PROJECT REPORT ON THE STUDY AND ANALYSIS OF DIFFERENT RATIOS IN AN ORGANISATION

Submitted by Mr. Nitin S Kaulgud. Diploma in Business Management Semester - IV Academic Year 2005-2006 TO THE UNIVERSITY OF PUNE THROUGH INSTITUTE OF BUSINESS MANAGEMENT AND RESEARCH (IBMR) CHINCHWAD PUNE – 411033 2005-2006

Acknowledgement: I am greatly and by heart thankful to Director of Prin. Mrs. Asha Pachpande & Our course co-ordinator Mr. S. Ramesh Kumar Mehta of Institute of Business Management & Research, Chinchwad ,Pune – 411030. Who helped me in completion of the project by their guidance & most valued knowledge during the study of ratio analysis and helping in preparation of this final report. I am also very much grateful to Mr. Avinash Puntambekar, Managing Director, Avirat Enterprises Pvt. Ltd., for giving me the chance to work in the organization and giving me all the related documents required for preparing this report.

Nitin Kaulgud.

S.

I N D E X I. II. Title Introduction to Ratio Analysis

III. Importance of Ratio Analysis IV. Objectives of Ratio Analysis V. Company Profile

VI. Financial Statements of the Company VII. Application of Different Ratios. VIII. Methodology IX. Suggestions X. Conclusions

TITLE .

TITLE Study and analysis of the different ratios that can be applied in an organization for knowing the financial as well as creditability position of the said organization on the basis of its Balance Sheet. .

INTRODUCTION .

if they properly analyze information reported in these statements.INTRODUCTION: The information contained in funds and cash flow statements is used by the Management. Users of these statements can get further insight about financial strength and weaknesses of the firm. Understanding the past is a pre-requisite for anticipating the future. . The future plans of the firm should be laid down in view of the firms financial strength and weaknesses. Investors and other to form judgment about the operating performance and financial position of the firm. Thus. financial analysis is the sophisticated forecasting and planning procedures. Management should be particularly interested in knowing financial strength of the firm to make their best use and to be able to spot out financial weaknesses of the firm to take suitable corrective actions. Creditors.

IMPORTANCE .

IMPORTANCE Financial Analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the Balance Sheet. . confine to the evaluation of the firms liquidity position. Creditors: Creditors are interested in firms ability to meet their claims over a very short period of time. therefore. Their analysis will. Trading and Profit & Loss Accounts. The reasons for selecting this topic can mentioned with the help of its different users as follows:  1.

They are also interested in the firm's financial structure to the extent it influences the firm's earnings. . Financial Institutions: Financial Institutions includes Banks.2. They restore more confidence in those firms that shows steady growth in earnings. etc. ability and risk. Long Term Moneylenders. As such. 3. are most concern about the firm's earnings. They analyze the firms profit ability over time. they concentrate on the analysis of the firm's present and future profitability. Investors: Investors who have invested their money in the firms shares. its ability to generate cans to be able to pay interest and repay principle and the relationship between various sources of funds.

Management: Management of the firm would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently and that the firm's financial condition is sound.4. .

OBJECTIVE OF RATIO ANALYSIS .

It helps to know the revenue generated from the utilization of funds. With help of various ratios. . 2. one can get the information about the ability of the firm to meet its current as well as future obligations. Basically.OBJECTIVE OF RATIO ANALYSIS 1. 3. ratio analysis is useful in judging the overall operating efficiency and performance of the firm. 4. Ratio Analysis helps the Management and other interested parties to get the information about long term solvency against the funds borrowed.

COMPANY PROFILE .

Near Aryaneshwar. 9. . +91-20-436 4586. Near Shankar Maharaj Math.COMPANY PROFILE: Company Name Registered Office : : Avirat Enterprises Private Limited. Pune . S.Satara Road. Rajdhani Complex. Marketing Office : 26A. No. Pune.411 043. Pune . Works : : : +91-20-437 5433. Sevanand Society. : +91-2135-32 132. 401. Telephone No. Taluka Rajgurunagar. Pune .411 009. Gat No. 138. Charoli Khurd. Telephone No. Dist. Wadgaon Road. Fax No. Sant Nagar.

The sustained healthy association between the staff and the management has created a very congenial work environment. X 30 mtrs. The company also have an advance hydraulic mobile crane of 8 Ton capacity. 2 Nos. Established in 1991. material handling projects. The Company's fabrication shop is located at Alandi. required by cement and sugar factories. The entire staff of the company is been in the heavy fabrication field for almost two decades.5 mtrs. of 12 mtrs. .Area of Plot Workshop Shed : : 2 Acres with Fencing. Avirat Enterprises Private Limited is one of the associate companies of Unipan Group. etc. leading to freedom from the stress of labor problems. on a acre plot owned by the Company. the company has capabilities of executing challenging jobs of heavy fabrications. 14 kms from Pimpri / Chinchwad industrial belt and 20 kms from Pune. X 12. distilleries.

Out of the 4 office staff.The company is in the process of establishing in-house machining facilities in the near future. semiskilled and unskilled workers. Solapur in November 2000 and Loknete Baburao Patil Sahakari Sakhar Karkhana. In the company. currently 16 fabrication workers and 4 Office Staff are working. one is as Manager. On the other hand the company is also engaged in erection and commissioning of sugar plants in Maharashtra. . Solapur in January 2002. The fabrication workers include skilled. Angar. two are Accounts Personnel and one is Head Foreman. The company has completed Lokmangal Sakhar Karkhana. Mohal. with sophisticated machinery and equipment.

APPLICATION OF DIFFERENT RATIOS .

e. Current Ratio: Current Ratio is calculated with the help of the following formula: Current Ratio = Current Assets ------------------------Current Liabilities Current Assets include cash and those assets which can be converted in cash within a year i. debtors and inventories. All obligations maturing within a year are included in Current Liabilities. . marketable securities. Current Liabilities include creditors.APPLICATION OF DIFFERENT RATIOS 1. bills payable.

Current Ratio is a measure of firm's short term solvency.short term bank loan. It indicates the availability of current assets in rupees for every one rupee of current liability. A ratio of greater than one means the firm has more current assets than current claims against them. . income tax liability and long term debt maturing in the current year.

between firms. Net Working Capital is sometimes used as a measure of a firm's liquidity. Net Working Capital Ratio: The difference between the current assets and the current liabilities excluding short term bank borrowings is called net working capital. It is considered that. the one having the larger net working capital has the greater ability to meet its current obligations.2. Net Working Capital Ratio = Net working capital --------------------------Net Assets . The Net Working Capital is calculated with the help of the following formula.

deferred payment arrangements for buying capital equipments. It may be therefore. Debt Ratio: Several debt ratios may be used to analyse the long term solvency of a firm. The formula for finding the debt ratio is as under: Debt Ratio = Total Debt ----------------------Capital Employed . The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. Total debt will include short term and long term borrowings from financial institutions. compute debt ratio by dividing the total debt by capital employed or net assets. bank borrowings. debenture / bonds. public deposits and any other interest bearing loans.3.

4. This ratio indicates the average spread between the cost of goods sold and the sales revenue. we obtain the ratio of cost of goods sold to sales. The formula for the calculation will be as follows. When we subtract the gross profit margin from 100%. Gross Profit Gross Profit Ratio = ---------------Sales . Gross Profit Ratio: The Gross Profit Ratio reflects the efficiency with which the management produces each unit of product.

5. Net Profit Ratio: Net Profit is obtained when operating expenses. The formula for calculating the net profit ratio is: Net Profit Ratio = Profit after Tax ------------------Sales . interest and taxes are subtracted from the gross profit.

METHODOLO GY .

M. Pandey.     Sorting of the required data for the calculation of the respective ratios.Methodology: The project has been performed with the help and the references as stated below:  The theoretical part required for the working and the analysis of the different ratios were referred from the text book. Undergone through the balance sheets of the organization for last 4 years. "Financial Management" by Prof. I have worked in the said organization for the period of 2 weeks in the finance department. I. . Notation of relevant data required for the calculation of the ratios being used by the said organization for various purposes.

 Different ratios were calculated and represented in tabular form. Suggestion s .  The calculated ratios were further represented in a graphical form.

. there is not much fluctuations and should be stable in all respects. the company has distributed more advance and investments in the inventories are higher. In the first year. The idle current ratio to be kept for any organization is to in between 2 : 1 to the maximum and 1. It is also seen that the same has risen in the 2nd year but good work done by the company that it has reduced same in the subsequent year. With reference to the net working capital ratio. it is observed that the borrowings are much higher than the capital invested 1. 2.5 : 1 to the minimum.Suggestions In the respect of the current ratio. It is suggested that these two things be reduced.

60. The company has struggled and reduced the borrowings in the next two years but. 3. the gross profit has not increased to that extent due to the . It is suggested that the company should try hard to reduce its liabilities and short term loans. The liquidity of the company has drastically changed from first year to second and then it is stabilized in the subsequent years but on the lower side.which has been affected adversely to the liquidity of the company. the outside borrowings are on higher side than the capital invested. With respect to the gross profit ratio. The standard net working capital ratio or liquidity be maintained between 0. It is observed that the loss has been occurred due to large amount of depreciation and excess interest paid. 4. Regarding the debt ratio.40 to 0. It is suggested to reduce the interest payment on the cash credit limits by reducing the excess usage of the limits. in the last year the same has risen due to enhanced cash credit limit and loss sustained in the same year. it is seen that due to the newly commencement of the company. it is observed that even that the turnover has increased to double compare to the first year.

in the last year the company has sustained loss due to the reason of high depreciation and excess interest payment. Unfortunately. direct expenses as well as the indirect expenses so that the company can have a better liquidity position. As far as the net profit is concerned. a better current ratio and maximum profits. reduce the advances. 5. it is affected in second year due to excess expenses made on travelling. The only thing that can be suggested is to reduce the expenses made on labour and wages to the maximum to ensure the gross profit is achieved to the same extent as to the sales. 6. In third year. excess payments on labour and wages and to reduce the administrative expenses. Overall with respect to the all ratios. .e. It is felt necessary to have monitoring on all the expenses i.drastic increase in the labour and wages. the company has reduced the same expenses which has affected the net profit positively. It is suggested to the company to ensure that the administrative or indirect expenses be reduced to the minimum it can be reduced. it is suggested that the company should try to reduce the liabilities.

Conclusion s .

Conclusions .

The theoretical applications of Ratio Analysis as been taught to us while the lectures and through the text books is been applied by the said organization for the purpose practical usage to some extent i. . The company has maintained all the above ratios. The company is trying hard to come out from the past losses and to improve the liquidity situations and to stabilize in the market. 80%.e.

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