Report On Ratio Analysis Jaipur Saras Dairy
Facility Guide Guide Prof. S.k.kapoor Mittal Company R. N.
Dinesh Kumar Choudhary JKBSchool, Gurgaon Jkbs090417
I take the opportunity to express my sincere gratitude and ineptness to Mr. L. K. Kaushik the managing director of Jaipur Dairy who gave me the chance of doing my summer training in Jaipur Dairy.
I would like to thanks Mr. D. C. MISHRA (sub M.D.) who gave me this challenging project. I am grateful to Mr. R. N. MITTAL DY. Manager (F&A), Jaipur dairy for his valuable advice during the entire project. He devote his valuable time regularly and always become a good listener for my feedback. He suggested me for better way. His friendly behavior and willingness to help has done much of the work.
Finally I would like to thank the entire staff of Jaipur dairy for their co-operation.
Dinesh Kumar Choudhary MBA Part 1st year JKBSchool, gurgoan
Financial analysis of any organization is done through analysis of its financial statement. Financial statement provides valuable information of past performance and present position of the company and is considered as ‘blue print of the company’.
In this study, a sincere attempt has been made to analyze the working of Jaipur Dairy making use of different financial appraisal technique like Ratio analysis, Trend analysis, Common size balance sheet analysis etc; the period of study was 2 year i.e. 2005-06 & 2006-07. The date for the study obtained from published annual report of the company. An effort has been made to appraise the overall financial performance and efficiency of management, but the scope and depth of study remained limited due to limiting factors of time, and resources. However, it is expected that the study will provide useful information for the better and easier understanding of the financial result of the company.
This study has been divided into 5 chapters. The first chapter has been devoted to introduction and brief profile and last to the summary of conclusion and recommendation. The second chapter provides the tests
for the judging the profitability and analysis of working result of the company. In the chapter three analysis of company’s performance through ratio analysis and fourth chapter deals with graphics presentation of financial performance of Jaipur dairy.
CONCEPTUAL To prepare a report after analysis and interpretation of finding from balance sheet as well profit and loss account through applying various mathematical and financial tool and techniques.
To get the practical knowledge about all the things and aspect which we learn during our MBA part one in 1st Semester
The present earning capacity or profitability of Jaipur Dairy. The operational efficiency of Jaipur Dairy. The short term and long term solvency. The financial position of a business.
The possibility of development in the future by making forecast and preparing budget. To facilitates inter-firm and intra-firm comparison
JAIPUR DAIRY AN OVERVIEW
BRIEF HISTORY OBJECTIVES ORGINISATION HISTORY
FINANCIAL STATEMENT CONCEPT BALANCE SHEET INCOME STATEMENT STATEMENT OF CHANGES IN FINANCIAL STATEMENT PARTIES INTRESTED
FINANCIAL APPRAISAL CONCEPT NEED OF FINANCIAL APPRAISAL TOOLS AND TECHNIQUE OF FINANCIAL APPRAISAL ACCOUNTING TECHIQUES
JAIPUR DAIRY AN OVERVIEW
Dairy Development was initiated by the state Government in the early seventies under the auspices of Rajasthan State Dairy Development Corporation (RSDDC) registered in 1975. Two years later RCDF assumed responsibility for the functions of
RSDD. It became the nodal agency for implementation of operation flood in the state.
Rajasthan Cooperative Dairy Federation (FCDF) set up in 1977 as the implementing agency for dairy development programmers in Rajasthan is registered as a society under the Rajasthan co-operative societies act 1965.
Towards fulfillment of the national object of making India self sufficient in milk production small step was taken in March 1975 and Jaipur Zila Dugdh Utpadak Sakhari Sangh Limited. (Jaipur Dairy) was registered under the co-operative act 1965 to work in Jaipur district. Initially this union did not have the processing facilities. It started with a model beginning of procuring 250 ltr. Of milk per day.
In June 1981, Jaipur dairy plant was commissioned as a unit of Rajasthan co-operative dairy federation ltd. Jaipur for processing and manufacturing milk and milk products. The initial handling capacity of dairy plant was 1.5 lakh ltr per day with a powder plant of 15 MT per day capacity. Processing facilities of dairy plant presently include multifarious activates like chilling, pasteurization, standardization, sterilion, production of ghee, table butter, skimmed milk nankeen chach, lassie, pannier, shrikhand, aseptic milk and powder.
The dairy procures milk through his network of more than 700 villages’ level dairy co-operative societies spread in Jaipur and Dausa district. Dairy arranges transportation of milk from doorsteps milk producers to the receiving points at a dairy plant and its chilling centers. Payment of milk is distributed to the milk producers on a ten day basis.
Procreant and input activities include farmers organization, input services like animals health coverage and supply of balance cattle feed and improved fodder seeds to the members, co-operative development programme, training etc. in 1992, the Jaipur dairy plant was handed over to Zila Dugdh Utpadak Sahakari Sangh (Jaipur milk union) with the multiple increases in market of milk and milk product and also in milk procurement. The capacity of the plan was increased to 2.5 lakh ltr per day in 1998-99 to improve the quality or raw milk the dairy has commissioned three chilling centers at Kaladera, Dudu & Shahapura apart from enhancing the capacity Dausa milk chilling center.
Over the year, there has been not looking back for Jaipur dairy and the significant growth has been achieved during the year 1998-99 monthly average of milk sale has been 143000 Ltr per day with peak milk procurement during besides the near by sale milk unions like Sikar, Tonk, Swaimadhopur and Bharatpur also send their milk to Jaipur dairy for processing during peak flush season.
The “SARAS” range:
Fresh Milk life milk (UHT) DTM Toned Standard Full Cream Skimmed Camel Milk Fresh Milk Products Products Chaach Lassi Dahi Paneer Shrikhand Icecream Rasgulla Flavored Milk Mawa Ghee Cow Ghee Table Butter SMP WMP Cheese Dairy Whitener White Butter
Long shelf Skimmed Milk Double Toned Milk Toned Milk (Taaza) Cow Milk
Long Shelf Life Milk
Cattle Feed Balanced feed
High energy Mineral Mixture Urea Molasses Brick (UMB)
Today Jaipur dairy provides liquid milk of four types name • Toned • Double toned • Standard and Gold (Full cream) and • Various products like Ghee, Paneer table butter, chach, lassi, shrikhand in the district of Jaipur & Dausa and also contbutes grid. Its sale tetra packs milk throughout the country.
The plant is managed and operated by will-qualified, competent and experienced, managerial cadre and highly motivated work force to provide highest quality of product and best of services to its esteemed customers.
To further improve the efficiency and efficiency and effectiveness of the plant performance, Jaipur Dairy (Jaipur Zila Dugdh Utpadak Sahakari Sangh Ltd., Jaipur) had earlier obtained the Quality Management Systems Certification as per ISO 9002:1994 in combination with IS: 15000 (HACCP) in the year 2000. Now the dairy has upgraded the system in accordance with ISO:9001:2000 in combination with (HACCP) as per IS: 15000:1998.
The primary concern of Jaipur dairy is to provide best quality and safe products and services, achieved this quality objectives of Jaipur dairy are designed to
Meet a well defined needs use and purpose of costumer. Satisfy customer’s expectation for good and safe milk and milk products. Comply with applicable national and international standard. Make available milk and milk products at comparative price.
Ensuring implementation of ISO 9002 quality management system.
Application ad adherence of HACCP principal for food safety. Motivates employees participation. for professional excellence and
The Jaipur dairy believes that the delighted customer is the only key for overall development of the organization
This is achieved by:-
Educating milk products for clean milk production. Manufacturing and supplying milk and milk products and services of consistent quality at comparative price. Adoptive innovate and modern technologies and system. Developing committed workforce. Adoption of safety and environment friendly standards with help of application of HACCP principals.
1) JAIPUR DAIRY email@example.com 2) Shri. Om Prakash Punia, firstname.lastname@example.org Chairman 3) Sh. L.K Kaushik, Managing email@example.com Director 4) Sh. Anil Shukla, Manager (QC) firstname.lastname@example.org 5) Sh. S. K. Mahajan, Manager email@example.com (Plant) 6) Sh.C.P. Mittal Manager (APS). firstname.lastname@example.org 7) Sh R.D Kaushik, Manager (FOP) email@example.com 8) Sh H.P Sharma, Dy Manager ( HQ firstname.lastname@example.org & Computer) 9) Sh. Govind Gupta, Dy Manager ( Marketing) 10) Sh. R. N. Mittal, OIC (F & A) 11) Sh. Rakesh Gupta, OIC (F & A) 12) Dr. D.C. Mishra , OIC (Input) 13) Sh. HL Agrawal, OIC (Engg) 14) Sh. KC Kabra, Dy.Mgr(P&A) 15) Sh. Anil Gaur, Public Relation Officer email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
16) Sh. Vijay Gupta, OIC (Purchase) firstname.lastname@example.org 17) Sh PS Chaudhary, OIC (Store) email@example.com 18) Sh. H. S. Sharma, OIC (MIS) firstname.lastname@example.org 19) Sh. Avinash Jain OIC( Powder email@example.com plant) 20) Sh. PK Satsangi OIC WDP firstname.lastname@example.org 21) Sh. Sanjay Mehan OIC(APS) email@example.com 22) Sh. Bipin Sharma Dy. Mgr firstname.lastname@example.org 23) Sh. Mahesh Gurnani OIC ( Milk email@example.com Packing) 24) Sh. Sunil Kumar, OIC (Milk firstname.lastname@example.org Processing)
As far as the organizational structure of RCDF (Saras) is concerned we can say that the federation is a state Level Apex co-operative Organization owned by its member unions each of which, in turn, is owned the dairy co-operative societies in its area of operation which are themselves owned by farmer members.
The federation has a board of directors which has overall responsibility for the planning policies, financial resource mobilization and management, member and public relations as well as liaison with agencies of the state and central Government, financing institutions etc. The federation has chief Executive designed as Managing Director.
The organization operates on three tier system where in farmer members own diary co-operative societies (DCS) which own district milk producers union. The unions collectively own the RCDF.
It is a vertically integrated structure that established a direct linkage between those who produce the milk and those who consume it.
Federation provides services and support to union. Marketing with in and outside State. Liaison with government and NGO agencies, mobilization of resources and co-ordination planning programmes or project.
Union-develops village milk co-operatives networks procure milk from DCS, process and markets. Sales of cattle feed and related inputs, promotions of cross breeding through AI and NS promotion of fodder development and general supports and supervision to DCS. DCS – provides input services (AH,AI) to its members and procurement of milk.
Quality Jaipur dairy has got a sophisticated quality Control Laboratory, which is equipped to carry out almost all the chemical and
bacteriological tests related with milk and milk products. The QC Lab also carries quality tests for various packaging material, ingredients, and chemicals used in Jaipur Dairy. The service of the quality control lab is also used for carrying our consumer awareness programs like “Dudh ka Pani Ka Pani”. We also have facility for general public for getting their milk or Ghee samples tested in our quality control lab free of cost.
Engineering The lifeline of Jaipur dairy i.e. steam, water and refrigeration is provided and maintained by the Engineering section. Apart from this section does regular maintenance both preventive and corrective only. Considering the perishable nature of milk, the engineering section has to be on its toes always. The section is managed by will – qualified and experienced manpower, which are at par with any professional organization.
Human Resource Development
Jaipur dairy has always considered its staff member as an asset. Various programs are run on continuous basis for keeping the morale of employees high. Without the positive support of the employees, the success story of Jaipur Dairy would not have been possible. Yearly Get-together of all officers and employees is one of the most important events of Jaipur Dairy.
For the last few years, more emphasis is being given on employees ‘training in the field of Attitude, Customer Relations, Positive Thinking, Time Management, Stress Management and Team Building etc; apart from technical subjects. Employees are being made aware of such subjects either by nominating them to various training organizations and workshops and seminars. Also experts are being invited to conduct in house workshops and seminars. Jaipur Dairy has h HRD cell also, which circulate good and readable articles to employees for self-development.
This Dairy procures milk through its strong network of over 1200 village level Dairy Co-operative spread in Jaipur and Dausa district. Dairy arranges transportation of milk from doorsteps of milk producers to the receiving point at daily plant and its chilling centers. Payments of milk are disbursed to the milk producers on ten day basis.
Procurement and input activities include Farmer’s Organization; input Services like Animal Health Coverage, Animal breeding Programme, Supply of balanced cattle feed and improved high yielding fodder seeds to the members, Co-operative institution building, Women Dairy co-operative Leadership programme and Training of DCS manpower and its Managing committee members etc.
Processing facilities of the dairy plant presently include multidimensional activities like chilling, Pasteurization, standardization, sterilization, production of Ghee, Butter (Salted / Unsalted) Skimmed Milk Powder (SMP), Indigenous fresh Milk Product (Paneer, Shrikhand, Chhach (Plain / Salted), Lassi, Mawa (Khoa) and Dahi (Plain / Mishti), and Aseptic Milk (Which was handed over to Jaipur Dairy only in 1997-98).
To improve the quality of raw milk, the Dairy has commissioned chilling centers and installed Bulk Coolers at various places in the milk shed.
We have entered in the 21st centaury; still Backbone of our Indian economy is primarily agriculture and animal husbandry. Most of the activities and related to there two fields are done by women but have contribution is not recognized at any level. In dairy and animal husbandry sector, she is playing very important role. But behind the screen, Jaipur dairy also identified the significance of her role and started emphasizing on participate increasing women participation by increasing women membership and no of women in D.C.S. management committee. It could yield only a mild positive impact. Jaipur Dairy in 1991 started RAJASTHAN WOMEN DAIRY PROJECT, supported by Ministry of HRD Government of India. Under this project exclusively women dairy co-operative societies were organized, where member, management committee member, chairperson secretary etc, were all women. Object of these projects was society economic development of rural women. This project had following programming literacy programme, health and Sanitation programme, Employment programme, Awareness Generation programme. All these activities were to be performed on women Dairy co-operative Society plate form.
This program yielded very good results. Beside considerable increase in income, income in literary level better adoptability of Health and Hygiene practices. There is tremendous increase in her awareness. She is more confident, better decision maker, self reliant, ambitious and vocal. All these features were observed and felicitated by the them US President Mr. Bill Clinton during his visit to NAILA (Jaipur) where are our dairy women demonstrated not only the working of on automatic milk collection station with computers but also discussed will him the story of their storage and success.
To system this impact and feature strengthening women dairy cooperative Jaipur dairy started women dairy co-operative leadership development. Program and co-operative institution building program with. The help and support of National Dairy Development Board, Jaipur. Objective of this program is again strengthening of WDES and its numbers by increasing women participation in all activities of WDES. Modus apparent for awareness is training at various levels. These peregrine facilitated by local resource person who is again a women, Selected out the same level onass, local, literate, vocal, acceptable locally, vibrant and having leadership ability. This programme has also given good result in the form of owning of organization role perception and loyalty to D.C.S.
Women empowerment is continuous process. Only this we can say is “A promise to keep, A Dream to fulfill, And Miles to go”
FINANCIAL STATEMENTS ANALYSIS
Accounting process involves recording, classifying and summarizing various business transactions. Financial statements are the result of summarizing process. Their purpose is to determine the profitability of the firm from operations and to know about the financial position. Thus, financial statements contain systematically collection summarized information about a firm’s operating results and financial strength and are means to communicate the information to various users. These financial statements are prepared from the accounting records maintained by the firm and the generally accepted accounting principles and procedures are followed in preparing these statements.
MEANING OF FINANCIAL STATEMENTS
Financial statements are the end products of the financial process. These statements are nothing but the presentation of financial information about the firm in concise and capsule form. The financial information is that information which relates to the financial position at a moment in time and the results of a series of activities over a period of time. Thus, “financial statements refer to the statements that show the financial position
and result of business activities at the end of the accounting period.” These statements reveal the gross and net profits of the business carried on during a certain period ad the financial position at the end of that period.
Financial statements from part of the process of financial reporting. A complete set of financial statements normally includes a balance sheet, a statement of profit and loss (also known as income statement), a cash flow statement and those notes and other statements and explanatory material that are an integral part of the financial statements. They may also include supplementary schedules and information based on or derived from, and expected to be real with such statements. Such schedules and supplementary information may deal, for example, with financial information about business and geographical segments, and disclosures about the effects of changing prices. Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in financial or annual report.
Ratio analysis has emerged as the principal technique of analysis of financial statement. It is an attempt to present the information of the information of the financial statements in simplified, systematized and summarized form by establishing the quantitative relationship of the items or group of items of financial statements. The system of analysis of financial statements by means of ratios was first made in 1919 by Alexander Wall. A number of ratios are calculated in this technique.
MEANING OF RATIO ANALYSIS
Figures are mere symbols and one can understand them by comparing them with same other relevant figures. Ratios are therefore calculated to assess one figure in the light of another. Thus, a ‘ratio’ is a simple arithmetical expression of the relationship of one number to another and is obtained by dividing the former by the later. In other words, ratios are simply a means of highlighting, in arithmetical terms, the relationship between figures drawn from financial statements; whereas ratio analysis is the process of determining and presenting the relationship of items or group of items in the financial statements. The relationship may be of two types: (1) associate relationship; and (2) cause/effect relationship. For example, there is an associate relationship between cost of goods sold and cost of raw material, whereas, there is cause/effect relationship between sales and profits. Both the relationships are expressed in terms of ratios. Thus, ratio analysis is a device by which the retroactive size and importance of the relationship between strategic items or groups
of items in the balance sheet and income statement are examined and compared by calculation of ratios.
EXPRESSION OF RATIOS:
Normally, the ratios may be expressed in any of the following ways: Ratio as proportion: In this form, the relationship between two figures is expressed in a common denominator. It is obtained by the simple division of one number by another so that the proportionate relationship because clear. For example, if current assets are Rs. 16,000 and current liabilities are Rs. 4000, the ratio between assets and current liabilities i.e. current ratio will be 4:1 (16,000/4,000). Ratio as Turnover: In this form, a ratio is calculated between two numerical facts for which one item is divided by another and the quotient so obtained is taken as unit of expression. When ratio is expressed in this form, it is called as ‘turnover’ and is written in ‘times’. For example, sales for the year are Rs. 80,000 and fixed assets are Rs. 20,000; it indicates that sales are 4 (80,000/20,000) times of fixed assets. Ratio as Percentage: In this form, the relationship between two items is expressed in percentage for which one item is divided by another and the quotient is multiplied by 100. For example, if sales are Rs. 80,000 and gross profit is Rs. 20,000, then percentage of gross profit to sales i.e. gross profit ratio will be 25% (20,000/80,000*100).
In financial analysis, these ratios highlight the financial position of the business, and hence known as financial ratios. These are also called accounting ratios, because they are based on the
data taken from financial accounts. Similarly, they measure the relative importance of the items expressed in financial statements, hence called structural ratios.
Ratios are guides or short-cuts that are useful in evaluating the financial position and operations of a company and in comparing them to previous year or to other companies. In accounting and financial management, ratios are regarded as the real test of earning capacity, financial soundness and operating efficiency of a business concern. That is why, a number of parties such as shareholders, creditors, financial executives are interested in ratio analysis with a view to take judicious decisions. As of J. Batty has said, “Ratios can also assist management in its basic functions of forecasting, planning, co-ordination, control and communication.” The following points highlight the importance of ratio analysis: 1. Simplifies Accounting Figures 2. Measures Liquidity Position 3. Measures Long-term Solvency 4. Measures Operational Efficiency 5. Measures Profitability
Facilitates Inter-firm and Intra-firm Comparisons
7. Trend Analysis 8. Managerial uses:
I. II. III. IV.
Aid in Planning and Forecasting Aid in control Aid in Communication Aid in Decision-making
LIMITATIONS OF RATIO ANALYSIS
Ratio analysis, as already mentioned, is a useful tool of financial evaluation of business firms. But, it should be kept in view that ratios are only guide in analyzing the financial statements, and not conclusive end in them. If these ratios are misused, the results will be incorrect and misleading. Therefore, the analyst should be aware of the weaknesses and limitations of ratio analysis while analyzing financial statements and using conclusions for decision-making on the basis of these ratios. The important limitations are identified as follows: 1. Need of Comparative Analysis 2. Qualitative Factors Ignored
Possibility of Window-dressing
4. Inherent Limitations of Accounting 5. Difference in Accounting Methods and systems 6. No Substitute for Sound Judgment 7. Lack of Standard Ratios 8. Personal Bias 9. Effect of Price Level Changes
PRECAUTIONS IN USING RATIONS
Ratio analysis is a widely used technique in analyzing the financial activities of a firm. If ratios are used in a wrong way or carelessly, there is a possibility of conclusions being misleading. Therefore, while using ratios, following precautions should be taken into consideration.
Ability to Understand Accounting Data: The user must be capable to understand the nature of accounting data used in preparing financial statements, from which ratios are calculated. It is much more essential when efficiency of one firm is compared with that of another firm. In such a case, the figures must have conceptual uniformity and be comparable. Speed Compilation: Speed compilation of ratios is desirable, because the utility of these ratios depends upon the timely availability to the person concerned. How speedy these should not be computed and a equilibrium between cost and benefit be maintained. Cost-Benefit: There is a cost of calculating ratios. Therefore, undesired or useless ratios should not be computed and an equilibrium between cost and benefit be maintained.
Presentation: The utility of ratios, to a great extent, depends upon their presentation. Only those ratios should be presented before the concerned person whom is to be considered. For example, ratios of productivity should be presented before the production manager. Incorporation of Changes: Ratios should be revised as per changing business conditions and assumptions. In the beginning, a few ratios are computed, but as business grows or expands, new ratios should be incorporated.
CLASSIFICATION OF RATIOS
Each business entity has its own problems. Different ratios are computed to analyses these problems. Ratio expert Spencer A. Tricker P.E. has analyzed such 429 ratio in his book, ‘Successful Management Control by Ratio Analysis”. Discussion of all these ratios, here, is neither feasible nor desirable. Hence, significant financial ratios based on balance sheet and profit and loss account are classified on the following bases: Structural Classification This is a conventional mode of classifying ratios where the ratios are classified on the basis of information given in the financial statements, i.e. balance sheet and profit and loss account to which the determinants of the ratios belong. On this basis, all ratios are grouped as follows:
Balance Sheet Ratio: The components for computation of these ratios are draws from balance sheet. These ratios are called financial ratios. Examples of such ratios are: current
ratio, liquid ratio, proprietary ratio, capital gear ratio, fixed assets ratio etc.
Profit and Loss Account Ratios: The figures used for the calculation of these ratios are usually taken out from the profit and loss account. These ratios are also called ‘income statement ratios’. Examples of such ratios are: gross profit ratio, net profit ratio, operating ratio, expenses ratio, stock turnover ratio etc. Inter-Statement Ratios or Combined Ratio: The information required for the computation of these ratios is normally drawn from both the balance sheet and profit and loss account. Examples of such ratios are: return on capital employed, return on owners’ fund, return on total investment, debtor’s turnover ratio, creditors turnover ratio, fixed assets turnover ratio, working capital turnover ratio etc.
Now-a-days, it is the most popular mode of classifying the ratios. Accordingly, the ratios may be grouped on the basis of certain tests which satisfy the needs of the parties having financial interest in the business concern. For example, creditors or banks have interest in the liquidity of the firm, debenture holders in the long-term solvency and shareholders in the profitability of the firm. The ratios may be grouped as per different interests or objectives as under:
Liquidity Ratios: These ratios are used to measure the ability of the firm to meet its short-term obligations out of its short-term resources. Such ratios highlight short-term solvency of the firm. Examples of such ratios are:
I. II. III.
Current Ratio Liquid or Quick Ratio Absolute Liquidity Ratio
Activity or Efficiency Ratio: These ratios enable the management to measure the effectiveness or the usages at the command of the firm. Following ratios are included in this category: I. II. III. IV. V. VI. VII. Stock Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Total Assets Turnover Ratio Fixed Assets Turnover Ratio Current Assets Turnover Ratio Working Capital Turnover Ratio Capital Turnover Ratio
Profitability Ratio: These ratios are intended to measure the end result of business operations i.e. profitability. Profitability is a measure of the ability to make a profit expressed in relation to the sales or investments, and as such the following ratios are computed in this category Based on Sales I. II. III. IV. Gross Profit Ratio Operating Ratio Expenses Ratio Operating Profit Ratio
Net Profit Ratio
Based on Capital or Investments I. II. III. IV.
Return on Capital Employed Return on Net Worth or Shareholders’ Fund Return on Equity shareholders’ fund Return on Total Assets
Investment Analysis Ratios: These ratios are helpful to the shareholders in analyzing the perspective investment in the company. Shareholders are able to know the future market price of their investment with the help of these ratios. Following ratios are included in this category: I. II. III. IV. V. VI. Earning per Share Price-Earning Ratio Dividend per Share Dividend Yield Ratio Dividend payment Ratio Book Value per Share
Capital Structure or Leverage Ratio: These ratios help in measuring the financial contribution of the owners as compared to that of creditors and also the risk in debt financing. The long-term solvency of the business can be examined by using leverage ratios. Following are such important ratios: I. II. Debt-Equity Ratio Proprietary Ratio
III. IV. V. VI. VII.
Solvency or Debt to Total Assets Ratio Fixed Assets to Net Worth Ratio Capital Gearing Ratio Interest Coverage or Debt-Service Ratio Dividend Coverage Ratio
Thus, ratios are classified with different point of views, but from analytical point of view, the functional classification is more appropriate as it highlights the utility of different ratios.
These ratios play a key role in analyzing the short-term financial position of a business Liquidity refers to a firm’s ability to meet its current financial obligations as they arise. Commercial banks and other short-term creditors i.e. suppliers of goods and services are generally interested in such ratios. However, the management can use these ratios to ascertain how efficiently it has utilizing the working capital. Some of the principal liquidity ratios are described below:
Current ratio is one of the important ratios used in testing liquidity of a concern. This is a good measure of the ability of accompany to maintain solvency over a short-run. This is computed by dividing the total current assets by the total current liabilities and is expressed as:
Current Assets Current ratio= -----------------------------Current Liabilities
The current assets of a firm represent those assets, which can be in the ordinary course of business, converted into cash within one accounting year. The current liabilities are defines as obligation maturing within a short period (usually one accounting year). Excess of current assets over current liabilities is known as working capital and since these two (Current assets and current Liabilities) are used in current ratio therefore, this ratio is also know as working capital ratio.
With the help of this ratio the analyst can review the extent to which the company can cover such liabilities with current assets. The current ratio gives the analyst a general picture of the adequacy of the working capital of a company and ability of the company to meet its day-to-day payment obligation. “It likewise measures the margin of safety provided for paying current debts in the event of a reduction in the values of current assets.”
The current ratio is very useful as a measure of short-terms debt prying ability but it is tricky to interpret this ratio. Experts are of the view that the value of current assets should be at least double the amount if current liabilities.
Walker and Bough have the same view they are a good current ratio may mean a good umbrella for creditors against the rainy days. But the management it reflects bad financial planning or presence of idle assets or over capitalization.”
Idle Current Ratio: 2:1
If this ratio is higher than standards than it is assumed Very good short-term liquidity or solvency. Excess stock, bad debts and idle cash Under trading
If this ratio is lower than standards than it is assumed Unsatisfactory short-term liquidity Shortage of stocks, less credit sales, shortage of cash Over trading
CURRENT RATIO OF JAIPUR DAIRY LTD.
DURING 2008 TO 2009 Year (A) 2008-2009 Current assets Current Liabilities (B) (C) Current Ratio (B)/(C) 1.92:1
This table reveals that current ratio increased that is making improvements in its short-term solvency. It is because of increase in current assets as compared to current liabilities. Still this is lower than standard current assets Ratio that shows a little bit unsatisfactory liquidity position of the company.
(B) QUICK RATIO
The solvency of the company is better indicated by quick Ratio. The fundamental object of calculating this Ratio is to enable the financial management of a company to ascertain that would happen if current creditors press for immediate payment and
either not possible to push up the sales of closing or it is sold; a heavy loss is likely to be suffered. This problem arises because closing stock is two steps away from the cash and their price is more or less uncertain according to market demand.
The term quick assets includes all current assets expect inventories and prepaid expenses. It shows the relationship of quick assets and current liabilities. The Ratio is calculated as following:
Quick Assets Quick Ratio = ------------------------------Current Liabilities
IDLE QUICK RATIO: 1:1
QUICK RATIO OF JAIPUR DAIRY LTD. DURING 2007 TO 2009
Year (A) 2008-2009
Quick assets (B) 446979434.8
Current Liabilities (C) 586443314.8
Quick Ratio (B)/(C) 0.72:1
Although it is less idle ratio still it has increasing trend that shows dairy improving condition of short term solvency of Jaipur dairy.
ABSOLATE LIQUIDITY RATIO
The absolute liquid ratio is the ratio between absolute liquid assets and current liabilities is calculated by dividing the liquid assets and current liabilities. Expressed in formula, the ratio is:
Absolute liquidity Assets Absolute liquidity Ratio: ------------------------------------------------Current Liabilities The term liquid assets include cash bank balance and marketable securities, if current liabilities are to pay at once, only balance of cash and bank and marketable securities will be utilized. Therefore, to measure the absolute liquidity of a business, this ratio is calculated.
IDLE RATIO: 0.5:1
The idle behind the norm is that if all creditors for demand for payment, at least 50% of their claim should be satisfied at once.
The table shown on the next page reflects the absolute liquidity ratio Jaipur Dairy Ltd. ABSOLUTE LIQUIDITY RATIO OF JAIPUR DAIRY LTD. DURING 2007 TO 2009 Year (A) 2008-2009 Absolute liquid Current assets Liabilities (B) 40069631.19 (C) 586443314.8 Absolute liquid ratio (B)/(C) 0.068:1
This ratio is very below from idle ratio. It is making insecure creditors claim but it is getting increasing trend. It is needed to maintain this trend.
ACTIVITY OR EFFICIENCY RATIOS
The funds of creditors and owners are invested in various assets to generate sales and profit. The better the management of these assets, the large the amount of sales. Activity ratios enable the firm to know how efficiently these assets are employed by it. These ratios indicate the speed with which assets are being converted or turned over into sales. Hence, these ratios are also known as ‘turnover ratios’ or ‘assets management ratios’. While calculating these ratios, a comparison is made between sales and investment in various assets (stock, debtors, fixed assets etc.). As such, an activity ratio is the relationship between sales or cost of goods sold and investment in various assets of the firm. It is important to note that these ratios are always expressed as turnover or in number of times i.e. rate of turning over or rotation, also known as velocity. Several activity ratios can be calculated to judge the
effectiveness of assets utilization. The following are the important and widely used ratios:
STOCK TURNOVER RATIO
Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. A too high inventory means higher carrying costs and higher risk of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. It is very essential to keep sufficient stock in business.
It is expressed in number of times. Stock turn over ratio/inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.
Higher ratio indicates Stock is sold out fast Same volume of sales from less stock or more sales from same stocks Too high ratio shows stock outs or over trading Less working capital requirement
Lower ratio reveals
Stock is sold at a slow speed
Same volume of sales from more stocks or less sales from same stocks More working capital requirement Too low ratios show obsolete stocks or under trading
Cost of Goods Sold or Sales Inventory (stock) ----------------------------------------------Turnover Ratio:
Average Inventory at cost
4953091928.7 =---------------------------------- = 588328734.15 It is always better to calculate Turnover Ratios on the basis of “Cost of Goods Sold”. If information regarding cost of goods sold is not available, only there the “Sales” figure should be used as base. 8.41 Times
Debtors or Receivables Ratio: Receivable normally include debtors and bills receivable and represent the uncollected portion of credit sales. If a firm is not
able to collect its debtors within a reasonable time, its funds are unnecessarily tied-up in receivables. Therefore, to know, how far the firm is successful in realizing the credit. ‘Debtors or receivables turnover ratio’ is calculated. This ratio establishes the relationship between net credit sales and average receivable of the year. The formula used for its calculation is as follows:
Net Credit Sales Debtors Turnover Ratio=--------------------------------------Average Receivable
4953091928.7 =---------------------------------- = 322356102.95 15.36 Times
Components: Credit Sales means all credit sales minus sales returns. If information about credit sales is not available, the figures of total sales may be assumed to be the credit sales. Debtors and bills receivable which arise out of credit sales should only be considered. While calculating this ratio, the full amount of bills discounted, which creates liabilities, should be included and provision for bad and doubtful debts should not be deducted because it may give an impression that some amount of receivables has been collected. If the data relating to opening and closing balance of debtors and receivables are not
available, the receivables at the end of the year may be considered for computing this ratio.
Interpretation and Significance: This ratio indicates the number of times the receivable are turned over in a year in relation to sales. It shows how quickly debtors are converted into cash. For example, in the above illustration a turnover of 13 signifies that debtors are converted into cash 13 times in a year. A higher debtor’s turnover ratio shows the efficiency in collection from debtors i.e. debtors are being collected more promptly. On the contrary, lower ratio indicates inefficiency of management in collection of payment against credit sales in time or payments by debtors are delayed. It is difficult to set up a standard for this ratio. It depends upon the policy of the management and the nature of the industry. To judge the effectiveness of this ratio, it should be compared with the ratio in the previous period or with the ratio of other firms doing similar business.
Average Collection Period This ratio is, inter-related with and dependent upon debtors’ turnover ratio. Average Collection period means the number of days over which debtors and bills receivable remain uncollected. This period can be calculated by any of the following formulae: Total or Average Receivables (Drs. + B.R.) 1. Average period=---------------------------------------------------------------Collection
Credit sales per day
Net Credit Sales Credit sales per day =------------------------------------------------365 days
Total or Average Receivables No. of Months 2. Average Collection period =--------------------------------------------------------Days in a year *
Net Credit Sales
Interpretation and significance: An average collection period or debtors velocity, say of two months, implies that debtors are collected in 60 days. It measures the quality of debtors because it indicates the rapidity to slowness in the collection process. A shorter collection period implies prompt payment by the debtors while a longer period reflects delay in payments by debtors. Fast recovery is the indications of good debtors and less probability of bad and unrecoverable debts. On the other hand, delay in recovery of debts in a business indicates increase in the amount of bad debts, negligence and inefficiency of management or relaxation in credit terms. In order to measure the efficiency of the credit collection department, this period should be compared with the average of the industry or with the credit period normally allowed by other firms.
CREDITORS OR PAYABLE TURNOVER RATIO:
Firm from whom goods and services are purchased on credit are known ‘creditors’ and the bills accepted in lieu of credit purchases are called ‘bills payable’. The creditors and bills payable both are reckoned as ‘Total payables’. If these payables remain out standing for a longer period, lesser will be the problem of working capital to the firm. But, when the firm does not pay off its creditors within time, it may face difficulties in procuring further working capita. Therefore, it is essential to know in how many days a firm can pay off its creditors. This requires computation of creditor’s turnover and average payment period or creditor’s velocity. Creditor’s turnover ratio shows the relationship between net credit purchases for year and total payables, whereas average payment period or creditors’ velocity signifies the credit period enjoyed by the firm in paying creditors. There are calculated by using the following formulae:
Net Credit Purchases 1. Creditors or Payable ---------------------------------------------Payable (Crs. + B.P.) Turnover =
Total or Average
Total or Average Payables * No. of months/days 2. Average Credit =---------------------------------------------------------------Purchases
Net Credit Purchases
4114975103.10 =---------------------------------- = 409632819.10 10.045 Times
Components: Credit purchases means all credit purchases of goods minus purchases returns. If information about credit purchases is not available, the figure of total purchases may be assumed to be credit purchases. Average payables refer to the one half of opening and closing balances of trade creditors which includes sundry creditors and bills payable. If opening and closing balances of creditors are not known, the balance of creditors given may be taken to find out the ratio. But, the amount of ‘provision for discount on creditors’ will not be deducted from the amount of creditors.
Interpretation and Significance: The creditors or payables turnover ratio indicates the number of times the creditors are
turned over in relation to purchases. A high turnover ratio or shorter payment period shows the availability of less credit or early payments. This boosts up the credit worthiness of the firm. On the other hand, a low turnover ratio or longer payment period implies availability of more credit or delayed payments. Thus, the lower the ratio, the better is the liquidity position of the firm, and the higher the ratio, the lesser is the liquid position of the firm. For meaningful analysis, a comparative analysis of different firms in the same industry and the trend may be used for different years.
TOTAL ASSETS TURNOVER RATIO:
This ratio expresses the relationship between costs of goods sold or net sales and total assets or investments of a firm. It is also called ‘Total Investment Turnover Ratio’ and is calculated by using the following formulae:
Net Sales or Cost of Goods Sold Total Assets Turnover -------------------------------------------------------Total Assets 4953091928.7 =---------------------------------- = 2.785 Times Ratio=
Components: Total Assets means all fixed and current assets but the provision for depreciation is adjusted in it. A few experts exclude fictitious assets like preliminary expenses, underwriting commission, discount on shares and debenture etc. but include intangible assets such as goodwill, patents, trade mark etc. but in practice, fictitious assets are excluded and intangible assets (If they have Realizable Value) are included. The figure of net sales can be used where information regarding cost of goods sold is not available. According to Helfert only operating assets are considered i.e. investments are also excluded.
Interpretation and Significance: This ratio indicates the number of times the assets are turned over in a year in relation to sales. A higher total assets turnover ratio indicates that assets are not properly utilized in comparison to sales. Thus, there is an over investment in assets. Extremely high ratio means over-trading in the business.
FIXED ASSETS TURNOVER RATIO
This ratio expresses the relationship between fixed assets (less depreciation) and net sales or cost of goods sold. Since investment in fixed assets is made for the ultimate purpose of
efficient sales, the ratio is used to measure the fulfillment of that objective. As such, investments are excluded from fixed assets as they do not affect sales. It is calculated by using the following formula:
Sales or Cost of Goods Sold Fixed Assets Ratio=------------------------------------------------------------Fixed Assets (less depreciation) 4953091928.7 =---------------------------------- = 2992268779.5 16.947 Times Turnover
Interpretation and Significance: This ratio measures the efficiency and profit earning capacity of the firm. The higher the ratio, the greater is the intensive utilization of fixed assets. Lower ratio means under utilization of fixed asset and excessive investment in these assets. As volume of sales depends on a variety of factors such as price, quality of goods, salesmanship, marketing etc. it is argued that no direct relationship can be established between sales and fixed assets. Accordingly, it is not recommended for general use.
CURRENT ASSETS TURNOVER RATIO
This ratio expresses the relationship between current assets and net sales or cost of goods sold. It is calculated using the following formula:
Sales or Cost of Goods Sold Current Assets Ratio=----------------------------------------------------Current Assets 4953091928.7 =---------------------------------- = 1159606169.4 4.27 Times Turnover
Interpretation and Significance: This ratio reflects the efficiency and capacity of working capital. It is a very useful technique for non-factoring units or those manufacturing units requiring lesser working capital. On the basis of this ratio, efficiency or current assets and over or under investment in the firm is examined.
WORKING CAPITAL TURNOVER RATIO
This ratio establishes the relationship between net working capital and net sales or cost of goods sold. It is calculated by dividing the net sales or cost of goods sold by net working capital. Expressed as a formula:
Sales or Cost of Goods Sold Working Capital Ratio=-------------------------------------------------Turnover
Net Working Capital 4953091928.7 =---------------------------------- = 573162854.6 8.64 Times
Interpretation and Significance: This ratio is used to assess the efficiency with which the working capital is being used in making sales. In other words it shows the number of times working capital has been rotated in generating sales. A high working ratio indicates efficient management of working capital or over-trading i.e. low investment in working capital and more profit. On the contrary, a low working capital turnover ratio implies under-trading i.e. funds are not being utilized efficiently. Higher sales in comparison to working capital means over-trading, whereas lower sales in comparison to working capital means under-trading.
CAPITAL TURNOVER RATIO
This ratio establishes the relationship between net sales or cost of goods sold and capital employed. Capital employed is calculated either by deducting current liabilities from total assets or by adding long-term loans in shareholders’ funds (share capital + reserves and surplus). Fictitious and non-trading assets are excluded from assets. It is calculated using the following formulae:
Sales or Cost of Goods Sold
Capital Turnover ------------------------------------------------------------Capital Employed
4953091928.7 =---------------------------------- = 379903765.46 13.04 Times
Interpretation and Significance: The efficiency and effectiveness of the operations are judged by comparing the sales or cost of sales with the amount of capital employed in the business and not with the assets held in the business. Therefore, this ratio is a better measurement of efficient use of capital employed. Efficient use of capital symbolizes profit earning capacity and managerial efficiency of the business. A higher ratio indicates the quicker rotation of capital to generate higher sales which leads to higher profitability. On the contrary a lower ratio will indicate that either the capital is not being used infinity to generate enough sales.
No idle standard can be fixed for his ratio, as turnover is different in different types of industries. In those industries where the investment required in fixed assets is more, the capital turnover ratio remains lower and where the investment is fixed assets is less, the ratio remains higher. As such, higher ratio shows higher profits and lower ratio shows lower profits.
The main objective of every business firm is to earn profit. It is possible only when resources of the firm are effectively utilized. The firm’s ability to earn maximum profit by the best utilization of its resources is called profitability. Profit refers to the absolute quantity of profit, whereas profitability refers to the ability to earn profit. Profit is an absolute measure of earning capacity and profitability is the relative measure of earning capacity. Profitability depends on quantum of sales, cost of production and use of financial resources etc. The profitability of a firm can easily be measured by its profitability ratios. These ratios indicate overall managerial efficiency. There are two types of profitability ratios. First, profitability ratios based on sales: Second, profitability ratios based on capital and assets.
PROFITABILITY RATIOS BASED ON SALES
From profit point of view, it is significant that adequate profit should be earned on each unit of sales. If adequate profit is not earned on sales, there will be difficulty in meeting the operating expenses and nod dividend will be paid to the shareholders. Therefore, following profitability ratios are calculated in relation to sales. These are also called ‘General Profitability Ratios’.
Gross Profit Ratio
This ratio expresses the relationship of gross profit on sales to net sales in terms of percentage. Expressed as a formula, the gross profit ratio is:
Gross Profit Gross Profit Ratio=----------------------Net Sales * 100
Net Sales – Cost of Goods Sold Gross Profit Ratio =-----------------------------------------Net Sales 334467118.68 =---------------------------------- *100 = 6.75% 4953091928.7 * 100
Components: According to Accounting Standard Board of India, Gross Profit is the excess of the proceeds of goods sold and services rendered during a period over their cost before taking into account administration, selling, distribution and financial expenses. It is calculated by deducting the cost of goods sold from net sales. Cost of goods sold includes purchase price and direct expenses relating to purchases such as carriage inward, octori etc. Cost of goods sold, in case of manufacturing concern, is the sum of cost of raw material used, wages, direct expenses and all manufacturing expenses. Net sales mean total sales minus sales returns.
Interpretation and Significance: This ratio measures the trading effectiveness and basic profit earning potentiality of a firm. The higher the ratio, the greater will be the margin and that is why it is also called, ‘margin ratio’. An increase in the gross profit ratio may be the result of one or all of the following: Higher selling price but cost of goods remaining the same Lower cost of goods sold but selling price remaining the same Such combination of selling prices and costs where margin is more Increase in items of excess margin On the contrary, a low gross profit ratio is the indication of the fact that – (1) profit are declining in comparison to sales, (2) production costs are much more due to inability to purchases raw material on reasonable terms, inefficient use of plant and machinery and over investment. This low gross profit may also be the result of reduction in selling price without a corresponding decline in cost of production. Therefore, a relatively low gross profit ratio is a danger signal and warrants a detailed analysis of the factors responsible for it.
This ratio expresses the relationship between operating costs and net sales. Operating costs refer to cost of goods sold plus operating expenses. Expressed as a formula:
Operating Costs Operating Ratio =--------------------------Net Sales * 100
Cost of Goods Sold + Operating Expenses Operating Ratio =--------------------------------------------------------- * 100 Net Sales
Components: Cost of goods sold is computed by adding purchases and direct expenses (relating to purchase and manufacturing) in opening stock and deducting the closing stock. The operating expenses include office and administration expenses (salary, rent, deprecation, director’s fee, electricity, insurance etc.) and selling and distribution expenses. Financial expenses such as interest, discount, provision for bad debts, provision for taxation and abnormal expenses like preliminary expenses, donations, share or debentures issue expenses etc. are excluded from operating expenses.
Interpretation and Significance: this ratio indicates the operational efficiency and profit earning capacity of the business. It shows the percentage of net sales that is absorbed by cost of goods sold and operating expenses. Therefore, the lower the operating ratio, the higher the operating profit to recover non-operating expenses such as interest, divided etc. and vice-versa. While interpreting this ratio, it is important to note that changing management decisions may create possible
variations in expenses from year to year or firm to firm. An operating ratio ranging between 75% and 85% is generally considered as standard for manufacturing firms.
Operating profit Ratio
This ratio is also called Operating Profit Margin. It establishes the relationship between operating profits and net sales. It is also defined as the ratio of profit before depreciation, interest and tax to total turnover. Operating profit means the net profit arising from the normal operations and activities of the business without taking into account of extraneous transactions and expenses of purely financial nature. In other words, operating profit is calculated by sub-starting all direct and indirect expenses relating to main business from net sales. This ratio is calculated by using the following formulae:
Operating Profit Operating profit Ratio =--------------------------- * 100 Net Sales
Gross Profit – Operating Expenses Operating Profit Ratio =---------------------------------------------Net Sales * 100
Interpretation and Significance: This ratio indicates the net profitability of the main business i.e. operating efficiency of a firm. In some firms, the profit from main business is very low; while the profit from secondary functions such as interest on bank deposits and dividend on shares etc. is so much that the net profit
of the net profit of the firm at the end is enhanced. In such a case, the operating profit ratio explains that the efficiency of the firm is very low. Therefore, the higher the operating ratio, the better would be the operational efficiency of the firm. A higher operating profit ratio means that a firm has been able not only to increase its sales but also been able to cut down its operating expenses.
Sometimes, it becomes imperative to analysis each component of cost of goods sold and operating expenses to find out how far the firm is able to save or over spend in respect of different items of expenses. Therefore, to express the relationship of each item of cost of goods and operating expenses with sales, the expenses ratios are computed. These ratios reveal the relationship of different expenses to net sales. Important expenses ratios are calculated using the following formulae:
Material consumed Material Consumed Ratio =-----------------------------Net Sales * 100
Manufacturing Expenses Manufacturing Expenses Ratio =----------------------------------------100 Net Sales *
Administrative Expenses Administrative Expenses Ratio =------------------------------------ * 100 Net Sales
Selling and Distribution Expenses Selling and Distribution =--------------------------------------------- * 100 Expenses Net Sales Ratio
Finance Expenses Finance Expenses Ratio =-------------------------------- * 100 Net Sales
Non-operating Expenses Non-operating Expenses Ratio =------------------------------------ * 100 Net Sales
Interpretation and Significance: Expenses ratios reveal the managerial efficiency and profit earning capacity of the firm. If these ratios are compared over a period of time with the ratios of similar firm as well as with the previous ratios of the same firm, the saving or over spending of each item can be ascertained. While interpreting the expenses ratios, it should be kept in view that certain fixed expenses would decrease as sales increase, but variable expenses would remain constant.
Net Profit Ratio
This ratio measures the relationship between net profit and sales of a firm. Net profit is the excess of revenue over expenses during a particular accounting period. The net profit ratio is determined by dividing the net profit by sales and expressed as percentage. The formula used is as follows:
Net Profit (After tax) Net Profit Ratio =---------------------------------------- * 100 Net Sales
Net Profit (before tax) Net Profit Ratio =------------------------------------ * 100 Net Sales
Interpretation and Significance: This ratio is the indication of overall profitability and efficiency of the business. It not only reveals the recovery of costs and expenses from to revenue of the period, but also to leave a margin of reasonable compensation to the owners for providing capital at their risk. A high net profit ratio would only means adequate returns to the owners. It also enables a firm to withstand in cut-throat competition when the selling price is falling or cost of production is rising. A low net profit ratio on the other hand, would only indicate inadequate returns to the owners.
Profitability Ratios based on Capital
This efficiency of an enterprise is judged by the amount of profits. But sometimes the conclusions drawn on the basis of profits to sales ratio may be misleading, as the amount of profit depends to a great extent upon the volume of investment in assets or capital employed in the business. Therefore, the state of efficiency cannot be judged by the volume of profits alone. This requires the calculation of ratio with reference to capital and assets to measure the real profitability. The important categories of such ratios are discussed below:
Return on capital Employed
The primary objective of making investment in any business is to obtain adequate return on capital. Therefore, to measure the overall profitability of the firm, it is essential to compare profit with capital employed. With this objective, return on capital employed is calculated. It is also called` Return on investment’ (ROI).This ratio expresses the relationship between profit and capital employed and is calculated in percentage by dividing the net-profit by capital employed.
Net profit (PBIT) Return on capital Employed=----------------------------------- * 100 Capital Employed Alternatively, it can be calculated as: Return on Capital Employed = Assets Turnover * Profit Margin
Sales =------------------Total Sales *
Net Profit ------------------------------ * 100 Sales
Components: Net Profit means the profit earned by capital employed. It is net profit before interest (on long-term loan) and tax (PBIT) excluding- (1) non-trading incomes such as income from investments, (2) non-recurring and abnormal profits, and (3) non-trading and abnormal losses. If profit after interest is given, then interest o long-term loans will be added back. It should be remembered, while calculating return on capital employed, that “profit before interest and tax” should be used for measuring managerial efficiency and ‘profit after interest and tax’ should be used for comparing two firms or computation for owners’ purpose.
Capital employed means gross capital employed and net capital employed. Gross capital employed means the total assets used in the business. Net capital employed means total assets minus current liabilities. While calculating capital employed-(1) nontrading investments, (2) idle assets, (3) intangible assets like goodwill, patent, trademark whose realizable value is nil, (4) factious assets like preliminary expenses, underwriting commission, discount on issue of shares and debentures etc. (5) abnormal debtors, obsolete stock and (6) cash or bank balance more than requirements should be excluded from assets.
A few experts apply ‘average capital employed’ instead of capital employed. The average capital employed may be calculated by dividing the sum of the capital employed at the beginning and at the end of the year by two or by deducting one half of current year’s profit in the capital employed at the end of the year.
Interpretation and Significance: Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used. In other words, it is also a measure how efficiently the capital employed in the business. Even the performance of two dissimilar firms may be compared with the help of this ratio. Furthermore, the ratio can be used to judge the borrowing policy of the enterprise. If an enterprise having the ratio of return on investment 15% borrows at 16%, it would indicate that it is borrowing at a rate higher than its earning. The comparisons of this ratio with that of similar firms and with industry average over a period of time would disclose as to how effectively the long-term funds provided by owners and creditors have been used.
Return on Net Funds/Equity
This ratio expresses the percentage relationship between net profit (after interest and tax) and net worth or shareholders’ funds. This is also known as ‘Return on Proprietors’ funds’ it is used to ascertain the rate of return on resources provided by the shareholders. The ratio is calculated by using the following formula:
Net Profit (after tax and interest) Return on Shareholders’ Fund =----------------------------------------------* 100 Shareholders’ Funds or Net Worth
Components: Net worth or shareholder’ funds include preference share capital as well as equity shareholders’ funds which in turn comprises equity share capital, share capital, share premium and reserves and surplus (after adjusting the accumulated losses and fictitious assets). The net profits are after deducting interest and tax but before deducting dividend on preference shares. It is the final income that is available for distribution as dividends to shareholders.
Significance: This ratio measures the amount of earnings for each rupee that the shareholders alive invested in the company. The higher the ratio the more favorable is the interpretation of the company’s use of its resources contributed by the
shareholders. This ratio can be composed with that of other units engaged in similar activities as also with the industry on average.
Return on Equity Shareholders’ funds
Equity shareholders are the real owners of a company. Therefore, the profitability of a company from the owners’ stand point should be viewed in terms of return to equity shareholders. This ratio is calculated by dividing the profit available for equity shareholders by the equity shareholders’ funds. Expressed as a formula, the ratio is:
Net Profit after tax – Preference Dividend Return on Equity Shareholders’ =-------------------------------------------------- * 100 Equity Shareholders’ funds fund
Components: Net profit represents the residual profit left and available for distribution to the equity shareholders after provision has been made for all other financial obligations such as taxation, interest and preference share dividend. Equity shareholders’ funds refer to equity share capital, revenue and capital reserves and undistributed profits and surplus (after deducting accumulated losses and fictitious assets, if any).
Interpretation and significance: This ratio is the best
measure of a company’s profit earning capacity. The higher the ratio, the better the performance and prospectus of the company. It provides adequate test to evaluate whether a company has earned satisfactory return for its equity shareholders or not. The adequacy of the return can be measured by comparing it with the return of the previous year or of companies engaged in similar business or with the overall industry average. The investors can decide to invest or not to invest in the equity shares of a company by comparing it with the normal rate of return in the market.
Due to issue of new shares or buy back of share during the year, the equity capital and preference share capital of the company do not remain the same throughout the year. Therefore, to calculate the amount of average shareholders’ fund which is one half of the opening and closing balance is used to calculate the – (1) Return on Net worth and (2) Return on Equity shareholders’ Fund. In absence of opening balance, closing balance is used.
Return on Total Assets
Profitability can also be measured by establishing relationship between net profit and total assets. This ratio is computed by dividing the net profits after tax by total and total assets. This ratio is computed by dividing the net profits after tax by total funds invested or total assets. Total assets means all net fixed assets, current assets are included only when they have realizable value. Expressed as formula, the ratio is
Net Profit after Tax Return on Total Assets =--------------------------------- * 100 Total Assets
Interpretation and significance: This ratio measures the profitability of investments which reflects managerial efficiency. The higher the ratio, the better is the profit earning capacity of the firm or vice versa. But this ratio does not reveal the profitability of different sources of funds used in purchasing the total assets.
Technically, this ratio suffers from the drawback that the interest paid to the creditors is excluded form the net profit, whereas the real return on the total assets is the net operating earnings. Therefore, to consider real earning, interest on long-term loans should be added back to profit after tax. Thus, return on total assets should be computed on the following revised formula:
Net Profit after tax + Interest Return on Total Assets =---------------------------------------- * 100 Total Assets
Note: In any view profit is earned on total assets of the business during the year and these assets may increase or decrease during the year. Therefore, average amount of the total assets should be used in calculating this ratio.
LEVERAGE OR CAPITAL STRUCTURE RATIO
Leverage or capital structure ratios are calculated to judge the long-term solvency or financial position of the firm. Therefore, these ratios are known as long-term solvency ratios. Capital structure or leverage ratios may be defined as financial ratios which highlight on the long-term solvency of a firm as reflected in its ability to assure the long-term creditors with regards to (1) periodic payment of interest during the period of the loan, and (2) repayment of principal on maturity or in pre-determined installments at due dates. Thus, there are two types of such ratios. First, those capital structure ratios which are based on the relationship of borrowed funds and owner’s funds. Such ratios are calculated to know the ability of the firm to repay the principal amount when due. Second, this capital structure ratios known as ‘coverage ratios’ are calculated to ascertain the firm’s capacity for regular payment of interest and dividend. Therefore, leverage ratios are also called, ‘debt management ratios’. All these ratios are discussed below:
1. Debt-Equity Ratio
This ratio indicates the relative proportion of debt and equity in financing the assets of a firm. In other words, debt-equity ratio reveals the relationship between internal and external sources of funds of a firm. Therefore, it is also known as ‘External-Internal Equity Ratio’. Expressed as a formula:
Debt-Equity Ratio -------------------------------
External equities refer to the total outsides liabilities i.e. short-term and long-term loans. The logic behind inclusion of current liabilities, like working capital, loans from bank in outside liabilities is that these short-term loans are renewed from year to year (barring exceptional circumstances) more or less permanently. Moreover, a fixed amount of loan, by and large, is always in use and available with the enterprise on a long-term basis. Apart from this short-term loans are also not cost free. Hence, inclusion of short-term loans in total liabilities would be justified. Internal equities or shareholders’ funds means total paid up amount of equity and preference share capital and accumulated amount of reserves and surplus (after deducting accumulated losses, factious assets and intangible assets having no realizable value). There are differences of opinion about the inclusion or exclusion of preference share capital in internal equities and current liabilities in external equalities. In general, however, long-term and short-term both types of debts are included in external equities and both equity and preference share capitals have been treated as the owners’ equity. When current liabilities are not included in external funds, the ratio is calculated by using the following formula:
Long-term Debts Debt-Equity Ratio =----------------------------------------------Shareholders’ Fund or Net Worth
Interpretation and Significance:
This ratio plays an important role in analyzing the long-term solvency of a company. It indicates the firm’s capacity to pay long-term debts and procure additional loans and reveals whether the firm is following the policy of trading on equity? This ratio indicates the owners’ capital invested in total assets of the business. A debt-equity ratio of 0.75:1 means that if owners’ capital invested in total assets is equal to rupee one, than outsiders’ capital is equal to 75 paisa only. Therefore, a low debt-equity ratio provides sufficient safety margin to creditors due to high stake of owners in the capital of the company. The servicing of debt (interest) is less burdensome for the company and consequently its ability to raise additional funds is not adversely affected. But, the shareholders of the company are deprived of the benefits of trading on equity. On the country, a high debt-equity ratio shows that the claims of creditors are greater than those of owners. Hence lesser safety. A high ratio is unfavorable from the firm’s point of view because it increases inflexibility in firm’s operation due to increasing interference and pressures from creditors. Moreover, the firm clear that both high as well as low debt-equity ratio are not desirable. It should be balanced and reasonable which depends upon the circumstances and policies. Normally debt-equity ratio of 1:1is reasonable.
This ratio is also called ‘Net Worth to Total Assets Ratio’. Proprietory ratio establishes relationship between proprietors’ or shareholders’ funds and total assets of the business i.e. to what extent shareholders’ funds are invested in financing the total assets of the business. Expressed as a formula, proprietary ratio is: Proprietors’ Funds
Proprietary Ratio =---------------------------------------Total Assets
Proprietors’ funds include share capital (equity and preference), all reserves and surplus and undistributed profits (after deducting accumulated losses). Total assets in include all current and fixed assets expending intangible assets are having no realizable value and fictitious assets such as preliminary expenses, discount on shares and debentures, underwriting commission etc.
Interpretation and significance: This ratio highlights the general financial strength of the firm. It is of great importance to creditors since it enables them to find out the proportion of shareholders’ funds in the total assets used in the business. Proprietary ratio may be further analyzed as-(a) Ratio of fixed assets to proprietors’ funds, and (b) Ratio of current assets to proprietors’ fund.
Fixed Assets to Proprietors’ Funds Ratio: This ratio establishes the relationship between fixed assets (after depreciation) and proprietary or shareholders’ funds. The purpose of this ratio is to know the percentage of owners’ funds invested in fixed assets. The ratio is:
Fixed depreciation) Ratio of Fixed Assets =-------------------------------------------to
Current Assets to Proprietors’ Funds Ratio:
This ratio expresses the relationship between current assets and owners’ funds. The purpose of this ratio is to calculate the percentage of owners’ funds invested in current assets. It is calculated as follows:
Current Assets Ratio of Current Assets =----------------------------------to Proprietors’ Funds
3. Solvency or Debt to Total Assets Ratio
This ratio measures the long-term solvency of the business. It reveals the relationship between total assets and total external liabilities. External liabilities mean all long-term and short-term liabilities. It is the difference of the 100 and proprietary ratio. It is calculated as follows:
Total Liabilities Solvency Ratio =-------------------------------Total Assets
Interpretation and Significance: This ratio measures
the proportion of total assets provided by creditors (long-term) of the firm i.e. what part should be financed from long-term funds only. If total assets are more than external liabilities, the firm is treated as solvent. So, the higher the ratio, the greater is the amount of creditors that is being used to generate profits for the owners of the firm.
4. Fixed Assets Ratio
This ratio is also called the ‘Fixed Assets to Capital Employed or Long-term Funds. As per sound financial policy, acquisition of fixed assets should be financed from long-term funds only. To test whether this policy is properly followed or not, this ratio is calculated. It expresses the relationship between fixed assets and long-term funds or capital employed of the firm. Expressed as a formula, the ratio is:
Fixed Assets Fixed Assets Ratio -----------------------Employed =------------------------
Fixed Assets or Capital
Components: Long-term funds include equity share capital,
preference share capital, all reserves and surplus and long-term loans. Fixed assets means net fixed assets i.e. fixed assets after
deducting depreciation and long-term investments including shares of subsidiary companies.
Interpretation and Significance: This ratio measures
the proportion of total assets provided by creditors (long-term) of the firm i.e. what part of assets is being financed from loans. If total assets are more than external liabilities, the firm is treated as solvent. So, the higher the ratio, the greater is the amount of creditors that is being used to generate profits for the owners of the firm.
5. Capital Gearing Ratio
The capital gearing ratio is mainly used to analysis the capital structure of a company. This ratio establishes the relationship between cost bearing and fixed cost bearing capital in the capital structure of a company. In the words of Howard and Brown, “the word capital gearing is applied to express the proportion between equity share capitals and fixed cost bearing securities of a company”. This ratio is also known as ‘capitalization ratio’ or ‘leverage ratio’. The formula used in calculating the ratio is: Variable Cost Bearing Capital Capital Gearing Ratio =-------------------------------------------------------Fixed Cost Bearing Capital OR
Equity to shareholders’ Funds =------------------------------------------------Debentures + Preference shares
fixed cost bearing capital includes funds supplied by debenture holders and preference shareholders funds including reserves and surplus i.e. net worth minus preference share capital. A few experts include only equity shareholders capital in variable cost bearing capital. In such case, the formula will be as follows:
Equity share Capital Capital Gearing Ratio =---------------------------------------Fixed Cost Bearing Capital
Interpretation and Significance:
The capital gearing ratio indicates the proportion of equity share capital and fixed income bearing securities to total employed in the business securities to total capital employed in the business. A high gear ratio (equity share capital is proportionately higher than fixed cost bearing capital) is the indication of lesser fixed financial charges i.e. interest and thus more profit to the business. Such situation is known as low gearing. On the contrary, a low gear ratio (equity capital is proportionately less than fixed cost bearing capital) is the indication of over-burden of fixed financial charges, but the equity shareholders will be benefited by ‘trading on equity’. This situation is known as high gearing. The importance of gearing in
the capital structure of a company should start its business with low gearing and on it grows and earn more profits, its may go in high gearing.
6.Interest Coverage Ratio or Debt-Service Ratio
This ratio measures the debt servicing capacity of a firm, and particularly, where payment of fixed interest and tax is used for the computation of this ratio since income tax is paid after the deduction of fixed interest charges. It is calculated as follows: Net Profit (before interest tax) Debt-service Ratio =-----------------------------------------------------Fixed Interest Charges
The interest coverage ratio is very significant from the lenders’ point of view. It gives an idea of the number of times the fixed interest charges are covered by net earning of the firm out of which they will be paid. The higher the ratio, the more is the interest paying capacity of the firm and safety margin available to long-term creditors. But, too high a ratio may only indicate the unused capacity of a firm which will reduce the profits from trading on equity resulting in the reduction in shareholders’ income. On the other hand, the low ratio indicates the firm is using excessive debt. The investors can forecast the financial risk by comparing interest coverage ratio with standard ratio of the industry. The standard for this ratio should be about 6 or times.
Some experts prefer to use ‘Cash to Debt-Service Ratio’ or ‘Cash Flow Coverage Ratio’ instead of debt service ratio, as debt-service charges are to be paid in cash. Therefore, total cash inflows of that period should be used in place of net income for the longterm liquidity analysis of the firm. If redemption fund is created for payment of debt, then yearly contribution to redemption fund should also be added in the amount of interest. Following formula is used to calculate this ratio:
Annual Cash Flow before Interest and Tax Cash to Debt-Service =----------------------------------------------------------Sinking Fund Appropriations Interest + ------------------------------------1 – Tax Rate Ratio
7. Dividend Coverage Ratio
This ratio measures the ability of a firm to pay dividend on preference shares which carry a fixed rate of dividend. It is calculated by dividing the net profits after tax by the amount of preference share dividend. The ratio is expressed in number of times of net profits after taxes. Thus,
Net Profit after tax and interest
Preference Dividend =----------------------------------------------
Interpretation and Significance:
This ratio, like interest coverage ratio, indicates the safety margin available to preference shareholders. As a rule, the higher the dividend coverage ratio, the better it is from the preference shareholders’ point of view.
INVESTMENT ANALYSIS OR MARKET VALUE RATIOS
These ratios are helpful to the shareholders in analyzing their present and perspective investment. With the help of these ratios, the shareholders can also compare the value of their investment with dividend, earnings and market price etc. these ratios also enable them in forecasting the future market price of their investments. Hence, also known as ‘Market Value Ratio’. The following ratios fall in this category.
1. Earning Per Share – EPS The rate of dividend on shares depends upon the amount of profits earned by the firm. Whatever profit remains, after meeting all expenses and paying preference share dividend, belong to
equity shareholders. These are the profits earned on equity shareholders. These are the profits earned on equity share capital. The earning per share (EPS) is calculated by dividing the profit available to equity shareholders by the issued. The profit available to the equity shareholders is represented by the net profit after taxes and preference share dividend. Thus, Profit after Tax – Preference Dividend Earning per Share =-------------------------------------------------------------or EPS
Number of Equity Shares
Interpretation and Significance: This is the most popular
ratio as it measures the profitability of a firm from the shareholders’ point of view. The higher the ratio, the better are the performance and prospects of the company and the greater would be the market price of a company’s shares or vice-versa. The higher earnings per share help the company in raising additional capital without any difficulty. The comparison of this ratio with that of similar companies and industry average over a period of time is important from investment point of view.
2. Price-Earning Ratio – P/E Ratio
The price earning ratio expresses the relationship between the market price of a share and earnings per share. In other words, it indicates, how many times is the market price of a share to its share to its earnings. Expressed as formula, the ratio is calculated as:
Market Price per Share Price Earning Ratio =-------------------------------------Earning per Share
Interpretation and Significance:
Price earning ratio helps in the assessment of the profitability of a firm from the point of view of equity shareholders. It indicates the market opinion of the earning capacity of a share and the future prospects of the company. That is why, many investors while purchasing share, do not consider any factor other than this. A higher price-earning ratio is the indication of over valuation of shares or vice-versa. This ratio is used in determining the future market price and rate of capitalization of a share. By comparing the price-earning ratio with that of similar firms or industry average, one can know whether the shares is over valued or under valued.
3. Dividend per Share – DPS
The EPS ratio represents to what extent the profits belong to the owners of a firm. But, it is customary in all companies to retain a part of profits in the business and distribute only the balance as dividend among shareholders. Thus, DPS ratio represents the dividend paid to the shareholders on per share basis. The DPS ratio is calculated by dividing the dividend paid to the shareholders by the number of equity shares issued. Expressed as formula, the ratio is
Dividend paid to Equity Shareholders Dividend per Share =-------------------------------------------------------No. of Equity Shares Outstanding
This ratio represents to what extent the profits have been received by the owners as dividend. An investor, desiring more income would like to invest in the shares of a high dividend paying company. It should be noted that dividend per share is not a measure of profitability of a company, since retained earnings might have been utilized for payment of dividend. This increases the distributable amount without increasing the number of shares.
4. Dividend Yield Ratio
This ratio is yet another profitability ratio from the standpoint of equity shareholders. The earning per share (EPS) and dividend per share (DPS) are determined on the basis of book value of shares, while this ratio is expressed in terms of market value per share. The dividend yield ratio expresses the relationship between the dividend per share and market value per share. Thus,
Dividend per Share Dividend Yield Ratio =---------------------------------- * 100 Market Price per Share
Interpretation and Significance: This ratio shows the
rate of return to shareholders in the form of dividend based on the market price of the share i.e. actual rate of dividend on his investment. The dividend yield ratio is also a popular ratio but its adequacy can be measured only by a comparison with the ratio of similar firms or industry average.
5. Dividend Pay-out (D/P) Ratio
The objective of this ratio is to ascertain, what percentage of net profits after tax has been distributed among shareholders in the form of cash dividend and what percentage is retained in the business. Thus, dividend pay-out ratio gives the percentage. It is calculated by that are distributed through dividends and is usually expressed as a percentage. It is calculated by dividing the total dividend paid to equity shareholders by the total profits belonging to them or by dividing the DPS by the EPS as given below:
Dividend per Share Dividend pay-out Ratio =---------------------------- * 100 Earning per share
Equity Dividend =----------------------------------------- * 100 Profit after tax – Pref. Dividend
Interpretation and Significance: a dividend pay-out ratio
of 40 percentages indicates that 40 percent of the earnings have been distributed as dividends and 60 percentages have been retained by the company. A ratio of less than 100percentage implies pouching back a portion of the profits into the business, while a ratio of higher 100 percent indicates that distribution of a portion of the reserves as dividends. Thus a company which distributes a lower portion of its earnings in the form of dividends will be financially stronger and is likely to expand and grow faster rate. Such a action result in an increase in the reserves to capital ratio that reveals sound financial position and the capacity. A comparison of this ratio with that of similar companies and over a period of year would reflect on the adequacy or otherwise of the dividend paid to the equity shareholders.
6. Book Value per Share
This ratio indicates the net worth per equity share. It is calculated as:
Equity Capital + Reserves – P&L (after depreciation) Book Value per =---------------------------------------------------------------------Total Number of Equity Shares Share
The book value is a reflection of past profits and dividend policy of the company. A high book value indicates that a company has higher resources and is a potential bonus candidate. A low book value indicates a liberal dividend and bonus policy or a poor track record of profitability. Book value is considered less relevant for the market price as compared to earning per share.
Research methodology is a systematically solve the research problem. It has many dimensions and research methods constitute a part of the research methodology.
Thus when we talk about research methodology, we don’t only talk of research methods but also consider the logic behind the
methods. We use in context of out research study, so that research results are capable of being evaluated by researcher himself or by others.
To effectively carry out my research, I used following research process, which consists of series of actions or steps.
Research comprises of following steps:1. Formulating the research problem 2. Research design & sample design 3. Analysis of data gathered 4. Data analysis comparison 5. Graphics and interpret
1. Formulating the research problem
This is the first step under which the problem is stated in general way and then ambiguities i.e. understanding and rephrasing the problem thoroughly and rephrasing the same into a meaningful terms from an analysis point of view.
The research problem under the present project was to study data of various funds. For this research process was to be formulated and the execution of which would result in the desired data.
2.PREPARING THE RESEARCH DESIGN The function of research design is to provide for the collection of relevant evidences with minimum expenditure of efforts, time and money.
Research design • Type of research • Sample design
Type of research The type of research under this project is an analytical research. In analytical research, we use facts or information already and analysis these to make a critical evaluation of the material. In this project I had collected facts, data and information.
SAMPLING DESIGN A sample deign is a definite plan determined before any data is actually collected for obtaining a sample. Researcher must select a sample design, which should be reliable and appropriate for his report.
3. OBSERVATION DESIGN (COLLECTION OF DATA)
Observational design relates to the condition under which the observations are to be made. Observational design is respect to descriptive research study. Data collection is an integral part of marketing research. There are several ways of collecting the appropriate data, which differ considerable in context of money, time cost and other resources at the disposal of the researcher.
Data can be obtained from two important sources: Primary data Secondary data
Primary data is collected a fresh and for the first time. Thus happens to be in character. Primary data can be collected by various methods i.e.
1. Observation 2. Interview 3. Schedules 4. Questionnaires
The sources of secondary data are:1. Corporative magazines 2. Manuals of various companies 3. Various publications 4. Books, magazines of particular clubs and newspapers 5. Employment exchange
SUMMARY OF RECOMMENDATION
Financial analysis is analysis of financial statements of and enterprise. Financial statement reorganized collection of data according to logical and constituent accounting procedures. However, financial statements in their traditional from giving historical data and information are of little us to these who use them to draw certain conclusions.
Financial appraisal is scientific evaluation of profitability and financial strength of any business concern. Financial appraisal techniques include ratio analysis common size analysis trend analysis, fund flow analysis etc. these techniques may be applied in the financial appraisal of any entity and Jaipur Dairy Ltd. is no exception to it.
After a careful and critical analysis of Jaipur Dairy Ltd. it is convenient to look into the overall conclusions and suggestions.
Today India is a biggest milk producer in the Asia. After independence and milk revelation the production of milk increased manifolds. Milk is an essential utility in every body’s life. It is one of the basic needs of human life. Now a day production of milk and milk products is most important in India, both in terms of generating employment opportunities and for meeting the basic requirement of people. It yields manifold
returns. This industry has contributed in a significant manner to the faster and quicker economic development of this members and country. The plant of Jaipur Dairy Ltd. is located on Jawaharlal Nehru Marg. This is the biggest milk supplier in Jaipur district
The measurement of profitability is a tool of overall measurement of efficiency. An overall study of profitability of Jaipur Dairy Ltd. has been Dade in relation to sales, operating assets capital employed and its net worth.
By analysis the working results i.e. profit and loss account of Jaipur Dairy Ltd. it was found that, the net profit before interest and tax of the dairy is showing an increasing trend. This is very good for Jaipur Dairy Ltd. The increase in the profits is nearly 24%. More than the previous year the reason is good sales growth between years.
For this following suggestion should be considered: Proper cost control is required and cost control techniques should adopt for it.
Operating expenses, Administrative expenses should be especially considered to be reduced. Inventory is the biggest item of Balance sheet that must have demanded a large amount of maintaining cost. So efficient inventory management should be done. Inventory should be reduced to some extent that would help to recover blocking money in inventory. The service staff should be given proper training and better environment for work. Proper advertisement and sales promotion is required. Dairy has to pay large fixed interest charges. Hence longterm borrowing should be reduced so that the earnings are satisfactorily earmarked with them.
The concept of working capital indicates the excess of current assets over current liabilities. Working capital should be sufficient for the company to conduct its business on the most economical basis.
The working capital of Jaipur Dairy Ltd. shows as increasing trend during 2007 to 2009. It means the Jaipur Dairy Ltd. has enough
fund to operate business after analysis different components of current assets. It can be concluded that debtors and stock constituted a major part of the current assets. It enable said that the dairy was not having adequate control on debtors and stock. In both years current liabilities were the major portion in all the liabilities.
The current ratio of the company has been lower than the generally accepted norm of 2:1. Throughout the period understudy the quick ratio was below the norm for all the years. This shows that Jaipur Dairy Ltd. with regard to meeting current liabilities from creditor’s point of view is not perfectly sound in both years. The absolute liquidity ratio has been below the norm of 0.5:1 in all the years.
However, the Jaipur Dairy Ltd. has shortage of capacity to pay its entire current liabilities at once. Inventory turnover ratio is very good that reveals that dairy can increase its sales at lower profits. Proper attention should be paid by management towards this side to utilize funds blocked in stock. Number of days to collect receivable requires improvement on the part of management. But since milks are a seasonal crop type business, stocks do get complied for a few months and that is why the funds get blocked.
It is suggested in this respect that the Jaipur Dairy Ltd. should try to balance the proportion of cash and bank balance in current assets. The management should take steps for proper utilization dependence on equity capital, which shows bright prospects of Jaipur Dairy Ltd. It is suggested in this respect that the Jaipur Dairy Ltd. should try to balance the proportion of cash and bank balance in current
assets. The management should take steps for proper utilization dependence on equity capital that shows bright prospects of Jaipur Dairy Ltd.
Capital structure means the financial plan of an organization. In which the various sources of capital are mixed in such a proportion that they provide a distinct capital set up more suited to the requirement of that particular organization. Capital structure of Jaipur Dairy Ltd. has been analyzed with the help of various ratios.
The various source of finance in the dairy are share capital and loan from different banks. These are:The bank of Rajasthan Ltd. State Bank of Bikaner & Jaipur Jaipur Central Co-operative Bank Oriental Bank of Commerce
Government subsidies have been also good sources of funds those are invested in expansion and development of members and societies. Outsiders’ funds have a major portion with compare to net worth that is risky from lenders points of view. It would make difficult for getting more outsiders’ funds. For this following suggestion should be considered:
It is considered to reduce dependency on outsiders’ sources of funds Unsubscribe capital requirements should be called up for funds
During the last two years the amount of net worth increased from 20.20 cores to 21.02 cores. There was decrease in the amount of reserve and surplus. Increase outsiders’ fund has been found 82.31 to 101.22 cores.
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Income statement and financial statement of 206-07 to
2008-09 as obtained from Jaipur Dairy.
Economic Times Business Standard
Business India Business World
Internet Portals: www.jaipurdairy.com www.dairyindia.com www.scribd.com