abhineet project

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CHAPTER: 1

MEANING OF FINANCIAL ANALYSIS

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Introduction

Financial analysis (also referred to as financial statement analysis or accounting

analysis) refers to an assessment of the viability, stability and profitability of a business,

sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of

information taken from financial statements and other reports. These reports are usually

presented to top management as one of their bases in making business decisions. Based

on these reports, management may:

Continue or discontinue its main operation or part of its business;

Make or purchase certain materials in the manufacture of its product;

Acquire or rent/lease certain machineries and equipment in the production of its goods;

Issue stocks or negotiate for a bank loan to increase its working capital;

Make decisions regarding investing or lending capital;

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Financial analysts often assess the firm's:

1. Profitability - its ability to earn income and sustain growth in both short-term and

long-term. A company's degree of profitability is usually based on the income statement,

which reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the

long-term;

3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate

obligations;

Both 2 and 3 are based on the company's balance sheet, which indicates the financial

condition of a business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, without having

to sustain significant losses in the conduct of its business. Assessing a company's

stability requires the use of, the income statement and the balance sheet, as well as other

financial and non-financial indicators.

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Financial statements

Are formal records of the financial activities of a business, person, or other entity?

In British English, including United Kingdom company law, financial statements are

often referred to as accounts, although the term financial statements are also used,

particularly by accountants.

Financial statements provide an overview of a business or person's financial

condition in both short and long term. All the relevant financial information of a

business enterprise presented in a structured manner and in a form easy to understand, is

called the financial statements. There are four basic financial statements:

Balance sheet: also referred to as statement of financial position or condition,

reports on a company's assets, liabilities, and Ownership equity at a given point in time.

Income statement: also referred to as Profit and Loss statement (or a "P&L"),

reports on a company's income, expenses, and profits over a period of time. Profit &

Loss account provide information on the operation of the enterprise. These include sale

and the various expenses incurred during the processing state.

Statement of retained earnings: explains the changes in a company's retained

earnings over the reporting period.

Statement of cash flows: reports on a company's cash flow activities, particularly

its operating, investing and financing activities.

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Purpose of financial statement

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 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." Financial statements may be used by users

for different purposes:

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.

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Employees also need these reports in making collective bargaining agreements

(CBA) with the management, in the case of labour unions or for individuals in

discussing their compensation, promotion and rankings.

Prospective investors make use of financial statements to assess the viability of

investing in a business. Financial analyses are often used by investors and are prepared

by professionals (financial analysts), thus providing them with the basis for making

investment decisions.

Financial institutions (banks and other lending companies) use them to decide

whether to grant a company with fresh working capital or extend debt securities (such as

a long-term bank loan or debentures) to finance expansion and other significant

expenditures.

Government entities (tax authorities) need financial statements to ascertain the

propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the

creditworthiness of the business. Media and the general public are also interested in

financial statements for a variety of reasons.

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RATIO ANALYSIS

Introduction to ratio analysis

Ratio analysis is one of the techniques of financial analysis where ratios are used to

evaluate the financial condition and performance of a firm. Analysis and interpretation

of various accounting ratios gives a skilled and experienced analyst better

understanding of financial conditions and performance of the firm ratios are relationship

expressed in anathematic terms by its figures, which are connected with each other in

some manner.

Meaning of Ratio

Generally speaking a ratio is simple one figure expressed in terms of another and

thus its an assessment of one number in relation to other. The relationship must be

established on the basis of some scientific and logical methods these a ratio is a

mathematical quantitative form. When this definitions of ratio is explained with

reference to the items shown in the financial statements, then it is called

Accounting Ratios. Hence in accounting ratio is defined as quantitative

relationship between two items in the financial statement. It is the process of

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determining and interpreting numerical relationship based on financial statements as

they are simple to calculate and easy to understand.

It is one of the techniques of financial analysis where ratios are used as yard for

evaluating the financial conditions and performance of a firm.

STEPS IN RATIO ANALYSIS

The first task of the financial analysis is to select the information relevant to the

decision under consideration from the statements and calculates appropriate ratios.

To compare the calculated ratios with the ratios of the same firm relating to the past

or with the industry ratios. It facilitates in assessing success or failure of the firm.

Third step is to interpretation, drawing of inferences and report writing conclusions

are drawn after comparison in the shape of report or recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They enableanalyst to draw conclusions regarding financial operations. They use of ratios as a tool

of financial analysis involves the comparison with related facts. This is the basis of ratio

analysis. The basis of ratio analysis is of four types.

Past ratios, calculated from past financial statements of the firm.

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Competitors ratio, of the some most progressive and successful competitor firm at

the same point of time.

Industry ratio, the industry ratios to which the firm belongs to

Projected ratios, ratios of the future developed from the projected or pro forma

financial statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements.

It is the process of establishing and interpreting various ratios for helping in making

certain decisions. It is only a means of understanding of financial strengths and

weaknesses of a firm. There are a number of ratios which can be calculated from the

information given in the financial statements, but the analyst has to select theappropriate data and calculate only a few appropriate ratios. The following are the four

steps involved in the ratio analysis.

Selection of relevant data from the financial statements depending upon the

objective of the analysis.

Calculation of appropriate ratios from the above data.

Comparison of the calculated ratios with the ratios of the same firm in the past, or

the ratios developed from projected financial statements or the ratios of some other

firms or the comparison with ratios of the industry to which the firm belongs

INTERPRETATION OF THE RATIOS

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Caliber of the analysis

IMPORTANCE OF RATIO ANALYSIS

Aid to measure general efficiency

Aid to measure financial solvency

Aid in forecasting and planning

Facilitate decision making

Aid in corrective action

Aid in intra-firm comparison

Act as a good communication

Evaluation of efficiency

Effective tool

SIGNIFICANCE OF RATIO ANALYSIS

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Managerial uses of ratio analysis

Helps in decision-making:

Financial statements are prepared primarily for decision-making. But the

information provided in financial statement is not and in itself and no meaningful

conclusion can be drawn from these statements alone. Ratio analysis helps in making

decision from the information provided in these financial statements.

Helps in financial forecasting and planning:

Ratio analysis is of much help in financial forecasting and planning. Planning is

looking ahead and the ratios calculated for a number of years work as a guide for the

future. Meaningful conclusions can be drawn for future from these ratios. Thus, ratio

analysis helps in forecasting and planning.

Helps in communicating:

The financial strength and weakness of the firm are communicated in a more easy

and understandable manner by the use of ratios. The information contained in the

financial statements is covered in a meaningful manner to the one whom it is meant.

Thus, ratios help in communication and enhance the value of the financial statements.

Helps in Co-Ordination:

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Ratios even help in co-ordination, which is of utmost importance in effective

business management. Better communication of efficiency and weakness of an

enterprise results in better co-ordination in enterprise.

Helps in control:

Ratio analysis even helps in making effective control of the business. Standard

ratio can be based upon performed financial statements and variances and deviations, if

any, can be found by comparing the actual with the standards so as to take a corrective

action at the right time. The weakness or otherwise, if any, come to the knowledge ofthe management which helps in effective control of the business.

A) Other Uses:

There are so many other uses of ratio analysis. It is an essential part of the

budgetary control and standard costing. Ratios are of immense importance in the

analysis and interpretation of financial statements as they bring the strength or weakness

of a firm.

B) Utility to share holders/Investors:

An investor in the company will like to assess the financial position of the concern

where he is going to invest. His first interest will be the security of his investment and

then a return in the form of dividend or interest. For the first purpose he will try to

assess the value of fixed assets and the loan rose against them. The investor will feel

satisfied only if the concern has sufficient amount of assets. Long-term solvency ratios,

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on the other hand, will be useful to determine profitability position. Ratio analysis will

be useful to the investor in making up his mind whether present financial position of the

concern warrants further investment or not.

C) Utility to creditors:

The creditors or suppliers extend short-term credit to concern. They are interested

to know whether financial position of the concern warrants their payments at a specified

time or not. The concern pays short-term creditors out of its current assets. If the

current assets are quite sufficient to meet current liabilities then the creditors will not

hesitate in extending credit facilities. Current and acid test ratios will give an idea about

the current financial position of the concerns.

D) Utility of Employees:

The employees are also interested in the financial position of the concern especially

profitability. Their wage increases and amount of fringe benefits are related to volume

of profits earned by the concern. The employees make use of information available in

financial statements. Various profitability ratios relating to gross profit, operating profit,

net profit, etc. enable employees to put forward their viewpoint for the increase ofwages of other benefits.

E) Utility to Government:

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Government is interested to know the overall strength of the industry. Various

financial statements published by industrial units are used to calculate ratios for

determining short-term, long-term and overall financial position of the concerns.

Profitability indexes can also be prepared with the help of ratios. Government may base

its future policies on the basis of industrial information available from various units. The

ratios may be used as indicators of overall financial strength of the public as well as

private sectors. In the absence of the reliable economic information, governmental plans

and policies may not prove successful.

F) Tax Audit Requirements:

The Finance Act, 1984, interested section 44 AB in the Income Tax Act. Under this

section every assessed engaged in any business having turnover or gross receipts

exceeding Rs.40 lacks is required to get the accounts audited by a chartered accountant

and submits the tax audit report before the due date for filing the return of income under

section 139(1). Incase of a professional, a similar report is required if the gross receipts

Exceed Rs.10 lacks. Clause 32 of the Income Tax Act requires that the following

accounting ratios should be given:

Gross Profit/Turnover

Net Profit/Turnover

Stock-in-trade/Turnover

Material Consumed/Finished Goods Produced

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ADVANTAGES OF RATIO ANALYSIS

Simplifies financial statements

Facilitates inter-firm comparison

Makes inter-firm comparison

Helps in planning and forecasting

Helps in decision making

It may also be used as a measurement of efficiency.

LIMITATIONS OF RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of financial management.

Though ratios are simple to calculate and easy to understand, they suffer from some

serious limitations:

Limited Use of a Single Ratio:

A single ratio, usually, does not convey much of a sense. To make a better

interpretation a number of ratios have to be calculated which is likely to confuse theanalyst than help him in making any meaningful conclusion.

No Fixed Standards:

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No Fixed Standards can be laid down for ideal ratios. There are no well-accepted

standards or rules of thumb for all ratios, which can be accepted as norms. It renders

interpretation of the ratios difficult.

Inherent Limitation of Accounting:

Like financial statements, ratios also suffer from the inherent weakness of

accounting records such as their historical nature. Ratios of the past are not necessarily

true indicators of the future.

Change of Accounting Procedures:

Change in accounting procedure by a firm often makes ratio analysis misleading,

example, a change in the valuation of methods of inventories, from FIFO to LIFO

increases the cost of sales and reduces considerably the value of closing stocks which

makes stock turnover ratio to be lucrative and an unfavorable gross ratio.

CLASSIFICATION OF RATIOS

The use of ratio analysis is not confined to financial manager only. There are

different parties interested in the ratio analysis for knowing the financial position of a

firm for different purposes. Various accounting ratios can be classified as follows:

Traditional Classification

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Functional Classification

Significance ratios

1. Traditional Classification

It includes the following.

Balance sheet (or) position statement ratio:

They deal with the relationship between two balance sheet items, e.g. the ratio of

current assets to current liabilities etc., both the items must, however, pertain to the

same balance sheet.

Profit & loss account (or) revenue statement ratios:

These ratios deal with the relationship between two profit & loss account items,

e.g. the ratio of gross profit to sales etc.,

Composite (or) inter statement ratios:

These ratios exhibit the relation between a profit & loss account or income

statement item and a balance sheet items, e.g. stock turnover ratio, or the ratio of total

assets to sales.

2. Functional Classification:

These include liquidity ratios, long term solvency and leverage ratios, activity

ratios and profitability ratios.

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3. Significance ratios:

Some ratios are important than others and the firm may classify them as primary

and secondary ratios. The primary ratio is one, which is of the prime importance to a

concern. The other ratios that support the primary ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION

THE RATIOS ARE:

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratio

1. LIQUIDITY RATIOS:

Liquidity refers to the ability of a concern to meet its current obligations as & when

there becomes due. The short term obligations of a firm can be met only when there are

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sufficient liquid assets. The short term obligations are met by realizing amounts from

current, floating (or) circulating assets The current assets should either be calculated

liquid (or) near liquidity. They should be convertible into cash for paying obligations of

short term nature. The sufficiency (or) insufficiency of current assets should be assessed

by comparing them with short-term current liabilities. If current assets can pay off

current liabilities, then liquidity position will be satisfactory.

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

Current ratio

Quick (or) Acid-test (or) Liquid ratio

Absolute liquid ratio (or) Cash position ratio

2. LEVERAGE RATIOS:

The leverage or solvency ratio refers to the ability of a concern to meet its long

term obligations. Accordingly, long term solvency ratios indicate firms ability to meetthe fixed interest and costs and repayment schedules associated with its long term

borrowings.

The following ratio serves the purpose of determining the solvency of the concern.

(a) Proprietary ratio.

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Components of proprietary ratio:

SHARE HOLDERS FUND TOTAL ASSETS

Share Capital Fixed Assets

Reserves & Surplus Current Assets

Cash in hand & at bank

Bills receivable

Inventories

Marketable securities

Short-term investments

Sundry debtors

Prepaid Expenses

3. ACTIVITY RATIO:

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

efficiency with which assets are managed directly effect the volume of sales. Activity

ratios measure the efficiency (or) effectiveness with which a firm manages its resources

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(or) assets. These ratios are also called Turn over ratios because they indicate the

speed with which assets are converted or turned over into sales.

To measure active ratio of the firm following ratios can bee calculated

(a) Working capital turnover ratio.

(b) Fixed assets turnover ratio.

(c) Capital turnover ratio.

(d) Current asset to fixed asset ratio.

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Component of Current Assets to Fixed Assets Ratio:

CURRENT ASSETS FIXED ASSETS

Cash in hand Machinery

Cash at bank Buildings

Bills receivable Plant

Inventories Vehicles

Work-in-progress

Marketable securities

Short-term investments

Sundry debtors

Prepaid expenses

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4. PROFITABILITY RATIOS:

The primary objectives of business undertaking are to earn profits. Because profit is the

engine, that drives the business enterprise.

(a) NET PROFIT RATIO.

(b) RETURN ON TOTAL ASSETS.

(c) RESERVES AND SURPLUS TO CAPITAL RATIO.

(d) EARNINGS PER SHARE.

(e) OPERATING PROFIT RATIO.

(f) PRICE - EARNING RATIO.

(g) RETURN ON INVESTMENTS

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Traditional

classification or

Statement Ratios

FunctionalClassification orClassificationAccording to Tests

Classificationaccording toImportance orSignificance

1. Balance sheet Ratios

or Position Statement

Ratios

2. Profit and Loss

Account Ratios or

Income Statement

Ratios

1. Liquidity Ratios

2. Leverage Ratios

3. Activity Ratios

4. Profitability

Ratios

1. Primary Ratios

2. Secondary

Ratios

CLASSIFICATION OF RATIO


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Traditional Classification or Statement Ratios

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Traditional classification or

Statementratios

Balance SheetRatios or PositionStatement Ratios

Profit and LossAccount Ratios orIncome StatementRatios

CompositeRatios orMixed Ratios

1. Current Ratio

2. Liquid Ratio

3. Absolute Liquid

Ratio

4. Debt-Equity

Ratio

5. Proprietary

Ratio

6. Capital Gearing

Ratio

7. Asset-

Proprietorship

Ratio

8. Inventory to

Working Capital

Ratio

1. Gross Profit Ratio

2. Operating Ratio

3. Operating Profit

Ratio

4. Net Profit Ratio

5. Expense Ratio

6. Interest Coverage

Ratio

1. Stock

Turnover Ratio

2. Debtors

Turnover Ratio

3. Payables

Turnover Ratio

4. Fixed Assets

Turnover Ratio

5. Return on

Equity

6. Return on

Shareholders

Fund

7. Return on

Capital

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Company Profile

Videocon industries foundation was laid 31 years back in 1979 at the strong hands

of Shri Nandlal Madhavlal Dhoot. Under his guidance and leadership the company

became Indian Multinational. After being in the market for more than three decades the

business is still carried in the strong hands of Shri Venugopal Dhoot (Chairman), &

K.R. Kim (CEO). The Promoters of the company have a good reputation in the business.

The promoter has track record of completing their project in a time with good quality.

Videocon today has become a brand to recon with. Videocon has been in the

business for three decades and in this tenure they have launched many products like

Consumer Electronics, Home appliances, Components, Mobile Phones, Wireless,

Internet, Petroleum, Satellite television and Power. Videocon has its head quarts in

Aurangabad, Maharashtra, India.

Acquisition of Thomson SA

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Videocon through its Wholly Owned Offshore Subsidiary acquired the Colour

Picture Tube (CPT) businesses from Thomson S.A having manufacturing facilities in

Poland, Italy, Mexico and China along with support research and development facilities.

Videocon Industries Ltd.

Type Public (BSE: 5511389)

Industry Conglomerate

Founded 1979

Founder Nandlal Madhavlal Dhoot

Headquarters Aurangabad, Maharashtra, India.

Key people Venugopal Dhoot

(Chairman)

K. R. Kim

(CEO)

Products Consumer Electronics

Home appliances

Components

Office Automation

Mobile Phones

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http://en.wikipedia.org/wiki/File:Videocon_Logo.svg


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Wireless

Internet

Petroleum

Satellite television

Power

Revenue US $ 2 billion (2010)

Net income US $ 276 million (2010)

Employees 5,000 (2010)

Website Videocon.com

Videocon is an industrial conglomerate with interests all over the world and

based in India. The group has 17 manufacturing sites in India and plants in China,

Poland, Italy and Mexico. It is also the third largest Picture tube manufacturer in the

world.

Corporate profile

The Videocon group has an annual turnover of US $ 2 billion, making it one of the

largest Consumer electronic and home appliance companies in India. Since 1998, it has

expanded its operations globally, especially in the Middle East.

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Consumer electronics

In India the group sells consumer products like Colour Televisions, Washing

Machines, Air Conditioners, Refrigerators, Microwave ovens and many other home

appliances, selling them through a Multi-Brand strategy with the largest sales and

service network in India. Videocon Group brands include Akai, Electrolux, Hyundai,

Kelvinator, Kenwood, Next, Kenstar, Planet M, Sansui, Toshiba, Philips (TV Products)

etc.

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CHAPTER: 3

RESEARCH METHODOLOGY

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1) Introduction

2) Types of research methodology

3) Objective of study

4) Scope and limitations of study

1) Introduction

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

be understood as a science of studying now research is done systematically. In that

various steps, those are generally adopted by a researcher in studying his problem along

with the logic behind them. It is important for research to know not only the research

method but also know methodology. The procedures by which researcher go about

their work of describing, explaining and predicting phenomenon are called

methodology. Methods comprise the procedures used for generating, collecting and

evaluating data. All this means that it is necessary for the researcher to design hismethodology for his problem as the same may differ from problem to problem. Data

collection is important step in any project and success of any project will be largely

depend upon now much accurate you will be able to collect and how much time, money

and effort will be required to collect that necessary data, this is also important step. Data

collection plays an important role in research work. Without proper data available for

analysis you cannot do the research work accurately.

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2) Types of data collection

There are two types of data collection methods available.

1. Primary data collection

2. Secondary data collection

1) Primary data

The primary data is that data which is collected fresh or first hand, and for first

time which is original in nature. Primary data can collect through personal interview,

questionnaire etc. to support the secondary data.

2) Secondary data collection method

Secondary data easily get those secondary data from records, journals, annual

reports of the company etc. It will save the time, money and efforts to collect the data.

Secondary data also made available through trade magazines, balance sheets, books etc.

But primary data collection had limitations such as matter confidential information thusproject is based on secondary information collected through two years annual report of

the company, supported by various books and internet sides. The data collection was

aimed at study of working capital management of the company.

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TYPES OF RESEARCH METHODOLOGY

1. Descriptive V/S Analytical

Descriptive research includes survey & facts finding inquiries of different kinds.The major purpose of descriptive research is description of the state of affairs, as it

exists at present. In analytical research, the research has to use facts or information

already available, and analyze these to make a critical evolution of the material.

2. Applied V/S Fundamental

Applied research aims to finding a solution for an immediate problem facing

society or an industrial or business organization where as a fundamental research is

mainly concerned with generalization & with the formation of a theory.

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Applied v/s

fundamental

Descriptive v/s

analytical

Quantitative

v/s qualitative

Some other

types of

research

Conceptual

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3. Quantitative V/S Qualitative

Quantitative research is based on the measurements of quantity or amount. It is

applicable to the phenomena that can be expresses in the term of quantity. Qualitative

research is especially important in the behavioral science where is to discover the

underline motives of human behavior.

4. Conceptual V/S Empirical:

Conceptual research is related to some abstract idea (s). It is generally used

philosophers & thinkers to develop new concepts or to interpret existing ones. Empirical

research relies on experience or observation alone often without regard for system &

theory. It is a data base research, coming up with conclusions, which are capable of

being verified, by observation or experiments.

5. Some Other Types Of Research

There may be other types of research such as one time research or the longitudinal

research from the view point of time. Laboratory research or stimulation research,

historical research & exploratory research are some of the other type of research.

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CHAPTER: 4

RATIO ANALYSIS

FINANCIAL ANALYSIS OF VIDEOCON

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Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of their profitability and

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

industry. Ratio analysis is one of the best possible techniques available to management

to impart the basic functions like planning and control. As future is closely related to the

immediately past, ratio calculated on the basis historical financial data may be of goodassistance to predict the future.

Ex:

On the basis of inventory turnover ratio or debtors turnover ratio in the past, the

level of inventory and debtors can be easily ascertained for any given amount of sales.

Similarly, the ratio analysis may be able to locate the point out the various arias which

need the management attention in order to improve the situation.

Ex:

Current ratio which shows a constant decline trend may be indicate the need for

further introduction of long term finance in order to increase the liquidity position. As

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

liquidity, solvency, activity, profitability and overall performance, it enables the

interested persons to know the financial and operational characteristics of an

organization and take suitable decisions.

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Vertical Analysis

Vertical analysis is the procedure of preparing and presenting common size

statements. Common size statement is one that shows the items appearing on it in

percentage form as well as in rupees form. Each item is stated as a percentage of some

total of which that item is a part. Key financial changes and trends can be highlighted by

the use of common size statements.

Videocon Industry has a separate financial department where in all financial

decision is taken by the experts, Videocon believes in maximum profit at least cost but

the finances in such a way that the goal of business say, profit maximization is realized.

Financial ratios

In general, there are 4 kinds of financial ratios that a financial analyst will use most

frequently, these are:

Performance ratios

Working capital ratios

Liquidity ratios

Solvency ratios

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These 4 financial ratios allow a good financial analyst to quickly and efficiently

address the following questions or concerns:

Performance ratios

What return is the company making on its capital investment?

What are its profit margins?

Working capital ratios

How quickly are debts paid?

How many times is inventory turned?

Liquidity ratios

Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

What is the level of debt in relation to other assets and to equity?

Is the level of interest payable out of profits?

Liquidity ratios

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Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

What is the level of debt in relation to other assets and to equity?

Is the level of interest payable out of profits?

The Balance Sheet and the Statement of Income are essential, but they are only the

starting point for successful financial management.

Apply Ratio Analysis to Financial Statements to analyze the success, failure, and

progress of your business.

Ratio Analysis enables the business owner/manager to spot trends in a business and

to compare its performance and condition with the average performance of similar

businesses in the same industry.

To do this compare your ratios with the average of businesses similar to yours and

compare your own ratios for several successive years, watching especially for any

unfavourable trends that may be starting.

Ratio analysis may provide the all-important early warning indications that allow

you to solve your business problems before your business is destroyed by them.

Balance Sheet Ratio Analysis

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Important Balance Sheet Ratios measure liquidity and solvency (a business's ability

to pay its bills as they come due) and leverage (the extent to which the business is

dependent on creditors' funding). They include the following ratios:

Liquidity Ratio

Liquidity ratios measure the ability of the firm to meet its current obligations. A

firm should ensure that it does not suffer from lack of liquidity, and also that it does not

have excess liquidity. The failure of a company to meet its obligations due to lack of

lack of sufficient liquidity, will result in poor creditworthiness, loss of creditors

confidence, or even in legal tangles resulting in the closure of the company. A very high

degree of liquidity is also bad; idle assets earn nothing. Therefore, it is necessary to

strike a proper balance between high liquidity and lack of liquidity.

1) CURRENT RATIO

2) QUICK RATIO

1.Current Ratio

Meaning & Objective:

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Current ratio is also known as Working Capital Ratio as it is a measure of

working capital available at a particular time. Current Ratio establishes relationship

between current assets and current liabilities.

Current Ratio of the firm measures its short-term solvency, which indicates the

rupees of current assets available for each rupee of current liability.

The current ratio represents a margin of safety for creditors. It is generally believed

that 2:1 ratio shows a comfortable working capital position. The minimum acceptable

current ratio is obviously 1:1, but that relationship is usually playing it too close for

comfort.

If you feel your business's current ratio is too low, you may be able to raise it by:

Paying some debts.

Increasing your current assets from loans or other borrowings with a maturity of

more than one year.

Converting non-current assets into current assets.

Increasing your current assets from new equity contributions.

Putting profits back into the business.

CURRENT RATIO

Current ratio may be defined as the relationship between current assets and current

liabilities. This ratio also known as Working capital ratio is a measure of general

liquidity and is most widely used to make the analysis of a short-term financial position

(or) liquidity of a firm.

Current assets

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Current ratio =

Current liabilities

Components of current ratio

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand Outstanding or accrued expenses

Cash at bank Bank over draft

Bills receivable Bills payable

Inventories Short-term advances

Work-in-progress Sundry creditors

Marketable securities Dividend payable

Short-term investments Income-tax payable

Sundry debtors

Prepaid expenses

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PARTICULARS FY 07 FY 08 FY 09

CURRENT

ASSET 5,142.49 7,641.68 8,820.90

CURRENT

LIABILITIES 1,616.44 1,444.55 1,521.48

CURRENT

RATIO

3.181 5.29 5.797

Interpretation

As a rule, the current ratio with 2:1 (or) more is considered as satisfactory position

of the firm.

Current ratio for year 2008 was very close to the standard ratio i.e. 2.22.We can

observe sudden increase in current ratio in 2007 and an increase in current ratio 2008

onwards.

QUICK RATIO

Quick ratio is a test of liquidity than the current ratio. The term liquidity refers to the

ability of a firm to pay its short-term obligations as & when they become due. Quick

ratio may be defined as the relationship between quick or liquid assets and current

liabilities. An asset is said to be liquid if it is converted into cash with in a short period

without loss of value.

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Quick or liquid assets

Quick ratio =

Current liabilities

Components of quick or liquid ratio:

QUICK ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses



Sundry debtors Short-term advances

Marketable securities Sundry creditors

Temporary investments Dividend payable

Income tax payable

Meaning & Objective

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The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures

of liquidity.

"If all sales revenues should disappear, could my business meet its current obligations

with the readily convertible quick' funds on hand?"

From the current assets categories, inventory being least liquid and it normally requires

some time for realizing in to cash therefore it is excluded while calculating quick ratio.

An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets"

are in accounts receivable, and the pattern of accounts receivable collection lags behind

the schedule for paying current liabilities.

QUICK RATIO

PARTICULARS FY 07 FY 08 FY 09

QUICK ASSET 5,142.49 7,641.68 8,820.90

QUICKLIABILITIES

1,616.44 1,444.55 1,521.48

QUICK RATIO 3.181 5.29 5.797

Interpretation

Quick assets are those assets which can be converted into cash within a short

period of time, say to six months. So, here the sundry debtors which are with the long

period does not include in the quick assets. We can observe that for year2009, the quick

ratio was highest. Where as in year 2007 ratio was close to 1:1 ratio. Upward increase in

the ratio is observed from 2007.

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Efficiency ratio

The ratios compounded under this group indicate the efficiency of the organization

to use the various kinds of assets by converting them the form of sale. This ratio also

called as activity ratio or assets management ratio. As the assets basically categorized as

fixed assets and current assets and the current assets further classified according to

individual components of current assets viz. investment and receivables or debtors or as

net current assets, the important of efficiency ratio as follow:

1) Working capital turnover ratio

2) Inventory turnover ratio

3) Current assets turnover ratio

Working Capital Turnover Ratio:

Meaning & Objective:

The Working Capital Turnover ratio measures the company's Net Sales from the

Working Capital generated. A company uses working capital (current assets - current

liabilities) to fund operations and purchase inventory. These operations and inventory

are then converted into sales revenue for the company. The working capital turnover

ratio is used to analyze the relationship between the money used to fund operations and

the sales generated from these operations.

Formula:

Working Capital = total current Assets total current Liabilities

Components of Working Capital:

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand Outstanding or accrued expenses

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Inventories Short-term advances

Work-in-progress Sundry creditors

Marketable securities Dividend payable

Short-term investments Income-tax payable

Sundry debtors

Prepaid expenses

PARTICULAR FY 07 FY 08 FY 09

CURRENT

ASSET 5,142.49 7,641.68 8,820.90

(-)CURRENTLIABILITIES 1,616.44 1,444.55 1,521.48

NET W.C.

3,526.05 6,197.13 7,299.42

Working capital turnover ratio= Net Sales/Working Capital

PARTICULAR FY 07 FY 08 FY 09

NET SALES 6,613.19 7,361.40 7,289.07

W.C. 3,526.05 6,197.13 7,299.42

W.C. TOR 1.875 1.187 0.998

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Interpretation

Income from services is greatly increased due to the extra invoice for Operations

& Maintenance fee and the working capital is also increased greater due to the increase

in from services because the huge increase in current assets. The income from services

is raised and the current assets are also raised together resulted in the decrease of the

ratio of 2008 compared with 2007.

Inventory Turnover Ratio

Meaning & Objective

Inventory turnover ratio reflects the efficiency of inventory management. It

indicates the number of times inventory is replaced during the year. Higher the ratio,

higher is efficient the management of inventory and vice versa in the organization.

Formula

Inventory Turnover Ratio= Cost of Goods sold/ Average inventory

Particulars 2007 2008 2009

Inventory turnover

ratio

8.40 5.99 7.51

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Current Assets Turnover:

Meaning & Objective

Current assets turnover ratio indicates productivity ratio, which measures the

output, produced from the given input employed. Current Assets are inputs, which can

be converted in to cash quickly. Higher the current assets turnover ratio, higher the

liquidity of the firm.

Formula

Current assets turnover ratio= Sales /Current Assets

PARTICULARS FY07 FY08 FY09

SALES 6,613.19 7,361.40 7,289.07

CUREENT ASSETS 5,142.49 7,641.68 8,820.90

C.A. TOR 1.285 0.963 0.826

Profitability ratio:

NET PROFIT RATIO:

Net profit after tax

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Net profit ratio= X 100

Net sales


Net profit after tax 4,652.98 4,637.15 4,706.12

Net sales 6,613.19 7,361.40 7,289.07

Ratio 0.703 0.629 0.645

Interpretation:

The net profit ratio is the overall measure of the firms ability to turn each rupee of

income from services in net profit. If the net margin is inadequate the firm will fail to

achieve return on shareholders funds. High net profit ratio will help the firm service in

the fall of income from services, rise in cost of production or declining demand.

GROSS PROFIT RATIO:

Gross profit

Gross profit ratio = X 100

Net sales

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Gross profit 8,083.16 8,947.78 9,004.95

Net sales 6,613.19 7,361.40 7,289.07

Ratio 1.222 1.215 1.235

RETURN ON TOTAL ASSETS

Net profit

Return on assets =

Total assets


Net profit 4,652.98 4,637.15 4,706.12

Total assets 10,884.50 14,819.39 16,384.59

Return on assets 0.427 0.312 0.287

Interpretation:

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This is the ratio between net profit and total assets. The ratio indicates the return on

total assets in the form of profits.

The net profit is decreased in the current year because of the decrement in the

income from services due to the increase in Operations & Maintenance fee.

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CHAPTER 5

CONCLUSION AND SUGGESTIONS

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BIBLIOGRAPHY

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Books

Financial Management - By Prassana Chandra

Financial Management By Ravi Kishor

Websites

www.moneycontrol.com

www.utvmoney.com

www.videocon.com

www.google.com

Magazines

Money

Business Today

Financial Planning Journal

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