INTRODUCTION

OBJECTIVE:

To understand the information contained in financial statements with a view to

know the strength or weaknesses of the firm and to make forecast about the future

prospects of the firm and thereby enabling the financial analyst to take different

decisions regarding the operations of the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the general

(qualitative) factors of a company. The other side considers tangible and measurable

factors (quantitative). This means crunching and analyzing numbers from the financial

statements. If used in conjunction with other methods, quantitative analysis can produce

excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet,

income statement, and cash flow statement. It's comparing the number against previous

years, other companies, the industry, or even the economy in general. Ratios look at the

relationships between individual values and relate them to how a company has

performed in the past, and might perform in the future.

MEANING OF RATIO:A ratio is one figure express in terms of another figure. It is a mathematical

yardstick that measures the relationship two figures, which are related to each other and

mutually interdependent. Ratio is express by dividing one figure by the other related

figure. Thus a ratio is an expression relating one number to another. It is simply the

quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure

ratio or in absolute figures as “ so many times”. As accounting ratio is an expression

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relating two figures or accounts or two sets of account heads or group contain in the

financial statements.

MEANING OF RATIO ANALYSIS:Ratio analysis is the method or process by which the relationship of items or

group of items in the financial statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative measure or guides concerning

the financial health and profitability of business enterprises. Ratio analysis can be used

both in trend and static analysis. There are several ratios at the disposal of an annalist

but their group of ratio he would prefer depends on the purpose and the objective of

analysis.

While a detailed explanation of ratio analysis is beyond the scope of this section, we will

focus on a technique, which is easy to use. It can provide you with a valuable

investment analysis tool.

This technique is called cross-sectional analysis. Cross-sectional analysis compares

financial ratios of several companies from the same industry. Ratio analysis can provide

valuable information about a company's financial health. A financial ratio measures a

company's performance in a specific area. For example, you could use a ratio of a

company's debt to its equity to measure a company's leverage. By comparing the

leverage ratios of two companies, you can determine which company uses greater debt

in the conduct of its business. A company whose leverage ratio is higher than a

competitor's has more debt per equity. You can use this information to make a judgment

as to which company is a better investment risk.

However, you must be careful not to place too much importance on one ratio. You

obtain a better indication of the direction in which a company is moving when several

ratios are taken as a group.

OBJECTIVE OF RATIOSRatio is work out to analyze the following aspects of business organization-

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A) Solvency-

1) Long term

2) Short term

3) Immediate

B) Stability

C) Profitability

D) Operational efficiency

E) Credit standing

F) Structural analysis

G) Effective utilization of resources

H) Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more variables /

accounting figures, such relationship can be expressed in different ways as follows –

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the

preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference

share capital is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be described as 4 times that

of preference share capital. Similarly, the cash sales of a firm are

Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales

can be described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales

are 2.5 times that of cash sales.

C] As a percentage:

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In such a case, one item may be expressed as a percentage of some other item.

For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is

Rs. 10,00,000, then the gross profit may be described as 20% of sales

[ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard ratio may be

the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio

of the most successful firm in the industry. In interpreting the ratio of a particular firm,

the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared

with some predetermined standard. The importance of a correct standard is oblivious as

the conclusion is going to be based on the standard itself.

TYPES OF COMPARISONS

The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them

with the ratio or ratios of some other selected firm in the same industry at the same

point of time. So it involves the comparison of two or more firm’s financial ratio at the

same point of time. The cross section analysis helps the analyst to find out as to how a

particular firm has performed in relation to its competitors. The firms performance may

be compared with the performance of the leader in the industry in order to uncover the

major operational inefficiencies. The cross section analysis is easy to be undertaken as

most of the data required for this may be available in financial statement of the firm.

2] Time series analysis:

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The analysis is called Time series analysis when the performance of a firm is

evaluated over a period of time. By comparing the present performance of a firm with

the performance of the same firm over the last few years, an assessment can be made

about the trend in progress of the firm, about the direction of progress of the firm. Time

series analysis helps to the firm to assess whether the firm is approaching the long-term

goals or not. The Time series analysis looks for (1) important trends in financial

performance (2) shift in trend over the years (3) significant deviation if any from the

other set of data\

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the

behavior & pattern of ratio, then meaningful & comprehensive evaluation of the

performance of the firm can definitely be made. A trend of ratio of a firm compared with

the trend of the ratio of the standard firm can give good results. For example, the ratio of

operating expenses to net sales for firm may be higher than the industry average

however, over the years it has been declining for the firm, whereas the industry average

has not shown any significant changes.

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The combined analysis as depicted in the above diagram, which clearly shows that the

ratio of the firm is above the industry average, but it is decreasing over the years & is

approaching the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions, there

are certain pre-requisites, which must be taken care of. It may be noted that these

prerequisites are not conditions for calculations for meaningful conclusions. The

accounting figures are inactive in them & can be used for any ratio but meaningful &

correct interpretation & conclusion can be arrived at only if the following points are well

considered.

1) The dates of different financial statements from where data is taken must be

same.

2) If possible, only audited financial statements should be considered, otherwise

there must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case of cross

section analysis otherwise the results of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of the firm. Therefore, a group

of ratios must be preferred. This will be conductive to counter checks.

5) Last but not least, the analyst must find out that the two figures being used to

calculate a ratio must be related to each other, otherwise there is no purpose of

calculating a ratio.

CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO

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BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY RATIO CREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR LONG TERMCREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from financial

statements. Figures may be taken from Balance Sheet , P& P A/C, or both. One-way of

classification of ratios is based upon the sources from which are taken.

1] Balance sheet ratio:If the ratios are based on the figures of balance sheet, they are called Balance

Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity.

While calculating these ratios, there is no need to refer to the Revenue statement.

These ratios study the relationship between the assets & the liabilities, of the concern.

These ratio help to judge the liquidity, solvency & capital structure of the concern.

Balance sheet ratios are Current ratio, Liquid ratio, and Proprietory ratio, Capital gearing

ratio, Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

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Ratio based on the figures from the revenue statement is called revenue

statement ratios. These ratio study the relationship between the profitability & the sales

of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net

profit ratio, Net operating profit ratio, Stock turnover ratio.

3] Composite ratio:These ratios indicate the relationship between two items, of which one is found in

the balance sheet & other in revenue statement.

There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits & the

investments of the concern. E.g. return on capital employed, return on proprietors

fund, return on equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios,

dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to liquidity

ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:It shows the relationship between the current assets & current liabilities of the

concern e.g. liquid ratios & current ratios.

2] Leverage ratios:It shows the relationship between proprietors funds & debts used in financing the

assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios.

3] Activity ratios:It shows relationship between the sales & the assets. It is also known as

Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

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4] Profitability ratios:a) It shows the relationship between profits & sales e.g. operating ratios, gross profit

ratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on investment,

return on equity capital.

5] Coverage ratios:It shows the relationship between the profit on the one hand & the claims of the

outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.

BASED ON USER:1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:Return on proprietors fund, return on equity capital

3] Ratios for management:Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:Debt equity ratios, return on capital employed, proprietor ratios.

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LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year)

obligations. The ratios, which indicate the liquidity of a company, are Current ratio,

Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below

CURRENT RATIOMeaning:

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This ratio compares the current assests with the current liabilities. It is also known as

‘working capital ratio’ or ‘ solvency ratio’. It is expressed in the form of pure ratio.

E.g. 2:1

Formula:

Current assetsCurrent ratio =

Current liabilities

The current assests of a firm represents those assets which can be, in the ordinary

course of business, converted into cash within a short period time, normally not

exceeding one year. The current liabilities defined as liabilities which are short term

maturing obligations to be met, as originally contemplated, with in a year.

Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL).

Current assets include cash and bank balances; inventory of raw materials, semi-

finished and finished goods; marketable securities; debtors (net of provision for bad and

doubtful debts); bills receivable; and prepaid expenses. Current liabilities consist of

trade creditors, bills payable, bank credit, provision for taxation, dividends payable and

outstanding expenses. This ratio measures the liquidity of the current assets and the

ability of a company to meet its short-term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets converted into

cash in the operating cycle of the firm and provides the funds needed to pay for CL. The

higher the current ratio, the greater the short-term solvency. This compares assets,

which will become liquid within approximately twelve months with liabilities, which will be

due for payment in the same period and is intended to indicate whether there are

sufficient short-term assets to meet the short- term liabilities. Recommended current

ratio is 2: 1. Any ratio below indicates that the entity may face liquidity problem but also

Ratio over 2: 1 as above indicates over trading, that is the entity is under utilizing its

current assets.

LIQUID RATIO:

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Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare the quick

assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1.

The term quick assets refer to current assets, which can be converted into, cash

immediately or at a short notice without diminution of value.

Formula:

Quick assetsLiquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to

those current assets that can be converted into cash immediately without any value

strength. QA includes cash and bank balances, short-term marketable securities, and

sundry debtors. Inventory and prepaid expenses are excluded since these cannot be

turned into cash as and when required.

QR indicates the extent to which a company can pay its current liabilities without relying

on the sale of inventory. This is a fairly stringent measure of liquidity because it is based

on those current assets, which are highly liquid. Inventories are excluded from the

numerator of this ratio because they are deemed the least liquid component of current

assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick

ratio is that it ignores the timing of receipts and payments.

CASH RATIOMeaning:This is also called as super quick ratio. This ratio considers only the absolute liquidity

available with the firm.

Formula:

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Cash + Bank + Marketable securities Cash ratio = Total current liabilities

Since cash and bank balances and short term marketable securities are the most liquid

assets of a firm, financial analysts look at the cash ratio. If the super liquid assets are

too much in relation to the current liabilities then it may affect the profitability of the firm.

INVESTMENT / SHAREHOLDER

EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the organization. An

earnings per Share represents earning of the company whether or not dividends are

declared. If there is only one class of shares, the earning per share are determined by

dividing net profit by the number of equity shares.

EPS measures the profits available to the equity shareholders on each share held.

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Formula:NPAT

Earning per share =Number of equity share

The higher EPS will attract more investors to acquire shares in the company as it

indicates that the business is more profitable enough to pay the dividends in time. But

remember not all profit earned is going to be distributed as dividends the company also

retains some profits for the business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share held.

Formula:

Dividend Paid to Ordinary Shareholders

Dividend per Share =Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to equity

shareholders out of the profit available to the equity shareholders.

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Formula:

Dividend per shareDividend Pay out ratio = *100

Earning per share

D/P ratio shows the percentage share of net profits after taxes and after preference

dividend has been paid to the preference equity holders.

GEARING

CAPITAL GEARING RATIO:-Meaning:Gearing means the process of increasing the equity shareholders return through the

use of debt. Equity shareholders earn more when the rate of the return on total capital is

more than the rate of interest on debts. This is also known as leverage or trading on

equity. The Capital-gearing ratio shows the relationship between two types of capital

viz: - equity capital & preference capital & long term borrowings. It is expressed as a

pure ratio.

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Formula: Preference capital+ secured loan

Capital gearing ratio = Equity capital & reserve & surplus

Capital gearing ratio indicates the proportion of debt & equity in the financing of assets

of a concern.

PROFITABILITY These ratios help measure the profitability of a firm. A firm, which generates a

substantial amount of profits per rupee of sales, can comfortably meet its operating

expenses and provide more returns to its shareholders. The relationship between profit

and sales is measured by profitability ratios. There are two types of profitability ratios:

Gross Profit Margin and Net Profit Margin.

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GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is defined as the

excess of the net sales over cost of goods sold or excess of revenue over cost. This

ratio shows the profit that remains after the manufacturing costs have been met. It

measures the efficiency of production as well as pricing. This ratio helps to judge how

efficient the concern is I managing its production, purchase, selling & inventory, how

good its control is over the direct cost, how productive the concern , how much amount

is left to meet other expenses & earn net profit.

Formula:

Gross profitGross profit ratio = * 100

Net salesNET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is usually

expressed in the form of a percentage.

Formula:

NPAT Net profit ratio = * 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and preference

shareholders) as a percentage of net sales. It measures the overall efficiency of

production, administration, selling, financing, pricing and tax management. Jointly

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considered, the gross and net profit margin ratios provide an understanding of the cost

and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of the total funds

employed in the firm. The term fund employed or the capital employed refers to the total

long-term source of funds. It means that the capital employed comprises of shareholder

funds plus long-term debts. Alternatively it can also be defined as fixed assets plus net

working capital.

Capital employed refers to the long-term funds invested by the creditors and the owners

of a firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the

efficiency with which the long-term funds of a firm are utilized.

Formula: NPAT

Return on capital employed = *100 Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted into cash.

They are also called efficiency ratios or asset utilization ratios as they measure the

efficiency of a firm in managing assets. These ratios are based on the relationship

between the level of activity represented by sales or cost of goods sold and levels of

investment in various assets. The important turnover ratios are debtors turnover ratio,

average collection period, inventory/stock turnover ratio, fixed assets turnover ratio, and

total assets turnover ratio. These are described below:

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DEBTORS TURNOVER RATIO (DTO) Meaning:DTO is calculated by dividing the net credit sales by average debtors outstanding during

the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit

sales minus returns, if any, from customers. Average debtors are the average of debtors

at the beginning and at the end of the year. This ratio shows how rapidly debts are

collected. The higher the DTO, the better it is for the organization.

Formula: Credit salesDebtors turnover ratio =

Average debtors

INVENTORY OR STOCK TURNOVER RATIO (ITR)Meaning:

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ITR refers to the number of times the inventory is sold and replaced during the

accounting period.

Formula:COGS

Stock Turnover Ratio = Average stock

ITR reflects the efficiency of inventory management. The higher the ratio, the more

efficient is the management of inventories, and vice versa. However, a high inventory

turnover may also result from a low level of inventory, which may lead to frequent stock

outs and loss of sales and customer goodwill. For calculating ITR, the average of

inventories at the beginning and the end of the year is taken. In general, averages may

be used when a flow figure (in this case, cost of goods sold) is related to a stock figure

(inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets.

Formula: Net salesFixed assets turnover =

Net fixed assetsThis ratio measures the efficiency with which fixed assets are employed. A high ratio

indicates a high degree of efficiency in asset utilization while a low ratio reflects an

inefficient use of assets. However, this ratio should be used with caution because when

the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover

ratio tends to be high (because the denominator of the ratio is very low).

PROPRIETORS RATIO:Meaning:

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Proprietary ratio is a test of financial & credit strength of the business. It relates

shareholders fund to total assets. This ratio determines the long term or ultimate

solvency of the company.

In other words, Proprietary ratio determines as to what extent the owner’s interest &

expectations are fulfilled from the total investment made in the business operation.

Proprietary ratio compares the proprietor fund with total liabilities. It is usually expressed

in the form of percentage. Total assets also know it as net worth.

Formula: Proprietary fund

Proprietary ratio = OR

Total fund

Shareholders fund

Proprietary ratio = Fixed assets + current liabilities

STOCK WORKING CAPITAL RATIO:Meaning:This ratio shows the relationship between the closing stock & the working capital. It

helps to judge the quantum of inventories in relation to the working capital of the

business. The purpose of this ratio is to show the extent to which working capital is

blocked in inventories. The ratio highlights the predominance of stocks in the current

financial position of the company. It is expressed as a percentage.

Formula:Stock

Stock working capital ratio = Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the

working capital. This ratio also helps to study the solvency of a concern. It is a

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qualitative test of solvency. It shows the extent of funds blocked in stock. If investment

in stock is higher it means that the amount of liquid assets is lower.

DEBT EQUITY RATIO:MEANING:This ratio compares the long-term debts with shareholders fund. The relationship

between borrowed funds & owners capital is a popular measure of the long term

financial solvency of a firm. This relationship is shown by debt equity ratio. Alternatively,

this ratio indicates the relative proportion of debt & equity in financing the assets of the

firm. It is usually expressed as a pure ratio. E.g. 2:1

Formula: Total long-term debt

Debt equity ratio = Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process of the

increasing the equity shareholders return through the use of debt. Leverage is also

known as ‘gearing’ or ‘trading on equity’. Debt equity ratio shows the margin of safety

for long-term creditors & the balance between debt & equity.

RETURN ON PROPRIETOR FUND:Meaning:Return on proprietors fund is also known as ‘return on proprietors equity’ or ‘return on

shareholders investment’ or ‘ investment ratio’. This ratio indicates the relationship

between net profit earned & total proprietors funds. Return on proprietors fund is a

profitability ratio, which the relationship between profit & investment by the proprietors in

the concern. Its purpose is to measure the rate of return on the total fund made

available by the owners. This ratio helps to judge how efficient the concern is in

managing the owner’s fund at disposal. This ratio is of practical importance to

prospective investors & shareholders.

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Formula: NPATReturn on proprietors fund = * 100

Proprietors fund

CREDITORS TURNOVER RATIO:It is same as debtors turnover ratio. It shows the speed at which payments are made to

the supplier for purchase made from them. It is a relation between net credit purchase

and average creditors

Net credit purchase Credit turnover ratio =

Average creditors

Months in a year Average age of accounts payable = Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher creditors

turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid

promptly. It enhances credit worthiness of the company. A very low ratio indicates that

the company is not taking full benefit of the credit period allowed by the creditors.

IMPORTANCE OF RATIO ANALYSIS:As a tool of financial management, ratios are of crucial significance. The

importance of ratio analysis lies in the fact that it presents facts on a comparative basis

& enables the drawing of interference regarding the performance of a firm. Ratio

analysis is relevant in assessing the performance of a firm in respect of the following

aspects:

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1] Liquidity position,

2] Long-term solvency,

3] Operating efficiency,

4] Overall profitability,

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION: -With the help of Ratio analysis conclusion can be drawn regarding the liquidity

position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet

its current obligation when they become due. A firm can be said to have the ability to

meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short

maturing debt usually within a year as well as to repay the principal. This ability is

reflected in the liquidity ratio of a firm. The liquidity ratio are particularly useful in credit

analysis by bank & other suppliers of short term loans.

2] LONG TERM SOLVENCY: -Ratio analysis is equally useful for assessing the long-term financial viability of a

firm. This respect of the financial position of a borrower is of concern to the long-term

creditors, security analyst & the present & potential owners of a business. The long-term

solvency is measured by the leverage/ capital structure & profitability ratio Ratio

analysis s that focus on earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect. The

leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of

various sources of finance or if it is heavily loaded with debt in which case its solvency

is exposed to serious strain. Similarly the various profitability ratios would reveal

whether or not the firm is able to offer adequate return to its owners consistent with the

risk involved.

3] OPERATING EFFICIENCY:

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Yet another dimension of the useful of the ratio analysis, relevant from the

viewpoint of management, is that it throws light on the degree of efficiency in

management & utilization of its assets. The various activity ratios measures this kind of

operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis,

dependent upon the sales revenues generated by the use of its assets- total as well as

its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial

position of a firm, the management is constantly concerned about overall profitability of

the enterprise. That is, they are concerned about the ability of the firm to meets its short

term as well as long term obligations to its creditors, to ensure a reasonable return to its

owners & secure optimum utilization of the assets of the firm. This is possible if an

integrated view is taken & all the ratios are considered together.

5] INTER – FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also

serves as a stepping-stone to remedial measures. This is made possible due to inter

firm comparison & comparison with the industry averages. A single figure of a particular

ratio is meaningless unless it is related to some standard or norm. one of the popular

techniques is to compare the ratios of a firm with the industry average. It should be

reasonably expected that the performance of a firm should be in broad conformity with

that of the industry to which it belongs. An inter firm comparison would demonstrate the

firms position vice-versa its competitors. If the results are at variance either with the

industry average or with the those of the competitors, the firm can seek to identify the

probable reasons & in light, take remedial measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In

other words, whether the financial position of a firm is improving or deteriorating over

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the years. This is made possible by the use of trend analysis. The significance of the

trend analysis of ratio lies in the fact that the analysts can know the direction of

movement, that is, whether the movement is favorable or unfavorable. For example, the

ratio may be low as compared to the norm but the trend may be upward. On the other

hand, though the present level may be satisfactory but the trend may be a declining

one.

ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant

accounting data relationships, which give the decision-maker insights into the financial

performance of a company. The advantages of ratio analysis can be summarized as

follows:

Ratios facilitate conducting trend analysis, which is important for decision

making and forecasting.

Ratio analysis helps in the assessment of the liquidity, operating efficiency,

profitability and solvency of a firm.

Ratio analysis provides a basis for both intra-firm as well as inter-firm

comparisons.

The comparison of actual ratios with base year ratios or standard ratios helps

the management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

1] Information problems

Ratios require quantitative information for analysis but it is not decisive about

analytical output .

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The figures in a set of accounts are likely to be at least several months out of

date, and so might not give a proper indication of the company’s current financial

position.

Where historical cost convention is used, asset valuations in the balance sheet

could be misleading. Ratios based on this information will not be very useful for

decision-making.

2] Comparison of performance over time

When comparing performance over time, there is need to consider the changes

in price. The movement in performance should be in line with the changes in

price.

When comparing performance over time, there is need to consider the changes

in technology. The movement in performance should be in line with the changes

in technology.

Changes in accounting policy may affect the comparison of results between

different accounting years as misleading.

3] Inter-firm comparison

Companies may have different capital structures and to make comparison of

performance when one is all equity financed and another is a geared company it

may not be a good analysis.

Selective application of government incentives to various companies may also

distort intercompany comparison. comparing the performance of two enterprises

may be misleading.

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Inter-firm comparison may not be useful unless the firms compared are of the

same size and age, and employ similar production methods and accounting

practices.

Even within a company, comparisons can be distorted by changes in the price

level.

Ratios provide only quantitative information, not qualitative information.

Ratios are calculated on the basis of past financial statements. They do not

indicate future trends and they do not consider economic conditions.

PURPOSE OF RATIO ANLYSIS:1] To identify aspects of a businesses performance to aid decision making

2] Quantitative process – may need to be supplemented by qualitative

Factors to get a complete picture.

3] 5 main areas:-

Liquidity – the ability of the firm to pay its way

Investment/shareholders – information to enable decisions to be made on the

extent of the risk and the earning potential of a business investment

Gearing – information on the relationship between the exposure of the business

to loans as opposed to share capital

Profitability – how effective the firm is at generating profits given sales and or its

capital assets

Financial – the rate at which the company sells its stock and the efficiency with

which it uses its assets

ROLE OF RATIO ANALYSIS: It is true that the technique of ratio analysis is not a creative technique in the

sense that it uses the same figure & information, which is already appearing in the

financial statement. At the same time, it is true that what can be achieved by the

28

technique of ratio analysis cannot be achieved by the mere preparation of financial

statement.

Ratio analysis helps to appraise the firm in terms of their profitability & efficiency

of performance, either individually or in relation to those of other firms in the same

industry. The process of this appraisal is not complete until the ratio so computed can

be compared with something, as the ratio all by them do not mean anything. This

comparison may be in the form of intra firm comparison, inter firm comparison or

comparison with standard ratios. Thus proper comparison of ratios may reveal where a

firm is placed as compared with earlier period or in comparison with the other firms in

the same industry.

Ratio analysis is one of the best possible techniques available to the

management to impart the basic functions like planning & control. As the future is

closely related to the immediate past, ratio calculated on the basis of historical financial

statements may be of good assistance to predict the future. Ratio analysis also helps to

locate & point out the various areas, which need the management attention in order to

improve the situation.

As the ratio analysis is concerned with all the aspect of a firms financial analysis

i.e. liquidity, solvency, activity, profitability & overall performance, it enables the

interested persons to know the financial & operational characteristics of an organisation

& take the suitable decision.

EVALUATION OF APLAB LIMITED THROUGH RATIO

29

COMPANY PROFILETHE COMPANY –

APLAB Limited is a professionally managed Public Limited company quoted on

the Bombay Stock Exchange. Since its inception in 1962, APLAB has been serving the

global market with wide range of electronic products meeting the international standards

for safety and reliability such as UL, VDE etc. They specialize in Test and Measurement

Equipment, Power Conversion and UPS Systems, Self-Service Terminals for Banking

Sector and Fuel Dispensers for Petroleum Sector. APLAB enjoys worldwide recognition

for the quality of its products, business integrity and innovative engineering skills.

ABOUT APLAB: Aplab started its operation in October 1962.

It is a professionally managed 40 years old public limited company.

It is quoted on BOMBAY STOCK EXCHANGE.

It serves customer global customer par excellence.

It specialized in Test & measurement instruments, power conversion, & UPS &

fuel dispensers for petroleum sector.

30

It enjoys worldwide recognition for the quality of its business integrity &

innovative engineering skills.

MISSION: To deliver high quality, carefully, engineered products, on time, with in budget, as

per the customer specification in a manner profitable to both, our customers & so

to us.

VISION: To be a global player, recognized for quality & integrity.

To be the TOP INDIAN COMPANY as conceived by our customers.

To be “ THE BEST ” company to work for, as rated by our employees.

GOAL: Goal at Aplab is extract ordinary customer service as we provide our customer

needs in the personal service industry.

CORPORATE MISSION –1] To achieve healthy and profitable growth of the company in the interest of our

customers & the shareholders.

2] To encourage teamwork, reward innovation and maintain healthy interpersonal

relations within the organization.

3] To expand knowledge and remain at the leading edge in technology to serve the

global market.

4] To understand the customer’s needs and provide solutions than merely selling

products.

31

5] To create intellectual capital by investing in hardware and embedded software

development.

VALUES & BELIEFS:Their values & beliefs required that they -

Treat employees with respect & give them an opportunity for input on how to

continuously improve their service goals.

Offer opportunities for growth, professional development & recognition.

Provide most effective & corrective action, to resolve customer service issues, to

ensure customer satisfaction.

Foster an open door policy, which encourages interaction, discussion & ideas to

improve work environment & increase productivity.

“ Do it right the first time & every time” is their team commitment * our way of

doing business, it ensures as growth & prosperity.

THE 21ST CENTURY SUCCESS –

APLAB had planned to enter the 21st Century with a program for a fast and

healthy growth in the global market based on company’s high technology foundation

and the reputation of four decades for prompt customer service and as a reliable

solution provider. After completing three years in the new era, we can say with pride

that we have been delivering our promises to our customers and the shareholders.

APLAB has entered the field of Professional Services starting with the Banking

and the Petroleum Industry. Focus on developing embedded system software has been

also enhanced. We believe that professional services sector is poised to grow at a very

rapid pace.

QUALITY IS OUR WORK CULTURE - ISO 9001:2000

Quality at APLAB is a part of our people’s attitude. Entire organization is

committed to create an environment that encourages individual excellence and a

32

personal commitment to quality. In APLAB, “Quality is everybody’s responsibility” and all

strive to “do it right the first time”. It is therefore natural that APLAB Limited is certified

for quality with ISO 9001:2000 registration.

QUALITY POLICY: Aplab will deliver to its customer products & services that consistently meet or

exceed their requirement.

Aplab will achieve this by total commitment & involvement of every individual.

Aplab will encourage its employees & suppliers to develop quality products

prevent defects & make continual improvement in all processes.

QUALITY OBJECTIVE: Aplab is an ISO 9001:2000 certifies company.

100% customer satisfaction.

On time delivery every time reduction is out going PPM to 10,000

[4 sigma]

RESEARCH AND DEVELOPMENT

Developing innovative products with the latest technology is the core strength of

APLAB. The Science & Technology Ministry of the Govt. of India accredits our R&D

Laboratories. We have a large team of dedicated, highly qualified skilled engineers who

excel in the latest state-of-the-art-technology. APLAB is recognized not only for

manufacturing standard products but also in providing solutions and services as per the

33

customer specifications. We spend more than 4% of the company revenue in Research

& Development activities.

Specific areas in which the company carries out R&D

1. Development of new product especially hi-tech intelligent product & electronic

transaction control system.

2. Improvement in the existing products & production processes, import

substitution.

3. Development of products to suit exports markets.

4. Customizing the products to the customer’s specifications & adaptation of

imported technology.

The company has achieved its position of leadership in the Indian

instrumentation industry & continuous to maintain it through its strong grip of

technology. Almost all the products manufactured by the company are import

substitution items, which are fully developed in house. It has resulted in considerable

saving of foreign exchange. With the company, R&D is an ongoing process. The

ministry of science & technology, Government of India, recognizes the company’s R&D.

Through a continuous interaction with production& Quality Assurance

Department takes up redesign of existing products. This is done to achieve state of the

art in our design & to bring about improvement to get maximum performance / cost

ratio.

FUTURE PLAN OF ACTIONMajor R&D activity is concentrated around up gradation of product design & re-

alignment of production processes to bring about improved quality at lower cost. This

will greatly help the company in facing competition in local markets from foreign

companies.

EXPORT

APLAB currently exports over 25% of its production to Western Europe, Canada

& USA. Over 30 million U.S. Dollars worth of Power Systems and Test Instruments from

34

APLAB are today operational in UK, Germany, France, Sweden, Belgium, Canada, and

USA & Australia.

APLAB’S ORGANISATION CHART EXECUTIVE

CHAIRMAN

MANAGING

DIRECTOR

DIRECTOR MAEKETING[TECHNICAL DIRECTOR

35

REGIOALHEAD:MUMBAINEWDELHISECUNDA-RABADBANGLORECHENNAI

- PE]

GENERALMANAGER

FINANCE G.M G.M. MATERIAL G.M. G.M.MANAGER PROD. MARKETING MANAGER ELTRAC DESIGN & PROD. & DESIGN DEVLOP-

MENT

OFFICERS

STAFF

WORKERS

PRODUCTS OF APLAB:a. TEST & MEASUREMENT INSTRUMENTS

b. HIGH POWER AC SYSTEMS (UPS, Frequency Converter, Inverter,

Isolation Transformer)

c. HIGH POWER DC SYSTEMS (DC Power Supply, DC Uninterruptible

Power Supply)

d. ATM INSTACASH

e. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC CONVERTERS,

SMPS, INVERTERS, STABILIZER, LINE CONDITIONER, ISOLATION

TRANSFORMER

36

ATM INSTACASHThe Banking Automation Division of

APLAB was launched in 1993, when

we introduced INSTACASH-India’s

first indigenously manufactured ATM

INSTACASH demonstrated

APLAB’s skills in design, hardware

manufacturing and software

integrations. Our in house R&D

group is constantly striving to scan

the rapidly changing technology and

offer suitable end to end solutions.

We are into Self Service Delivery

Systems, MICR Cheque Processing

and Smart Card based solutions. The latest is IMAGEENABLED Cheque Processing

solution- QUICKCLEAR.

APLAB LIMITED

BALANCE SHEET AS AT 31ST MARCH 2008(RS.’000)

AS AT 31ST 2002 AS AT 31ST 2008SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 16,29,69

21,29,69LOANSSecured 12,13,48Unsecured 3,67,99

15,81,47DEFFERED TAX LIABILITY (NET) 1,06,85TOTAL 38,18,01

APPLICATION OF FUNDS

37

FIXED ASSETSGross block 15,90,33Less: depreciation 10,32,96Net block 5,57,37Capital work in progress 54,36

6,11,73INVESTMENT 1,22,32CURRENT ASSESTS, LOANS & ADVANCESInventories 19,09,77 Sundary debtors 18,49,35Cash & bank balances 3,31,32Loan & advances 5,80,36

46,70,80CURRENT LIABLITIES & PROVISIONSCurrent liabilities 15,36,09Provisions 57,57

15,93,66NET CURRENT ASSESTS 30,77,14MISCELLANEOUS EXPENDITURE 6,84Total 3818,01

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2008

(RS.’000)

AS AT 31-3- 2002 AS AT 31-3-2008INCOME:Sales and operating earnings 48,19,19Other income 80,50Variation in stock 1,31,07

50,30,76EXPENCES: Materials consumed 18,97,28Purchase of trading goods 8,61,75 Payments to & provision for 9,95,04 employeesManufacturing expenses 2,21,37Excise duty 65,05Other expenses 5,76,71Interest & finance charges 2,60,22Depreciation 1,05,37

38

Less: transferred to revaluation 1,15 1,04,2249,81,64

PROFIT BEFORE TAX 49,12PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 24,42Deferred tax liability / (Assets) 4,02PROFIT AFTER TAX 20,68Balance brought forward from previous year 1Balance available for appropriation 20,69

Appropriations:General reserve 20,68Surplus / (loss) carried to B/S 1Proposed dividendTax on proposed dividend

20,69Basic earning per share (rupee)

0.410.41

BALANCE SHEET AS AT 31ST MARCH 2009(RS.’000)

AS AT 31-3- 2003 AS AT 31-3- 2009SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 16,55,19

21,55,19LOANSSecured 10,27,55Unsecured 4,53,16

14,80,71DEFFERED TAX LIABILITY (NET) 87,21TOTAL 37,23,11

APPLICATION OF FUNDSFIXED ASSETSGross block 17,40,97

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Less: depreciation 11,40,93Net block 6,00,04Capital work in progress 29,74

6,29,78INVESTMENT 1,47,26CURRENT ASSESTS, LOANS & ADVANCESInventories 19,02,79 Sundary debtors 19,05,76Cash & bank balances 3,95,25Loan & advances 8,98,62

51,02,42CURRENT LIABLITIES & PROVISIONSCurrent liabilities 20,41,56Provisions 1,20,76

21,62,32NET CURRENT ASSESTS 29,40,10MISCELLANEOUS EXPENDITURE 5,97TOTAL 37,23,11

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2009

(RS.’000)

AS AT 31-3- 2003 AS AT 31-3- 2009INCOME:Sales and operating earnings 59,62,22Other income 15,04Variation in stock (59,27)

59,17,99EXPENCES: Materials consumed 22,41,60Purchase of trading goods 10,37,52 Payments to & provision for 10,63,96 EmployeesManufacturing expenses 2,69,99Excise duty 72,69Other expenses 7,62,23Interest & finance charges 2,36,57Depreciation 1,07,97Less: transferred to revaluation 1,03 1,06,94

57,91,50

40

PROFIT BEFORE TAX 1,26,49PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 63,19Deferred tax liability / (Assets) (19,64)PROFIT AFTER TAX 82,94Balance brought forward from previous year 1Balance available for appropriation 82,95

Appropriations:General reserve 26,50Surplus / (loss) carried to B/S 4Proposed dividend 50,00Tax on proposed dividend 6,41

82,95Basic earning per share (rupee) 1.66

BALANCE SHEET AS AT 31ST MARCH 2010(RS.’000)

AS AT 31-3- 2004 AS AT 31-3- 2010SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 17,42,59

22,42,59LOANSSecured 11,38,86Unsecured 5,58,29

16,97.15DEFFERED TAX LIABILITY (NET) 95,33TOTAL 40,35,07

APPLICATION OF FUNDSFIXED ASSETSGross block 18,41,58Less: depreciation 12,40,03Net block 6,01,55Capital work in progress 15,29

6,16,84

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INVESTMENT 1,48,34CURRENT ASSESTS, LOANS & ADVANCESInventories 21,46,20 Sundary debtors 19,51,56Cash & bank balances 4,49,74Loan & advances 850,58

53,98,08CURRENT LIABLITIES & PROVISIONSCurrent liabilities 18,16,17Provisions 3,12,02

21,28,19NET CURRENT ASSESTS 32,69,89TOTAL 40,35,07

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2010

(RS.’000)

AS AT 31-3- 2004 AS AT 31-3-2010INCOME:Sales and operating earnings 73,90,47Other income 31,39Variation in stock 53,99

74,75,85EXPENCES: Materials consumed 28,51,40Purchase of trading goods 14,03,33 Payments to & provision for 12,94,47 employeesManufacturing expenses 3,07,51Excise duty 70,08Other expenses 9,17,94Interest & finance charges 2,46,30Depreciation 1,10,89Less: transferred to revaluation 93 1,09,96

72,00,99PROFIT BEFORE TAX 2,74,86PRIOR YEAR ADJUSTMENT (NET) 25,71

42

PROVISION FOR TAXATIONCurrent tax 1,19,50Deferred tax liability / (Assets) 8,13PROFIT AFTER TAX 17294Balance brought forward from previous year 4Balance available for appropriation 1,72,98

Appropriations:General reserve 88,30Surplus / (loss) carried to B/S 7Proposed dividend 75,00Tax on proposed divident 9,61

1,72,98Basic earning per share (rupee) 3.46

BALANCE SHEET AS AT 31ST MARCH 2011(RS.’000)

AS AT 31-3- 2005 AS AT 31-3- 2011SOURCES OF FUNDSSHAREHOLDERS FUNDShare capital 5,00,00Reserves and surplus 19,14,91

24,14,91LOANSSecured 17,23,12Unsecured 5,36,89

22,60,01DEFFERED TAX LIABILITY (NET) 92,02TOTAL 47,66,94

APPLICATION OF FUNDSFIXED ASSETSGross block 21,64,89Less: depreciation 13,43,05Net block 8,21,84Capital work in progress -

8,21,84INVESTMENT 2,32,91CURRENT ASSESTS, LOANS & ADVANCES

43

Inventories 19,32,88 Sundary debtors 23,06,67Cash & bank balances 6,04,64Loan & advances 10,04,02

58,48,21CURRENT LIABLITIES & PROVISIONSCurrent liabilities 16,55,15Provisions 4,80,87

21,36,02NET CURRENT ASSESTS 37,12,19TOTAL 47,66,19

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2011

(RS.’000)AS AT 31-3- 2005 AS AT 31-3 2011

INCOME:Sales and operating earnings 74,20,31Other income 41,69Variation in stock (38,45)

74,23,55EXPENCES: Materials consumed 25,91,83Purchase of trading goods 15,21,00 Payments to & provision for 13,54,15 employeesManufacturing expenses 2,71,41Excise duty 75,41Other expenses 8,44,78Interest & finance charges 2,15,82Depreciation 1,26,68Less: transferred to revaluation 84 1,25,84

70,00,24PROFIT BEFORE TAX 4,23,31PRIOR YEAR ADJUSTMENT (NET)PROVISION FOR TAXATIONCurrent tax 1,50,84Deferred tax liability / (Assets) (3,31)PROFIT AFTER TAX 2,75,78Balance brought forward from previous 7

44

yearBalance available for appropriation 2,75,85

Appropriations:General reserve 1,73,20Surplus / (loss) carried to B/S 3Proposed dividend 90,00

2,75,85Basic earning per share (rupee) 5.52

CALCULATIONS AND INTERPRETATION OF RATIO’S

1] CURRENT RATIO:Formula: Current assets

Current ratio = Current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Current assets 46,70,80 51,08,39 53,98,08 58,28,21Current liabilities 15,93,66 21,62,32 21,28,19 21,36,02Current ratio 2.93 2.36 2.53 2.72

COMMENTS:In Aplab company the current ratio is 2.72:1 in 2004-2005. it means that for one

rupee of current liabilities, the current assets are 2.72 rupee are available to the them.

In other words the current assets are 2.72 times the current liabilities.

Almost 4 years current ratio is same but current ratio in 2004-2005 is bit higher, which

makes company more sound. The consistency increase in the value of current assets

will increase the ability of the company to meets its obligations & therefore from the

point of view of creditors the company is less risky.

The available working capital with the company is in increasing order.

2001-2002 - 30,77,14

2002-2003 - 29,46,07

45

2003-2004 - 32,69,89

2004-2005 - 36,92,19

The company has sufficient working capital to meets its urgency/ obligations. A

company has a high percentage of its current assets in the form of working capital, cash

that would be more liquid in the sense of being able to meet obligations as & when they

become due. From this working capital, the company meets its day-to-day financial

obligations.

Thus, the current ratio throws light on the company’s ability to pay its current

liabilities out of its current assets. The Aplab Company’s has a very good liquidity

position of company.

2] LIQUID RATIO:Formula:

Quick assetsLiquid ratio =

Quick liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Quick assets 21,80,67 23,01,01 24,01,30 29,11,31Quick liabilities 15,93,66 21,62,32 21,28,19 21,36,02 Liquid ratio 1.36 1.06 1.12 1.36

COMMENTS:The liquid or quick ratio indicates the liquid financial position of an enterprise.

Almost in all 4 years the liquid ratio is same, which is better for the company to meet the

urgency. The liquid ratio of the Aplab Company has increased from 1.12 to 1.36 in

2004-2005. Day to day solvency is more sound for company in 2004-2005 over the year

2003-2004.

This indicates that the dependence on the short-term liabilities & creditors are

less & the company is following a conservative working capital policy.

46

Liquid ratio of Company is favorable because the quick assets of the company

are more than the quick liabilities. The liquid ratio shows the company’s ability to meet

its immediate obligations promptly.

3] PROPRIETORY RATIO:Formula:

Proprietary fundProprietary ratio = OR

Total fund

Shareholders fundProprietary ratio = Fixed assets + current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Proprietary fund 21,29,69 21,55,19 22,42,59 24,14,91Total fund 52,82,53 57,38,17 66,14,92 66,70,05Proprietary ratio 40 37.55 33.90 36.20

COMMENTS:The Proprietary ratio of the company is 36.20% in the year 2004-2005. It means

that the for every one rupee of total assets contribution of 36 paise has come from

owners fund & remaining balance 66 paise is contributed by the outside creditors. This

shows that the contribution by outside to total assets is more than the owners fund. This

Proprietary ratio of the Company shows a downward trend for the last 4 years. As the

Proprietary ratio is not favorable the Company’s long-term solvency position is not

sound.

4] STOCK WORKING CAPITAL RATIO:Formula:

StockStock working capital ratio = Working Capital

47

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Stock 19,09,77 19,02,79 21,46,20 19,32,88Working Capital 30,77,14 29,46,07 32,69,89 37,12,19Stock working capital ratio

62.06 64.58 65.63 52.06

COMMENTS:This ratio shows that extend of funds blocked in stock. The amount of stock is

increasing from the year 2001-2002 to 2003-2004. However in the year 2004-2005 it

has declined to 52%. In the year 2004-2005 the sale is increased which affects

decrease in stock that effected in increase in working capital in 2004-2005.

It shows that the solvency position of the company is sound.

5] CAPITAL GEARING RATIO:Formula:

Preference capital+ secured loanCapital gearing ratio =

Equity capital & reserve & surplus

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Secured loan 12,13,48 10,27,56 11,38,86 1,72,312Equity capital & reserves & surplus

21,29,69 21,55,19 22,42,59 2,41,491

Capital gearing ratio

56.97 47.67 50.78 71

COMMENTS:Gearing means the process of increasing the equity shareholders return through

the use of debt. Capital gearing ratio is a leverage ratio, which indicates the proportion

of debt & equity in the financing of assets of a company.

For the last 3 years [i.e.2001-2002 TO 2003-2004] Capital gearing ratio is all most same

which indicates, near about 50% of the fund covering the secured loan position. But in

the year 2004-2005 the Capital-gearing ratio is 71%. It means that during the year

2004-2005 company has borrowed more secured loans for the company’s expansion.

48

6] DEBT EQUITY RATIO:Formula:

Total long term debt

Debt equity ratio = Total shareholders fund

YEAR 2007-2008 2008-2009 2009-20010 2010 -2011 Long term debt 15,81,47 14,80,70 16,97,15 22,60,01

Shareholders fund

21,29,69 21,55,19 22,42,59 24,14,91

Debt Equity Ratio 0.74 0.68 0.75 0.93

COMMENTS:The debt equity ratio is important tool of financial analysis to appraise the

financial structure of the company. It expresses the relation between the external

equities & internal equities. This ratio is very important from the point of view of creditors

& owners.

The rate of debt equity ratio is increased from 0.74 to 0.93 during the year 2001-

2002 to 2004-2005. This shows that with the increase in debt, the shareholders fund

also increased. This shows long-term capital structure. The lower ratio viewed as

favorable from long term creditors point of view.

7] GROSS PROFIT RATIO:Formula:

Gross profitGross profit ratio = * 100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Gross profit 24,54,48 37,65,90 45,57,45 42,37,52

49

Net sales 43,45,46 51,02,37 68,76,89 68,09,78Gross profit Ratio 56.48 73.80 66.27 62.22

COMMENTS:The gross profit is the profit made on sale of goods. It is the profit on turnover. In

the year 2001-2002 the gross profit ratio is 56.48%. It has increased to 73.80% in the

year 2002-2003 due to increase in sales without corresponding increase in cost of

goods sold. However the gross profit ratio decreased to 66.27% in the year 2003-2004.

It is further declined to 62.22% in the year 2004-2005, due to high cost of

purchases & overheads. Although the gross profit ratio is declined during the year 2002-

2003 to 2004-2005. The net sales and gross profit is continuously increasing from the

year 2001-2002 to 2004-2005.

8] OPERATING RATIO:Formula: COGS+ operating expenses

Operating ratio = *100 Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

50

COGS + Operating expenses

18,90,98 +2,21,37 +5,76,71

21,96,32 +2,69,98 +7,62,23

28,33,02 +3,07,51 +9,17,94

2,57,226+27,141+84,478

Net sales 43,45,46 51,02,37 68,76,89 6,80,978Operating ratio 61.88% 63.27% 59% 54.16%

COMMENTS:The operating ratio shows the relationship between costs of activities & net sales.

Operating ratio over a period of 4 years when compared that indicate the change in the

operational efficiency of the company.

The operating ratio of the company has decreased in all 4 year. This is due to

increase in the cost of goods sold, which in 2001-2002 was 61.88%, in 2002-2003 was

63.27%, in 2003-2004 was 59% & in 2004-2005 it is 54.16%. though the cost has

increased in 2002-2003 as compared to 2001-2002, it is reducing continuously over the

next two years, indicate downward trend in cost but upward / positive trend in

operational performance.

9] EXPENSE RATIO:The ratio of each item of expense or each group of expense to net sales is known as

‘Expense ratio’. The expense ratio brings out the relationship between various elements

of operating cost & net sales. Expense ratio analyzes each individual item of expense or

group of expense& expresses them as a percentage in relation to net sales.

A] MANUFACTURING EXPENSES:Formula:

Manufacturing expensesManufacturing expense ratio = *100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Manufacturing expenses

2,21,37 2,69,98 3,07,51 2,71,41

Net sales 43,45,46 51,02,37 68,76,89 68,09,78

51

Manufacturing expenses ratio

5% 5.29% 4.47% 3.98%

COMMENTS:The manufacturing expense is shows the downward trend. During the year

2001–2002 to 2002-2003 the manufacturing expense increased because there is

increase in the charges like labour, rent , power & electricity, repair to plant & machinery

& miscellaneous works expenses. The manufacturing expense during the year 2001-

2002 to 2004-2005 is decreased from 5% to 3.96%. This indicates that the company

has control over the manufacturing expense.

B] OTHER EXPENSES:Formula: Other expenses Other expense ratio = *100 Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Other expenses 5,76,71 7,62,23 9,17,94 8,44,78Net sales 43,45,46 51,02,37 68,76,89 68,09,78Other expenses ratio

13.2% 14.93% 13.34% 12.40%

COMMENTS:The other expense of company is increased during the 2001-2002 to 2003-2004,

because increase in the charges of rent of office, equipment lease rental, printing &

stationary, advertisement & publicity, transport outward & other charges. But during the

year 2004-2005 the other expenses is decrease from 13.34% to 12.40%. Because

decrease in equipment lease rental, advertisement & publicity, transport charges,

commission & discount, sales tax & purchase tax . This indicates that the company also

controlling the other expenses.

52

10) NET PROFIT RATIOFormula:

NPAT Net profit ratio = * 100

Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,98 82,94 1,72,94 2,75,78Net sales 434546 51,02,37 68,76,89 68,09,78Net profit ratio 0.48 1.6 2.5 4.04

COMMENTS:The net profit ratio of the company is low in all year but the net profit is increasing

order from this ratio of 4 year it has been observe that the from 2001-2002 to 2004-2005

the net profit is increased i.e. in 2003 it is increased by 1.12 in 2003-2004 by 0.9 & in

2004-2005 by 1.54.

Profitability ratio of company shows considerable increase. Company’s sales

have increased in all 4 years & at the same time company has been successful in

controlling the expenses i.e. manufacturing & other expenses.

53

It is a clear index of cost control, managerial efficiency & sales promotion.

11] STOCK TURNOVER RATIO:Formula:

COGS Stock Turnover Ratio = Average stock

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005COGS 18,90,98 21,96,32 28,33,02 25,72,26Average stock 5,49,90 5,97,58 6,73,11 6,89,30Stock Turnover Ratio

3.4 3.6 4.20 3.73

COMMENTS:Stock turnover ratio shows the relationship between the sales & stock it means

how stock is being turned over into sales.

The stock turnover ratio is 2001-2002 was 3.4 times which indicate that the stock

is being turned into sales 3.4 times during the year. The inventory cycle makes 3.4

round during the year. It helps to work out the stock holding period, it means the stock

turnover ratio is 3.4 times then the stock holding period is 3.5 months

[12/3.4=3.5months]. This indicates that it takes 3.5 months for stock to be sold out after

it is produced.

For the last 4 years stock turnover ratio is lower than the standard but it is in

increasing order. In the year 2001-2002 to 2004-2005 the stock turnover ratio has

improved from 3.4 to 3.73 times, it means with lower inventory the company has

achieved greater sales. Thus, the stock of the company is moving fast in the market.

12] RETURN ON CAPITAL EMPLOYED:Formula:

NPAT

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Return on capital employed = *100 Capital employed

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,68 82,94 1,72,94 2,75,78Capital employed 38,18,01 37,23,11 40,35,07 47,66,93Return on capital employed

0.54 2.23 4.28 5.79

COMMENTS:The return on capital employed shows the relationship between profit &

investment. Its purpose is to measure the overall profitability from the total funds made

available by the owner & lenders.

The return on capital employed of Rs.5 indicate that net return of Rs.5 is earned

on a capital employed of Rs.100. this amount of Rs.5 is available to take care of

interest, tax,& appropriation.

The return on capital employed is show-increasing trend, i.e. from 0.54 to 5.79. All of

sudden in 2001-2002 the return on capital employed increased from 0.54 to 5.79. This

indicates a very high profitability on each rupee of investment & has a great scope to

attract large amount of fresh fund.

13] EARNING PER SHARE:

Formula: NPAT

Earning per share = Number of equity share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,98,000 82,94,000 1,72,94,000 2,75,78,000No.ofequity share 50,00,000 50,00,000 50,00,000 50,00,000Earning per share 0.41 1.66 3.46 5.52

COMMENTS: Earning per share is calculated to find out overall profitability of the company.

Earning per share represents the earning of the company whether or not dividends are

declared.

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The Earning per share is 5.52 means shareholder gets Rs. 5.52 for each share of

Rs. 10/-. In other words the shareholder earned Rs. 5.52 per share.

The net profit after tax of the company is increasing in all years. Therefore the

shareholders earning per share is increased continuously from 2001-2002 to 2004-2005

by 0.41 to 05.52. This shows it is continuous capital appreciation per unit share by 0.41

to 05.52.

The above diagram shows the Earning per share and Dividend per share is

increasing rapidly. It is beneficial to the shareholders and prospective investor to invest

the money in this company.

14] DIVIDEND PAYOUT RATIO:

Formula: Dividend per share

Dividend Pay out ratio = * 100 Earning per share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Dividend per share

- 1 1.50 1.80

Earning per share 0.41 1.66 3.46 5.52Dividend payout - 60.24 43.35 32.60

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ratio

COMMENTS:In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is 60.24 and

43.35 respectively. In the year 2002-2003 the company has declared the dividend 60.24

and the balance 39.76 is retained with them for the expansion. The company has not

earned more profit in the year 2001-2002 hence the company has not declared dividend

in the year 2001-2002. However the company has declared more dividends in the year

2002-2003 as the company has sufficient profit. In the year 2004 the company has

declared 1.50 dividends per share hence the earning per share has doubled. From this

one can say that the company is more conservative for expansion.

15] COST OF GOODS SOLD:Formula: COGSCost of goods sold Ratio = * 100 Net sales

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005COGS 18,90,98 21,96,32 28,33,02 25,72,26Net sales 43,45,46 51,02,37 68,76,89 68,09,78Cost of goods sold ratio

43.51 43.04 41.19 37.77

COMMENTS:This ratio shows the rate of consumption of raw material in the process of

production. In the year 2001-2002 the cost of goods sold ratio is 43.51% so the gross

profit is 56.49%. it indicates that in 2001-2002, the 43% of raw material is consumed in

the process of production.

During the last 4 years the rate of cost of goods sold ratio is continuously

decreasing however the gross profit & sales is increased during the same period.

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16] CASH RATIO:Formula:

Cash + Bank + Marketable securities

Cash ratio = Total current liabilities

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Cash + Bank + Marketable securities

3,31,32 3,95,25 4,49,74 6,04,64

Total current liabilities

15,93,66 21,62,32 21,28,19 21,36,02

Cash ratio 0.20 0.18 0.21 0.28

COMMENTS:This ratio is called as super quick ratio or absolute liquidity ratio. In the year

2001-2002 the cash ratio is 0.20 & then it is decreased to 0.18 in the year 2002-2003.

Then again it is increased to 0.21 in the year 2003-2004 & 0.28 in the year 2004-2005.

This shows that the company has sufficient cash, bank balance, & marketable securities

to meet any contingency.

17] RETURN ON PROPRIETORS FUND:Formula:

NPATReturn on proprietors fund = * 100

Proprietors fund

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,68 82,94 1,72,94 2,75,78Proprietors fund 21,29,69 21,55,19 22,42,59 24,14,91Return on proprietors fund

0.97 3.84 7.71 11.41

COMMENTS:

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Return on proprietors fund shows the relationship between profits & investments

by proprietors in the company. In the year 2002-2003 the return on proprietors fund is

3.84% it means the net return of Rs. 3 approximately is earned on the each Rs. 100 of

funds contributed by the owners.

During the last 4 years the rate of return on proprietors fund is in increasing

order. The return on proprietors fund during the year 2001-2002 to 2004-2005 is

increased from 0.97% to 11.41%.

It shows that the company has a very large returns available to take care of high

dividends, large transfers to reserve etc. & has a great scope to attract large amount of

fresh fund from owners.

18] RETURN ON EQUITY:Formula:

NPATReturn on equity share capital = * 100

No. of equity share

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005NPAT 20,68 82,94 1,72,94 2,75,78No. of equity share

50,000 50,000 50,000 50,000

Return on equity share capital

4.13 16.5 34.58 55

COMMENTS:This ratio shows the relationship between profit & equity shareholders fund in the

company. It is used by the present / prospective investor for deciding whether to

purchase, keep or sell the equity shares.

In the year 2002-2003 the return on proprietors fund is 16.5%, which means the

net return of Rs. 16, is earned on the each Rs.100 of the funds contributed by the equity

shareholders.

The rate of return on equity share capital is increased from4.13% to 55% during

the year 2001-2002 to 2004-2005. This shows that the company has a very large

returns available to take care of high equity dividend, large transfers to reserve, & also

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company has a great scope to attract large amount to fresh funds by issue of equity

share & also company has a very good price for equity shares in the BSE.

19] OPERATING PROFIT RATIO:

Formula:Operating profit

Operating profit ratio = *100Net sales

COMMENTS:Operating profit ratio shows the relationship between operating profit & the sales.

The operating profit is equal to gross profit minus all operating expenses or sales less

cost of goods sold and operating expenses.

The operating profit ratio of 7.11% indicates that average operating margin of

Rs.7 is earned on sale of Rs. 100. this amount of Rs. 7 is available for meeting non

operating expenses. In the other words operating profit ratio 7.11% means that 7.11%

of net sales remains as operating profit after meeting all operating expenses.

During the last 4 years the operating profit ratio is increased from 7.11% to

9.38%. It indicates that the company has great efficiency in managing all its operations

of production, purchase, inventory, selling and distribution and also has control over the

direct and indirect costs. Thus, company has a large margin is available to meet non-

operating expenses and earn net profit.

20] CREDITORS TURNOVER RATIO:

Formula:

Net credit purchase Credit turnover ratio =

Average creditors

Months in a year

Average age of accounts payable =

60

Credit turnover ratio

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005Net credit purchase

21,21,43 22,71,80 29,08,61 25,29,04

Average creditors 5,88,42 7,91,21 6,96,86 7,80,39Credit turnover ratio

3.6 times 3.6 times 4 times 3 times

Average age of accounts payable

3.3 months 3.3 months 3 months 4 months

COMMENTS:The creditors turnover ratio shows the relationship between the credit purchase and

average trade creditors. It shows the speed with which the payments are made to the

suppliers for the purchase made from them.

The credit turnover ratio of 4, indicate that the creditors are being turned over

4times during the year. It indicates the number of rounds taken by the credit cycle of

payables during the year.

There is no standard ratio in absolute term. The creditors ratio for the year 2001-

2002 and 2002-2003 as good as the same, but it is increased by 3.6 to 4 in 2003-

2004.this means the company has settled the creditors dues very fastly than the

previous year.

DEBTORS TURNOVER RATIO:Formula:

Credit salesDebtors turnover ratio =

Average debtors

Days in a yearDebt collection period =

Debtor’s turnover

YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

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Credit sales 47,77,48 55,21,33 74,87,36 68,09,78Average debtors 18,49,35 19,05,76 19,51,56 23,06,67Debtors turnover ratio

2.5 times 2.8 times 3.8 times 2.9 times

Debt collection period

146 days 130 days 96 days 125 days

COMMENTS:Debtor’s turnover ratio is alternative known as “ Accounts Receivable Turnover

Ratio”. This ratio measures the collectibility of debtors & other accounts receivable, it

means the rate at which the trade debts are being collected.

The Debtors turnover ratio of 2.5 indicates that the debtors are being turned over

2.5 times during the year. It means that the credit cycle of debtors makes 2.5 rounds

during the year. It helps to workout the debt collection period i.e. 146 days [365/ 2.5 =

146]. This indicates that it take146 days on an average for the debtors to be settled.

Debt collection period indicates the duration of the credit cycle of the debtors.

The Debtors turnover ratio is almost same during the year 2001-2002 to

2004-2005, which indicates that the debts are being collected at a fast speed during the

year. The operating cycle of the debtors is short. In other words the debts collection

period is short which result into less chance of bad debts.

SUMMARY OF FINANCIAL POSITION OF APLAB LIMITEDAfter going through the various ratios, I would like to state that:

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The short-term solvency of the company is quite satisfactory.

Immediate solvency position of the company is also quite satisfactory. The

company can meet its urgent obligations immediately.

Credit policies are effective.

Over all profitability position of the company is quite satisfactory.

Stock turnover rate is satisfactory. Stock of the company is moving fast in the

market.

The company is paying promptly to the suppliers.

The return on capital employed is satisfactory.

The management should take care of inventory management and speed up the

movement of stock. Effective selling technique or product modification may be adopted

to face the competitors and to improve the financial position of the company by taking

appropriate decisions.

CONCLUSION:

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The focus of financial analysis is on key figures contained in the financial

statements and the significant relationship that exits. The reliability and significance

attach to the ratios will largely on hinge upon the quality of data on which they are best.

They are as good for as bad as the data it self.

Financial ratios are a useful by product of financial statement and provide

standardized measures of firms financial position, profitability and riskiness. It is an

important and powerful tool in the hands of financial analyst. By calculating one or other

ratio or group of ratios he can analyze the performance of a firm from the different point

of view.

The ratio analysis can help in understanding the liquidity and short-term solvency

of the firm, particularly for the trade creditors and banks. Long-term solvency position as

measured by different debt ratios can help a debt investor or financial institutions to

evaluate the degree of financial risk. The operational efficiency of the firm in utilizing its

assets to generate profits can be assessed on the basis of different turnover ratios. The

profitability of the firm can be analyzed with the help of profitability ratios.

However the ratio analyses suffers from different limitations also. The ratios need

not be taken for granted and accepted at face values. These ratios are numerous and

there are wide spread variations in the same measure. Ratios generally do the work of

diagnosing a problem only and failed to provide the solution to the problem.

BIBLIOGRAPHY

REFERENCE BOOKS –

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FINANCIAL MANAGEMENT Theory, Concepts & problems

R.P.RUSTAGI

FINANCIAL MANAGEMENT Text and problems

M.Y. KHAN AND P. K. JAIN

MANAGEMENT ACCOUNTING

AINAPURE

FINANCIAL MANAGEMENT

L.N. CHOPDE D.N. CHOUDHARI S.L. CHOPDE

ANAUAL REPORTS OF APLAB LIMITED

2001-2002 2002-2003 2003-2004 2004-2005

WEBSIDES -

www.bizd.ac.uk/compfact/ratio

www.cecunc.org.com/business/financial

www.zeromillion.com.business/financial

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