RATIO ANALYSIS

An analysis of financial statement based on „ratios‟ is known as „ratio analysis‟.

It was pioneered by Alexander Wall who presented a system of ratio analysis in
the year 1909. A ratio is a mathematical relationship between two or more items
taken from the financial statements. Ratio analysis is the process of computing,
determining and presenting the relationship of items. Ratio analysis is helpful to
management and outsiders to diagnose the financial health of a business
concern. It helps in measuring the profitability, solvency and activity of firm.

MEANING OF RATIO

A „ratio‟ is a mathematical relationship between two items expressed in a

quantitative form. Ratios can be defines as “relationship expressed in quantitative
terms, between figures which have cause and effect relationship or which are
connected with each other in some manner or the other”.

MODELS OF EXPRESSION OF RATIOS

(a) IN PROPORTION

In this types of expression the amounts of two items are expressed in a

common denominator. An example of this form of expression is the relationship
between current assets and current liabilities as 2:1

(b) IN RATE OR TIME OR COEFFICIENT

In this type of expression, a quotient obtained by dividing one item by

another is taken as unit of expression. An example of this expression is cost of
sales divided by average stock , thus is the ratio between cost of sales and stock.

(c) IN PERCENTAGE

In this type of expression, a quotient obtained by dividing one item by

another is multiplied by one hundred to show the relationship in terms of
percentage. For example, the relationship between net profit and sales .

1
 STEPS IN RATIO ANALYSIS

(a) SELECTION OF RELEVANT INFORMATION

The first step in ratio analysis is to select relevant information form

financial statements and calculation appropriate ratios for decision under
consideration.

(b) COMPARISON OF CALCULATED RATIOS

In order to assess the relative meaning, the ratios calculated are

compared with the past ratios and industry ratios.

(c) INTERPRETATION AND REPORTING

The third step in ratio analysis is to interpret the significance of

various ratios, draw inferences and to write a report. The report may recommend
specific action in the matter of the decision situation or may present alternative
with comparative merits or it may just state the facts and interpretation.

ADVANTAGES OF RATIO ANALYSIS

The basis objective of ratio analysis is to help management in interpretation of

financial statement to enable it to perform the managerial functions efficiently.
The following are the advantages of ratio analysis:

(a) FORCASTING- Ratios reveal the trends in costs, sales, profits and other inter-
related facts which will be helpful in forecasting future event.

(b) MANAGERIAL CONTROL- Ratios can be used as „instrument of ccontrol‟

regarding sales, costs and profit.

(c) FACILITIES COMMUNICATION- Ratios facilities the communication function of

management as ratios convey the information relating to the present and future
quickly, forcefully and clearly.

(d) MEASURING EFFICIENCY- Ratios help to know the operational efficiency by

comparison of present ratios with those of the past working and also with those
of other firm in the industry.
 LIMITATIONS OF RATIO ANALYSIS

Like all techniques of control, ratio analysis also suffers from several „ifs and
buts‟ and for purpose communication and utilization of the ratios the analyst
should be aware of the limitations of the ratios analysis. The following are the
limiting factors that minimize or reduce the value of ratio analysis.

a. PRACTICAL KNOWLEDGE- The analyst should have through knowledge and

experience about the firm and industry. Otherwise his analysis and interpretation
are of little practical use.

b. RATIOS ARE MEANS- Ratios are not an end in themselves but they are means
to achieve a particular purpose or end.

c. INTER-RELATIONSHIP- Ratios are interrelated and therefore a single ratio

cannot convey any meaning. It has to be interpreted with reference to other
related ratios to draw meaningful conclusions.

d. ACCURACY OF FINANCIAL INFORMATION- The accuracy of a ratio depends

on the accuracy of information derived from financial statements. If the
statements are inaccurate, small will be the results with ratios.

e. NON AVAAILABILITY OF STANDARDS OR NORMS- Ratios will be meaningful

if they can be compared with standards or norms. Expect for a few financial
ratios. Other ratios lack standards which are universally recognized.

CURRENT RATIO

Current ratio (also known as working capital ratio) is a popular tool to evaluate
short-term solvency position of a business. Short-term solvency refers to the
ability of a business to pay its short-term obligations when they become due.
Short term obligations (also known as current liabilities) are the liabilities payable
within a short period of time, usually one year.
Formula

CURRENT RATIO = CURRENT ASSET/CURRENT LIABILITIES

Table No.4.1

YEAR CURRENT ASSET CURRENT LIABILITIES CURRENT RATIO

2014-2015 102926.08 181217.18 0.56times

2015-2016 103967.35 258099.23 0.40times

2016-2017 111055.62 205621.00 0.54times

INFRENCE

The ideal ratio for any firm is 2:1, the above table shows that, in the year 2014-
2015 is 0.56times and in the year it is decreased to 0.40times but it is rapidly
increased to 0.54times so the company is sound good.
 Chart No.4.1

CURRENT RATIO
0.6

0.5

0.4

0.3
CURRENT RATIO

0.2

0.1

0
2014-2015 2015-2016 2016-2017
LIQUID RATIO

Quick ratio (also known as “acid test ratio” and “liquid ratio”) is used to test
the ability of a business to pay its short-term debts. It measures the relationship
5between liquid assets and current liabilities. Liquid assets are equal to total
current assets minus inventories and prepaid expenses.

Formula

The formula for the calculation of quick ratio is given below:

LIQUID RATIO=LIQUID ASSET/CURRENT LIABILITIES

Table No.4.2

YEAR LIQUID ASSET CURRENT LIABILITIES LIQUID RATIO

2014-2015 82950.44 181217.18 0.45times

2015-2016 95703.12 258099.23 0.37times

2016-2017 76294.23 205621.00 0.37times

INFRENCE

The ideal ratio for any firm is 2:1, the above table shows that, in the year 2014-
2015 is 0.56times and in the year it is decreased to 0.40times but it is rapidly
increased to 0.54times so the company is sound good.

Chart No.4.2

LIQUID RATIO
0.5

0.45

0.4

0.35

0.3

0.25
LIQUID RATIO

0.2

0.15

0.1

0.05

0
2014-2015 2015-2016 2016-2017
ABSOLUTE LIQUID RATIO

In addition to computing current and quick ratio, some analysts also

compute absolute liquid ratio to test the liquidity of the business. Absolute liquid
ratio is computed by dividing the absolute liquid assets by current liabilities.

Formula:

ABSOLUTE LIQUID RATIO=

ABSOLUTE LIQUID ASSET/CURRENT LIABILITIES

Table No.4.3

ABSOLUTE LIQUID CURRENT ABSOLUTE

YEAR
ASSETS LAIBILITIES LIQUID RATIO

2014-2015 37227.31 181217.18 0.21times

2015-2016 26908.36 258099.23 0.10times

2016-2017 15479.51 205621.00 0.075times

INFERENCE

This ratio is useful only when used in conjunction with current ratio and
quick ratio. An absolute liquid ratio of 0.5:1 is considered ideal for most of the
companies. In the year 2014-2015 the ratio is 0.21times but it is 0.075 in 2016-
2017 when compare between these two year business does not sound well.

Chart No.4.3

ABSLOUTE LIQUID RATIO

0.25

0.2

0.15

ABSLOUTE LIQUID RATIO

0.1

0.05

0
2014-2015 2015-2016 2016-2017
DEBT EQUITY RATIO

Debt to equity ratio is a long term solvency ratio that indicates the
soundness of long-term financial policies of a company. It shows the relation
between the portion of assets financed by creditors and the portion of assets
financed by stockholders. As the debt to equity ratio expresses the relationship
between external equity (liabilities) and internal equity (stockholder‟s equity), it is
also known as “external-internal equity ratio”.

Formula

DEBT EQUITY RATIO=TOTAL LIABILITY/STOCKHOLDER’S EQUITY

Table No.4.4

YEAR TOTAL LIABILITIES STOCKHOLDER‟S EQUITY DEBT EQUITY RATIO

2014-2015 750338.38 76472.22 9.81times

2015-2016 767339.55 87479.07 8.77times

2016-2017 799136.05 102844.00 7.77times

INFERENCE

This ratio is useful only when used in conjunction with current ratio and
quick ratio. An absolute liquid ratio of 0.5:1 is considered ideal for most of the
companies. In the year 2014-2015 the ratio is 0.21times but it is 0.075 in 2016-
2017 when compare between these two year business does not sound well.

Chart No.4.4

DEBT EQUITY RATIO

12

10

6
DEBT EQUITY RATIO

0
2014-2015 2015-2016 2016-2017
PROPRIETARY RATIO

The proprietary ratio (also known as net worth ratio or equity ratio) is used
to evaluate the soundness of the capital structure of a company. It is computed
by dividing the stockholders‟ equity by total assets.

Formula

PROPRIETARY RATIO=STOCKHOLDER’S EQUITY/TOTAL ASSETX100

Table No.4.5

YEAR STOCKHOLDER‟S EQUITY TOTAL ASSETS PROPRIETARY RATIO

2014-2015 76472.22 750338.38 11%

2015-2016 87479.07 767339.55 10%

2016-2017 102844.00 799136.05 12%

INFERENCE

The proprietary ratio does not always means that the company has an ideal
capital structure. The proprietary ratio is 11% in the year 2014-2015. But it is
12% as slight increased in the year 2016-2017

Chart No.4.5

PROPRIETARY RATIO
14%

12%

10%

8%

PROPRIETARY RATIO
6%

4%

2%

0%
2014-2015 2015-2016 2016-2017
GROSS PROFIT RATIO

Gross profit ratio (GP ratio) is a profitability ratio that shows the
relationship between gross profit and total net sales revenue. It is a popular tool
to evaluate the operational performance of the business . The ratio is computed
by dividing the gross profit figure by net sales.

Formula:

The following formula/equation is used to compute gross profit ratio

GROSS PROFIT RATIO=GROSS PROFIT/NET SALESX100

Table No.4.6

YEAR GROSS PROFIT NET SALES GROSS PROFIT RATIO

2014-2015 22290.73 95401.29 23%

2015-2016 23701.97 92703.23 26%

2016-2017 24076.72 92165.94 26%

INFERENCE

Generally, the higher the gross profit margin the better. A high gross profit
margin means that the company did well in managing its cost of sales. In the
year 2014-2015 the ratio is 23%, in 2016-2017 it is 26% as compare to 2014-
2015 the is slightly increased in the year 2016-2017.

Chart No.4.6

GROSS PROFIT RATIO

27%

26%

26%

25%

25%

24%
GROSS PROFIT RATIO

24%

23%

23%

22%

22%

2014-2015 2015-2016 2016-2017

NET PROFIT RATIO

Net profit ratio (NP ratio) is a popular profitability ratio that shows
relationship between net profit after tax and net sales. It is computed by dividing
the net profit (after tax) by net sales.

Formula

NET PROFIT RATIO = NET PROFIT/NET SALESX100

Table No.4.7

YEAR NET PROFIT NET SALES NET PROFIT RATIO

2014-2015 14642.32 95401.29 15%

2015-2016 15272.22 92703.23 16%

2016-2017 15364.93 92165.94 17%

INFERENCE

Net profit ratio is used to measure the overall profitability and hence it is very
useful to proprietors. The ratio is very useful as if the net profit is not sufficient,
the firm shall not be able to achieve a satisfactory return on its investment. In the
year 2014-2015 the ratio is 15%, in 2016-2017 it is 17% as compare to year
2014-2015 it is slightly increased in the year 2016-2017.

Chart No.4.7

NET PROFIT RATIO

18%

17%

17%

16%

NET PROFIT RATIO

16%

15%

15%

14%
2014-2015 2015-2016 2016-2017

17
OPERATING RATIO

Operating ratio (also known as operating cost

ratio or operating expense ratio) is computed by dividing operating expenses
of a particular period by net sales made during that period. Like expense ratio, it
is expressed in percentage.

Formula:

Operating ratio is computed as follows:

OPERATING RATIO = OPERATING EXPENSES/NET SALESX100

Table No.4.8

YEAR OPERATING EXPENSES NET SALES OPERATING RATIO

2014-2015 63.45 95401.29 0.06%

2015-2016 72.79 92703.23 0.07%

2016-2017 82.52 92165.94 0.09%

18
INFERENCE

This ratio is used to measure the operational efficiency of the management. It

shows whether the cost component in the sales figure is within normal range. In
the year 2014-2015 the ratio is 0.06%, in the year 2016-2017 it is 0.09% so as
compare to the previous year it is slightly increased in current year.

Chart No.4.8

OPERATING RATIO
0.10%

0.09%

0.08%

0.07%

0.06%

0.05%
OPERATING RATIO

0.04%

0.03%

0.02%

0.01%

0.00%

2014-2015 2015-2016 2016-2017

19
ADMINISTRATIVE EXPENSES RATIO

Expense ratio (expense to sales ratio) is computed to show the

relationship between an individual expense or group of expenses and sales. It is
computed by dividing a particular expense or group of expenses by net
sales. Expense ratio is expressed in percentage.

Formula:

EXPENSES RATIO = PARTICULAR EXPENSES/NET SALESX100

Table No.4.9

YEAR ADMIN. EXPENSES NET SALES ADMIN. EXPENSES RATIO

2014-2015 3148.00 95401.29 3.30%

2015-2016 3414.59 92703.23 3.68%

2016-2017 3911.42 92165.94 4.24%

20
INFERENCE

Expense ratio shows what percentage of sales is an individual expense or

a group of expenses. A lower ratio means more profitability and a higher ratio
means less profitability. So in the year 2016-2017 it is increased as 4.24% so the
profitability of company is not good.

Chart No.4.9

ADMIN. EXPENSES RATIO

4.50%

4.00%

3.50%

3.00%

2.50%

ADMIN. EXPENSES RATIO

2.00%

1.50%

1.00%

0.50%

0.00%
2014-2015 2015-2016 2016-2017

21
RETURN ON SHAREHOLDER’S INVESTMENT RATIO

Return on shareholders‟ investment ratio is a measure of overall

profitability of the business and is computed by dividing the net income after
interest and tax by average stockholders‟ equity. It is also known as return on
total equity (ROTE) ratio and return on net worth ratio. The ratio is usually
expressed in percentage.

Formula:

RETURN ON SHAREHOLDER’S INVESTMENT RATIO =

INCOME AFTER INT. &TAX/ TOTAL AVG. STKHOLDER’S EQUITYX100

Table No.4.10

TOTAL AVG. RETURN ON

INCOME AFTER
YEAR STKHOLDER‟S SHAREHOLDER‟S
INT.&TAX
EQUITY INVESTMENT RATIO

2014-2015 14642.32 76472.22 19.14%

2015-2016 15272.22 87479.07 17.46%

2016-2017 15364.93 102844.00 14.94%

22
INFERENCE

Return on total equity (ROE) is used to measure the overall profitability of

the company from preference and common stockholders‟ point of view. So as
per the table in 2016-2017 the ratio is 14.9% this shows the company does not
have good profitability.

Chart No.4.10

RETURN ON SHAREHOLDER’S
INVESTMENT RATIO
25.00%

20.00%

15.00%

RETURN ON SHAREHOLDER’S
INVESTMENT RATIO
10.00%

5.00%

0.00%
2014-2015 2015-2016 2016-2017
FIXED ASSET TURNOVER RATIO

Fixed assets turnover ratio (also known as sales to fixed assets ratio) is a
commonly used activity ratio that measures the efficiency with which a company
uses its fixed assets to generate its sales revenue. It is computed by dividing
net sales by average fixed assets.

Formula:

FIXED ASSET TURNOVER RATIO = NET SALES/AVERAGE FIXED

ASSETX100

Table No.4.11

NET AVG. FIXED FIXED ASSET TURNOVER

YEAR
SALES ASSETS RATIO

2014-
95401.29 647412.30 14.74%
2015

2015-
92703.23 663372.20 13.97%
2016

2016-
92165.94 688080.43 13.39%
2017
INFERENCE

Generally, a high fixed assets turnover ratio indicates better utilization of

fixed assets and a low ratio means inefficient or under-utilization of fixed assets.
The usefulness of this ratio can be increased by comparing it with the ratio of
other companies, industry standards and past years.

Chart.No.4.11

FIXED ASSET TURNOVER RATIO

15.00%

14.50%

14.00%

FIXED ASSET TURNOVER RATIO

13.50%

13.00%

12.50%
2014-2015 2015-2016 2016-2017
CURRENT ASSET TO EQUITY RATIO

Current assets to equityratio (also known as current assets to proprietors‟

fund ratio) shows the stockholders‟ funds invested in current assets. The ratio
may be expressed in proportion or percentage.

Formula:

CURRENT ASSET TO EQUITY RATIO =

CURRENT ASSETS/ STOCKHOLDER’S EQUITYX100

Table No.4.12

CURRENT STOCKHOLDER‟S CURRENT ASSET TO

YEAR
ASSETS EQUITY EQUITY RATIO

2014-
102926.08 10125.44 10.17%
2015

2016-
103967.35 10125.44 10.27%
2016

2016-
111055.62 10125.44 10.97%
2017
INFERENCE

There is no norm, the ratio varies from industry to industry. Like fixed asset to
equity ratio, it is used as a complementary ratio to proprietary ratio .

Chart No.4.12

CURRENT ASSET TO EQUITY RATIO

11.20%

11.00%

10.80%

10.60%

10.40% CURRENT ASSET TO EQUITY

RATIO

10.20%

10.00%

9.80%

9.60%
2014-2015 2015-2016 2016-2017
TIMES INTEREST EARNED RATIO (TIE)

Times interest earned (TIE) ratio shows how many times the annual
interest expenses are covered by the net operating income (income before
interest and tax) of the company. Times interest earned ratio is known by various
names such as debt service ratio, fixed charges cover ratio and Interest
coverage ratio. The ratio is expressed in times.

Formula:

TIMES INTEREST EARNED RATIO =

INCOME BEFORE INTEREST&TAX/ INTEREST EXPENSE

Table No.4.13

TIMES
INCOME BEFORE INTEREST
YEAR INTEREST
INTEREST&TAX EXPENSE
EARNED RATIO

2014-
336.59 61252.22 5.98times
2015

2015-
324.37 59918.64 5.41times
2016

2016-
339.84 57925.25 5.87times
2017
INFERENCE

Times interest earned ratio is very important from the creditors view point.
A high ratio ensures a periodical interest income for lenders. The companies with
weak ratio may have to face difficulties in raising funds for their operations.

Chart No.4.13

TIMES INTEREST EARNED RATIO

6.1

5.9

5.8

5.7

5.6
TIMES INTEREST EARNED
RATIO
5.5

5.4

5.3

5.2

5.1

2014-2015 2015-2016 2016-2017

RETURN ON CAPITAL EMPLOYED RATIO

Return on capital employed ratio is computed by dividing the net income

before interest and tax by capital employed. It measures the success of a
business in generating satisfactory profit on capital invested. The ratio is
expressed in percentage.

Formula:

ROCE RATIO = INCOME BEFORE INT. &TAX/ CAPITAL EMPLOYEDX100

Table No.4.14

RETURN ON
INCOME BEFORE CAPITAL
YEAR CAPITAL
INT.&TAX EMPLOYED
EMPLOYED RATIO

2014-
336.59 569121.2 0.059%
2015

2015-
324.37 509240.32 0.064%
2016

2016-
339.84 593515.05 0.057%
2017
INFERENCE

Return on capital employed ratio measures the efficiency with which the
investment made by shareholders and creditors is used in the business.
Managers use this ratio for various financial decisions. It is a ratio of overall
profitability and a higher ratio is, therefore, better .

Chart No.4.14

RETURN ON CAPITAL EMPLOYED RATIO

0.07%

0.06%

0.06%

0.06%

RETURN ON CAPITAL
EMPLOYED RATIO
0.06%

0.06%

0.05%

0.05%
2014-2015 2015-2016 2016-2017
FIXED ASSET TO EQUITY RATIO

Fixed assets to equity ratio measures the contribution of stockholders and

the contribution of debt sources in the fixed assets of the company. It is
computed by dividing the fixed assets by the stockholders‟ equity.

Formula:

FIXED ASSET TO EQUITY RATIO = FIXED ASSETS/ STOCKHOLDER’S

EQUITYX100

Table No.4.15

FIXED STOCKHOLDER‟S FIXED ASSET TO EQUITY

YEAR
ASSETS EQUITY RATIO

2014-
647412.30 10125.44 63.94%
2015

2015-
663372.20 10125.44 65.52%
2016

2016-
688080.43 10125.44 67.96%
2017
INFERENCE

If fixed assets to stockholder‟s equity ratio is more than 1, it means that

stockholders‟ equity is less than the fixed assets and the company is using debts
to finance a portion of fixed assets.Fixed assets to stockholders‟ equity ratio is
used as a complementary ratio to proprietary ratio.

Chart No.4.15

FIXED ASSET TO EQUITY RATIO

69.00%

68.00%

67.00%

66.00%

65.00% FIXED ASSET TO EQUITY

RATIO
64.00%

63.00%

62.00%

61.00%
2014-2015 2015-2016 2016-2017
FINDINGS
 There is a gradual increase in the ratio of the three years indicating high
grow in profit. It means that they trading on an equity, accelerating
towards the corporate goal with more speed.
 By examining the above three years operating profit ratio has fluctuating
trend it reveals that management has not taken necessary steps to
schedule the operating expenses.
 There is decrease in the net profit from in the first two years. But it
suddenly increased to a higher ration. This indicates that the management
has taken necessary steps and controlled its operating cost when it
decreased in the second year which produced a huge increase in the
year.
 There is a gradual increase in the first two years showing a profit. But
there is a suddenly decrease in the third year indicating a poor profitability
of investment with a low profit.
 By comparing the years ratio, there is a huge decrease in the second year
from the first and slight decrease in the third year, this shows that the
member of times the owned capital turned over is very less in the two year
than the first year. This indicates the conversion of inventories sales and
then to cash is very low.
 The current ratio for the three year has fallen below the standard has the
ideal ratio. Therefore the company will not be able to meet its immediate
commitments.
 The ratios of the above three years are normal when compared to the
acceptable norm, there ratios indicates that the shareholders fund are
normal to the total asset showing the creditors are not at risk.
SUGGESTIONS

 From the study it is obtained that the gross profit ratio indicates a positive
increase which supports for the growth of the company. The company
keep on improving its gross profit.
 The company should not practice the decrease in net profit. This will not
support the growth of the company.
 Operating expenses should be concentrated and at the same time it
should no get increased.
 From the research in ratio analysis, the earning and profit ratio increased.
The company should maintain this for all the upcoming years.
 The company should improve effective methods to increase the turnover
ratio.

CONCLUSION

The company has appositive review. It is found through the research conducted
in the ratio analysis. The company has some low ratings in the case of the
turnover ratios. Yet the earning ratio lift up the capacity of the company and it
also enables the company to work over improvement in increase in the profits in
the future. The company as well reputation in the basis of finance.
Websites used :-

https://www.sundaramfinance.com/financial-statements 2015

https://www.sundaramfinance.com/financial-statements 2016

https://www.sundaramfinance.com/financial-statements 2017

https://www.sundaramfinance.com/financial-statements 2018

https://economictimes.indiatimes.com/sundaram-finance-ltd/stocks/companyid-
8345.cms