(Session: 2009-2011

)

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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(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. 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. 6. If the gross profit of two firm is 25%. Strikes. Misleading results in the absence of absolute data: In the absence of actual data the size of the business cannot be known. so a particular ratio cannot be supported to be standard for everyone. Profitability of the two firms is the same but the business is quite different. Every firm has to work in different situation and circumstances. ______________________________________________________________6 . so it cannot be matched with the circumstances in normal days. 7. wars etc materially affect the performance. lockouts.

the reliability of the financial statements should be confirmed. 2. 3. If possible. 4. 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. 1. As such. If the statements are reliable. This may be done by using the technique of current purchasing power or current cost accounting. Computation of the ratios on the basis of irrelevant figures may even lead to wrong conclusions. Ratios are computed on the basis of financial statements. There should not be any holding back of any information or data by the constituent units. the impact of inflationary conditions are changing price level should be taken into account before computing the ratios. age. Ratios should be computed on the basis of inter-related figures which have a cause and effect relationship. nature of business. 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. etc. Incase of inter-firm comparison of ratios.(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. then only the ratios computed there from will be meaningful. before using the ratio analysis. The constituent unit must be following similar accounting policies more particularly in the areas of charging the depreciation and stock valuation. degree of automation. ______________________________________________________________7 . • • • The constituent units should be comparable in terms of size. following propositions should be kept in mind.

Activity Ratios: These ratios measure how well the various assets are managed. The trend of these ratios tells the story of what has been happening in the firm in recent years. 4. while analyzing the financial statement through ratio analysis: 1. 2. turnover and financial capability. Arrangement of data. Calculation of ratios and their interpretation. 3. 3. Some of the possible classification is mentioned below. each case may involve different procedure. 2. ______________________________________________________________8 . 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. Profitability Ratios: These ratios reflect the profitability of the firm. 5.(Session: 2009-2011) PROCEDURE (STAGES) FOR RATIO ANALYSIS The following procedure is generally followed. 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. Financial ratios are generally classified into five categories. Analysis of financial statement is made with a view to ascertain the efficiency in financial soundness of the company. It may also depend upon the availability of data. Several significant structure ratios may be classified from various standpoints. Classification of ratios. 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 Classifications of ratios depend upon the objectives for which they are calculated. as such ratios can be classified on the basis of profitability. They are as follows: 1. Liquidity Ratio: These ratios reflect the firm’s ability to meet scheduled short time obligations. Leverage Ratios: These ratios show how much of the debt has been used to finance the various investments in different assets. No definite procedure or step may be designed for arranging data.

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

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

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

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

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

The returns generated must sufficiently cover the cost of fund employed. high turnover ratios are usually are associated with good asset management and low turnover ratios with poor asset management ratio. hence the efficiency of the companies operations and whether capital is locked up unnecessarily in large stocks. ______________________________________________________________14 . 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. 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. A variation is to show the average turnover period. The inventory turnover is the ratio of the cost of goods sold to average inventory. These ratios are called turnover ratios because they show how rapidly the assets are being converted or rather turned over into sales. In terms of days. Inventory turnover ratio: This ratio indicates how well a firm has used inventory to generate the goods and services that are sold. This may provide a vital warning signal. Generally speaking. Inventory Turnover Ratio = Cost of goods sold Average inventory This measures the speed with which the stock is turned over. It helps to know whether the capital has been effectively and gainfully used.(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. Test of efficiency (Activity Ratio): Activity ratio attempt to measure how Efficiently the firm is managing its assets. ACTIVITY/TURNOVER RATIO 1.

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

Capital Turnover Ratio: It is the ratio of turnover to capital. ______________________________________________________________16 . It indicates how productive the assets have been used. 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. both current and fixed. it indicates the effective use of capital. However. It may also mean that the firm is taking advantage of longer credit from its creditors. all the problems associated with the inventory turnover. 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. In other words. It indicates the frequency with which sales are generated in relation to capital. 4. It explains how many times turnover is multiple to capital. since total assets turnover is a composite of all the firms tangible assets.(Session: 2009-2011) Unsuccessful assets management. debtors turnover ratio and fixed assets turnover ratios are inherent in the total assets turnover ratio. which may mean increase in working capital requirements and lower profits. 5. Creditors Turnover Ratio: This ratio indicates the credit period enjoyed from the creditors. It is calculated as follows : Capital Turnover Ratio = Sales Turnover Capital Capital is normally taken as the shareholders funds.

In other words. it reflects the firms financial risk posture. There can be many version of the debt-equity ratio. whereas a low ratio means the firm has paid for its assets mainly through equity funds. A high ratio means that the firm has liberally used debt (i. Debt Liquidity Ratio: This ratio represents the proportion of external equity to internal equity in the capital structure of the company. It indicates the proportion of the outsider’s money in comparison with the owner’s stake. what percent of the firm’s capital is in equity and what percent is in debt. It reflects the capital structure of the firm. Too low ratio suggests that ______________________________________________________________17 . borrowings) to finance its assets. 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. The leverage ratios reflect the financial risk posture of the firm. Total debt means both long term and short term debts. 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. Too high ratio indicates excessive use of external funds and therefore exposure to risk. The use of debt financing increases the risk of the firm. Generally. the higher would the firms leverage ratios and more risk present in the firm.(Session: 2009-2011) Test of Solvency (Leverages Ratio): Leverages ratio indicates the extent to which the firm has financed its assets by borrowing.e. Some of the leverage ratios are explained below: LEVERAGES RATIO 1. The more extensive the use of debt. This ratio indicates the capacity of the concerned to raise loans. this is taken to be the ratio of the long-term debt to equity.

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

It indicates to what extent the total tangible assets have been financed from shareholders funds.(Session: 2009-2011) 4. ______________________________________________________________19 . A high proprietary ratio is indicative of good borrowing capacity. Proprietary Ratio: It is the ratio of the shareholders funds to total tangible assets. 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.

on the other hand is the value of equity as perceived by investors. with the opposite being true for companies with limited growth opportunities. ______________________________________________________________20 . Companies with ample opportunities for growth generally have high price/earnings ratios.(Session: 2009-2011) TEST FOR INVESTORS MARKET: MARKET VALUE RATIO 1. 2. The market value. 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. Earnings per share : The shareholders invest their money with the expectation of getting dividends and capital appreciation on the shares. 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. 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 competition of earning per share is made by dividing net income remaining for ordinary shareholders by the number of ordinary shares issued. investors are always interested in knowing the earnings per share. Since the earnings form the basis for dividend payment as well as basis for any future increase in the market price of shares. Price Earning Ratio: This ratio highlights the relationship between the market price of a share and the current earnings per share.

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

(Session: 2009-2011) COMPANY PROFILE ______________________________________________________________22 .

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

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

Environment and society: While serving our company. Quality in products and services: An uncompromising focus on quality not just in products but in all that we do. Proactive response to change: We create value by anticipating. Our people matter. ______________________________________________________________25 .” 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. we don't forget our commitment to serve our society for everything that it has given us. preparing and facing changes in a world where the only thing that is permanent. with our business associates. Human resources: We are not just individuals doing our respective jobs. Trust & long term relationships with stake holders: We value relationships and we live it. We are partners in progress. Business ethics: Our strong foundation has been ethical practices and open and transparent operations. is change itself.(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.

______________________________________________________________26 . 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.

marine construction equipment and generator sets applications.000 engines for P A R W A N O O Parwanoo is in Himachal Pradesh where transmission components. cam shafts etc are made for captive consumption by TMTL. 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. ______________________________________________________________27 . in industrial. Capacity: 30.(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. industrial and Diesel Generator set applications.

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

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

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

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

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

(Session: 2009-2011) RESEARCH METHODOLOGY ______________________________________________________________33 .

It is necessary for the researcher to know not only the research methods but also methodology. So it is necessary for the researcher to design his methodology for his problem as the same may different from problem to problem. It may be understood as a science of studying how research is done scientifically. 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. Research methodology has many dimensions and research methods do constitute a part of the research methodology. In research the scientist has to research decisions to evaluation before they are implemented. ______________________________________________________________34 .(Session: 2009-2011) RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. 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. In research methodology one studies the various steps that are generally adopted by researcher in studying his research problem along with logic behind them.

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. 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. time and money. Decisions regarding what when where. how much. Research design in fact has a great bearing on the reliability of the results. by what means concerning an inquiry or research study constitute a research design. Preparation of the research design should be done with great care as any error in it may upset the entire project.(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. time and money. ______________________________________________________________35 . In fact the research design is the conceptual structure within which the research is conducted it constitute the blue print for the collection. 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. The firm foundation of the entire edifice of the research work. measurement and analysis of data.

the researcher comes to a decision which is precise and rational. that the data is collected for a definite purpose and here the purpose is definite i. 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.e. 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 statistical because throughout the study all the similar samples are selected and grouped together (similarity of ages thus forming a group). the data is collected. 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. Thus. Conclusive because after concluding the study. to find out the effectiveness of the advertisement.

(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. Journals & Periodic Chairman’s Speech ______________________________________________________________37 . It is worth a while to mention that I have used the following types of published data:• • • • Balance Sheet Profit & Loss A/c Newspapers.

o Financial management of any public sector TAFE is very vast to analyze. ______________________________________________________________38 .(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.

(Session: 2009-2011) FINANCIALS ______________________________________________________________39 .

3 ______________________________________________________________40 .(2009-10) YEAR NO. OF TRACTOR SOLD TURNOVER (In Mn.6 2009-10 78847 33973.) 2004-05 9889.70 2006-07 66667 25744.31 2008-09 80134 31077.92 248905 2005-06 33848 14526.(Session: 2009-2011) (2004-05) . Rs.

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

The company must be able to meet its current obligations out of the current assets.1 1.08 1.04 Interpretation: Current ratio indicates the short term financial soundness of the company.20 1.80 4501.10 1.80 1.06 2008 4949.20 5993.60 5920. 2010 2009 2008 ______________________________________________________________42 .06 1.(Session: 2009-2011) CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES Particulars Current Assets Current Liabilities Ratio 2010 6444.10 1.08 2009 6257. It judges whether current assets are sufficient to meet the current liabilities. Current ratio is increasing which is showing a sound financial position of the company.

23 12 11.10 11.5 10 9.80 1612.30 10. a high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold. WORKING CAPITAL TURNOVER RATIO ______________________________________________________________43 .5 2010 2009 2008 Interpretation: Inventory turnover ratio measures the velocity of conversion of stock into sales.(Session: 2009-2011) INVENTORY TURNOVER RATIO = SALES/INVENTORY Particular Sales Inventory Ratio 2010 22188.40 1689.5 11 10.65 2008 16493. The inventory turnover ratio is decreasing which is not a good sign for the company.30 2103. Usually.55 2009 19686. the lesser amount of money is required to finance the inventory.80 10.

2009 2008 FIXED ASSET TURNOVER RATIO = SALE / FIXED ASSETS ______________________________________________________________44 .20 2009 19686.(Session: 2009-2011) = SALES / WORKING CAPITAL Particular Sales Working Capital Ratio 2010 22188.80 448.00 36.82 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.30 451.40 337.33 2008 16493.50 58.00 49.

80 5003.10 ______________________________________________________________45 .60 2009 609. The effective utilization of fixed assets will result in increased production and reduced cost.6 3.20 3.4 3.50 3.90 3.30 5815. 2009 2008 NET PROFIT RATIO = NET PROFIT / SALES Particular Net Profit 2010 640.8 3.30 4 3.(Session: 2009-2011) Particular Sales Fixed Assets ratio 2010 22188.82 2009 19686. Fixed assets turnover ratio is increasing which shows that fixed assets are efficiently utilized.70 2008 16493.70 2010 453.2 3 2010 Interpretation: Fixed assets are used in the business for producing goods to be sold.40 5314.

03 0. 2009 2008 ______________________________________________________________46 .015 0.03 19686.(Session: 2009-2011) Sales Ratio 22188.025 0.80 0.03 16493.03 0.40 0.01 0.30 0.005 0 2010 Interpretation: Net Profit Margin of the company is constant for three consecutive years which is good sign for the company.02 0.

It judges whether current assets are sufficient to the current liabilities.(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 .

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

The proportion of current assets is more. it should be reduced. SUGGETIONS • • • TAFE should try to increase its proportions of fixed assets to net worth. TAFE should utilize its stock more efficiently.(Session: 2009-2011) • • • • Inventory Turnover Ratio is decreasing which is not a good sign for the company. Fixed Assets are efficiently utilized. ______________________________________________________________50 . 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 also pay attention in increasing its net worth in comparisons to sales. TAFE should try to reduce their expenses particularly non operating expenses.(Session: 2009-2011) • • • • • • TAFE should pay attention proper and efficient utilization of working capital. so that the margin of profit can be increased. TAFE must try and maintain a good fixed assets base. so that it can survive in adverse conditions also. ______________________________________________________________51 . TAFE should increase its net profit margin. TAFE must increase its return.

(Session: 2009-2011) BIBBLIOGRAPHY BIBBLIOGRAPHY ______________________________________________________________52 .

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

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

50 5314. Expenses (E) Total Assets (A+B+C+D+E) 5815.10 12391.20 258.60 Assets Fixed Assets Gross Block (-) Depreciation Net Block (A) Capital Work in Progress (B) Investments (C) Current Assets.30 856.80 2437.30 2867.80 165.10 177.60 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.70 March.80 2207.50 193.10 1893.70 1014.10 16299.30 1432.70 3049.00 261.20 489.40 6444.40 1151.80 744.80 138.10 577.30 180.50 85.90 6182.10 ______________________________________________________________55 .2008 280.70 1209.90 3852.10 1256.10 276.10 337.00 1900.80 4133.90 14511.00 2695.80 448.00 2937.30 5993.90 6561.80 170.00 1612.60 1444.20 4296. Inventories Sundry Debtors Cash & Bank Loan & Advances (i) Current Liab.80 3487.40 187.80 742.20 4450.20 225.60 March.20 3182.60 280.50 6.2010 22188.50 5920.90 2051.10 876.60 1253.60 453.90 1300.70 3143.50 1223.60 5003.50 2689.80 22369.40 609.30 1689.50 4949.30 1118.00 0.40 430.70 1122. Current Liabilities Provisions (ii) Net Current Assets (i-ii) (D) Misc.50 405.80 477.50 2377.00 2721.2009 March.50 19873.70 2103.60 640.2009 19686.30 1176.10 4501.90 1696.2010 March.60 4666.50 280.30 6087.80 2197.80 1413.40 6257.20 2765. & Provs.70 2952.50 -194.70 468.70 866. Loans & Advs.00 6561.30 16664.20 72.00 20.(Session: 2009-2011) Liabilities Share Capital Reserve & Surplus Net Worth(1) Secured Loans(2) Unsecured Loans(3) Total Liabilities (1+2+3) March.90 4169.40 4583.30 545.10 6087.20 451.2008 16493.90 4302.30 886.

50 140.80 112.10 630.70 1715.40 ______________________________________________________________56 .Recurring Income Reported Profit Equity Dividend -10.70 2168.90 612.60 814.(Session: 2009-2011) Other Non.50 2.

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