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APPLICATION OF RATIO ANALYSIS FOR CELLO PLASTIC PRODUCTS LTD (Submitted towards partial fulfillment of the requirements for the Degree (Submitted towards partial fulfillment of the requirements for the Degree of Master of Business Administration) of Master of Business Administration) Under the Supervision of Submitted by Ms. NEHA AGARWAL SONALI KUKREJA Assistant Proffesor M.B.A. II Year (MBA Department) 1

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APPLICATION OF RATIO ANALYSIS

FOR CELLO PLASTIC PRODUCTS LTD

(Submitted towards partial fulfillment of the requirements for the Degree of(Submitted towards partial fulfillment of the requirements for the Degree of

Master of Business Administration) Master of Business Administration)

Under the Supervision of Submitted by

Ms. NEHA AGARWAL SONALI KUKREJA

Assistant Proffesor M.B.A. II Year

(MBA Department)

COER School of Management

Uttarakhand Technical University D. Dun

(2013-14)

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DECLARATION

I hereby declare that the project entitled ‘RATIO ANALYSIS’ being

submitted by me at COER-SM, Roorkee towards the partial fulfillment of the

requirement for the award of Degree of Master of Business Administration (MBA).

I hereby also declare that this Project work is my original work. The matter

embodied in this project report has not been submitted to any other Institution or

University for the award of any degree, diploma, certificate etc.

Name & Signature of Student

Sonali Kukreja

MBA 2ND YEAR

Place: haridwar

Date:

ACKNOWLEDGEMENT

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I feel myself privileged at having an opportunity to thank the people who helped me at all stages

of my research work.

It is which a deep sense of gratitude that I acknowledge valuable guidance and timely suggestion

offered to me by my project guide Mrs Megha Gupta. I am indebted to all staff and operational

people at CELLO PLASTIC PRODUCTS LTD for giving me full support and encouragement

I am thankful to Ms. Neha Agarwal for helping me to make this project report . It is my sheer

pleasure to acknowledge who have directed or indirectly guided and cooperated in one way or

other

SONALI KUKREJA

MBA 2ND YEAR

EXECUTIVE SUMMARY

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 This project is specially designed to understand the subject matter of financial statement

analysis through various ratios in the company. This project gives us information and report

about company’s financial position.

Through a thorough financial analysis, my aim is to understand the financial factors is

influencing the company and its decision making. Later, I try and evaluate the various ratios to

appreciate their impact on company’s performance over the last two years. The financial

statements of last two years are identified, studied and interpreted in light of company’s

performance. Critical decisions of distributing dividends, Issue of bonus Debentures and other

current news are analyzed and their impact on the bottom line of the company is assessed.

Finally, I study ratio analysis, fund flow analysis and cash flow analysis of the company to

analyse the financial position of the company in last two years.

TABLE OF CONTENT

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CHAPTERS Page No.

1. INTRODUCTION

1.1 About Cello Plastic Products Ltd 2

1.2 Capabilities of Cello 3

1.3 Capacities of Cello 4

1.4 Cello Group of company at a glance 5

1.5 Quality Recognitions and Awards 6

1.6 Cello products 7

1.7 Cello Household products 8

1.8 Cello Writing Instruments 9-10

1.9 Objectives of the study 11

1.10 Limitations of the study 12

2. THEORTICAL BACKGROUNG OF RATIO

2.1 Financial Analysis 14

2.2 Ratio Analysis 14-15

2.3 Advantages of Ratio 15

2.4 Limitation of Ratio 16

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2.5 Classification of Ratio 16-33

3. ANALYTICAL STUDY OF RATIO 35-53

4. CONCLUSIONS & RECOMMENDATIONS 55-57

ANNXURE 58

BIPLOGRAPHY 59

1.0 OBJECTIVES OF THE STUDY

The objectives of the study are:

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1) To evaluate the performance of the company by using ratio as a yardstick to measure

the efficiency of the company

2) To understand the liquidity and profitability of the company during the study period

3) To make comparisons between the ratios during different periods(2 years data from

2011 to 2012)

 

2.0 CELLO – AN INTRODUCTION

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Cello plastic products ltd founded by Mr G.D. RATHOD ,chairman ,in May 10,1986,at a small

factory in Goregaon,Mumbai,with just 60 workers and 7 machines engaged in the manufacture

of the finest range of Casserole,or Hotpots,as they were later position,that the Indian market have

ever seen Mr Pradeep Rathod ,Managing Director and Mr PankajRathod,Deputy Managing

Director, spearheaded the growth and diversification into new products and markets. First and

largest Manufacturer of Branded household products in India ,having wide range of plastic

moulded products.Annual sales turnover of more than USD 100 million and exports of USD 28

millions .2100 employees-more than 300 engineers and plastic technologist.

CAPABILITIES OF CELLO

Investment of more than USD 50 million in ultra modern plastic processing machines

from BATTENFIELD –Germany ,WIMPLAST-Italy and SUMMITOMO-Japan

Strong in house R&D base, having developed the unique break through insulation

technology-THERMI-GUARD

Many product designs PATENTED in Europe

Having warehouse and sales offices in different locations in

India ,Nepal,Srilanka,U.A.E,Kenya and USA

Regularly exporting to more than 60 countries including USA ,UK,Italy,Germany

CAPACITIES OF CELLO

Insulated Thermoware-More than 5million piece per year.

Household Products-More than 12 million piece per year

Moulded Furniture-More than 2 million piece per year

Writing Instrument-216million piece per year

Tooth Brushes-17million pieces per year

CELLO GROUP OF COMPANIES AT A GLANCE

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Turnover:-

Plastic household & thermoware Rs.1405millions

Plastic Furniture Rs 762 million

Writing Instrument Rs 1806 million

Tooth Brush Rs 50 millions

A)Factory Area:-7,00,000s.q.ft at Daman

B)Work Force:-Managerial posts 35nos

Factory Staff 3000nos.

Office Staff 300nos.

Sales staff 100nos.

C)Distribution Strength:Distributors 200nos.

Class retail outlets 7000nos.

Class retail outlets 8000nos.

QUALITY RECOGNITION AND AWARDS

Largest Exporter of Insulated Thermoware from India

Recognised as Export House by Government of India since 1996

Winner of prestigious Plexcouncil Award as highest Exporter since last

CELLO PRODUCTS

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A) CELLO WRITING INSTRUMENT

B) CELLO PLASTIC PRODUCTS

C) CELLO FURNITURES

D) CELLO CASSEROLES

CELLO HOUSEHOLD PRODUCTS

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Storage Buckets with lids:- Owing to our expertise, we are distributing and supplying a wide

assortment of houseware range. Design and fabricated using the fine quality raw material and

sophisticated technology at vendor’s unit, these have gained huge demand due to their attractive

look and clean finish. Our offered product range includes plastic utility products, home plastic

products, household plastic items, microwave safe products, food savers and cleaning brushes.

Apart from this, we provide these products in various sizes, shapes and colors at market leading

prices

Cello AirTight Containers:- We are engaged in distributing and supplying superior quality cello

air tight containers. In order to manufacture these containers, our vendors use optimum quality

plastic material and modern machine as per the prescribed set of norms. In addition, our offered

containers are microwave safe and freezer safe and extensively used in domestic and commercial

sectors for food storage. Due to their air tight facility, these are used to store rice, powdered

milk, pasta, beans and other dry food items. Available in diverse sizes, shapes and molded

designs, clients can avail these at the most affordable prices.

CELLO WRITING INSTRUMENTS

Cello ceaselessly endeavours to bring in the newest and the best of technology to set new

benchmarks in quality and innovates constantly to blaze new trails in the market place

1982 - With a tiny factory for making plastic household goods, Mr. G. D. Rathod makes a small

beginning in manufacturing.

Behind this step the founder has a vision of uncompromising quality and total consumer

satisfaction. Set up on this deep foundation, Cello begins its journey to become a leader.

1986 - A new factory for Cello Thermoware is set up in Goregaon, Mumbai capable of

manufacturing the finest range of hot pots and casseroles, insulated water bottles, attractive range

of insulated jugs and flasks. Soon demand rises for the new and quality products, to keep up with

which a new factory is set up in Daman. Cello Household Products began to be exported to a

number of countries

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1994 - Cello Group ventures into manufacturing moulded furniture. Elegant, versatile and

durable, Cello furniture brings convenience and style to consumers at surprising economical

price , made from special grade plastic and state-of-the-art moulds from Italy. Cello furniture

becomes a household name in quality.

1995 - Cello Writing Instruments, a part of Cello Group entered the plastic moulded ball pen

market. In 1995, Cello exploded on the scene with Cello Clear Pens with Swiss tips and German

ink and changed forever the way pen ran on paper. The revolutionary new smear free, smooth

flowing pen not just took the market by storm but marked a new era in writing instruments in

India. Not too long after, the company unveiled two more models Prism and Crystal and with

that what started as a mere 3-machine company, took wings.

3.0 RATIO ANALYSIS-AN INTRODUCTION

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Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number

to another. It may be defined as the indicated quotient of two mathematical expression.It

expresses a magnitude by which one quantity is a multiple or a part of another similar quantity .

When the concept of ratio is explained with reference to the items shown in financial statements,

then it is called ‘Accounting Ratios’

According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of

the quantitative relationship between two numbers”.

 Ratio Analysis:- Ratio analysis is the process of determining and presenting the relationship of

items and group of items in the statements.

According to Batty J. Management Accounting “Ratio can assist management in its basic

functions of forecasting, planning coordination, control and communication”.

 It is helpful to know about the liquidity, solvency, capital structure and profitability of an

organization. It is helpful tool to aid in applying judgement, otherwise complex situations.

Ratio may be expressed in the following three ways :

1.     Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by

another. For example , if the current assets of a business are Rs. 200000 and its current

liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1.

2.     ‘Rate’ or ‘So Many Times :- In this type , it is calculated how many times a figure is,

in comparison to another figure. For example , if a firm’s credit sales during the year are

Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover

Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison

to debtors.

3.     Percentage :- In this type, the relation between two figures is expressed in hundredth.

For example, if a firm’s capital is Rs.1000000 and its profit is Rs.200000 the ratio of

profit capital, in term of percentage, is 200000/1000000*100 = 20%

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ADVANTAGE OF RATIO ANALYSIS 

1. Helpful in analysis of Financial Statements.

2. Helpful in comparative Study.

3. Helpful in locating the weak spots of the business.

4. Helpful in Forecasting.

5. Estimate about the trend of the business.

6. Fixation of ideal Standards.

7. Effective Control.

8. Study of Financial Soundness.

LIMITATIONS OF RATIO ANALYSIS

1.     Comparison not possible if different firms adopt different accounting policies.

2.     Ratio analysis becomes less effective due to price level changes.

3.     Ratio may be misleading in the absence of absolute data.

4.     Limited use of a single data.

5.     Lack of proper standards.

6.     False accounting data gives false ratio.

7.     Ratios alone are not adequate for proper conclusions.

8.     Effect of personal ability and bias of the analyst. 

CLASSIFICATION OF RATIO 

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Ratio may be classified into the four categories as follows:

A) Liquidity Ratio

a.      Current Ratio

b.     Quick Ratio or Acid Test Ratio

B)   Leverage or Capital Structure Ratio

a.      Debt Equity Ratio

b.     Debt to Total Fund Ratio

c.     Proprietary Ratio

d.     Fixed Assets to Proprietor’s Fund Ratio

e.      Capital Gearing Ratio

f.       Interest Coverage Ratio

C)   Activity Ratio or Turnover Ratio

a.      Stock Turnover Ratio

b.     Debtors or Receivables Turnover Ratio

c.     Average Collection Period

d.     Creditors or Payables Turnover Ratio

e.      Average Payment Period

f.       Fixed Assets Turnover Ratio

g.     Working Capital Turnover Ratio

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D).    Profitability Ratio or Income Ratio

  (A) Profitability Ratio based on Sales :

 a. Gross Profit Ratio

 b. Net Profit Ratio

 c. Operating Ratio

  (B) Profitability Ratio Based on Investment :

          I.       Return on Capital Employed

      II.      Return on Shareholder’s Funds :

a.      Return on Total Shareholder’s Funds

b.     Return on Equity Shareholder’s Funds

c.     Earning Per Share

d.     Dividend Per Share

e.      Dividend Payout Ratio

f.       Earning and Dividend Yield

g.     Price Earning Ratio

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Figure 1 classification of ratios

A) LIQUIDITY RATIO

It refers to the ability of the firm to meet  its current liabilities. The liquidity ratio, therefore, are

also called ‘Short-term Solvency Ratio’. These ratio are used to assess the short-term financial

position of the concern. They indicate the firm’s ability to meet its current obligation out of

current resources.

 In the words of Saloman J. Flink, “Liquidity is the ability of the firms to meet its current

obligations as they fall due”.

 Liquidity ratio include two ratio :-

a.      Current Ratio

b.     Quick Ratio or Acid Test Ratio

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a. Current Ratio:- This ratio explains the relationship between current assets and current

liabilities of a business.

Current Assets:-‘Current assets’ includes those assets which can be converted into cash with in

a year’s time.

Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment +

Debtors(Debtors – Provision) + Stock(Stock of Finished Goods + Stock of Raw

material)

Current Liabilities :- ‘Current liabilities’ include those liabilities which are repayable in a

year’s time.

Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation

+ Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans

payable in a year

Significance :- According to accounting principles, a current ratio of 2:1 is supposed to be an

ideal ratio.It means that current assets of a business should, at least , be twice of its current

liabilities. The higher ratio indicates the better liquidity position, the firm will be able to pay its

current liabilities more easily. If the ratio is less than 2:1, it indicate lack of liquidity and

shortage of working capital.

The biggest drawback of the current ratio is that it is susceptible to “window dressing”. This ratio

can be improved by an equal decrease in both current assets and current liabilities.

b. Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current

liabilities with in a month or immediately.

‘Liquid Assets’ means those assets ,which will yield cash very shortly.

LIQUID ASSETS=CURRENT ASSETS-STOCK-PREPAID ASSETS

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Significance :- An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better.

This ratio is a better test of short-term financial position of the company.

B) LEVERAGE OR CAPITAL STRUCTURE RATIO

This ratio disclose the firm’s ability to meet the interest costs regularly and Long term

indebtedness at maturity.

These ratio include the following ratios :

a. Debt Equity Ratio:- This ratio can be expressed in two ways:

According to this approach, this ratio expresses the relationship between long term debts and

shareholder’s fund.

 Formula:

Debt Equity Ratio=Long term Loans/Shareholder’s Funds or Net Worth

Long Term Loans:- These refer to long term liabilities which mature after one year. These

include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public

Deposits etc.

Shareholder’s Funds :- These include Equity Share Capital, Preference Share Capital, Share

Premium, General Reserve, Capital Reserve, Other Reserve and Cr edit Balance of Profit & Loss

Account.

Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term

liabilities. Generally, debt equity ratio of is considered safe.If the debt equity ratio is more than

that, it shows a rather risky financial position from the long-term point of view, as it indicates

that more and more funds invested in the business are provided by long-term lenders.The lower

this ratio, the better it is for long-term lenders because they are more secure in that case. Lower

than 2:1 debt equity ratio provides sufficient protection to long-term lenders.

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b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio and gives the

same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds,

i.e., both equity and debt.

Formula:

Debt to Total Funds Ratio = Long-term Loans/Shareholder’s funds + Long-term Loan

Significance :- Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory.

In other words, the proportion of long term loans should not be more than 67% of total funds .A

higher ratio indicates a burden of payment of large amount of interest charges periodically and

the repayment of large amount of loans at maturity. Payment of interest may become difficult if

profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower

ratio is better from the long-term solvency point of view.

c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by

Formula:

Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans

Significance :- This ratio should be 33% or more than that. In other words, the proportion of

shareholders funds to total funds should be 33% or more. A higher proprietary ratio is

generally treated an indicator of sound financial position from long-term point of view,

because it means that the firm is less dependent on external sources of finance.If the ratio is

low it indicates that long-term loans are less secured and they face the risk of losing their

money.

d. Fixed Assets to Proprietor’s Fund Ratio :- This ratio is also know as fixed assets to net

worth ratio.

 Formula:

Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets/Proprietor’s Funds (i.e., Net Worth)

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Siqnificance:- The ratio indicates the extent to which proprietor’s (Shareholder’s) funds are

sunk into fixed assets. If this ratio is less than 100%, it would mean that proprietor’s fund are

more than fixed assets and a part of working capital is provided by the proprietors. This will

indicate the long term financial soundness of business.

e. Capital Gearing Ratio:- This ratio establishes a relationship between equity capital

(including all reserves and undistributed profits) and fixed cost bearing capital.

Formula:

Capital Gearing Ratio = Equity Share Capital+Reserves+P&L Balance/ Fixed cost Bearing

Capital

Whereas, Fixed Cost Bearing Capital = Preference Share Capital  + Debentures + Long Term

Loan

Significance:- If the amount of fixed cost bearing capital is more than the equity share capital

including reserves an undistributed profits), it will be called high capital gearing and if it is less,

it will be called low capital gearing.The high gearing will be beneficial to equity shareholders

when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of

return on investment in business. Thus, the main objective of using fixed cost bearing capital is

to maximize the profits available to equity shareholders.

f. Interest Coverage Ratio:- This ratio is also termed as ‘Debt Service Ratio’. This ratio is

calculated as follows:

 Formula

Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest

Charge

Significance :- This ratio indicates how many times the interest charges are covered by the

profits available to pay interest charges.This ratio measures the margin of safety for long-term

lenders. This higher the ratio, more secure the lenders is in respect of payment of interest

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regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the

company also , as nothing will be left for shareholders. An interest coverage ratio of 6 or 7 times

is considered appropriate.

C) ACTIVITY RATIO OR TURNOVER RATIO

These ratio are calculated on the bases of ‘cost of sales’ or sales, therefore, these ratio are also

called as ‘Turnover Ratio’.  Turnover indicates the speed or number of times the  capital employed

has been rotated in the process of doing business. Higher turnover ratio indicates the better use of

capital or resources and in turn lead to higher profitability.

 It includes the following :

a.     Stock Turnover Ratio:- This ratio indicates the relationship between the cost of goods

during the year and average stock kept during that year.

Formula:

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

 Here, Cost of goods sold = Net Sales – Gross Profit

 Average Stock = Opening Stock + Closing Stock/2

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

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

the year.The higher the ratio, the better it is, since it indicates that stock is selling quickly.In a

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

even than the profitability may be quit high.

b.     Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and

average debtors during the year :

Formula:

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Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R

While calculating this ratio, provision for bad and doubtful debts is not deducted from the

debtors, so that it may not give a false impression that debtors are collected quickly.

Significance :- This ratio indicates the speed with which the amount is collected from debtors.

The higher the ratio, the better it is, since it indicates that amount from debtors is being collected

more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the

lower the expenses of collection and increase in the liquidity of the firm.

By comparing the debtors turnover ratio of the current year with the previous year, it may be

assessed whether the sales policy of the management is efficient or not.

c. Average Collection Period :- This ratio indicates the time with in which the amount is

collected from debtors and bills receivables.

Formula:

Average Collection Period = Debtors + Bills Receivable / Credit Sales per day

Here, Credit Sales per day = Net Credit Sales of the year

Second Formula :-

Average Collection Period = Average Debtors *365 / Net Credit Sales

Average collection period can also be calculated on the bases of ‘Debtors Turnover Ratio’. The

formula will be:

Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio

Significance :- This ratio shows the time in which the customers are paying for credit sales. A

higher debt collection period is thus, an indicates of the inefficiency and negligency on the part

of management. On the other hand, if there is decrease in debt collection period, it indicates

prompt payment by debtors which reduces the chance of bad debts.

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d. Creditors Turnover Ratio :- This ratio indicates the relationship between credit purchases

and average creditors during the year .

Formula:-

Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average B/P

Significance :- This ratio indicates the speed with which the amount is being paid to creditors.

The higher the ratio, the better it is, since it will indicate that the creditors are being paid more

quickly which increases the credit worthiness of the firm.

e. Average Payment Period :- This ratio indicates the period which is normally taken by the

firm to make payment to its creditors.

 Formula:-

Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio

Significance :- The lower the ratio, the better it is, because a shorter payment period implies that

the creditors are being paid rapidly.

f.     Fixed Assets Turnover Ratio :- This ratio reveals how efficiently the fixed assets are

being utilized.

Formula:-

Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets

Here, Net Fixed Assets = Fixed Assets – Depreciation

Significance:- This ratio is particular importance in manufacturing concerns where the

investment in fixed asset is quite high. Compared with the previous year, if there is increase in

this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this

ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the

previous year.

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g.      Working Capital Turnover Ratio :- This ratio reveals how efficiently working capital

has been utilized in making sales.

Formula :-

Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

Here, Cost of Goods Sold = Opening Stock + Purchases +  Carriage + Wages + Other Direct

Expenses - Closing Stock

Working Capital = Current Assets – Current Liabilities

Significance :- This ratio is of particular importance in non-manufacturing concerns where

current assets play a major role in generating sales. It shows the number of times working capital

has been rotated in producing sales.A high working capital turnover ratio shows efficient use of

working capital and quick turnover of current assets like stock and debtors.A low working

capital turnover ratio indicates under-utilisation of working capital.

(D) Profitability Ratios or Income Ratios:- The main object of every business concern is to

earn profits. A business must be able to earn adequate profits in relation to the risk and capital

invested in it. The efficiency and the success of a business can be measured with the help of

profitability ratio.

 Profitability ratios are calculated to provide answers to the following questions:

          i.            Is the firm earning adequate profits?

        ii.            What is the rate of gross profit and net profit on sales?

      iii.            What is the rate of return on capital employed in the firm?

      iv.            What is the rate of return on proprietor’s (shareholder’s) funds?

        v.            What is the earning per share?

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 Profitability ratio can be determined on the basis of either sales or investment into business.

(A)      Profitability Ratio Based on Sales :

 a. Gross Profit Ratio : This ratio shows the relationship between gross profit and sales.

 Formula :

Gross Profit Ratio = Gross Profit / Net Sales *100

 Here, Net Sales = Sales – Salesreturn.

Significance:- This ratio measures the margin of profit available on sales. The higher the gross

profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio

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

depreciation, interest on loans, dividends and creation of reserves.

b. Operating Net Profit Ratio:- This ratio shows the relationship between net operating profit

and sales. It may be calculated by two methods:

 Formula:

Operating Net Profit = Operating Net Profit / Net Sales *100

Here, Operating Net Profit = Gross Profit – Operating Expenses such as Office and

Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on

short-term debts etc.

Significance :- This ratio measures the rate of net profit earned on sales. It helps in determining

the overall efficiency of the business operations. An increase in the ratio over the previous year

shows improvement in the overall efficiency and profitability of the business.

c. Operating Ratio:- This ratio measures the proportion of an enterprise cost of sales and

operating expenses in comparison to its sales.

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 Formula:

Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct

Expenses - Closing Stock

Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. +

Discount + Bad Debts + Interest on Short- term loans.

‘Operating Ratio’ and ‘Operating Net Profit Ratio’ are inter-related. Total of both these ratios

will be 100

Significance:- Operating Ratio is a measurement of the efficiency and profitability of the

business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods

sold and operating expenses. Lower the operating ratio is better, because it will leave higher

margin of profit on sales.

(B) Profitability Ratio Based on Investment in the Business:-

These ratio reflect the true capacity of the resources employed in the enterprise. Sometimes the

profitability ratio based on sales are high whereas profitability ratio based on investment are low.

Since the capital is employed to earn profit, these ratios are the real measure of the success of the

business and managerial efficiency.

These ratio may be calculated into two categories:

I. Return on Capital Employed

II. Return on Shareholder’s funds

I.      Return on Capital Employed :- This ratio reflects the overall profitability of the business.

It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is

usually in percentage and is also known as ‘Rate of Return’ or ‘Yield on Capital’. 

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Formula:

Return on Capital Employed = Profit before interest, tax and dividends/Capital Employed

*100

Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves +

P&L Balance +Long-Term Loans- Fictitious Assets (Such as Preliminary Expenses OR etc.) –

Non-Operating Assets like Investment made outside the business.

Capital Employed = Fixed Assets + Working Capital

 Advantages of ‘Return on Capital Employed’:-

Since profit is the overall objective of a business enterprise, this ratio is a barometer of the

overall performance of the enterprise. It measures how efficiently the capital employed in

the business is being used.

Even the performance of two dissimilar firms may be compared with the help of this ratio.

The ratio can be used to judge the borrowing policy of the enterprise.

This ratio helps in taking decisions regarding capital investment in new projects. The new

projects will be commenced only if the rate of return on capital employed in such projects

is expected to be more than the rate of borrowing.

This ratio helps in affecting the necessary changes in the financial policies of the firm.

Lenders like bankers and financial institution will be determine whether the enterprise is

viable for giving credit or extending loans or not.

With the help of this ratio, shareholders can also find out whether they will receive regular

and higher dividend or not.

II. Return on Shareholder’s Funds :-

Return on Capital Employed Shows the overall profitability of the funds supplied by long term

lenders and shareholders taken together. Whereas, Return on shareholders funds measures only

the profitability of the funds invested by shareholders.

These are several measures to calculate the return on shareholder’s funds:

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a. Return on total Shareholder’s Funds :-

For calculating this ratio ‘Net Profit after Interest and Tax’ is divided by total shareholder’s

funds.

 Formula:

Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total

Shareholder’s Funds

Where, Total Shareholder’s Funds = Equity Share Capital + Preference Share Capital + All

Reserves + P&L A/c Balance –Fictitious Assets

Significance:- This ratio reveals how profitably the proprietor’s funds have been utilized by the

firm. A comparison of this ratio with that of similar firms will throw light on the relative

profitability and strength of the firm.

b. Return on Equity Shareholder’s Funds:-

 Equity Shareholders of a company are more interested in knowing the earning capacity of their

funds in the business. As such, this ratio measures the profitability of the funds belonging to the

equity shareholder’s.

Formula:

Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference

dividend) / Equity Shareholder’s Funds *100

 Where, Equity Shareholder’s Funds = Equity Share Capital + All Reserves + P&L A/c  Balance

– Fictitious Assets

 Significance:- This ratio measures how efficiently the equity shareholder’s funds are being used

in the business. It is a true measure of the efficiency of the management since it shows what the

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earning capacity of the equity shareholders funds. If the ratio is high, it is better, because in such

a case equity shareholders may be given a higher dividend.

c. Earning Per Share (E.P.S.) :- This ratio measure the profit available to the equity

shareholders on a per share basis. All profit left after payment of tax and preference

dividend are available to equity shareholders.

 Formula:

Earning Per Share = Net Profit – Dividend on Preference Shares / No. of Equity Shares

Significance:- This ratio helpful in the determining of the market price of the equity share of the

company. The ratio is also helpful in estimating the capacity of the company to declare dividends

on equity shares.

d. Dividend Per Share (D.P.S.):- Profits remaining after payment of tax and preference

dividend are available to equity shareholders.But of these are not distributed among them

as dividend . Out of these profits is retained in the business and the remaining is

distributed among equity shareholders as dividend. D.P.S. is the dividend distributed to

equity shareholders divided by the number of equity shares.

 Formula:

D.P.S. = Dividend paid to Equity Shareholder’s / No. of Equity Shares *100

e. Dividend Payout Ratio or D.P. :- It measures the relationship between the earning available

to equity shareholders and the dividend distributed among them.

 Formula:

 D.P. = Dividend paid to Equity Shareholders/ Total Net Profit belonging to Equity

Shareholders *100

D.P. = D.P.S. / E.P.S. *100

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 f. Earning and Dividend Yield :- This ratio is closely related to E.P.S. and D.P.S. While the

E.P.S. and D.P.S. are calculated on the basis of the book value of shares, this ratio is calculated

on the basis of the market value of share

 g. Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between market price per equity

share & earnings per share. The ratio is calculated to make an estimate of appreciation in the

value of a share of a company & is widely used by investors to decide whether or not to buy

shares in a particular company.

Significance :- This ratio shows how much is to be invested in the market in this company’s

shares to get each rupee of earning on its shares. This ratio is used to measure whether the

market price of a share is high or l.

4.O RESEARCH METHODOLOGY31

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Res ea r ch  me t hodo log y   i s   a  way   t o   sy s t e ma t i c a l l y   so l ve   t he   r e s ea r ch

p rob l em. It may be understood as a science of studying how research is done scientifically.

So, the research methodology not only talks about the research methods but also considers the

logic behind the method used in the context of the research study

RESEARCH DESIGN

From the study, the type of data to be collected and the procedure to be used for  this

purpose were decided.

DATA COLLECTION METHODS

1) PRIMARY DATA

Primary data are those data, which is originally collected afresh so in this project no

primary data was collected.

2) SECONDARY DATA

The required data for the study are basically secondary in nature and the data are

collected through Balance Sheet and Profit and Loss Account of the company and

through internet.

TOOLS USED

Tables

Bar graphs

charts

5.0 DATA ANALYSIS

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1)LIQUIDITY RATIO

A)CURRENT RATIO

CALCULATION OF CURRENT RATIO

(RS IN CRORE)

YEAR 2011 2012

Current assets 98.77 127.38

Current liability 21.97 25.34

CURRENT RATIO 4.49 4.49

TABLE 1

2011 20120

0.51

1.52

2.53

3.54

4.55

4.49 4.49

CURRENT RATIO

CUR-RENT RATIOC

UR

RE

NT

RA

TIO

YEAR

INTERPRETATION:. If we see the current ratio of the company for last 2 year has remain

same which is 4.49 but it is more than 2:1 which is beneficial for short term creditors.

D) QUICK RATIO

CALCULATION OF QUICK RATIO

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(RS IN CRORE)

YEAR 2010-11 2011-12

Quick Assests 66.68 84.64

Current Liabilities 21.97 25.34

Quick Ratio 3.03 3.34

TABLE 2

CALCULATION OF QUICK ASSETS

2011

98.77-32.09=66.68

2012

127.38-42.74=84.64

2011 20122.8

2.9

3

3.1

3.2

3.3

3.4

3.03

3.34

QUICK RATIO

QUICK R...Q

UIC

K R

AT

IO

YEAR

INTERPRETAION:- A quick ratio is an indication that the firm is liquid and has the ability to

meet its current liabilities in time .The ideal quick ratio is 1:1.Company’s quick ratio is more

than its ideal ratio .This shows that company has no liquidity problem.

B) LEVEARAGE OR CAPITAL STRUCTURE RATIO

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A) DEBT EQUITY RATIO

CALCULATION OF DEBT EQUITY RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Long term loans .89 1.36

Shareholder’s fund 118.41 151.12

DEBT EQUITY RATIO .007 .009

TABLE 3

2011 20120

0.002

0.004

0.006

0.008

0.01

0.00700000000000001

0.009

DEBT EQUITY RATIO

DEBT EQUITY RATIO

DE

BT

EQ

UIT

Y R

AT

IO

YEAR

INTERPRETATION:- This ratio suggests the claims of creditors and owners over the assets

of the company. It shows the best pictures (growth) of a company's leverage. . The higher the

figure, the higher is the leverage the company enjoys. The calculate figure is 0.09 in 2012 but as

compare with 2011 the company DER is 0.07 which is lesser than previous year so the company

focus on this ratio to improve its market position but overall the company leverage is good.

B) DEBT TO TOTAL FUNDS

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CALCULATION OF DEBT TO TOTAL FUNDS RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Long term loans .89 1.36

Shareholder’s funds 118.41 151.12

DEBT TO TOTAL FUNDS .00751 .00892

TABLE 4

2011 20120.0065

0.007

0.0075

0.008

0.0085

0.009

0.0095

0.00751000000000001

0.00892

DEBT TO TOTAL FUNDS RATIO

DEBT TO TOTAL FUNDS RATIO

DE

BT

TO

TO

TA

L F

UN

D R

AT

IO

YEAR

INTERPRETATION: This ratio is less than 0.67 in both the year which shows better long

term solvency position of the company as higher ratio indicates a burden of payment of large

amount of loans at maturity.

B) PROPRIETARY RATIO

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CALCULATION OF PROPRIETARY RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Shareholder’s funds 118.41 151.12

Long term loans .89 1.36

PROPRIETARY RATIO 99.25% 99.11%

TABLE 5

2011 201299.00%

99.05%

99.10%

99.15%

99.20%

99.25%

99.30%99.25%

99.11%

PROPRIETARY RATIO

PROPRIETARY RATIO

PR

OP

RIE

TA

RY

RA

TIO

YEAR

INTERPRETATION: This ratio highlights the fact as to what is the proportion of proprieters

and outsiders in financing the total business,AS the company’s ratio is more than 50% in both

the years so it depicts sound financial position of a company

C) FIXED ASSET TO PROPRIETAR’S FUNDS

CALCULATION OF FIXED ASSET TO PROPRIETAR’S FUNDS

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(RS IN CRORE)

YEAR 2010-11 2011-12

Fixed assets 41.61 44.33

Proprietor’s funds 118.41 151.12

FIXED ASSETS TO

PROPRIETOR’S FUNDS

35.1% 29.3%

TABLE 6

2011 201226.00%27.00%28.00%29.00%30.00%31.00%32.00%33.00%34.00%35.00%36.00%

35.10%

29.30%

FIXED ASSETS TO PROPRIETAR'S FUNDS

FIXED ASSETS TO PROPRIETAR'S FUNDS

FIX

ED

AS

SE

T T

O P

RO

PRIE

TA

RS

FU

ND

S

YEAR

INTERPRETATION: Proprietar’s funds is more than the fixed assets in both the year but the

ratio reduce to 29.3% in the current year which is not the good indicator for the company as this

ratio shows the long term financial soundness of business.

E) CAPITAL GEARING RATIO

CALCULATION OF CAPITAL GEARING RATIO

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(RS IN CRORE)

YEAR 2010-11 2011-12

Equity share capital 8.33 8.33

P&L balance 31.61 32.71

Fixed cost bearing capital .89 1.36

CAPITAL GEARING

RATIO

44.87 30.17

TABLE 7

2011 201205

101520253035404550 44.87

30.17

CAPITAL GEARING RATIO

CAPITAL GEARING RATIO

CA

PIT

AL

GE

AR

ING

RA

TIO

YEAR

INTERPRETATION: Capital gearing ratio is a useful tool to analyze the capital structure

of a company .As fixed cost bearing capital is less than the equity share capital in both the

years then this shows that the company is low geared which is not beneficial for the equity

shareholders.

3) ACTIVITY RATIO

A) STOCK TURNOVER RATIO

CALCULATION OF STOCK TURNOVER RATIO

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(RS IN CRORE)

YEAR 2010-11 2011-12

Cost of goods sold 122.95 134.24

Average stock 24.49 37.41

STOCK TURNOVER

RATIO

5.02 3.588

TABLE 8

CALCULATION OF COST OF GOODS SOLD-

2011

62.71-39.7=122.95

2012

174.47-40.23=134.24

2011 20120

1

2

3

4

5

65.02

3.588

STOCK TURNOVER RATIO

STOCK TURNOVER RATIO

STO

CK

TU

RN

OV

ER

RA

TIO

YEAR

INTERPRETATION: This ratio shows how rapidly the inventory is turning in to receivables

through sales. In 2011the company has high inventory turnover ratio but in 2012 it has reduce to

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3.588 times .This shows that the company’s inventory management technique is less efficient as

compare to last year

B) DEBTORS TURNOVER RATIO

CALCULATION OF DEBTORS TURNOVER RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Sales 162.71 174.47

Average Debtors 48.57 65.90

DEBTOR TURNOVER RATIO 3.35 2.64

TABLE 9

2011 20120

0.51

1.52

2.53

3.54

3.35

2.64

DEBTOR TURNOVER RATIO

DEBTOR TURNOVER RATIO

DE

BT

OR

TU

RN

OV

ER

RA

TIO

YEAR

INTERPRETATION:-This ratio indicates the speed with which debtors are being converted or

turnover in to sales .The higher the values or turnover in to sales. The higher the values of

debtors turnover ,the more efficient is the management of credit. But in the company the debtor

turnover ratio is decreasing .This shows that the company is not utilizing its debtors

efficiency .Now their credit policy become liberal as compare to previous.

C) CREDITORS TURNOVER RATIO

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CALCULATION OF CREDITORS TURNOVER RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Net credit purchase 100.71 94.91

Average creditors 19.41 23.87

Average bills payable - -

CREDITORS TURNOVER

RATIO

5.18 3.97

TABLE10

2011 20120

1

2

3

4

5

65.18

3.97

CREDITORS TURNOVER RATIO

CREDITORS TURNOVER RATIO

CR

ED

ITO

R T

UR

NO

VE

R R

AT

IO

YEAR

INTERPRETATION:-As the company’s creditors turnover ratio has decreased so it indicate

less period of credit enjoyed by business it may due to the fact that either has better liquidity

position, believe in availing cash discount and consequently enjoys better credit standing in the

market.

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4) PROFITIBILITY RATIO

A) GROSS PROFIT RATIO

CALCULATION OF GROSS PROFIT RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Gross profit 39.76 40.23

Net sales 162.71 174.47

GROSS PROFIT RATIO 24.43% 23.05%

TABLE 11

2011 201222

22.5

23

23.5

24

24.5

25

24.43

23.05

GROSS PROFIT RATIO

GROSS PROFIT RATIO

GR

OSS

PR

OFI

T R

AT

IO

YEAR

INERPRETATION:- Gross profit is the result of the relationship between prices, sales volume

and costs .The gross margin represents the limit beyond which fall in sales prices are outside the

tolerance limit.In this company, in 2011, gross profit is 24.5% it is good for every company but

after one year it was fallen down to 23% in 2012 which shows that the company is not making

good profit.

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B) NET PROFIT RATIO

CALCULATION OF NET PROFIT

(RS IN CRORE)

YEAR 2010-11 2011-12

Operating net profit 22.41 15.23

Net sales 162.71 174.47

NET PROFIT 13.77 8.72

TABLE 12

CALCULATION OF NET PROFIT

2011

39.76-17.35=22.41

2012

40.23-25.00=15.23

2011 20120

5

10

15 13.77

8.72

NET PROFIT RATIO

NET PROFIT RATIO

NE

T P

RO

FIT

RA

TIO

YEAR

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INTERPRETATION: The net profit ratio is the overall measure of the firm’s ability to turn

each rupee of income from services in net profit. If the net margin is inadequate the firm will fail

to achieve return on shareholder’s funds. In 2011 net profit is 13.77 and in 2012 it decreases to

8.72 which is not good for the company.

C) OPERATING RATIO

CALCULATION OF OPERATING RATIO

(RS IN CRORE)

YEAR 2010-11 2011-12

Cost of goods sold 122.95 134.24

Operating expenses 17.35 25.00

Net sales 162.71 174.47

OPERATING RATIO 86.22 91.27

TABLE 13

2011 201283

84

85

86

87

88

89

90

91

92

86.22

91.27OPERATING RATIO

OPERATING RATIO

OPE

AR

TIN

G R

AT

IO

YEAR

INTERPRETATION:- This ratio shows that effectiveness of a company's management by

comparing operating expense to net sales. In this company in 2011 operating ratio is 86.22 and in

2012 it is 91.27 which is increasing as compare to previous year because of increase in net sales.

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5.0 CONCLUSION AND RECOMMENDATION

Finance is the life blood of every business. Without effective financial management a company

cannot survive in this competitive world. A Prudent financial Manager has to measure the

working capital policy followed by the company.

This company is going good if we talk about liquidity ratio it is increasing from the last year ,

fixed assets are also increasing compare to the previous year and equity share capital remain

same in the current year.

Debtors turnover ratio has decreased which shows that the company is not utilizing its debtor’s

efficiency and creditors turnover ratio has also reduced which indicates less period of credit

enjoyed by the business. Profitability ratio decreases which is not the good indicator for the

company as efficiency of a business is measured in terms of profit.

RECOMMENDATIONS

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The company should make the balance between liquidity and solvency position of the

company.

The profit ratio is decreased in current year so the company should pay attention to this

because profit making is the prime objective of every business.

The cost of goods sold is high in every year so the company should do efforts to control

it.

The long term financial position of the company is very good but it should pay a little

attention to short term solvency of the company.

REFRENCES

REFRENCE BOOKS

MANAGEMENT ACCOUNTING Dr.K.L GUPTA

ANNUAL REPORT OF CELLO PLASTIC PRODUCTS LTD

2010-11

2011-12

WEBSITES

www.celloworld.com

www.google.org.in

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