation. In other words. Proprietary ratio compares the proprietor fund with total liabilities. This ratio determines the long term or ultimate solvency of the company. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets.
It is expressed as a percentage.g.STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital. If investment in stock is higher it means that the amount of liquid assets is lower. It indicates the composition & quality of the working capital. It shows the extent of funds blocked in stock. The ratio highlights the predominance of stocks in the current financial position of the company. Formula: Stock Stock working capital ratio = Working Capital Stock working capital ratio is a liquidity ratio. It is usually expressed as a pure ratio. 2:1 Formula: . It is a qualitative test of solvency. this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. This ratio also helps to study the solvency of a concern. Alternatively. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. E. This relationship is shown by debt equity ratio. It helps to judge the quantum of inventories in relation to the working capital of the business. DEBT EQUITY RATIO: MEANING: This ratio compares the long-term debts with shareholders fund. The purpose of this ratio is to show the extent to which working capital is blocked in inventories.
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‟. Leverage is also known as „gearing‟ or „trading on equity‟.Total long-term debt Debt equity ratio = Total shareholders fund Debt equity ratio is also called as leverage 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 indicates the relationship between net profit earned & total proprietors funds. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity. Return on proprietors fund is a profitability ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. This ratio is of practical importance to prospective investors & shareholders. Formula: NPAT Return on proprietors fund = * 100 Proprietors fund CREDITORS TURNOVER RATIO: . This ratio helps to judge how efficient the concern is in managing the owner‟s fund at disposal.
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.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 enhances credit worthiness of the company. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: . 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. ratios are of crucial significance. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditors. IMPORTANCE OF RATIO ANALYSIS: As a tool of financial management. Higher creditors turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid promptly.
for instance. 2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability 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. 1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. security analyst & the present & potential owners of a business. 4] Overall profitability. The leverage ratios. 3] Operating efficiency.1] Liquidity position. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of short term loans. This respect of the financial position of a borrower is of concern to the long-term creditors. 2] Long-term solvency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. 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. 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 . The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. 5] Inter firm comparison 6] Trend analysis.
total as well as its components. the firm can seek to identify the probable reasons & in light. If the results are at variance either with the industry average or with the those of the competitors. This is possible if an integrated view is taken & all the ratios are considered together. 3] OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis. in the ultimate analysis. which are interested in one aspect of the financial position of a firm. is that it throws light on the degree of efficiency in management & utilization of its assets. the solvency of a firm is. 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. one of the popular techniques is to compare the ratios of a firm with the industry average. dependent upon the sales revenues generated by the use of its assets. 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. 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.strain. The various activity ratios measures this kind of operational efficiency. 4] OVERALL PROFITABILITY: Unlike the outsides parties. relevant from the viewpoint of management. to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. In fact. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. the management is constantly concerned about overall profitability of the enterprise. . An inter firm comparison would demonstrate the firms position vice-versa its competitors. they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors. This is made possible due to inter firm comparison & comparison with the industry averages. That is. take remedial measures.
ratio analysis enables a firm to take the time dimension into account. that is. The advantages of ratio analysis can be summarized as follows: Ratios facilitate conducting trend analysis. which is important for decision making and forecasting. operating efficiency. whether the financial position of a firm is improving or deteriorating over the years. though the present level may be satisfactory but the trend may be a declining one. For example. which give the decision-maker insights into the financial performance of a company. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. profitability and solvency of a firm.6] TREND ANALYSIS: Finally. whether the movement is favorable or unfavorable. ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant accounting data relationships. These limitations are described below: 1] Information problems . In other words. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. the ratio may be low as compared to the norm but the trend may be upward. On the other hand. Ratio analysis helps in the assessment of the liquidity. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement. LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations.
. 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 price. Inter-firm comparison may not be useful unless the firms compared are of the same size and age. 2] Comparison of performance over time When comparing performance over time. When comparing performance over time. comparing the performance of two enterprises may be misleading. The movement in performance should be in line with the changes in price. Selective application of government incentives to various companies may also distort intercompany comparison. Ratios based on this information will not be very useful for decision-making. The movement in performance should be in line with the changes in technology. 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. and so might not give a proper indication of the company‟s current financial position. and employ similar production methods and accounting practices. Where historical cost convention is used. asset valuations in the balance sheet could be misleading. Changes in accounting policy may affect the comparison of results between different accounting years as misleading. there is need to consider the changes in technology. Ratios require quantitative information for analysis but it is not decisive about analytical output .
comparisons can be distorted by changes in the price level. it is true that what can be achieved by the technique of ratio analysis cannot be achieved by the mere preparation of financial statement. 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 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. Ratios provide only quantitative information. Even within a company. Ratios are calculated on the basis of past financial statements. which is already appearing in the financial statement. At the same time. . They do not indicate future trends and they do not consider economic conditions. not qualitative information. 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.
as the ratio all by them do not mean anything. either individually or in relation to those of other firms in the same industry. . As the ratio analysis is concerned with all the aspect of a firms financial analysis i. Ratio analysis is one of the best possible techniques available to the management to impart the basic functions like planning & control. profitability & overall performance.e. 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. The process of this appraisal is not complete until the ratio so computed can be compared with something. 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. inter firm comparison or comparison with standard ratios. Ratio analysis also helps to locate & point out the various areas. liquidity. 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. solvency. As the future is closely related to the immediate past. activity. This comparison may be in the form of intra firm comparison.
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