Rakumar Ratio

8/10/2019 Rakumar Ratio

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Ratio Analysis

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Ratio Analysis

EXECUTIVE SUMMARY Ratio Analysis is one of the techniques of nancial analysis where ratios

are used as a yardstick for evaluating the nancial condition and

performance of a rm. Analysis and interpretation of various

accounting ratios gives a better understanding of nancial condition

and performance of rm. Trend ratios indicate the direction of change

in the performance improvement, deterioration or constancy over

the year.

Objectives of the study

!. To help the management in its planning and forecasting

activities.

". To evaluate operational e#ciency, liquidity, and solvency of $%&.

'. To help the management in having e(ective control over the

activities of di(erent departments.

). To compare the previous ve years and present year

performance of the company.

*. To give suggestion and recommendation based on the study.

+or the study $irani sugars &td, is considered. The ratio analysis is doneusing the ncome statements and -alance %heets of the company

between " * to " /.

0ata nterpretation on trend ratio analysis is carried out at $%& at

1ulali cross Tq2 3udhol 0ist2 -agalkot 1arnataka %tate. +or study, of

ve years is considered and compared it4s performance over the period

of ve years. +or result analysis and 3% 56cel %oftware package are

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Ratio Analysis

used. +rom the analysis, am able to indicate following nding of the

rm

!. +rom the current ratio it is found that the ratio is not satisfactory

because the 7 increase in current assets is less than the 7

increase in current liabilities during the year " * " /.The

highest ratio recorded is '. ) in " * and the lowest ratio

recorded is .)" in the year " 8.And less than the standard

ratio.

". +rom the gross pro t ratio it is found that the ratio is satisfactory

during the last three years from " 8 to " /. The highest ratio

recorded in the year " 9 is "!.:* and the lowest ratio recorded

is .!! in the year " *.

'. +rom the operating pro t ratio it is found that the ratio is highly

satisfactory during the considered nancial years. The highest

ratio recorded is ! . 9 in the year " 8 and the lowest is ::.*:

in the year " ).

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Ratio Analysis

I!TRO"UCTIO!Ratio analysis is a technique of analy;ing the nancial statement

of industrial concerns. $ow a day this technique is sophisticated and is

commonly used in business concerns. Ratio analysis is not an end but it

is only means of better understanding of nancial strength and and

weakness of a rm.

Ratio analysis is one of the most powerful tools of nancial

analysis which helps in analy;ing and interpreting the health of the

rm. Ratio4s are proved as the basic instrument in the control process

and act as back bone in schemes of the business forecast.

#ith the hel$ of %atio &e can dete%'ine

The ability of the rm to meet its current obligation.

The limit or e6tent to which the rm has used its borrowed funds.

The e#ciency with which the rm is utili;ing in generating sales

revenue.

The operating e#ciency and performance of the company .

Classi(cation of Ratios

Ratios can be classi ed into di(erent categories depending

upon the basis of classi cation.

I) TRA"ITIO!A* C*ASSI+ICATIO!

Traditional &oss account ratios.

5.g. ?ross =ro t Ratio, $et =ro t Ratio, @perating Ratio etc

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Ratio Analysis

".-alance sheet ratio.

5.g.


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Ratio Analysis

!"USTRY ,RO+I*E

The .isto%ical -ac/0%ound of the Indian Su0a% Indust%y

The sugar industry is proud to be an industry, which spreads the

taste of sweetness to the mankind. The history of origin of this industry

is as old as the history of main him self. %ugar is generally made from

sugarcane and beet. n ndia, sugar is produced mainly from sugarcane.

ndia had introduced sugarcane all over the worlds and is a leading

country in the making sugar from sugarcane.

E%aint Fishwamitra4 is known as the research person of the

sugarcane in religious literature. e can nd the e6ample of sugarcane

in Fedic literature also as well as sugarcane. e can also nd the

reference of sugar and the sugarcane in =atanGali4s 3ahabashya and

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Ratio Analysis

the treaty on the grammar of E=anini4. ?reek traveler E$iyarchus4 and


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Ratio Analysis

* million sugarcane farmers and a large number of agricultural

laborers are involved in sugarcane cultivation and ancillary activities,

constituting 8.*7 of the rural population. -esides, the industry

provides employment to about " million skilledBsemi skilled workers

and others mostly from the rural areas. The industry not only generates

power for its own requirement but surplus power for e6port to the grid

based on by product -agasses. t also produces ethyl alcohol, which is

used for industrial and potable uses, and can be used to the

manufacture 5thanol, an ecology friendly and renewable fuel for

blending with petrol.

The sugar industry in the country uses only sugarcane as inputJ

hence sugar companies have been established in large sugarcane

growing states like Httar =radesh, 3aharashtra, 1arnataka, ?uGarat,

Tamilnadu, and Andhra =radesh. n sugar year " ' ), these si6

states contribute more than 9*7of total sugar production in the

countryJ Httar =radesh, 3aharashtra, and 1arnataka together

contribute more than :*7of total production. The government of ndia

licensed new units with an initial capacity of !"* T


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Ratio Analysis

The entrepreneurs have been allowed to set up sugar factories of

e6pand the e6isting sugar factories as per the techno economic

feasibility of the proGect. Kowever, they are required to maintain a

radial distance of !* kms from the e6isting sugar factory. After de

licensing, a number of new sugar plants of varying capacities have

been set up and the e6isting plants have substantially increased their

capacity.

There are *:: installed sugar mills in the country as on 3arch

'! st " *, with a production capacity of !9 lack 3Ts of sugar, of which

only )*' are working. These mills are located in !9 states of the

country.

The secto% &ise b%ea/ u$1s as follo&s 2

Table no23

%l.

$o.

%ector $o of factories

!. =rivate !9/

". =ublic :"

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Ratio Analysis

RATIO A!A*YSIS AT I!"USTRIES

Objectives of the study

:. To help the management in its planning and forecasting

activities. To evaluate operational e#ciency, liquidity, and solvency of

$%&.

8. To help the management in having e(ective control over the

activities of di(eent departments.

9. To compare the previous ve years and present year

performance of the company.

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Ratio Analysis

/. To give suggestion and recommendation based on the study.

*IMITATIO! O+ T.E STU"Y

!C The study is limited to few ratios because of non availability of

detailed nancial data.

"C The study is used on secondary data such as annual report of the

company

'C The reliability and accuracy of calculation depends more on

information found in pro t and loss aBc and balance sheet.

)C The study is con ned only to a period of * years.

MET.O"O*O4Y

The study is conducted at $irani %ugars &td, 3udhol.

TqJ 3udhol, 0ist2 -agalkot.

%@HR


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Ratio Analysis

3Bs. $ rani %ugars &imited I$%&C, a company incorporated on the

: th 0ec, !//* under the up

gradation of e6isting sugar factory with an installed capacity of !"*

T


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Ratio Analysis

%ubsequently, the company has been converted into =ublic &imited


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plant of "* T


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and e6changing products of values with others. This marketing is

important element in every organi;ation, which should be maintained

compulsory in a systematic manner.

This section will take care of all sale transactions like sale of

sugar, molasses, -agasse and scrap material. This section works by 8

employees including sales manager. The factory has sold the sugar

according to central government noti cation. The central government

sends the notice to the factory every month regarding sale of sugar,

without notice the sugar is not sold to anybody. The government is

giving permission for a particular period, particular for sale of sugar.

The sugar is sold to the buyer who quotes highest price. n this

section, some records like sale of sugar register, molasses register,

-agasse registers and scrap material registers are maintained.

,RO"UCT O+ SA*E

The organi;ation undertakes selling activities in two methods2

! +REE SA*E 2 free sale of sugar is being done to bulk purchases

on the basis of tenders called, collected, negotiated and sold.

" *EVY SA*E 2 This is being sold to the government of 1arnataka

on levy basis. The government then distributes the same to the

public through public distribution outlets at predetermined

reasonable price.

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Ratio Analysis

,RO"UCTIO! ,ROCESS

Ste$ 3) weighing of sugar cane, it means, when the sugar cane comes

to the factory. After weighing of sugar cane the unloaded carrier cane

weigh bridge.

Ste$ 6) n the ne6t step sugar cane go to the cane cutter machine

and it cuts the ne pieces after that, there are ' mills and * mills

tandem that is sequential mill.

Ste$ 9) After the milling of sugar cane there is a separation of

baggasse and Guice milk, baggasse will be used as a fuel. There are 8

boilers. They used as a fuel and there is production steam and steam is

used to produce the electricity.

Ste$ : . The Guice, weighing takes place and there are mi6ing the Guice

and there is addition of phosphoric. After heated of Guice milk 8* earn pro t. The e#ciency with which assets are managed directly

a(ects the volume of sales. The better the management of assets, the

larger is the amount of sales > the pro t. Activity ratio measures the

e#ciency or e(ectiveness with which a rm manages its resources or

assets. These ratios are also called turnover ratio because they

indicate the speed with which assets are converted or turned over into

sales.

The various activity ratios are2

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Ratio Analysis

Invento%y Tu%nove% Ratio

nventory turnover ratio indicates the number of times stockhas been turned over during the period > evaluates e#ciency with

which a rm is able manage inventory.

The ratio is calculated by dividing the net sales divided by

average inventory at.

cost TRP $et %ales .

Average nventory at at the end of period >

dividing it by " to calculate average inventory.

TA-&5 ).! nventory turnover ratio

Lear $et %ales Average nventory Ratio" )

* ":/9)")/* !)/ ) **: !.9!" *

: :"":89:)" !!)) )*8' ".))" :

8 */"*'":9/ '!":) 9 !./" 8

9 )*')'*!"' )9):"' )) ./)

" 9 8':" :/98 '8/'!))') !./)

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Ratio Analysis

/

INVENTORY TURNOVER RATIO

1.81

2.441.9

0.94

1.94

0

0.5

1

1.5

2

2.5

3

2004-05 2005-06 2006-07 2007-08 2008-09

YEAR

R A T I O

Ratio

I!TER,RETATIO!

The table shows the increase in the inventory turnover ratio from !.9!

to ".)) in the year " * and " : . n the year " 8 there was a

Ouctuation to !./ and further to ./) in the year " 9,but in the year

" / there was a drastical increase to !./).

The company had "'.)87 decrease in net sales and increase by

**. 7 in average inventory but in the year " / there was increase in

net sales by :".':7 and decrease by "!.8'7 in average inventory.

nventory turnover ratio signi es the liquidity of the inventory. A high

ratio implies good inventory management ,a low ratio results in

blocking of funds in inventory. The reference value of this ratio / and

the ma6imum conversion period is '99.

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Ratio Analysis

F/A TURNOVER RATIO

0.51

1.161.04

0.8

1.29

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2004-05 2005-06 2006-07 2007-08 2008-09

YEAR

R A T I O

Ratio

I!TRE,RETATIO!

The table reveals that there is increase in 6ed asset turnover ratio from

.*! in the year " * to !.!: in the year " : but decreased to !. ) in

the year " 8 and drastical Ouctuation to .9 in the year " 8 and raise

in the year to !."/ in the year " /.

The company had "'.)87 decrease in net sales and increase in 6ed

assets by ."'7 in the year " 9 and further in the year " / it had

increase net sales by :".':7 and increase by .!97 in 6ed assets.

@ne of the cautions to be kept in mind that when 6ed assets are old

and substantially depreciated the ratio tenders to be high,because,the

denominator of the ratio will be low.

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Ratio Analysis

ii) Cu%%ent Assets Tu%nove% Ratio

This ratio is indicates how many net sales are made for every rupee of

investment in current assets.


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Ratio Analysis

to !.8: in the year " 8 and !. / in the year " 9. -ut there was a

drastical increase of ratio to ".!! in the year " /.

The company had decrease of "'.)87 in net sales and increase in

current assets by ")." 7 . n the year " / there was increase in net

sales by :".':7 and !:.'97 decrease in currents asssets.

d) #o%/in0 Ca$ital tu%nove% Ratio

A rm may also related net current assets to sales. orking

capital turnover ratio indicates the velocity of the utili;ation of net

working capital.

orking


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year " 8 there was a drastical Ouctuation to .!" in the year " 8

further there was a high increase in working capital turnover ratio to

*."' in the year " 9 and 9.!* in " /.

There is decrease in net sales by "'.)87 and /).9 7 in net current

assets in the year " 9 and in the year " / the net sales increased by

:".':7 and decreased by '9.9:7 in net current assets.

The assets turnover ratio measures the e#ciency of a rm in managing

and utili;ing the assets.Kigher turnover ratio,more e#cient is the

management utili;ation of the assets while low turnover are indicative

of under utili;ation of available resources and presence of idle capacity.

n operational terms, it implies that rm can e6pand its activity level

without requiring additional capital investments.

+I!"I!4S

?

SU44ESTIO!S

+I!"I!4S

I ) *IDUI"ITY RATIO

!. +rom the current ratio it is found that the ratio is not satisfactory

because the 7 increase in current assets is less than the 7

increase in current liabilities during the year " * " /.The

highest ratio recorded is '. ) in " * and the lowest ratio

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Ratio Analysis

recorded is .)" in the year " 8.And less than the standard

ratio.

". +rom the quick ratio it is found that the ratio is not satisfactory

because the ratios recorded during the year were less than the

standard ratio. n the year " 9 the ratio recorded is .!* and the

ratio recorded highest was ". ! in the year " *.

II ) *EVERA4E RATIO

+rom the debt equity ratio it is found that the ratio recorded during the

year " *," :,> " 8 is satisfactory as the ratios are near to the

standard ratio but during the year " 9>" / it is not satisfactory as

the ratios are very high compared to the standard ratio.

!. +rom the current assets to proprietors fund ratio is not

satisfactory as the proprietory funds invested in the current

assets is less in the year " / is less compared to previous years

.The highest ratio recorded is !./8 in the year " * and the

lowest ratio recorded is !.** in the year " 8.

III ) ,RO+ITA-I*ITY RATIOS

!. +rom the gross pro t ratio it is found that the ratio is satisfactory

during the last three years from " 8 to " /. The highest ratio

recorded in the year " 9 is "!.:* and the lowest ratio recorded

is .!! in the year " *.

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Ratio Analysis

". +rom the operating pro t ratio it is found that the ratio is highly

satisfactory during the considered nancial years.The highest

ratio recorded is ! . 9 in the year " 8 and the lowest is ::.*:

in the year " ).

'. +rom the return on investment it is found that the ratio calculated

for the considered nancial years is good . The ratio is

satisfactory as the return on investment is e(ective and

good,comparing the previous years.

IV ) ACTVTY RATIOS

!. +rom the inventory turnover ratio it is found that the ratio is not

satisfactory as the inventory holding period is very

high,compared during the nancial years.

". +rom the 6ed assets turnover ratio it s found that the ratio is

satisfactory as the ratios are raising yearly during the

comparative years.

Su00estion

!. The company may improve its current ratio by decreasing the

current liabilities because in the year " 9 / current assets are

decreased and it may also improve its quick ratio.

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Ratio Analysis

". The company may decrease its total debt as there is increase in

total debt the year " 9 /. The company may increase its

investment in current assets.

'. &ong terms solvency of the company has to be improved by

limiting amount invested by outsiders to the amount invested by

the owner of the company . this can be achieved by purchasing

the shares gradually.

). The proper management of the inventory can improve liquidity

position and e#ciency of the company.

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Ratio Analysis

CO!C*USIO!

%tuday of ratio analysis of nirani sugars &td. Reveals the

performance of the company in terms of nancial aspects. t is found

that there is increase in sales gross pro t during " * to " /. The

cash balance is also increased for the above saied years this is due to

company4s revised policy in debt collection. t is also observed that the

current ratio is not so satisfactory which creates chunks in the current

assets in the form of sundry debtors and inventory.

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Ratio Analysis

Refe%ences

!C. Annual reports of $irani sugars ltd. for " *, " :, " 8, " 9,

" /.

"C. S 3adegouda MAccounting for managersN

'C. 1han 3 and =.1. Sain M+inancial managementN

Documents

Rakumar Ratio