# (Session: 2009-2011

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INTRODUCTION

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(Session: 2009-2011)

RATIO ANALYSIS
Ratio analysis is one of the methods of analyzing financial statements. It implies the process of computing, determining and presenting the relationship of items of financial statements. It also involves the comparison and interpretation of ratio to use them for future projections.

Alexander Wall is considered the pioneer of ratio analysis. After pondering upon this for quite some time he presented a detailed system of ratio analysis in1909. He explained that the work of interpretation can be made easier by establishing qualitative relationship between the facts given in the financial statements

MEANING OF RATIO
A ratio is a mathematical relationship between two related items expressed in quantitative form. When this definition of ratio is explained with reference to the items shown in the financial statements then it is called as Accounting ratio. Hence, an accounting ratio is defined a quantitative relationship between two or more items of the financial statements connected with each other. This quantitative relationship that is ratio will be expressed in either of the following ways: a) In Proportion: In this form the amount of two items are being expressed in a common denominator. The example of this form of expression is the relationship between current asset and current liabilities as 2:1. b) In Rate or Times or Coefficient: In this form a quotient obtained by dividing one item by another item is taken as unit of expression. The example of this form is sales divided by stocks (say it comes 6); thus 6 times is the ratio between sales and stock. It is important to note that when the ratio is expressed in this form, it is called as” Turnover” and is written in “times”.
c)

In Percentage: In this form a quotient obtained by dividing one item by another item is multiplied by hundred and it becomes a percentage form of expression. For example, the relationship between gross profit and sales as 25%, which is in percentage form.

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(Session: 2009-2011)

UTILITY OR OBJECTIVES OF RATIO
Accounting ratios are the true test of the profitability, efficiency and financial Soundness of the company. These ratios have the following objectives:
1.

Measurement of profitability: We can measure the profitability of the business by calculating gross profit, net profit, expenses and other ratios. Profitability is the profit earning capacity of the business.

2.

Judging the operational efficiency of the management: The operational efficiency of the business can be ascertained by calculating operating ratio. The operating ratio shows the operational cost of the business.

3.

Assessing the solvency of the business: we can ascertain whether the firm is solvent or not by calculating solvency ratios. Solvency ratios show the relationship between liability and assets.

4.

Measuring Short and long term financial position of the company: We can know the short term and long term position of the business by calculating various ratios. Current and liquid ratios indicate short-term financial position, whereas debt-equity ratios fixed asset ratios and proprietary ratios show long-term financial position.

5.

Indicator of true efficiency: Financial statements is i.e. trading and profit and loss account and balance sheet may indicate the amount of profit or the balance of different accounts but the profitability can be known by analysis of financial statements i.e. calculation of ratio shows the profit earning capacity of the business.

6.

Facilitating comparative analysis of performance: Every promising company has to compare its present performance with the previous performance and discover the plus and minus points.

7.

Helpful in budgeting & forecasting: Accounting ratios make the figures simple and intelligible. They simplify, summarize and systematize the long monotonous figures. Those who do not know accounting can easily understand the ratios. The importance of the ratios lies in the fact that they provide relationship between different figures.

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(Session: 2009-2011)

SIGNIFICANCE OF RATIO ANALYSIS
The need or significance of ratio analysis arises due to the following facts: 1. Business facts shown in the financial statements do not carry any importance individually. Their importance lies in the facts that they are inter-related. Hence, there is need for conclusion to be drawn by their users. 2. Ratio Analysis as a tool for the interpretations of financial statements is also very significant because ratio help the analyst to have a deep peep into the data neither significant nor able to be compared. In fact, they are basically dumb. Ratio provides power to speak. On account of the above facts plus the utility discussed earlier, the use of ratio analysis has increased considerably.

IMPORTANCE OF RATIO ANALYSIS
1. It helps to understand the efficiency and performance of the company as a whole. 2. Its main purpose is to gain insights into the operating and financial problems confronting the firm. 3. It helps to identify the trouble or potential trouble spots of the firm. This would impel the management to investigate those areas more thoroughly. 4. It helps to pinpoint relationship that are not obvious from the financial statements. 5. It helps to highlight the factor responsible for the present state of financial affairs. 6. Ratio analysis helps the shareholders in evaluating the firm’s activities and policies that affect the profitability, liquidity and ultimately the market price of the shares.
7.

They help to examine the adequacy of funds, the solvency of the firm and its ability to meet the financial obligations as when they become due.

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(Session: 2009-2011)

LIMITATION OF RATIO ANALYSIS
Accounting ratios are insignificant alone. These ratios become meaningful when they are compared with the previous performance of the firm or with the performance of other firm. The ratios though indicate profitability, efficiency and financial soundness, but they suffer from some limitations. These limitations are as follows:
1.

False result: Ratios are based upon financial statement. In case, financial statements are incorrect or the data upon which ratios are based is incorrect, ratios calculated would also be false and defective. The accounting system itself suffers from much inherent weakness, so the ratio based upon it cannot be said to be always reliable.

2.

Limited comparability: The ratios of one firm cannot always be compared with the performance of other firm, if uniform accounting polices are not adopted by them. The difference in the methods of calculation of stock or the method used to record depreciation on assets will not provide identical data, so they cannot be compared.

3.

Absence of standard uniformly accepted terminology: Different meanings are given to a particular term. Such as some firm take profit before interest and after tax, others may take profits before interest and tax. Bank overdraft is taken as current liability but some firm may take it as non -current. The ratios can be comparable only when uniform terminology is adopted by both the firms.

4.

Price level changes affect ratios: The comparability of ratios suffers, if the prices of the commodities in two year are not the same. Changes in price affect the cost of production, sales and also the value of the assets. It means that the ratio will be meaningful for comparison, if the prices do not change.

5.

Ignoring qualitative factors: Ratio analysis is the quantitative measurement of the performance of the business. It ignores the qualitative aspect of the firm, howsoever important it may be. It shows that ratio is only one –sided approach to measure the efficiency of the business.

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so it cannot be matched with the circumstances in normal days. 7. 6. lockouts. Every firm has to work in different situation and circumstances. Misleading results in the absence of absolute data: In the absence of actual data the size of the business cannot be known. Strikes. ______________________________________________________________6 . If the gross profit of two firm is 25%. it may be just possible that the profit of one is Rs2500 and sales I Rs10000 whereas the gross profit and sales of other firm is Rs 500000 and sales Rs 2000000. Profitability of the two firms is the same but the business is quite different.(Session: 2009-2011) No single standard ratio: There is not a single standard ratio that can indicate the true performance of the business at all time. floods. so a particular ratio cannot be supported to be standard for everyone. wars etc materially affect the performance.

There should not be any holding back of any information or data by the constituent units. This may be done by using the technique of current purchasing power or current cost accounting. Illustration: a higher current ratio should be treated as a good sign only after confirming the fact that there are no non-moving or obsolete stocks or non-recoverable debtors. degree of automation. • • • The constituent units should be comparable in terms of size. following propositions should be kept in mind. Ratios should be computed on the basis of inter-related figures which have a cause and effect relationship. 2. age. then only the ratios computed there from will be meaningful. Incase of inter-firm comparison of ratios. Ratios are computed on the basis of financial statements. The constituent unit must be following similar accounting policies more particularly in the areas of charging the depreciation and stock valuation. 4. If the statements are reliable. the reliability of the financial statements should be confirmed. the impact of inflationary conditions are changing price level should be taken into account before computing the ratios. ______________________________________________________________7 . nature of business. etc. Computation of the ratios on the basis of irrelevant figures may even lead to wrong conclusions. As such.(Session: 2009-2011) PRECAUTIONS TO BE TAKEN Considering the various limitations in respect of ratio analysis following precautions should be taken before using it as technique for interpretation of financial statements. 1. It should always be remembered that ratios only show symptoms and the indications given by the ratios can be interpreted correctly only after studying the realities behind the financial statements. 3. If possible. before using the ratio analysis.

Liquidity Ratio: These ratios reflect the firm’s ability to meet scheduled short time obligations. turnover and financial capability. Arrangement of data. Financial ratios are generally classified into five categories. 5. Arrangement of data Arrangement of data implies the representation of various items of annual accounts after appropriate reshuffling in the form suitable for analysis and interpretation. Leverage Ratios: These ratios show how much of the debt has been used to finance the various investments in different assets. The trend of these ratios tells the story of what has been happening in the firm in recent years. Market Value Ratios: These ratios reflect the market response to the performance of the company based on the dividend and earning pattern of the concern. Classification of ratios. Some of the possible classification is mentioned below. as such ratios can be classified on the basis of profitability. ______________________________________________________________8 . each case may involve different procedure. They are as follows: 1. 2. 2. while analyzing the financial statement through ratio analysis: 1. Classification of ratios Classifications of ratios depend upon the objectives for which they are calculated. 3. It may also depend upon the availability of data.(Session: 2009-2011) PROCEDURE (STAGES) FOR RATIO ANALYSIS The following procedure is generally followed. No definite procedure or step may be designed for arranging data. 4. Calculation of ratios and their interpretation. 3. Profitability Ratios: These ratios reflect the profitability of the firm. Several significant structure ratios may be classified from various standpoints. Activity Ratios: These ratios measure how well the various assets are managed. Analysis of financial statement is made with a view to ascertain the efficiency in financial soundness of the company. However the item should be arranged in such a way that all items needed for calculating a particular ratio are not only easily available but also are free from any ambiguity.

Acid Test Ratio Profitability Ratio 1. Return on Capital Employed Activity/ Leverages Ratio 1. Earning Yield Ratio 4. Return on Equity 5. Proprietary Ratio Market Turnover Ratio 1. Total Assets Turnover Ratio 4. Capital Turnover Ratio Ratio 1. Earning Per Share 3. Operating Ratio 4. Fixed Assets Turnover Ratio 3. Debt Liquidity Ratio 2. Capital Gearing Ratio 4. Creditor Turnover Ratio 5. Dividend Yield Ratio ______________________________________________________________9 . Net Profit Ratio 3. Gross Profit Ratio 2. Return on Total Assets 6.(Session: 2009-2011) CLASSIFICATION OF RATIOS Liquidity Value Ratio 1. Interest Coverage Ratio 3. Price Earning Ratio 2. Inventory Turnover Ratio 2. Current Ratio 2.

i. The proportion of each element of current assets is significant. generating revenue. stocks will be moving quickly through the business. debtors into cash and cash to creditors. Each item within both current assets and current liabilities has a separate significance that is lost in the overall ratio. LIQUIDITY RATIOS: Liquidity ratios measure the extent to which the firm can meet its immediate obligation. Furthermore.e. If liquidity is stretched. If business operations are successfully managed. sales may be lost if the company’s liquidity position prevents the extension of credits to its customers. They also reflect the firm’s ability to meet financial contingencies that might arise. by definition. However the current ratio groups all current assets together on the assumption that all of them can be converted into cash within a year. This ratio is of importance to suppliers of short term funds. Even though. current assets can be converted into cash within a year. not all current assets can be transformed into cash in short span of one year. Broadly speaking. they will cease to extend credit.(Session: 2009-2011) CALCULATION & INTERPRETATION OF RATIOS Test of Liquidity: Liquidity refers to a company‘s ability to meet its current financial obligations as they arise and thereby remain solvent. Hence it is better to read ______________________________________________________________10 . If creditors lose confidence in the company’s ability to pay. the banker and trade creditors. 1. bankruptcy and liquidation would follow. even though they both have the same current ratio. as company having a high percentage in cash is more liquid than one with a high percentage in inventories. thereby putting a further strain on what may already be a serious cash situation. which improves the profitability and working capital thereby maintaining liquidity. liquidity is concerned with the entire conversion cycle of stock into sales. Standard ratio is 2:1. Current Ratio: Current Asset Current Liabilities This indicates the company’s ability to meet current liabilities as they become due by using its current assets. and this can add impetus to a downhill slide.

Gross Profit is critical because it represents the amount of money remaining to pay operating costs. Cost of Goods sold = Opening Stock + Purchases + Direct Expenses . This ratio is described below: 2. Whereas immediate liabilities are current liabilities net of bank overdraft. it is possible to exclude bank overdraft is a continuance finance facility provided by the bankers which need not be paid off completely at any given time during the continuance of business operations. Standard ratio is 1:1. This gives a more immediate measure of liquidity.(Session: 2009-2011) the current ratio along with the acid test (quick) ratio which excludes the least liquid of the current assets i. financing costs. its riskiness. ______________________________________________________________11 .closing stock. The gross profit margin is affected by Changes in sales volume. The liquid assets to arrive at this ratio normally cover the same current liabilities. administrative and selling expenses. PROFITABILITY RATIO: 1. Acid test (Quick Ratio): Quick Assets Immediate Liabilities Quick assets are defined as current assets net of stock. Test of profitability: Profitability ratios focus on the company’s effectiveness at generating profit. The quick ratio provides a more conservative view of liquidity by excluding the least liquid assets. showing the profit potential before charging financial. and the effect of leverages. Where. Gross Profit Ratio = Gross Profit* 100 Sales This ratio is an important indicator of profitability.e.Gross Profit Ratio: This ratio expresses the relationship between gross profit and Sales. However. They reflect the operating performance. inventory. since the need to make sales is not relevant. and taxes and to provide for profit. Gross profit is the difference between sales and the cost of good sold. • Changes in sales price. The gross profit margin is the amount of each rupee of sales left over after paying the cost of goods sold.

general and administrative expenses. This ratio is worked out as follow: Operating Ratio = Cost of Goods Sold + Operating expenses *100 Sales Operating expense / incomes. The operating cost is expressed a percentage of sales. interest and taxes. including cost of goods sold. 3. Operating Ratio: This is the ratio. A lower ratio is an indicative of higher efficiency and higher profitability. It indicates what percent of every rupee of sales.) Operating & Non operating Incomes. It is guiding ratio for determining the dividend payout per share . the firm was able to convert into profit. which shows the relationship between operating cost and sales. It reveals the amount of sales required to cover the cost of goods sold plus operating expenses. which measures the performance of the management. Higher This ratio is complimentary of net profit ratio. 2 Net Profit Ratio: Net profit ratio relates net profit to the firm’s sales level. subject to the existence of non-Profitability is not always the indicator of higher operational efficiency. The net profit margin measures the profit that is available from each rupee of sales after all expenses have been paid.It also determines the market price of the share. selling. It signifies the operational efficiency of the business. The formula is as follows: Net Profit Ratio = Net Profit (after taxes)*100 Sales In order to calculate this ratio we require Net Profit which can be obtained from Profit and Loss account by using this formula: Net Profit = Gross Profit ( + ) Operating & Non operating Incomes ( . as it may be caused due to existence of non- ______________________________________________________________12 . It is a yardstick. depreciation. Normally higher ratio is always considered good and serves as an index of high profitability.(Session: 2009-2011) • Changes in the cost of production.

The ratio is calculated as follows in two different ways Return on Capital employed = Net Profit (after taxes)*100 Capital Employed Return on Capital Employed = NPAT + Interest on long term loan Capital Employed ______________________________________________________________13 . Capital employed consists of shareholders funds plus all the long-term loans including debentures. In such a case. It is the rate of net profit (after taxes) as a percentage of capital employed. While the return on assets ratio does crudely reflect how well the firm uses its assets. there may be differences between some firms return on assets simply because of the degrees to which the fixed assets have been depreciated. In total. 4. Return on total assets: Return on assets relates net profit to total tangible assets. Return on Equity: Return on equity indicates what kind of rate of return was earned on the book value of owners equity. This ratio indicates the effective use of capital. Return on Assets = Net Profit (after taxes)*100 Total Assets If the ratio is lower than the industry average. 6. In case. Return on Capital Employed: It is a measure of profits as a return on Capital Employed. as an index of operational efficiency. operating ratio. helps to confirm to what extent the business operations have in fact been conducted efficiently. a proportion of the total assets are fixed asset and since book values and market values of fixed assets may be widely divergent. in other words whether there is excessive investment or inadequate investment in assets. It measures how profitably the firm has used its assets. The formula would be as follows: Return on Equity = Net Profit (after taxes)*100 Equity 5.(Session: 2009-2011) operating incomes also. It show whether the investment in fixed assets is in line with the sales volume. there are some difficulties associated with it. it would mean that the firm is not utilizing its assets as profitably as many of its competitors.

Inventory turnover ratio: This ratio indicates how well a firm has used inventory to generate the goods and services that are sold. ______________________________________________________________14 . The returns generated must sufficiently cover the cost of fund employed. it can be expressed as follows: Average turnover period (in days) = Average stock*360 days Cost of goods sold The above will then indicate the ‘shelf life’ of the inventory in terms of time period. This ratio indicates the number of times stock is replenished in a year and resultantly how long on an average it is held without any movement. There are several activity ratios. ACTIVITY/TURNOVER RATIO 1. A variation is to show the average turnover period. hence the efficiency of the companies operations and whether capital is locked up unnecessarily in large stocks. In terms of days. It helps to know whether the capital has been effectively and gainfully used. These ratios are called turnover ratios because they show how rapidly the assets are being converted or rather turned over into sales. Test of efficiency (Activity Ratio): Activity ratio attempt to measure how Efficiently the firm is managing its assets. high turnover ratios are usually are associated with good asset management and low turnover ratios with poor asset management ratio.(Session: 2009-2011) It helps to judge whether the returns are adequate in comparison with the capital employed. each is directed towards a specific type of asset management. This may provide a vital warning signal. Inventory Turnover Ratio = Cost of goods sold Average inventory This measures the speed with which the stock is turned over. Generally speaking. The inventory turnover is the ratio of the cost of goods sold to average inventory.

For example. The fixed assets turnover ratio is the sales turnover divided by the fixed assets. Total asset turnover ratio is defined as sales turnover divided by the total assets. since the book value of fixed assets may be considerably different than the market value of these assets.(Session: 2009-2011) 2. It indicates how many rupees of sales are supported by one rupee of fixed assets. a firm with a relatively old but serviceable plant where it has been almost fully depreciated. It is measure of firm’s total assets management. whereas a lower fixed asset turnover ratio reflects poor fixed asset management. 3. However. the fixed assets turnover ratio may be deceptively low or high. This ratio measures how effectively and productively the firms has used its fixed assets. Fixed Assets Turnover Ratio: This ratio indicates the efficiency in the utilization of fixed assets. higher than average fixed turnover ratio is indicative of Better fixed asset management. high total assets turnover ratios are supposed to indicate successful assets management whereas low total assets turnover ratios indicates ______________________________________________________________15 . the formula is as follows: Fixed Assets Turnover = Sales turnover Fixed Assets Generally speaking. It indicates how many rupees of sales are supported by one rupee of total tangible assets. The formula is as follows: Total Assets Turnover Ratio = Sales Turnover Total Asset Generally speaking. will have a lower book value of fixed assets than a similar concern with a new plant and therefore for similar sales levels the older plant will tend to have a higher fixed assets turnover even though both firms may be utilizing their fixed assets at about the same level of efficiency. Total Assets Turnover Ratio: It measures the overall efficiency and performance of the assets employed in business.

which may mean increase in working capital requirements and lower profits. However. It may also mean that the firm is taking advantage of longer credit from its creditors. It is calculated as follows : Capital Turnover Ratio = Sales Turnover Capital Capital is normally taken as the shareholders funds. The ratio is calculated as follows : Creditors Turnover Ratio = Creditors *360 days (12 months) Credit purchases A higher turnover ratio may indicate inability to pay creditors on time. It indicates how productive the assets have been used. debtors turnover ratio and fixed assets turnover ratios are inherent in the total assets turnover ratio. 4.(Session: 2009-2011) Unsuccessful assets management. both current and fixed. It indicates the frequency with which sales are generated in relation to capital. Creditors Turnover Ratio: This ratio indicates the credit period enjoyed from the creditors. ______________________________________________________________16 . Capital Turnover Ratio: It is the ratio of turnover to capital. It explains how many times turnover is multiple to capital. A low turnover ratio indicates that sufficient credit is not being enjoyed or the firm is not taking advantage of the credit facility offered by the creditors. 5. it indicates the effective use of capital. all the problems associated with the inventory turnover. In other words. since total assets turnover is a composite of all the firms tangible assets.

This ratio indicates the capacity of the concerned to raise loans. It reflects the capital structure of the firm. The leverage ratios reflect the financial risk posture of the firm. A high ratio means that the firm has liberally used debt (i. The use of debt financing increases the risk of the firm. Some of the leverage ratios are explained below: LEVERAGES RATIO 1. Too low ratio suggests that ______________________________________________________________17 . Too high ratio indicates excessive use of external funds and therefore exposure to risk. what percent of the firm’s capital is in equity and what percent is in debt. the higher would the firms leverage ratios and more risk present in the firm. However we are restricting to the following two commonly used debt equity ratio: • Debt Equity Ratio = Long term debt Equity • Debt Equity Ratio = Total Debt Equity This ratio brings about the safety cushion available to the loan creditors/ third party liability against their money lent for materials supplied or services rendered on credit to the company. Debt Liquidity Ratio: This ratio represents the proportion of external equity to internal equity in the capital structure of the company. whereas a low ratio means the firm has paid for its assets mainly through equity funds. In other words. The more extensive the use of debt. borrowings) to finance its assets. There can be many version of the debt-equity ratio. it reflects the firms financial risk posture.(Session: 2009-2011) Test of Solvency (Leverages Ratio): Leverages ratio indicates the extent to which the firm has financed its assets by borrowing. High proportion of debt increases the risk of insolvency since the fixed burden of interest expenses are to be paid for even in the periods of low profitability or losses. It can also be taken as the ratio of the total debt to equity. Total debt means both long term and short term debts. this is taken to be the ratio of the long-term debt to equity. It indicates the proportion of the outsider’s money in comparison with the owner’s stake.e. Generally.

A highly geared company being one that has a high proportion of debt capital. the better is the ability of the firm to discharge its interest expense. It indicates how many times the interest charge is covered by the funds available to meet such interest expenditure. In other words this enables to measure the ratio of income available to pay interest to the amount of interest itself.(Session: 2009-2011) the management is not taking advantage of opportunities to maximize profits through external borrowings.e. How highly geared a company will hinge critically on its profit stability. It is on eof the debt service ratios. The formula is as follows: Interest coverage ratio = Net Earnings before taxes and interest Interest Charges It measures how aptly the firm can meet its interest obligations. stability must continue and exist into the long term also. 2. Capital Gearing Ratio: Short-term stability is not a sufficient condition for financial strength. This hinges upon the attainment of satisfactory relationship between the borrowed funds and internal sources of capital. ______________________________________________________________18 . The greater the interest coverage ratio. It describes how well and how easily the firm can service its debts and meet its interest obligations associated with the debt. Capital Gearing = Fixed Interest Bearing Securities Equity Capital Fixed income bearing securities consists of all those securities where the return in the form of dividend or interest is fixed and does not increase with increase in earnings i. The relationship between the debt and equity defines a firm’s gearing. Standard ratio is 2:1. Times interest earned or Interest Coverage Ratio: This ratio is the sum of the net earnings before taxes and interest charge divided by the interest expenditure. This ratio is worked out as follows. Debt capital imposes a minimum required profit to cover interest payments and if thee is nothing left after interest. 3. preference share capital. debentures and long term loans. the shareholders will not be rewarded.

A high proprietary ratio is indicative of good borrowing capacity.(Session: 2009-2011) 4. Proprietary Ratio: It is the ratio of the shareholders funds to total tangible assets. It indicates to what extent the total tangible assets have been financed from shareholders funds. ______________________________________________________________19 . The ratio is calculated as follows : Proprietary Ratio = Shareholders Funds Total Tangible Assets A low proprietary ratio sends warning signal to the creditor and financiers indicating high degree of risk in lending money.

The competition of earning per share is made by dividing net income remaining for ordinary shareholders by the number of ordinary shares issued. with the opposite being true for companies with limited growth opportunities. Since the earnings form the basis for dividend payment as well as basis for any future increase in the market price of shares. on the other hand is the value of equity as perceived by investors. investors are always interested in knowing the earnings per share. Price / Earning Ratio = Market Price Earnings per share The price / earnings ratio is widely used by investors as a general guideline in gauging share values.(Session: 2009-2011) TEST FOR INVESTORS MARKET: MARKET VALUE RATIO 1. Price Earning Ratio: This ratio highlights the relationship between the market price of a share and the current earnings per share. Investors increase or decrease the price earnings ratio that they are willing to accept for a share according to how they view its future prospects. Companies with ample opportunities for growth generally have high price/earnings ratios. 2. ______________________________________________________________20 . Earnings per share : The shareholders invest their money with the expectation of getting dividends and capital appreciation on the shares. Earnings per share = Net profit after taxes – preference dividends Number of ordinary shares It indicates the earnings (profits) available to the equity shareholders on per share basis. The market value.

It is the reciprocal of the price earnings ratio. The effective ratio of return may be higher lowering compared to the rate of dividend.(Session: 2009-2011) 3. which guides the prospective investor in deciding the investment. The yield is expressed in terms of the market price of the share. depending on the market value of share. ______________________________________________________________21 . The rate of dividend is not the same as the effective rate of return. 4. it is one of the ratios. Earnings Yield Ratio = Earnings per share Market price per share This is the capitalization rate at which the stock market capitalizes the value of current earnings. This ratio reflects how the dividend income is related to the market value of share. It serves as a guiding ratio for the intended investors. Hence. which he can expect on his proposed investment. Dividend Yield Ratio = Dividend per Share Market Price per Share This ratio shows the prospective investors the effective return.

(Session: 2009-2011) COMPANY PROFILE ______________________________________________________________22 .

plantations and passenger car distribution through other divisions and wholly owned subsidiaries. in collaboration with Massey Ferguson (now owned by AGCO corporation. TAFE acquired the Eicher tractors business. its engine plant at Alwar and transmissions plant at Parwanoo through a wholly owned subsidiary “TAFE Motors and Tractors Limited.(Session: 2009-2011) TAFE is a US\$750 million tractor major incorporated in 1960 at Chennai in India. apart from the tractor manufacturing plant at Mandideep mentioned above. this company has four plants involved in tractor manufacturing at Mandidheep (Bhopal). a Diesel Engine plant at Alwar. gears. engineering plastics. USA). Kallidaipatti (Madurai). A member of the Amalgamations Group of Chennai. hydraulic pumps. Apart from being among the top five tractor manufacturers in the world. TAFE is also involved in making diesel engines. Rajasthan producing a range of air cooled and water cooled diesel engines up to 80 HP with plans are on to increase the product range up to 125 KVA. panel instruments. Doddabalbur (Bangalore) and in Chennai. The Transmissions Division located at Parwanoo in Himachal ______________________________________________________________23 . TAFE Motors and Tractors Limited has.

for “Strong commitment to excel on the journey towards excellence”. The commendation is based on an independent assessment of the organization on the basis of specified criteria which include Leadership. trailers and accessories. People Results. was announced at the 15th Quality Summit conducted by the Confederation of Indian Industry (CII) held at the NIMHANS auditorium in Bangalore recently. TAFE. Key results. IT. Policy & Strategies. white goods and automotive sector and has the distinction of being awarded Toyota Quality Award. first tractor company to be recognized for strong commitment to excel at CII -EXIM Bank Award for Excellence. TAFE Access Limited is a wholly owned subsidiary of TAFE involved in the manufacture and marketing of farm implements. ______________________________________________________________24 . Processes. TAFE’s Power Source Division produces a range of automotive batteries for both 2wheeler and 4-wheeler applications for sale through AMCO Batteries Ltd. Partnership & resources.(Session: 2009-2011) Pradesh produces a range of transmission components both for captive use as well as for sale to OE manufacturers. As well as for sale directly through a dedicated distribution channel under the brand name of “Speed”. distribution of passenger cars. manufacture of hydraulic pumps and panel instruments to discerning customers both in India and overseas. The commendation to Tractors and Farm Equipment Limited (TAFE). TAFE’s Engineering Plastics Division produces a range of components for the consumer electronics. Customer results and Society results.

Environment and society: While serving our company. preparing and facing changes in a world where the only thing that is permanent. Our people matter. Business ethics: Our strong foundation has been ethical practices and open and transparent operations. with our business associates. Quality in products and services: An uncompromising focus on quality not just in products but in all that we do.(Session: 2009-2011) VISION – “To achieve the distinction of the First Choice among the farming community of India and a Growing Presence in International Markets through setting Leadership standards of Performance and Customer Care in the Agricultural Machinery Business. Proactive response to change: We create value by anticipating. we don't forget our commitment to serve our society for everything that it has given us. Trust & long term relationships with stake holders: We value relationships and we live it. Human resources: We are not just individuals doing our respective jobs. is change itself. ______________________________________________________________25 . We are partners in progress.” CORE VALUES Customer satisfaction: We may not be able to wipe the sweat from the customer's brow but we can certainly put a smile on their face.

K A L L A D I P A T T I Most modern Tractor assembly plant at Kalladipatti near Madurai set among verdant fields and orchards.(Session: 2009-2011) C H E N N A I TAFE’s first plant which now houses TAFE’s R & D and the total machining operations of key tractor components. D O D D A B A L P U R Tractors assembly plant at Doddaballapur near Bangalore. ______________________________________________________________26 .

A L W A R Alwar is in Rajasthan where the Eicher diesel engines are made for captive consumption at TAFE Motors and Tractors as well as for supply to other original equipment manufacturers agricultural.000 engines for P A R W A N O O Parwanoo is in Himachal Pradesh where transmission components. Capacity: 30. ______________________________________________________________27 . in industrial. cam shafts etc are made for captive consumption by TMTL. marine construction equipment and generator sets applications. industrial and Diesel Generator set applications.(Session: 2009-2011) M A N D I D E E P The Eicher Tractor plant at Mandidheep also houses Eicher R & D facilities apart from a new line to manufacture the Massey Ferguson range.

(Session: 2009-2011) FACT SHEET TAFE. TAFE USA imports tractors from TAFE in India. and manufacturers’ tractors and components for AGCO for exportation. TAFE has agreements with other companies to brand and market tractors under the TAFE name to the USA. Georgia. (formerly LG Tractors). TAFE purchased Eicher motors Tractors and Engines business. TAFE is one of the largest tractor manufacturers in India over 500 dealers and outlet in India alone. TAFE was established in 1961 to market and manufacturer tractors under the license of Massey Ferguson. In June 2004. is a unit of the Amalgamation Group. the owner of the Massey Ferguson brand. ______________________________________________________________28 . as well as tractors manufactured by LS Tractors in South Korea. which are branded as TAFE. along with the Eicher brand name for tractors. Tractors And Farm Equipment. TAFE is also active in exporting their own TAFE branded tractors. India based tractor manufacturer. This put them in the #2 position for market share of tractors in India. TAFE is 24% owned by the AGCO Corporation of Duluth. is a Chennai. TAFE manufactures Simpson engines from designs under license from the Perkins Company.

apart from its core business of manufacturing and marketing tractors. TAFE has also diversified into Engineering plastics and Production of tools and dies for this industry. TAFE has developed a range of matching trailers. TAFE has in-house facilities for the manufacture of Hydraulic pumps and Gears for tractors. TAFE through TAL is also involved in the marketing and distribution of lubricants and greases for tractors through its dealer network. ______________________________________________________________29 . TAFE is also involved in the packaged power industry through its Power Source Division.(Session: 2009-2011) BUSINESS AREA TAFE Limited is also involved in the following areas. implements and accessories These are marketed through TAFE’s dealer network by a totally owned subsidiary. TAFE access Limited (TAL). not only for captive use but also for the growing automobile industry in India is an integral part of the company. A related facility for the manufacture of panel instruments.

where the factory is located. branches. stands in perfect harmony with nature. TAFE has an ongoing Village Development Program which provides primary health services. also houses a serene bird sanctuary. The Simpson Industrial Estate. COMMUNITY SERVICE TAFE’s factory at Sembium. prosperity and profits. ______________________________________________________________30 . where TAFE’s Product Training Centre and “J” Farm are located . drinking water. At Paddur Village. Education and Vocational Training to the villagers from in and around Paddur.(Session: 2009-2011) MARKETING NETWORK TAFE has a network of more than 500 dealers. TAFE is committed to providing complete farming solutions to its customers and empowering them to work towards increase farm productivity. service outlets as well as its own sales officers and depots covering the entire width and breadth of India.

(Session: 2009-2011) OBJECTIVES OF THE STUDY ______________________________________________________________31 .

o To find out profitability position of the TAFE.(Session: 2009-2011) OBJECTIVES OF THE STUDY o To calculate financial ratio of TAFE. o To know the strength and weakness of the TAFE. ______________________________________________________________32 . o To analyze the liquidity position of the TAFE. o To study the financial performance of the TAFE.

(Session: 2009-2011) RESEARCH METHODOLOGY ______________________________________________________________33 .

(Session: 2009-2011) RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. Research methodology has many dimensions and research methods do constitute a part of the research methodology. So it is necessary for the researcher to design his methodology for his problem as the same may different from problem to problem. In research methodology one studies the various steps that are generally adopted by researcher in studying his research problem along with logic behind them. In research the scientist has to research decisions to evaluation before they are implemented. ______________________________________________________________34 . Researcher has to specify very clearly and precisely what decision he selects and why he selects them so that they cam be evaluated by others also. Questions which are usually answered when one talk of research methodology Concerning a research problems or study are: o Why the research study has been undertaken o How the research problem has been defined o In what way the hypothesis has been formulated o Why the hypothesis has been formulated o What data have been collected o What particular methods has been adopted and o What particular techniques of analyzing data have been used. It may be understood as a science of studying how research is done scientifically. It is necessary for the researcher to know not only the research methods but also methodology.

The firm foundation of the entire edifice of the research work. time and money. time and money. Research design in fact has a great bearing on the reliability of the results. Decisions regarding what when where. Research design is needed because it facilitates the smoothing sailing of the various research operations there by making research as efficient as possible yielding maximal information with minimal expenditure of effort. Research design stands for advance planning of the methods to be adopted for collecting the relevant data and the techniques to be used in there analysis keeping in view the objective of the research and the availability of staff. The design helps the researcher to organize his ideas in a form where by it will be possible for the researcher to look for flaws and inadequacies. by what means concerning an inquiry or research study constitute a research design. In fact the research design is the conceptual structure within which the research is conducted it constitute the blue print for the collection. Preparation of the research design should be done with great care as any error in it may upset the entire project. ______________________________________________________________35 . measurement and analysis of data. how much.(Session: 2009-2011) RESEARCH DESIGN A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure.

e. the data is collected. this conclusive descriptive statistical study is the best study for this purpose as it provides the necessary information which is utilized to arrive at a concrete decision ______________________________________________________________36 . The study is descriptive because it is in the descriptive study.(Session: 2009-2011) TYPES OF STUDY The study conducted is a conclusive descriptive statistical study. Conclusive because after concluding the study. that the data is collected for a definite purpose and here the purpose is definite i. Thus. The study is statistical because throughout the study all the similar samples are selected and grouped together (similarity of ages thus forming a group). The study is conclusive because after doing the study the researcher comes to a conclusion regarding the position of the brand in the minds of respondents of different age groups. to find out the effectiveness of the advertisement. the researcher comes to a decision which is precise and rational.

It is worth a while to mention that I have used the following types of published data:• • • • Balance Sheet Profit & Loss A/c Newspapers. Journals & Periodic Chairman’s Speech ______________________________________________________________37 .(Session: 2009-2011) TOOLS USED It is essential to use a systematic research methodology for the assessment of a project because without the use of a research methodology analysis of any company or organization will not be possible.

(Session: 2009-2011) LIMITATIONS OF THE STUDY o Due to lack of time and resources I was not able to cover all the aspects but I have tried to my best extent and covered each and every aspect related to the project. ______________________________________________________________38 . o Financial management of any public sector TAFE is very vast to analyze.

(Session: 2009-2011) FINANCIALS ______________________________________________________________39 .

92 248905 2005-06 33848 14526.31 2008-09 80134 31077. OF TRACTOR SOLD TURNOVER (In Mn.6 2009-10 78847 33973.3 ______________________________________________________________40 .70 2006-07 66667 25744. Rs.(Session: 2009-2011) (2004-05) .(2009-10) YEAR NO.) 2004-05 9889.

(Session: 2009-2011) DATA ANALYSIS & INTERPRETATION ______________________________________________________________41 .

The company must be able to meet its current obligations out of the current assets.20 5993. 2010 2009 2008 ______________________________________________________________42 .10 1.80 4501.04 Interpretation: Current ratio indicates the short term financial soundness of the company.60 5920.(Session: 2009-2011) CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES Particulars Current Assets Current Liabilities Ratio 2010 6444.1 1.08 2009 6257.06 1.06 2008 4949.20 1.80 1. It judges whether current assets are sufficient to meet the current liabilities.10 1.08 1. Current ratio is increasing which is showing a sound financial position of the company.

5 10 9.(Session: 2009-2011) INVENTORY TURNOVER RATIO = SALES/INVENTORY Particular Sales Inventory Ratio 2010 22188. Usually.30 10.55 2009 19686. a high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold. The inventory turnover ratio is decreasing which is not a good sign for the company.5 11 10.30 2103.23 12 11.10 11.80 1612.5 2010 2009 2008 Interpretation: Inventory turnover ratio measures the velocity of conversion of stock into sales.40 1689. the lesser amount of money is required to finance the inventory. WORKING CAPITAL TURNOVER RATIO ______________________________________________________________43 .80 10.65 2008 16493.

20 2009 19686.(Session: 2009-2011) = SALES / WORKING CAPITAL Particular Sales Working Capital Ratio 2010 22188.00 36.40 337. 2009 2008 FIXED ASSET TURNOVER RATIO = SALE / FIXED ASSETS ______________________________________________________________44 .50 58.82 60 50 40 30 20 10 0 2010 Interpretation: Working capital turnover ratio is decreasing which shows that company’s liquidity position is not strong.33 2008 16493.30 451.80 448.00 49.

2009 2008 NET PROFIT RATIO = NET PROFIT / SALES Particular Net Profit 2010 640.6 3. The effective utilization of fixed assets will result in increased production and reduced cost.2 3 2010 Interpretation: Fixed assets are used in the business for producing goods to be sold.30 4 3.4 3.60 2009 609.90 3.70 2010 453.30 5815.(Session: 2009-2011) Particular Sales Fixed Assets ratio 2010 22188.80 5003.20 3.82 2009 19686.40 5314. Fixed assets turnover ratio is increasing which shows that fixed assets are efficiently utilized.50 3.10 ______________________________________________________________45 .70 2008 16493.8 3.

30 0. 2009 2008 ______________________________________________________________46 .03 16493.80 0.(Session: 2009-2011) Sales Ratio 22188.025 0.03 19686.03 0.03 0.005 0 2010 Interpretation: Net Profit Margin of the company is constant for three consecutive years which is good sign for the company.01 0.40 0.015 0.02 0.

(Session: 2009-2011) OBSERVATIONS AND FINDINGS OBSERVATIONS AND FINDINGS • Current ratio indicates the short term financial soundness of the company. The company must be able to meet its current obligations ______________________________________________________________47 . It judges whether current assets are sufficient to the current liabilities.

• Inventory turnover ratio measures the velocity of conversion of stock into sales. ______________________________________________________________48 . Usually. a high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold. The effective utilization of fixed assets will result in increased production and reduced cost. • • Working capital turnover ratio is decreasing which shows that company’s liquidity position is not strong. Current Ratio is increasing which is showing a sound financial position of the company. Fixed assets are used in the business for producing goods to be sold. the lesser amount money is decreasing which is not a good sign for the company. Fixed Assets Turnover Ratio is increasing which shows that fixed assets are efficiently utilized.(Session: 2009-2011) out of the current assets. • Net profit margin of the company is constant for three consecutive year which is good sign for the company.

______________________________________________________________49 .(Session: 2009-2011) CONCLUTION & SUGGETIONS CONCLUSION Some of the major conclusions drawn are as follows: • Current Ratio is increasing which is showing a sound financial position of the company.

Fixed Assets are efficiently utilized.(Session: 2009-2011) • • • • Inventory Turnover Ratio is decreasing which is not a good sign for the company. SUGGETIONS • • • TAFE should try to increase its proportions of fixed assets to net worth. TAFE should utilize its stock more efficiently. Liquidity position is not strong. Net Profit Margin of the company is constant for three consecutive years which is good sign for the company. it should be reduced. ______________________________________________________________50 . The proportion of current assets is more.

TAFE must try and maintain a good fixed assets base. It should also pay attention in increasing its net worth in comparisons to sales. ______________________________________________________________51 . TAFE should increase its net profit margin.(Session: 2009-2011) • • • • • • TAFE should pay attention proper and efficient utilization of working capital. TAFE must increase its return. so that the margin of profit can be increased. TAFE should try to reduce their expenses particularly non operating expenses. so that it can survive in adverse conditions also.

(Session: 2009-2011) BIBBLIOGRAPHY BIBBLIOGRAPHY ______________________________________________________________52 .

Vishwa prakashan.. “Management of working capital”.. “Management accounting and financial control”. Sahitya Bhawan Publication. New Century Publications. Maheshwari S.K. Gupta S. First Edition. (2003). 1997. WEBSITES: 1. “Financial Management”. “Management accounting principles and practice”. Second Edition. TMH. 2002 Khan & Jain. K. New Delhi. Annual Publications.. & Gupta Shashi k.. “Financial Management” 7th Edition.P. Vikas Publishing House. 3rd Edition.M. New Delhi. New Delhi. Gupta Sunita. “Research methodology-methods & techniques”. 1999. Kalyani Publisher’s. 4th Edition.(Session: 2009-2011) BOOKS: • • • • • • • • • Sharma R. “Financial management and policy”. Eighth edition. First Edition.com ______________________________________________________________53 .N.tafe. sons. www.. Pandey I. New Delhi.R. New Delhi (1990). New Delhi (2002). “Management Accounting”. Thirteenth Edition. New Delhi Chandra Prasanna. “Financial Management”. Bhalla V. Sultan chand & Kothari C. MH.

(Session: 2009-2011) ANNEXURE BALANCE SHEET ______________________________________________________________54 .

70 468.80 170.80 2437.2008 280.20 451.50 19873.10 1256.80 2207. Expenses (E) Total Assets (A+B+C+D+E) 5815.30 1689.70 2952.00 261.90 6561.30 886.10 12391.80 138.2009 March.70 3049.2010 22188.50 6.10 ______________________________________________________________55 .2009 19686.20 225.70 3143.80 2197.20 2765.20 72.40 609.80 477.90 6182.80 744.80 448.80 165.30 856.10 4501.50 -194.90 4302.00 2721.60 280.30 6087.80 3487.40 4583.30 16664.70 March.30 5993.10 1893.40 1151.60 4666.10 337. Loans & Advs.60 640.40 430.30 180.10 16299.00 1900.50 280.50 5920.50 5314.80 742.60 PROFIT & LOSS Particulars Sales Other Income Total Income Raw Material Cost Excise Other Expenses Operating Profit Interest Gross Profit Depreciation Profit Benefit Tax Tax Net Profit March.00 1612.30 545. & Provs.70 866.70 1209.60 1253.30 1176.50 4949.50 193.70 1014.50 2377.2008 16493. Current Liabilities Provisions (ii) Net Current Assets (i-ii) (D) Misc.00 2695.00 20.30 1118.00 2937.30 1432.60 Assets Fixed Assets Gross Block (-) Depreciation Net Block (A) Capital Work in Progress (B) Investments (C) Current Assets.2010 March.80 1413.40 6444.60 5003.70 1122.20 489.80 4133.50 2689.10 577.20 4450.20 258.60 1444.20 3182.40 187.00 6561.10 876.60 453.70 2103. Inventories Sundry Debtors Cash & Bank Loan & Advances (i) Current Liab.10 177.00 0.80 22369.90 2051.90 1696.50 85.30 2867.90 14511.90 1300.50 1223.90 3852.10 6087.60 March.10 276.50 405.90 4169.40 6257.20 4296.(Session: 2009-2011) Liabilities Share Capital Reserve & Surplus Net Worth(1) Secured Loans(2) Unsecured Loans(3) Total Liabilities (1+2+3) March.

10 630.70 2168.50 2.80 112.90 612.Recurring Income Reported Profit Equity Dividend -10.(Session: 2009-2011) Other Non.70 1715.40 ______________________________________________________________56 .50 140.60 814.