A

PROJECT REPORT

ON

ANALYSIS OF FINANCIAL STATEMENTS

Project Report Submitted

To

Delhi Institute of Advanced Studies

For the Partial fulfillment of the degree of MBA (2006-08)

Submitted by: Under the Supervision of:

PALKA Mr. Kamal Ahuja

ROLL NO.- 0551233906

MBA (A)- 3rd Sem.

DELHI INSTITUTE OF ADVANCE STUDIES

GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY

NEW DELHI

ACKNOWLEDGEMENT

I would like to express my deep sense of gratitude to my project guide Mr. Kamal

Abuja, my mentor at Indiabulls for his immerse support, help & cooperation at every

step of my project. Without his support this project would not have taken in present

form in reality.

I would like to thank all the faculty members of Delhi Institute of Advanced

Studies (DIAS) for extending time to time to help for the fulfillment of this project.

Their invaluable guidance all through this project has enabled me to complete project

work in systematic manner.

I also want to extend my deep sense of gratitude to all the members of Accounts

payable team who helped me to understand the intricacies of working of the

organisation & lent full cooperation & guidance, which was necessary for successful

completion of project.

I thank especially my parents for giving me monumental support and inspiration

during the course of this project. Last but not the least to all my friends who helped

me in every possible manner during the course of my project.

Palka

2

Executive Summary

In any country; more so far a developing country like India; there is a great need for

capital formation through saving & investments. To achieve this objective individuals

as well as groups savings and investments are to be properly planned, promoted &

channeled.

When an individual or group saves some money and decides to invest the same in

various schemes provided by the financial institutions /companies, they directly

participate in economic development.

On the other hand Financial Institutions/ Companies fulfills the credit needs of a large

percentage of population in India. They offer consumer loans, personal loans,

securities, brokerage and other financial products and services to the customers and

helps to fulfill their dreams.

With the rapid growth and maturation of Indian financial markets provide a unique

opportunity to create a leader in diversified financial services, who is able to offer a

one stop shop for all investment & credit needs of retail clients and builds a long term

relationship with customers. It is believed that ultimately a hand full of big players

will emerge as winners as the credits and securities business continue to grow and

consolidate, and barriers to entry & scale advantages dominate the business.

Technology, analytics and national scale provide unique advantage to a business

model when combined with strong sales & marketing and local presence. Only a

handful of financial institutions are building a national brand & serving the customer

across product needs. With the power of information, technology and strong local

presence Indiabulls Financial Services Ltd. group, have built as winning national

scale credit and securities business.

Indiabulls has built one of the largest customer franchises in India with almost

3,00,000 customers as of March 2006. It is leading financial services and Real estate

company having presences over 414 locations in more then 124 cities.

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It serves the customers with wide range of financial services and products from

securities, derivatives, trading, depository services, research & advisory services,

insurance, consumer secured and unsecured credit, loans against share & mortgage

and housing finance.

The project has been undertaken to study the financial position of the company, with a

view to understand the functioning & the whole ambit of the Indiabulls Financial

Services Ltd. Group including the Analysis of Financial Statements of four

subsidiaries viz. Indiabulls Financial Services Limited, Indiabulls Credit Services

Limited, Indiabulls Securities Limited & Indiabulls housing Finance Limited.

The project has been divided into 4 chapters. First chapter deals with the theoretical

aspects of the ‘Analysis of Financial statements’ including the Types of financial

statements, Types of financial analysis, Steps involved in financial statement analysis,

Nature & limitations of financial statements, Tools of Financial Analysis.

Second Chapter explains the theoretical aspect of ‘Ratio Analysis ‘, the tool that has

been used for the analysis of financial statements in the project including the

Definition of ratios, Classification of ratios, explanation of ratios covered by each

category, Advantages & Limitations of Ratio Analysis.

Third Chapter has exclusively been devoted to Calculation, analysis & interpratation

of ratios of four companies namely Indiabulls Financial Services Limited, Indiabulls

Credit Services Limited, Indiabulls Securities Limited & Indiabulls housing Finance

Limited for last 3 years.

Chapter 4 exclusively deals with the inter-firm comparisons. The ratios of the four

companies have been compared.

PALKA

4

Table of Contents

Acknowledgement………………………………………………. 2

Executive Summary…………………………………………….. 3-4

1. Introduction………………………………………….….6

2. Company Profile………………………………………..7-13

3. Analysis of Financial statements-An overview……... .14-22

3.1 Meaning of Financial statements.……………….……14

3.2 Different types of financial statements………….……14-16

3.3 Nature of Financial Statements………………………16-17

3.4 Limitations of financial statements…………………..17-18

3.5 Various Techniques of Financial Analysis…………...18-21

3.6 Types of Financial Analysis………………………….21-22

4. Ratio Analysis – An overview………………………….23-34

4.1 Introduction…………………………………………..23

4.2 Categories of Ratio…………………………………..23-32

4.3 Advantages of Ratio Analysis………………………. 32-33

4.4 Limitation of Ratio Analysis.………………………...33-34

5. Analysis & Interpretation of Ratios…………………..35-77

5.1 Ratio Analysis of Indiabulls Financial Services………35-43

5.2 Ratio Analysis of Indiabulls Securities Limited………43-53

5.3 Ratio Analysis of Indiabulls Credit Services Limited…53-63

5.4 Ratio Analysis of Indiabulls Housing Finance Limited.63-72

5.5 Inter-firm comparison………………………………….72-78

6. Bibliography ...……………………………………………79

5

INTRODUCTION

Every country in the world tries to attain the economic development irrespective of

the degree of development. The economic development is influenced by economic

and non-economic factors. The economic factors include capital stocks and its role of

accumulation, capital output ratio in various sectors. Of course non-economic factors

include political freedom social organizations, general education etc. So among all the

economic developments finance has its key importance. It helps in economic

development, which is necessary for the growth of all economies. Adequate finance is

absolutely necessary to lubricate industrial machines to insure its smooth working.

On going discussion led us to visualize the growth & development of companies

involved or engaged in providing financial services. Indiabulls Financial Services Ltd.

is one of the companies actively engaged in providing financial services. The

company has 8 subsidiary companies, which are engaged in various areas of financial

services sector and real estate.

Indiabulls has emerged as one of the leading and fastest growing in less than two

years since its initial public offering in September 2004. It has a market capitalization

of around US $ 800 million and consolidated net worth of around US $500 million.

Indiabulls has an extra ordinary financial performance as its revenues more than

tripled to Rs. 613.15 crores & it’s net profit after tax more than quadrupled to

Rs.253.36 crores.

The project has been undertaken in order to understand the changes in financial

position of the organisation over the last three years, brief explanation of the financial

services provided by the Financial Services Limited Group and real estate arm of the

oraganisation.. An effort has been made through this study to look into the growth

story of the organisation Indiabulls Financial Services Ltd. & also through its

subsidiaries over last 3 years

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Company Profile

Indiabulls is India’s leading Financial Services and Real Estate company having

15000 employees with presence over 414 locations in more than 124 cities. Indiabulls

serves the financial needs of more than 3,00,000 customers with its wide range of

financial services and products from securities, derivatives trading, depositary

services, research & advisory services, insurance, consumer secured & unsecured

credit, loan against shares and mortgage & housing finance. With around 5000

Relationship Managers, Indiabulls helps its clients to satisfy their customized

financial goals. Indiabulls through its group companies has entered Indian Real Estate

business in 2005. It is currently evaluating several large-scale projects worth several

hundred million dollars.

Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay

Stock Exchange, Luxembourg Stock Exchange and London Stock Exchange. The

market capitalization of Indiabulls is around USD 800 million, and the consolidated

net worth of the company is around USD 500 million. Indiabulls and its group

companies have attracted USD 300 million of equity capital in Foreign Direct

Investment (FDI) since March 2000. Some of the large shareholders of Indiabulls are

the largest financial institutions of the world such as Fidelity Funds, Capital

International, Goldman Sachs, Merrill Lynch, Lloyd George and Farallon Capital.

Indiabulls is ranked 82nd in the list of most valuable companies in India in BT500.

Business of the company has grown in leaps and bounds since its inception. It hass

been rated as ‘Fastest Growing Large Cap Company’ in India in a report by

Business Today magazine in April, 2006 as revenue of the company grew at a CAGR

of 184% from FY03 to FY06. During the same period, profits of the company grew at

a CAGR of 268%.

Indiabulls became the first company to bring FDI in Indian Real Estate through a

Joint Venture with Farallon Capital Management LLC, a respected US based

investment firm. Indiabulls has demonstrated deep understanding and commitment to

7

Indian Real Estate market by winning competitive bids for landmark properties in

Mumbai and Delhi. In April 2006, Indiabulls announced demerger of its real estate

division to a separate entity.

Financial year 2006 was a transformational year for Indiabulls as the company

executed on its vision to be a leader in diversified financial services and branch out

beyond their heritage in securities business. It has launched its Housing Finance

Company, Indiabulls Housing Finance Limited, strengthened the position of

Indiabulls Credit Services Limited, and continued to show its leadership and

momentum in Securities business.

Indiabulls Retail brokerage and securities business continued to generate exceptional

results. Every business metric exceeded expectations and delivered record revenues

and profits in each quarter of the year. Indiabulls client acquisition strategy has been

bearing fruit as it ramped up its monthly consumer adds from few thousands to over

25000 per month by the end of the fiscal year, providing fastest growing & most

valuable customer franchise in India.

Indiabulls consumer credit and housing loan products have been well established in

the market place and are now offered out over 165 locations. It has strong credit sales

team in place across the country and its sales volume and credit performance has been

ahead of business expectations.

Indiabulls entered into real estate development through its associate companies 2005

to exploit the huge opportunity in an unconsolidated industry with fat margins and

huge market opportunities, where they can bring its strong execution skills and create

a national leader. Indiabulls partnered with strong international investors to acquire

projects in Delhi and Mumbai and have seen significant appreciation in the value of

holdings. Company kicked off strategic diversification by foraying onto booming real

estate sector by:

Winning bids for Jupiter and Elphinstone mills in Mumbai as part of the NTC

Mills auction

8

Forming joint venture with DLF Universal to acquire 35.8 acres of prime land

in south Delhi by putting in the highest bid of 450 crore in the auction carried

out by Delhi Development Authority

Acquiring over 150 acres of land in Sonepat in national Capital Region

( NCR) to develop prime residential housing complex

Milestones of Indiabulls

2000-01 Indiabulls Financial Services Ltd. established

India’s one of the first trading platforms with

the development of an in house team

2001-03 Indiabulls expands its service offerings to

include Equity, F&O, Wholesale Debt, Mutual

fund, IPO distribution and Equity Research.

2003-04 Indiabulls ventured into Insurance distribution

and commodities trading.

Company focused on brand building and

franchise model.

2004-05 Indiabulls came out with its initial public offer

(IPO) in September 2004.

Indiabulls started its consumer finance business.

Indiabulls entered the Indian Real Estate market

and became the first company to bring FDI in

Indian Real Estate.

Indiabulls won bids for landmark properties in

Mumbai

2005-06 Indiabulls has acquired over 115 acres of land in

Sonepat for residential home site development.

9

Merrill Lynch and Goldman sac, one of the

renowned investment banks in the world have

increased their shareholding in Indiabulls.

Indiabulls is a market leader in securities

brokerage industry, With around 31% share in

online trading,

Farallon Capital and its affiliates, the world’s

largest hedge fund committed Rs. 2000 million

for Indiabulls subsidiaries Viz. Indiabulls Credit

Services Ltd. and Indiabulls Housing Finance

Ltd.

Steel Tycoon Mr. LN Mittal promoted LNM

India Internet venture Ltd. acquired 8.2% stake

in Indiabulls Credit Services Ltd.

2006-07 Indiabulls entered in a 50/50 joint venture with

DLF, Kenneth Builders & Developers (KBD).

KBD has acquired 35.8 acres of land from Delhi

Development Authority through a competitive

bidding process for Rs 450 crore to develop

residential apartments.

Indiabulls Financial Services Ltd. is included in

the prestigious Morgan Stanley Capital

International Index (MSCI).

Farallon Capital has agreed to invest Rs. 6,440

million in Indiabulls Financial Services Ltd.

Indiabulls ventured into commodity

brokerage business.

Indiabulls has received an “in principle

approval” from Government of India for

development of multi product SEZ in the state

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of Maharashtra.

Dev Property Development plc., has subscribed

to new shares and has also acquired a minority

shareholding from the Company.

Indiabulls Financial Services Ltd. Board resolves to

Amalgamate Indiabulls Credit Services Limited and

demerge Indiabulls Securities Limited.

CORPORATE STRUCTURE

11

INDIABULLS

Financial Services Group-1

Real EstateGroup

Indiabulls

Securities

Ltd.

100%

Indiabulls

CreditService

s

Limited53.02%

Indiabulls

Housing

FinanceLtd.

66.66%

Indiabulls

Finance Compa

ny Private

Ltd.57.50%

Indiabulls

Estate Ltd.

40%

Indiabulls

Properties Pvt.

Ltd.40%

Indiabulls Real Estate Compa

ny Private

Ltd.40%

Indiabulls

Infrastructure

Limited40%

PRODUCT PORTFOLIO

Financial Services Group

1. Indiabulls Securities Limted(ISBL): It is India’s largest retail brokerage and

securities related company with a client base of over 2,36,000 customers & the

market share of 6.73% in calendar 2005 on the cash segment of NSE. ISBL

provides various types of brokerage accounts & services related to purchase

and sale of securities such as equity, debt, and derivatives listed on BSE &

NSE.

2. Indiabulls Credit Services Ltd. (IBCSL): It provides secured and unsecured

consumer loans to the individuals in the middle-income sector of Indian

consumer credit market. It operates many credit products including direct

consumer loans, loans for two wheelers and cars, loans for commercial trucks,

loan against property and home equity products.

3. Indiabulls Housing Finance Limited (IBHFL): It provides housing loans to

middle income segment under the national housing bank guidelines. The

company is focused on middle income segment and finances both primary

purchase of property & refinancing of existing propertied to provide access to

liquidity and credit to its customers base.

4. Indiabulls Finance Company Private Limited (IBFCPL): It provides financing

loans to retail customers.

Real Estate Group:

1. Indiabulls Estate Ltd.: The real estate sector has been extremely fragmented

with local developers dominating the market. In March 2005 govt. opened real

estate sector to FDI. Indiabulls has positioned its real estates business to

benefit the national scale players who have the relationships with financers

and large corporate customers on one hand and have deep local market

knowledge. 7 expertise to execute the projects in time and under the budget on

the other hand.Company has three major projects under development.

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2. Indiabulls Properties Private Ltd. (IBPPL): This Company has acquired

successfully 11-acre site of Jupiter Mills auctioned by NTC in Mumbai. It is

currently developing a world class IT office complex at the acquired place.

3. Indiabulls Real Estate Company Private Ltd. (IBRECPL): This company

successfully acquired 8 acres site of Elphinstone Mills auctioned by NTC in

Mumbai and currently developing a world class IT office complex on the site

with an expected lea sable square footage of around 1.5 million square feet.

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Chapter 3Analysis of Financial statements-An overview

3.1 MEANING OF FINANCIAL STATEMENTS

According to Himpton John, “ A financial statement is an organized collection

of data according to logical & consistent accounting procedures. Its purpose is to

convey an understanding of some financial aspects of a business firm. It may

show a position at a moment of time as in the case of balance sheet, or may

reveal a series of activities over a given period of time, as in the case of an

income statement”.

On the basis of the information provided in the financial statements, management

makes review of the progress of the company and decides the future course of

action. The term financial statements refers to two basic statements:

(i) The income statement and (ii) the Balance Sheet. Of course, a business

may also prepare (iii) Statement of Retained earnings, and (iv) a statement of

change in financial Position.

3.2 DIFFERENT TYPES OF FINANCIAL STATEMENTS

3.2.1 Income Statement: The income statement or profit & loss account is considered

as a very useful statement of all financial statements. It depicts the expanses

incurred on production, sales and distribution and sales revenue and the net

profit or loss for particular period. It shows whether the operations of the firm

resulted in profit or loss at the end of a particular period.

3.2.2 Balance Sheet: Accounting Standards Board, India has defined balance sheets

as, “ a statement of financial position of an enterprise as at a given date which

exhibits its assets, liabilities, capital reserves and other account balances at their

respective book values”. Balance sheet is a statement, which shows the financial

position of a business as on a particular date. It represents the assets owned by

the business and the claims of the owners and creditors against the assets in the

form of liabilities as on the date of statement. According to Harry G. Guthmann,

“ the balance sheets might be described as financial cross section taken at

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certain intervals and earning statements as condensed history of the growth and

decay between the cross sections”.

3.2.3 Statement of Retained Earnings: The statement of retained earnings is also

called profit & loss appropriation account. It is a link between income statement

& balance sheet. Retained earnings are the accumulated excess of earnings over

losses and dividends. The balance shown by the income statements is

transferred to the balance sheet through this statement after making the

necessary appropriations.

3.2.4 Fund Flow Statement: According to Anthony,” The funds Flow Statement

described the sources from which the additional funds were derived and the use

to which these funds were put”. Funds flow statements help the financial analyst

in having amore detailed analysis and understanding the changes in the

distribution of resources between two balance sheet periods. The statement

reveals the sources of funds and their application for different purposes.

3.2.5 Cash Flow Statements: A cash flow statement depicts the changes in cash

position from one period to another. It shows the inflow and outflow of cash and

helps the management in making plans for immediate future. An estimated cash

flow statement enables the management to ascertain the availability of cash to

meet business obligations. This statement is useful for short term planning by

management.

3.2.6 Schedules & Note to Financial Statements: Schedules are the statements, which

explains the items given in the income statement and balance sheet. Schedules

are a part of financial statement, which give detailed information about the

financial position of a business organisation. Certain notes are often used to

supplement the information comprised in basic financial statements. These are

virtually a part of financial statements.

3.2.7 Annual Reports / Corporate reports: Apart from the financial statements annual

report contains other relevant information such as Management discussion &

15

analysis, Reports on corporate Governance, Director’s report, details of the

subsidiary companies. These reports play as important role as financial

statements of the company in understanding of the complete financial position.

3.3 NATURE OF FINANCIAL STATEMENTS

According to the American Institute of Certified Public Accountants, financial

statements reflect “ a combination of recorded facts, accounting conventions and

personal judgments and conventions applied affect them materially”. It means

that data presented in financial statements is affected by recorded facts,

accounting concepts & conventions and personal judgments.

a) Recorded facts: The term-recorded facts refer to the figures, which are

shown in the book of accounts. The figures, which are not recorded in the

books, are not depicted in financial statements, no matter how important

or unimportant those facts are.

b) Accounting policies, Assumptions, concepts & conventions:

Accounting policies encompasses the principles, bases, conventions, rules

and procedures adopted by in preparing and presenting financial

statements. Accounting policies of the organisation are consistently

followed over along period of time and are reported as schedule to

financial statements or as notes to financial statements in the annual

report.

As per accounting standards Board, India, fundamental accounting

assumptions mean “ basic accounting assumptions which underline the

preparation & presentation of financial statements. Usually, they are not

specifically stated because their acceptance and use are assumed.

Disclosure is necessary if they are not followed”. Some fundamental

accounting assumptions are Going concern concept, consistency, accrual

etc.

Accounting concepts are basic framework on the basis of which

accounting work is carried out. Some accounting concepts are Business

entity concept, Money measurement concept, going concern concept, cost

concept, matching concept, Dual aspect concept etc.

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Accounting conventions are the principles, which enjoy the sanctity of

application on account of long usage, are termed as accounting

conventions. E.g. consistency, conservatism, materiality, full disclosure.

c) Personal Judgments: Personal judgments of the accountant are of

importance despite of properly laid down concepts, conventions, policies

and assumptions. The judgment needs to be exercised in proper

classification of assets, classification of expenditure into capital &

revenue, creation of provisions and reserves.

3.4 LIMITATIONS OF FINANCIAL STATEMENTS

i) Financial statements disclose only monetary facts. There are certain assets

and liabilities, which are not disclosed in the balance sheets. For example

the most tangible assets of the company is its management force and its

dissatisfied labor force is its liability which are not disclosed in the

balance sheet.

ii) The financial statements are generally prepared with from the point of

view of shareholders and their use is limited in the decision making by the

management, investors and creditors.

iii) An investor likes to analyze the present and future prospects of the

business while the balance sheet show the past position. As such the use

of balance sheet is limited.

iv) Even the audited financial statement does not provide complete accuracy.

v) The net income is the result of personal judgment and bias of accountants

cannot be removed in the matters of depreciation and stock valuation. .

vi) Profit arrived at by profit & loss account is interim in nature. Actual

profits can be ascertained only after the firm achieves the maximum

capacity.

vii) The profit & loss account does not disclose the factors like quality of

product and efficiency of management.

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viii) The accounting year may be fixed to show a favorable picture of

business. In case of sugar industry a balance sheet prepared in off-season

depicts a better liquidity than in the crushing season.

3.5 VARIOUS TECHNIQUES OF FINANCIAL ANALYSIS

3.5.1 Comparative Financial Statements: Comparative financial statements are

statements of financial position of a business designed to provide time

perspective to the to the consideration of various elements of financial position

embodied in such statements. Comparative statements reveal the following:

(i) Absolute data (Money value or rupee amounts)

(ii) Increase or reduction in absolute data (in terms of money values)

(iii) Increase or reduction in absolute data (in terms of percentage)

(iv) Comparison (in terms of ratios)

(v) Percentage of totals

Comparative balance sheets, comparative income statements and comparative

statements of changes in financial position can be prepared. American

Institute of Certified Public accountants have explained the utility of preparing

the comparative statements, thus:

“ The presentation of comparative statements is annual and other reports enhance the

usefulness of such reports and brings out more clearly the nature and trend of current

changes affecting the enterprise. Such presentation emphasis the fact that statements

for a series of period are far more significant that those of a single period and that the

accounts of one period are but an installment of what is essentially a continuous

history. In any one year, it is ordinarily desired that the balance sheet, the Income

statement and the surplus statement be given for one or more preceding years as well

as for the current years”.

3.5.2 Common size Statements: The figures shown in financial statements viz.

Profit & loss account and balance sheet are converted to percentages so as to

establish each element to the total figure of the statement and theses statement

are called common size statements. These statements are useful in analysis of

the performance of the company by analyzing each individual element to the

18

total figure of the statement. Theses statements will also assist in analyzing the

performance over years and also with the figures of the competitive firm in the

industry for making analysis of relative efficiency.

3.5.3 Trend Analysis: In trend analysis ratios different items are calculated for

various periods for comparison purposes. Trend analysis can be done by trend

percentages, trend ratios and graphic and diagrammatic representation. The

trend analysis is a simple technique and does not involve tedious calculations.

However, comparisons would be meaningful only when accounting policies

are uniform and price level changes do not present a distorted picture of

phenomenon. The trend analysis conveys a better understanding of

management’s philosophies, policies and motivations, which have bought

about the changes revealed over the years. Thus method is a useful analytical

device for the management since by substitution of percentages for large

amounts, the brevity and readability are achieved. However trend percentages

are not calculated only for major items since the purpose is to highlight

important changes.

3.5.4 Fund flow analysis: Fund Flow Statement: Fund flow analysis reveals the

changes in working capital position. Working capital is of paramount

importance in any business so this kind of a analysis proves to be very useful.

According to Anthony,” The funds Flow Statement described the sources from

which the additional funds were derived and the use to which these funds were

put”. Funds flow statements help the financial analyst in having amore detailed

analysis and understanding the changes in the distribution of resources between

two balance sheet periods. The statement reveals the sources of funds and their

application for different purposes. Fund flow analysis has become an important

tool for any financial analyst; credit granting institutions and financial

managers.

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3.5.5 Cash Flow Analysis: A cash flow statement depicts the changes in cash position

from one period to another. It shows the inflow and outflow of cash and helps

the management in making plans for immediate future. An estimated cash flow

statement enables the management to ascertain the availability of cash to meet

business obligations. This statement is useful for short term planning by

management.

3.5.6 Ratio Analysis: Ratio analysis is very important analytical tool to measure

performance of an organisation .The ratio analysis concentrates on the

interrelationship among the figures appearing in the financial statements. The

ratio analysis helps the management to analyze the past performance of the firm

and to make further projections. Ratio analysis allows interested parties like

shareholders, investors, creditors, government and analysts to make an

evaluation of certain aspects of firm’s performance. It is a process of

comparison of one figure against another, which make a ratio, and the appraisal

of the ratios to make proper analysis about the strength and weakness of firm’s

operations. This tool of financial has been discussed in detail in next chapter.

3.5.7 Value Added Analysis: ‘Value Added’ is a basic and important measurement to

judge the performance of an enterprise. It indicates the net value or wealth

created by the manufacturer during a specified period. No enterprise can survive

or grow if it fails to generate wealth. An enterprise can survive without making

profits but cannot survive without adding value.

‘Value added’ is described as “ the wealth created by the reporting entity by its

own and its employees’ efforts and comprises salary, wages, fringe benefits,

interest, dividend, tax, depreciation and net profit (Retained).

Value added is the increase in the market value brought by an alteration in the

form, location or availability of a product or service excluding the cost of

bought in material or services used in that product or service. To carry out the

Value added analysis, a typical statement of added value is prepared as routine

20

part of management information system. The value added statement is basically

rearrangement of information given in income statement.

3.6 Types of Financial Analysis

(i) On the basis of Material Used: The analysis can be of following types:

(a) Internal Analysis: It indicates the analysis carried out by those parties

who have the access to the book and records of the company.

Naturally, it indicates basically the analysis carried out by

management of the company to enable the decision making process.

This may also indicate the analysis carried out in legal or statutory

matters where the parties which are not a part of management of the

company may have the access to the books and records of the

company.

(b) External Analysis: It indicates the analysis carried out by those parties

who do not have the access the books an\d records of the company.

This may involve the analysis carried out by creditors, prospective

investors, and other outsiders. Naturally, those outsiders are required

to depend upon the published financial statements. As such, the depth

& correctness of the external analysis is restricted, though some of the

recent amendments of the statutes like Companies Act, 1956 have

made it mandatory for the companies to reveal maximum information

relating to the operations & financial position, in order to facilitate the

correct & proper analysis & interpretation of the Financial statements

by the readers.

(ii) On the basis of Modus Operandi: The analysis can be of following types:

(a) Horizontal Analysis: The horizontal analysis consists of the study of

the behavior of each of the item in the financial statement- that is, its

increase & decrease with the passage if time. It is also known as

dynamic type of analysis since it shows the changes, which have

taken palace. The comparison of the items is made across the year, ,

the eyes look at the comparative analysis is at the horizontal level ,

hence the analysis id termed as horizontal analysis.

21

(b) Vertical Analysis: In vertical analysis a study is made of the

quantitative relationship between he various items in the financial

statements on a particular date. It’s a static type of analysis or study

of position. Such an analysis is useful in comparing the performance

of several companies in the same group or divisions or department in

the same company. Since this analysis depends on the data for one

period, this is not very conducive to a proper analysis of the

company’s financial position. It is also called ‘ Static’ analysis as it is

frequently used for referring to ratio developed on the date or for one

accounting period.

Analysis can be done both horizontally and vertically. As a matter of fact one

type of analysis is incomplete in itself. Both are complementary to each other.

Both these analysis form the backbone of the technique of financial statement

analysis.

22

Chapter 4

Ratio Analysis – An overview

4.1 DEFINITION

The term ratio implies arithmetical relationship between two related figures. The

technique of ‘Ratio Analysis’ as technique for interpretation of financial statements

deals with the computation of various ratios, by grouping or regrouping the various

figures and/or information appearing on the financial statements (either profitability

statements or balance sheet or both) with the intention to draw the fruitful conclusion

thereform. Ratios, depending on the nature of ratio, may be expressed in either of the

following ways:

(a) Percentage for example, Net Profit as 10% of Sales

(b) Fractions for example, retained earnings as 1/3 rd of share capital

(c) Stated comparison between numbers for example, Current assets as twice the

current liabilities.

The ratio can be defined as the qualitative or mathematical relationship that persists

between two similar variables. In other words it is the precise relationship between

two comparative variables in terms of quantitative figures (either in percentage or

proportion). Comparative variable should have the same unit of measurement.

This technique is based on the premise that a single accounting figure by itself does

not communicate any meaningful information but expressed as a relative to some

other figure. It may definitely give some significant information.

4.2 CLASSIFICATION OF RATIOS

Ratios are classified into different categories depending upon the basis of

classification.

1. Structural Classification/ Traditional Classification: The classification on the

basis of items in the financial statements to which the determinant of a ratio

belongs is known as structural classification. The ratios are classified as:

23

(a) Balance Sheet ratio: The ratio which are calculated by using the

figures given in the balance sheet only are known as balance sheet

ratios.

(b) Income Statement Ratio: The ratio, which are computed by using the

figures in the income statements i.e. profit & loss account only are

called income statement ratios.

(c) Inter-statement Ratio: The ratios which are computed by using the

figures given in balance sheet as well as income statement both at a

time are regarded as inter-statement or composite ratios.

The above classification can be put as under also:

(a) Financial ratios: Ratios which are derived from comparisons of balance

sheet items, or of balance \sheet items with profit & loss items are

known as financial ratios.

(b) Operating ratios: Ratios, which are derived from comparisons of items

of income & expanse, are termed as operating ratios.

2. Functional Classification: The classification according to the purpose of

computing the ratio is known as functional classification. On this basis, the

ratio may be classified in the following categories:

(a) Profitability Ratio: Ratio, which measures the profitability of a

business, is termed as profitability ratio. These highlight the

significance of end results of business activities. The main objective is

to judge the efficiency of the business.

(b) Turnover or Activity ratio: It is used to measure the effectiveness of

the use of capital/ assets are termed as turnover or activity ratio.

(c) Solvency ratio: The ratio which test the financial position / status of an

enterprise are called solvency ratio. They can be further subdivided

into two parts:

--Short term Solvency Ratio

--Long term Solvency Ratio

24

Functional Classification of Ratios

I Profitability Ratios:

The purpose of study & analysis of profitability ratio are to help assess the

adequacy of profits earned by the company & also to discover whether profitability is

increasing or decreasing. The profitability of the firm is the net result of a large

number of policies & decisions. The profitability ratios show the combined effects of

liquidity, asset management & debt management on operating results. Profitability

ratio are measured with reference to sale, capital employed, total assets employed,

shareholders fund etc. The major profitability ratios are following:

25

RATIOS

Profitability Ratios

Turnover Ratios

Solvency Ratios

1.Operating Ratio

2. Net Profit Ratio 3. ROI (Return

on Investment)

1.Fixed Asset Turnover Ratio

2. Current Assets

Ratio 3. Working

Capital Turn-over Ratio

4. Capital Turnover Ratio

1.Debt- Equity Ratio

2. Proprietary Ratio 3. Current Ratio

(a) Operating Ratio: The ratio of all operating expanses (i.e. material used,

labor, factory overheads, administration & selling expanses) to sales is the

operating ratio. A comparison of the operating ratio would indicate whether

the cost content is high or low in the figure of sales. If an annual comparison

show that the sales has increased the management would be naturally

interested & concerned to know as to which element of the cost has gone up. It

is not necessary that the management should be concerned only when the

operating ratio goes up. If the operating ratio has fallen, through the unit

selling price has remained the same. Still the position needs analysis, as it may

be the some total of efficiency in certain departments & in efficiency in others.

A dynamic management should be interested in making a complete analysis.

Significance: The ratio is the test of operational efficiency with which the

business being carried. The operating ratio should be low enough to leave a

portion of sales to give affair return to investors. A comparison of operating

ratio will indicate whether the cost component is high or low in the figure of

sales. In case the comparison shows that there is increase in this ratio, the

reason for such increase should be found out & management be advised to

check the increase.

(b) Net Profit ratio: Net profit ratio relates net profit to net sales. Net profit is

“the excess of revenue over expanses during a particular accounting period”.

It is the net result of the working of a company during a period. The ratio may

be computed on the basis of net profit after tax or before tax or both.

This ratio could be compared with that of the previous years and with that of

competitors to determine the trend in Net profit Margins of the company & its

performance in the industry. This measure will depict the correct trend of

performance where there are erratic fluctuations in the tax provisions from year to

26

Net Profit Ratio = Net Profit x 100 Net Sales

year. It is to be observed that majority of the cost debited to the profit & loss

account are fixed in nature & many increase in sales will cause the cost per unit to

decline because of the spread of same fixed cost over the increased number of

units sold.

Significance: This ratio help in determining the efficiency with which affairs of

the business are being managed. An increase in the ratio over the previous period

indicates the improvement in the operational efficiency of the business provided

the gross profit ratio is constant. The ratio is thus an effective measure to check

the probability of business.

( c) ROI (Return on Investment): The main objective of a business enterprise is to

earn a return on capital employed. The rate of return on investment is determined by

dividing net profit or income by the capital employed or investment made to achieve

the profit. Capital employed includes all the long-term funds in the balance sheet that

is shareholders’ funds plus long-term loans plus miscellaneous long-term funds. The

ROI is calculated as:

Return on investment analysis provides a strong incentive for optimal utilization of

the assets of the company. This encourages managers to obtain assets that will provide

a satisfactory return on investment and to dispose of assets that are not providing an

acceptable return. Thus ROI provides a suitable measure for assessment of

profitability of each proposal.

Significance: The return on Capital Employed invested is a concept that measures the

profit, which a firm earns on investing a unit of capital. ‘Yield on capital’ is another

term employed to present the same concept. It is advised to ascertain it periodically.

The profit being the net result of all the operations, the return on capital expresses all

efficiencies or inefficiencies of the business collectively and thus is a dependable

basis for judging its overall efficiency or inefficiency. The business can survive only

27

ROI = Net profit before Interest & taxes Capital Employed

when the return on capital employed is more than the cost of capital employed in the

business.

II. Turnover Ratios:

Turnover ratios are used to measure the effectiveness of the employment of

resources are termed as activity ratios. Since they relate to the use of assets for

generation of income through turnover, they are known as turnover ratios. How many

times the assets turnover during business operations – is to be measured by these

ratios. The greater the rotation of assets to generate sales, the better it is for the

business. The business would be more profitable if greater turnover is achieved with

lesser use of funds. Hence it is an indirect measure of profitability. More efficient the

operations of an undertaking, the quicker and more number of times the rotation is.

The rate of rotation of capital employed is a significant contributor of to the

profitability of an enterprise.

(a) Fixed Assets Turnover Ratio: This measures the company’s ability to

generate sales revenue in relation to fixed asset investment. In other words it

indicates the extent to which the investment in fixed assets contribute towards

sales. A low asset turnover may be remedied by increasing sales or by

disposing of certain assets or both. This is a difficult set of ratios to interpret

as asset values are based on historic cost. An increase in the fixed asset figure

may result from the replacement of an asset at an increased price. Or the

purchase of an additional asset intended to increase production capacity. The

later transaction might be expected to result in increased sales whereas the

former would more probably be reflected in reduced operating cost.

It is calculated as:

Significance:

A high fixed asset turnover ratio indicates the capability of the organisation to

achieve maximum sales with minimum investment in fixed assets. It in

28

Fixed Assets Turnover = Net Sales Fixed Assets

indicates that the fixed assets are turned over in the form of sales more number

of times. So higher the fixed asset turnover ratio better will be the situation.

(b) Current Asset Turnover Ratio:

The way fixed asset turnover ratio is calculated, similarly Current Assets

turnover Ratio is computed, since the total assets can be divided into two

major parts- fixed assets & current assets. Current assets are composed of

broadly Receivables (Debtors + B/R), stock and cash. The turnover of even

these three can be calculated separately to analyze which part of the working

capital or current assets is efficiently put to operations and which part not.

Net sales includes sales after returns, if any, both cash as well as credit.

Current asset ratio is calculated as:

Significance: A high current Asset turnover ratio indicates the capability of

the organization to achieve minimum sales with the minimum investment in

current assets. It indicates that the current assets are turned over in the form of

sales more number of times. As such higher the current asset turnover ratio

better will be the situation.

(c) Working Capital Turnover Ratio:

Working Capital turnover ratio indicates the extent of working capital turned

over in achieving sales of the firm. It tells the management of the

oraganisation that to what extent the working capital funds have been

fruitfully employed in the business towards sales. The decline in the number

of times of working capital turnover means that either the working capital is in

excess of the requirements or there have been operational inefficiencies. It is

calculated as:

29

Current asset Turnover Ratio = Net Sales Current Assets

Working Capital Turnover Ratio = Net Sales Working Capital

Significance: A high working capital turnover ratio indicates the capability of the

organisation to achieve maximum sales with the minimum investment in working

capital. It indicates that working capital is turned over in the form of sales more

number of times. As such, higher the ratio, better will be the situation.

(d) Capital Turnover Ratio:

Capital turnover ratio indicates, efficiency in utilization of capital employed in

generating revenue. This ratio indicates the efficiency with which the capital

employed is being utilized. It is calculated as:

Significance: As this ratio the management of the organisation about the

efficiency or inefficiency in the utilization of capital, a high capital turnover

indicates the capacity of the organisation to achieve maximum sales with

minimum amount of capital employed. It indicates that the capital employed is

turned over in the form of sales more number of times. As such higher the

capital turnover ratio, better will be the situation.

III. Solvency Ratio:

(i) Long term Solvency Ratios: The long-term financial stability of the firm

may be considered dependent upon its ability to meet all its liabilities,

including those not currently payable. The ratios which are important in

measuring the long term solvency are:

(a) Debt Equity Ratio: The debt-equity ratio is determined to ascertain the

soundness of the long-term financial policies of the company. It is also

known as “External-Internal” Equity ratio. The ratio indicates the pattern

of financing of the business. The ratio can be computed by putting long-

term debt in relation to shareholder’s fund. A proper proportion must be

maintained

30

Capital turnover Ratio = SalesCapital Employed

between proprietors’ (owners’) funds and long-term loans. It is calculated as

follows:

The ratio may be 2:1. It implies that outside long-term loans may be twice the

shareholder’s fund. If the ratio is more than two, the business would become

risky. The ideal ratio may be 0.67. However, if the business is flourishing

and there is high profitability ever after repayment of interest and liquidity

position is not adversely affected by repayment of interest & principal sum, it

is definitely advisable to have greater debt-equity ratio.

Significance: Debt-Equity ratio indicates the stake of shareholders or owners

in the oraganisation vis-à-vis that of the creditors. It indicates the cushion

available to the creditors on liquidation of the organizations. A high debt-

equity ratio may indicate that the financial stake of the creditors is more than

that of the owners. A very high debt-equity ratio may make the proposition of

investment in the oraganisation very risky one. On the other hand, a very low

debt-equity ratio may mean that the borrowing capacity of the organisation is

being underutilized.

(b) Proprietary Ratio: Proprietary ratio indicates the relationship between

the owners’ fund and total assets. It is a slight variant of the debt-equity

ratio. The general financial strength or the weakness of the concern is

reflected by this ratio as this ration as it shows the proportion of

proprietor’s fund invested in assets employed in the business. The ratio

can be calculated as:

Significance: The ratio indicates the extent to which the owners’ funds are sunk in

different kinds of assets. The high ratio is indicative of the sound financial status of

the company and the creditors are relatively at a comfortable position. Financing of

31

Debt- Equity Ratio = External Equity Internal Equity

Proprietary Ratio = Owners’ Fund Total Assets

assets to the extent of more than 50% through the use of outside funds may be

dangerous for the enterprise.

(ii) Short term Solvency Ratios

(a) Current Ratio: Current ratio measures the solvency of the company in

the short term. Current assets are those assets, which can be converted into

cash with in one year. Current Liabilities and provisions are those

liabilities that are payable within a year. A current ratio of 2:1 indicates a

highly solvent position. A current ratio of 1.33:1 is considered by banks as

the minimum acceptable level for providing working capital finance. A

very high current ratio will have adverse impact on the profitability of the

organisation. A high current ratio may be due to the piling up of inventory,

inefficiency in collection of debtors, high balances in cash and bank

accounts without proper investment. It can be calculated as:

Significance:

It indicates the backing available to current liabilities in the form of current

assets. In other words, a higher current ratio indicates that there are

sufficient assets available with the organisation, which can be converted

into cash, without any reduction in value, in a short span of time, i.e.

current assets, to pay off the liabilities, which are to be paid off in the

short span of time, i.e. current liabilities. As such higher the current ratio ,

better will be the situation.

4.3 ADVANTAGES OF RATIO ANALYSIS

‘Ratio Analysis is to a business what a score board is to a game’. The ratios

are useful in the following ways:

(i) Assessment of Financial health & operational efficiency: Ratios reveal

useful trends for assessment of financial strength and operational efficiency

of an enterprise.

32

Current Ratio = Current Assets, Loans & Advances Current Liabilities & Provisions

(ii) Facilitates inter-firm Comparison: For inter-firm comparison, ratio analysis

is of immense importance. Suitable relationships can be established between

various relevant factors in a concern and these can be compared with the

same in other units in the industry or average for the industry as a whole.

(iii)Intra firm comparison possible: The performance of different divisions of

the enterprise can also be compared suitably with the help of ratio analysis.

The departmental efficiency can be judged and appropriate decisions taken

in several directions.

(iv)Planning & Forecasting: Ratios not only perform post mortem operations,

but also serve as barometers for future. Ratios have predatory value and they

are very helpful in forecasting and planning the business activities for a

future period.

The ratio analysis is one of the most popular techniques employed to diagnose the

financial edifice and flow of funds of a firm. The ratios are used to locate symptoms

of problems.

4.4 LIMITATIONS OF RATIO ANALYSIS

It is said “ ratios like statistics have an air of precision and finality about them

which at times may be misleading.” Ratios can at times be quite deceptive since they

are precise in numbers mathematically. Therefore, the limitations of ratio analysis

must be kept in mind, which are as under:

(i) Only Indicators: Ratios are simply indicators, too much reliance should not be

put on figures. Ratios are at best only symptoms and there is always a need to

investigate the facts revealed by them further, since the malady may be deep seated.

(iii) Dependence of financial statements: The base of ratio analysis is financial

statement. Whatever limitations financial statements have, those automatically

apply to ratio analysis too. There may be differing accounting policies pursued

in different years or different firms. Comparisons, horizontal or vertical, will

become vicious, in case, say, valuation of inventories or charge of

depreciation is on different basis. Careful examination of the statements

disclosing accounting policies, if any, is necessary. Suitable adjustments

should be made in the financial statements before attempting ratio analysis.

33

(iv) No precise terminology: Accounting ratios and terms used to calculate such

ratios have no standard and precise definitions as yet. For example, net profit

ratio is calculated on the basis of operating profit by one and net profit before

tax by the other and the net profit after tax by the third.

(v) Effect of inflation: Comparisons become meaningless since, on account of

change in the level of prices, the values shown in the financial statements

loose their significance. Adjustment in the values is required before

undertaking ratio analysis.

(vi) Accuracy of accounts: If the accounts have not been correctly prepared, the

ratio cannot be correctly computed. Ratios are only as accurate as the

accounts on the basis of which these are established. The effect of window

dressing should be eliminated after proper adjustments in case the ratio

analysis is to serve any useful purpose.

(vii) Cause-and-Effect Relation missing: The relationship of cause & effect is

necessary to be established before relating two variables. If ratios of not

significantly related figures are calculated, these will give misleading results.

The exact cause & the exact effect should also be very clear at the outset.

(viii) Correct Interpretation: Ratio computation leads us nowhere; accept to some

summarized figures only after studying the realities behind the financial

statements, the ratio can be correctly interpreted.

(ix) No suitable standards: Suitable standards for comparison are missing. In the

absence of a single standard, it becomes very difficult to apply the technique

to serve any effective purpose.

34

Chapter 5

Analysis & Interpretation of Ratios

5.1 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS

FINANCIAL SERVICES LIMITED

I. Profitability Ratios

(i) Operating Ratio (ii) Net Profit Ratio (ii) ROI (Return on investment)

(i) Operating Ratio

Formula: Operating Costs X 100

Net Sales

Calculation:

For 2004-05 43,384,674 = 0.0836518,906,568

For 2005-06 382,572,697 = 0.18582,058,627,680

For 2006-07 584,297,562 = 0.16593,521,811,800

Interpretation: From the above bar graph, it can be concluded that the operating ratio

of the company has increased to a great extent in the year 2006 & 2007 as compared

35

to 2005. From the figures it can be interpreted that the company’s operating expanses

has gone up considerably in the year 2005-06, which can be because of business

expansion spree. Increase in the operating expanses in 2005-06 was 781.8% while

increase in the sales was mere 296.72%. The operating expanses increased to 52.72%

in 2006-07 while sales increased to a higher proportion of 71%, indicating a better

operational efficiency achieved in 2006-07.

(ii) Net Profit Ratio

Formula = Net Profit after tax x100

Net sales

Calculation:

For year 2004-05 236,057,575 = 0.4549518,906,568

For 2005-06 742,569,096 = 0.3607 2,058,627,680

For 2006-07 1,531,031,869 = 0.4347

3,521,811,800

Interpretation: From the bar graph showing the Net profit ratio, it can be very well

concluded that the net profit ratio is showing almost same trend as operating cost

ratio. The figure for net profit has obviously gone up by 214.57 % in the year 2005-06

36

but it was not proportionate to increase in sales that were approx. 296.72%, resulting

in a decrease in Net profit ratio. This decrease can again be apportioned to increase

operating costs in the same year. While situation has been improved to in the year

2006-07 as an increase of 71 % in sales has bought about 106.18 % increase in Net

profits making the picture better. But Net profit ratio for the year 2006-07 has not yet

crossed the 2004-05 mark. But if the trend continues, 2007-08 will see an improving

figure.

(iii) Returns on Capital Employed:

Formula = Net profit before Interest & TaxesTotal Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities -

(Non-Business Assets +Fictitious Assets)

Calculation:

For 2004-05 = 479,915,565 = 0.0586 8,177,880,088

For 2005-06 = 1,730,199,899 = 0.085 20,242,008,142

For 2006-07 = 2,940,626,689 = 0.1408 20,873,998,850

Interpretation: From the figure shown above, the increasing trend of Return on

capital employed in clearly visible, which is obviously a good sign. In the year 2005-

06, 149.74 % increase in capital employed bought about 260.52 % increase in net

37

profit. While in year 2006-07 a mere 3.09% increase in capital employed bought

69.95 % increase in Net profit. It shows better fund management by the company &

overall increase in the efficiency of the business. It shows that borrowing policy of the

company was wise & economic and capital has been employed fruitfully.

II. Turnover Ratios

(i) Fixed Assets Ratio (ii) Current Assets Ratio (iii) Working Capital Turnover Ratio.(iv) Capital Turnover ratio

(i) Fixed Assets Ratio:

Formula = Net Sales Fixed Assets (net)

Calculation:

For 2004-05 = 518906568 = 455.708 times 1,138,680

For 2005-06 = 2,058,627,680 = 12.862 times 160,052,625

For 2006-07 = 3,521,811,800 = 18.750 times 187,828,422

38

Interpretation: A high fixed asset turnover ratio indicates the capability of the

organisation to achieve maximum sales with minimum investment in fixed assets and

vice-versa. A high fixed asset turnover in year 2004-05 shows better utilization of

fixed assets. But in year 2006-07, 13.956 % increase in fixed assets could bring about

an increase of mere 296.72 % in sales reducing the ratio to a great extent. It could be

because of high investment made by the organisation for business expansion. The

situation has slightly improved in the year 2006-07 as an increase of 17% in fixed

assets caused 71.07 % increase in sales. Hence the figures are moving to a better end.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Formula = Net Sales Current Assets

Calculation:

For 2004-05 = 518,906,568 = 0.0662 7,832,695,451

For 2005-06 = 2,058,627,680 = 0.1407 14,622,116,651

For 2006-07 = 3,521,811,800 = 0.2198 16,015,707,358

Interpretation: The current ratio figures are showing an increasing trend over the

years. A high & increasing current ratio figure indicates capability of the organisation

to achieve maximum sales with minimum investment in current assets. Here current

39

assets include Interest accrued, sundry debtors, cash & bank balances, Loans &

advances. In year 2005-06, an increase in 86.68 % in current assets resulted in

296.72% increase in sales. While an increase of 9.53 % in current assets in

year 2006-07, increased the sales to 71%. It shows a better current assets management

i.e efficient cash management & debtors management by the company.

(iii) Working Capital Turnover Ratio

Formula = Net Sales Working Capital

Calculation:

For 2004-05 = 518,906,568 = 0.0679 7,635,103,324

For 2005-06 = 2,058,627,680 = 0.1499 13,726,337,642

For 2006-07 = 3,521,811,800 = 0.2378 14,809,844,853

Interpretation: Working capital ratio is also showing an upward trend over three

years. It indicates the higher increase in sales with less than proportionate increase in

working capital. Hence an increasing working capital turnover ratio shows better

efficiency in utilizing working capital for achieving maximum sales. In year 2005-06,

40

an increase of 79.77 % in working capital showed approx. 292% increase in sales.

While in 2006-07 increase in working capital brought about almost proportional

increase in sales. The situation on this front is improving year by year.

(iv)Capital Turnover ratio: This is calculated as:

Formula = Sales Capital Employed

Calculation:

For 2004-05 = 518,906,568 = 0.0634 8,177,880,088

For 2005-06 = 2,058,627,680 = 0.1017 20,242,008,142

For 2006-07 = 3,521,811,800 = 0.1687 20,873,998,850

Interpretation: Capital turnover ratio indicates the efficiency of the organisation with

which the capital employed is being utilized. A high turnover ratio indicates the

capability of the organisation to achieve maximum sales with minimum amount of

capital employed. From the above figure, it is clearly visible that the capital turnover

ratio is showing an increasing trend. In the year 2005-06,the ratio has increase 60% as

compared to year 2004-05, while the increase in approx. 65 % in the year 2006-.07.

41

As in year 2005-06, 147.52 % increase in capital employed, increased the sales to

296.72%. While in year 2006-07 a mere 3.122% increase in capital employed caused

71% increase in sales.

III. Solvency Ratios

(i) Debt-Equity Ratio(ii) Proprietory Ratio(iii)Current Ratio

(i) Debt-Equity Ratio:

Formula = Long term Liabilities Shareholders’ funds

Calculation:

For 2004-05 = 4,673,428,516 = 1.333 3,504,451,572

For 2005-06 = 10,242,900,000 = 1.024 9,999,108,142

For 2006-07 = 8,803,895,386 = 0.6486 13,572,959,124

Interpretation: Debt-Equity ratio indicates the stake of shareholders in the

organisation vis-à-vis that of creditors. The debt-equity ratio of the company is

showing a decreasing trend over the years. The ratio is very near to ideal figure in

42

2006. Further the decrease in 2007 to .64 indicates debt repayment or decreased

dependence on external liabilities while there is an increase in the shareholder’s fund.

(ii) Proprietary Ratio

Formula = Total assets Owners fund

Calculation:

For 2004-05= 3,504,451,572 = 0.4184 8,375,478,888

For 2005-06 = 9,999,108,142 = 0.4730 21,137,787,151

For 2006-07 = 13,572,959,124 = 0.5755 23,582,717,015

Interpretation: The above figure shows an increasing trend of proprietary ratio over

the years. An increasing Proprietary ratio is indicative of strong financial position of

the business. However a ratio below 50% is regarded as alarming for the creditors.

The ratio has shown an increase of 13% in the year 2005-06 as compared to 2004-05.

While the ratio increased by 22 % in 2006-07. The increasing proprietary ratio is a

satisfactory indication of organization’s financial health.

43

(iii) Current Ratio:

Current ratio = Current assets Current Liabilities

Calculation:

For 2004-05= 7,832,615,451 = 157.855 49,619,014

For 2005-06 = 14,622,116,651= 50.39 290,166,741

For 2006-07 = 16,015,707,358 = 86.869 184,364,862

Interpretation: Current ratio measures the short-term solvency of the business.

Current ratio indicates the backing available to current liabilities in the form of

current assets. The ideal current ratio is 2:1. The current ratio figure is very high in all

the three years, which indicates that the current liabilities are very less as compared to

current assets. The company needs to lower down its current ratio as it indicates poor

utilization of current assets.

44

5.2 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS SECURITIES LIMITED

I. Profitability Ratios

(i) Operating Ratio (ii) Net Profit Ratio (iii)ROI (Return on investment)

(i) Operating Ratio

Operating Costs X 100

Net Sales

For 2004-05= 586,059,770 = 0.5126 1,143,112,652

For 2005-06= 1,244,234,043 = 0.3914 3,178,627,596

For 2006-07= 2,182,119,545 = 0.5160 4,228,287,659

Interpretation: From the figure give above, it can be seen that operating ratio has

decreased in the year 2005-06 & showed again an increasing trend in year 2006-07 &

reached a figure even more than year 2004-05. In the year 2005-06, 112.30 %

increase in operating cost resulted in 178.06% increase in sales, thus reducing the

ratio. Although the ratio decreased but it was high in absolute terms. In year 2006-07,

33% increase in sales was bought about by 75.38 % increase in operating cost.

45

(ii) Net Profit Ratio:

Net Profit after tax x100Net sales

Calculation:

For year 2004-05 = 312,272,496 = 0.2731 1,143,112,652

For year 2005-06 = 1,192,219,615 = 0.3750 3,178,627,596

For year 2006-07 = 1,380,887,469 = 0.3265 4,228,287,659

Interpretation: Net profit ratio is showing a trend almost similar to operating cost

ratio. In year 2005-06, increase in sales was 178.06%, while there was more than

proportionate increase in net profit i.e. 281.78%, resulting in a maximum net profit

ratio of 37.50% over three years. However during the year 2006-07, due to increase in

operating expanses as shown by operating cost ratio, profits increased to mere 15.82

% while sales increased to 33%. Hence it can be concluded that the heavy operating

expanses in the 2006-07, resulted in a high operating cost ratio & lower net profit

ratio.

(iii) ROI (Return on investment)

It is calculated as:

46

Net profit before Interest & TaxesTotal Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities -

(Non-Business Assets +Fictitious Assets)

Calculation:

For 2004-05= 541,152,367 = 0.2782 1,945,224,984

For 2005-06 = 1,869,955,267 = 0.3502 5,339,804,196

For 2006-07 = 2,136,627,267 = 0.5956 3,587,133,659

Interpretation: Return on capital employed ratio is showing an increasing trend,

depicting a positive situation. The return on capital employed increased by 25.88% in

the year 2005-06 while increase was approx. 70% in 2006-07. The capital employed

increased by 174.51 % in year 2005-06 while increase in profits was more than

proportionate i.e. 245.55%. Though the capital employed decreased in year 2006-07

because of repayment of secured loans, net profit increased by 14.26%. The

organisation has managed to earn increasing returns over the years.

II. Turnover Ratios

(i) Fixed Assets Ratio (ii) Current Assets Ratio (iii)Working Capital Turnover Ratio.

47

(iv) Capital Turnover ratio

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales Fixed Assets (net)

Calculation:

For 2004-05= 1 ,143,112,652 = 5.5159 times 207,236,343

For 2005-06= 3,178,627,596 = 6.1815 times 514,215,779

For 2006-07 = 4,228,287,659 = 3.8913 times 1,086,579,538

Interpretation: Fixed asset ratio indicates efficiency of using the fixed assets by the

organisation. Higher the fixed asset ratio better will be the position. In year 2005-06,

148.13 % increase in fixed assets resulted in more than proportionate increase in sales

i.e. 178.06%. While in year 2006-07, an increase of 111.3 % in fixed assets bought

only 33% increase in sales. It can be because of investment in fixed assets, which

could not bring immediate increase in the sales.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net SalesCurrent Assets

48

Calculation:

For 2004-05= 1,143,112,652 = 0.3581 3,191,843,980

For 2005-06= 3,179,725,601 = 0.3477 5,339,804,196

For 2006-07 = 4,228,287,659 = 0.7542 5,606,212,698

.Interpretation: This ratio tests the efficiency or inefficiency in utilizing the

investment in current assets made by the organization. Higher ratio indicates the

better efficiency of firm investment i.e. the company can able to utilize their current

assets effectively for generating more sales/revenue. In 2005-06 the ratio decreased by

approx 3% while in 2006-07 the ratio again increased to 0.7542. It indicates that the

current assets utilization is done efficiently in the year 2006-07 as compared to

2005-06. The current assets increase by 33% in year by 2006-07, resulting in a

proportionate increase in sales i.e. 33%. As the current ratio has improved in the

recent years, the figures are showing appositive movement.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net SalesWorking Capital

Calculation:

For 2004-05= 1,148,763,391 = 1.3559

49

847,182,769

For 2005-06= 3,179,855,601 = 0.67264,727,410,061

For 2006-07 = 4,466,135,091 = 1.8945 2,357,336,042

Interpretation: Working Capital turn over ratios indicates the efficiency in

utilization of working capital. In the year 2005-06 the increase in working capital was

5.6 times, which resulted in 2.8 times increase in sales. While in year 2006-07, in

spite of 50% decrease in working capital, there is 3% increase in sales. It indicates

that organization has managed to achieve increased sales in spite of a decrease in

working capital. It shows a better working capital management by the company in

year 2006-07.

(iv) Capital Turnover ratio: It is calculated as:

SalesCapital Employed

Calculation:

For 2004-05= 1,143,112,652 = 0.5876 1,945,224,984

For 2005-06= 3,179,725,601 = 0.5954

50

5,339,804,196

For 2006-07 = 4,228,287,659 = 1.1787 3,587,133,659

Interpretation: Capital turnover ratio indicates the amount of capital turned over to

achieve the sales/ revenues. In year 2005-06 capital employed increased to 2.74 times

which resulted in almost proportionate increase in sales i.e. 2.78times. While in year

2006-07 capital employed decreased, but sales increase by 33%, resulting in approx 2

times increase in Capital employed turnover ratio. It indicates the efficiency of

organisation in utilizing the capital resources. Capital employed ratio is increasing

over the years, indicating the improving situation, as higher the ratio better will be the

position.

III. Solvency Ratio

(i) Debt-Equity Ratio(ii) Proprietary Ratio(iii) Current Ratio

(i) Debt-Equity Ratio: It is calculated as

External Liabilities Shareholders’ funds

51

Calculation:

For 2004-05= 860,893,605 = 0.79391,084,331,379

For 2005-06= 3,522,114,194 = 1.93761,817,690,002

For 2006-07 = 395,501,234 = 0.1239 3,191,632,425

Interpretation: Debt-Equity ratio indicates the stake of shareholders in the

organisation vis-à-vis that of creditors. The debt-equity ratio of the company is has

increased in ear 2005-06 while again decreased in year 2007. External liabilities

increased to 4 times in 2005-06 while shareholder’s funds increased by only 1.6

times, resulting in a 2time increase in Debt-equity ratio. In year 2006-07 external

liabilities again decreased due to repayment of loans while shareholder’s fund

increased almost by 1.75 times resulting in improving the debt-equity mix situation.

(ii) Proprietary Ratio: This ratio is calculated as:

Shareholders’ / Owner’s fund Total assets

* Here we have considered F.A.+C.A. = Total Assets.

Calculation:

For year 2004-05 = 1,084,331,379 = 0.31903,399,080,323

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For year 2005-06 = 1,817,690,002 = 0.1881 9,659,152,087

For year 2006-07 = 3,191,632,425 = 0.4768 6,692,792,236

Interpretation: An increasing Proprietary ratio is indicative of strong financial

position of the business. However a ratio below 50% is regarded as alarming for the

creditors. Although in all the three years, the proprietary ratio is below 50% mark, but

it has improved in year 2006-07 & the figure is quite near to satisfactory level. In year

2007 total assets have decreased by 1.44 times while shareholders funds have

increased to 1.75 times, thus increasing the proprietary ratio, but this figure is required

to be improved further.

(iii) Current Ratio: It is calculated as:

Current ratio = Current assets Current Liabilities

* C.A. include C.A.’s + loans and advances.* C.L. includes C.L.’s + Provisions.

Calculation:

For year 2004-05 = 3,191,843,980 = 2.2245 1,434,832,894

53

For year 2005-06 = 9,144,936,308 = 2.1372 4,278,809,843

For year 2006-07 = 5,606,212,698 = 1.8622 3,010,384,947

Interpretation: Current ratio measures the short-term solvency of the business.

Current ratio indicates the backing available to current liabilities in the form of

current assets. The ideal current ratio is 2:1. The current ratio figure is showing a

decreasing trend over the years & figure is very near to the satisfactory level. It

indicates that the organisation is maintaining a proper balance between the current

liabilities & current assets. The current ratio has decreased by 4% in year 2005-06,

while it decreased by 12.86 % in year 2006-07.

5.3 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS CREDIT SERVICES LIMITED

II. Profitability Ratios

(i) Operating Ratio (ii) Net Profit Ratio (iv)ROI (Return on investment)

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(i) Operating Ratio

Operating Costs X 100

Net Sales

For 2005 = 198,467 = 0.0158 12,483,090

For 2006 = 357,966,291 = 0.4582 781,143,954

For 2007 = 1,842,446,409 = 0.5902 3,121,564,463

Interpretation: The operating ratio indicates the operational efficiency of the

business. The operating cost ratio is showing an upward trend over the years, which is

not a positive sign. In the years 2005-06 operating costs became 1804 times the 2004-

05 figure, while increase in sales was mere 62.57 times. In the year 2006-07, the an

increase of 51.22 times was seen in operating cost resulting in an increase of 3.996

times in sales. Increase is operating cost is more steep during the year 2005-06 as

compared to year 2006-07.This huge increase in operating costs can be attributed to

initial investments required to be made in business.

(ii) Net Profit Ratio: It can be calculated as:

Net Profit after tax x100Net sales

Calculation:

For year 2004-05 = 14,179,477 = 1.1358

55

12,483,090

For year 2005-06 = 281,077,091= 0.3598 781,143,954

For year 2006-07 = 797,914,368 = 0.2556 3,121,564,463

Interpretation: Net profit ratio is reflecting the increasing trend of operating cost.

As operating costs are increasing, net profit figure is decreasing resulting in a

decrease in Net profit ratio, which is also not a positive sign for the organisation.

Sales increased 62.57 times in year 2005-06 while increase in profit was less than

proportionate i.e. 19.82 times. While in year 2006-07, sales increase to 3.996 times,

making net profits increase to 2.84 times, which was very near to proportionate. But

increase is sales was lesser than the last year. The net profit ratio is required to

increase in the coming years, as decreasing ratio is reflecting inefficiencies in

business operations.

(iii) ROI (Return on investment): It is calculated as:

Net profit before Interest & Taxes

Total Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities

(Non-Business Assets +Fictitious Assets)

Calculation:

For 2004-05 = 22,339,445 = 0.0168 1,327,914,843

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For 2006-07 = 425,490,819 = 0.0902 4,716,634,402

For 2006-07 = 1,270,764,665 = 0.1737 7,315,454,695

Interpretation: Return on Investment indicates the Net profit earned on the total

capital employed. Return on capital employed is showing an increasing trend over the

years. In year 2005-06 increase in capital employed was 3.55 times which resulted in

more than proportionate increase in net profit before interest & taxes i.e. 19.07 times.

In year 2006-07, Capital employed increased to 1.55 times of previous year, while

sales increased to 2.98 times. The increase has been steeper in year 2005-06 as

compared to year 2006-07. It is good indicator for the organisation because in spite

of increasing operating costs, it is able to give increasing returns on capital employed.

II. Turnover Ratios

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales Fixed Assets (net)

Calculation:

For 2004-05 = 12,483,090 = Nil Nil

For 2005-06 = 781,143,954 = 18.18 42,949,828

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For 2006-07 = 3,121,564,463 = 15.675 199,133,425

Interpretation: It indicates the efficiency of utilizing fixed assets to attain the

sales/revenues, hence higher the ratio better the position is. The available financial

information shows that the company didn’t own any fixed assets in the year of its

inception. The fixed asset ratio decreased in the year 2006-07 as fixed assets increased

by 4.64 times as compared to 2005-06 while increase in sales is slightly less than

proportionate i.e. 3.996, keeping the fixed assets ratio low. It can be because of

investment in fixed assets, which could not bring immediate increase in the sales.

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net Sales

Current Assets

Calculation:

For 2004-05 = 12,483,090 = 0.00934 1,336,200,011

For 2005-06 = 781,143,954 = 0.1559 5,009,014,889

For 2006-07 = 3,121,564,463 = 0.3693 8,450,405,011

58

Interpretation: It indicates the efficiency in utilizing the current assets to achieve the

sales/ revenue. The current assets turnover ratio is showing an increasing trend,

showing that company is improving in utilizing its current assets. In year 2005-06, the

current assets had increased by 3.75 times while the increase in sales was more than

proportionate i.e. 62.57 times. In year 2006-07, an increase of 1.69 times sin current

assets bought about 3.996 times increase in sales. It can be concluded that the

company in improving upon the current asset utilization & managing them in efficient

manner.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net Sales

Working Capital

Calculation:

For 2004-05 = 12,483,090 = 0.0094 1,327,849,811

For 2005-06 = 781,143,954 = 0.1637 4,770,479,328

For 2006-07 = 3,121,564,463 = 0.5148 6,062,813,229

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Interpretation: Working capital Turnover ratio indicates the efficiency in utilizing

the working capital in increasing sales/ revenues. This ratio is also showing an

increasing trend, which is again a positive sign for the organisation. An increase of

3.5 times in working capital had brought about an increase of 62.57 times in sales, in

year 2005-06. While the increase in working capital turnover ratio is steeper in year

2006-07 than in year 2005-06.In year 2006-07, 1.27 times increase in working capital

resulted in3.996 times increase in working capital.

(iv) Capital Turnover ratio: It is calculated as:

Sales

Capital Employed

Calculation:

For 2004-05 = 12,483,090 = 0.0094 1,327,914,843

For 2005-06 = 781,143,954 = 0.1656 4,716,634,402

For 2006-07 = 3,121,564,463 = 0.4267 7,315,454,695

60

Interpretation: Capital turnover ratio indicates the amount of capital turned over to

achieve the sales/ revenues. In year 2005-06 capital employed increased to 3.552

times, which resulted in more than proportionate increase in sales i.e. 62.57 times.

While in year 2006-07 capital employed increased by 1.55 times while sales increase

by 3.996 times resulting in approx 2.5 times increase in Capital turnover ratio. It

indicates the efficiency of organisation in utilizing the capital resources. Capital

employed ratio is increasing over the years, indicating the improving situation, as

higher the ratio better will be the position.

III. Solvency Ratio

(i) Debt-Equity Ratio: It is calculated as:

External Liabilities

Shareholders’ funds

Calculation:

For 2004-05 = Nil = Nil 1,327,914,843

For 2005-06 = 568,748 = 0.00012 4,716,065,654

For 2006-07 = 1,809,564,673 = 0.32865 5,505,890,022

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Interpretation: The leverage reflects the company’s capital structure, which is a very

important financial decision take by company. From the above information we can

say that in the year 2005 company had no debt in their total capital employed whereas

in year 2006 it had increased it to Rs. 568,748 out of the total capital employed. In

year 2006-07, external liabilities increased 3182 times while shareholders funds

increased only by 1.17 times resulting in a high debt-equity ratio.

(ii) Proprietary Ratio: It is calculated as

Shareholders’ / Owner’s fund

Total assets

Calculation:

For year 2004-05 = 1,327,914,843 = 0.9937 1,336,200,011

For year 2005-06 = 4,716,065,654 = 0.9335 5,051,964,717

For year 2006-07 = 5,505,890,022 = 0.5477 10,050,963,114

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Interpretation: This ratio indicates the relationship between the owners’ fund and

total assets. An increasing Proprietary ratio is indicative of strong financial position of

the business. However a ratio below 50% is regarded as alarming for the creditors.

The ratio is showing a decreasing trend over the years with minimum ratio in 2006-

07, however the ratio in more than 50%, reflecting a satisfactory position. The

decrease in proprietary ratio had been steeper in year 2006-07,as shareholder’s wealth

increased 0.85 times while, total assets became 2 times of previous year.

(iii) Current Ratio: It is calculated as:

Current ratio = Current assets

Current Liabilities

NOTE: C.A. include C.A.’s + loans and advances.

C.L. includes C.L.’s + Provisions.

Calculation:

For year 2004-05 = 1,336,200,011 = 160.02 8,350,200

For year 2005-06 = 5,009,014,889 = 20.999 238,535,561

For year 2006-07 = 8,450,405,011 = 3.539 2,387,591,782

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Interpretation:

The current ratio indicates the short-term solvency position of a company. The ideal

ratio is 2:1 for current ratio. The ratio of company is showing a decreasing trend and

moving towards ideal figure. In the initial year i.e. 2005 & 2006 the ratio had been

very high indicating improper balance between current assets & current liabilities.

The ratio is required to be further lowered down by financing current liabilities from

current assets.

5.4 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS HOUSING FINANCE LIMITED

I. Profitability Ratios

(i) Operating Ratio: It is calculated as:

Operating Costs X 100

Net Sales

For 2005-06 = 1,835,382 = 0.0544 33,726,534

For 2006-07 = 303,549,376 = 0.2850 1,065,237,712

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Interpretation: Operating ratio has become 5 times in year 2006-07 as compared to

year 2005-06. Operating costs have increased 165.38 times while corresponding

increase in Net sales is less than proportionate i.e. only 31.6 times. Increasing

operating ratio is not appositive indicator. The reason behind such increase could be

the initial investment required in the beginning of the business.

(ii) Net Profit Ratio: It is calculated as:

Net Profit after tax x100Net sales

Calculation:

For Year 2005-06 = 23,783,546 = 0.7052 33,726,534

For Year 2006-07 = 539,737,692 = 0.5066 1,065,237,712

65

Interpretation: The Net profit ratio is reflecting the trend showed by operating

cost ratio. As Operating cost is increasing over the years, Net profit ratio is

showing a decreasing trend, which is not a good indicator. In year 2006-07, the

net sales have gone up by 31.6 times, while corresponding Net Profit after Tax

figure increased less than proportionate i.e. 23 times.

(iii) ROI (Return on investment): It is calculated as:

Net profit before Interest & TaxesTotal Capital Employed

Capital Employed = Share capital + Reserves and surplus + Long term liabilities

(Non-Business Assets +Fictitious Assets)

Calculation:

For 2005-06 = 31,891,152 = 0.0156 2,039,654,198

For 2006-07 = 826,991,568 = 0.3206 2,579,236,690

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Interpretation: Return on Investment is showing an increasing trend, which is

positive sign. It shows that in spite of decreasing Net profit ratio & increasing

Operating cost ratio, company’s Return on Investment is increasing. In the year 2006-

07, Total Capital Employed increased only 1.26 times, while Net Profit before interest

& Taxes increased to 26 times the net profit figure of 2005-06.

II. Turnover Ratios

(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows:

Net Sales Fixed Assets (net)

Calculation:

For 2005-06 = 33,726,534 = Nil Nil

For 2006-07 = 1,065,237,712 = 19.38 times. 4,955,396

(ii) Current Assets Turnover Ratio: It is calculated as follows: -

Net SalesCurrent Assets

Calculation:

For 2005-06 = 33,726,534 = 0.0165 2,049,514,715

For 2006-07 = 1,065,237,712 = 0.3162 3,368,499,830

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.

Interpretation: As we know that current ratio indicates the efficiency of current asset

utilization, an increasing current assets turnover ratio reflects a positive picture.

Current assets have increased to 1.64 times in year 2006-07, while sales have

increased to 31.6 times which is very high as compared to increase in current assets.

(iii) Working Capital Turnover Ratio: This ratio is calculated as follows:

Net Sales

Working Capital

Calculation:

For 2005-06 = 33,726,534 = 0.0165 2,039,574,952

For 2006-07 = 1,065,237,712 = 0.3862 2,758,118,387

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Interpretation: It indicates the efficiency in working capital utilization in making

sales/Revenues. Working capital turnover ratio is showing an increasing trend.

Working Capital is showing an increase of 1.35 times, while sales have increased by

31.6 times.

(iii) Capital Turnover ratio: It is calculated as:

SalesCapital Employed

Calculation:

For 2005-06 = 33,726,534 = 0.1653 2,039,654,198

For 2006-07 = 1,065,237,712 = 0.4130 2,579,236,690

Interpretation: It indicates the efficiency in utilization of capital employed in

achieving the sales/revenue targets of the organisation. Capital turnover ratio is

showing an increasing trend. Capital Employed is showing an increase of 1.35 times,

while sales have increased by 31.6 times.

69

III Solvency Ratio

(i) Proprietary Ratio: It can be calculated as:

Shareholders’ / Owner’s fund Total assets

Calculation:

For Year 2005-06 = 2,039,654,198 = 0.9952 2,049,514,715

For Year 2006-07 = 2,579,236,690 = 0.7534 3,423,455,226

Interpretation: The above figure shows a decreasing trend of proprietary ratio over

the years. An increasing Proprietary ratio is indicative of strong financial position of

the business. However a ratio below 50% is regarded as alarming for the creditors.

The ratio has shown a decrease of 24% in the year 2006-07 as compared to 2005-06.

Shareholder’s wealth increased to 1.26 times, while the total assets increased to 1.67

times.

(ii) Current Ratio: It is calculated as:

Current ratio = Current assets Current Liabilities

NOTE: C.A. include C.A.’s + loans and advances.C.L. includes C.L.’s + Provisions.

70

Calculation:

For year 2005-06 = 2,049,514,715 = 20.62 9,939,763

For year 2006-07 = 3,368,499,830 = 5.520 610,381,443

Interpretation: Current ratio measures the short-term solvency of the business.

Current ratio indicates the backing available to current liabilities in the form of

current assets. The ideal current ratio is 2:1. The current ratio figure is very high in

both the years, which indicates that the current liabilities are very less as compared to

current assets. The company needs to lower down its current ratio as it indicates poor

utilization of current assets.

71

5.5 INTER-FIRM COMPARISON

I. Operating Cost Ratio

Years IFSL ISL ICSL IHFL

2005 8.36 51.25 1.58 (Min) NIL

2006 18.58 39.14 45.82 5.44

2007 16.59 51.6 59.02 (Max.) 28.5

II. Net Profit Ratio:

Years IFSL ISL ICSL IHFL

2005 45.49 27.31 113.58 (Max) NIL

2006 36.07 37.5 35.98 70.52

2007 43.47 32.65 25.56 (Min) 50.66

72

III. Return on Investment

Years IFSL ISL ICSL IHFL

2005 5.86 27.82 1.68 Nil

2006 8.5 35.02 9.02 1.56 (Min)

2007 14.08 59.56 (Max) 17.37 32.06

73

IV. Fixed Assets Turnover Ratios

Years IFSL ISL ICSL IHFL2005 455.71(Max) 5.52 Nil Nil2006 12.86 6.18 18.18 Nil2007 18.75 3.89 (Min) 15.68 19.38

V. Current Assets Turnover Ratio

Years IFSL ISL ICSL IHFL

2005 6.62 35.81 0.93 (Min) Nil

2006 14.07 34.77 15.59 1.65

2007 21.98 75.42 (Max) 36.93 31.62

74

VI. Working Capital Turnover Ratio

Years IFSL ISL ICSL IHFL

2005 6.79 135.59 0.94 (Min) Nil

2006 14.99 67.26 16.37 1.65

2007 23.78 189.45 (Max) 51.48 38.62

VII Capital Employed Turnover Ratio

Years IFSL ISL ICSL IHFL

2005 6.34 58.76 0.94 (Min) Nil

2006 10.17 59.54 16.56 16.53

2007 16.87 117.87 (Max) 42.67 41.30

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VIII. Debt-Equity Ratio

Years IFSL ISL ICSL

2005 133.33 79.39 0.00 (Min)

2006 102.40 193.76 (Max) 0.012

2007 64.86 12.39 32.86

IX.Proprietary Ratio

Years IFSL ISL ICSL IHFL

2005 41.84 31.90 99.37 Nil

2006 47.30 18.81(Min) 93.35 99.52 (Max)

2007 57.55 47.68 54.77 75.34

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X. Current Ratio

Years IFSL ISL ICSL IHFL2005 157.86 2.22 160.02 (Max) Nil2006 50.39 2.14 20.99 20.622007 86.87 1.86 (Min) 3.54 5.52

77

Bibliography

(i) Walsh, Ciaran, “Key Management Ratios-How to Analyze, Compare and

Control the figures that Drive the Company Value”, Macmillan India

Limited, 1997

(ii) Mittal, S.N., “Management Accounting and Financial Management”,

Mahavir Publication, 4th Edition, pp. 576-693

(iii) Mahesgwari, S.N., “ Management Accounting and Financial Control”,

Sultan Chand & Sons, 1999, pp. B.1-B.96

(iv) Kishore, Ravi M., “ Cost & Management Accounting” Taxmann’s

Paublication, 2nd Edition, pp.2.537-2.545

Website

http://www.indiabnulls.com/

www.nseindia.com

www.investopedia.com

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