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I have also emphasized more on need and importance of Ratio Analyses. Ratio analyses
have been carried out using financial information for last five years. i.e. from 2005-2009, ratios
like liquidity ratio, leverage ratio, profitability ratio, activity ratio and other measures has been
calculated and interpretation has been made.
After conducting study I have found that the company is in good condition and I have
given some suggestions and conclusion on the basis of my project study, which is highlighted, in
my study.
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GENERAL INTRODUCTION
OF THE STUDY
The study conducted with HGM ltd is on “RATIO ANALYSIS”. Ratio Analysis is one of
the important concepts of the finance department in each and every company. Ratio Analysis
helps to know the ‘Financial performance’ of the company. It helps to study the ‘Financial
Statements’ in detail, i.e., it consists of two statements, they are
It helps to know the critical situation that occurs in future by the analysis of
different ratios.
It helps to solve the financial problems that occur during the business by
computing the ratios.
RESEARCH METHODOLOGY
The statement of the problem selected as “An evaluative study on RATIO ANALTSIS of
HUTTI GOLD MINES ltd through various financial techniques like financial statements,
comparative statements, and calculation of various ratios pertaining to liquidity, leverages ,
turnover, and profitability, etc,.”
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OBJECTIVE OF THE STUDY
1. To make the study on the Financial statements like Balance Sheet and Profit and Loss
Account of HGM ltd to evaluate the performance & soundness of Ratio analysis of the
company over the past __ years through the financial statements.
2. To know the effective techniques used in calculating the various ratios of the companies.
3. To provide the various suggestions as for as possible for effective functioning and the
evaluation of financial performance of the company.
Liquidity ratios
Profitability ratios
Turnover ratios
Activity ratios
Operating ratios
5. To know the efficiency of management position of the company.
2. Review of the various ratios relating to liquidity, leverages, turnover, & profitability.
3. Assessing the present trend of the ratios in the company in order to measure, whether the
performance is good or bad.
4. Assessing the company’s growth & stability of its annual sales by following the various
ratios.
5. Summarizing the conclusions and findings and also by indicating the corrective measure
where necessary.
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RESEARCH DESIGN OF THE STUDY
As my learning organization, I have selected ___ to learn the performance and soundness
of Ratio Analysis of the company as it has the huge daily financial transactions involved all over
India and abroad also. So, it requires deep knowledge to deal with the accounts of ____ in
order to deal with the accounts of _____, The two sources of data are required. So, I have
collected the data from the two sources, they are:
Primary data
Secondary data
1. Primary data: These are collected by the researcher himself. These are the first hand data
collected for the study on Ratio Analysis.
Survey
Observation
Experimentation
It also includes personal interview with the industry personnel, company profile, &
company’s annual reports.
2. Secondary data: These are the data that were developed for some purpose other than
helping to solve the problem at hand.
Internal data
External data
Published data
Unpublished data
It also includes journals, ledgers, books of various authors, company’s various websites,
etc., & there is no sampling used in this study.
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LIMITATIONS OF THE STUDY
RATIO ANALYSIS
MEANING OF RATIO:
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DEFINITION OF RATIO ANALYSIS:
Accounting ratio is defined as quantitative relationship between two or more items of the
financial statements connected with each other.
1. The relation of one amount, a) to another b), expresses as the ratio of “a to b” Kohler.
2. “A number expresses in terms of another.
3. “Ratio is a yardstick used to evaluate the financial condition and performance of a
firm, relating to two pieces of financial data to each other”. James C. Van Horne.
4. “Ratio is a fraction whose numerator is the antecedent and denominator the
consequent”.
5. “Ratio is the relationship or proportion that one amount bears to another, the first
number being the numerator and the later denominator”. H. G. Guttmann.
All these definitions clearly indicate one simple point regarding ratio. That is, the ratio is a
relationship between two figures or factor or variables. This relationship helps to know the
financial condition and performance when applied to the financial data.
1. Selection of relevant data from the financial statements depending upon the objective of
the analysis.
2. Calculation of appropriate ratios from the given data.
3. Comparison of the calculated ratios with the ratios of the same from in the past or a
standard ratio.
4. Interpretation of the ratios.
SIGNIFICANCE OF RATIO ANALYSIS:
The persons interested in the analysis of the financial statements can be grouped under
three heads:
The significance of ratios varies for these three groups as their purposes differ widely. The
investors are mainly concerned with the earning capacity of the company whereas creditor
including bankers and financial institutions are interested in knowing the ability of the enterprise
to meet its financial obligations timely. The financial executives are concerned with evolving
analytical tools that will measure and compare costs, efficiency, liquidity, and profitability with a
view to making intelligent decisions.
The uses of ratio analysis are classified into four ways. They are as follows:
1. Helps in decision making: Financial statements are prepared primarily for decision
making. But the information provided in financial statements in not an end in itself and
no meaningful conclusions can be drawn from these statements alone. Ratio analysis
helps in decision making from the information provided in these financial statements.
2. Helps in financial forecasting and planning: Ratio analysis is of much help in financial
forecasting and planning. Planning is looking ahead and the ratio calculated for a number
of years work as a guide for the future, meaningful conclusions can be drawn for future
from these ratios. Thus, ratio analysis helps in financial forecasting and planning.
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5. Helps in control: Ratio analysis helps in making effective control of the business.
Standard ratio can be based upon Performa of financial statements and variances or
deviations, if any, can be found by comparing the actual with the standards so as to take
corrective action at the right time. The weaknesses or otherwise, of any, come to the
knowledge of the management which help in effective control of the business.
An Investors in the company will like to assess the financial position of the concern
where he is going to invest. His first interest will be the security of his investment and then a
return in the form of dividend or interest. For the first purpose he will try to assess the value of
the fixed assets and the loans rose against them. The investors will feel satisfied only if the
concern has sufficient amount of assets. Long-term solvency ratios will help him in assessing
financial position of the concern. Profitability ratios, on the other hand, will be useful to
determined profitability position. Ratio analysis will be useful to the investor in making up his
mind whether present out financial position of the concern warrants further investment or not.
The creditors or suppliers extend short-term credit to the concern. They are interested to
know whether financial position of the concern warrants their payments at a specified time or
not. The concern pays short-term creditors out of its current liabilities then the creditors will not
hesitate in extending credit facilities. Current and acid- test ratios will give an idea about the
current financial position of the concern.
Other uses:
There are so many other uses of ratio analysis. It is an essential part of budgetary control
and standard costing. Ratios are of immense importance in the analysis and interpretation of
financial statements as they bring out the strength or weakness of a firm
Ratio analysis has been acclaimed as a very important tool in the kit of the financial
management helping several things at a time like simplifying financial information, measuring
and studying the financial health, helping inter-firm and intra firm comparison and above all
helping in co-ordination, communication and control. However, it is not without any limitations,
which are listed below:
1. Though ratio analysis serves the purpose of quantitative analysis, yet certain important
qualitative factors may be ignored. This may distort the purpose of analysis.
2. Ratios acquire significance only when they are studied along with other ratios. A ratio in
isolation can be meaningless by itself.
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3. The data available are at best, only estimates which give an impression of accuracy and
precision. Therefore, the results of the analyst cannot claim total accuracy is based on
estimates which by themselves are not precise.
4. Information from ratio analysis can only be the beginning of the end and not an end in
itself. This can only be a fraction of information which must always be used with other
material information from various other sources for a dependable analysis.
5. Ratio analysis can be termed as historical documents, since they probe in to past financial
statements. They should not mislead in reflecting current conditions and may be able to
throw very little light on the future, particularly in the context of the expanding modern
business.
6. In the absence of a clear cut and predetermined standard and if accounting information is
not consistent to that extent ratio analysis becomes weak and helpless as a dependable
tool of financial analysis.
7. Ratio analysis ignores the topical problem of changes in price levels and the impact of
inflation.
8. Comparison of two variables with tool of ratio analysis will be fruitful when proper
method of valuation is adopted by the firms and the method is identical. But in actual
practice different methods are followed by different companies regarding the valuation of
stock or fixed assets or other current assets.
The calculation of ratio may not be a difficult task but their use is not easy. The
information on which these based, the constraints of financial statements, objectives for using
them, the caliber of the analyst, etc,. is important factors which influence the use of ratios.
Following guidelines may be kept in mind while interpreting various ratios:
The ratios are calculated from the data available in financial statements. The reliability of
ratios is linked to the accuracy of information in these statements. Before calculating ratios one
should see whether proper concepts and convention have been used for preparing financial
statement or not. These statements should also be properly audited by competent auditors. The
precautions will establish the reliability of data given in financial statements.
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OBJECTIVES OF ANALYSIS:
The type of ratio to be calculated will depend upon the purpose for which these are
required; if purpose is to study current financial position then ratios relating to current assets and
current liabilities will be suited. The purpose of “user” is also important for the analysis of the
ratios. A creditor, a banker, an investor, a shareholder, has different objects for studying ratios.
The purpose for which ratio are required to be studied should always be kept in mind
while studying various ratios. Different objects may require the study of different ratios.
SELECTION OF RATIOS:
Another precaution in ratio analysis is the proper selection of appropriate ratios. The ratio
should match the purpose for which these are required. Calculation of large number of ratios
without determining their need in the present context may confuse things instead of solving
them. Only those ratios should be selected which can throw proper light on the matter to be
discussed.
USE OF STANDARD:
The ratio will give an indication of financial position only when discussed with reference
to certain standards. Unless otherwise these ratios are compared with curtained standards, one
will not be able to reach conclusions. These standards may be rule of thumb as in the case of
current ratio (2:1) and acid test ratio(1;1), may be industry standard, may be budgeted or
projected ratios, etc,. the comparison of calculated ratios with the standards will help the analyst
in forming his opinion about financial situation of the concern.
The ratios are only tools of analysis and their interpretation will depend upon the caliber
and competence of the analyst. He should be familiar with various financial statements and the
significance of changes, etc., a wrong interpretation may create havoc for the concern since
wrong conclusions may lead to wrong decisions. The utility of ratio is linked to the enterprise of
the analyst.
The ratios are only guidelines for the analyst. He should not base his decisions entirely on
them. He should study any other relevant information, situation in the concern, general economic
environment, etc., before reaching final conclusions. The study of ratios in isolation may not
always prove useful. A businessman will not afford a single wrong decision because it may have
for reaching consequences. The interpreter should use the ratios as guide and try to solicit any
other relevant information which helps in taking the correct decision.
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CLASSIFICATION OF RATIOS:
1. Classification according to Statements: The various ratios falling under this basis of
classification are as follows:
a) Balance Sheet ratios/Position Statement ratios/ Financial ratios : They deal with the
relationship between two items or group of items which are taken from the balance sheet
such as current ratio, debt equity ratio, etc,.
b) Profit & Loss Account ratios/ Revenue Statements ratios ; These are the ratios
calculated out of the figures appearing in the profit & loss account. They are also known
as operating ratios. Some examples of the ratios classified on this basis are as follows:
Gross profit ratio, Expenses ratio, operating profit ratio, etc,.
c) Position-cum-Revenue ratios: These ratios are also known as Consolidated or
Combined or Complex Ratios or Inter- Statement ratios. They portray the relationship
between items one of which is a part of the balance sheet and other of the revenue
statement. Examples of ratios which fall under this category are, Return on capital
Employed ratio, Earning ratio, etc,.
2. Classification according to Time: The various ratios which fall under this basis are as
follows:
a) Structural ratios: Structural ratios are the ratios computed from data referring to the
same point of time, e.g., ratios of a particular month or year.
b) Trend ratios: Trend ratios are the ratios compared between the items referring to
different periods of time.
3. Classification according to Nature: The various ratios which fall under this category are
as follows:
a) Primary ratios: It measures the size of profit in relation to capital employed as for
example operating profit to capital employed.
b) Secondary ratios: It also referred to as supporting ratios: they bring to light strategic
facts in the profit earning structure. Example of such ratios are stock velocity ratio,
debtors velocity ratio, expenses ratio, etc,.
4. Classification according to the Function: Ratios are grouped in accordance with certain
tests which they are intended to sub serve from the view point of various parties having a
financial interest in the enterprise. These tests are:
a. Test of liquidity.
b. Test of profitability.
c. Market test
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Ratios
Liquidity ratio Long term solvency ratio Activity ratio Profitability ratio
1. Current 1. Debt equity ratio 1. Stock turnover ratio 1. Gross profit ratio
ratio
2. Proprietary ratio 2. Debtors turnover ratio 2. Net profit ratio
2. Acid test
ratio 3. Capital gearing 3. Debt collection period 3. Operating profit
ratio ratio
3. Absolute 4. Creditors turnover ratio
liquid ratio 4. Fixed assets to 4. Return on capital
5. Debt payment period employed
net worth ratio
6. Fixed assets turnover 5. Return on total
ratio resources ratio
8. Working capital
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ANALYSIS AND INTERPRETATION OF DATA
LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually one
year. Liquidity ratios are generally based on the relationship between current assets (the sources
for meeting short term obligations) and current liabilities. The important liquidity ratios are:
current ratio, acid-test ratio and cash ratio.
Activity ratio
Activity ratio are concerned with measuring the efficiency in assets management, it
measures hoe quickly a firm converts non-cash asset to cash asset (sales). The greater is the
rate of turn over or conversion the more efficient is the utilization of assets, other things being
equal. For this reason such ratio is also designated as turnover ratio.
It may be defined as the test of relationship between sales and various assets of firm.
Depending on the various types of assets, there are various types of activity ratio.
PROFITABILITY RATIOS
There are many measures of profitability. As group, these measures enable the analyst
to evaluate the firm’s profits with respect to a given level of sales, a certain level of assets, or
the owner’s investment. Owners, creditors and management pay close attention to boosting
profits. The management of the firm is naturally eager to measures its operating efficiency.
Similarly the owners invest their funds in the expectation of reasonable returns. Profitability
ratio measures the firm’s use of its assets and control of its expenses in order to generate an
acceptable rate of return.
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1. Current Ratio
This is most widely used ratio to know the working capital position. This ratio expresses
the relationship between current assets and current liabilities. This ratio gives the information
about firm ability to meet short term and long term working capital.
Current assets
Current Ratio= --------------------------------
Current liabilities
Amount in lakhs
Inference: The ideal current ratio 2:1. From the above chart, we can see the slight variation of
current ratio from one year to another. Even though we find variation in current ratio, the
company met its current obligations or current liabilities by making huge profits. The ratio
represents the margin of safety.
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2. Quick Ratio
Liquid ratios express the relationship between liquid assets and liquid liabilities. The ideal
ratio for a concern is 1:1. This ratio is measure repayment of immediate liabilities
Current Assets- Inventory
Acid test Ratio= ---------------------------------------
Current liabilities
Rs in lakhs
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3. Cash Ratio
It is ratio of cash equivalent balance to current liability it can be calculated
Since cash is the most liquid assets, a financial analyst may examine cash ratio and its
equivalent to current liabilities. Trade investments or marketable securities are equivalent of
cash; therefore, they may be included in the computation of cash ratio.
Cash
Cash Ratio= -----------------------------
Current liabilities
Amount in Lakhs
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1. i) Debt Equity ratio
The debt-equity ratio shows the relative contribution of creditors and owners.
It is defined as: Debt equity measures the ratio of long term or total debt to share holder’s
equity. The relationship between borrowed funds and owner’s capital is popular measure of the
long term financial solvency of a firm
Long term Debt
Debt-equity ratio= ---------------------------
Net worth
Amount in lakhs
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ii) Debt to asset ratio
The debt to asset ratio measures the extent to which borrowed funds supports the firm’s assets
It can be defined as: Debt ratio may be used to analyze the long term solvency of a firm.
The firm may be interested in knowing the proportion of interest bearing debt in capital structure.
Total debt includes long term and short term borrowing.
Debt
Debt to asset ratio= -----------------------------
Asset
Amount in lakhs
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2. Proprietary Ratio:
The ratio that expenses the relationship between proprietor’s fund and total assets is called
proprietary ratio. This ratio can be calculated as under.
Equity
Proprietary Ratio= …………………….
Total asset
*Equity = Share Capital + Reserve & Surplus.
Amount in lakhs
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3.Fixed Asset to Net Worth Ratio
The ratio, which establishes the relationship between fixed assets and shareholders fund, is
called fixed asset to Net worth ratio. This ratio can be calculated as follows:
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4.Ratio of Current Assets to Net worth Ratio
The ratio which establishes the relationship between current assets and share
holder’s funds is called ratio of current assets to net worth ratio.
Current Assets
= ………………………………
Share holders fund
Amount in lakhs
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Activity Ratio
1.Inventory Turnover ratio:
It is the ratio of which indicates the number of times the stock is turnover i.e., sold during
the year. In other words, it is the ratio between the cost of goods sold and closing stock.
Sales
Stock turnover ratio = ……………………….
Closing Inventory
Amount in lakhs
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2.Raw material turnover ratio
Raw material turn over ratio can be defined as:
Amount in lakhs
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3.Raw material conversion period
It can be defined as:
365
Raw material conversion period=----------------------------------
Raw material turns over ratio
(in days)
Raw material
turns over ratio
Raw material
conversion period
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4.Work in Progress Turnover Ratio
Work in progresses can be defined as:
Cost of production
WIP turnover ratio=------------------------------------------
Avg WIP
365
WIP conversion period=------------------------------------------
WIP turnover ratio
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6.Finished goods turnover ratio: It can be defined as
Amount in lakhs
Average finished
goods
Finished goods
turnover ratio
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7.Finished goods conversion period: It can be defined as:
365
Finished goods conversion period =---------------------------------------
Finished goods turnover ratio
(in days)
FG turnover
ratio
FG conversion
period
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8.Fixed asset turnover ratio
It is defined as:
Sales
FATR= ------------------------------------
Fixed assets(Net Block)
Amount in lakhs
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9.Working capital turnover ratio: Working capital of a concern is directly related to sales this
ratio measures the efficiency with which working capital is being used by a company.It can be
defined as
Net sales
WCTR=-----------------------------
Net working capital
Amount in lakhs
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10.Current asset turnover ratio:
Amount in lakhs
Particulars/yea 2004-05 2005-06 2006-07 2007-08 2008-09
rs
11.Total asset turnover ratio: Akin to the output –capital ratio in economic analysis.
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Total asset turnover ratio can be defined as:
Net sales
TA Turnover ratio= -------------------------------------
Avg TA Amount in
lakhs
Avg TA
TA turnover
ratio
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12.Proprietary Fund turnover ratio:
Sales
PFTR=………………………...............
Proprietary Fund (Shareholders fund)
Amount in
lakhs
32
13.Sales to current assets ratio: Sales to current asset ratio can be defined as
Net sales
Sales to current asset ratio= -------------------------------
Current asset
Amount in
lakhs
33
4). Probability Ratio:
1. Gross profit ratio:
Gross Profit
GPR= …………………………
Sales
Amount in lakhs
34
2.Net profit ratio:
Net profit
Net profit ratio=…………………………………….
Sales
Amount in
lakhs
35
4. Operating ratio:
Operating cost
Operating ratio=………………………………
Sales Amount in
lakhs
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5. Debtors turnover ratio: This ratio shows how many times sundry debtors turn over
during the year. It can be defined as:
Credit sales
Debtors turnover ratio=------------------------
Avg debtors
NOTE: since there is no provision of credit sales policy in company could not be
generated hence credit sales and average debtor con not be calculated
365
Average collection period= ---------------------------------------
Debtors turnover ratio
NOTE: since there are no debtors in company average collection period cannot be
calculated.
.
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BALANCE SHEET FOR 5 YEARS (Rs. In lakhs)
SOURCES OF FUNDS:
1. Shareholders’ Funds
Particulars For The For The For The For The For The
Year Year Year Year Year
Ended 31st Ended 31st Ended 31st Ended 31st Ended 31st
1. INCOME
2. Expenditure
Provision for losses and write-off 19.08 36.21 265.83 60.88 308.26
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Deferred revenue expenditure 497.63 508.19 477.79 1272.21 845.54
written-off
2. Profit
Profit for the year before 7323.79 8193.72 8528.37 14493.59 15395.95
taxation
Profit for the year after taxation 4374.13 5770.82 5565.39 9635.15 9305.99
3. Appropriation
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Interim dividend on equity 44.43 ----- ------- -------- -------
shares
CONCLUSION
FINDINGS
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