EXECUTIVE SUMMARY

For every organization or an enterprise to run, finance department plays a pivotal

role. One of the major roles of the finance department is to identify appropriate
financial information prior to communicating this information to managers and
decision-makers, in order that they make informed judgments and decisions.
Finance department also prepares financial documents and final accounts for
managers to use and for reporting purposes (AGM etc). Finance department
ensures that there are adequate funds available to acquire the resources needed to
help the organization achieve its objectives. It also ensures costs are controlled and
also to ensure that there is adequate cash inflow. It also establishes and controls the
profitability levels.

In this report, I have taken Arihant Retail Private Limited’s (ARPL’s) balance
sheet and profit & loss account for doing Ratio Analysis. The primary objective of
this study is to ascertain the financial position of the company. Ratio Analysis of
financial statements is a study of relationship among various financial factors in a
business as disclosed by a single set of statements and a study of trend of these
factors as shown in a series of statements.

1
CHAPTER 1

2
 INTRODUCTION
Any management will be interested in knowing the financial strength of the
firm to make their best of the company to take suitable corrective actions.
Hence financial analysis an essential function of the firm. Financial analysis is
a process of identifying the financial strength and weakness of the company by
properly establishing the relationship between item of balance sheet and the
profit & loss account.

Ratios are useful to know the financial performance in the past and assess
the present financial strengths. This is the process of identifying the financial
strength and weakness of the company by properly establishing relationship
between item of balance sheet and profit and loss account.

“According to Webster a ratio is defined as the relationship between two on

more things” expressed mathematically is known as financial ratio.

Ratio may be expressed in any of the three. In time percentage and

proportion. There is a growing body of evidence that ratio can be directly
helpful as a basis for making predications. There are two main ways to analyze
the ratio. In trend analysis the performance of the firm at single point of time
relevance either of other firms. In industry on some other generally accepted
industry standard is studied.

In comparative analysis the performance or a company at a single point of

time relative either of other firm in the industry on some other generally
accepted industry standard industry standard is studied.

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 In our present study we compare the ratios for the past four years. As an
effective analytical tool, ratios are useful not only to management but also for
the investor, creditors, and stock dealers etc., to comprehend the financial
aspects of the company in different dimensions as glance. Ratio analysis helps
to study and diagnose the financial problems and suggest corrective actions.
There is a growing body or evidence that ratio can be directly helpful as a basis
for making predictions especially rations are useful for the predication of
business.
Ratio analysis indicates quantitative relationships, which can be used to
make qualities, judgment. To evaluate the financial conditions of a firm the
financial analysis need contain yardsticks. On the basis of ratio analysis the
management can assess the profit performance of the firm. The helps to assess
the soundness of the investment in an enterprise with the help or the ratio
analysis. Thus it is evident that the ratio analysis is a tool of financial
management with the multidimensional users.

. IMPORTANCE OF THE STUDY

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  The study has great significance and provides benefits to various
parties whom directly or indirectly interact with the Arihant Retail Pvt
.Ltd.

 It is beneficial to management of ARPL by providing crystal clear

picture regarding important aspects like liquidity, leverage, activity
and profitability.

 The study is also beneficial to employees and offers motivation by

showing how actively they are contributing for company’s growth.

 The investors who are interested in investing in the company’s shares

will also get benefited by going through the study and can easily take
a decision whether to invest or not to invest in the company’s shares.

SCOPE OF THE STUDY

Scope of the project is very wide for the reason that there is scope for improvement
of the profitability of the company. Scope is also to ascertain the sources of fund
on effective application of funds in business. The financial soundness of the
company with references to various factors namely short – term and long term
based on the profitability liquidity found.

OBJECTIVES OF THE STUDY

5
The following are the objectives of the study:

• To ascertain the financial position of the Arihant Retail Pvt. Ltd.

• To find out the profitability of ARPL.

• To analyze the capital structure of the ARPL with the help of ratios

• To offer appropriate suggestions for the better performance of the

organization.

• To ascertain the drawbacks of the ARPL

• To compare the performance of different divisions

• Ratio Analysis helps in taking Investment decision

• Helps in planning and forecasting the financial statements.

6
 METHODOLOGY

The information is collected through the secondary sources during the project. That
information was utilized for calculating performance evaluation and based on that,
interpretations were made.

Types of research:

The researcher has applied analytical research for this study.

Sources of Data:
As secondary data is used the main sources of the data is company’s annual
report for the period from 2007 - 2009, it is Collected from the company textbooks
and the data are also collected from the estimated statement prepared by the firm.

Tools of Analysis:
 Ratio analysis
 Comparative Financial Statements
 Trend Percentage analysis

Sources of secondary data:

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 i. Most of the calculations are made on the financial statements of the
company provided statements

ii. Referring standard text and referred books collected some of the information
regarding theoretical aspects.

iii. Method:- to assess the performance of the company method of observation

of the work in finance department in followed.

LIMITATIONS

o The study provides an insight into the financial, personnel, marketing

and other aspects of Arihant Retail Pvt. Ltd. Every study will be
bound with certain limitations.

o The below mentioned are the constraints under which the study is
carried out.

o One of the factors of the study was lack of availability of ample

information. Most of the information has been kept confidential and
as such as not assed as art of policy of company.

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o Time is an important limitation. The whole study was conducted in a
period of 90 days, which is not sufficient to carry out proper
interpretation and analysis.

9
 CHAPTER 2

INDUSTRY PROFILE
Indian Textile Industry

The textile industry is the largest industry of modern India. It accounts for over 20
percent of industrial production and is closely linked with the agricultural and rural
economy. It is the single largest employer in the industrial sector employing about

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38 million people. If employment in allied sectors like ginning, agriculture,
pressing, cotton trade, jute, etc. are added then the total employment is estimated at
93 million. The net foreign exchange earnings in this sector are one of the highest
and, together with carpet and handicrafts, account for over 37 percent of total
export earnings at over US $ 10 billion. Textiles,1 alone, account for about 25
percent of India’s total forex earnings.

India’s textile industry since its beginning continues to be predominantly cotton

based with about 65 percent of fabric consumption in the country being accounted
for by cotton. The industry is highly localised in Ahmedabad and Bombay in the
western part of the country though other centres exist including Kanpur, Calcutta,
Indore, Coimbatore, and Sholapur.

The structure of the textile industry is extremely complex with the modern,
sophisticated and highly mechanised mill sector on the one hand and the
handspinning and handweaving (handloom) sector on the other. Between the two
falls the small-scale powerloom sector. The latter two are together known as the
decentralized sector. Over the years, the government has granted a whole range of
concessions to the non-mill sector as a result of which the share of the
decentralized sector has increased considerably in the total production. Of the two
sub-sectors of the decentralized sector, the power loom sector has shown the faster
rate of growth. In the production of fabrics the decentralized sector accounts for
roughly 94 percent while the mill sector has a share of only 6 percent.

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Being an agro-based industry the production of raw material varies from year to
year depending on weather and rainfall conditions. Accordingly the price
fluctuates too.

India's trade in textiles and its share in world trade can be categorized as follows:

India’s Trade in Textiles

(1998)
Type India's Share in
World Trade Compound Annual Growth Rate (CAGR) of
different segments
Yarn 22%
Fabrics 3.2%
Apparel 2% Type CAGR (1993-98)
Made-ups 9%
Yarn 31.79%

Fabric 9.04%
Over-all 2.8%
Made-ups 15.18%

Garment 6.795%

2.1.2. Global Scenario

The textile and clothing trade is governed by the Multi-Fibre Agreement (MFA)
which came into force on January 1, 1974 replacing short-term and long-term
arrangements of the 1960’s which protected US textile producers from booming
Japanese textiles exports. Later, it was extended to other developing countries
like India, Korea, Hong Kong, etc. which had acquired a comparative advantage
in textiles. Currently, India has bilateral arrangements under MFA with USA,

12
 Canada, Australia, countries of the European Commission, etc. Under MFA,
foreign trade is subject to relatively high tariffs and export quotas restricting
India’s penetration into these markets. India was interested in the early phasing
out of these quotas in the Uruguay Round of Negotiations but this did not
happen due to the reluctance of the developed countries like the US and EC to
open up their textile markets to Third World imports because of high labour
costs. With the removal of quotas, exports of textiles have now to cope with
new challenges in the form of growing non-tariff / non-trade barriers such as
growing regionalisation of trade between blocks of nations, child labour, anti-
dumping duties, etc.

Nevertheless, it must be realised that the picture is not all rosy. It is now being
admitted universally and even officially that the year 2005 AD is likely to
present more of a challenge than opportunity. If the industry does not pay
attention to the very vital needs of modernisation, quality control, technology
upgradation, etc. it is likely to be left behind. Already, its comparative
advantage of cheap labour is being nullified by the use of outmoded machinery.

With the dismantling of the MFA, it becomes imperative for the textile industry to
take on competitors like China, Pakistan, etc., which enjoy lower labour costs. In
fact the seriousness of the situation becomes even more apparent when it is realised
that the non-quota exports have not really risen dramatically over the past few
years. The continued dominance of yarn in exports of cotton, synthetics, and
blends, is another cause for worry while exports of fabrics is not growing. The
lack of value added products in textile exports do not augur well for India in a non-
MFA world.

Textile exports alone earn almost 25 percent of foreign exchange for India yet its
share in global trade is dismal, having declined from 10.9 percent in 1955 to 3.23

13
percent in 1996. More significantly, the share of China in world trade in textiles,
in 1994, was 13.24 percent, up from 4.36 percent in 1980. Hong Kong, too,
improved its share from 7.06 percent to 12.65 percent over the same period.
Growth rate, in US$ terms, of exports of textiles, including apparel, was over 17
percent between 1993-94 to 1995-96. It declined to 10.5 percent in 1996-97 and to
5 percent in 1997-98. Another disconcerting aspect that reflects the declining
international competitiveness of Indian textile industry is the surge in imports in
the last two years. Imports grew by 12 percent in dollar terms in 1997-98, against
an average of 5.8 percent for all imports into India. Imports from China went up
by 50 percent while those from Hong Kong jumped by 23 percent.

Global factors influencing textile industry

The history of the textile and clothing industry has been replete with the use of
various bilateral quotas, protectionist policies, discriminatory tariffs, etc. by the
developed world against the developing countries. The result was a highly
distorted structure, which imposed hidden costs on the export sectors of the Third
World. Despite the fact that GATT was established way back in 1947, the textile
industry, till 1994, remained largely out of its liberalisation agreements. In fact,
trade in this sector, until the Uruguay Round, evolved in the opposite direction.
Consequently, since 1974 global trade in the textiles and clothing sector had been
governed by the Multi-fibre agreement, which was the sequel to an increasingly
pervasive quota regime that began with the Short-term arrangement on cotton
products in 1962 and followed by the Long-Term arrangement. After the
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successful conclusion of the Uruguay Round in 1994, the MFA was replaced by
the Agreement on Textiles and Clothing (ATC), which had the same MFA
framework in the context of an agreed, ten year phasing out of all quotas by the
year 2005. The section that follows takes a brief look at the history of these
protectionist regimes as also a more detailed look at the MFA and the ATC.

2.1.3. Structure of India’s Textile Industry

Close to 14% of the industrial output and 30% of the export market share is
contributed directly by the Indian textile industry. Indian textile industry is also the
largest industry when it comes to employment that generates jobs not just within
but also in various support industries like agriculture. As per a recent survey the
textile industry is going to contribute 12 million new jobs in India by 2010 itself.

Indian textile industry is as old as the word textile itself. This industry holds a
significant position in India by providing the most basic need of Indians. Starting
from the procurement of raw materials to the final production stage of the actual
textile, the Indian textile industry works on an independent basis.

Indian textile industry concludes of various segments like:

1. Woolen Textile
2. Cotton Textiles
3. Silk Textiles
4. Readymade Garments
5. Jute And Coir
6. Hand-Crafted Textile Like Carpets

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 7. Man Made Textiles

Indian textile industry in a very short span had made a distinct position globally,
alluring the globe towards the ‘World of Indian textiles’. This has happened mainly
because:

8. High availability of raw materials

9. Highly skilled economical labor, an added advantage
10.Largest producer of cotton yarn contributing 25% towards worlds cotton
11.Availability of all kinds of fibers like silk, cotton, wool and even high
quality synthetic fibers
12.Flexibility of the readymade garment industry in terms of sizes, fabric
variety, quantity, quality and cost

It’s not just the present that is shinning like a bright start but also the future, as the
textile export market of India is expected to reach a high of $50 billion by 2010.
This will eventually make a profit by 300%. In order to attain this target Indian
textile industry has already started improving their design skills, including a
combination of various fibers. Indian textile industry is all set to meet international
standards and is planning to invest $5 billion in machineries very soon.

Most of the international brands like Marks & Spencer, JC penny, Gap have started
procuring most of their fabrics from India. In fact, Walmart, who had procured
textile worth $ 200 million last year, intends to procure $ 3 billion worth of textile .

The golden phase of the Indian textile industry has just begun where the world is
chasing it from all nooks and corners.

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2.1.4. INDIAN TEXTILE INDUSTRY – SWOT
ANALYSIS

Strength

» India has rich resources of raw materials of textile industry. It is one of the
largest producers of cotton in the world and is also rich in resources of fibres like
polyester, silk, viscose etc.
» India is rich in highly trained manpower. The country has a huge advantage due
to lower wage rates. Because of low labor rates the manufacturing cost in textile
automatically comes down to very reasonable rates.
» India is highly competitive in spinning sector and has presence in almost all

17
processes of the value chain.
» Indian garment industry is very diverse in size, manufacturing facility, type of
apparel produced, quantity and quality of output, cost, and requirement for fabric
etc. It comprises suppliers of ready-made garments for both, domestic or exports
markets.

Weakness
» Knitted garments manufacturing has remained as an extremely fragmented
industry. Global players would prefer to source their entire requirement from two
or three vendors and the Indian garment units find it difficult to meet the capacity
requirements.
» Industry still plagued with some historical regulations such as knitted garments
still remaining as a SSI domain.

» Labour force giving low productivity as compared to other competing countries.

» Technology obsolescence despite measures such as TUFS.
» Low bargaining power in a customer-ruled market.
» India seriously lacks in trade pact memberships, which leads to restricted access
to the other major markets.
» Indian labour laws are relatively unfavorable to the trades and there is an urgent
need for labour reforms in India.

Opportunity
» Low per-capita domestic consumption of textile indicating significant potential
growth
» Domestic market extremely sensitive to fashion fads and this has resulted in the

18
development of a responsive garment industry.\
» India's global share is just 3% while China controls about 15%. In post-2005,
China is expected to capture 43% of global textile trade.
» Companies need to concentrate on new product developments.
» Increased use of CAD to develop designing capabilities and for developing
greater options.

Threats
» Competition in post-2005 is not just in exports, but is also likely within the
country due to cheaper imports of goods of higher quality at lower costs.
» Standards such as SA-8000 or WARP have resulted in increased pressure on
companies for improvement of their working practices.
» Alternative competitive advantages would continue to be a barrier

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2.2. COMPANY PROFILE

PROFILE REPORT

20
 CONSTITUTION PRIVATE LIMITED COMPANY

DATE OF ESTABLISHMENT 21.05.1996

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 LINE OF ACTIVITY TRADING IN TEXTILES,
GARMENTS, AND ALLIED
PRODUCTS.

2.2.1. BACKGROUND OF THE COMPANY

M/s. Arihant Retail Pvt. Ltd is a Private Limited Company established in 1996.
The company was established on 21.05.1996 in the name of Manasee Textiles Pvt.

22
Ltd and the name was changed on 12.08.2002 as Surana Fashions Pvt. Ltd and
again the name was changed on 05.01.2007 as Arihant Retail (P) Ltd. The
company is a trading concern engaged in textiles/ready made garments.

Arihant Retail Pvt. Ltd (Formerly known as Surana Fashions Pvt. Ltd) was
incorporated in 1996 and is mainly engaged in retailing of garments, textiles,
ready-mades, furnishing and upholstery. The business is carried on under the brand
name ‘Arihant’, which today has become the household name in the garment
business. ‘Arihant- the Family Clothing Shop’ is the punch line which has become
the catchword with the families of Chennai.

The logo of Arihant is a well-recognized trademark. The Company also has a

concept store by name “HOTMALE” meant exclusively for men. Also heavy
promos in outdoor media by way of hoardings, wall paintings, newspaper ads,
attractive schemes and offers etc. are undertaken to carry the message to people at
large.

There are presently 3 showrooms of Arihant and 2 showroom of Hotmale apart

from a franchise showroom with Basics & Genesis (Hasbro Clothing Pvt.ltd)
which is one of the popular brands in South India.

The 1st Arihant Showroom located at 92, G.A. Road, Wanarpet is a very big
showroom owned by the promoters with about 17,000 sq.ft. of floor space spread
in 3 floors. This showroom caters to the readymade needs of the customer and
deals exclusively in readymade products for people of all age.

The 2nd Arihant Showroom located at 73, G.A. Road, Wanarpet is a very big
showroom owned by the company with about 17,500 sq. ft. of floor space spread
over 4 floors. This showroom caters to the Textiles needs of the customer and deals
exclusively in readymade products for people of all age. Both the showrooms at
23
G.A Road are adjacent to each other and enjoy the advantage of market leader in
the area.

24
The 3rd Arihant Showroom is located right in the heart of today’s retail market i.e.
T.nagar, which has toady become the hub for all FMCG goods ranging from
textiles, household items to gold jewellery. Ranganathan Street, where the
showroom is located, is the busiest street in world today. Approx 1 lakh
customers throng the place every day and they hustle and bustle of this area is
un-paralled T.Nagar’s retail market has evolved as a most successful and a
unique retail model in the World today. The T.Nagar showroom, which has
renovated, offers wide range of garments at the most affordable rates. It is one
of the fastest growing shop in the area. A floor space of 700 sq. ft. expanded in
two floors offers a whole new shopping experience to the customers.

The 1st Showroom of Hotmale located at 94 M.C Road, Chennai 600 02, started
on 2nd October 2006 is an exclusive showroom for Gents only. The showroom
is around 2500 sq. ft. spread over 2 floors and caters the need of mainly the
young generation.

The 2nd Showroom of Hotmale located at Anna Nagar in the Shanty Colony with
an area of around 2000 sq. ft. is an exclusive showroom for Gents only. The
showroom caters the need of mainly the young generation. The store is an
operation since May 2007 and is having a very good response from the market.

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FRANCHISE SHOWROOM WITH BASICS & GENESIS:

Apart from this the company has also started a new showroom at 68 G.A road, Old
Washermanpet, Chennai 600 021 measuring about 1000 sq. ft. as a franchise of
Basics & Genesis (a well known brand for Gents clothing in South India).

26
2.2.2. Details of the Promoter
Sri Hastimal Surana, the Chairman of the group, who is also the chief architect
of the success story of the Surana Family. He is leading businessman and has
been in Textile Wholesale business for the past 35 years. In fact, he is among
the first businessmen to have started the textile business in the area of Old
Washermenpet. He has a very vast and rich experience of promoting and
managing business. He is the patriarch under whose overall supervision all
the activities of the Group are run. His credentials and business acumen
command an excellent respect from all quarters of the society. Being in
business for the past 4 decades, he has the intricate knowledge and nitty gritty
of the business. Needless to say, he is the Father Figure behind all the group
activities and the group owes all its prosperity to his selfless and unrelenting
efforts.

27
Sri Hastimal Surana requires no introduction to the business and banking
community of Chennai. As the Chairman, he spearheads the well diversified
business interests of this Group. This Group has come a long way from being
primarily engaged in wholesale textile business to now having interests in
Education, Garments Retailing, Financing, Infrastructure Projects etc.
Mr.Vishal Surana, the first son of Sri. Hastimal Surana is the other key
persons behind the management of this company. Vishal Surana is about 33
years old and he has done his M.B.A. from S.P Jain Institute of Management,
Mumbai. He is the key person behind the flagship brand of the Hastimal
Group- Arihant. He has been into the garments business for the past 13 years.
He is in-charge of the business under Arihant Retail Pvt. Ltd which has 6 show
rooms in Chennai spread over 50000 Sq ft, the garment divisions of the HVS
Group. He has travelled extensively across the globe spanning the countries of
Malaysia, Kenya, Singapore, Dubai, China and other countries.

Also, he has undertaken business visits to source the supplies from all the textile
hubs across the country. He is a member of various trades and other
associations and an active participant of all their activities. Being a dynamic
young man himself, he has the right eye to evaluate the tastes of the new
generation. No wonder, the growth curve of Arihant as a brand has been
vertical throughout under his leadership. His HR practices are admired by one
and all and so are his compensation packages.

2.2.3. General Details

28
The company has a well defined hierarchy where in the Board comprises of
Chairman (Shri Hastimal Surana), Executive Director (Shri Vishal Surana)
along with four General Manager namely Md.Sulaiman, Raj Chordia, Md.Ali
and Rajesh Agarwal. Below the General Manager there are several Managers,
Assistant General Manager and Supervisor. So the company has a well laid
hierarchy which helps in the management of the company in a professional
manner.

The key person apart from the Chairman and executive Director has a well defined
portfolio as detailed below.

1. Rajesh Agarwal: GM (Finance & Accounts). Aged about 34 years, he is a

Chartered Accountant by profession. He is in this industry for more than 7
years which helps in having a thorough knowledge of the industry. Being
professional, his experience to various functions in the field of finance and
accounts is an advantage for the company. His academic background,
leadership skills, ability to work in team and analytical skill guides the
company to manage its finances in a professional manner.

2. Md. Sulaiman: GM (Purchase- Textiles). Aged about 45 years and is

associated with the group for more than 20 years. He is a master in purchase of
textiles material and kids section. He handles the entire operation of purchase
with regard to textiles. He travels across India for the selections of clothing
material. He has great taste when it comes to clothing and is the prominent
figure in Arihant when it comes to procurement of material.

29
3. Raj Chordia: He is GM (purchase- Readymade). Ages about 35 years, he is a
young and dynamic person looking after the readymade section of the company
especially focusing on Gents section. He is very trendy in selection and he has
helped in bringing the new culture and trend in the company of having
exclusive gents store apart from the family stores. He keeps himself ahead of
time and is far sighted when it comes to fashion for young generations. He
takes care of procurement of Gents section which the company caters in all its
4 locations as of now.

4. Md. Ali; GM (Admin & HR). Aged about 38 years, Mr.Ali is a sensational
personality when it comes to managing the HR. he is a master in administration
and has the natural capability to manage human resource. He is instrumental in
making Arihant a six stores company from one store company.

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2.2.4. VISION AND MISSION OF THE COMPANY
Surana Group is poised to join the big league in retail clothing business. The
promoters have drawn out a very ambitious growth plans for the near future
and have envisioned a chain of retail stores under brand name Arihant. They
have embarked upon plans to set-up more showrooms by next fiscal. The
outlay for these 2 projects is pegged at Rs. 10 Crores.

The future roadmap in terms of growth is chartered to achieve atleast three-fold

ramp-up of the shopping space and more than 2 fold jump in the Turnover of
the Businesses. The economies of scale would in turn boost up our bottom-line.
As a value- addition to the existing business, the Group has identified one of
the most potential sectors i.e. to source quality fabrics and textile materials
from abroad which, of late, are enjoying unprecedented demand in the
domestic market. Several new promotional schemes coupled with unmatched
customer service are being introduced to augment the sales.

It has been the conviction of the Group that customer satisfaction alone would
yield lasting and ever-improving results. The Showrooms have been renovated
and their stylish and aesthetic looks will definitely add to the existing brand
value. The garment business of these showrooms is expected to post a quantum
leap and we are confident of achieving the projections. The areas identified for
expansion plans are critically located and fall among the most progressive
localities today. Hence, the Group intends to take the plunge well ahead of its
competitors and thus derive that First Move Advantages.

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2.2.5. EXPANSION PROGRAMME OF THE
COMPANY
1. New Store at Dr.Allagappa Road, Puruswallkam: The Company wants to come
up with a new store at Dr. Allagappa Road. Puruswallkam and measuring
16000Sq.ft. with parking area of 3000 Sq.ft. comprised in ground plus 2 floors.
Once again this shall be owned by promoters, thereby increasing their property
base in Chennai. This shall help the promoters to make their presence felt in
the developed market of Chennai.

2. Wind Mill from Suzlon: The Company plans to set up a wind mill from Suzlon
having installed capacity of 600 MW. The wind mill will be able to generate 15
Lacs unit of Electricity per year. At present the company is paying electricity
for about 70 lacs per year. The current cost of electricity is Rs. 5.8 per Unit.

Once the wind mill is set up the same can be transmitted to the store through
TNEB at a nominal cost of 7.5% of total generated electricity. So by paying a
cost of (7.5% of 70 lacs i.e. 5.4 lacs approx) the company will be able to meet
its electricity requirement. Apart from this the interest cost on wind mill will be
around 35 lacs per year. So the total EB cost will be around 40 lacs thereby the
total savings in Electricity will be 30 lacs approx per year.

Further the company will be eligible to claim benefit under sec 80IA wherein
the company will be eligible to claim Depreciation @ 80% in the first year
which will help to bring the tax liability of the company by 18% as per current
Income Tax Norm.

32
3. New Store at Madippakkam: The Company wants to come up with a new store
at Madippakkam measuring 16000 Sq.ft of sales area with parking area of 4000
Sq.ft comprised in ground plus 3 floors. This shall be a rented property wherein
the monthly rent shall be 4 lacs. The cost for furniture and interior along with
AC and generator is estimated to be 4.70 crores and bank term loan is
estimated at 75% of the project cost i.e. 3.5 Crores.

4. Franchise Store of Koutons: The Company plans to enter into franchise

business with Koutons Ltd who has their head office in Delhi and has 1450
stores across. The company has 7 stores in Chennai which are run by Koutons
on their own. The Company has approached to give the same to on a franchise
basis where in the same is beneficial to both the companies.

33
2,2.6. SWOT ANALYSIS OF THE COMPANY
STRENGTHS:
The strengths of the company are as below:

Biggest store in North Chennai.

Located in clothing market

Customer Service: Provides exceptional customer service which has made them
loyal to get attached to Arihant

Huge variety in Clothing

Separate sections for each variety like pattu section, churidar section, gents
readymade section, gents textiles section, kids section and so on.

More than 90% of the retail space is owned by the promoters with very little
premises.

In depth knowledge of the textile business by the promoters.

Catering to the middle income group which is the majority in Indian Public and
hence a good future.

The knowledge of upcoming market and the taste to keep the goods accordingly.

WEAKNESS:
Lack of car parking facilities.

34
Relatively young brand.

Absence in high segment people.

Lack of visibility of the brand.

OPPORTUNITIES:
Expansion of men’s (branded section)

Proposed exclusive biggest men’s store in Chennai at Dr.Allagappa road,

Puruswallkam. Chennai

Business promotion through advertisement media. At present the company doesn’t

spend much on advertisement, once they do that it will definitely help to
improve sales.

THREATS:
Coming up of new big stores in North Chennai like Big Bazaar, Veeras Collection.
However this will increase the market size and potential of North Chennai as a
whole. The company being in the market as an experienced player will be in
better position to capitalize on the same.

35
CHAPTER 3

3.1. DETAILS OF CONCEPT USED

THEORITICAL BACKGROUND

36
MEANING OF RATIO ANALYSIS:
It is a powerful tool of financial analysis. A ratio is defined as the “indicated
quotient of two mathematical expressions” and as “the relationship between two or
more things”. In financial analysis, a ratio is used as a benchmark for evaluating
the financial position and performance of a firm. The absolute accounting figures
reported in the financial statements do not provide a meaningful understanding of
the performance and financial position of a firm. Ratio helps to summarize large
quantities of financial data and to make qualitative judgment about the firm’s
financial performance. The greater the ratio, the greater the firm’s liquidity and
vice versa.

3.1.2. ADVANTAGES OF RATIOS

Ratio analysis is an important and age-old technique of financial analysis. The

following are some of the advantages of ratio analysis
a) Simplifies financial statements: It simplifies the comprehension of financial
statements. Ratios tell the whole story of changes in the financial condition of the
business
b) Facilitates inter-firm comparison: It provides data for inter-firm comparison.

Ratios highlight the factors associated with successful and unsuccessful firm. They
also reveal strong firms and weak firms, overvalued and undervalued firms.
Helps in planning: It helps in planning and forecasting. Ratios can assist
management, in its basic functions of forecasting. Planning, co-ordination, control
and communications.
c) Makes inter-firm comparison possible: Ratios analysis also makes possible
comparison of the performance of different divisions of the firm. The ratios are
helpful in deciding about their efficiency or otherwise in the past and likely

37
performance in the future.
d) Help in investment decisions: It helps in investment decisions in the case of
investors and lending decisions in the case of bankers etc.

3.1.3. LIMITATIONS OF RATIOS

Accounting Information

Different Accounting Policies: The choices of accounting policies may distort

inter company comparisons. Example IAS 16 allows valuation of assets to be
based on either revalued amount or at depreciated historical cost. The business may
opt not to revalue its asset because by doing so the depreciation charge is going to
be high and will result in lower profit.

Creative Accounting: The businesses apply creative accounting in trying to show

the better financial performance or position which can be misleading to the users of
financial accounting. Like the IAS 16 mentioned above, requires that if an asset is
revalued and there is a revaluation deficit, it has to be charged as an expense in
income statement, but if it results in revaluation surplus the surplus should be
credited to revaluation reserve. So in order to improve on its profitability level the
company may select in its revaluation programme to revalue only those assets
which will result in revaluation surplus leaving those with revaluation deficits still
at depreciated historical cost.

Information problems

Ratios are not definite measures: Ratios need to be interpreted carefully. They can
provide clues to the company’s performance or financial situation. But on their

38
own, they cannot show whether performance is good or bad. Ratios require some
quantitative information for an informed analysis to be made.

Outdated information in financial statements: The figures in a set of accounts are

likely to be at least several months out of date, and so might not give a proper
indication of the company’s current financial position.

Historical costs not useful in decision making: IASB Conceptual framework

recommends businesses to use historical cost of accounting. Where historical cost
convention is used, asset valuations in the balance sheet could be misleading.
Ratios based on this information will not be very useful for decision making.

Financial statements certain summarized information: Ratios are based on

financial statements which are summaries of the accounting records. Through the
summarization some important information may be left out which could have been
of relevance to the users of accounts. The ratios are based on the summarized year
end information which may not be a true reflection of the overall year’s results.

Interpretation of the Ratios: It is difficult to generalize about whether a particular

ratio is ‘good’ or ‘bad’. For example a high current ratio may indicate a strong
liquidity position, which is good or excessive cash which is bad. Similarly Non
current assets turnover ratio may denote either a firm that uses its assets efficiently
or one that is under capitalized and cannot afford to buy enough assets.

Comparison of performance over time

Price Changes: Inflation renders comparisons of results over time

misleading as financial figures will not be within the same levels of

39
purchasing power. Changes in results over time may show as if the
enterprise has improved its performance and position when in fact after
adjusting for inflationary changes it will show the different picture.

Technology changes: When comparing performance over time, there is

need to consider the changes in technology. The movement in
performance should be in line with the changes in technology. For ratios
to be more meaningful the enterprise should compare its results with
another of the same level of technology as this will be a good basis
measurement of efficiency.

Changes in Accounting Policies: Changes in accounting policy may

affect the comparison of results between different accounting years as
misleading. The problem with this situation is that the directors may be
able to manipulate the results through the changes in accounting policy.
This would be done to avoid the effects of an old accounting policy or
gain the effects of a new one. It is likely to be done in a sensitive period,
perhaps when the business’s profits are low.

Changes in Accounting Standards: Accounting standards offers

standard ways of recognizing, measuring and presenting financial
transactions. Any change in standards will affect the reporting of an
enterprise and its comparison of results over a number of years.

Impact of seasons on Trading: As stated above, the financial statements

are based on year end results which may not be true reflection of results
year round. Businesses which are affected by seasons can choose the best
time to produce financial statements so as to show better results. For
example, a tobacco growing company will be able to show good results if
40
 accounts are produced in the selling season. This time the business will
have good inventory levels, receivables and bank balances will be at its
highest. While as in planting seasons the company will have a lot of
liabilities through the purchase of farm inputs, low cash balances and
even nil receivables.

STEPS IN RATIO ANALYSIS

• The first task of the financial analysis is to select the information relevant to
the decision under consideration from the statements and calculates
appropriate ratios.

• To compare the calculated ratios with the ratios of the same firm relating to
the pas6t or with the industry ratios. It facilitates in assessing success or
failure of the firm.

• Third step is to interpretation, drawing of inferences and report writing

conclusions are drawn after comparison in the shape of report or
recommended courses of action.

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use is not
easy. Following guidelines or factors may be kept in mind while interpreting
various ratios are

• Accuracy of financial statements

• Objective or purpose of analysis

• Selection of ratios

• Use of standards

41
 • Caliber of the analysis

IMPORTANCE OF RATIO ANALYSIS

• Aid to measure general efficiency

• Aid to measure financial solvency

• Aid in forecasting and planning

• Facilitate decision making

• Aid in corrective action

• Aid in intra-firm comparison

• Act as a good communication

• Evaluation of efficiency

• Effective tool

3.1.4. CLASSIFICATION OF RATIOS

Different ratios are calculated from different financial figures which carry different
significance for different purposes. For example, for the creditors liquidity and
solvency ratios are more significant than the profitability ratios, which are of prime
importance for an investor. This means that ratios can be grouped on different
basis depending upon their significance. The classification is rather crude and
unsuitable to determine the profitability or financial position of the business. In

42
general, accounting ratios may be classified on the following basis leading to
overlap in many cases.

A. According to the Statement upon which they are based

Ratios can be classified in to three groups according to the statements from which
they are calculated.

a) Balance Sheet Ratios: They deal with relationship between two items
appearing in the balance sheet, e.g., current assets to current liability or
current ratio. These ratios are also known as financial position ratios since
they reflect the financial position of the business.

b) Operating Ratios or Profit and Loss Ratios: These ratios express the
relationship between two individual or group of items appearing in the
income or profit and loss statement. Since they reflect the operating
conditions of a business, they are also known as operating ratios, e.g., gross
profit to sales, cost of goods sold to sales, etc.

c) Combined Ratios: These ratios express the relationship between two items
each appearing in different statements, i.e.…. one appearing in balance sheet
while the other in income statement, e.g., return on investment (net profit to
capital employed: Assets turnover (sales) ratio, etc. Since both the
statements are involved in the calculation of each of these ratios, they are
also known as inter-statement ratios.

43
 Since the balance sheet figures refer to one point of time, while the income
statement figures refer to events over a period of time, care must be taken while
calculating combined or inter-statement ratios.

B. Functional classification

The classification of ratios according to the purpose of its computation is known as

functional classification. On this basis ratios are categorized in the following
manner:

(a) Profitability Ratios: Profitability ratios given some yardstick to measure the
profit in relative terms with reference to sales, assets of capital employed. These
ratios highlight the end result of business activities. The main objective is to judge
the efficiency of the business.

(b) Turnover Ratios or Activity Ratios: These ratios are used to measure the
effectiveness of the use of capital/ assets in the business. These ratios are usually
calculated on the basis of sales or cost of goods sold and is expressed in integers
rather than as percentages.

(c) Financial Ratios or Solvency Ratios: These ratios are calculated to judge the
financial position of the organization from short term as well as long term solvency
point of view. Thus, it can be sub divided in to : (a) Short term Solvency Ratios
(Liquidity Ratios) and (b) Long term Solvency Rations (Capital Structure Ratios)

(d) Market Test Ratios: These are of course, some profitability ratios, having a
bearing on the market value of the shares.

44
C. Classification According to Importance

This classification has been recommended by the British Institute of

Management for inter firm comparisons. It is based on the fact that some ratios are
more relevant and important than other in the process of comparisons and decision
making. Therefore, ratios may be treated as primary or secondary.

a) Primary Ratio: Since profit is a primary consideration in all business

activities, the ratio of profit to capital employed is termed as “Primary
Ratio”. In business world this ratio is known as “Return on Investment”. It
is the ratio which reflects the validity or otherwise of the existence and
continuation of the business unit. In case if this ratio is not satisfactory over
long period, the business unit cannot justify its existence and hence, should
be closed down. Because of its importance for the very existence of the
business unit it is called “Primary Ratio”.

b) Secondary Ratios: These are ratios which help to analyze the factors
affecting “Primary Ratio”. These may be sub classified as under.

i) Supporting Ratios: These are ratios which reflect the profit earning
capacities of the business and thus support the “Primary ratio”.

ii) Explanatory Ratios: These are ratios which analyze and explain the factors
responsible for the size of profit earned. Gross profit to sales, cost of goods
sold to sales, stock turnover, debtors turnover are some of the ratios which
can explain the size of the profits earned. Where these ratios are calculated
to highlight the effect of specific activity, they are termed as “Specific
Explanatory Ratios”

45
3.1.5. TYPES OF RATIOS
PROFITABILITY RATIOS
A measure of “Profitability” is the overall measure of efficiency. In general
terms efficiency of business is measured by the input output analysis. By
measuring the output as a proportion of the input, and comparing result of similar
other firms or periods the relative change in its profitability can be established.

The income (Output) as compared to the capital employed (input) indicates

profitability of a firm. Thus the chief profitability ratio is:

Operating Profit (Net Margin)

x 100
Operating Capital Employed

Once this is known, the analyst compares the same with the profitability ratio
of other firms or periods. Then, when he finds some contrast, he would like to have
details of the reasons. These questions are sought to be answered by working out
relevant ratios. The main profitability ratio and all the other sub ratios are
collectively known as “Profitability ratios”.

Profitability ratio can be determined on the basis of either investments or

sales. Profitability in relation to investments is measured by return on capital
employed, return on shareholder’s funds and return on assets. The profitability in
relation to sales is profit margin (gross and net) and expenses ratio or operating
ratio.

1) Return on Investment:

This ratio is also known as overall profitability ratio or return on capital

employed. The Income (output) as compared to the capital employed (input)

46
indicates the return on investment. It shows how much the company is earning on
its investment. This ratio is calculated as follows:

Net Operating Profit

Return on Investment = Capital Employed
x 100

Operating profit means profit before interest and tax. In arriving at the profit,
interest on loans is treated as part of profit (but not the interest on bank overdraft or
other short term finance) because loans themselves are part of the input, i.e., the
capital employed and hence, the interests on loans should also be part of the output
and should not be excluded there from. All non business income or rather income
not related to normal operations of the company should be excluded. Thus profit
figure shall be IBIT, i.e., Income before Interest and Taxation (excluding non
business income).

The income figure is reckoned before taxation because the amount of tax has
no relevance to the operational efficiency. Both interest and taxation are
appropriations of profit and do not reflect operational efficiency. Moreover, to
compare the profitability of two different organizations having different sources of
finance and different tax burden, the profit before interest and taxation is the best
measure.

Capital employed comprises share capital and reserves and surplus, long term
loans minus non operating assets and fictitious assets it can also be represented as
net fixed assets plus working capital (i.e. Current assets minus Current liabilities).
Thus capital employed may comprise of:

Share capital + Reserve and Surplus + Long term Loans – Non operating Assets –
Fictitious Assets.

47
 In using overall profitability ratio as the chief measure of profitability, the
following two notes of caution should be kept in mind. First, the figure of
operating profit shows the profit earned throughout a period. On the other hand the
figure capital employed refers to the values of assets as on a balance sheet date. As
the values of assets go on changing throughout a business period it may be
advisable to take the average assets throughout a period, so that the profits are
compared against average capital employed during a period.

Secondly, in making comparison between two different units on the basis

of the overall profitability ratio, the time of incorporation of the two units should
be taken care off. If a company incorporated in 1990 is capered with that
incorporated in 2000, the first company’s assets will be appearing at a much lower
figure than those of second company. Thus the former will show a lower capital
base and if profits of both the companies are the same, the former will show a
higher rate of return. This does not indicate higher efficiency. Only the capital
employed is lower because of the reason that it started 10 years earlier. Hence, in
such cases the present value of the fixed assets should be considered for calculating
the capital employed.

In the end, it may be stated that the limitations of the ratio should be kept in
mind while forming an opinion. The ‘profits’ and “Capital employed” figures are
the result of a number of approximations (examples, deprecation) and human
judgment (valuation of assets). The purpose of calculation of the ratio should be
kept in view and appropriate figures should be selected having regard to impact of
changing price levels. “Return on capital employed” is an instrument to be used
cautiously with clear understanding of its limitations.

48
2) Return on Shareholder’s Funds:

It is also referred to as return on net worth. In this case it is desired to work

out the profitability of the company from the shareholder’s point of view and it is
computed as follows:

Net Profit after interest and tax

x 100
Shareholde r' s Funds

Modifications of the “return on capital employed” can be made to adopt it to

various circumstances. Thus if it is required to work out the profitability from the
shareholder’s point of view, then the profit figure should be after interest and
taxation and the capital employed should be after deducting the long term loans.
This ratio would reflect the profitability for the shareholders. To extend the idea
further, the profitability from equity shareholders point of view can also be worked
out by taking the profits after preference divided and comparing against capital
employed after deducting both long term loans and preference share capital.

3) Return on Assets:

Here the profitability is measured in terms of the relationship between net

profits and assets. It shows whether the assets are being properly utilized or not. It
is calculated as.

Net Profit after Tax

x 100
Total Assets

This ratio is a measure of the profitability of the total funds or investment of the
organization.

49
. PROFIT RATIOS
(i) Gross Profit Ratio or Gross Margin:

Gross profit ratio expresses the relationship of gross profit to net sales or
turnover. Gross profit is the excess of the proceeds of goods sold and services
rendered during a period over their cost, before taking in to account administration,
selling and distribution and financing charges. Gross profit ratio is expressed as
follows:

Gross Profit
x 100
Net Sales

This ratio is important to determine general profitability since it is expected that

the ratio will be quite high so as to cover not only the remaining costs but also to
allow proper returns to owners.

Any fluctuation in the gross profit ratio is the result of a change either in
‘sales’ or the ‘cost of goods sold’ or both. The rise or fall in the selling price may
be an external factor over which the management may have little control,
especially when prices are controlled. The management, however, must try to keep
the other end of the margin (i.e. cost) at least steady, if not reduce it. If the gross
profit ratio is lower than what it was previously, when the selling price has
remained steady, it can be reasonably concluded that there is an increase in the
manufacturing cost. Since manufacturing overheads include a fixed element as
well, a fall in the volume of sales will also lower the rate of gross profit and vice –
versa.

(ii) Net Profit Ratio:

50
 One of the components of return on capital employed is the net profit ratio
(or the margin on sales) calculated as:

Operating Profit
Net Profit Ratio = Sales
x 100

It indicates the net margin earned in sales of Rs. 100. Net profit is arrived at
from gross profit after deducting administration, selling and distribution expenses;
non operating incomes, such as dividends received and non operating expenses are
ignored, since they do not affect efficiency of operations.

If the expenses met out of the gross profit are disproportionately heavy, the
net profit ratio will go down. If gross profit ratio is 40%, but the net profit ratio is
15% it means the expenses ratio is 25%. Thus a complement of the net profit ratio
is:

Administra tion Expenses + Selling Expenses

x 100
Sales

Proceeding upwards from net profit, we can arrive at gross profit if administrative
and selling expenses are added back. Similarly, if we add administrative and
selling expenses ratio to the profit ratio we can get the gross profit ratio.

(iii) Operating Ratio

The ratio of all operating expenses (i.e., materials used, labour, factory
overheads, office and selling expenses) to sales in the operating ratio.

A comparison of the operating ratio would indicate whether the cost content
is high or low in the figure of sales. If the annual comparison shows that the sale

51
has increased, the management would be naturally interested and concerned to
know as to which elements of the cost has gone up.

It is not necessary that the management should be concerned only when the
operating ratio goes up. If the operating ratio has fallen, though the unit selling
price has remained the same, still the position needs analysis as it may be the sum
total of efficiency in certain departments and inefficiency in others. A dynamic
management should be increased in making a fuller analysis.

It is therefore, necessary to break up the operating ratio into various cost

ratios. The major components of cost are: material, labour and overheads.
Therefore, it is worthwhile to classify the cost ratio as:

Material Consumed
Material Cost Ratio = Sales
x 100

Labour Cost
Labor Cost Ratio = Sales
x 100

Overheads Cost
Factory Overhead Cost Ratio = Sales
x 100

Administra tion Expenses

Administration Expenses Ratio = Sales
x 100

Selling and Distributi on Expenses

Selling and distribution Expenses Ratio = Sales
x 100

Generally all these ratios are expressed in terms of percentage. They total up
to Operating Ratio. Thus, deduct from 100 will be equal to the Net Profit Ratio.

If possible, the total expenditure for effecting sales should be divided into
two categories, namely, fixed and variable and then ratios should be worked out.

52
The ratio of variable expenses to sales will be generally constant, that of fixed
expenses should fall if sales increase, and it will increase if sales fall.

I. TURNOVER RATIOS

The ratios used to measure the effectiveness of the employment of resources

are termed as activity ratios. Since these ratios relate to the use of assets for
generation of income through turnover they are also known as turnover ratios, as
we have seen already, the overall profitability of the business depends on two
factors. i.e. i) The rate of return on sale and ii) The rate of return on capital
employed i.e. the speed at which the capital employed in the business is related.
More efficient the operations of an undertaking, the quicker and more number of
times the rotation is. Thus the overall profitability ratio is calculated as – Net Profit
Ratio multiplied by Turnover Ratio. The net profit ratio has already been
discussed. Now the important turnover ratios as regards to capital employed and
assets are discussed below.

Capital Turnover (Sales to Capital Employed) Ratio:

This ratio shows the efficiency of capital employed in the business and is
calculated as follows:

Net Sales
Capital Turnover Ratio = Capital Employed
x 100

The higher the ratio the greater are the profits

Total Assets Turnover Ratio:

This ratio is ascertained by dividing the net sales by the value of total assets
Net Sales
Thus, Total Assets Turnover Ratio= Total Assets
x 100

53
A high ratio is an indicator of overtrading of total assets while a low ratio reveals
idle capacity. The total Assets Turnover Ratio can be segregated into:

a) Fixed Assets Turnover Ratio:

This ratio indicates the number of times fixed assets are being turned over in a
stated period. It is calculated as:

Net Sales
Fixed Assets Turnover Ratio = Fixed Assets

This ratio is an indicator of the extent to which investment in fixed assets

contributes to generate sales. The fixed assets are to be taken net of
depreciation. The higher is the ratio better is the performance.

b) Working Capital Turnover Ratio:

This ratio shows the number of times working capital is turned over in a
stated period. This ratio is calculated as:

Net Sales
Working Capital Turnover Ratio = working Capital

It indicates to what extend the working capital funds have been employed in
the business towards sales.

Stock Turnover Ratio (Inventory Turnover Ratio):

This ratio is an indicator of the efficiency of the use of investment in stock. It is

calculated as:

54
 Cost of Goods Sold Sales
Stock Turnover Ratio = Average Inventory or Average Inventory

Too large an inventory will decrease the ratio, control over inventories and
active sales promotion will increase the ratio. If desired this ratio may be split into
two ratios, one for raw materials and other for finished goods.

Material Consumed
i) Average raw material stocks and

Sales or Cost of Goods Sold

ii) Average stock of finished goods

This analysis will throw a better light on the inventory position.

Average inventory is calculated on the basis of the average inventory at the

beginning and at the end of the accounting period.

Debtors Turnover Ratio (Debtor’s Velocity):

These days some amount of sales always is locked up in the form of book debts.
Efficient credit control and prompt collection of amounts due will mean lower
investments in book debts. This ratio measures the net credit sales of a firm to
the recorded trade debtors thereby indicating the rates at which cash is
generated by turnover of receivable or debtors. This ratio is calculated as:

Credit Sales
Average Debtors

Debt Collection Period: This ratio indicates the extent to which the debts have been
collected in time. This ratio is in fact, interrelated with and dependent upon the
debtor’s turnover ratio. It is calculated by dividing the days in a year by the
debtor’s turnover. This ratio can be computed as follows:

55
 Average Debtos
×365
Credit Sales

Debtor’s collection period shows the quality of debtors since it measures the
speed with which money is collected from them. It is rather difficult to specify a
standard collection period for debtors upon the nature of the industry, seasonal
character of the business and credit policy of the firm etc.

v. Creditor’s Turnover Ratio (Creditor’s Velocity):

Like debtor’s turnover ratio, this ratio indicates the speed at which the payments
for credit purchase are made to creditors. This ratio is computed as follows:

Credit Purchase
Creditor’s Turnover Ratio = Average Creditors

The term ‘creditors’ include, trade creditors and bills payable. In case the
details regarding credit purchases, opening and closing balances of creditors are
not available, then instead of credit purchases, total purchases may be taken and in
place of average creditors, the balance available may be substituted.

56
 Debt Payment Period: This ratio gives the average credit period enjoyed
from the creditors. It can be computed as under:

Average Creditors
I= × 365
Credit Purchases

FINANCIAL RATIOS

Financial statements of a firm are analyzed for ascertaining its profitability as

well as financial position. A firm is said to be financially sound provided if it is
capable of meeting its commitments both short term and long term debts.
Accordingly, the ratios to be computed for judging the financial position are
also known as solvency ratios and those are computed for short term solvency
is known as liquidity ratios.

Liquidity Ratio:

In a short period, a firm should be able to meet all its short term
obligations i.e. current liabilities and provisions. It is current assets that
yield funds in the short period. Current assets are those assets that not
only should yield sufficient funds to meet current liabilities as they fall
due but also to enable the firm to carry on its day to day activities. The
ratios to test the short term solvency or liquidity position of an enterprise
are mainly the following:

Current Ratio: - Current ratio also known as the working capital ratio, is
the most widely used ratio. It is the ratio of total current assets to current
liabilities and is calculated by dividing the current assets by current
liabilities.

57
 Current Assets
Current Ratio = Current Liabilitie s

It indicates the firm’s commitment to meet its short term obligations. It is a

measure of testing short term solvency or in other words, it is an index of
the short term financial stability of an enterprise because it shows the
margin available after paying of current liabilities.

Generally 2: 1 ratio is considered ideal for a concern. If the current assets

are two times of the current liabilities, there will be no adverse effect on
the business operations when the payment of liabilities is made. In fact a
ratio much higher than 2: 1 may be unsatisfactory from the angle of
profitability, though satisfactory from the point of view of short term
solvency. A high current ratio may be taken as adverse on account of the
following reasons:

The stock might be pilling up because of poor sales.

The amount might be looked up in debtors due to slack collection policy

The cash or bank balances might be lying idle because of no proper investment.

Components of current ratio

CURRENT ASSETS CURRENT LIABILITIES

58
Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses

b) Liquid Ratio: This is also known as Quick Ratio or Acid Test Ratio.
This ratio is calculated by relating liquid or quick assets to current
liabilities. Liquid assets mean those assets which are immediately
converted in to cash without much loss. All current assets except
inventories and prepaid expenses are categorized as liquid assets. The ratio
can be computed as:

Liquid Assets
Liquid Ratio = Current Liabilitie s

Where

Liquid assets = Current Assets – Closing Stock – Prepaid Expenses.

59
 Liquidity ratio may also be computed by substituting liquid liabilities in
place of current liabilities. Liquid liabilities mean those liabilities which are
payable with a short period. Bank overdraft and cash credit facilities, if they
become a permanent mode of financing they are excluded from current
liabilities to arrive at liquid liabilities. Thus,

Liquid Assets
Liquid Ratio = Liquid Liabilitie s

This ratio is an indicator of the liquid position of an enterprise. Generally, a

liquid ratio of 1:1 is considered as ideal as the firm can easily meet all current
liabilities. The main difference in current ratio and liquid ratio is on account of
inventories and therefore a comparison of two ratios leads to important
conclusion regarding inventory holding up.

Components of quick or liquid ratio

QUICK ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Sundry debtors Short-term advances
Marketable securities Sundry creditors
Temporary investments Dividend payable
Income tax payable

Long Term Solvency Ratios

60
 Long term sources and uses of funds forms the basic input for
computation of long term solvency ratios. The investors both present and
prospective i.e., shareholders and debenture holders are interested in
knowing the financial status of the company so that they can take
decision for long term investment of their funds. The following are the
main ratios in this category.

a) Debt Equity Ratio:

Debt equity ratio is the relation between borrowed funds and owners
capital in a firm. It is also known as external internal equity ratio. The
debt equity ratio is used to ascertain the soundness of long term financial
policies of the business. Debt means long term loans, i.e. debentures or
long term loans from financial institutions. Equity means shareholders
funds i.e., preference share capital, equity share capital, reserves and
surplus less loss and fictitious assets like preliminary expenses. It is
calculated in the following ways:

Debts
1. Equity (Sharehold ers funds)
or

Debts
2. Long term funds (Sharehold ers funds + Debts)

The main purpose of this ratio is to determine the relative stakes of

outsiders and shareholders.

Proprietary Ratios:

61
This ratio is a variant of debt equity ratio which establishes the relationship
between shareholders funds and total assets. Shareholder’s funds means, share
capital both equity and preference and reserves and surplus less losses. This
ratio is worked out as follows:

Shareholde r' s Fund

Proprietary Ratio = Total Assets

This ratio indicates the extent to which shareholder’s funds have been invested in
the assets.

c) Fixed Assets Ratio:

The ratio of fixed assets to long term funds is known as fixed assets ratio. It
focuses on the proportion of long term funds invested in fixed assets. The ratio is
expressed as follows:

Fixed assets
Fixed Assets Ratio = Long term funds

d) Debt Service Ratio:

This ratio is also known as fixed charges cover or interest cover. This ratio
measures the debt servicing capacity of a firm in so far as fixed interest on long
term loan is concerned. It is determined by dividing the net profit before interest
and taxes by the fixed charges on loan. Thus:

Net Profit before interest and Tax

Debt Service Ratio = Interest Charges

This ratio is expressed as number of times to indicate the profit is number of

times the interest charges. It is also measure of profitability. Thus higher the ratio,
higher will be the profitability. The ideal ratio should be 6 to 7 time

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Capital Gearing Ratio:

The proportion between fixed interest or dividend bearing funds and non- fixed
interest or divided bearing funds in the total capital employed in the business is
termed as capital gearing ratio. Debentures, long term loans and preference
share capital belong to the category of fixed interest/ dividend bearing funds.
Equity share capital, reserves and surplus constitute non- fixed interest or
dividend bearing funds. This ratio is calculated as follows:

Fixed Interest Bearing Funds

Capital Gearing Ratio = Equity Shareholde rs funds

In case the fixed income bearing funds are more than the equity shareholder’s
funds, the company is said to be highly geared. A low capital gearing implies
that equity funds are more than the amount of fixed interest bearing securities.
This ratio indicates the extra residual benefits accruing to equity shareholders.
Whether the concern is operating on trading on equity can be judged by this
ratio.

IV. Market Test Ratios

These ratios are calculated generally in case of such companies whose shares and
stocks are traded in the stock exchanges. Shareholders, present and probable,
are interested not only in the profits of the company but also in the appreciation
of the value of their shares in the stock market. The value of shares in the stock
market, besides other factors, also depends upon factors like dividends
declared, earning per share, the payout policy etc. of the companies.

i) Earnings Per Share:

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 Net Profit After Interest & Tax
EPS = No of Equity Shares

ii) Price Earning Ratio:

Market Value per equity share

PER = Earning per share

iii) Dividend Pay Out Ratio:

Dividend per equity share

DPR= Earnings per share

iv) Dividend Yield Ratio:

Dividend per share

DYR= Market price per share
x 100

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 CHAPTER 4

4.1. RATIO ANALYSIS AND

INTERPRETATION

4.1.1. PROFITABILITY RATIOS

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 1) Return on Investment

PARTICULARS 2007 2008 2009

Return on 203% 548.13% 160.02%

Investment

TABLE – 4.1.1.

Interpretation:

Despite reaching a high of 548.13% return on capital employed in 2008, ARPL’s

return on Investment has gone down to mere 160.02% in 2009.This has happened
mainly because of approx 38% hike in the cost of sales which resulted in the fall of
Net profit for the company during the year 2009.

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 2) Return on Share holders fund:

PARTICULARS 2007 2008 2009

Return on share 6.81% 11.77%% 11.91%%

holders Fund

TABLE -4.1.2.

Interpretation:

Return on Share holders fund shows how much profitable is the company from the
share holders point of view. ARPL’s return on Share holders fund has been

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stagnant since 2008. In 2007 its return to its shareholder was only 6.81% which
has now increased to 11.91% in 2009,this shows that share holders are pretty
satisfied with the firms performance.

3) ROA:

PARTICULARS 2007 2008 2009

Return on Assets 1.46% 1.12%% 1.29%

TABLE- 4.1.3

Interpretation:

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This ratio is a measure of the profitability of the total funds or investment of the
organization. ARPL’s return on Asset ratio has always been more than 1, which
shows that its Assets have been used to the core to generate sufficient profits for
the company. Though its return on asset declined in the year 2008 because of lesser
profits and hike in expenses, ARPL has managed to improve its ROA in the year
2009.

4.1.2. PROFIT RATIOS

1) Gross Profit:

PARTICULARS 2007 2008 2009

Gross Profit 2.48%% 4.8% 4.73%

TABLE – 4.2.1.

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Interpretation:

This ratio is important to determine general profitability since it is expected that

the ratio will be quite high so as to cover not only the remaining costs but also to
allow proper returns to owners. Despite of good sales in terms of figures in 2009,
gross profit of ARPL is lesser than that of 2008; this is mainly due to higher cost of
sales. The management needs to concentrate on reducing the cost of sales.

2) Net Profit:

PARTICULARS 2007 2008 2009

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Net Profit 0.70% 1.03% 0.80%
TABLE - 4.2.2.

Interpretation:

This ratio is very important for deriving net profitability of the company after
deducting all expenses. ARPL’s net profit has been fluctuating over the years.
During 2007 the profit ratio was 0.70% which increased to 1.03% in 2008 because
of good sales and lesser expenses when compared to 2007, but in the year 2009
everything was vice versa and net profit ratio of the firm came down due to
increase in overall expenditure.

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 3) Operating Profit:

a) Financial Expenses ratio:

PARTICULARS 2007 2008 2009

Financial Expense 2.3% 5.59% 7.04%

Ratio

TABLE – 4.2.3.

Interpretation:

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This ratio indicates the sales generated in proportionate to the money spent on
acquiring funds for the investment. ARPL’s financial expenses ratio has increased
drastically over the years, this is due to increase in the long term funds of the
company. ARPL borrowed huge funds for the purpose of investment which raised
its financial expenditure and it did not meet the expected returns.

b) Administration Expenses ratio:

PARTICULARS 2007 2008 2009

Administration 11.73% 11.37%% 9.15%

Expense Ratio

TABLE – 4.2.4.

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Interpretation:

This ratio indicates the quantum of sales generated in proportionate to the money
spent on administration. Administration expenses ratio of ARPL has come down
over the years, which is due to increase in sales in proportionate to expenses met in
administration, which is good for the company.

TURNOVER RATIOS

1) Capital Turnover Ratio:

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 PARTICULARS 2007 2008 2009

Capital Turnover 208.62% 108.31% 138.53%

Ratio

TABLE – 4.3.1.

Interpretation:
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This ratio shows the efficiency of capital employed in the business. ARPL’s capital
turnover went down drastically during the year 2008 because of over investment in
Fixed assets, which failed to register sales proportionate to investment. Anyhow
ARPL improved its capital turnover to good extent in the following year.

2) Total Asset Turnover Ratio

PARTICULARS 2007 2008 2009

Total Asset 208.11% 108.20% 138.47%

Turnover Ratio

TABLE – 4.3.2.

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Interpretation:

This ratio indicates how efficiently the overall assets have been used to generate
sales. ARPL had a huge decline in Total asset turnover ratio in 2008 because of
heavy investment in fixed assets which did not generate expected sales. Anyhow
ARPL improved its total asset turnover ratio during the assessment year 2009
which is a good sign for the company.

3) Fixed asset Turnover ratio:

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 PARTICULARS 2007 2008 2009

Fixed Asset 43.40 17.86 14.19

Turnover Ratio

TABLE – 4.3.3.

Interpretation:

This ratio indicates the number of times fixed assets are being turned over in a
stated period. ARPL,s fixed asset turnover ratio has come down sharply from
43.40% in 2007 to 17.86% in 2008 and it has further declined to 14.19% in 2009,
this is mainly due to massive investment on fixed assets during the year 2008 and
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2009.The investment in fixed asset was bitter as it could not generate sales
proportionate to its investment.

4) Working Capital Turnover ratio:

PARTICULARS 2007 2008 2009

Working Capital 2.85 1.98 3.08

Turnover Ratio

TABLE – 4.3.4.

Interpretation:

79
 This ratio indicates to what extend the working capital funds have been
employed in the business towards sales. During the 2007 the working capital ratio
of ARPL was 2.85, which came down to 1.98 in 2008 due to increase in working
capital. Anyhow the ratio went up again to 3.08 in the year 2009 which is a good
sign for the company.

5) Stock Turnover Ratio:

PARTICULARS 2007 2008 2009

Stock Turnover 3.23 2.46 3.45

Ratio

TABLE – 4.3.5.

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Interpretation:

This ratio is an indicator of the efficiency of the use of investment in stock.

ARPL’s stock turnover ratio portrays that its inventory is marginal which shows
that it has good sales because the higher ratio is indicator of lesser inventory. Other
than the assessment year 2008 the stock turnover ratio has always been more than
3, which portrays that the investment in stock has been fruitful.

FINANCIAL RATIOS

1) Liquidity Ratio

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 a) Current ratio:

PARTICULARS 2007 2008 2009

Current Ratio 5.3 4.49 5.09

TABLE – 4.4.1.

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Interpretation:

Current ratio indicates the firm’s commitment to meet its short term obligations.
Generally 2:1 ratio is considered to be good but in ARPL’s case it is more than 5
which can be considered good in terms of solvency but very bad in terms of
profitability. It shows that ARPL might be having poor sales leading to pile up of
stocks or lying of idle cash or bank balance because of no proper investment.

b) Liquid Ratio:

PARTICULARS 2007 2008 2009

Liquid Ratio 1.57 1.77 1.44

TABLE – 4.4.2.

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Interpretation:

This ratio is an indicator of the liquid position of an enterprise. ARPL is in a

condition to meet its current liabilities with ease, as it has more liquid assets that its
current liabilities. This shows how good ARPL is in allocating its long term and
short term fund. It has always maintained a good liquidity position to run its firm
smooth and steadily.

2) Long Term Solvency Ratio:

a) Debt equity Ratio:

PARTICULARS 2007 2008 2009

Debt equity Ratio 0.12 0.62 0.27

TABLE – 4.4.3.

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 Debt Equityratio
0.7

0.6

0.5

0.4

0.3 Debt Equity ratio

0.2

0.1

0
2007 2008 2009

Interpretation:

Debt equity ratio is the relation between borrowed funds and owners capital in a
firm. In ARPL’s case the borrowed funds are higher than that of Owners fund.
ARPL borrowed funds to expand its retail empire which proved to be a good
decision. ARPL’s debt equity ratio increased from 0.12 in 2007 to 0.62 in 2008,
later in 2009 the debt equity ratio fell down to 0.27, as ARPL used its profit to
payout its lenders and increase their share in the company.

b) Proprietary Ratio

PARTICULARS 2007 2008 2009

Proprietary Ratio 0.21 0.09 0.10

TABLE- 4.4.4.
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Interpretation:

This ratio indicates the extent to which shareholder’s funds have been invested in
the assets. ARPL’s proprietors share in total asset is very low, as it has used its
borrowed funds to acquire majority of its assets. Thus ARPL’s proprietary ratio
is only 0.10 during the assessment year 2009,which shows that the company is
highly dependent on its long term loans.

c) Fixed Asset Ratio:

TABLE – 4.4.5.

PARTICULARS 2007 2008 2009

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Fixed asset Ratio 0.33 0.48 0.47
 Fixed AssetRatio
0.6

0.5

0.4

0.3
Fixed Asset Ratio
0.2

0.1

0
2007 2008 2009

Interpretation:

This ratio focuses on the proportion of long term funds invested in fixed assets.
ARPL has segregate its long term funds in to three parts namely Fixed asset,
investments and current asset. Out of which majority has been used for acquiring
fixed assets. When compared to 2007 ARPL has used more of its long term funds
for buying fixed assets which is good for the company’s operations.

MARKET TEST RATIO

1) EPS:

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 PARTICULARS 2007 2008 2009

EPS 1.86 3.66 3.88

TABLE – 4.5.1.

Interpretation:

As ARPL is a private limited company, its shares are not listed in any of the stock
exchanges. But still the Earnings Per Share has been computed which portrays that

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EPS of ARPL has been gradually increasing since 2007 from Rs 1.86 per share to
Rs 3.88 in 2009.

89
 CHAPTER 5

SUMMARY AND FINDINGS

The following are the Findings from the financial statements of ARPL:

90
1) After the analysis of Financial Statements, the company status is better,
because the Net working capital of the company is doubled from the last
year’s position.

2) The company’s Net profit has gone down to mere 0.80% in 2009 when
compared to 1.03% in 2008, this is due to increase in the cost of goods sold.

3) The company’s Return on Investment has declined heavily from 548.13% in

2008 to mere 160.02% in 2009. This is due to decrease in sales of the
company and over investment in fixed assets.

4) ARPL’s current ratio is more than 5 which can be considered good in terms
of solvency but very bad in terms of profitability. It shows that ARPL might
be having poor sales leading to pile up of stocks or lying of idle cash or bank
balance because of no proper investment.

5) ARPL’s proprietors share in total asset is very low, as it has used its
borrowed funds to acquire majority of its assets. Thus ARPL’s proprietary
ratio is only 0.10 during the assessment year 2009,which shows that the
company is highly dependent on its long term loans.

6) ARPL’s borrowed funds are higher than that of Owners fund. ARPL
borrowed funds to expand its retail empire which proved to be a good
decision. ARPL’s debt equity ratio increased from 0.12 in 2007 to 0.62 in
2008, later in 2009 the debt equity ratio fell down to 0.27, as ARPL used its
profit to payout its lenders and increase their share in the company.

7) During the 2007 the working capital ratio of ARPL was 2.85, which came
down to 1.98 in 2008 due to increase in working capital. Anyhow the ratio
went up again to 3.08 in the year 2009 which is a good sign for the
company.
91
 8) As ARPL is a private limited company, its shares are not listed in any of the
stock exchanges. But still the Earnings Per Share has been computed which
portrays that EPS of ARPL has been gradually increasing since 2007 from
Rs 1.86 per share to Rs 3.88 in 2009.

9) ARPL’s stock turnover ratio portrays that its inventory is marginal which
shows that it has good sales because the higher ratio is indicator of lesser
inventory. Other than the assessment year 2008 the stock turnover ratio has
always been more than 3, which portrays that the investment in stock has
been fruitful.

10) However the company’s overall financial position in the current year
is good when compared to previous years. The overall profitability and sales
volume of the firm has gone up heavily which shows that the firm has no
dead stocks in its warehouses. ARPL has good scope of expanding its
Textile Empire to many other cities in the upcoming years.

SUGGESTIONS

From the overall analysis of Balance sheet and Profit and Loss statement, I found
that ARPL has to make some improvement in the following aspects
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  The overall profitability of ARPL has been affected due to increase in the
cost of sales. So ARPL needs to adopt cost cutting strategies to minimize
their costs and thus ending up raising its profitability.

 The financial expense of ARPL has increased drastically over the years, as
the long term funds borrowed for the purpose of generating higher sales and
investments didn’t meet up as expected..Thus ARPL needs to diversify their
available funds in to sectors from which they can generate better returns and
make optimum use of the resources.

 ARPL used its borrowed funds to buy more fixed assets, but the investment
turned out to be bitter for the company as it did not generate expected sales
proportionate to its investment. So ARPL should try to maximize the use of
its fixed assets to a greater extent.

 ARPL’s current ratio is more than 5 which can be considered good in terms
of solvency but very bad in terms of profitability. It shows that ARPL might
be having poor sales leading to pile up of stocks or lying of idle cash or bank
balance because of no proper investment. Thus ARPL should give more
importance to this aspect and try to generate higher sales to avoid pile up of
stocks and make proper use of idle cash balance.

CONCLUSION

The internship I have done is on “Overall analysis of Balance sheet and

Profit and Loss statement of a ARPL. In these 90 days tenure I gained lot of

93
knowledge on how to crack a balance sheet and profit and loss statement of a
company in order to forecast its future performance and rate its operations. It is
nothing but the projection of company’s financial position of a company in order to
map its future performance. In this period I have analyzed ARPL’s balance sheet
and profit and loss statement to prepare project report. It is totally based on our
logical and analytical skill.

In this projection I have learnt how to build the company’s portfolio, and
come out with strategies to remove the flaws in the funds allocation or mismatch of
long term and short term funds resulting in poor performance of the company. I
also learnt how to rate the financial position of a firm depending upon its cash
inflows and outflows and also how to rate the company’s credibility depending on
its liquidity position which portrays how solid is the company.

The company’s overall position is at a good position. Particularly the current

year’s position is well due to raise in the profit level from the last year position. It
is better for the organization to diversify the funds to different sectors in the
present market scenario

ANNEXURES

REFFERED BOOKS

94
• REDDY T.S. AND MOORTHY - FINANCIAL MANAGEMENT

• M.ZAHEER AHMED – MANAGEMENT ACCOUNTANCY

• REDDY T.S. AND MOORTHY – MANAGEMENT ACCOUNTING

95