INTRODUCTION

A ratio analysis is a quantitative analysis of information contained in a company’s financial

statements. Ratio analysis is based on line items in financial statements like the balance sheet, income
statement and cash flow statement; the ratios of one item – or a combination of items - to another item
or combination are then calculated. Ratio analysis is used to evaluate various aspects of a company’s
operating and financial performance such as its efficiency, liquidity, profitability and solvency. The
trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios
are also compared across different companies in the same sector to see how they stack up, and to get
an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis is good to
all company to check the liquidity in the market or firm to increase it in high level.

Ratio analysis involves the calculation and interpretation of key financial performance indicators to
provide useful insights.

Financial information is always prepared to satisfy in some way the needs of various interested parties
(the "users of accounts"). Stakeholders in the business (whether they are internal or external to the
business) seek information to find out three fundamental questions:

(1) How is the business trading?

(2) How strong is the financial position?

(3) What are the future prospects for the business?

For outsiders, published financial accounts are an important source of information to enable them to
answer the above questions.

To some degree or other, all interested parties will want to ask questions about financial information
which is likely to fall into one or other of the following categories, and be about

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Profitability

Is the business making a profit?

How efficient is the business at turning revenues into profit?

Is it enough to finance reinvestment?

Is it growing?

Is it sustainable (high quality)?

How does it compare with the rest of the industry?

Financial efficiency

Is the business making best use of its resources?

Is it generating adequate returns from its investments?

Is it managing its working capital properly?

Liquidity and gearing

Is the business able to meet its short-term debts as they fall due?

Is the business generating enough cash?

Does the business need to raise further finance?

How risky is the finance structure of the business?

Shareholder returns

What returns are owners gaining from their investment in the business?

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 How does this compare with similar, alternative investments in other businesses?

Advantages and Disadvantages of Ratio Analysis

Advantages:

 Ratios help compare current performance with previous records.

 Ratios help compare a firm’s performance with similar competitors.
 Ratios help monitor and identify issues that can be highlighted and resolved.
Disadvantages:

 Ratio analysis information is historic – it is not current.

 Ratio analysis does not take into account external factors such as a worldwide recession.
 Ratio analysis does not measure the human element of a firm.

In mathematics, a ratio is a relationship between two numbers indicating how many times the first
number contains the second. For example, if a bowl of fruit contains eight oranges and six lemons,
then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ratio 4:3).
Thus, a ratio can be a fraction as opposed to a whole number. Also, in this example the ratio of
lemons to oranges is 6:8 (or 3:4), and the ratio of oranges to the total amount of fruit is 8:14 (or 4:7).

The numbers compared in a ratio can be any quantities of a comparable kind, such as objects, persons,
lengths, or spoonfuls. A ratio is written "a to b" or a:b, or sometimes expressed arithmetically as
a quotient of the two. When the two quantities have the same units, as is often the case, their ratio is
a dimensionless number. A rate is a quotient of variables having different units. But in many
applications, the word ratio is often used instead for this more general notion as well

The ratio of numbers A and B can be expressed as:

 the ratio of A to B
 A is to B (followed by "as C is to D")
 A:B
 A fraction that is the quotient: A divided by B: , which can be expressed as either a simple or a
decimal fraction.
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The numbers A and B are sometimes called terms with A being the antecedent and B being
the consequent.

The proportion expressing the equality of the ratios A:B and C:D is written A:B = C:D or A:B::C:D.
This latter form, when spoken or written in the English language, is often expressed as

A is to B as C is to D.

A, B, C and D are called the terms of the proportion. A and D are called the extremes,
and B and C are called the means. The equality of three or more proportions is called a continued
proportion.

Ratios are sometimes used with three or more terms. The ratio of the dimensions of a "two by
four" that is ten inches long is 2:4:10. A good concrete mix is sometimes quoted as 1:2:4 for the
ratio of cement to sand to gravel.

For a mixture of 4/1 cement to water, it could be said that the ratio of cement to water is 4:1, that
there is 4 times as much cement as water, or that there is a quarter (1/4) as much water as cement.

It is impossible to trace the origin of the concept of ratio because the ideas from which it developed
would have been familiar to preliterate cultures. For example, the idea of one village being twice as
large as another is so basic that it would have been understood in prehistoric society. However, it is
possible to trace the origin of the word "ratio" to the Ancient Greek (logos). Early translators
rendered this into Latin as ratio ("reason"; as in the word "rational"). (A rational number may be
expressed as the quotient of two integers.) A more modern interpretation of Euclid's meaning is more
akin to computation or reckoning. Medieval writers used the word ("proportion") to indicate ratio
and proportionalitas ("proportionality") for the equality of ratios.

Euclid collected the results appearing in the Elements from earlier sources.
The Pythagoreans developed a theory of ratio and proportion as applied to numbers. The
Pythagoreans' conception of number included only what would today be called rational numbers,
casting doubt on the validity of the theory in geometry where, as the Pythagoreans also discovered,
incommensurable ratios (corresponding to irrational numbers) exist. The discovery of a theory of
ratios that does not assume commensurability is probably due to Eudoxus of Cnidus. The exposition

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of the theory of proportions that appears in Book VII of The Elements reflects the earlier theory of
ratios of commensurables.

The existence of multiple theories seems unnecessarily complex to modern sensibility since ratios are,
to a large extent, identified with quotients. This is a comparatively recent development however, as
can be seen from the fact that modern geometry textbooks still use distinct terminology and notation
for ratios and quotients. The reasons for this are twofold. First, there was the previously mentioned
reluctance to accept irrational numbers as true numbers. Second, the lack of a widely used symbolism
to replace the already established terminology of ratios delayed the full acceptance of fractions as
alternative until the 16th century.

Euclid's definitions

Book V of Euclid's Elements has 18 definitions, all of which relate to ratios. In addition, Euclid uses
ideas that were in such common usage that he did not include definitions for them. The first two
definitions say that a part of a quantity is another quantity that "measures" it and conversely,
a multiple of a quantity is another quantity that it measures. In modern terminology, this means that a
multiple of a quantity is that quantity multiplied by an integer greater than one—and a part of a
quantity (meaning aliquot part) is a part that, when multiplied by an integer greater than one, gives the
quantity.

Euclid does not define the term "measure" as used here, However, one may infer that if a quantity is
taken as a unit of measurement, and a second quantity is given as an integral number of these units,
then the first quantity measures the second. Note that these definitions are repeated, nearly word for
word, as definitions 3 and 5 in book VII.

Definition 3 describes what a ratio is in a general way. It is not rigorous in a mathematical sense and
some have ascribed it to Euclid's editors rather than Euclid himself. Euclid defines a ratio as between
two quantities of the same type, so by this definition the ratios of two lengths or of two areas are
defined, but not the ratio of a length and an area. Definition 4 makes this more rigorous. It states that a
ratio of two quantities exists when there is a multiple of each that exceeds the other. In modern

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notation, a ratio exists between quantities p and q if there exist integers m and n so
that mp>q and nq>p. This condition is known as the Archimedes property.

Definition 5 is the most complex and difficult. It defines what it means for two ratios to be equal.
Today, this can be done by simply stating that ratios are equal when the quotients of the terms are
equal, but Euclid did not accept the existence of the quotients of incommensurate, so such a definition
would have been meaningless to him. Thus, a more subtle definition is needed where quantities
involved are not measured directly to one another. Though it may not be possible to assign a rational
value to a ratio, it is possible to compare a ratio with a rational number. Specifically, given two
quantities, p and q, and a rational number m/n we can say that the ratio of p to q is less than, equal to,
or greater than m/n when np is less than, equal to, or greater than mq respectively. Euclid's definition
of equality can be stated as that two ratios are equal when they behave identically with respect to
being less than, equal to, or greater than any rational number. In modern notation this says that given
quantities p, q, r and s,then p:q::r:s if for any positive way to incrase a any type of ratio
integers m and n, np<mq, np=mq, np>mq according as nr<ms, nr=ms, nr>ms respectively. There is a
remarkable similarity between this definition and the theory of Dedekind cuts used in the modern
definition of irrational numbers.

Definition 6 says that quantities that have the same ratio are proportional or in proportion. Euclid uses
the Greek (analogon), this has the same root as and is related to the English word "analog".

Definition 7 defines what it means for one ratio to be less than or greater than another and is based on
the ideas present in definition 5. In modern notation it says that given quantities p, q, r and s,
then p:q>r:s if there are positive integers m and n so that np>mq and nr≤ms.

As with definition 3, definition 8 is regarded by some as being a later insertion by Euclid's editors. It
defines three terms p, q and r to be in proportion when p:q::q:r. This is extended to 4
terms p, q, r and s as p:q::q:r::r:s, and so on. Sequences that have the property that the ratios of

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consecutive terms are equal are called geometric progressions. Definitions 9 and 10 apply this, saying
that if p, q and r are in proportion then p:r is the duplicate ratio of p:q and if p, q, r and s are in
proportion then p:s is the triplicate ratio of p:q. If p, q and r are in proportion then q is called a mean
proportional to (or the geometric mean of) p and r. Similarly, if p, q, r and s are in proportion
then q and r are called two mean proportionals to p and s.

In general, a comparison of the quantities of a two-entity ratio can be expressed as a fraction derived
from the ratio. For example, in a ratio of 2:3, the amount, size, volume, or quantity of the first entity
is that of the second entity.

If there are 2 oranges and 3 apples, the ratio of oranges to apples is 2:3, and the ratio of oranges to the
total number of pieces of fruit is 2:5. These ratios can also be expressed in fraction form: there are 2/3
as many oranges as apples, and 2/5 of the pieces of fruit are oranges. If orange juice concentrate is to
be diluted with water in the ratio 1:4, then one part of concentrate is mixed with four parts of water,
giving five parts total; the amount of orange juice concentrate is 1/4 the amount of water, while the
amount of orange juice concentrate is 1/5 of the total liquid. In both ratios and fractions, it is
important to be clear what is being compared to what, and beginners often make mistakes for this
reason.

Fractions can also be inferred from ratios with more than two entities; however, a ratio with more than
two entities cannot be completely converted into a single fraction, because a fraction can only
compare two quantities. A separate fraction can be used to compare the quantities of any two of the
entities covered by the ratio: for example, from a ratio of 2:3:7 we can infer that the quantity of the
second entity is that of the third entity.

If we multiply all quantities involved in a ratio by the same number, the ratio remains valid. For
example, a ratio of 3:2 is the same as 12:8. It is usual either to reduce terms to the lowest common
denominator, or to express them in parts per hundred (percent).

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If a mixture contains substances A, B, C and D in the ratio 5:9:4:2 then there are 5 parts of A for
every 9 parts of B, 4 parts of C and 2 parts of D. As 5+9+4+2=20, the total mixture contains 5/20 of A
(5 parts out of 20), 9/20 of B, 4/20 of C, and 2/20 of D. If we divide all numbers by the total and
multiply by 100%, we have converted to percentages: 25% A, 45% B, 20% C, and 10% D (equivalent
to writing the ratio as 25:45:20:10).

If the two or more ratio quantities encompass all of the quantities in a particular situation, it is said
that "the whole" contains the sum of the parts: for example, a fruit basket containing two apples and
three oranges and no other fruit is made up of two parts apples and three parts oranges. In this case, ,
or 40% of the whole is apples and , or 60% of the whole is oranges. This comparison of a specific
quantity to "the whole" is called a proportion.

If the ratio consists of only two values, it can be represented as a fraction, in particular as a decimal
fraction. For example, older televisions have a 4:3 aspect ratio, which means that the width is 4/3 of
the height (this can also be expressed as 1.33:1 or just 1.33 rounded to two decimal places). Modern
widescreen TVs have a 16:9 aspect ratio, or 1.78 rounded to two decimal places. One of the popular
widescreen movie formats is 2.35:1 or simply 2.35. Representing ratios as decimal fractions simplifies
their comparison. When comparing 1.33, 1.78 and 2.35, it is obvious which format offers wider
image. Such a comparison works only when values being compared are consistent, like always
expressing width in relation to height.

Some ratios are between incommensurable quantities (quantities whose ratio is an irrational number).
The earliest discovered example, found by the Pythagoreans, is the ratio of the diagonal to the side of
a square, which is the square root of 2.

The ratio of a circle's circumference to its diameter is called pi, and is not only irrational but
also transcendental.
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Another well-known example is the golden ratio, which is defined as both sides of the equality a:b =
(a+b):a. Writing this in fractional terms as and finding the positive solution gives the golden
ratio which is irrational. Thus at least one of a and b has to be irrational for them to be in the golden
ratio. An example of an occurrence of the golden ratio is as the limiting value of the ratio of two
successive Fibonacci numbers: even though the n-th such ratio is the ratio of two integers and hence is
rational, the limit of the sequence of these ratios as n goes to infinity is the irrational golden ratio.

Similarly, the silver ratio is defined as both sides of the equality a:b = (2a+b):a. Again writing it in
fractional terms and obtaining the positive solution, we obtain which is irrational, so of two
quantities a and b in the silver ratio at least one of them must be irrational.

Profitability ratios attempt to work out how profitable a company is. With all of these ratios, the
higher the value, the better the business is performing.

Gross Profit Margin

The calculation for this ratio is:

The gross profit margin shows how much profit the business earns above the cost of making the
product. An increase from a previous year means that either revenue has increased faster than costs, or
that the cost of goods sold has decreased, possibly as a result of changing suppliers or through cost
negotiations.

Net Profit Margin

The calculation for this ratio is:

The net profit margin shows how much profit is left after all of the business's costs have been paid.
The ratio of Net Profit to Sales is lower than Gross Profit, as all expenses have been deducted from
gross profit. Basically it shows how much of the money spent by customers is turned into profit.

Liquidity ratios attempt to work out a firm's ability to pay its debts.

Current (working capital) ratio

The calculation for this ratio is:

For example, if a business had $100000 of current assets and $50000 of current liabilities, the
calculation would be:
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 The current ratio shows what proportion of the business's current liabilities will be met by its
current assets. Basically, it shows whether the firm has enough money to pay its current debts.
In the above example, the current ratio is 2 : 1, which means that for every dollar they owe,
they have two dollars. Ideally the ratio should be around 1.5 : 1, as it means the business can
easily pay off its debts. If the ratio is lower than 1 : 1 the business owes more money that it
has. This might not be a problem if more money will be coming in soon. However the more
below 1 the figure is, the greater the difficulty the firm has in paying its debts. If the ratio is
above 2 : 1 the business probably has too much money, and it should invest more back into
the business.

Acid test (liquid capital) ratio

The calculation for this ratio is:

This ratio is similar to the current ratio. Stock takes the longest time to be turned into cash (it
is the most illiquid), so if a business can pay its debts whilst ignoring stock, it is in a better
position. For this reason, a good ratio is considered to be about 1 : 1.

While there are numerous financial ratios, most investors are familiar with a few key ratios,
particularly the ones that are relatively easy to calculate. Some of these ratios include the current
ratio, return on equity, the debt-equity ratio, the dividend payout ratio and the price/earnings (P/E)
ratio.

For a specific ratio, most companies have values that fall within a certain range. A company whose
ratio falls outside the range may be regarded as grossly undervalued or overvalued, depending on the
ratio.

For example, if the average P/E ratio of all companies in the S&P 500 index is 20, with the majority
of companies having a P/E between 15 and 25, a stock with a single-digit P/E would be considered
undervalued, while one with a P/E of 50 would be considered overvalued. Of course, this ratio would
typically only be considered as a starting point, with further analysis required to identify if these
stocks are really as undervalued or overvalued as the P/E ratios suggest.

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As well, ratios are usually only comparable across companies in the same sector, since an acceptable
ratio in one industry may be regarded as too high in another. For example, companies in sectors such
as utilities typically have a high debt-equity ratio, but a similar ratio for a technology company may
be regarded as unsustainably high.

Ratio analysis can provide an early warning of a potential improvement or deterioration in a

company’s financial situation or performance. Analysts engage in extensive number-crunching of the
financial data in a company’s quarterly financial reports for any such hints.

Successful companies generally have solid ratios in all areas, and any hints of weakness in one area
may spark a significant sell-off in the stock. Certain ratios are closely scrutinized because of their
relevance to a certain sector, as for instance inventory turnover for the retail sector and days sales
outstanding (DSOs) for technology companies.

The financial statements as prepared and presented annually are of little use for guidance of
prospective investors, creditors, and even management. If relationship between various related items
in this financial statement is established, they can provide useful clues to gauge accurately the
financial health and ability of business to make profit. This relation between two related items of
financial statements is known as Ratio. A ratio is thus, one number expressed in terms of another.

Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for
evaluating the financial condition and performance of a firm. Analysis and interpretation of various
accounting ratios gives a skilled and experienced analyst a better understanding of the financial
condition and performance of the firm than he could have obtained only through a perusal of
financial statements.

Ratios are relationship expressed in mathematical terms figures which are connected with each
other in some manner. Obviously, no purpose will be served by comparing two sets of figures
which are not at all connected with each other. Ratio analysis simplifies the comprehension of
financial statements. Ratios tell the whole story of changes in the financial condition of the
business. Ratio analysis helps in planning and forecasting. Over a period of time a firm or

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industry develops certain norms that may Indicate future success or failure. If relationships
changes in firm’s data over different time periods , the ratios may provide clues on trends and
future problems.
Thus, “ratios can assist management in basic function of forecasting, planning, coordination, control
and communication.”

Ratio Analysis is the calculation and comparison of main indicators - ratios which are derived from
the information given in a company's financial statements(which must be from similar points in time
and preferably audited financial statements and developed in the same manner). It involves methods
of calculating and interpreting financial ratios in order to assess a firm's performance and status. This
Analysis is primarily designed to meet informational needs of investors, creditors and management.
The objective of ratio analysis is the comparative measurement of financial data to facilitate wise
investment, credit and managerial decisions. Some examples of analysis, according to the needs to be
satisfied, are:

 Horizontal Analysis - the analysis is based on a year-to-year comparison of a firm's ratios,

 Vertical Analysis - the comparison of Balance Sheet accounts either using ratios or not, to get
useful information and draw useful conclusions, and
 Cross-sectional Analysis - ratios are used and compared between several firms of the same
industry in order to draw conclusions about an entity's profitability and financial
performance. Inter-firm Analysis can be categorized under Cross-sectional, as the analysis is done
by using some basic ratios of the Industry in which the firm under analysis belongs to (and
specifically, the average of all the firms of the industry) as benchmarks or the basis for our firm's
overall performance evaluation.

The informational needs and appropriate analytical techniques needed for specific investment and
credit decisions are a function of the decision maker’s time horizon(short versus long term investors
and creditors). A pervasive problem when comparing a firm’s performance over time(trend or time
series analysis) or with other firms(cross sectional or common size analysis) is changes in the firm’s
size over time and the different sizes of firms which are being compared. However, one approach to
this problem is to use common size statements in which the various components of the financial
statements are standardized by expressing them as a percentage of some base (base in the income

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statement is sales and base in the balance sheet is total assets). See sample file below for further
understanding.

In general, a process of standardization is being achieved by the use of ratios. They can be used to
standardize financial statements allowing for comparisons over time, industry, sector and cross-
sectional between firms and further facilitate the evaluation of the efficiency of operations and/or the
risk of the firm’s operations regarding the scope and purpose of evaluation. Ratios measure a firm’s
crucial relationships by relating inputs(costs) with output(benefits) and facilitate comparisons of these
relationships over time and across firms.

Many attractive categories of financial ratios and numerous individual ratios have been proposed in
the literature. The most prominent literature on financial analysis - though non-exhaustive - indicates
the following categories of ratios:

Profitability

 Gross Profit ratio = ( Gross Profit / Sales) * 100

 Operating Profit = ( Operating profit / Sales) * 100
 Return on Capital Employed (ROCE) , in times = ( Profit before interest and tax / Capital
Employed)or Return on Equity (ROE), in times = Net Income ÷ (Average Equity during the
period)

Very often, the reported profits are adjusted to reflect sustainable levels of performance and thus
instill more meaning to the computation and interpretation of the financial ratios. In this
context, EBITDA is used, which is calculated by excluding from the profit figure the tax, interest,
depreciation and amortization amount. Non-recurring expenses or income is also excluded when this
can be substantiated to enhance the interpretation of the derived ratio figures. EBITDA figure can be
used as an approximation of the underlying cash flows which at the same time incorporate the future
potentials of the company's profitability rather than just the cash generation of a financial year.

Activity or Management Efficiency ratios

 Debtors days, in days = ( Av. Debtors / Sales ) * 365

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 Creditors days, in days = ( Av. Creditors / COGS ) * 365, where COGS is the Cost of Goods Sold
by the firm
 Stock days, in days = ( Av. Stock / COGS ) * 365

Where "Av.", is the Average amount of the opening and closing balance of the corresponding account
of the financial year the Analysis is being undertaken.

Market or Investment ratios

 Dividend cover, in times = ( Profit after tax / dividends )

 Dividend yield = ( Dividend / Share price )
 P/E = ( Share price / Earnings per share )
 EPS = ((Profit after tax - pref. dividends) / Total number of ordinary shares outstanding )

Each category can be further utilized and an in-depth analysis can be adopted to reflect the
corresponding needs of each user, i.e. a bank considering whether to lend a specific company would
focus more on financial and liquidity - as the risk of lending to a company that does not have the
resources to repay the loan is of great concern for a bank - and profitability ratios, to see whether the
company's earnings are adequate to cover the interest on the loan. An analysis from an investor's point
of view on the other hand would focus more on profitability and investment ratios, to evaluate the
prospects of his potential returns.

Note that there is no absolute guidance or specific definition of ratios and therefore special
consideration should be undertaken when ratios are used to make comparison either in a cross-
sectional analysis or Inter-firm (as described above).

Limitations of ratios and potential impact in the financial analysis

 Ratios are not predictive; as they are usually based on historical information notwithstanding
ratios can be used as a tool to assist financial analysis.

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 They help to focus attention systematically on important areas and summaries information in an
understandable form and assist in identifying trends and relationships (see methods for facilitating
the financial analysis above).
 However they do not reflect the future perspectives of a company, as they ignore future action by
management.
 They can be easily manipulated by window dressing or creative accounting and may be distorted
by differences in accounting policies.
 Inflation should be taken into consideration when a Ratio Analysis is being applied as it can
distort comparisons and lead to inappropriate conclusions.
 A comparison with industry averages is difficult for a conglomerate firm since it operates in many
different market segments.
 Seasonal factors may distort ratios and thus must be taken into account when making ratios are
used for financial analysis.
 Not always easy to tell that a ratio is good or bad. Must be always used as an additional tool to
back up or confirm other financial information gathered.
 Different operating and accounting practices can distort comparisons.

UTILITY OF RATIO ANALYSIS

1. Liquidity position:-
With the help of ratio analysis, conclusion can be drawn regarding the liquidity position of firm. The
liquidity position of a firm would be satisfactory if it is able to meet its current obligations when
they become due.

2. Long-term solvency:-
This aspect of the financial position of a borrower is of concern to the long term creditors, security
analysis and the present and potential owners of a business.

3. Operating efficiency:-

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It throws light on the degree of efficiency in the management and utilization of its assets. It would be
recalled that the various activity ratios measure this kind of operational efficiency.

4. Over-all profitability:-
The management is concerned about the ability of the firm tomeet its short-term as well as long term
obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization
of the assets of a firm.

5. Inter-firm comparison:-
Ratio analysis is not only throws light on the financial position of a firm but also serves as a stepping
stone to remedial measure. This is made possible inter-firm comparison/comparison with industrial
averages.

6. Trend analysis:-
Whether the financial position of a firm is improving or deteriorating over the years. This is made
possible by the use of a trend analysis.

TYPES OF RATIO

1. Solvency ratio :-
Short term solvency (liquidity)

 Current ratio.
 Liquidity ratio.

Long term solvency

 Debt-equity ratio.
 Total debt to owners fund
 Interest coverage ratio. Etc.

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2. Profitability :-

 Gross profit ratio.

 Net profit ratio.
 Return on assets ratio.
 Return on capital employed.
 Operating profit ratio

3.Activity ratio :-

 Inventory turnover ratio.

 Debtors turnover ratio.

4. EARNINGS :-

 EARNING PER SHARE .

SIGNIFICANCE OF PROBLEM
Ratios as a tool of financial analysis provide symptoms with the help of which any analyst is in a
position to diagnose the financial health of the unit. Financial analysis may be compared with biopsy
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conducted by the doctor on the patient in order to diagnose the causes of illness so that treatment may
be prescribed to the patient to help him recover. As already hinted different groups of persons are
interested in the affairs of any business entity, Mass of information contained in the financial
statements may be unintelligible a confusing. Ratios help in highlighting the areas deserving attention
and corrective action facilitating decision making.
Planning and forecasting can be done only by knowing the past and the present. Ratio helps the
management in understanding the past and the present of the unit. These also provide useful idea
about the existing strength and weaknesses of the unit. This knowledge is vital for the management to
plan and forecast the future of the unit. Ratios have the capability of communicating the desired
information to the relevant persons in a manner easily understood by them to enable them to take
stock of the existing situation. Being precise, brief and pointing to the specific areas the ratios are
likely to attract immediate grasping and attention of all concerned and is likely to result in improved
coordination from all quarters of management.
System of planning and forecasting establishes budgets, develops forecast statements and lays down
standards. Ratios provide actual basis. Actual can be compared with the standards. Variances to be
computed an analyzed by reasons and individuals. So it is great help in administering an effective
system of control.

REVIEW OF EXISTING LITERATURE

Lev and Sunder (1979) point out, using theoretical deduction, that in order to control for the size
effect, the financial ratios must fulfill very restrictive proportionality assumptions. It is shown that the
choice of the size deflator (the ratio denominator) is a critical issue. Furthermore, Lev and Sunder
bring up the problems caused in multiple regression models where the explaining variables are ratios
with the same denominator. This is a fact that has been discussed earlier in statistics oriented literature
like in Kuh and Meyer (1955). Barnes (1982) shows how the non-normality of financial ratios can
result from the underlying relationships of the constituents of the financial ratios.

He is thus able to tie in the ratio format aspects with the distributional properties of financial ratios. In

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the discussion on Barnes's paper (Horrigan, 1983, Barnes, 1983), Horrigan puts forward that financial
ratio researchshould be more interested in the role of the financial ratios themselves than in"the
nature of the ratios' components or to the ratios' incidental role as data size deflators". To extrapolate
from Horrigan's critique, in our own interpretation the validity of financial ratio analysis should be
determined by its usefulness to the decision making process of the different interested parties
(owners, management, personnel etc.)

Mecimore (1968) In the history of FRA it is common that professional journals and academic
papers do not recognize each other. An early paper on financial ratio distributions was published in
Management Accounting by Mecimore.

CONCEPTUALIZATIONS
Conceptualization is the process of development and clarification of concepts. In other words,
clarifying one's concepts with words and examples and arriving at precise verbal definitions. e.g.,
what is meant by education? “Amount of knowledge and training acquired in school." Another
Example:-What do we mean by "social status?” – Wealth (millionaire) – Prestige (Harvard professor)
– Power (military general) these are called “dimensions” of social status. Dimensions we classify
different meanings into different groups. Such groups are called "dimensions." A concept may have
more than one dimension (e.g., as in case of social status). At a practical level, we are usually more
interested in dimensions than in concepts (which are more abstract, vague). Indicators when a
dimension is not directly observable, we use indicators.
For example, to measure power, we may use
(1) Number of people under your supervision
(2) Extent of your supervision (work‐related only, or sleep and food?)
(3) Your annual budget
(4) Amount of equipment under your control Comparison of Concept, Dimension, and Indicator

In practice, the three terms are often interchangeable (e.g., gender, race). One difference is the level of
abstraction: Concept Dimension Indicator Highly abstract abstract concrete one concept may have
multiple dimensions; and one dimension may have multiple indicators A Related term: Variables a
19
variable is a statistical term, meaning a quantity that can take on different possible values. Both
dimension and indicator can be variables. When a concept has only one dimension with one indicator,
a concept is practically equivalent to a variable.

OPERATIONALIZATION OF THE CONCEPT

The movement from theory to the successful operationalization of a concept is not an easy step. One
can produce a "brilliant" theory of a phenomena by conducting a thorough literature review resulting
in a system of logically interrelated propositions, assumptions, and conceptualizations; yet, it is still
possible to fail in providing good empirical indicators for the variable of interest. All too frequently
research methodologists overlook the importance of the process of measurement. In our zeal to
successfully provide abstract explanations, formulate a research design, collect data, and analyze the
results in search of support for our hypotheses, we very often fail to adequately measure the concepts
at hand. Yet, no matter how sophisticated our theorizing, or how high-powered our statistical
analyses, the results can be erroneous if the variables are improperly operationalized. With tongue in
cheek, social scientists refer to this problem as "GIGO" (Geego)--Garbage In, Garbage Out.

This chapter will examine issues related to operationalization and measurement of variables. We will
attempt to provide the beginning researcher with an understanding of measurement techniques and
familiarize him or her with tests of validity, reliability, unidimensionality, and reproducibility of
measurement.

FOCUS OF THE STUDY

20
The focus of the study is limited to collecting financial data published in the annualreports of the
company every year. The analysis is done to suggest the possible solutions. Thestudy is carried out for
4 years.Using the ratio analysis, firms past, present and future performance can be analyzed andthis
study has been divided as short term analysis and long term analysis. The firm shouldgenerate enough
profits not only to meet the expectations of owner, but also to expansionactivities.The prevalent
educational system providing the placement training at an industry being a part of the curriculum has
helped in comparison of theoretical knowledge with practical system. Ithas led to note the
convergences and divergence between theory and practice.The study enables us to have access to
various facts of the organization. It helps inunderstanding the needs for the importance and advantage
of materials in the organization, thestudy also helps to exposure our minds to the integrated materials
management the different of part and vary useful techniques that is make a full type of stages in
various procedures, methods and technique adopted by the organization. The study provides knowled
geabout how the theoretical aspects are put in the organization.

.OBJECTIVES OF THE STUDY/PROJECT

 To study and analyze the financial position of the Company through ratio analysis.
 To suggest measures for improving the financial performance of organization.
 To analyze the profitability position of the company.
 To assess the return on investment.
 To analyze the asset turnover ratio.
 To determine the solvency position of company.
 To suggest measures for effective and efficient usage of inventory.

LIMITATIONS OF THE STUDY

21
•The study was limited to only four years Financial Data.

•The study is purely based on secondary data which were taken primarily fromPublished annual
reports of Mahindra & Mahindra Ltd.

•There is no set industry standard for comparison and hence the inference is madeon general
standards.

•The ratio is calculated from past financial statements and these are not indicators offuture.

•The study is based on only on the past records.

• Non availability of required data to analysis the performance.

•The short span of the time provided also one of limitations.

CHAPTERIZATION

CHAPTER-1-INTRODUCTION

Ratio analysis is used to evaluate various aspects of a company's operating and financial performance
such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is
studied to check whether they are improving or deteriorating.
 Significance of Problem
 Review of existing literature
 Conceptualizations
 Operationalization of the concept
 Focus of the study
 Objectives of the study/Project
 Limitation of the study

CHAPTER-2-RESEARCH METHODOLOGY
22
This chapter focuses on industrial profile, Company profile and its history, position in market, objectives,
Sample size and techniques, Analysis pattern, Data collection (primary and secondary).

CHAPTER-3- MICRO ANALYSIS

This chapter includes the questions that were asked to the people, survey and reviews etc.

CHAPTER-4-MACRO ANALYSIS

Thischapter covers the interpretation of all analysis, surveys and questions that are covered in micro analysis .

CHAPTER-5- FINDINGS AND RECOMMENDATIONS

This chapter covers the observations, suggestions and conclusion made by project report maker.

 Observations
 Suggestions
 Conclusions
BIBLIOGRAPHY

Bibliography is a discipline and traditionally the academic study of books as physical, cultural objects in the
study or research. It includes the books and articles that is used in the study.

 Books
 Websites
 Pages
 Articles
 Newspapers

APPENDICES Supplementary document forming a part of main document but not essential for its
completeness containing the supporting information and appearing usually at the end.

INDUSTRY PROFILE

23
With the potential to become the fifth largest banking industry in the world by 2020 and third largest
by 2025 according to KPMG-CII report, India’s banking and financial sector is expanding rapidly.
The Indian Banking industry is currently worth Rs. 81 trillion (US $ 1.31 trillion) and banks are now
utilizing the latest technologies like internet and mobile devices to carry out transactions and
communicate with the masses.

The Indian banking sector consists of 26 public sector banks, 20 private sector banks and 43 foreign
banks along with 61 regional rural banks (RRBs) and more than 90,000 credit cooperatives.

Factors promoting growth of Banking and Financial Services

The Banking Laws (Amendment) Bill that was passed by the Parliament in 2012 allowed the Reserve
Bank of India (RBI) to make final guidelines on issuing new bank licenses. Moreover, the role of the
Indian Government in expanding the banking sector is noteworthy. It is expected that the new
guidelines issued by RBI will curb practices of impish borrowers and streamline the loan system in
the country. In the coming time, India could see a rise in the number of banks in the country, a shift in
the style of operation, which could also evolve by incorporating modern technology in the industry.

Another emerging trend witnessed by the banking sector is the use of social media platform like
Facebook to attract customers. In September 2013 ICICI bank launched a Facebook bill payment and
fund transfer service called ‘Pockets’ for customer convenience.

According to a report by Zinnov, a Globalization and Market Expansion firm, ‘IT adoption in BSFI
sector in India’, the Information Technology Industry spend in BFSI vertical is expected to reach
USD 3.5 billion by Financial Year 2014. The study also highlighted ‘the growing maturity of Indian
BFSI organizations in IT adoption, as technology is seen as a driver of business value. Technology
firms have great potential to explore in the BFSI sector, which contributes to eight per cent of India's
Gross Domestic Product.’

Life Insurance

24
The Indian life insurance industry is estimated to grow at a compounded annual growth rate (CAGR)
of 14.1 per cent, and reach US$ 111.9 billion in 2015 from US$ 66.5 billion in 2011, according to a
report by BRIC data. This would make India the third-largest market for life insurance in the world by
2015. India’s present position is at number 12, among top global markets for life insurance. Number
of policies sold is expected to increase to 85.21 million in 2015 from 53.23 million in 2010. The
2014-15 Union Budget should exempt life insurance products from taxation to provide investors an
incentive to buy a policy. The insurance industry can gain leverage from India's burgeoning
population only by providing a special tax window for life insurance policies.

Health Insurance
In the non-life insurance industry, health insurance is the second largest segment in India; with
players in both the public and private sectors playing an active role. The industry is concentrated
around 4 major public sector companies namely, New India Assurance, United India Insurance,
National Insurance and Oriental Insurance.

The Indian health insurance industry has seen major growth in the past 6 years. The Indian health
insurance industry is expected to grow at a CAGR of 37.2% from FY’2011 - FY’2016; with surging
medical costs, rising population and increased awareness among consumers in the country.

Recruitment Trends in BSFI Industry

The Banking and Financial Services Industry is expected to recruit about 8.4 million people as per the
growth rate each year. BSFI workforce requirement between 2008 and 2022 is expected to be about
4.2 million and sector may create up to 20 lakh new jobs in the next 5-10 years.

Advantaged by issuance of new licences and efforts being made by the RBI and the Government to
expand financial services into rural areas, the hiring trend may further get a boost from the public
sector banks. Since most banking workforce is scheduled to retire in the times to come, they would be
in dire need of fresh talent. According Randstad India, global HR service provider in India, the
banking sector will generate 7-10 lakh jobs in the coming decade and the sector would be the among
top job creators in 2016.

25
According to ‘Human Resource and Skill Requirements in the Banking, Financial Services &
Insurance Sector (2022) report, apart from the on-rolls employment there is significant contractual
employment across all the above segments through various financial positions such as Direct Selling
Agents (DSA’s), Insurance agents, Mutual Fund Advisors, etc.

Challenges in BFSI
The major challenge faced by the Indian Banking and Financial sector is that the level of financial
exclusion in India is alarming and there is an urgent need to find a plausible solution to the same. The
IBA–BCG survey of banks revealed that the level of confidence in finding profitable solutions for
financial inclusion is not very high. Financial inclusion has solely been the responsibility of public
banks up until now, but by using inclusive growth as one of the criteria for new licences (new banks
have to open 25 per cent of their branches in rural areas); the RBI will have made the new private
sector banks responsible as well. Currently, public sector banks have more branches than any other
bank group in the rural and semi-urban areas.

The banking and insurance industry is challenged by competitive pressures, changes in customer
loyalty, stringent regulatory environment and entry of new players, all of which are pressuring the
organizations to adopt new business models, streamline operations and improve processes.

Road Ahead
An IBA-FICCI-BCG report suggests that India’s gross domestic product (GDP) growth will make the
Indian banking industry the third largest in the world by 2025. According to the report, the domestic
banking industry is set for an exponential growth in coming years with its assets size poised to touch
USD 28,500 billion by the turn of the 2025. With the deposits growing at a CAGR of 21.2 per cent (in
terms of INR) in the period FY 06–13, there has been evident growth in the overall industry.

This growth can be attributed to banks shifting focus to client servicing. Public as well as private
sector banks are underlining the importance of technology infrastructure, in order to improve
customer experience and gain a competitive edge. Utilizing the popularity of internet and mobile

26
banking, banks are increasingly adopting an integrated approach for asset–liability match, credit and
derivatives risk management.

PROFILE OF THE ORGANIZATION/COMPANY

Mahindra and Mahindra Limited is engaged in the manufacture of passenger cars, commercial
vehicles and tractors. The Company's segments include Automotive, which is engaged in the sale of
automobiles, spare parts and related services; Farm Equipment, which is engaged in the sale tractors,
spare parts and related services; IT Services, which includes business consulting and related support
activities; Financial Services, which includes services relating to financing, leasing and hire purchase
of automobiles and tractors; Steel Trading and Processing, which is engaged in trading and processing
of steel; Infrastructure, including operation of commercial complexes, project management and
development; Hospitality, including sale of Timeshare; Systech, which consists of automotive
components and other related products and services; Two wheelers, which consists of sale of two
wheelers, spare parts and related services, and Others, which includes logistics, after-market and
investments.

Mahindra & Mahindra Ltd is an India-based company. The company operates in nine segments:
automotive segment comprises of sales of automobiles, spare parts and related services; farm
equipment segment comprises of sales of tractors, spare parts and related services; information
technology (IT) services comprises of services rendered for IT and telecom; financial services
comprise of services relating to financing, leasing and hire purchase of automobiles and tractors;
steel trading and processing comprises of trading and processing of steel; infrastructure comprise
of operating of commercial complexes, project management and development; hospitality segment
comprises of sale of timeshare; Systech segment comprises of automotive components and other
related products and services, and its others segment comprise of logistics, after-market, two
wheelers and investment.

Mahindra & Mahindra Ltd was incorporated on October 2, 1945 with the name Mahindra &
Mohammed Ltd. The company was renamed as Mahindra & Mahindra Ltd in the year 1948. The

27
steel trading business was commenced in association with suppliers in UK. In the year 1950, the
company commenced the first business with Mitsubishi Corporation and 5000 tons of wagon
building plates from Yawata Iron & Steel were supplied.

In the year 1953 Otis Elevator Company (India) was established. A joint venture was made with
Rubery Owen & Company Limited, UK and established a company under the name of Mahindra
Owen. The companys Machine Tools Division was commenced its operations in the year 1958. In
the year 1960, Mahindra Sintered Products Limited was established based on a joint venture with
Bir Field (GKN Group, UK). In the year 1962, Mahindra Ugine Steel Company was established as
a joint venture between the company and UgineKuhlmann, France. In the year 1963, International
Tractor Company of India was established as a joint venture with International Harvester
Company, USA.

In the year 1965, the company entered into light commercial vehicles segment. They established
Vickers Sperry of India Ltd, a joint venture with Sperry Rand Corporation, USA. In the year 1969,
the company entered the world market with export of utility vehicles and spare parts.

In the year 1977, International Tractor Company of India merged with the company and became its
Tractor Division. In the year 1982, Mahindra brand of tractors were launched and also became the
market leader in the Indian tractor market. In the year 1991, the company introduced commander
range of vehicles in the market. Also, they established Mahindra Financial Services Ltd as a
wholesale fund provider.

In the year 1995, Mahindra Holding & Finance Limited became a subsidiary of the company to
carry out business as an investment company. The company made a technical collaboration with
Mitsubishi / Samcor to manufacture the Mitsubishi L300. In the year 1996, Mahindra Ford India
Limited was established, a joint venture with Ford Motor Company, USA, to manufacture
passenger cars. In the year 1999, the company acquired a major stake in Gujarat Tractors and
renamed it Mahindra Gujarat Tractors Ltd. Also, Mahindra & Mahindra Financial Services Ltd
became a subsidiary of the company.

In the year 2000, the company set up their first satellite tractor plant at Rudrapur. They launched a
new age tractor, Mahindra Arjun 605 DI (60 HP) in the market. Also, they launched Bolero GLX

28
(a utility vehicle) launched in response to the needs of urban consumers. In the year 2001, the
company launched Champion, a 3-wheeler diesel vehicle. They launched Mahindra MaXX, a
multi-utility vehicle positioned with the caption Maximum Space, Maximum Comfort. They made
a tie up with Renault for Petrol Engines.

In the year 2002, the company launched Scorpio, a new generation, world-class sports utility
vehicle. In the year 2003, they launched Invader, a sporty open top vehicle and MaXXPik Up.
They set up second tractor assembly plant in USA. They ventured into Industrial engine business.
Also, they launched Indias first Turbo tractor, Mahindra Sarpanch 595 DI Super Turbo.

In the year 2004, the company launched Bolero and Scorpio in Latin American, Middle East and
South African markets. They signed anMoU to enter into joint venture with Jiangling Motor
Company Group (JMCG) of China, to acquire tractor manufacturing assets from Jiangling Tractor
Company, a subsidiary of Jiangling Motor Company Group.

In the year 2005, the company acquired 51% stake in SAR Transmission Private Limited, a
company engaged in manufacture of gears and transmission shafts. The company became the
became the first Indian auto manufacturer to launch the Common Rail Diesel Engine (CRDe),
offering it in the Scorpio. They acquired 80% stake in the joint venture with Jiangling Motors i.e.
in Mahindra (China) Tractor Company. They established Mahindra Renault Ltd, a joint venture
with Renault to manufacture and market Logan, a mid-sized sedan, in India. Also, they established
Mahindra International Ltd, a joint venture with International Truck and Engine Corporation to
manufacture trucks & buses in India.

In the year 2006, the company acquired the Stokes Group of UK, the largest automotive forgings
company in the UK. They launched the Scorpio V-series. In July 2007, the company launched the
Mahindra Pik-Up (double cab) in Chile. In November 1, 2007, a wholly owned affiliate of Navistar
International Corporation signed a joint venture agreement with the company to produce diesel
engines for medium and heavy commercial trucks and buses in India.

In the year 2008, the company introduced FuelSmart system in Bolero and Scorpio SUVs. They
entered into JV with TMI Pacific in Australia. In the year 2009, the company launched Xylo. Also,
they launched New, Mighty Muscular Scorpio in the market.

29
During the year 2009-10, the company hived off Mahindra Defence Systems Division into a
wholly owned subsidiary, Mahindra Defence Land Systems Pvt Ltd (now rechristened as Defence
Land Systems India Pvt Ltd) with effect from July 1, 2009. Also, the company signed a joint
venture agreement on November 30, 2009 with BAE Systems Plc. to form a 74:26 Joint Venture
for defence land systems products. The company divested 46.66% of the equity share capital in
Mahindra Gears & Transmissions Pvt Ltd in favour of ICICI Venture Fund. As per the scheme of
arrangement between the company and Mahindra Shubhlabh Services Ltd, the Agri Inputs
Business of along with other common assets and liabilities of MSSL was de-merged and
transferred into the company.

During the year 2010-11, the company acquired SYMC, a premier manufacturer of sports utility
vehicles and recreational vehicles in Korea. Also, the company acquired 38% of the paid-up equity
share capital through a Preferential Allotment in EPC Industrie Ltd (EPC), a company listed on the
Bombay Stock Exchange Limited. In February, 2010, the company had launched Maxximo in a
very competitive small 4-wheeler cargo segment (0.75 Ton). In June 2011, Bristlecone
International AG became a subsidiary of the company.

In 2012, the company which had acquired Ssangyong Motor Company, a South Korean SUV
maker, almost a year ago, was now planning to set up a assembly plant and invest Rs 800 crore
over next 3-4 years. The company wins arbitration award and class action suit against global
vehicles. During the year, the company also entered the Kenyan passenger vehicles market with
the launch of their utility vehicles, XUV500 and Scorpio. Other vehicles include pick-up range,
Genio and Maxximo mini-truck The company also signed an agreement with Telephonics
Corporation to form a joint venture, named as Mahindra-Telephonics Integrated Systems Limited.

In 2013, the company has inked partnership with online shopping portal, Snapdeal.com to sell its
two-wheeles on the site. The company launches new visual identity reflecting modernity and
dynamism. The company launches the Verito Executive edition. The company unveils the new
MaxximoPlus Mini-truck in Bengaluru and Chennai. The company expands dealership network
across India. The company launches the new Bolero Maxi Truck Plus - The Perfectly Styled City
Pick-up in Ahmedabad. During the year, Mahindra Two Wheelers wins 3 Awards at the CMO Asia

30
- Manufacturing Excellence Awards 2013. Mahindra 2 Wheelers opens new dealership in Zirakpur,
Punjab.

In 2014, the company introduces Yoga Seats in Quanto Compact SUV. During the year, the
company signs MoU with Government of Bhutan to promote usage of Electric Vehicles in the
country. Mahindra Defence Naval Systems Inaugurates new Chakan plant. Mahindra Integrated
Business Solutions signs MoU with CARE Advisory. Mahindra Logistics acquires majority stake
in LORDS Freight (India) Pvt. Ltd.

In 2015, Mahindra & Mahindra Ltd, Mahindra Two Wheelers and Peugeot Motocycles complete
strategic partnership. Mahindra inaugurates its extended automotive manufacturing facility at
Zaheerabad in Telangana. During the year under review, Mahindra & Mahindra & Mitsubishi
Heavy Industries enter into Strategic Partnership in Agricultural Machinery. The company
launches all new mini-truck Jeeto small commercial vehicle landscape in India. During the year,
the company has set up an Africa-focused business unit to maintain double-digit growth levels in
the continent. The company is also signing an MOU with the Government of Tamil Nadu. The
company launches its tough & stylish true blue SUV - TUV 300. Mahindra & Mahindra,
Mitsubishi Agricultural Machinery and Mahindra announce Start of their Strategic partnership.
Mahindra Introduces the All New Automatic Transmission of The New Age XUV500.
PininfarinaS.p.A (Pininfarina), an automotive design and engineering services company was
acquired by the Mahindra group during the year under review.

RESEARCH DESIGN
In view of the objects of the study listed above an exploratory research design has beenadopted.
Exploratory research is one which is largely interprets and already available information and it lays
particular emphasis on analysis and interpretation of the existing and available information.
•To know the financial status of the company.

•To know the credit worthiness of the company.

•To offer suggestions based on research finding.

31
 SAMPLE SIZE AND TECHNIQUES

Sample Size:
The size of the sample was around 100 people considering the time constraint.

ANALYSIS PATTERN

To summarize findings of any project study the data collected needs analysis of the raw data can be
made meaningful simple and appropriate. Presentations of such interpretations help to draw
conclusion from the analyzed data. This analysis is based on the data collected from the companies
belonging to the sectors namely, Analysis will be based on journal, internet. And there three types of
scheme provided by Bajaj Allianz.

 Two wheeler insurance

 Health Insurance
 Travel Insurance
 Car Insurance

DATA COLLECTION (PRIMARY AND SECONDARY)

Data collection is the selection of sources of information and selection of methods and procedures
for gathering the data needed for any research.

“ The search for answers to research questions is called collection of data.”

“Data are facts and other relevant materials serving a base for study& analysis.”

32
For economy analysis, various types of survey’s data are collected from ministry of finance. Industry
analysis was carried from the various research report prepared by the government of India. The
company analysis is done through financial statements , which are required for analyzing the ratios,
balance sheet and profit & loss a/c , which is collected from the company MAHINDRA
ANDMAHINDRA LTD.
The task of data collection begins after a research problem has been defined and research
design/plan chalked out.
While deciding about the method of data collection to be used for the study, the researcher
should keep in mind two types of data…

1. Primary data method.

2. Secondary data method

For my study purpose I have used SECONDARY DATA METHOD. And the data is collected from
the internet (website) and some data from the company and then calculation & analysis is done.

The basic significance or merits of secondary data are:-

 Readymade availability.
 Available quickly and cheaply.
 Less time is consumed.
 Less effort is required to collect the data.

33
 DATA ANALYSIS & INTERPRETATION
CALCULATION OF RATIO
Q1. What is the current ratio of assets and liabilities?
1. Solvency ratio:- (Liquidity Ratios)Current ratio :-The current ratio is the ratio of total current
assets to total current liabilities. The ideal current ratio of any firm is 2:1. The current ratio of a firm
measures its short- term solvency, that is, its ability to meet short term obligations. The higher the
current ratio, the larger is the amount of rupees available per rupee of current liability, the more is
the firm’s ability to meet current obligations and the greater is the safety of funds of short –term
creditors

34
Q1. Current/Solvency Ratio
( IN CR)

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Current 3569.16 5535.18 6409.53 8263.86 7060.37

Assets

Current 3679.55 5591.09 6283.85 6944.42 6724.16

liabilities

Current 0.97 0.99 1.02 1.19 1.05

Ratio

Chart: - 1

Column1
1.4

1.2

0.8

0.6

0.4

0.2

35
 QUICK RATIO:
Q2. What is the quick ratio?
This ratio is also called liquid ratio or acid test ratio. It establishes a relationship between quick
assets and quick liabilities. Quick assets includes all the current assets except stock & prepaid
expenses and quick liabilities refer to liabilities which are repayable within a short period. It refers to
current liabilities excluding bank overdraft & cash credit.

The actual quick ratio has to be compared with the standard or ideal quick ratio of 1:1. If the actual
quick ratio is equal to or more than the standard quick ratio of 1:1, the conclusion can be that the
concern is liquid, and so, it can pay off its short-term liabilities out of its quickly realizable assets
without any difficulty. On the other hand, if the actual quick ratio is less than the standard ratio of
1:1, the conclusion can be that the concern is not liquid.

Formula:-

Where,

Quick Assets = current assets-(stock + prepaid expenses)

36
Table: - 2

(IN CR)

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Current 3569.16 5535.18 6409.53 8263.86 7060.37

Assets

inventories 871 1450 1553 1827 1500

current 3679.55 5591.09 6283.85 6944.42 6724.16

Liabilies

Quick 0.73 0.72 0.77 0.93 .84

Ratio

Chart:- 2

Column1
1
0.9
0.8
0.7
0.6 Column1
0.5
0.4
0.3
0.2
0.1
0

37
 DEBT TO EQUITY RATIO:-
Q3 What is debt to equity ratio of firm?
Debt= Current Liabilities
TABLE:-3
( incr)
YEAR 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Long term 2321.1 3174.22 3227.07 3745.16 3987

debt.

Share holder 293.62 294.52 295.16 295.16 295.87

Equity

Debt to 7.91 10.77 10.93 12.69 13.48

equity ratio

chart:-3
16
14
12
10
8
6
4
2
0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

38
 DEBT TO CAPITAL RATIO:-
Q4. What is debt to capital ratio of the firm?
The Relationship between Creditor’s funds and owner’s capital can also be expressed in terms of
another leverage ratio. Here, the outside liabilities are related to the total capitalization of the firm and
not merely to the shareholder’s equity.
TABLE:-4

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Long term 5739.49 5742.03 4833.57 4876.64 8185.1

Debt

Permanent 6078.84 6072.38 5822.87 5914.89 10970.39

Capital

Debt to 0.94 0.94 0.83 0.82 0.74

capital ratio

39
 chart:-4

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

40
 INTEREST COVERAGE RATIO
Q5. What is the interest coverage ratio of the firm?
This ratio measure the debt servicing capacity of the firm in so far as fixed interest on long term loan
is concerned. It is determined by dividing the profits or earnings before interest and taxes by the
fixed interest charges on loans.This ratio, as the name suggests shows how many times the interest
charges are covered by the EBIT out of which they will be paid .In other words, it indicates the
extent to which fall in EBIT is tolerable in the sense that the ability of the firm to service its debt
would not be adversely affected .
Formula:
TABLE:-5
(incr)

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Ebit 4005.96 4344.78 5349.09 5491.99 5794.78

interest 192.78 193.19 224.85 311.16 282.95

Interest 20.78 22.49 23.79 17.65 20.48

coverage

Ratio

41
chart:-5
25

20

15

10

0
2012 2013 2014 2015 2016

42
 GROSS PROFIT MARGIN:
Q6. What is the gross profit margin of the firm?
Gross profit is the result of relationship between prices, sales volume and costs .A change in the gross
margin can be brought about by change in any of these factors. The gross margin represents the limit
beyond which fall in sales prices are outside the tolerance limit. Further the gross profit ratio/margin can
also be made use of determining the extent of loss caused by theft, spoilage, damage and so on in the case
of those firms which follows the policy of fixed gross profit margin in pricing their products.

TABLE: 6
Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Gross 3040.44 3191.72 3995.58 3859.4 3872.02

Profit

Sales 23460.26 31853.53 40441.16 40508.5 40844.1

G.p. ratio 12.96% 10.02% 9.88% 9.52% 9.48%

43
 Chart:-6

14

12

10

0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

44
 NET PROFIT:-
Q7. What is the net profit of the firm?
Net profit margin is indicative of management abilities to operates the business with sufficient
success not only to recover from revenue of the period, cost of merchandise or service , the expense
of operating the business and the cost of borrowed funds but also leave a margin of reasonable
compensation to the owner for providing their capital at risk.

TABLE:-7
Year 2011-'12 2012'-13 2013-'14 2014-'15 2015-'16

Net profit 2662.1 2878.89 3352.82 3758.35 3812.28

Sales 23460.26 31853.52 40441.16 40508.5 40681.47

Net profit 11.14 8.9 8.17 9.11 9.34

ratio.

45
 Chart:-7

12

10

0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

46
 RETURN ON CAPITAL EMPLOYED:-
Q8. What is the return on capital employed of the firm?
Here the profits are related to the total capital employed. The term capital employed refers to long
term fund supplied by the creditors and owners of the firm. Thus the capital employed basis
provides a test of profitability related to the source of long term funds. It would provide sufficient
insight into how efficiency the long term funds of owners and creditors are being used. The higher
the ratio, the more efficient is the use of capital employed.

TABLE:-8

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

Eat +int.-tax 255.15 110.31 409.59 1033.32 841.26

Avg. total 7829.37 7493.87 7152.33 7172.48 9367.5

Capital
employed

ROCE (%) 3.25 1.47 5.72 14.4 8.98

47
 Chart:-8

16
14
12
10
8
6
4
2
0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

48
 RETURN ON ASSET:-
Q9. What is the return on assets of the firm?
Profitability ratio is measured in terms of the relationship between net profits and assets. The Return
on assets may also be called as profit to asset ratio.

TABLE:-9

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

EAT 59.99 590.15 530.18 600.14 650.24

ASSETS 5774.36 6234.22 13159.32 15148.7 18007.15

RETURN 1.03 9.45 4.02 3.96 3.61

ON ASSETS

(IN %)

49
Chart:-9

50
10

9
8
7
6
5
4
3
2
1
0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

51
 OPERATING PROFIT RATIO:-
Q10. Calculate operating profit ratio of the firm?
It is a ratio showing relationship between cost of goods sold plus operating expenses and sales. It
shows the efficiency of the management this ratio suggests that a particular share of selling price is
absorbed by cost of sales and other operating expenses and the remainder is left for the owner of the
business.Hence, the higher this ratio, the less profitable it is, because it would prove insufficient to
pay dividend and create necessary reserves.

TABLE:- 10

Year 2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

EBIT 208.97 472.25 1542.46 1207.01 1578.42

SALES 1764.78 3700.95 6116.71 6182.58 6207.2

Operating 11.84 11.73 25.22 19.58 25.43

ratio ( in %)

52
 Chart:-10

30

25

20

15

10

0
2011-'12 2012-'13 2013-'14 2014-'15 2015-'16

53
INTERPRETATION :-

From graphical representation we can observe that current ratio improve from 2012 to 2016
means firm’s liquidity improved year by year .Higher ratio is preferable because it shows better
short term solvency. But very high ratio of current asset to current liability is indication of poor
credit management and firm may not make full use of its borrowing capacity.

INTERPRETATION:-

Quick ratio shows liquidity of firm. It is same as current ratio but it’s more stringent than current
ratio. Because it exclude inventory and advance means those current assets which can not easily
convert in cash. Liquidity in terms of ability of firm to meet obligation immediately and that can be
current assets and all those assets which can easily convert into cash.. So from table we can see
quick ratio improved means firm’s liquidity improved. It shows decrease in liquid liabilities.

INTERPRETATION:-

As per Chart debt ratio is very low in year 2014-'15 compare to other year it shows in year 2011-'12
debt proportion is less compare to owner’s fund which may dilute control over operation because
no of equity shares increase. At same time its very good condition from creditor’s point of view
because firm have enough fund to meet obligation .
Ratio is very high in year 2011-'12 is dangerous for creditors. If firm fail financially, creditors loose
very high at a same time interruption of creditors increase in operation.

INTERPRETATION:-

Ratio decreased from 2011 to 2016 Lower ratios is better condition for creditors of firm. It means
proportion of debt in total capital employed is very less compared to owner’s firm which shows
sufficient safety margin available to creditor.

54
But it reduces possibility of equity trading so firm can not utilize its ability for capital gearing. Initially
ratio is very high which is dangerous for firm’s creditors.

INTERPRETATION:

From the table, we can see initially ratio is low during initial period but after ratio increase .There is
coverage of four times which indicate that fall in operating earning to only up to one fourth level
can be tolerated arger is the ratio means greater is the ability of the firm to handle fixed charge
liabilities and the more assured is the payment of interest to the creditors. However too high a ratio
may imply unused debt capacity. In contrast, low ratio is a danger signal the firm is using excessive
debt and does not have the ability to offer assured payment of interest to the creditors.

INTERPRETATION:

A high gross profit margin relative to the industry average implies that he firm is able to produce at
relatively lower cost. It’s sign of goods management. The more the firms maintain it, better would
for his firm itself.
A high gross profit margin relative to the industry average implies that he firm is able to produce at
relatively lower cost. Company’s gross profit increase a sign of goods management. The more the
firms maintain it, better would for a high gross profit margin relative to the industry average
implies that Company’s gross profit increase a sign of goods management. The more the firms
maintain it.

INTERPRETATION:-

From graph we can see net profit margin was initially negative means initially firm's ability was so
poor that it could not meet even expenses. Than after firm’s ability improved day by day. On an
average net profit was high in the year 2011-'12 compare to other years .High net profit margin
ensure adequate return to the owners as well as enable a firm to with stand adverse economic
conditions .so we can say firm’s performance was better in year 2012-'13 compare to other year.

55
INTERPRETATION:-

From the table, we can see ratio is very high in 2013-'14 compare to other year. Ratio improving
year by year .From ratio we can see firm utilize very efficiently its capital employed. Thus the
capital employed basis provided a test of profitability related to source of long –term funds.
In year firm utilized its capital very efficiently which make firm to earn more profit on capital
employed. In year ratio is very less in year 2012-'13 means firm didn't utilized its capital fully.
So if firm want to increase its revenue as well enhance its growth, firm must give more important on
utilization on capital employed.

INTERPRETATION:-

This ratio gives the relationship between profit and asset. From table we can see ratio is negative in
year 2012 and it increase from 2012 to 2016. So we can see firm was able to earn higher profit in
year 2011 on asset.
The Return on assets measures the profitability of the total funds /investments of a firm .so we can say
year by year firm’s ability to earn.

INTERPRETATION:-

From the table, we can see net profit margin was initially negative means initially firm’s ability was
so poor that it could not meet even expenses. Than after firm’s ability improved day by day.
On an average net profit was high in the year 2013-'14 compare to other years .High net profit
margin ensure adequate return to the owners as well as enable a firm to with stand adverse economic
conditions .
So we can say firm’s performance was better in year2013-'14 compare to other year.

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 SUMMARY OF MAJOR OBSERVATIONS

Viewing MAHINDRA INTERNATIONAL from every angle, it can be conclude that the entire unit
is progressing well because kinetic has provided excellent quality of product due to sophisticated
technology and highly qualified technical & management staff. By this way, they can able to create a
good demand for their product and satisfy the consumer.

In the report presented, an attempt has been made to focus on the ratio analysis
throughMAHINDRA AND MAHINDRA LTDOF MAHINDRA INTERNATIONAL at Delhi. It
was an excellent opportunity and I am glad that I was provided an opportunity to make an internship
report on such a famous company.

It can be said that credit of success of the company goes to the management as well as workers and
employee that MAHINDRA INTER-NATIONAL has bring bright future.

In Short, Its grip on every aspect of the business is right which helps it in fight every uncertainty. It
is continues to do well, sure its future will be full of success. Again, I am thanking to all who
directly or indirectly helped me.

FINDINGS

Except in the year 2017, the company is maintaining current ratio as 2 and more, standardwhich
indicates the ability of the firm to meet its current obligations is more. It showsthat the company is
strong in working funds management.

The company is maintaining of quick assets more than quick ratio. As the companyhaving high value of
quick ratio. Quick assets would meet all its quick liabilities with outany difficulty.

The company is failed in keeping sufficient cash & bank balances and marketablesecurities.

57
In above all current assets and liabilities ratios are better that also it is double thenormal
position. Observe the absolute & super quick ratio the company cash performance is down position.

In the year 2006 debt equity ratio is 0.08 (8%) but it is increased to 0.11 (11%) &0.16(16%) in 2016
and 2017 increased every year. It shows that the company is losing its condition.

Net working capital ratio is 0.45 in 2016 but also 0.50 in 2017. It is increased very high but condition
of business working capital is not shortage .

Debt Equity ratio is increasing every year. It indicates the company depends on the debtfund increasing.

Total liabilities ratio is also increasing year by year.

In the year 2016, the interest coverage ratio 7.56 which increased to 94.76 in the year2017 and high
fluctuations in the followed years. In this position, outside investors areinterested to invest their money
in this company.

The company is declining of its coverage ratio to serve long term debts.

Inventory turnover also increased for year by year that is company production is
alsoincreased. Subsequently sales are also increased.

The net profit ratio of the company increasing over the study period. Hence theorganization having the
good control over the operating expenses.

SUGGESTIONS

After analyzing the ratio and watching the whole condition of the business. I would like to give
suggestions as bellow.

The operating expenses are very high .such as a raw material research &extension, packaging, power
& fuel etc. In this expense raw material consumption is the most and company can never controlled.
Such expenses, because MAHINDRA AND MAHINDRA LTD.Is expanding its network year by
year. So plant machinery consumption, operation expenses and other expenses will be increase in
58
future.

So the firm should more focus to increase in sales, because selling is being increased more and more
company can achieve such an expenses. So increasing the selling of the products is necessary.

In the globalization world when cutthroat competition is prevailing in all developed or developing
country so to survive in the market, high qualified persons are more necessary for every firm. Due
to, lack of salary and other Facilities qualified person cannot stay in the particular firm. So, for
MAHINDRA AND MAHINDRA LTD manufacturing ltd. should take necessary steps for this.
Firm should increase extra facility or high salary.

In the marketing field, to increase the market of new products, Firm should use more and more
distribution channels like MAHINDRA AND MAHINDRA LTD.DELHIretailer, and direct selling
and media like more advertisement in television, news-paper posters, board and many more.

BIBLIOGRAPHY
59
BOOKS

Bhaves, M Patel, Project Management, Vikas Publishing House, New Delhi

Drury, Colin, Management Accounting and Control, Thomson Learning

Khan, M.Y., Financial Services, Tata McGraw Hill, New Delhi.

Machiraju, H.R., Project Finance,Vikas Publishing House, New Delhi.

Reference:-

https://www.google.co.in/#q=ratio+analysis+importance+and+limitations
http://www.investopedia.com/terms/r/ratioanalysis.asp
http://www.myaccountingcourse.com/financial-ratios/
http://www.myaccountingcourse.com/financial-ratios/
http://www.yourarticlelibrary.com/accounting/ratio-analysis/ratio-analysis-meaning-advantages-and-
limitations-accounting/65204/
http://www.yourarticlelibrary.com/accounting/accounting-ratios/accounting-ratios-definition-
importance-and-limitations/65812/

QUESTIONNAIRE
60
Q1. What is the current ratio of assets and liabilities?
a.) Current Assets
b.) Current Liabilities
c.) Current Ratio

Q2. What is the quick ratio?

a.) Current Assrts
b.) Inventories
c.) Current Liabilities
d.) Current Ratio

Q3 What is debt to equity ratio of firm?

a.) Long term debt
b.) Share holder Euity
c.) Debt to Equity ratio

Q4. What is debt to capital ratio of the firm?

a.) Long term debt
b.)Permanent Capital
c.) Debt to capital ratio

Q5. What is the interest coverage ratio of the firm?

a.) EBIT
b.) Interest
c.) Interest coverage Ratio

Q6. What is the gross profit margin of the firm?

a.) Gross Profit
b.) Sales
c.) G.P Ratio

61
Q7. What is the net profit of the firm?
a.) Net profit
b.) Sales
c.) Net profit Ratio

Q8. What is the return on capital employed of the firm?

a.) Eat + Int. – Tax
b.) Average total Capital employed
c.) ROCE (%)

Q9. What is the return on assets of the firm?

a.) EAT
b.) Assets
c.) Return on assets (IN %)

Q10. Calculate operating profit ratio of the firm?

a.) EBIT
b.) Sales
c.) Operating ratio (in %)

LIST OF GRAPHS
62
S.NO. PARTICULARS PAGE
NO.

1. Current Ratio 35

2. Quick Ratio 37

3. Debt Equity Ratio 38

4. Capital Ratio 40

5. Interest Coverage Ratio 42

6. Gross Profit Margin 44

7. Net Profit 46

8. Return on Capital Employed 48

9. Return on Assets 50

10. Operating Profit Ratio 52

LIST OF TABLE

63
S.NO. PARTICULARS PAGE
NO.

1. Current Ratio 35

2. Quick Ratio 37

3. Debt Equity Ratio 38

4. Capital Ratio 39

5. Interest Coverage Ratio 41

6. Gross Profit Margin 43

7. Net Profit 45

8. Return on Capital Employed 47

9. Return on Assets 49

10. Operating Profit Ratio 51

64