verka report

1. INTRODUCTION TO ORGANISATION

Verka is Co-Operative Company and is former oriented autonomous or organization based on

Co-Operative pattern. It is the king of Punjab Region as far as Milk Procurement is concerned.

Its daily Milk production is around 2.00 lacs liters per day on an average and that is why huge

amount of Milk production has become its core competency. It produces many daily products.

"MILKFED" is a group of Milk Union established under operation flood program as the

implementing agency by the government of Ropar and metropolis Chandigarh. The Ropar

district co-operative milk produces union was established in the year of 1980.

The main objectives for its establishment were:

1. To create an organized factor to develop and command a major share of urban milk market of

Chandigarh.

2. To provide year around remuneration price to the small rural Milk producers organized into

co-operative.

3. To provide quality milk and milk produces to the consumers.

4. The milk plant carries out activities conductive to the economic development to agriculturist

by organizing effective production, process and marketing of commodities.

The milk plant has installed capacity of process 1,00,000 litres of milk per day and it is

registered handling capacity of 2,00,000 liters by the year 2008-09. The milk plant is managed

by qualified professionals in the dairy field. The production facility are backed up by quality

assurance, marketing training, financial management, data processing and other required

services, providing a vibrant work environment to its personnel in pursuit of excellence.

The milk plant is committed to supply quality and safe milk and milk products to its esteem

customers at the right time. The milk plant has introduced ISO 9001:2000. Management system

and Indian standard of hazard analysis and critical points (HACCP)/IS: 15000-1998 to ensure

highest quality products with built in safety to consumers.

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Recently, the Verka Milk Plant Mohali of Milkfed Punjab have bagged prestigious National

Productivity Council Award at National level Competition in the field of dairy processing

industries conducted by National Productivity Council of India, New Delhi.

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1.1 HISTORY AND PRESENT POSITION OF VERKA

A. HISTORY OF VERKA

The company has been well known by its brand name "VERKA" especially In Punjab and

Haryana. Chandigarh Milk Plant was set up in year 1961-1962 to meet the milk initially. But it

was not able to fulfill the growing requirements of Chandigarh City. Due to this reason another

plant set up in September 1980 at Mohali (Punjab), which is adjoining to Chandigarh.

MILK PLANT MOHALI

"The Ropar Distt. Co-op Producer Union"

It is one of the "MILKFED" group located at S.A.S Nagar, Mohali (Punjab). It is registered on

05.07.1978 under Punjab Cooperative Societies Act, 1961. It started its activities on September

1980.

B. PRESENT POSITION OF VERKA

Presently it has 856 Societies and around 46000 members are supplying milk and making their

contribution to the Mohali (Punjab) Plant as follows:-

1. In Ropar District 520 Village Societies.

2. In S.A.S Nagar, Mohali 164 Societies.

3. In Fatehgarh District 109 Societies.

4. In Patiala District 60 Societies.

5. In UT 3 Societies.

In Ropar District three chilling centers are situated namely Morinda, Jhinjri and Nurpur.

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The Milk Plant Mohali produces 2 Lakhs to 2.25 Lakhs liters of Milk per day during winter

season and 1.50 Lakhs liters per day in summer season. About 2.00 Lakhs liters pasteurized

liquid milk is being supplied to the citizen of urban area per day. The plant runs throughout 24

hours in three shifts at about 200% of its installed capacity manner with 500 employees.

The plant is supplying milk mainly to the cities Chandigarh, Mohali and Panchkula also covering

some adjoining cities of Himachal Pradesh and Haryana.

It also produces PANEER, GHEE, LASSI, BIOYOGURT, GULAB JAMUN, KHEER, CURD,

FLAVOURED MILK etc. All these products are marketed at the plant under the name "The

Punjab State Co-operation Milk Producers Federation Ltd" under the Brand name of 'Verka Milk

Plant".

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1.2 ORGANISATION NETWORK

For the smooth running of plant, various sections are managed by the management. Each and

every activity is delegated to particular section. It is impossible for top management to take

decision on every problem, so various tasks are delegated to various sections. These sections are

interrelated to have frequent contacts with one another and it is easy to share the information.

These integrated tasks teams handle their problems and make the supervision easy.

The following are the sections in the Verka Organisation:

1. Procurement Section

2. Production Section

3. Quality Control Section

4. Marketing Section

5. Accounts Section

6. Administrative Section

7. Engineering Section

8. Purchase Section

9. Store Section

10. MIS Section

11. Security Section

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1.3 NETWORK

Verka is having an apex body at the state land known as "MILKFED" Punjab, Chandigarh. To

start with functions in various fields of different unions in different Districts and to operate with

Dairying and Dairy Fields that is the operation flood with assistance of National Dairy Co-

operation (NDC) Delhi and later on is launched to operate flood second who is affiliated to

Punjab Milk Fed. It helps to its affiliated Districts Milk Co-operations in 11 Districts. These

Districts Union are:-

1. ROPAR

2. PATIALA

3. LUDHIANA

4. FARIDKOT

5. FEROZPUR

6. SANGRUR

7. BATHINDA

8. GURDASPUR

9. HOSHIARPUR

10. JALANDHAR

11. AMRITSAR

These unions in eleven districts of the state carry out smooth functioning of marketing,

procurement, cattle breeding program though district co-operative unions.

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1.4 PLANT AT A GLANCE

Establishment 1980 : The Ropar District Co-operative Milk

Producers Union Milk Plant, Mohali.

Brand Name : Verka

Installed Capacity : 1,00,000 Liters of Milk Per Day

Production : 2,00,000 Liters of Milk per Day

Status : Co-operative Society

Head Office : Milkfed, Punjab, Sector 34, Chandigarh

Plant : The Ropar District Co-operative Milk

Producers Union Ltd. Milk Plant, S.A.S

Nagar, Mohali

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Abbreviations used:-

DM Deputy Manager S.R" Sale Representative

ASSTT Assistant JDC Junior Dairy Chemist

SUP Supervisor S.K Store Keeper

INC. SEC Incharge Security F.S.R Sales Representative

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2.RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is the mathematical relationship

between two quantities in the form of a fraction or percentage. It is essentially concerned with

the calculation of relationships which after proper identification and interpretation may provide

information about the operations and state of affairs of a business enterprise.

The analysis is used to provide indictors of past performance in terms of critical success factors

of a business. This assistance in decision making reduces reliance on guesswork and intuition

and establishes a basis for a sound judgment

In financial analysis, a ratio is used as a benchmark for evaluating the financial position and

performance of a firm. The absolute accounting figures reported in the financial statements do

not provide a meaningful understanding of the performance and financial position of a firm.

Absolute figures expressed in monetary terms in financial statements by themselves are

meaningless. These figures do not convey much meaning unless expressed in relation to other

figures.

For example: One trader Rohit earns a profit of Rs. 2,00,000, whereas another trader Ronit earns

a profit of Rs. 2,50,000.

Which one is more efficient?

Generally, we can say that Ronit is more efficient as he is earning more profits. But in order to

give the correct answer, we must find out how much the capital is employed by each of them?

Suppose, Rohit has employed a capital of Rs. 10,00,000 and Ronit has employed 15,00,000. We

can now calculate the percentage of profit earned by each of them on the capital employed:

Rohit = 2,00,000 /10,00,000*100 = 20%

Ronit = 2,50,000 715,00,000*100 = 17%

This shows that Rohit has earned Rs. 20 for every Rs. 100 of capital, whereas Ronit has earned

Rs. 17 for every Rs. 100 of capital. As, Rohit is using his capital more efficiently.

The above example shows that figures assume significance only when expressed in relation to

other figures. Just as in the example given above, the absolute figure of profit was meaning less

but when the figure of profit was expressed in relation to capital, it assumed significance.

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Thus, we can say that the relationship between two figures, expressed in arithmetical terms is

called a 'RATIO'.

In the words of R.N. ANTHONY:

"A ratio is simply one number expressed in terms of another. It is found by dividing one number

into the another".

Ratio may be expressed in the following three ways:

1. Pure Ratio or Simple Ratio:

It is expressed by the simple division of one number by another. For example, if the

Current Assets of a business are Rs. 2,00,000 and Current Liabilities are Rs. 1,00,000, then

the ratio of "Current Assets to Current Liabilities" will be 2:1.

2. Rate or So Many Times:

In this type, it is calculated how many times a figures is, in comparison to another figure.

For example, if a firm's credit sales during the. year are Rs. 2,00,000 and its debtors at the

end of the year are Rs. 40,000, its DEBTORS TURNOVER RATIO = 2,00,000/40,000 = 5

times. It shows that the credit sales are 5 times in comparison to debtors.

3. Percentage:

In this type, the relation between the two figures is expressed in hundredth. For example, if

a firm's capital is Rs. 10,00,000 and its profit is Rs. 2,00,000, the ratio of profit to capital in

terms of percentage = 2,00,000/10,00,000*100 = 20%.

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3. REVIEW OF LITERATURE

Review of literature is the most useful and simple method of formulating the research problem.

The researches done by previous researchers are reviewed and their usefulness is evaluated to

serve as basis for further research. Thus researcher reviews builds upon the work of others. The

reviews that are collected by the researcher should give an insight into the field under study. The

reviews must explain the need and scope of the study under consideration. It is not necessary

that the reviews are to be in accordance with the objectives. Being a layman in the research field,

I as a researcher have covered reviews that are related to Credit Rating Agencies.

Ria Goel (2007): Ratio Analysis Caffe Nero, Ratio Analysis is A tool used to conduct a

quantitative analysis of information in a company's financial statements. Ratios are calculated

from current year numbers and are then compared to previous years, other companies, the

industry to judge the performance of the company. Caffè Nero Group plc, the leading

independent UK coffee house operator of 282stores, which has been voted the top rated brand by

consumers for the last six consecutive years. It had another year of solid progress, again

achieving revenue and profit growth. Its revenue gone up by 29% to £90.7 million where as in

year 2005 it was £70.1 million. Earnings before interest, tax , depreciation and amortization has

increased by 38% to £15.6 million whereas it as £11.3million in year 2005. Operating profit

(before prior year goodwill write off) improved by 38% to £8.2 million where as in year 2005 it

was £6.0 million). Overall Operating profit improved by 74% to £8.2m from £4.7million in

2005.

Cndymn91(2006); Financial Ratio Analysis Report Of Ford Motor Company, Any successful

business owner or investor is constantly evaluating the performance of the companies they are

involved with, comparing historical figures with its industry competitors, and even with

successful businesses from other industries. To complete a thorough examination of any

company's effectiveness, however, more needs to be looked at than the easily attainable numbers

like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make

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the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's

strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any

other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as

the only possibilities. However, when used in conjuncture with various other business evaluation

processes, financial ratios are invaluable. By examining Ford Motor Company's Financial ratios,

along with a few other company factors, this report will give a clear picture of

how the company is doing now and should do in the future.

This is a trend table of Ford's financial ratio for the previous five years:

Ford motor company:

Ratios 12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000

Return on equity(%) 22.65, 7.9, 5.08, -70.04, 29.07

Return on assests(%) 1.19, 0.29, 0.1, -1.97, 1.9

Current ratio(%) 0.47, 0.52, 0.51,0.37, 0.33

Quick ratio(%) 0.29, 0.35, 0.35, 0.22, 0.22

Akehrig(2007): Ak Steel Ratio Analysis, The current ratio has shown an upward trend

overall which is an indication that AK Steel is increasing their ability to meet their short-

term obligations. This ratio is increasing due to the fact that AK's current assets are

growing at a faster rate then their current liabilities. Over the 4-year span (2003-2006)

their cash has increased $464,700,000 with an ending balance in 2006 of $519,400,000.

The current ratio suggests that AK Steel is in very good standing with enough cash to make

moves in the future. The inventory turnover ratio has increased over the 3 year span from

6.44 to 6.55 and is significantly higher then the competition. This shows a slight increase

however it is still an area in which AK can work to improve. Because steel companies

work on such small margins, a falling steel market can have a drastic effect on the net profit

if there is leftover, high priced, inventory. This is an area in which a company can always

work to improve their efficiency because it will pay off on their bottom line in the future.

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Apur Basarker(2007): financial Analysis Of Hmt,Industrialization commenced in earnest only

after the independence in 1947. From a predominantly agrarian economy, India has moved

towards rapid industrialization with the state retaining the privilege of entrepreneurship an

authority in a system of mixed economy. For four decades, the focus had been on the public

sector, which was perceived as a means of achieving industrial growth with social justice.

It was Pandit Jawaharlal Nehru the 1st prime minister of independent India, who laid the

foundation of a strong industrial base for the country. It was he who should be given the chief

credit for fostering the creation of a rich scientific and technological pool by which the country is

benefiting today. During his time many dams were built such as the one at Bhakra Nangal. In the

mixed economy followed during that period as per his brand of socialist ideology, in which both

the public and private sectors were given the scope and the opportunities to grow. The private

sector was allowed to function along with public enterprises, but under the control of the

government with strict licensing and supervision. Initially, this led to a rapid industrialization

with large capital-intensive industries in the public sectors. A number of state owned industrial

enterprises were established in various sectors - In steel, power, heavy engineering etc. It cannot

be denied that much of the industrial and scientific advance achieved by India of which are

proudly boasted today owe a lot to his foresight and vision. He called all these projects, The

Temples of Modern India, “that would bring about the country progress and prosperity. But

unfortunately many of the state owned and run enterprises in various sectors did not function

successfully and satisfactorily due to structural, operational, managerial, marketing, and other

such deficiencies so that the public sector came to be looked upon as inefficient, not yielding.

Vadu Krishna(2008): Annual report analysis of Kotak Mahindra Bank Limited, Financial

statements provide an overview of a business' financial condition in both short and long term.

They help in understanding the past performance of the company and making future predictions

about the company. It thus helps us to look beyond the profit figures. There are 3 basic financial

statements are used. They are income statement, balance sheet and cash flow statement, the

purpose of financial statements "The objective of financial statements is to provide information

about the financial position, performance and changes in financial position of an enterprise that

is useful to a wide range of users in making economic decisions."[Financial statements should be

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understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are

directly related to an organization's financial position. Reported income and expenses are directly

related to an organization's financial performance. Financial statements are intended to be

understandable by readers who have "a reasonable knowledge of business and economic

activities and accounting and who are willing to study the information diligently."Owners and

managers require financial statements to make important business decisions that affect its

continued operations. Financial analysis is then performed on these statements to provide

management with a more detailed understanding of the figures. These statements are also used as

part of management's annual report to the stockholders.Employees also need these reports in

making collective bargaining agreements (CBA) with the management, in the case of labor

unions or for individuals in discussing their compensation, promotion and rankings, External

Users: are potential investors, banks, government agencies and other parties who are outside the

business but need financial information about the business for a diverse number of reasons.

Icarr (2006): Nike, Inc. Financial Ratio Analysis, In assessing the significance of various

financial data, experts engage in financial analysis, the process of determining and evaluating

financial ratios. A ratio is a relationship that indicates something about a company's activities,

such as the ratio between the company's current assets and current liabilities or between its

accounts receivable and its annual sales. The basic source for these ratios is the company's

financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only

meaningful when compared with other financial information. Since compared with industry data,

ratios help an individual understand a company's performance relative to that of competitors, and

used to trace performance over time (Venture Line, 2005).

Kalmah(2009); MODERN CEMENT, Ratio Analysis, Activity Analysis .Interpretations: Short

Term Activity ratios calculate the operational efficiency regarding the utilization of short term

assets. Inventory Turnover Ratio: The ratio tells about how many times Inventory turnover is

made or complete in a given year. Higher the ratio is better that mean the inventory is turnover

very quickly. Inventory Turnover Ratio 1.11 in 2003 indicates that company can sell total

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finished goods (inventory) 1.11 times every year. Increase in this ratio indicates the efficiency in

managing inventory, which is not present in this company as we can the declining rate over the

past years. This also indicates that the reserve of inventory and inventory holding cost is high for

this company. Inventor Turnover Period: The ratio tells about number of days inventory remains

in the stock and lower the ratio and better it is. From the table we can see that the ratios are too

high which also indicates Modern Cement is inefficient in managing its inventory.

Sat56(2008): Ratio Analysis Of Bharti Airtel, it is India's leading provider of

telecommunications services. The company has 27 million customers across India. It is a part of

Bharti Enterprises, which manufactures and exports telecom equipment, provides telecom

services in Seychelles, delivers products and services to telecom carriers, offers a range of

Customer Management Services (CMS) and exports fresh agricultural products exclusively to

markets in Europe and the USA. Business. The business has been structured into three individual

strategic business units (SBUs) mobile services, broadband and telephone services (B&T) and

enterprise services. The last group has two sub-units carriers (long distance services) and

services to corporate. Brands All the services of the company are bundled under the Airtel brand.

P/L account of Bharti Airtel

Year Mar 07(12) Mar 06(12) Mar 05(12) Mar 04(12) Mar 03(12) budgeted/mar08

INCOME :

Sales Turnover +

17,851.60 11,231.47 7,903.03 0 0 39,808.33

Excise Duty 0 0 0 0 0 0 Net Sales 17,851.60 11,231.47 7,903.03 0 0 39,808.33

Other Income +

148.49 94.3 122.02 63.15 72.9 628.11

Stock Adjustments +

30.07 -13.84 11.57 0 0 92.31 Total Income 18,030.16 11,311.93 8,036.62 63.15 72.9 40,528.75

EXPENDITURE :

Raw Materials +

53.95 54.42 83.7 0 0 86.85

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Power & Fuel Cost+ 9.72 26.98 16.69 0.38 0.1 71.89

Employee Cost + 1,102.03 754.99 488.13 16.84 18.94 3460.03

Other Manufacturing Expenses + 6,709.58 4,404.78 3,139.48 1.29 2.41 8990.83

Selling and Administration Expenses + 1,973.64 1,330.07 869.69 15 10.5 6927.22

Miscellaneous Expenses + 801.13 671.92 538.32 4.16 5.85 3036.28

Arunam Jain(2008): Ratio Analysis Of Tcs Wipro Infosys, CURRENT RATIO. It is a liquidity

ratio that measures a company's ability to pay short-term obligations. Also known as "liquidity

ratio", "cash asset ratio" and "cash ratio". By putting to test a company's financial strength,

deduces company's ability to pay back its short-term liabilities (debt and payables) with its short-

term assets (cash, inventory, receivables).The higher the current ratio, the more capable the

company is of paying its obligations. An acceptable current ratio varies by industry. Generally,

the more liquid the current assets, the smaller the current ratio can be without cause for the

concern

Jitesh Chudasama(2009): Analysis Of Annual Report Of Ongc, Every limited company has to

declare it’s annual report at the end of every year. It is compulsory for each and every limited

company to do so as per company’s law.. The annual report of the company gives financial

position to the insiders and outsiders of the company. This project report gives practical

knowledge of financial analysis, which is prepared by me on financial analysis of ONGC Ltd. for

two years with interpretation. It covers financial Ratio Analysis, Common Size statement and

Comparative Analysis. This ratio is made in order to analyze financial condition of ONGC Ltd.

including tables as and when required. The project to prepare the financial analysis of an

organization has bridged the gap between the academics and the practical work.

Sasandifer(2009):Ratio Analysis Of Starbucks Vs Mcdonald's, McDonald’s Corporation

operates in the food service industry. The company has its restaurants in more than 100 countries

of the world. McDonald’s, the world’s largest food chain is headquartered in U.S. having an

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employee population of 390000 (About McDonald's..., 2008), Starbucks Corporation, Seattle

based, Starbucks Corporation is the leading coffeehouse chain in the world. The company has its

operations in more than 44 countries. The main products offered by Starbucks various kinds of

drinks, snacks, coffee beans. The company also operates in the field of marketing of music,

books (The Company, 2008). Ratio Analysis.

Ratios Starbucks McDonalds

Current Ratio 0.79 0.80

Quick Ratio 0.30 0.67

Debt Equity Ratio 1.34 0.92

Proprietary Ratio 0.43 0.52

Solvency Ratio 0.57 0.48

Inventory Turnover Ratio 12.13 118.77

Gross Profit Ratio (%) 23.34 34.69

Net Profit Ratio (%) 7.15 15.67

Return on Proprietors' Funds (%) 29.45 15.67

Earning Per Share 0.91 2.06

Jain and Sharma(2008): A financial report on ratios of 3M’s corporation, in this research

essay provides a detailed analysis of the success of 3M Corporatio'sn generation and

management of its accounting and financial information. This information is then evaluated as

it applies to decisions making and control process within the company. A brief introduction to

3M's main business segments is presented. Charts and graphs illustrate the company's output

and financial standing throughout the paper. The author recommends an analysis of 3M's

financial statements in order to understand the company’s strengths and drawbacks.

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Simon Mohun (2008) In the decomposition of the US macroeconomic pre-tax rate of profit as

the product of profit share and capital productivity, this paper considers the role of capital

productivity over the period 1964–2001. The primary finding is that prior to 1982 capital

productivity fell because capital deepening proceeded faster than labour productivity growth,

whereas from 1982 to 1997 the opposite occurred. If, prior to 1982, the US economy was

characterized by Marx-biased technical progress, what requires explanation is why labour

productivity continued to grow after 1982 in the absence of sufficient capital deepening. The

paper explores various hypotheses, contrasts neoclassical and classical notions of technical

change, and investigates the robustness of its results to the productive–unproductive distinction

and to accounting for changes in capacity utilization.

Antonio C. David (2007) In this paper we attempt to analyze whether price-based controls on

capital inflows are successful in insulating economies against external shocks. We present results

from vector autoregressive (VAR) models, which indicate that Chile and Colombia, countries that

adopted controls on capital inflows, seem to have been relatively well insulated against certain

types of external disturbances. Subsequently, we use the autoregressive distributive lag (ARDL)

approach to co-integration in order to isolate the effects of the capital controls on the pass-

through of external disturbances to domestic interest rates in those economies. We conclude that

there is evidence that the capital controls have allowed for greater policy autonomy.

Lilia Costabile(2004) A ‘disequilibrium’ between saving and investment decisions determines a

maladjustment in production, the disruption of capital, and a downturn in economic activity,

according to the ‘Austrian’ approach. By contrast, the ‘Dynamists’ argue that it may lead to

economic growth, as disequilibrium may well be instrumental to capital accumulation. What

explains these different predictions in otherwise similar models? The key is in the interplay

between the analytical features and the ideological options underlying each of these approaches:

alternative lines of thought, entirely compatible with their analytical models, were abandoned by

some of these authors when they conflicted with their pre-analytical views. This paper illustrates

the argument by exploring the models of two ‘fathers’, von Mises and Robertson.

4.SCOPE OF THE STUDY

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The scope of this study to analyze the five year’s financial reports of the Verka Milk Plant

Mohali. And find out the ratios from balance sheets, profits and loss accounts, and from other

financial papers, after the calculations of ratios compare them with the previous figures . the

second main purpose of this study to give the yearly report to its shareholders, outsiders and to

the management to make the good, sound and essential decision to run the organization in a

smooth and good manner. This project will also helpful to everyone to tell about the financial

condition of the verka milk plant ,mohali . all the study has conducted in the verka milk plant,

mohali. In this study calculated ratios also tells about the performance the the plant in the years ,

from 01-04-2004 to 31-03-2009.

This analysis also provides indictors of past performance in terms of critical success factors of a

business. This assistance in decision making reduces reliance on guesswork and intuition and

establishes a basis for a sound judgment. In the project financial techniques are used to calculate

the ratio and do analysis , and do the interpretation of the calculated results.

5. OBJECTIVE OF THE STUDY

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1. To Analysis Financial Statements:

To acquire enough knowledge about the profitability and financial health of the business. In

the light of the knowledge so acquired by us, we can take necessary decisions about their

relationships with the concern.

2. To Simplify Accounting Data:

To simplifies and summaries a long array of accounting data and makes them

understandable. Also to disclose the relationship between two such figures have a cause and

effect relationship with each other.

3. To Locate the Weak Spots of the Business:

We have calculated five years ratios and compared with each other so that weak spots will

be located and remedial measures will be taken.

4. For Effective Control of the Enterprise:

To disclose the liquidity, solvency and profitability of the enterprise. Such information

enables management to assess the changes that have taken place over a period of time in the

financial activities of the business.

5. To Study the Financial Soundness:

To disclose the position of business with different viewpoints. With the help of such a study

we can draw conclusions regarding the financial health of the business enterprise.

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6. RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done systematically.

According to D. Slesinger and M. Stephenson ‘Research’ may be defined as “the manipulation

of things, concepts or symbols for the purpose of generalizing to extend, correct or verify

knowledge, whether that Knowledge aids in the construction of theory or in the practice of an

art”. Thus it is an original contribution to the existing stock of knowledge of making for its

advancement.

RESEARCH

Research is the systematic process of collecting and analyzing information to increase our

understanding of the phenomenon under study. It is the function of the researcher to contribute to

the understanding of the phenomenon and to communicate that understanding to others.

6.1 RESEARCH DESIGN

Research design is known as framework within which the whole activity of research and

methods or procedures is clearly mentioned under which the research is to conduct.

Type of Research

Exploratory & Descriptive research design is used for the study. Descriptive research design

implies the study of complete information regarding the respondents profile and his/her

views/opinions/preferences towards some problem. It can be called a research framework

whereby the complete descriptive of the respondent is studied and data in specific is collected

and analyzed to draw conclusions for a problem. The data is analyzed in a tabular form and in

well and easy to understand manner.

6.2 SAMPLING DESIGN

The sample design of a sample survey refers to the techniques for selecting a probability sample

and the methods to obtain estimates of the survey variables from the selected sample.

(i) Universe

The universe is most commonly defined as everything that physically exists; the entirely of space

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and time, all forms of matter, energy and momentum, and the physical laws and constants that

govern them. And in my study all the employees of accounts branch are in the universe.

(ii) Sampling unit

A member of a sample selected from a sampling frame is called sampling unit.

The sampling units are Manager (Finance) and other Department Officials, Sr. Manager of plant.

(iii) Sample size

The number of member in a sample is called sample size

The sample size is 10.

(iv) Sampling technique

Judgment sampling technique is used for the survey.

6.3 DATA COLLECTION

Both primary and secondary data are used for the study.

PRIMARY SOURCES:

1. The first step has to do appropriate literature which was collected by consulting various

finance officers at head office.

2. Personal interview had been conducted with Mr. Chakraborthy, who is a Deputy Manager of

the Finance Department, to get adequate information and appropriate suggestions through out the

project.

SECONDRY SOURCES:

1. Balance Sheet of the Verka Milk Plant.

2. Books for financial statement analysis.

3. Other financial Accounts.

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6.4 TOOLS USED:

FINANCIAL TOOLS: Following financial tools were used to analyze the actual performances

of organization by adopting various techniques.

PRESENTATION TOOLS: The presentation tools have been used to present the facts and

figures in an attractive manner. The details of the same exhibits have been also mentioned

alongside for the easy reference of the readers. Following main presentation tools have been used

for better exhibition of the data: Tables & Graphs

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7. Analysis of data

After data have been collected, the researcher turns to the task of analyzing them. The analysis of

data requires a number of closely related operations such as establishment of categories, the

application of these categories to raw data through tabulation and drawing statically inferences.

The term analysis refers to the computation of certain measure along with searching for patterns

of relationship that exist among data groups. Thus, “in the process of analysis, relationships or

differences, supporting or conflicting with original or new data.

After analyzing the data, the researcher should have to explain the findings on the basis of some

theory. It is known as interpretation.

That made possible counting of classified data easy. From the master table various summery

tables were prepared. They have been presented along with their interpretation in this manner.

And we have used many arithmetic methods to test the data in the manner of ratios.

24

7.1 ANALYSIS OF SHORT-TERM FINACIAL POSITION OR TEST

OF LIQUIDITY

The short-term creditors of a company like suppliers of goods of credit providing short-term

loans are primarily interested in knowing the company's ability to meet its current or short-term

obligation as and when these become due.

Two types of ratios can be calculated for measuring short-term financial position or short-term

solvency of a firm.

7.1.1 Liquidity Ratios

7.1.2 Current Assets Movement or Efficiency Ratios.

7.1.1 Liquidity Ratios:

It refers to the ability of a firm to meet its short-term financial obligations when and as

they fall due.

In fact, analysis of liquidity needs the preparations of cash budgets and cash and fund

flow statements; but liquidity ratios by establishing a relationship between cash and other

current assets to current obligations, provide a quick measure of liquidity.

The main concern of liquidity ratio is to measure the ability of the firm to meet their

short-term maturing obligations. Failure to do this will result in total failure of the

business, as it would be forced into liquidation.

To measure the liquidity of a firm, the following ratios can be calculated:

I. Current Ratio

II. Quick or Acid Test or Liquid Ratio

III. Absolute Liquid Ratio or Cash Position Ratio

IV. Measure Ratio

26

I. Current Ratio:

This ratio explains the relationship between Current Assets and Current Liabilities of a business.

The formula for calculating the ratio is:-

Current Ratio= Current Assets/ Current Liabilities

'Current Assets' includes those Assets which can be converted into cash within a YEAR'S time

like Cash in Hand, Cash at Bank, B/R, Short-term Investments, Debtors, Stock, and Inventories

etc.

'Current Liabilities' include those liabilities which are repayable in a YEAR'S time like Bank

O/D, B/P, Creditors, Provision for Taxation, Proposed Dividends, Outstanding Expense and

Loans payable with in a year etc.

SIGNIFICANCE:-

This ratio is used to assess the firm's ability to meet its short term liabilities on time. According

to accounting principals, a current ratio of 2:1 is supposed to be an IDEAL RATIO. It means that

Current Assets of a business should, at least, be twice of its Current Liabilities. The higher the

ratio, the better it is, because the firm will be able to pay its Current Liabilities more easily. The

reason of assuming 2:1 as the Ideal Ratio is that the Current Assets includes such Assets as

Stock, Debtors etc. from which full amount cannot be realized in case of need, hence even if half

the amount is realized from the Current Assets on time, the firm can still meet its Current

liabilities.

If the Current Ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital.

But a much higher ratio, even though it is beneficial to' the short term creditors, is not

necessarily good for the company. A much higher ratio than 2:1 may indicate the poor

investment policies of the management.

While calculating Current Ratio, we have taken Loans &

Advances as Debtors in the Current Assets.

In Current Liabilities, we included the Provisions to calculate Total Current Liabilities.

27

RATIO ANALYSIS OF VERKA PLANT FOR THE LAST FIVE YEARS

CURRENT RATIO (in times):

(Figures in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Cash in Hand 116489 169160 402612 118602 63186

Cash at Bank 56707499 66252837 58962074 98867680 91224268

Short term 0 0 0 0 0

Securities


Investment

Bill Receivable 0 0 0 0 0

Debtors 4625507 5274297 4612368 6534532 10598671

Closing stock 2172298 1878940 2369378 2996974 2602243

(Raw Material)

Closing stock 46683615 78208544 122647164 129007472 141409710

(Milk Products)

Inventories 11677194 10197213 8926601 9941325 14430914

Loans & 95101375 86167137 74145794 63743041 87795776

Advances

Total Current 217083977 248148128 272065990 311209625

Assets

Current 83229814 105968700 119615577 162318926 187581717

Liabilities

Provisions 20572065 20970919 18308891 14425219 11204841

Total Current 103801879 126939619 137924468 176744145 198786558

Liabilities

Current Ratio 2.09 1.95 1.97 1.76 1.76

28

2004-05 2005-06 2006-07 2007-08 2008-091.5

1.6

1.7

1.8

1.9

2

2.1

2.2

Current Ratio

Ratio in times

ANALYSIS OR INTERPRETATION:

29

In 2004-05: The Current ratio is 2.09 times, it has been increased from the Standard ratio i.e. 2:1.

The reason for increased Current Ratio may be slow moving stocks. The stocks will pile up due

to poor sales. The cash or Bank Balances may be idle because of sufficient Investments

opportunities.

In 2005-06: The Current Ratio is 1.95 times, it has been decreased from 2004-05, and the

Current Assets double the Current Liabilities are considered to be satisfactory.

In 2006-07: The Current Ratio is 1.97 times, it is almost same as it was in last year. It means that

there is no change in working conditions from last year.

In 2007-08: The Current Ratio is 1.76 times, it is decreasing from previous year due to increase

in Current liabilities. It is not necessarily good for the company. The creditors of the company

are less secure than previous year.

In 2008-09: Analysis the current ratio is 1.76 times, It’s equal to the previous year which is a

good symbol for company. But the creation of the company are less secure than last other years.

II QUICK OR ACID TEST OR LIQUID RATIO:

30

Quick Ratio indicates whether the firm is in a position to pay its current liabilities within a month

or immediately. As such the quick ratio is included by dividing liquid assets (Quick Assets) by

current Liabilities:-

Quick Ratio or Acid Test Ratio = Liquid Assets/Current Liabilities

'Liquid Assets' means those assets which will yield cash very shortly. All current assets except

stock and prepaid expenses are included in liquid assets. Stock is excluded from liquid assets

because it has to be sold before it can be converted into cash. Prepaid expenses too are excluded

from the list of liquid assets because they are not expected to be converted into cash. Liquid

assets thus include cash, debtors, bill receivable and short term securities.

SIGNIFICANCE:

An ideal quick ratio is said to be 1:1. if it is more, it is considered to be better. The idea is that for

every rupee of current liabilities, there should be at least one rupee of liquid assets. This ratio is

better test of short-term financial position of the company than the current ratio, as it considers

only those assets which can be easily converted into cash. Stock is not included in liquid assets

as it may take a lot of time before it is converted into cash.

Quick ratio thus is more rigorous test of liquidity than the current ratio and when used together

with current ratio, it gives a better picture of the short term financial position of the firm.

While calculating Quick Assets, we have deducting Inventories assuming as a stock -from

Current Assets so that Quick Assets are obtained.

RATIO ANALYSIS OF VERKA PLANT FOR THE LAST FIVE

YEARS

31

Quick Ratio (in times):

(Figures in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Current Assets 217083977 248148128 272065990 311209625 2602243

Closing stock

(Raw Material)

(2172298) (1878940) (2369378) (2996974)

Closing stock

(Milk Products)

(46683615) (78208544) (122647164) (129007472)

Inventories (11677194) (10197213) (8926601) (9941325) 141409710

Total Quick

Assets

156550870 157863431 138122847 169263854 189683521

Total Current

Liabilities

103801879 126939619 137924468 176744145 198786558

Quick Ratio 1.51 1.24 1.00 0.95 0.95

32

2004-052005-06

2006-072007-08

2008-09

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Quick ratio

Ration in times


33

In 2003-04: The Quick Ratio is 0.77 times, which is less than the ideal ratio i.e. 1:1. It will not

be easy to pay its creditors on time. The company's Quick Assets must be Equal of its Current

liabilities to meet standard ratio. It is not necessarily good for the company.

In 2004-05: The Quick ratio is 1.51 times, it has been increased from the Standard ratio i.e. 1:1.

It is good for the organization. The cash or Bank Balances may be idle because of sufficient

Investments opportunities.

In 2005-06: The Quick Ratio is 1.24 times, it has been decreased from previous year and the

Quick Assets Equal to the Current Liabilities are considered to be satisfactory.

In 2006-07: The Quick Ratio is 1.00 times, it is the ideal Quick Ratio for the organization. It

means that the Quick Assets are able to meet Current liabilities and further no quick assets are

invested unproductive.

In 2007-08: The Quick Ratio is 0.95 times, it is decreasing from previous year due to increase in

Current liabilities more than the increase in Quick Assets. But also it is almost near to the ideal

ratio as it was in previous year.

In 2008-09: The Quick ration is .95 times it is equal to the last year ration. Which is good for the

company that it is maintain its ratio. But also almost equal so the ideal ratio.

Ill ABSOLUTE LIQUID RATIO OR CASH RATIO:

34

Generally, debtors and bill receivables are 'more liquid than inventories. There may be doubts

regarding their realization into cash immediately or in time. Some authorities are of the opinion

that the absolute liquid ratio should also be calculated together with current assets and find out

the absolute liquid assets.

Absolute Liquid Ratio/ Cash Ratio= Cash + Short Term Securities/ Current Liabilities

SIGNIFICANCE:

Absolute Liquid Assets include cash in Hand and at Bank and marketable Securities or

temporary investments. The acceptance norm for this ratio is 50% or 0.5:1 or 1:2 i.e. Re. 1 worth

Liquid Assets are considered adequate to pay Re. 2 worth Current Liabilities in time as all the

creditors are not expected to demand cash at the same time and then cash may also be realized

from debtors and inventories.


35

Absolute Liquid Ratio or Cash Ratio (in times):

(Figures in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Cash in 116489 169160 402612 118602 63786

hand

Cash at bank 56707499 66252837 58962074 98867680 91224286


Securities

Absolute 56823988 66421997 59364685 98986281 91224286

Liquid

Assets

Total 103801879 126939619 137924468 176744145 198786558

Current

Liabilities

Quick Ratio 0.55 0.52 0.43 0.56 0.45

36

2004-05 2005-06 2006-07 2007-08 2008-090

0.1

0.2

0.3

0.4

0.5

0.6

Absolute liquid ratio

Absolute liquid ratio


37

In 2003-04: The Cash Ratio is 0.26 times, it is less than the ideal ratio and it shows that

company needs to improve their short term financial position.

In 2004-05: The Cash ratio is 0.55 times, it has been increased from the standard ratio i.e. 0.5:1,

and it is quite satisfactory because it is higher than the rule of thumb, it shows that company is

improving their short term financial position.

In 2005-06: The Cash Ratio is 0.52 times, it shows that Absolute Liquid Assets are considered

adequate to pay its Current Liabilities in time as all .the creditors are not expected to demand

cash at the same time and then cash may also be realized from debtor's inventories.

In 2006-07: The Cash Ratio is 0.43 times, it is nearer to the ideal Quick Ratio. But also it has

decreased from the last year due to increase in Current Liabilities of the organization. It means

that the organization need to improve little bit on Absolute Liquid Assets.

In 2007-08: The Quick Ratio is 0.56 times, it is increasing from previous year due to increase in

Absolute Liquid Assets more than the increase in Current liabilities. But also it is almost near to

the ideal ratio as it was in 2005-06.

In 2008-09 : The absolute ration is .45 times it is decreasing from previous year which is not a

good sign for company.

III Interval Measure or Defensive Interval Ratio:

38

In order to the comparison of current or liquid assets to current liabilities, the liquidity position

of a firm may also be examined to measure whether the liquied assts are sufficient relative to the

firm's daily cah requirements for operating expenses. Such a measure of liquidity is called

interval measure or defensive-linterval ration.

Interval measure = Liquid Assets/Average Daily cash operating expenses.

SIGNIFICANCE:

This ration is calculated to measure the liquid assets whether these liquid assets are sufficient for

meeting the daily cash operating expenses.

Liquid assets include cash, short-term securities, and receivable. Whereas, average daily

operating expenses includes cost pf goods sold, administrative & office expenses, selling &

distribution expenses.

All these above expenses are divided by number of days in a year (365).


Interval Measure of defensive-interval (in days)

39

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

Opening Stock

Raw Material 4242595 2518563 2172298 1878940 2369378

Milk Products 40956760 136002057 46683615 78208544 122647164

Purchases

Raw Material 918684564 881863560 948991951 1157575427 1425081941

Milk Products 102780424 118084264 113417917 133907625 168226278

Direct Expenses

Procurement 43952952 47939056 53236469 52088837 64560151

Expenses

Manufacturing 54998646 51529372 62962235 62973538 7355420

Expenses

Packing 39226368 38963229 48266840 56126206 57631627

Expenses

Purchases Tax/ 6058174 2184677 2214206 1692681 4596638

Cess

Total 1210900483 1279084778 1277945531 1544448798 1918468597

Closing Stock

Raw Material (2518563) (2172298) (1878940) (2369378) (2996974)

Milk Products (136002057) (46683615) (78208544) (122647164) (129007472)

Cost of Goods 1072379863' 1230228865 1197858047 1419432256 1786464151

Sold

Administrative 19353645 21350166 25649243 24186218 25410461'

Expenses

Store Expenses 21488791 20574656 21712945 21578939 25461485

Distribution 9985722 13688584 11896308 20189201 38157296

40

Expenses

Liquid Assets 1123208021 1285842271 1257116543 1485386614 1875493392

Number of Days 365 365 365 365 365

Average Daily 3077282 3522855 3444155 4069552 5138338

Cash Operating

Expenses.

Total Quick

Assets

160715169 156550570 157863431 138122846 169263854

Average Daily

Cash Operating

Expenses

3077282 3522855 3444155 4069552 5138338

Interval Measures 53 45 46 34 33

41

2003-04 2004-05 2005-06 2006-07 2007-080

10

20

30

40

50

60 Interval Measure/Defensive -interval Ratio

Interval Measure/Defensive -in-terval Ratio


42

In 2003-04: The Interval Measure Ratio is 53 Days/ which indicates that it is increased from the

estimated Ratio i.e. 45 Days. This shows that company's liquid assets are more sufficient for

operating daily cash requirements.

In 2004-05: The Interval Measure Ratio is 45 Days, which is equivalent to the target ratio. This

shows that company has achieved their target and it has neither increased nor decreased their

ratio.

In 2005-06: The Interval Measure Ratio is 46 Days, it has been increased quite from the targeted

ratio. This shows that company has more liquid assets to meet their daily requirements.

In 2006-07: The Interval Measure Ratio is 34 Days, it has decreased from the previous year due

to increase Daily Cash requirements for Operating Expenses. It means that the organization

needs to improve little bit on this Ratio.

In 2007-08: The Interval Measure Ratio is 33 Days, it is almost same as it was in previous year

this shows that company is not having liquid assets to meet their daily requirements.

7.1.2 CURRENT ASSETS MOVEMENT OR EFFICIENCY/

ACTIVITY RATIOS:

43

Funds are invested in various assets in business to make sales and earn profits. The efficiency

with which assets are managed directly affects the volume of sales. The better the management

of assets, the larger is the amount of sales and profits. Activity ratios measure the efficiency or

effectiveness with which a firm manages its resources or assets. These ratios are also called

turnover ratios because they indicate the speed with which assets are converted or turned over

into sales.

For example: Inventory turnover ratio indicates the rate at which the funds invested in

inventories are converted into sales. Depending upon the purpose, a number of turn over ratios

can be calculated, as Debtors or Receivable Turnover, Average Collection Period, Stock/

Inventory Turnover, Creditors/Payable Turn over, Average Payment Period, Working Capital

Turnover Ratio.

I. Inventory/Stock Turnover Ratio:

This ratio indicates the relationship between the cost of googs sold during the year and average

stock kept during that year.

Stock Turnover Ratio= COGS/Average Stock

Cost of Goods Sold= Opening Stock + Purchases + Carriage +

wages + other direct charges - Closing Stock OR Net Sales - Gross profit.

Average Stock= (Opening Stock + Closing Stock)/ 2

SIGNIFICANCE:

44

This ratio indicates whether stock has been efficiently used or not. It shows the speed with which

the stock is rotated into sales or the number of times the stock is turned into sales during the year.

The higher the ratio the better it is. Since it indicates that the stock is selling quickly. In a

business, where stock turnover ratio is high, goods can be sold at a lower margin of profit and

even the profitability may be quite high. A low stock turnover ratio indicates that stock does not

sell quickly and remains lying in the godown for a long time. This results in increased storage

cost, blocking of funds and losses on account of goods becoming obsolete. This ratio can be

compared with the previous year, the management can access whether the stock has been more

efficiently used or not.


45

STOCK TURNOVER RATIO (in times):

(Amount in figures)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-2009

Cost of

Goods

Sold

1230228865 1197858047 1419432256 1786464151 2178653051

Opening

Stock

Raw

Material

2518563 2172298 1878940 2369378 2996974

Milk

Products

136002057 46683615 78208544 122647164 129007472

Closing

Stock

Raw

Material

2172298 1878940 2369378 2996974 2602243

Milk

Products

46683615 78208544 122647164 129007472 141409710

Total Stock 187376533 128943397 134716332 257020988 296015799

Average

Stock

93688267 64471698 67358163 128510494 148007899.5

Stock Turn

Over Ratio

13.13 18.58 21.09 13.90 14.7

46

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

Stock turn over ratio

stock turn over ratio


47

In 2003-04: The Stock Turnover Ratio is 11.67 times more than its average stock. It means how

efficiently stock is being utilized in the company to convert into COGS or sales. The higher the

ratio the better it is. So it indicates that stock is selling quickly, it is a good indicator for company

that stock is being efficiently used in the company.

In 2004-05: The Stock Turnover Ratio is 13.13 times more than its average stock, it has been

increased from previous year. This shows that company is now utilizing their stock into sales.

In 2005-06: The Stock Turnover Ratio is 18.58 times more than average stock. It has been,

increased from both the previous years. This shows that company is more properly utilizing its

stock into sales and selling quickly to earn profits.

In 2006-07: The Stock Turnover Ratio is 21.09 times more than average stock. This year it has

been increased from all the previous years and further it is increasing yearly and the company is

utilizing its stock more efficiently.

In 2007-08: The Stock Turnover Ratio is 13.90 times it has been decreased from the last year

due to increase in Average Stock from last year. Now the company has to search ways to

overcome this problem and for full utilization of stocks and to go for more sales.

In 2008-09: The Stock Turnover Ratio is 13.90 times it has been Increaseing from the last year

due to increase in average stock from last year company have to work upto how increase sales.

7.2 ANALYSIS OF LONG-TERM FINANCIAL POSITION

48

OR

TEST OF SOLVENCY

These ratios are calculated to assess the ability of the firm to meet its long term liabilities as and

when they become due. Long term creditors including debentures holders are primarily

interested to know whether the company has ability to pay regularly interest due to them and to

repay the principle amount when it become due. Solvency ratios disclose the firm's ability to

meet the interest cost regularly and long term indebtedness at maturity. Solvency ratios include

the following ratios: 7.2.1 Debt-Equity Ratio

7.2.2 Funded-Debt to Total Capitalization Ratio

7.2.3 Equity Ratio

7.2.4 Solvency Ratio

7.2.5 Proprietor's Funds Ratio

7.2.6 Fixed Assets Radio

7.2.7 Ratio of Current Assets to Proprietor's Funds

7.2.8 Debt service ratio

7.2.9 Capital gearing ratio

7.2.1 Debt-Equity Ratio:

This ratio expresses the relationship between long term debt and shareholders funds. It indicates

the proportion of the funds which are acquired by long term borrowings in comparison to

shareholders funds. This ratio is calculated to ascertain the soundness of the long term financial

policies of the firm. The Debt-Equity can be calculated are as follows:

Debt-Equity= Outsiders Funds/ Shareholders Funds

OR External Equities/ Internal Equities

Outsiders Funds:

These refer to long term liabilities which mature after one year. These include debentures,

mortgage loans, public deposits etc.

Shareholder's funds:

49

These include equity share capital, preference capital, share premium, general reserve and other

reserves and credit balance of profit and loss account. However accumulated losses and fictitious

assets remaining to be written off like preliminary expenses, underwriting commission, share

issue expenses should be deducted.

SIGNIFICANCE:

This ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally

Debt-Equity Ratio is of 2:1 is considered safe, if this is more than that it shows a rather risky

financial position from the long term point of view as it indicates that more and more funds are

invested in the business; are provided by long term lenders. The lower this ratio the better it is

for long term lenders because they are more secure in that case. Lower than 2:1 Debt-Equity

Ratio provides sufficient protection to long term lenders. A high Debt-Equity Ratio which that

the claims of Creditors are greater than those of owners, may not be considered by the time of

liquidation of the firm

.

Current liabilities:

These are taken as an Outsider's Funds. As Current Liabilities which mature after one year so

Current Liabilities are treated as Outsider's Funds.

In order to calculate Shareholder's Funds, we include Share Capital and Reserves & Surplus. We

deduct Depreciation Reserve Fund as it is included in Reserve and Surplus.


50

DEBT-EQUITY RATIO (in times):

(amount in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Current

Liabilities

(outsiders)

103801878 126939618 137924468 140218557 198786558.10

Share Capital 25256000 25827120 26427245 26819655 27493755

Reserve &

Surplus

142896591 147889652 065263766} 204449286 208475082.78

Depreciation

Reserve Fund

(78294915) (81971713) (85669555) (91050385) 97321702

Shareholder's

Funds

89857676 91745059 106021456 140218557 138647135

Debt-Equity

Ratio

1.1 1.4 1.3 1.26 1.43

51

2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6Debt-Equity ratio

Debt-Equity ratio


52

In 2003-04: The Debt-Equity Ratio is 3 times. It shows risky-financial position from the long

term point of view as it indicates that more and more funds invested in the business are provided

by long term lenders. It has also increased from the Standard Ratio which is not good for lenders.

In 2004-05: The Debt-Equity Ratio is 1.1 times. It has been decreased from last year due to

decrease in current liabilities. This is in favor of the lenders as their money is secure and for

organization also as they have less liability to pay off.

In 2005-06: The Debt-Equity Ratio is 1.4 times. It has increased from the last year but it is quite

Satisfactory as the company is maintaining their Debts.

In 2006-07: The Debt-Equity Ratio is 1.3 times. It is almost same like previous year as it is

decreased little bit as the company is maintaining Debts.

In 2007-08: The Debt-Equity Ratio is 1.26 times. It is also almost same from last Three Previous

Years also favorable to both Lenders and Company.

In 2008-09 : The Debt-Equity Ratio is 1.43 times. Which is increase from the last year. It is a

good sign for company increase of Debt-Equity ratio shows risky financial position.

7.2.2 FUNDED DEBT TO TOTAL CAPITALIZATION RATIO:

53

The ratio establishes a link between the long term funds raised from outsiders and total long term

funds available in the business. The debt to total capitalization can be calculated are as follows:

Funded Debt to Total Capitalization Ratio= Funded Debt/Total Capitalization*100

Funded Debt= Debentures + Mortgage Loans + Bonds + other Long term Loans.

Total Capitalization Equity Share Capital + Preference Share capital + Reserve & Surplus

+ Other Undistributed Reserves + Debentures + Mortgage Loans + Bonds + Other Long

Term loans.

SIGNIFICANCE:

As funded Debt to Total Capitalization represents the relationship of long term funds. There is no

'Rule of Thumb' but still the lesser the reliance on outsiders the better it will be. If this ratio is

smaller, better it will be, up to 50% or 55% this ratio may be to tolerable and beyond.

54


FUNDED DEBT TO TOTAL CAPITALIZATION RATIO (in times):

(Amount in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Funded Debt (Secured

Loans)

38947059 23571398 18805950 13579377 10570321

Share Capital 25256000 25827120 26427245 26819655 27493755

Reserve & Surplus 142896591 147889652 165263766 204449286 208475082.78

Secured Loans 38947059 23571398 18805950 13579377 10570321

Depreciation Reserve

Fund

(78294915) (81971713) (85669555) (91050385) (47321702.78)

Total Capitalization 128804735 115316457 124827406 153797934 149217456

FUNDED DEBT TO

TOTAL

CAPITALIZATION

RATIO (in times):

0.3 0.2 0.15 0.08 0.07

55

2004-05 2005-06 2006-07 2007-08 2008-090

0.05

0.1

0.15

0.2

0.25

0.3

0.35Funded dept to total capitalization ration

Funded dept to total capitalization ration


56

In 2004-05: The Funded Debt to Total Capitalization Ratio is 0.30 times. It has been decreased

from last year due to decrease in Total Capitalization. Now the company has reduced its long

term borrowing capacity from the last year.

In 2005-06: The Funded Debt to Total Capitalization Ratio is 0.20 times. It has been reduced

from both the previous years. From now the company has controlled their debt to total

capitalization ratio and make the efforts to reduce their ratio. The company has better long term

financial position.

In 2006-07: The Funded Debt to Total Capitalization Ratio is 0.15 times. It has also reduced

from previous years. We can see that the company is doing well and ratio is reducing on yearly

basis.

In 2007-08: The Funded Debt to Total Capitalization Ratio is 0.08 times. It is also decreasing

and we can say that company is not too much dependent on long term funds.

In 2008-09: The Funded Debt to Total Capitalization Ratio is 0.08 times. It is decreasing and we

can say that company is not too much dependent on long term funds.

7.2.3 PROPRIETORY RATIO OR EQUITY RATIO

57

This ratio establishes the relationship between shareholder's funds to total assets of the firm. This

ratio is important for determining long term solvency of a firm. The equity ratio may be

calculated are as follows:

Equity Ratio= Shareholder's Funds/Total Assets

Shareholder's Funds= We include Share Capital and Reserves & Surplus. We deduct

Depreciation Reserve Fund as it is included in Reserve and Surplus.

Total Assets= It is calculated by deducting depreciation reserve fund from total of assets side of

the balance sheet.

SIGNIFICANCE:

As this ratio represents the relationship of owner's funds to total assets, higher the ratio better is

the long term solvency position of the company. This ratio indicates the extent to which the

assets can be lost without affecting the interest of creditors of the company.


PROPRIETORY RATIO OR EQUITY RATIO (in times):

58

(Amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Shareholder's

Fund

89857676 91745059 106021456 1402185

Assets 335813735 374951084 408377953 4569675

Depreciation

Reserve Fund

(78294915) (81971713) (85669555) (910503

Total Assets 257518820 292979371 322708398 3659171

PROPRIETORY

RATIO OR

EQUITY RATIO

(in times):

0.35 0.31 0.32 0.38

59

2003-04 2004-05 2005-06 2006-07 2007-080

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4 The proprietary ration or Equity ratio

The proprietary ration or Equity ratio


60

In 2003-04: The Proprietary Ratio or Equity Ratio is 0.2 times more than its total assets. Higher

the ratio or the share of the shareholders in the total capital of the company better is the long

term solvency position of the company.

In 2004-05: The Proprietary Ratio or Equity Ratio is 0.35 times. It has been increased from last

year. It is a good indicator for the company from the long term point of view. It is a healthier

signal and long term lenders are secured from total funds.

In 2005-06: The Proprietary Ratio or Equity Ratio is 0.31 times. It has been reduced from the

previous year but it is satisfactory for the company.

In 2006-07: The Proprietary Ratio or Equity Ratio is 0.32 times. It is almost same as it was in

previous year. It is a good sign that the company is maintaining this ratio.

In 2007-08: The Proprietary Ratio or Equity Ratio is 0.38 times. It is also increasing from the

last two years and we can say that it is a healthier signal.

7.2.4 SOLVENCY RATIO OR THE RATIO OF TOTAL ASSETS:

61

This ratio indicates the relationship between the total liabilities to outsiders to total assets of a

firm and can be calculated as follows:

Solvency Ratio= Total Liabilities to Outsiders/ Total Assets

SIGNIFICANCE:

As this ratio represents the relationship between the total liabilities to outsiders to total assets,

more satisfactory of stable is the long-term solvency position of firm.

Total liabilities to outsiders are assumed as current Liabilities.


SOLVENCY RATIO (in times):

(Amount in rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Current

Liabilities

(Outsiders)

103801878 126939618 137924468 176744145 198786558

Total Assets 257518820 292979371 322708398 365917145 435831987

SOLVENCY

RATIO (in

times):

0.40 0.43 0.43 0.48 0.456

62

2004-05 2005-06 2006-07 2007-08 2008-090

2

4

6

8

10

12

Column2


63

In 2004-05: The Solvency Ratio is 0.40 times more than its total assets which indicates that the

company has reduced their solvency ratio and make under the control.

In 2005-06: The Solvency Ratio is 0.43 times more than its total assets. It has been increased

quite but it also shows that company is now taking steps to control this ratio.

In 2006-07: The Solvency Ratio is 0.43 times more than its total assets. It is same as it was in

previous year. It is a good sign that the company is maintaining this ratio.

In 2007-08: The Solvency Ratio is 0.48 times more than its total assets. It is also increasing from

the last two years and we can say that it is not a healthier signal. It indicates that the company

has to pay more liabilities compared to last years.

In 2008-09: The Solvency Ratio is 0.48 which is less than last year. It is healthier signal for the

company. It indicates company have much pay less liabilities as compared to last year

7.2.5 FIXED ASSETS TO NET WORTH RATIO OR FIXED ASSETS TO

PROPRITOR'S FUND:

64

The ratio establishes the relationship between fixed assets and shareholder's funds, i.e. share

capital plus reserves and surplus and deducting depreciation reserve surplus from reserves and

surplus.

Fixed Assets to Net Worth Ratio = Fixed Assets/Shareholder's Funds

SIGNIFICANCE:

The ratio of fixed assets to net worth indicates the extent to which shareholder's funds are sunk

into fixed assets. If the ratio is less than 100%, it implies that owner's funds are more than total

fixed assets. When the ratio is more than 100%, it implies that owner's funds are not sufficient to

finance the fixed assets and the firm has to depend upon outsider's to finance the fixed assets.

There is no 'Rule of Thumb' to interpret this ratio but 60% is considered to be satisfactory ratio.


FIXED ASSETS TO NET WORTH RATIO (in times):

65

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Work in

Progress

Plant &

Machinery

564002 933703 6424176 0 0

Building 0 2302675 3562286 2895711 0

Fixed Assets 100665655 106066476 108825401 125362093 167527199

Total Fixed

Assets

101229657 109302854 118811563 128257804 167527199

Depreciation

Reserve

(78294915) (81971713) (8566955) (91050384) (7321702)

Net Fixed

Assets

22934742 27331141 33142308 37207420 70205497

Shareholder's

Fund

89857676 91745059 106021456 140218557 198786558

FIXEDASSETS

TO NET

WORTH RATIO

(in times):

0.25 0.30 0.31 0.27 0.35

66

2004-05 2005-06 2006-07 2007-08 2008-090

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4 Fixed assest to new worth ration

Fixed assest to new worth ration


67

In 2004-05: The Fixed Assets to Net Worth Ratio is 0.25 times. It has been decreased from the

last year. It is not a good sign for the company.

In 2005-06: The Fixed Assets to Net Worth Ratio is 0.30 times. It has been increased from

previous year. It is not the healthy sign for the company. The company has to improve their ratio

and make efforts to improve their long term financial position.

In 2006-07: The Fixed Assets to Net Worth Ratio is 0.31 times. It has been increased from the

last year. This implies that owner's funds are not sufficient to finance the fixed assets and the

company has to depend upon outsider's to finance for fixed assets

In 2007-08: The Fixed Assets to Net Worth Ratio is 0.27 times. It is almost same as it was in last

year. It is not a good sign for the company.

In 2008-09: The Fixed Assets to Net Worth Ratio is 0.35 times. It is more than last year. It is not

a good signal for company.

7.2.6 FIXED ASSETS TO TOTAL LONG TERM FUNDS OR FIXED

ASSETS RATIO:

68

A variant to the ratio of fixed assets to net worth is the ratio of fixed assets to total term funds

which is calculated as:

Fixed Assets Ratio= Fixed Assets/ Total Long Term Funds

SIGNIFICANCE:

The ratio indicates the extent to which the total of fixed assets is financed by long term funds of

the firm. Generally, the total of the fixed assets should be equal to the long term funds. But if the

fixed assets exceed the total of the long term funds it implies that the company has financed a

part o the fixed assets out of current funds or the working capital which is not a good financial

policy.


FIXED ASSETS TO NET WORTH RATIO (in times):

69

(Amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Total Fixed

Assets

101229657 109302854 118811563 128257804 167527199

Depreciation

Reserve

(78294915) (81971713) (8566955) (91050384) 973217021

Net Fixed Assets 22934742 27331141 33142308 37207420 70205497

Shareholder's

Fund

89857676 91745059 106021456 140218557 198786558

Funded Debt

(Secured Loans)

38947059 23571398 18805950 13579377 10570321

Total Long term

Funds

128804735 115316457 124827406 153797934 209356879

FIXEDASSETS

RATIO (in

times):

0.18 0.24 0.27 0.24 0.33

70

2004-05 2005-06 2006-07 2007-08 2008-090

0.05

0.1

0.15

0.2

0.25

0.3

0.35 Fixed Asset Ratio

Fixed Asset Ratio


71

In 2004-05: The Fixed Assets Ratio is 0.18 times. It has been decreased from the last year. It is

not a good sign for the company.

In 2005-06: The Fixed Assets Ratio is 0.24 times. It has been increased from previous year. The

company has to improve their ratio and make efforts to improve their long term financial

position.

In 2006-07: The Fixed Assets Ratio is 0.27 times. It has been increased from the last year. It is a

good sign for the company. This implies that the company is going to improve their long term

financial position.

In 2007-08: The Fixed Assets Ratio is 0.24 times. It is almost same as it was in last year. It is not

a good sign for the company.

In 2008-09: The Fixed Assets Ratio is 0.33 which is increase from last year. But it is not

sufficient . It is not good sign for company.

7.2.7 RATIO OF CURRENT ASSETS TO PROPRIETOR'S FUNDS:

72

The ratio is calculated by dividing the total of current assets by he amount of shareholder's funds.

It is calculated as follows:

C/A to Proprietor's Funds= Current Assets/Proprietor's Funds*100

SIGNIFICANCE:

The ratio indicates the extent to which proprietor's funds are invested in current assets. There is

no 'Rule of Thumb' for this ratio and depending upon the nature of the business there may be

different firms. Proprietor's funds are assumed as shareholder's funds.


CURRENT ASSETS TO PROPRIETOR'S FUNDS (in times):

73

(Amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Inventories 11677194 10197212 8926601 9941325 14430914.82

Sundry Debtors 4625507 5274296 4612368 6534532 10599671.84

Loans & advances 95101375 86167137 74145794 63743041 87795776

Closing Stock of

Raw Material

2172297 1878940 2369378 2996974 2602243.6

Closing Stock of

Milk Products

46683614 78208543 122647164 129007472 141409710

Cash in Hand 116489 169160 402612 118602 63786.36

Cash at Bank 56707498 66252837 58962074 98867680 91224286.21

Current Assets 217083974 248148125 272065990 311209625 348126389

Proprietor's

fund/Shareholder's

Fund

89857676 91745059 106021456 140218557 198786558.01

CURRENT ASSETS

TO

PROPRIETOR'S

FUNDS RATIO (in

times):

2.41 2.7 2.56 2.21 1.8

74

2004-05 2005-06 2006-07 2007-08 2008-090

2

4

6

8

10

12

Column2


75

In 2004-05: The Current Assets to Proprietor's Funds Ratio is 2.41 times. It has been decreased

from the last year. It is not a good sign for the company.

In 2005-06: The Current Assets to Proprietor's Funds Ratio is 2.7 times. It has been increased

from previous year. It is a healthy sign for the company. The company has to improve their ratio

more and make efforts to improve their long term financial position.

In 2006-07: The Current Assets to Proprietor's Funds Ratio is 2.56 times. It has been decreased

from the last year. It is not a good sign for the company. This implies that owner's funds are not

sufficient to finance the fixed assets and the company has to depend upon outsider's to finance

for fixed assets.

In 2007-08: The Current Assets to Proprietor's Funds Ratio is 2.21 times. It is also decreased

from previous year. It is not a good sign for the company.

In 2008-09: The Current Assets to Proprietor's Funds Ratio is 1.8 times. This is decreasing from

last 3 years. It is not beneficial for the company.

7.2.8 DEBT SERVICE RATIO RATIO:

76

This ratio establishes the relationship between equity share capital including reserve and

surpluses to preference share capital and other fixed interest bearing loans. This ratio is

calculated is used to test the debt-servicing capacity of a firm. The ratio is also known as Interest

Coverage Ratio or Fixed Charges Cover or Times Interest Earned. This ratio is calculated by

dividing the net profits before and taxes by fixed interest charges:

Debt-Service Ratio= Net Profit (B.I.T.)/Fixed Interest Charges

SIGNIFICANCE:

This ratio indicates the number of times interest is covered by the profits available to pay the

interest charges. Generally, higher the ratio the better it is and safer are the long term creditors

because even if earnings of the firm fall, the firm shall be able to meet its commitment of fixed

interest charges. But a too high interest coverage ratio may not be good for the company because

it may imply that firm is not using debt as a source of finance so as to increase the earnings per

share.


DEBT-SERVICE RATIO (in times):

77

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Net Profits

after Interest

& Taxes

32607331 38573189 43808467 48228847 52819123.82

Interest on

NDDB loans

3414642 282678 554629 508090 441281

Net Profit

before Interest

& Taxes

36021973 38855867 44363096 48736937 5346040.82

Fixed Interest

Charges

3414642 282678 554629 508090 441281

DEBT

SERVICE

RATIO (in

times):

10.5 137.4 79.9 95.92 121.1

78

2004-05 2005-06 2006-07 2007-08 2008-090

2

4

6

8

10

12

Series 3


79

In 2004-05: The Debt Service Ratio is 10.5 times. It has been decreased from the last year. It is

not a good sign for the company.

In 2005-06: The Debt Service Ratio is 137.4 times. It has been increased frpm previous year. It

is a healthy sign for the company. The company is improving their ratio and making efforts to

improve their long term financial position.

In 2006-07: The Debt Service Ratio is 79.9 times. It has been decreased from the last year. It is

not a good sign for the company. This implies that owner's funds are not sufficient to finance the

fixed assets and the company has to depend upon outsider's to finance for fixed assets.

In 2007-08: The Debt Service Ratio is 95.92 times. It is increased from the last year which

shows that company is making efforts.

In 2008-09: The Debt Service Ratio is 121.1 times. It is increased from the last year which

shows that company is doing well in this field.

7.2.9 CAPITAL GEARING RATIO:

80

This ratio establishes the relationship between equity share capital including reserve and

surpluses to preference share capital and other fixed interest bearing loans. This ratio is

calculated as follows:

Capital Gearing Ratio= Fixed Income Bearing Funds/Long term Debt Bearing Fixed

Interest

SIGNIFICANCE:

Capital Gearing ratio is very important leverage ratio Gearing Should be kept in such a. way that

the company is able to maintain a steady rate of dividend. High Gearing ratio is not good for a

new company or a company in which future earnings are uncertain.

There is no preference capital so we have not included in it. We have also taken long-term debt

bearing fixed interest as secured loans (long-term Loans).

(RATIO ANALYSIS OF VERKA PLANT FOR THE LAST

FIVE YEARS)

81

CAPITAL GEARING RATIO (in times):

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Equity Share

Capital

25256000 25827120 26427245 26819655 27493755

Reserve &

Surplus

142896591 147889652 165263766 204449286 208475082.78

Fixed Income

Bearing Funds

168152591 173716772 191691011 231268941 235968837

Secured loans

(long term

Loans)

38947059 23571398 18805950 13579377 10570321

CAPITAL

GEARING

RATIO (in

times):

4.3 7.4 10.19 17.03 22.3

82

2004-05 2005-06 2006-07 2007-08 2008-090

2

4

6

8

10

12

Column2


83

In 2004-05: The Capital Gearing Ratio is 4.3 times.



In 2007-08: The Capital Gearing Ratio is 17.03 tomes.


High Gearing ratio is not good for the company or a company in which future earnings are

uncertain. It has been increasing from last five years. It shows that company has no good signal

about its profitability and its financial position.

7.3 ANALYSIS OF PROFITABILITY OR PROFITABILITY RATIOS

84

The main object of all the business concerns is to earn profit. Profit is the measurement of the

efficiency of the business. Equity shareholders of the company are mainly interested in the

profitability of the company. Profitability Ratios measure the various aspects of the profitability

of a company such as

1. What is the rate of the profit on sales?

2. Whether the profits are increasing or decreasing?

And if decreasing, then it helps in finding out the cause of their decrease.

3. Whether an adequate return is being obtained on capital employed?

Profitability Ratios include the following:-

6.3.1 General Profitability Ratios

6.3.2 Overall Profitability Ratios

1. General Profitability Ratios

The following ratios are known as general profitability ratios:

I. Gross Profit Ratio

II. Operating Ratio

III. Operating Profit Ratio

IV. Expenses Ratio

V. Net Profit Ratio

85

I. Gross Profit Ratio:

This ratio shows the relationship between gross profit and sales.

Gross Profit Ratio= Gross Profit/Net Sales*100

Net Sales= Sales- Sales Return

SIGNIFICANCE:

This ratio measures the margin of profits available on sales. The higher the ratio, the better it is.

The ratio should be adequate enough not only to cover the operating expenses but also to provide

for the depreciation, interest on loans, dividends and reserves. The ratio is compared with earlier

ratio and important conclusion is drawn from such comparison for instances if there is a decline

in gross profit ratio in comparison to previous year it may be concluded that:

I. Price of material purchased, freight, wages and direct changes may have gone up but selling

price may not have gone up in proportion to increase in the cost.

II. The selling price may have fallen but the price of the materials, freight, wages and other direct

charges may have not fallen relatively.

III. There is a fall in sales of more profitable variety of goods.


YEARS

86

GROSS PROFIT RATIO (in %):

(Amount in Rupees)

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

Gross Profit 96495769 101273528 106155602 118319642 131687654

Net Sales 1168875630 1331502393 1304013647 1537754900 1935681202

GROSS

PROFIT

RATIO

(in %):

8.2 7.6 8.1 7.69 6.8

87

2003-04

2004-05

2005-06

2006-07

2007-08

0 1 2 3 4 5 6 7 8 9

Column2


88

In 2003-04: The Gross Profit Ratio is 8.2%. Gross profit must be sufficient to provide for

operating expenses, interest on loans, depreciation and dividends otherwise company will not

operate in this environment. It must generate sufficient profits. Higher the ratio better it is.

In 2004-05: The Gross Profit Ratio is 7.6%. It has been decreased from the last year. It is not a

good sign for the company. It will be beneficial for the company to reduce operating expenses,

dividend and interest on loans, otherwise there will be decrease in net profits.

In 2005-06: The Gross Profit-Ratio is 8.1%. It has been increased from previous year. It is a

healthy sign for the company. The company is improving from the previous year ratio.

In 2006-07: The Gross Profit Ratio 7.69%. It has been decreased from the last year. It is not a

good sign the company.

In 2007-08: The Gross Profit Ratio is 6.8%. It is almost same as it was in last year. It is also not

a gci6tr sign for the company because company can do well as it was in previous years.

II. OPERATING RATIO:

89

It establishes the relationship between cost of goods and other operating expenses on the one

hand and the sales on the other hand. It measures the cost of operations by dividing operating

costs with the net sales.

Operating Ratio= Operating Cost/Net sales*100 Operating

Cost= COGS+ Operating expenses

SIGNIFICANCE:

This ratio indicates the percentage of net sales that is consumed by operating cost. Obviously,

higher the operating ratio, the less favorable it is, because it would have margin (operating profit)

to cover interest, income-tax dividend and reserves. There is no rule of thumb for this ratio as it

may differ from to firm depending upon the nature of its business and its capital structure.


90

OPERATING RATIO (in %):

(Amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Cost of Goods

Sold

1230228864 1197858045 1419432256 1786464151 218653051

Operating

Expenses:-

Administrative

Exp.

21350165 25649243 24186218 25410461 38556621.34

Store Exp. 20574655 21712944 25461485 21578939 21697023.29

Distribution Exp. 13688584 11896307 20189201 38157296 18521261.26

Operating Cost 12858422680 1257116539 1485386614 1875493391 2257427157

Net Sales 1331502393 1304013647 1537754900 1937515705 2339977375

OPERATING

RATIO (in %):

96.6 96.4 96.59 96.79 96.5

91

2004-05

2005-06

2006-07

2007-08

2008-09

96.2 96.3 96.4 96.5 96.6 96.7 96.8 96.9

Operating Ratio


In 2004-05: Operating Ratio of the company is 96.6%.

92





It indicates that the percentage of net sales that is consumed by operating cost. Obviously, higher

the operating ratio, the less favorable it is. But the operating ratio is higher from the last five

years which shows that a small margin (operating profit) cover interest, income tax, dividend

and reserves is left.

III. OPERATING PROFIT RATIO:

This ratio is calculated by dividing operating profit by sales. This ratio is calculated are as

follows:

93

Operating profit ratio = Operating profit x 100

Sales

Operating Profit = Net sales - Operating Cost

Operating Cost = Cost of goods sold + Administrative and

office expenses + selling and distributive expenses.

This ratio can also be calculated as:

Operating profit ratio = 100-operating ratio

OPERATING PROFIT RATIO

(OF VERKA MILK PLANT FOR THE LAST FIVE YEARS)

(amount in Rupees)

94

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Sales 1331502393 1304013647 1537754899 1937515705 2339977375

Operating

Cost

(1285842268) (1257116530) (1485386613) (187493391) 2257427950

Operating

Profit

45660125 46897117 52368286 62022314 82549419

Net Sales 1331502393 1304013647 1537754900 1937515705 2339977375

COST OF

GOODS

SOLD

RATIO

(in %):

3.4 3.6 3.4 3.2 3.53

95

2004-05

2005-06

2006-07

2007-08

2008-09

3 3.1 3.2 3.3 3.4 3.5 3.6 3.7

Operating Profit Ratio


96

In 2004-05, The Operating Profit Ratio is 3.4%




In 2008-09, The operating profit ration is 3.5%

The company in 2003 has operating profit ratio is at 3.9%. But the perating profit ratio goes on

declining i.e. 3.4%. In 2007, it remains constant. In 2006, it has been increased their ratio by 3.6.

Now in the 2007 it has been decrease to 3.2. In 2007 it has been drease to 302 and in 2008 it

again increase by 3.53 that mean company is controlling their costs.

(IV) EXPENSES RATIOS:

97

Expenses ratios indicate the relationship of various expenses to net sales. Expenses ratios are

calculated by dividing each item of expenses with the net sales to anlyse the cause of several of

the operating ration. The rati can be calculated for each individual item of expenses like cost of

sales ratio, administrative expenses ratio, selling expenses ratio, material consumed ratio, etc.

SIGNIFICANCE:-

This ratio indicates the relationship of various expenses to net sales. The lower the ratio, the

greated is the profitability and higher the ratio, lower is the profitability. While interpreting the

ratio, it must be remembered that for a fixed expenses like rent, the ratio will fall if sales increase

and for a variable expense, the ratio in proportion to sales shall remain nearly the same.

EXPENSES RATIO MAY BE CALCULATED AS:

1. Cost of goods sold ratio:

Cost of goods sold/ Sales

COST OF GOODS SOLD RATIO


98

(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Cost of

goods sold

123028864 1197858045 1419432256 1786464151 2339977375

Net Sales 1331502393 1304013647 1537754900 1937515705 161324324

COST OF

GOODS

SOLD

RATIO (in

%):

92.4 91.8 92.3 92.20 93.1

99

2004-05

2005-06

2006-07

2007-08

2008-09

91 91.5 92 92.5 93 93.5

Cost of Goods Sold Ratio

2. Administrative & Office expenses ratio: Administrative & Office expenses x

100/ Sales

ADMINISTRATIVE & OFFICE EXPENSES

100


(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Administrativ e

& Office

expenses

21350165 25649243 24186218 35649454 38556621.34

Net Sales 1331502393 1304013647 1537754900 1937515705 2339977375

ADMINISTR

ATIVE &

OFFICE

EXPENSES

RATIO (in

1.6 2 1.57 1.84 1.65

101

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.5 1 1.5 2 2.5

Ratio Times

3. Selling & Distribution Expenses Ratio : Selling & Distribution Expenses x

100/Sales

SELLING & DISTRIBUTION EXPENSES

102

(OF VERKA MILK PLANT FOR THE LAST FIVE YEARS) (amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Distribution

Expenses

13688584 11896307 20189201 18521261.26 18521261.26

Net Sales 1331502393 1304013647 1537754900 1937515705 2339977375

SELLING &

DISTRIBUTION

EXPENSES

RATIO (in %):

1 0.9 1.31 0.94 0.92

103

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Column2

4. Store expenses ratio Store expenses x 100/Sales

STORE EXPENSES RATIOS


104

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Store

Expenses

20574655 21712944 21578939 17671840.58 21697023

Net Sales 1331502393 1304013647 1537754900 1937515705 2339977375

STORE

EXPENSES

RATIO (in

%):

1.5 1.7 1.4 0.91 0.92

105

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Column2

5. Non -Operating expenses ratio : Non -Operating expenses x 100/Sales

106

NON OPERATING EXPENSES RATIOS


(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Depreciation 5938526 3676797 3697842 5380822 6271318.25

Net Sales 1331502393 1304013647 1537754900 1939681203 2339977375

NON

OPERATING

EXPENSES

RATIO (in

%):

0.5 0.3 0.24 0.27 0.27

107

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.1 0.2 0.3 0.4 0.5 0.6

Series 3

ANALYSIS OF INTERPRETATION:

108

(I) Cost of goods sold ratio:

The cost of goods sold ratio of the company in 2003-04 is 91.7%, in 2004-05 is 92.4%, in 2005-

06 is 91.8%, in 2006-07 is 92.30% and in 2007-08 is 92.20%. In 2008-09 it becomes 9.3. This

shows that the ratio is first of increased from the last three years. But after that the company has

decreased their ratio because lower the ratio, better it is for the company.

(II) Administration expenses ratio:

The company's Administration expenses ratio in 2003-04 is 1.7%, in 2004-05 is 1.6%, in 2005-

06 is 2 %, in 2006-07 is 1.57% and in 2007-08 is l.|lj%. phis shows that the ratio is decreasing

from the last three years. But after that the company has decreased their ratio because, the ratio

better it is for the company. In 2008-09 it becomes 1.65.

(III) Selling & Distributive Expenses:

The company's Selling and Distributive Ratio in 2003-04 is 0.8%, in 2004-05 is 1%, in 2005-06

is 0.9%, in 2006-07 is 1.31% and in 2007-08 is 1.96 in 2008-09 it becomes 0.8. It shows that

sometime it increasing or some time it decreasing.

(IV) Store expenses ratio:

The company's store expenses ratio in 2003-04 is 1.8%, in 2004-05 is 1.5%, in 2005-06 is 1.7 %,

in 2006-07 is 1.4% and in 2007-08 is 0.94 %.

In 2008-09 it becomes 9.2.

(V) Distribution expenses ratio & non-operating expenses ratio:

109

The company's Distribution expenses ratio & non-operating expenses ratio has decreased. The

company has reduced their expenses ratio as lower the ratio, better it is.

(VI) Net Profit ratio:

This ratio shows the relationship between net profit and sales. It may be calculated by two

methods:

1. Net Profit ratio = Net Profit/Net sales x 100

2. Net Profit ratio = Operating Net Profit/Net sales x100

SIGNIFICANCE:-

This ratio measures the rate of net profit earned on net sale. It helps in determining the overall

efficiency of the business operation. An increase in ratio over the previous year shows

improvement in the overall efficiency and profitability of the business.

NET PROFIT RATIO


110

(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 _^ 2007-08 2008-09

Net Profit after

Tax

24912205 25811088 34145435 35375066 52452906

Income Tax

Deposit

8300000 12753210 12102832 13000000 0

Refund of

Income Tax

(604875) (198209) (2659662) (357922) 0

FBT Deposited 0 207100 219862 211703 366217

Depreciation 5938526 3676797 3697842 5380829 6271318

Miscellaneous (5848822) (10824133) (13047142) 13902053 13322789

Income

Net Operating

Profit

32697034 31425853 34459167 35375066 45767652

Net Sales 1331502393 1304013647 1537754900 1935681203 23399773758

NET PROFIT

RATIO (in

%):

2.5 2.4 2.22 1.82 2

111

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.5 1 1.5 2 2.5 3

Column2

ANALYSIS OF INTERPRETATION:

112

(i) From year 2003 to 2005: The net profit ratio has been increased every year. Net profits

which are distributed to shareholder, funds or in reserves of the company. It is a good indicator

for the financial soundness of the company. This shows that it has been increased only if the

operating income will increase and operating expenses will decrease. It means company

profitability and financial condition is sound which is beneficial for the shareholder and also for

employees of the company.

(ii) From year 2006 to 2007: The net profit ratio has been decreased. But in 2005-06, the ratio

has been decreased by 0.1%. It is quite declined which it is satisfactory for the company. In

2006, the ratio may decrease due to income tax, depreciation, etc. It means company profitability

and financial condition is sound which is beneficial for the shareholders and also for the

employees of the company.

VII CASH PROFIT RATIO:

113

The net profits of the firm are affected by the amount of depreciation charged. Further,

depreciation being non-cash expense, it is better to calculate cash profit ratio. This ratio measures

the relationship between cash generated from operations and the net sale. Thus,

Cash profit ratio = Cash profit/net sales x100

Cash profit = net profit + depreciation.

CASH PROFIT RATIO


Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Net Profit 32607330 38573189 43808467 48228847 45767652

Depreciation 5938526 3676797 3697842 5380829 6271318

Cash Profit 38545856 42249986 47506309 53609676 52038970

Net Sales 1331502393 1304013647 1537754900 193751705 2339977375

CASH PROFIT

RATIO (in

%):

2.9 3.2 3.08 2.76 2.2

114

2004-05

2005-06

2006-07

2007-08

2008-09

0 0.5 1 1.5 2 2.5 3 3.5

Column2


115

In 2004-05, The Company's cash profit ratio is 2.9%





The company's cash profit ratio is increasing every year. It is a good sign for the company. It

shows that company's profitability and financial position is sound. It also indicated that the cash

profits have been increased over the net sales. As the net sales increases, the cash profits are also

increases every year.

7.3.2 OVERALL PROFITABILITY RATIOS:

116

Profits are the measures of overall efficiency of a business. The Higher the profits, the more

efficient are the business considered. Following are the important overall profitability ratios

or measures of Return on Investments:

I Return on Shareholder's Investment

II Return on Equity Capital

III Earning Per Share

IV Return on Gross Capital Employed

V Return on Net Capital Employed

VI Capital Turnover Ratio

1. Return on Shareholder's Investment or Net Worth:

This ratio establishes the relationship between net profits (after interest and taxes) and the

proprietor's funds. Thus

ROI= Net profits(after interest and taxes)/ Shareholder's funds

SIGNIFICANCE:

This ratio reveals how well the resources of a firm are being used, higher the ratio, better are the

results. This ratio is calculated as a percentage by multiplying with 100.

RETURN ON SHAREHOLDER'S INVESTMENT OR NET

WORTH

117


Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Net Profit after Tax 24912205 25811088 34145435 35375066 92452906

Shareholder's Funds 89857676 91745059 106021456 140218557 198786558

RETURN ON

SHAREHOLDER'S

INVESTMENTS (in

%):

27.7 28.1 32.20 25.22 26.4

118

2004-05

2005-06

2006-07

2007-08

2008-09

0 5 10 15 20 25 30 35

Column2


In 2004-05: The Company's ROI ratio is 27.7%


119



In 2008-09: The Company's ROI ratio is 26.4%.

This ratio reflects the over-all profitability of the business. In 2003, it has been reduced from the

previous year which shows that it has been reduced on total capital employed. But from 2004 to

2009 the company has been increased its ratio which shows the company has improved its profits

on capital employed.

II. Return on Equity Capital

This ratio establishes the relationship between profits of a capital and its equity capital can be

calculated as:

120

Return on Equity Capital = Net Profit after Tax-Preference Dividend/Equity share capital

(paid up)

SIGNIFICANCE:

The ratio is meaningful to the equity shareholders who are interested to fenow profits earned by

the company and those profits which can be made available to pay dividend to them. Higher the

ratio, better it is.

RETURN ON EQUITY CAPITAL


(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Net Profit after

Tax

24912205 25811088 34145435 35375066 52452906

Equity Share

Capital

25256000 25827120 26427245 26819655 27493755

RETURN ON

EQUITY

CAPITAL (in

%):

98.6 99.9 129.20 131.89 190.7

121

2004-05

2005-06

2006-07

2007-08

2008-09

0 50 100 150 200 250

Column2



122




In 2008-09: The Company's ROI ratio is.190.7%%

This ratio measures how effectively the equity shareholder's funds are being used in the business.

Higher the ratio better is the performance and prospects of the company. The company has

higher return which is belonging to equity shareholders. It has been increased due to increase in

net profits after interest and tax. All profits left will be available to all equity shareholders. This

indicates that the company has high earning capacity. The company's profitability and financial

position is sound.

III. Earnings per Share(E.P.S):

E.P.S. is a small variation of return on equity capital and is calculated by dividing the net profit

after taxes and preference dividend by the total number of equity share.

123

E.P.S.= Net Profits after Taxes-Preference Dividend/ No. of Equity Shares

SIGNIFICANCE:

The earnings per share are a good measure of profitability and when compared with E.P.S. of

similar other companies, it gives a view of the comparatives earnings or earning power of the

company. E.P.S. calculated for number indicates whether or not earning power of the company

has increased.

EARNING PER SHARE


(amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Net Profit

after Tax

24912205 25811088 34145435 35375066 52452906

Number of

Equity Shares

25256 25827 26427 26820 27140

EARNINGS

PER SHARE

(in %):

986.4 999.4 1292 1318.98 1932.6

124

2004-05

2005-06

2006-07

2007-08

2008-09

0 500 1000 1500 2000 2500

Column2


In 2004-05: The Company's ROI ratio is 986.4 times.


125

In 2006-07: The Company's ROI ratio is 1292 times.



From the above, earnings per share of the company shows that the earnings per share are

increasing every year. The company has too much high earning capacity. The company has

profitability position as well as financial position is sound. As earnings per share is a good

measure of profitability.

IV. Return on Capital Employed:

This ratio establishes the relationship between profits and the capital employed. It is used to

measure the overall profitability and efficiency of a business. Capital employed refers to the

126

total of investments made in a business and can be defined in a number of ways. The three

widely used definition of this term are:

I. Gross Capital Employed

II. Net capital Employed

III. Proprietor's Net Capital Employed

IV. Capital Turnover Ratio

I. Gross Capital Employed:

It is usually comprises the total assets fixed as well as current assets used in a business.

Gross Capital Employed= Fixed Assets+ Current Assets

GROSS CAPITAL EMPLOYED


YEARS

127

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Fixed Assets

after

Depreciation

22934742 27331141 108S25401 37207420 46143681

Investments

(inside

business)

17500000 17500000 17500100 17500100 17500100

Current

Assets

217083977 248148128 196382897 311209625 348126390.1

Total Assets 257518719 292979269 322708398 365917145 411770171

Net Profit as

per P&L A/C

32607330 38573189 43808467 48228847 52819123.82

RETURN ON

GROSS

CAPITAL

EMPLOYED

(in %):

12.7 13.2 13.5 13.18 17.9

128

2004-05

2005-06

2006-07

2007-08

2008-09

0 2 4 6 8 10 12 14 16 18 20

Column2


129

The company's gross capital employed is increasing every year. It is a good sign for the

company's. It shows that company's Profitability and financial position is sound. It is the prime

ratio which measures the efficiency of a business. This shows that the company has properly

formulated its borrowing policy which indicates the rate of interest on borrowing policy which

indicates the rate of interest on borrowings is less than the return on capital employed. As the

ratio increases every year, it is also beneficial to the employees of the company by providing

them fair remuneration.

V. Net capital Employed:

It comprises the total assets used in a business less its Current Liabilities.

130

Net Capital Employedh Total Assets-Current Liabilities.

NET CAPITAL EMPLOYED


YEARS

Particulars 2005-06 2006-07 2007-08 2008-09

I Net Profits 38573189 43808467 48228847 52819123

Total Assets 292979269 322708398 365917145 411770171

Current

(Liabilities

(short-term)

(126939618) (137924468) (176744145) (198186558)

Net Capital

Employed

166039651 184783930 189173000 2129973613

NET

CAPITAL

EMPLOYED

(in %):

23.2 23.7 25.49 25

131

2004-05

2005-06

2006-07

2007-08

2008-09

0 5 10 15 20 25 30

Column2


The company's return on capital employed is increasing every year. It is a good sign for the

company's. It shows that company's Profitability and financial position is sound. It is the prime

ratio which measures the efficiency of a business. This shows that the company has properly

132

formulated its borrowing policy which indicates the rate of interest on borrowing policy which

indicates the rate of interest on borrowings is less than the return on capital employed. As the

ratio increases every year, it is also beneficial to the employees of the company by providing

them fair remuneration.

IV. Capital Turnover Ratio:

This ratio establishes the relationship between cost of goods sold and the capital employed. This

ratio is calculated to measure the efficiency of effectiveness with which a firm utilizes its

133

resources or the capital employed. As capital is invested in a business to make sales and earn

profits, this ratio is a good indicator of overall profitability of a concern.

Capital Turnover Ratio= COGS/Capital Employed

CAPITAL TURNOVER RATIO


(Amount in Rupees)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

COGS 1230228864 1197858045 1419432256 1786464151 2178653051

Net Capital

Employed

153716841 166039651 184783930 189173000 1891783930

CAPITAL

TURNOVER

RATIO (in

8 7.2 7.68 9.44 9.5

134

2004-05 2005-06 2006-07 2007-08 2008-090123456789

10

Column2


135

In 2004-05: The Company's Capital Gearing Ratio is 8 times, which is quite increased from

previous year. This ratio measures the efficiency or effectiveness with which the company

utilizes its resources or capital employed.

In 2005-06: The Company's Capital Gearing Ratio is 7.2 times, it has been decreased from all

the previous years. There must be improvement in capital efficiency otherwise the company

might be get into trouble and its financial efficiency will be reduced.

In 2006-07: The Company's Capital Gearing Ratio is 7.68 times, it has been increased from

previous year. But this improvement is not sufficient.

In 2007-08: The Company's- Capital Gearing Ratio is 9.44 times, it has been increased with

more improvement than last year. This shows that how much times the capital is turned over into

sales.

In 2008-09: The Company's Capital Gearing Ratio is 9.5 times, which means quicker rotation of

capital to generate higher sales which in turn leads to higher profitability. It indicates that how

much times the capital is turned over into sales.

8. CONCLUSIONS AND FINDINGS:

136

1. The company's short term financial positions is found and satisfactory because .its current

as well as quick ratio is double than its current liabilities of the company each year, which means

company's creditors secured each year.

2. From the point of view of long term financial position of the company Debt Equity ratio,

debts are always less than equity in five years. It means company is less dependent on outside

loans.

3. Cash Profit Ratio, Return on Shareholders funds ratio and earnings per share are earning

per share are increasing each year. It is a good sign for the company.

At the end, we can say that the financial position of the company is sound.

9. SUGGESTIONS:

137

1. The company's capital turnover ratio has been decreasing each year. It must be improved. If

the capital turnover ratio is low, it will indicate that capital is lying ideal. Now this

time it is decreasing otherwise company will suffer,

2. The company's working capital turnover is also low. It has been decreasing since last four

years. It means stock is not readily converted into sales. It must be increased

otherwise sales can suffer.

3. The company's gross profit ratio is decreased. But now the ratio is increased because of

reduce in direct expenses. It must be reduced otherwise profits will not increased in

future.

9.BIBLIOGRAPHY

138

Balance sheet of five years of Verka Milk Plant, Mohali.

Balance sheet from 01-04-2004 to 31-03-2005,




Balance sheet from 01-04-2008 to 31-03-2009

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1990, New Delhi.

I.M.Pandey, “Financial management” Vikas Publishing House, 2004.

Khan and Jain, “Financial management” Himalaya Publishing House, 1999, Mumbai.

MY Khan , P.K Jain “ Management accounting” Tata Mc Graw Hills ,2001,Noida.

I.M Pandey, “Finance, a guide for managing company funds and profits”, prentice hall of

India, 2005.

ShashiK.GuptaandR.K.Sharma,”Management accounting,”Kalyani publishers, 2009,

New Delhi.

Ria Goel : Ratio Analysis of Caffe Nero,2007,machester

Cndymn91; Financial Ratio Analysis Report Of Ford Motor Company,(2006) washington

Akehrig: Ak Steel Ratio Analysis,(2007)linden

Apur Basarker: financial Analysis Of Hmt,(2007),Dhaka

Vadu Krishna:Annual report analysis of Kotak Mahindra Bank(2008),Bangalore

Icarr : Nike, Inc. Financial Ratio Analysis(2006), Nashville,TN

Kalmah; Modern cement, Ratio Analysis(2009), Dhaka

Sat56: Ratio Analysis Of Bharti Airtel(2008),Noida

Arunam Jain: Ratio Analysis Of Tcs Wipro Infosys(2008),Pune

Jitesh Chudasama: Analysis Of Annual Report Of Ongc(2009), Gujarat

Sasandifer :Ratio Analysis Of Starbucks Vs Mcdonald's(2009),Portland

Jain and Sharma:A financial report on ratios of 3M’s corporation, (2008)

Simon Mohum (2008) Oxford Journal of Working Capital”,

Antonio C.David (2007) K. Bers Martina (2000), “The financial Review”,

Lilia Costabile (2004) Wang Rowe Wei (2000), “The Oxford Journal”.

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http://www.oppapers.com/essays/analysis-ratio-of- wipro/165894

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http://www.oppapers.com/essays/analysis-ratio-of-kotak/185059

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http://www.oppapers.com/essays/analysis-ratio-of-ak



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