1

RATIO ANALYSIS

GROUP ASSIGNMENT

DONE BY :SHAILINI.M.SHAHANU DAMODARANKRITIKA MATHUR

ASHWATHI

2

INTRODUCTION TO RATIO ANALYSIS

A ratio is defined as a relationship between two numbers of the same kind.

The ratio analysis is one of the most useful and common methods of analyzing  financial statement.

Ratio enables the mass of data to be summarized and simplified.

3

IMPORTANCE OF RATIO ANALYSIS

Ratio analysis of a firm’s financial statement is ofinterest to a number of parties mainly: Shareholders - interested with earning

capacity of the firm. Creditors - interested in knowing the ability

of firm to meet financial obligation. Financial Executives - concerned with

evolving analytical tools that will measure and compare costs, efficiency liquidity and profitability with a view to making intelligent decisions.

4

IMPORTANCE OF RATIO ANALYSIS

Enables the banker or lender to arrive at the following factors :

Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans &

advances to be or already been provided

5

How a Ratio is expressed?

As Percentage - such as 25% or 50% .

As Proportion – The figures may be expressed in terms of the relationship as 1 : 4.

As Pure Number /Times - The same can also be expressed in an alternatively way for example the sale is 4 times of the net profit or profit is 1/4th of the sales.

6

Classification of Ratios

7

ADVANTAGES OF RATIO ANALYSIS

Aids to measure general efficiency. Aids to measure financial  liquidity

and solvency. Aids in forecasting and planning. Facilitates decision making.  Effective control and performance

tool.

8

LIMITATIONS OF RATIO ANALYSIS

Limitations of recording: Ratio analysis is based on financial statement, which are themselves subject to limitations.

Changes in accounting procedure: Most often firms for their valuation follow different methods hence comparison will be practically of no use.

9

Lack of proper standard: It is very difficult to ascertain the standard ratio in order to make proper comparison. Because ratios differ from firm to firm and industry to industry.

Limited use of single ratio: A single ratio will not be able to convey anything.

Too many ratios: Are likely to confuse instead of revealing meaningful conclusions.

Personal bias: Different people may interpret the same ratio in different ways.

10

ANALYSIS AND INTERPRETATIO

NS

11

RATIOS ANALYSED

1. Current Ratio2. Debt/Equity Ratio3. Net Profitability Ratio4. Gross Profitability Ratio5. Inventory Turnover Ratio6. Debtor’s Turnover Ratio7. Creditor’s Turnover Ratio8. Return on Capital Employed

12

CURRENT RATIO The current ratio establishes the

relationship between the current assets and the current liabilities. The ideal ratio is 2:1.

Current Assets Current Ratio = -------------------------- Current liabilities

13

YEARSCURRENT ASSETS (A)

CURRENT LIABILITES (B)

RATIO (A/B)

2009-2010 52703.71 27479.45 1.91

2010-2011 82175.67 37195.10 2.2

2009

-201

0

2010

-201

11.7

1.9

2.1

CURRENT RATIO

CURRENT RATIO

14

INTERPRETATION:

Here the current ratio seems to assure that the company is in a position to pay off any short term liabilities with liquid assets such as cash and bank balances, inventory, accounts receivables and short-term assets(can be converted to cash).

This means that the company appears to be doing well and liquidity has remained stable.

It can be seen that the current ratio has been increased from 1.91 to 2.2.

15

DEBT/EQUITY RATIO This ratio is calculated to measure

the relative proportion of outsider’s funds invested in the company.

Long term debt Debt Equity Ratio =

 --------------------- Shareholder’s fund

16

YEARS DEBT (A)

EQUITY (B)

RATIO (A/B)

2009-2010 1,63,579.72

49,029.03 3.33

2010-2011 1,99,491.75

57,014.55 3.49

2009-2010

2010-2011

3.25

3.35

3.45

debt/equity ratio

debt/equity ratio

17

INTERPRETATIONS

A Debt to Equity ratio of 3.49 means that debt holders have a 3.49 times more claim on assets than equity holders.

Thus this does not appear to be a healthy situation for the company , which means they cannot borrow more from banks.

The Debt to Equity ratio has increased from 3.33 to 3.49 and hence decreases the protection of creditors.

18

NET PROFITIBILITYRATIO

This ratio establishes the relationship between the amount of net profit or net income and the amount of sales revenue.

Net Profit Net Profit Ratio = ------------------- * 10

0% Sales

19

YearNET PROFIT (A)

SALES (B)

RATIO (A/B*100%)

2009-2010 6,320.47 251489.41 2.51%

2010-2011 8786.56 340047.99 2.58%

2009-2010

2010-2011

2.46

2.5

2.54

2.58

NET PROFIT RATIO

NET PROFIT RATIO

20

INTERPRETATIONS

This is a low margin of profit indicating a low margin of safety, higher risk that a decline in sales will erase profits and result in a net loss.

Different strategies and product mix should be used to get higher profit margin.

Net profit margin is mostly used to compare a companies results overtime.

In this case net profit margin has negligibly increased from 2.51 to 2.58.

To compare Net profit margin between companies in the same industry might have little meaning as we can’t say which is more efficient or less efficient.

21

GROSS PROFITIBILITY RATIO

This ratio establishes the relationship between gross profit on sales and net sales in terms of percentage indicating the percentage of gross profit earned on sales.

Gross Profit Gross Profit Ratio = ------------------- * 1

00% Sales

22

YEARGROSS PROFIT (A)

NET SALES (B)

RATIO (A/B*100)

2009-2010 18702.14 251489.41 7.43%

2010-2011 20617.72 340047.99 6.06%

2009-2010

2010-2011

02468

GROSS PROFIT RATIO

GROSS PROFIT RATIO

23

INTERPRETATIONS

In this case the Gross Profit Ratio does not seem to be good enough and hence indicates reduced efficiency in production of the unit.

Gross profit has decreased from 7.43 to 6.06.

Gross profit margin can be used to compare a company with its competitors.

24

INVENTORY TURNOVER RATIO

Inventory turnover ratio which is also called stock turnover ratio or stock velocity establishes the relationship between the cost of goods sold during a given period and the average of the costs of opening and closing stocks.

Cost of goods sold Stock Turnover Ratio : ------------------------- Inventory holdings

25

YEARCOST OF GOODS SOLD (A)

INVENTORY HOLDINGS (B)

RATIO (A/B)

2009-2010 251489.41 15821.36 15.89

2010-2011 340047.99 23832.49 14.26

2009-2010

2010-2011

13

14

15

16

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO

26

INTERPRETATIONS

This ratio can reflect both on the quality of the inventory and the efficiency of management.

Typically, the higher the turnover rate, the greater the likelihood that profits would be larger and less working capital bound up in inventory.

In this case the turnover rate is low and indicates more working capital being bound up in inventory.

The inventory turnover ratio has decreased from 15.89 to 14.26.

27

DEBTORS TURNOVER RATIO

Debtor turnover ratio, also known as receivables turnover ratio or debtors velocity establishes the relationship between the net credit sales of the year and the average receivable

Net Sales Debtors Turnover Ratio = ---------------

------ Debtors

28

YEARNET SALES

DEBTORS RATIO

2009-2010 251489.41 12686.88 19.82

2010-2011 340047.99 15954.32 21.31

2009-2010

2010-2011

192021

DEBTORS TURNOVER RATIO

DEBTORS TURNOVER RATIO

29

INTERPRETATIONS

In this case debtor turnover ratio is good which indicates that we are collecting money fast.

Here debtor turn over ratio has increased from 19.82 to 21.31.

30

CREDITORS TURNOVER RATIO

This ratio, also known as payable turnover ratio establishes the relationship between the net credit purchases and the average trade creditors.

Net Purchases Creditors Turnover Ratio = -------------

------ Creditors

31

YEARNET PURCHASES

CREDITORS RATIO

2009-2010 1408.82 11523.99 0.12

2010-2011 1378.51 15384.08 0.089

2009-

2010

2010-

2011

0

0.1

CREDITORS TURNOVER RATIO

CREDITORS TURNOVER RATIO

32

INTERPRETATIONS

In this case , there is a low turnover which means that it takes longer for the company to pay off its creditors.

The ratio has fallen from 0.12 to 0.089, it means the company is now taking longer to repay creditors.

This may be the result of low sales, or other issues.

A continued drop may be a cause for concern as it suggests the company cannot control its debt and may be at risk of bankruptcy.

33

RETURN ON CAPITALEMPLOYED(ROCE)

A ratio that indicates the efficiency and profitability of a company's capital investments.

Calculated as: PROFIT BEFORE INTEREST AND TAX ROCE = ________________ CAPITAL EMPLOYED

34

YEAR PROFIT BEFORE TAX

CAPTIAL EMPL0YED

RATIO

2009-2010 251489.41 12686.88 19.82

2010-2011 28648.65 133641.06 21.43

2009

-201

0

2010

-201

119

21

RETURN ON CAPITAL EMPLOYED

RETURN ON CAPITAL EMPLOYED

35

INTERPRETATIONS

The company has been utilising the capital invested in a favourable manner with returns increasing as compared to the previous financial year.

The ROCE has increased from 19.82 to 21.43.

36

The current position of the company when assessed on the basis of current ratio and ROCE appears to be healthy though negligibly.

It should be noted that the Debtors turnover ratio is high, thus indicating that the company is promptly receiving its debts back.

On the basis of profitability, inventory turnover ratio and creditors turnover ratio, the company does not appear to be performing at a satisfactory level.

37

CONCLUSION & RECOMMENDATION

Considering the above mentioned points it is advisable that the management should change its strategies in terms of better utilization of current assets to pay back its creditors on time, rework its pricing policies in order to avoid pressure on profit margins.

38

THANK YOU