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Summer Internship Report
On
FINANCIAL ANALYSIS
OF
BENGAL PACKERS
Submitted for the partial fulfillment for the award of the degree of Masters in
Business Administration
Of
LINGAYAS UNIVERSITY, FARIDABAD
Session 2011-12
Under the Guidance of: Submitted By
Ms. Suman Arora Name: Shweta Gupta
Roll No: 10 MBA32
Lingayas University, Foundation CampusNachauli Jasana Road, Old Faridabad, Haryana
Website:www.Lingayasuniversity.org
http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/8/3/2019 project report ratio analysis
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TABLE OF CONTENTS
CONTENTS PARTICULARS PAGE
NO.
Declaration by student
Certificate of the project guide
Acknowledgement
CHAPTER-
1
INTRODUCTION:
1.0 Executive summary
1.2 Objective
1.2.Research methodology
CHAPTER-
2
COMPANIES PROFILE [IN BRIEF]
2.0 Introduction
2.1Organisation Structure
2.2 List Of Key Management Personnel
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CONTENTS PARTICULARS PAGE
NO.
2.3Current Sales
2.4 Product Mix
2.5 Direct Competitor
2.6 Future Plans
CHAPTER-
3
STUDYCASH MANAGEMNT
3.1 Introduction of Financial management
3.2 Introduction of cash management
3.3Strategies of cash management
3.4 Cash planning and control and its tools
3.5 Cash flow statement of Escort ltd.
CHAPTER-4
ANALYSIS AND INTERPRETATION
4.1 Change in sales
4.2 Change in contribution per tractor
4.3 Shareholding pattern
4.4 Lquidity of share
4.5 Statistics of dividend payment
CHAPTER-
5
5.1 Recommendations
5.2 Suggestions
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5.3 Annexure
5.4 Bibliography
5.5 Questionaires
DECLARATION BY THE CANDIDATE
I hereby declare that the work, which is being present in this Project, entitled
STUDY OF FINANCIAL STATEMENT OF BENGAL JUTE TRADER
USING RATIO ANALYSIS is an authentic record of my own work carried
out by me under the Supervision and Guidance of Mr. AMIT SINGLA,
Executive Director.
This Project was undertaken as a Summer Training Project in the Fourth
Semester of MBA Degree as per the Curriculum of Lingayas university,
Faridabad.
I have not submitted the matter embodied here in this Project for the award
of any other Degree/Diploma.
Name: SHWETA GUPTA
Roll No.: 10 MBA 32MBA IV Semester
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Acknowledgement
On the completion of my training at Bengal Packers. I like to thank the
management of the firm for the opportunity to work with them and the guidance
throughout the course of this project.
I would like to thank Mr. Manish singla, Accounts Officer, Finance Department
and Mr. Amit, Planning Manager, Replenishment Department for their continuous
guidance and encouragement. I am very grateful to Mr. Ramesh, Manager, and
Finance Department for giving me the required work exposure. I also acknowledge
that all other staff of Bengal Packers was really co-operative too.
Lastly, I am very thankful to my project guide MS. SUMAN ARORA for her
suggestions ,which led to the completion of this projecto.
SHWETA GUPTA
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EXECUTIVE SUMMARY
The main purpose of taking this project was to gain a firsthand knowledge about
the structure and the functioning of the finance department and to develop and
disseminate comparative financial indicator of BENGAL PACKERS using ratio
analysis. A literature view has analyzed the use of 4 important ratios i.e. Liquidity,
Solvency, Activity and Profitability ratios that have proven useful for assessing the
financial condition.
The project helped to see the applicability and usability of theory which have been
taught during the MBA programme. Results of the project showed that over 3years
since 2006, BANGAL PACKERS have become more profitable however looking
at the past data trends it can be conferred that the management of the firm have
been exercising a policy by increasing the debt component in the capital structure
and introducing private capital equity as major source of capital.
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OBJECTIVE OF THE STUDY
The above study aimed at:
To gain the overall idea about the organization and to gain a firsthand
knowledge about the structure and the functioning of the finance department and
enabling the financial analyst to take different decisions regarding the operations
of the firm.
To find out the importance of finance in business, financial performance of the
organization the future requirement of finance in business and to study the
investment decisions based on the return.
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SCOPE OF STUDY
To know the ability of the firm to meet the current obligation.
To know the extent to which firm has used its long term solvency by borrowing funds
To know the efficiency to which firm is utilizing its assets in generating sales revenue.
To know whether the firm is utilizing the overall operating efficiency .
To know the performance of the firm.
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RESEARCH METHODOLOGY
Plan of study:-
A proper and systematic approach is essential in any project work. Proper planning
should be conducting the data collection, completion and presentation of the project.
Each and every step must be so planned that it leads to the next step automatically.
This systematic approach is a blend a planning and organization and major emphasis
is given to independences of various steps.
The plan of this study is as follows:
Research purpose
The purpose of the research is to find out the criteria on which investment of the
company is raised every year and a favorable rate of return is arrived at, increasing the
net result of the company as per their budget.
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RESEARCH DESIGN:
The research methodology used in this study isDescriptive research because it will
ensure the minimization of bias and maximization of reliability of data collected.
The information already available through financial statements of earlier years was
taken and analyzed to make critical evaluation of the available material. Hence by
making the type of the research conducted to be both Descriptive and Analytical
in nature.
SOURCES OF DATA COLLECTION:
The required data for the study are basically secondary in nature and the data
are collected from the audited reports of the company.
The information was collected from various sources which are listed below:-
1 From the official document.
2 From records and manuals of different departments of the organizations.
3 From a close observation of the functioning of various departments of the
Organizations.
4 Last but not least, knowledge, both negative and positive precipitated through
informal discussions with the employees of different departments.
The sources of data are from the annual reports of the company from the year
2006to 2009
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Sample Size
The sample size selected is of three years.
Software tools used for the data analysis :
The software tools used for data analysis is MS WORD & MS EXCEL
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INTRODUCTION OF THE COMPANY
Established in the year 1995,BENGAL PACKERS , are a sole proprietorship
firm engaged in manufacturing and supplying corrugated boxes, sheets and rolls.
We perfectly utilize the procured raw material, so that the products are produced as
per the international quality standards. Known for high load bearing capacity, these
products are durable, high in strength and are utilized mainly in food,
pharmaceutical and cosmetic industries.
Facilitated with hi-tech manufacturing unit and advanced in-house designing unit,
we are proficient in catering to the specific needs of our clients. Clients are the axis
of our organization and therefore, we make sure that they do not face any problem
while dealing with us. Therefore, we ensure timely delivery of products andprovide them with numerous payment modes such as cash, cheque, Our large
network of loyal clients in India speaks volumes for our success in this domain.
MISSION STATEMENT OF A COMPANY
The firm is producing fine quality boxes and providing satisfaction to theircustomer.
VISION STATEMENT OF THE COMPANY
The firm vision is to attain a global leadership in manufacturing of high quality
corrugated box and sheet board.
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Strength of the firm
We manufacture products using the top quality Kraft papers. These are available in
many more designs, patterns, sizes, and also in customized choices. Following are
the characteristics of our products that bring us a countless number of reputed
customers across the world:
* Attractive packaging.
* Eco-friendly materials.
* Strength
* Durability
* Timely Delivery* Customers Satisfaction
* Easy Mode of Payment
* Professional Team of Workers
* Maintaining the Standard Thickness of the Wall.
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About the product
Corrugated sheet boxes protect the contents against hazards of shipping and
transporting and preserve the taste, moisture or dryness, appearance and original
form. They prevent contamination of any kind. They can be handled easily,forming, filling, closing and loading into stripping containers. Corrugated board is
used for making corrugated boxes which find application in packing a wide variety
of consumer products like cosmetics, drugs, households goods,
electrical/electronic goods, cigarettes, textiles, beverages, chemicals, hardware, tea
and coffee. It is one of the important packaging media for various light weight
goods. They are made from corrugated board consisting of two flat parallel sheets
of craft paper board with a centrally fluted corrugated sheet between them
Manufacture of corrugated box is being done in small scale as well as large scale
industries. India imports fine quality corrugated boards and also manufacture
some. There is vase use of these boxes, 40 % being used for TV, radio, bulbs and
tubes, electronic goods, 10 % used by dairy products. There is great demand with a
good marketing setup. There is very bright scope for entrepreneur as these are
being accepted for export business also.
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LITERATURE REVIEW
Introduction of ratio analysis
Financial analysis is the process of identifying the financial strengths and
weaknesses of the firm and establishing relationship between the items of
the balance sheet and profit & loss account.
Financial ratio analysis is a fascinating topic to study because it can teach
us so much about accounts and businesses. When we use ratio analysis we
can work out how profitable a business is, we can tell if it has enough
money to pay its bills and we can even tell whether its shareholders should
be happy!
Ratio analysis can also help us to check whether a business is doing better
this year than it was last year; and it can tell us if our business is doing
better or worse than other businesses doing and selling the same things. In
addition to ratio analysis being part of an accounting and business studies
syllabus, it is a very useful thing to know anyway!
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Ratio analysis
Ratio analysis is one of the techniques of financial analysis to evaluate the
financial condition and performance of a business concern. According to
Myers , Ratio analysis of financial statements is a study of relationship
among various financial factors in a business as disclosed by a single set of
statements and a study of trend of these factors as shown in a series of
statements."
Advantages and Uses of Ratio Analysis
To workout the profitability: Accounting ratio help to measure the
profitability of the business by calculating the various profitability ratios. It
helps the management to know about the earning capacity of the business
concern. In this way profitability ratios show the actual performance of the
business.
To workout the solvency: With the help of solvency ratios, solvency ofthe company can be measured. These ratios show the relationship between
the liabilities and assets. In case external liabilities are more than that of
the assets of the company, it shows the unsound position of the business. In
this case the business has to make it possible to repay its loans.
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Helpful in analysis of financial statement: Ratio analysis help the
outsiders just like creditors, shareholders, debenture-holders, bankers to
know about the profitability and ability of the company to pay them
interest and dividend etc.
Helpful in comparative analysis of the performance: With the help of
ratio analysis a company may have comparative study of its performance
to the previous years. In this way company comes to know about its weak
point and be able to improve them.
To simplify the accounting information: Accounting ratios are very
useful as they briefly summarize the result of detailed and complicated
computations.
Limitations of Ratio Analysis
In spite of many advantages, there are certain limitations of the ratio
analysis techniques and they should be kept in mind while using them in
interpreting financial statements.
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The following are the main limitations of accounting ratios:
Limited Comparability: Different firms apply different accountingpolicies. Therefore the ratio of one firm cannot always be compared with
the ratio of other firm. Some firms may value the closing stock on LIFO
basis while some o
ther firms may value on FIFO basis. Similarly there may be difference in
providing depreciation of fixed assets or certain of provision for doubtful
debts etc.
False Results: Accounting ratios are based on data drawn from
accounting records. In case that data is correct, then only the ratios will be
correct. For example, valuation of stock is based on very high price, the
profits of the concern will be inflated and it will indicate a wrong financial
position. The data therefore must be absolutely correct.
Effect of Price Level Changes: Price level changes often make the
comparison of figures difficult over a period of time. Changes in price
affect the cost of production, sales and also the value of assets. Therefore,
it is necessary to make proper adjustment for price-level changes before
any comparison.
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Qualitative factors are ignored: Ratio analysis is a technique of
quantitative analysis and thus, ignores qualitative factors, which may be
important in decision making. For example, average collection period may
be equal to standard credit period, but some debtors may be in the list of
doubtful debts, which is not disclosed by ratio analysis.
Effect of window-dressing: In order to cover up their bad financial
position some companies resort to window dressing. They may record the
accounting data according to the convenience to show the financial
position of the company in a better way.
CLASSIFICATION OF RATIOS :
Ratios may be classified in a number of ways to suit any particular
purpose. Different kinds of ratios are selected for different types of
situations. Mostly, the purpose for which the ratios are used and the kind of
data available determine the nature of analysis. The various accounting
ratios can be classified as follows:
IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE
1. Liquidity ratio
2. Leverage ratio
3. Activity ratio
4. Profitability ratio
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CLASSIFICATION OF RATIOS :
A. Liquidity ratios :
1 Current ratio
2 Liquid /Acid test / Quick ratio
B. Leverage ratios or long term solvency ratios :
1 Debt equity ratio
2 Proprietary or Equity ratios
C. Activity ratios:
1. Working capital turnover ratio
2. Fixed assets turnover ratio
D. Profitability ratios :
1 Net profit ratio
2 Gross profit ratios
3 Return on investments
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1. LIQUIDITY RATIOS:
Liquidity refers to the ability of a concern to meet its current
obligations as & when there becomes due. The short term obligations of a firm can
be met only when there are sufficient liquid assets. The short term obligations are
met by realizing amounts from current, floating (or) circulating assets The current
assets should either be calculated liquid (or) near liquidity. They should be
convertible into cash for paying obligations of short term nature. The sufficiency
(or) insufficiency of current assets should be assessed by comparing them with
short-term current liabilities. If current assets can pay off current liabilities, then
liquidity position will be satisfactory.
To measure the liquidity of a firm the following ratios can be
calculated
Current ratio Quick (or) Acid-test (or) Liquid ratio
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(a) CURRENT RATIO:
Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio is also known as "working capita l ratio ". It is a measure of
general liquidity and is most widely used to make the analysis for short term
financial position or liquidity of a firm. It is calculated by dividing the total of the
current assets by total of the current liabilities.
Current assets
Current ratio =
Current liabilities
Components:
The two basic components of this ratio are current assets and current
liabilities. Current assets include cash and those assets which can be easily
converted into cash within a short period of time, generally, one year, such
as marketable securities or readily realizable investments, bills receivables,
sundry debtors, (excluding bad debts or provisions), inventories, work in
progress, etc. Prepaid expenses should also be included in current assets
because they represent payments made in advance which will not have to
be paid in near future. Current liabilities are those obligations which are
payable within a short period of tie generally one year and include
outstanding expenses, bills payable, sundry creditors, bank overdraft,
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accrued expenses, short term advances, income tax payable, dividend
payable, etc. However, sometimes a controversy arises that whether
Overdraft should be regarded as current liability or not. Often an
arrangement with a bank may be regarded as permanent and therefore, it
may be treated as long term liability. At the same time the fact remains that
the overdraft facility may be cancelled at any time.
Accordingly, because of this reason and the need for conversion in
interpreting a situation, it seems advisable to include overdrafts in current
liabilities.
Significance:
This ratio is a general and quick measure of liquidity of a firm. It represents
the margin of safety or cushion available to the creditors. It is an index of the
firms financial stability.
It is also an index of technical solvency and an index of the strength of
working capital.
A relatively high current ratio is an indication that the firm is liquid and has
the ability to pay its current obligations in time and when they become due.
On the other hand, a relatively low current ratio represents that the liquidity
position of the firm is not good and the firm shall not be able to pay its
current liabilities in time without facing difficulties. An increase in the
current ratio represents improvement in the liquidity position of the firm
while a decrease in the current ratio represents that there has been
Deterioration in the liquidity position of the firm.
The current ratio measures the quantity of the current assets and not the
quality of the current assets. If a firm's current assets include debtors which
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are not recoverable or stocks which are slow-moving or obsolete, the current
ratio may be high but it does not represent a good liquidity position.
Limitations of Current Ratio:
This ratio is measure of liquidity and should be used very carefully because
it suffers from many limitations. It is, therefore, suggested that it should not
be used as the sole index of short term solvency.
1. It is crude ratio because it measures only the quantity and not the quality
of the current assets.
2. Even if the ratio is favorable, the firm may be in financial trouble, because
of more stock and work in process which is not easily convertible into cash,
and, therefore firm may have less cash to pay off current liabilities
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(b) Liquid or Liquidity or Acid Test or Quick Ratio: -
Definition:
Liquid ratio is also termed as "Liquidity Ratio, Acid Test Ratio " or
"Quick Ratio ". It is the ratio of liquid assets to current liabilities. The true
liquidity refers to the ability of a firm to pay its short term obligations as and
when they become due.
Components:
The two components of liquid ratio (acid test ratio or quick ratio) are liquid
assets and liquid liabilities. Liquid assets normally include cash, bank,
sundry debtors, bills receivable and marketable securities or temporary
investments. In other words they are Ratio current assets minus inventories
(stock) and prepaid expenses. Inventories cannot be termed as liquid assets
because it cannot be converted into cash immediately without a
loss of value. In the same manner, prepaid expenses are also excluded from
the list of liquid assets because they are not expected to be converted into
cash. Similarly, Liquid liabilities means current liabilities i.e., sundry
creditors, bills payable, outstanding expenses, short term advances, income
tax payable, dividends payable, and bank overdraft (only if payable on
demand). Some time bank overdraft is not included in current liabilities, on
the argument that bank overdraft is generally permanent way of
Financing and is not subject to be called on demand. In such cases overdraft
will be excluded from current liabilities.
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Formula of Liquidity Ratio
Quick or liquid assets
Quick ratio =
Current liabilities
Significance:
The quick ratio/acid test ratio is very useful in measuring the liquidity
position of a firm.
It measures the firm's capacity to pay off current obligations immediately
and is more rigorous test of liquidity than the current ratio. It is used as a
complementary ratio to the current ratio. Liquid ratio is more rigorous test of
liquidity than the current ratio because it eliminates inventories and prepaid
expenses as a part of current assets. Usually a high liquid ratio an indication
that the firm is liquid and has the ability to meet its current or
liquid liabilities in time and on the other hand a low liquidity ratio represents
that the firm's liquidity position is not good. As a convention, generally, a
quick ratio of "one to one" (1:1) is considered to be satisfactory.
Although liquidity ratio is more rigorous test of liquidity than the current
ratio, yet it should be used cautiously and 1:1 standard should not be used
blindly. A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity
position of the firm if all the debtors cannot be realized and cash is needed
immediately to meet the current obligations. In the
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same manner, a low liquid ratio does not necessarily mean a bad liquidity
position as inventories are not absolutely non-liquid. Hence, a firm having a
high liquidity ratio may not have a satisfactory liquidity position if it has
slow-paying debtors. On the other hand, a firm having a low liquid ratio may
have a good liquidity position if it has a fast moving inventory. Though this
ratio is definitely an improvement over current ratio, the
Interpretation of this ratio also suffers from the same limitations as of
current ratio.
II. LEVERAGE RATIOS
(a) PROPRIETORY RATIO :-Definition:
This is a variant of the debt-to-equity ratio. It is also known as equity ratio or net
worth to total assets ratio. This ratio relates the shareholder's funds to total assets.
Proprietary / Equity ratio indicates the long-term or future solvency position of the
business.
Formula of Proprietary/ Equity Ratio:
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Components:
Shareholder's funds include equity share capital plus all reserves and surpluses
items. Total assets include all assets, including Goodwill. Some authors exclude
goodwill from total assets. In that case the total shareholder's funds are to be
divided by total tangible assets. As the total assets are always equal to total
liabilities, the total liabilities, may also be used as the denominator in the above
formula.
Significance:
This ratio throws light on the general financial strength of the company. It is also
Regarded as a test of the soundness of the capital structure. Higher the ratio or the
share of shareholders in the total capital of the company better is the long-term
solvency position of the company. A low proprietary ratio will include greater risk
to the creditors.
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(b). DEBT- EQUITY RATIO :
Definition:
Debt-to-Equity ratio indicates the relationship between the external equities or
outsiders funds and the internal equities or shareholders funds. It is also known as
external internal equity ratio. It is determined to ascertain soundness of the long
term financial policies of the company.
Formula of Debt to Equity Ratio:
Following formula is used to calculate debt to equity ratio
1. DEBT-EQUITY RATIO = DEBT(long-term loans)/EQUITY
Components:
The two basic components of debt to equity ratio are outsiders funds i.e. external
Equities and share holders funds, i.e., internal equities. The outsiders funds
include all debts / liabilities to outsiders, whether long term or short term or
whether in the form of debentures, bonds, mortgages or bills. The shareholders
funds consist of equity share capital, preference share capital, capital reserves,
revenue reserves, and reserves representing accumulated profits and surpluses like
reserves for contingencies, sinking funds, etc. The accumulated losses and deferred
expenses, if any, should be deducted from the total to find out shareholder's funds
some writers are of the view that current liabilities do not reflect long term
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commitments and they should be excluded from outsider's funds. There are some
other writers who suggest that current liabilities should
also be included in the outsider's funds to calculate debtequity ratio for the reason
that like long term borrowings, current liabilities also represents firm's obligations
to outsiders and they are an important determinant of risk. However, we advise that
to calculate debt equity ratio current liabilities should be included in outsider's
funds. The ratio calculated on the basis outsider's funds excluding liabilities may
be termed as ratio of long-term debt to share holders funds. It means that for every
four dollars worth of the creditors investment the shareholders have invested six
dollars. That is external debts are equal to 0.66% of shareholders funds.
Significance of Debt to Equity Ratio:
Debt to equity ratio indicates the proportionate claims of owners and the outsiders
against the firms assets. The purpose is to get an idea of the cushion available to
outsiders on the liquidation of the firm. However, the interpretation of the ratio
depends upon the financial and business policy of the company. The owners want
to do the business with maximum of outsider's funds in order to take lesser risk of
their investment and to increase their earnings (per share) by paying a lower fixed
rate of interest to outsiders.
The outsiders creditors) on the other hand, want that shareholders (owners) should
invest and risk their share of proportionate investments. A ratio of 1:1 is usually
considered to be satisfactory ratio although there cannot be rule of thumb or
standard norm for all types of businesses. Theoretically ifthe owners interests are
greater than that of creditors, the financial position is highly solvent. In analysis of
the long-term financial position it enjoys the same importance as the current ratio
in the analysis of the short-term financial position.
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3. ACTIVITY RATIOS:-
(a). Working Capital Turnover Ratio:
Definition:
Working capital turnover ratio indicates the velocity of the utilization of
net working capital. This ratio represents the number of times the
working capital is turned over in the course of year and is calculated as
follows:
Formula of Working Capital Turnover Ratio:
The two
components of the ratio are cost of sales and the net working capital. If
the information about cost of sales is not available the figure of sales may
be taken as the numerator. Net working capital is found by deduction
from the total of the current assets the total of the current liabilities.
Significance:
The working capital turnover ratio measures the efficiency with which the working
capital is being used by a firm. A high ratio indicates efficient utilization of
working capital and a low ratio indicates otherwise. But a very high working
capital turnover ratio may also mean lack of sufficient working capital which is not
a good situation.
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(b). Fixed Assets Turnover Ratio: Definition:
Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio
measures the efficiency and profit earning capacity of the concern. Higher the
ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-
utilization of fixed assets.
The ratio is calculated by using following formula:
Formula of Fixed Assets Turnover Ratio:
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IV. PROFITABILITY RATIOS
(a) NET PROFIT RATIO
Net profit ratio establishes a relationship between net profit (after tax)and sales and indicates the efficiency of the management in manufacturing, selling
administrative and other activities of the firm.
Net profit after tax
Net profit ratio=
Net sales
Net Profit after Tax = Net Profit () Depreciation () Interest () Income Tax
Components of net profit ratio:
The two basic components of the net profit ratio are the net profit and sales. The
net profits are obtained after deducting income-tax and, generally, non-operating
expenses and incomes are excluded from the net profits for calculating this ratio.
Thus, incomes such as interest on investments outside the business, profit on sales
of fixed assets and losses on sales of fixed assets, etc are excluded.
Significance:
NP ratio is used to measure the overall profitability and hence it is very useful
Proprietors. The ratio is very useful as if the net profit is not sufficient, the firm
shall not be able to achieve a satisfactory return on its investment. This ratio also
indicates the firm's capacity to face adverse economic conditions such as price
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competition, low demand, etc. Obviously, higher the ratio the better is the
profitability. But while interpreting the ratio it should be kept in minds that the
performance of profits also is seen in relation to investments or capital of the firm
and not only in relation to sales.
(b) Gross profit ratio (GP ratio):-
Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage.
It expresses the relationship between gross profit and sales.
Formulae:
Significance:
Gross profit ratio may be indicated to what extent the selling prices of goods per
unit may be reduced without incurring losses on operations. It reflects efficiency
with which a firm produces its products. As the gross profit is found by deducting
cost of goods sold from net sales, higher the gross profit better it is. There is no
standard GP ratio for evaluation.
It may vary from business to business. However, the gross profit earned should be
sufficient to recover all operating expenses and to build up reserves after paying all
fixed interest charges and dividends.
Hence, an analysis of gross profit margin should be carried out in the light of the
information relating to purchasing, mark-ups and markdowns, credit and
collections as well as merchandising policies.
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(c) Return on shareholders investment:-
It is the ratio of net profit to share holder's investment. It is the relationship
between net profit (after interest and tax) and share holder's/proprietor's fund. This
ratio establishes the profitability from the share holders' point of view. The ratio is
generally calculated in percentage.
Components:
The two basic components of this ratio are net profits and shareholder's funds.
Shareholder's funds include equity share capital, (preference share capital) and all
reserves and surplus belonging to shareholders. Net profit means net income after
payment of interest and income tax because those will be the only profits available
for share holders.
Formula of return on shareholder's investment or net worth Ratio:
Net profit (after interest and tax)
Return on shareholders investment =
Shareholders funds
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Significance:
This ratio is one of the most important ratios used for measuring the overall
efficiency of a firm. As the primary objective of business is to maximize its
earnings, this ratio indicates the extent to which this primary objective of
businesses being achieved. This ratio is of great importance to the present and
prospective shareholders as well as the management of the company.
ANALYSISAND
INTERPRETATION
OF DATA
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LIQUIDITY RATIOS
CURRENT RATIO
Current ratio =current assets/current liabilities
Year 2007-08 2008-09 2009-10
Current assets 59, 09,348.61 39, 98,435.35 42, 86,280.29
Current liabilities 13, 15,901.44 6, 28,723.51 7, 86,028.60
Current ratio 4.49:1 6.36:1 5.45:1
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CURRENT RATIO
0
1
2
3
4
5
6
7
2007-08 2008-09 2009-10
Current
ratio
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INTERPRETATION
The current ratio with 2:1 (or) more is considered as satisfactory position of thefirm. The company has achieved the current ratio of 4.49, 6.36, 5.45 during the
years 2007-08, 2008-09, 2009-10 respectively. The current ratio for the firm is
favorable and shows that there has been an increase in the capacity of the firm to
pay its short term liabilities. Cash and Bank balance has increased. The ratio is
maximum in 2008-09 and dropped in 2009-10 as the liability has increased
because company has taken up some new projects. The company has less current
liabilities as compared to the assets but now the organization has increased the
proportion of short term loans as compared to the previous years still they are able
to maintain a good liquid position. The company has high liquidity because of high
value of current ratio and a slight decline in the current assets or increase in the
liabilities will not affect the ability of the firm to meet its liabilities. The company
can easily fulfill the short term liability. For a creditor the company is less risky.
The higher the ratio the less risky is the firm.
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QUICK RATIO
Quick ratio = quick assets /current liabilities
Year 2007-08 2008-09 2009-10
Quick asset 5553048.61 36, 72,035.35 4118680.29
Current liabilities 13, 15,901.44 6, 28,723.51 7, 86,028.60
Quick ratio 4.22:1 5.84:1 5.24:1
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QUICK RATIO
0
1
2
3
4
5
6
7
2007-08 2008-09 2009-10
Quick
ratio
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INTERPRETATION:
The quick ratio is an alternative measure of liquidity that does not include
inventory in the current assets .As a conventional rule a quick ratio of 1:1 is
considered satisfactory. The company has achieved the quick ratio of 4.22, 5.84,
5.24 during the years 2007-08, 2008-09, 2009-10 respectively. The ratio is
maximum in year 2008-09and then decreased due to increase in the current
liabilities in 2009-10.The Company has high liquidity because of high value of
current ratio. The company doesnt have much inventory so there is less difference
in quick and current ratio .so the firm the capacity to pay off current obligations
immediately (the short term liability).
For a creditor the firm is favorable.
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SOLVENCY RATIO
PROPERITORY RATIO
PROPERITORY RATIO=Share holder fund/ total assets
YEAR 2007-08 2008-09 2009-10
Shareholder fund 58, 1453.08 793823.04 920547.51
Total assets 6,233,629.61 4,607,499.35 5,522,505.29
Proprietor ratio 0.09 0.17 0.16
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PROPERITORY RATIO
INTERPRETATION:
This ratio indicates the extent to which the shareholders fund has been used to
finance the total assets of the firm. In the initial year 2007-08 the level of share
holders fund was less that is 0.09 which rises in the year 2008-09 to 0.17, and it
slightly decrease in year 2009-10 to 0.16 , but the increase in the total asset hasbeen proportionately more than the rise in shareholders fund. The company was
using other sources of funds to finance major part of the assets. Higher the ratio
better is the long term solvency of the firm and involves less risk for the credit.
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
2007-08 2008-09 2009-10
Properitory
Ratio
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DEBT EQUITY RATIO
DER = Debt /Equity
year 2007-08 2008-09 2009-10
Debt 4550137.11 3377408.29 4030789.16
Equity 581453.08 793823.04 920547.51
Debt equity 7.83:1 4.25:1 4.38:1ratio
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DEBT EQUITY RATIO
0
1
2
3
4
5
6
7
8
9
2007-08 2008-09 2009-10
Debt Equity
Ratio
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INTERPRETATION:
This ratio is calculated to assess the ability of the firm to meet its long term
liabilities.
As 2:1 considered safe ratio.
The company has achieved the debt equity ratio of 7.83, 4.25, 4.38 during the years
2007-08, 2008-09, 2009-10 respectively. We can easily point out that there is a
sharp decline in the debt-equity ratio from 2007-08 to 2008-09 From the above
data we conclude in the year 2008-09 the proportion of shareholders fund has
been increased without much changing the debt so the ratio declined in 20008-09
Company should raise more funds from shareholders(private equity).
In 2009-10 lower proportion of debt initially and the proportion of debt was
increased over the year that leads to the increase in the ratio. Its Debt as well as
equity is increased which increases its ratio.
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ACTIVITY RATIO
WORKING CAPITALTURNOVER RATIO
WC Turnover ratio = sales/ wc
Working capital turnover ratio = (sales / WC)
YEAR 2007-08 2008-09 2009-10
Sales 10653085.54 7422199.00 7569877.50
Working
Capital 4593447.17 3369711.84 3500251.69
Working
Capital
Turnover ratio 2.31 2.20 2.16
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WORKING CAPITALTURNOVER RATIO
2.05
2.1
2.15
2.2
2.25
2.3
2.35
2007-08 2008-09 2009-10
Working
capital
turnover
ratio
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INTERPRETATION
The working capital turnover ratio measures the efficiency with which the working
capital is being used by a firm. The ratio is acceptable level in all the year that is
2.31, 2.20, 2.16 in year 2007-08, 2008-09 and 2009-10 respectively. The company
should pay more attention for proper utilization of the working capital (an effective
working capital utilization strategy) and further raise the level of returns.The
efficiency with which the working capital is being used by a firm is good and
improving.
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FIXED ASSETS TURNOVER RATIO
Fixed assets turnover ratio = Cost of sales/Net Fixed Assets
YEAR 2007-08 2008-09 2009-10
Sales 10,653,085.54 7,422,199.00 7,569,877.50
Fixed assets 3, 24,281.00 6, 09, 064.00 12,36,225.00
Ratio 32.85 12.18 6.12
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INTERPRETATION:
A high ratio indicates efficient utilization of fixed assets in generating sales. Theratio was 32.85 in the year 2007-2008,which had gone to12.1 8in 2008-2009 and
the ratio further decrease to 6.12 in year 2009-10 this sudden decline was because
a major part of fixed asset during 2008-09and 2009-10 was in work in progress
category
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PROFITABILITY RATIO
GROSS PROFIT RATIO
GPR = Gross profit / Net Sales *100
YEAR 2007-08 2008-09 2009-10Gross Profit 1636251.82 1214958.65 1245335.84
Net Sales 10653085.54 7422199.00 7569877.50
Gross profit ratio 15.36% 16.37% 16.45%
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GROSS PROFIT RATIO
14.80%
15.00%
15.20%
15.40%
15.60%
15.80%
16.00%
16.20%
16.40%
16.60%
2007-08 2008-09 2009-10
G.P
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INTERPRETATION:
The ratio measures the margin of profit available on sales. Higher the profit it will
be good for the company.
As the gross profit in year 2007-08 is 15.36%and it is increased in year 2008-09 to16.35% and it further increased in year 2009-10 to 16.45%
The evaluation of gross profit ratio varies from business to business. However, the
gross profit earned should are sufficient to recover all operating expenses and to
build up reserves after paying all fixed interest charges and dividends. The gross
profit of the Business is increasing at a very favorable rate and is able to generate
increasing reserves for the business year after year.
This shows that the risk for the investors is less and the company is able to
generate revenues that could be used to pay dividends.
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NET PROFIT RATIO
NPR =Net profit/Net sales*100
YEAR 2007-08 2008-09 2009-10
Net Profit 213862.22 192455.49 214859.98
Net Sales 10653085.54 7422199.00 7569877.50
NET PROFIT RATIO 2.01% 2.59% 2.84%
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NP RATIO
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
2007-08 2008-09 2008-09
N P
RATIO
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INERPREATATION:
The Net profit ratio tells us how much profit a company makes for every Re.1 it
generates in revenue or sales. The ratio is very useful as if the net profit is not
sufficient, the firm shall not be able to achieve a satisfactory return on its
investment. Higher the ratio the better is the profitability
The ratio measures the margin of profit available on sales after deducting all
operating expenses from gross profit.
As the net profit in year 2007-08 is 2.01%and it is increased in year 2008-09 to
2.59% and it further increased in year 2009-10 to 2.84%
As the gross profit is increasing yearly it states that the sales of the company are
increasing. This indicates the firm's capacity to face adverse economic conditions
such as price competition, low demand, etc
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RETRUN ON INVESTMENT RATIO
YEAR 2007-08 2008-09 2009-10
Return on investment 36.78% 24.24% 23.34%
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RETURN ON INVESTMENT RATIO
INTERPRETATION
Return on investment is decreasing every year it states the company is not getting
the profits how much they are investing.
In year 2007-08 the ROI ratio is 36.78% in 2008-09 ratio decreased to 24.24%
and in 2009-10 it further decreased to 23.34
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2007-08 2008-09 2009-10
ROI
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FINDINGS & SUGGESTIONS
The companys profitability analysis shows the favorable result. The main reason
of favorable condition is Increase in Gross profit, Net Profit, as compare to sales in
the comparative years.
Company also earns profit and comparing to its base year this profit has
increased. Increase in the current asset with increase in the profit is a sign that the
business is expanding.
The return of the following years has again improved and is supposed to
increase further in the years to come when these fixed asset investments will give
returns.
The company has considerable liquidity position that means it is in a better
position to pay of its obligations or liabilities. The lowest current ratio in past three
year was 4.49and that was in 2006-07 since then company has expanded their
business with a rise in the liquidity position.
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We can observe that there has been a gradual increase in the cash and bankbalance and the absolute liquidity of the company is really good that means the
company has cash to meet their short term liabilities.
Company should raise more funds from shareholders (private equity).
The company should pay more attention for proper utilization of the working
capital (an effective working capital utilization strategy) and further raise the level
of returns.
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CONCLUSION
Fundamentally speaking, the firm is undergoing a major growth phase where its
financial condition is improving. The companys profit margin is increasing over
the last few years.
A company with high operating efficiency showing good management practices
and utilization of the assets.
A company with adequate liquidity making it a low risk company for the investors.
The company has considerably increased the proportion of debt in financing the
business. Debt financing helps in magnifying the returns because of tax shield it
provides on the interest which is not tax deductible. The company is lookingforward for more investment via private equity.
Gross profit and net profit of the firm is increasing every year which shows the
better financial position of the firm.
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ANNEXURE
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P & L A/C
OF
YEAR 2009-10
PARTICULAR AMT PARTICULAR AMT
PURCHASE A/C 55,87,490.66 SALES A/C 75,69,877.50
DIRECT EXPENSES 5,78,251.00 CLOSING STOCK 1,67,600.00
G/P 12, 45,335.84
77, 37,477.50 77,37,477.50
INDIRECT EXPENSES 10, 30,475.86 G/P Trf 12,45,335.84
N/P 2, 14,859.98
12,45,335.84 12,45,335.84
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BALANCE SHEET
OF
YEAR 2009-10
MANAGEMENT ACCOUNTING BY KHAN & JAIN. FINANCIAL ANALYSIS BY T.S GREWAL FINANCIAL MANAGEMENT BY I.M PANDEY
LIABLITIES AMT ASSETS AMT
CAPITAL 7,05,687.53 FIXED ASSETS 12,36,225.00
LOAN 40,30,789.16 CURRENT ASSETS 42,86,280.29
CURRENT LIABILITY 7,86,028.60
P&L A/C
OPENING BALANCE 2,14,859.98
CURRENT PEIOD 2,14,859.98
55,22,505.29 55,22,505.29
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Bibliography
Principles of financial Management by R.P Rusta. Financial analysis by T.S Grewal. Financial management by I.M Pandey.
Annual report of Bengal packers