Ratio Analysis

Ratio Analysis RATIO ANALYSIS

1. INTRODUCTION

The ratio analysis is one of the most powerful tools of financial analysis. It is used as a

device to analyze and interpret the financial health of enterprise. With the help of ratios

that the financial statements can be analyzed more clearly and decisions made from such

analysis. Financial analysis is the process of identifying the financial strengths and

weakness of the firm y properly establishing relationship between the items of balance

sheet and the profit and loss account. There are various methods or techniques used in

analyzing financial statements. By the use of ratio analysis one can measure the financial

conditions of a firm and can point out whether the conditions is strong, good,

questionable or poor.

Analysis and interpretation of financial statement with the help of ratio is termed

as Ratio analysis.

It is process of identifying the financial strengths and weakness of the firm. This

may be accomplished either through a trend analysis of the firm over a period of time or

through a comparison of the firm ratios with its nearest competitors and with the industry

averages

Ratio analysis was pioneered by Alexander Wall, who presented a system of ratio

analysis in the year 1909. Alexander’s contention was that interpretation of financial

statements can be made either by establishing quantitative relationships between various

items of financial statements.

SSITS, RAYACHOTY Page 1

Ratio Analysis

Standards of comparison

The ratio analysis involves comparison for a use of full interpretation. A single

ratio in itself does not indicate favourable or unfavourable condition. It should be

compared with some standards. Standards of comparison may consist.

1. Ratios calculated from the past financial statement of the firm.

2. Ratios developed using the projected, or proforma of financial statements of the

same firm.

3. Ratios of some selected firm’s, especially the most progressive and successful, at

same point in the time, and

4. Ratios of the industry to which the firm belongs.

The easiest way to evaluate the performance of a firm is to compare its ratios with

the past ratios. When financial ratios over a period of time are compared it is known as

the time series. It gives an indication of the direction of change and reflects whether the

firm’s financial performance has improved, deteriorated or remained constant over time.

The analyst should not simply determine the change, but more importantly, he should

understand why ratios have changed. The change may be affected by changes in the

accounting polices without a material changes in the firm’s performance.

Sometimes ratios are used as the standard of comparison. Future ratios can be

developed from the projected or proforma of financial statements. The comparison of

past ratios with future ratios shows the firm’s relative strengths and weakness in the past

and future.

If the ratios indicate weak financial position, corrective actions should be initiated.

Another way of comparison is to compare ratios of firm with some selected firms in the

same industry at the same point in time. This kind of comparison indicates the relative

financial position and performance of the firm.


Ratio Analysis

To determine the financial condition and performance of a firm, its ratios

compare with average ratios of the industry analysis, helps to ascertain the financial

standing and capability of the firm in the industry to which it belong. Industry ratios are

important standards in view of the fact that each industry has its characteristics, which

influence the financial and operating relationship.

1.1 Meaning of ratios

A ratio is a mathematical relationship between two items expressed in a

quantitative form.

Ratio can be defined as “Relationship in quantization forms, between figures

which have cause and effect relationship or which are connected with each other in some

manner or the other”.

Ratio analysis is an age old technique of financial analysis. The

information provided by the financial statements in absolute form is and conveying very

little meaning to the users.

Advantage or Importance of ratio analysis

1. The Ability of corporation to meet its current obligations i.e., liquidity position.

2. Ratio analysis provides data for inter firm comparison. Ratios highlights the

factors associated with successful & unsuccessful firms corporations.

3. The efficiency of .the Corporation is. Utilizing its various assets in generating

sales revenue.

4. The extent to which the firms has used its ling-term solvency for borrowing funds.

5. The overall operating efficiency & performance of the corporation


Ratio Analysis

Limitations of ratio analysis

1. Comparison between two variables, prove worth provided their basis of valuation

is identical. But in reality, it is not possible, such as method of valuation of stock-

in-trade, or charging different methods of depreciation of fixed assets etc.

2. Ratio depends on the figure of the financial statement. But in most cases, the

figures are window dressed.

3. Ratio analysis became more meaningful and significant if trend analysis (i.e., the

analysis over a number of years) is possible, but in practice, it is difficult all the

time.

4. Ratio are calculated jointly on the basis of past result which may not be suited to

implement to the present business polices.

5. It is very difficult to ascertain the normal or standard ratio in order to make proper

comparison. Because, it differs from firm to firm, industry to industry.

1.2 Types of ratios

Several ratios, calculated from the accounting data, can be grouped into classes

according to financial activity or function to be evaluated. The parties interested in

financial analysis are short-term and long-term creditors, owners and management. Short-

term creditor’s main interest is in the liquidity position or short-term solvency of the firm,

long-term solvency and profitability of the firm. Similarly, concentrate on the firm’s

profitability and financial condition. Management is interested in evaluation of every

aspect of the firm’s performance. They have to protect the interests of all parties and see

that the firm grows profitably.


Ratio Analysis

The requirement of the various of ratios, we may classify them into the following four

important categories.

1. Liquidity ratios

2. Leverage ratios

3. Activity ratios

4. Profitability ratios

1. Liquidity ratios

It is extremely essential for a firm to meet its obligations as they

become due. Liquidity ratios measure the ability of the firm to meet its current

obligations. In fact, analysis of liquidity needs the preparation of cash budgets and

fund flow statements, but liquidity ratios, by establishing a relationship between cash

and other current assets to current obligations, provide a quick measure of liquidity.

A firm should ensure that if not suffer from lack of liquidity, and also it does not have

excess liquidity. The failure of a company to meet its obligations due to lack of

sufficient liquidity, will result in a poor credit worthiness, loss of creditor’s

confidence, or even legal tangles resulting in the closure of the company. A very high

degree of liquidity is also bad, idle assets earn nothing. The firm’s funds will be

unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper

balance between high liquidity and lack of liquidity.

The most common ratios, which indicate the extent of liquidity or lack of it, are:

Current ratio

The current ratio is the ratio of the total current assets to total current

liabilities. It is calculated as:

Current ratio = current assets/current liabilities.


Ratio Analysis

The current assets of the firm include cash and bank balances and those assets

which can be converted into cash within a year, such as marketable securities, debtors

and inventories. Pre-paid expenses, bills receivable accrued income are also included in

current assets.

Current liabilities include creditor’s bills payable, accrued expenses, short term

bank loan, income tax liability and long debt maturing in current year.

Quick ratio or acid-test ratio

Quick ratio established a relationship between quick or liquid assets and current

liabilities. The quick ratio is found out by dividing quick assets by current liabilities.

Quick assets includes assets which can be converted into cash immediately

without a loss of value such as cash and bank balance, book debts (debtors and bills

receivables) and marketable securities (temporary quoted investments). Inventories are

not included in quick assets because they require time for converting into cash and also

their value may fluctuate. Quick Ratio = Current Assets – Inventories / Current

Liabilities.

Cash ratio

Cash ratio establishes a relationship between cash and cash equalent and

current liabilities. To get the cash ratio only absolute liquid assets and readily

realizable securities are taken into consideration. A cash ratio of 0.5 to 1 is considered

as satisfactory.

Cash ratio= cash & bank + marketable securities/current liabilities


Ratio Analysis

Net working capital ratio

Working capital ratio is the difference between the current assets and

current liabilities. The amount of working capital in some times used as a measure of

the firms liquidity. It is considered that if a firm has more working capital ratios has

the greater ability to meet its current obligations.

Working capital ratio= current assets-current liabilities / net asset

2. Leverage ratios

The process of magnifying the shareholder’s return through

the employment of debt is called “trading on equity”. To judge the long term financial

position of the firm, financial leverage or capital structure ratios are calculated. The ratios

indicate funds provided by owners and lenders. As a general rule there should be

appropriate mix of debt and owners equity in financing the firm’s assets.

The use of debt magnifies the shareholders’ earning as well as increases their

risk and firm’s ability of using debt for the benefit of shareholder. Basically these are

prepares to know the extent which operating profits are sufficient to cover the fixed

charges.

The following are the some of the important leverage ratios:

Debt-equity ratio

The debt equity ratio is an important tool of financial analysis to appraise the

financial structure of a firm. Debt equity ratio is the measure of relative claims of

creditors and owners the firm’s assets. So it has an important implication form the

creditor and owners point of view of the firm.


Ratio Analysis

The debt equity ratio cab be calculated by dividing total debt by net worth.

Debt Equity Ratio = Total Debt / Net worth.

Total-debt ratio

The total debt ratio can be calculated by dividing total debt by capital

employed or total net assets. The total debt will include short and long term borrowings

from financial institutions. Capital employed will include total debt and net worth or net

assets consists of net fixed (long term) assets minus current liabilities excluding interest

bearing short term debt. Total Debt Ratio= Total Debt/capital employed

Capital employed to net worth ratio or Equity ratio

The ratio can be calculated by dividing capital employed

or net assets by net worthy. Network includes share capital and reserves and surplus.

Generally, capital employed or net assets to net worth ratio should be more than one.

Capital employed of NA = capital employed / Net worth

3. Activity ratios

The funds of creditors and owners are invested in various assets to generate sales

and profits, the better assets management, the large amount of sales. Activity ratios are

employed to evaluate the efficiency with which the firm manages and utilizes its assets.

These ratios are also called as turnover ratios, because they indicate the speed with which

assets are being converted or turned into sales.

The following are the important activity ratios, which will evaluate the efficiency of

the firm:


Ratio Analysis

Inventory turnover ratio

This ratio indicates the efficiency of the firm in selling its product and also

shows how rapidly the inventory is turning into receivables through sales.

The ratio is calculated by dividing the cost of goods sold by the average

inventory. Cost of goods sold is sales- gross profit of purchases + direct expenses+

opening stock+ manufacturing expenses – closing stock. Average inventory is the

average of opening and closing balances of inventory.

Generally a high inventory turnovers indicative of good inventory management

and a low inventory turnover suggests an inefficient inventory management. Further a

low inventory turnover implies excessive inventory levels than warranted by production

and sales activities, or a slow moving of obsolete inventory, a high level of sluggish

inventory amounts to unnecessary tie up of funds, reduced profit and increased costs.

Therefore a balance should be maintained between too high and too low inventory

turnovers.

Inventory Turnover Ratio = Cost of goods sold / Average Stock.

Working capital turnover ratio

The ratio show the firm is able to generate sales by using its limited

resources of working capital. The firm may also take the ratio relating to net current

assets to sales. If the ratio is more it indicates efficient working capital management and

if it is less we can say it is inefficient in working capital management.

The networking capital turnover ratio can be computed by dividing sales by

networking capital. Working capital is current assets minus current liabilities.

Working Capital Turnover = Sales / Net Working capital.


Ratio Analysis

Debtors turnover ratio

A firm sells goods for cash and credit bases, when the firm extends credits to its

customers, book debts (debtors or receivables) are created the firms account and they are

expected to be converted into cash over a short period of time, so these are included in

current assets. The liquidity of the firm depends on the quality of debtors to great extent.

To judge the quality of liquidity of debtors, we have to calculate the debt turnover ratio

and average collection period.

The debt turnover ratio is calculated by dividing credit sales by average debtors.

When the information regarding credit sales and opening and closing balance of debtors

may not be available, then debtor turnover ratio can be calculated by dividing total sales

by the yearend balance of debtors.

Generally the higher the value of debtor’s turnover, the more efficient is the

management of credit.

Average collection period is calculated to know the nature of the firm’s credit

policy and the quality of the debtors more clearly. It can be calculated by days in a year

divided by debtors turnover of debtors by sales multiplied by 360 days.

The shorter the average collection period, the better the quality of debtors, as a

short collection period implies the prompt payment by debtors.

Debtors turnover ratio = sales/debtors


Ratio Analysis

Debtors Collection period

The average number of days for which debtors remain outstanding is

called the average collection and can be computed as follows:

Debtors collection period = no. of days in a year / debtors turn over ratio

(or)

Avg debtors /sales*365

The less collection period leads to the worthiness of the debtors.

4. Profitability ratios

Profit is the difference between revenues and expenses over a period of

time (usually one year). Profit is the ultimate output of a company, and it will have no

future if it fails to make sufficient profits. Therefore, the financial manager should

continuously evaluate the efficiency of the company in term of profits.

The profitability ratios are calculated to measure the operating efficiency of

the company. Besides management of the company, owners are also interested in the

profitability of the firm. Creditors want to get interest and repayment of principal

regularly. Owners want to get a required rate of return on their investment. This is

possible only when the company earns enough profits. The following are the some of the

important profitability ratios:

Gross profit ratio

It is the first profitability ratio calculated in relation to sales. This ratio can

be called as gross profit margin of gross margin ratio. This ratio establishes a relationship

between gross profit and sales to measure the efficiency of the firm and it reflects its

pricing policy.


Ratio Analysis

The ratio is calculated by dividing the gross profit by sales. A high gross profit

margin indicates that the firm is able to produce at relatively lower cost and it is also a

sigh of good management.

Whereas as a low gross profit margin reflects a higher cost of goods sold

due to the firm’s inefficient management.

Gross Profit Margin = Gross Profit / Sales * 100

Net profit ratio

Net Profit Margin Ratio establishes a relationship between net

profit and sales of the firm. It indicates the management’s ability to earn sufficient profit

on sales to cover all operating expenses, the cost of merchandising of servicing and also

should have a sufficient margin to pay reasonable compensation to shareholders. A high

ratio shows better and low ratio shows the opposite.

The net profit is calculated by dividing the net profit after tax by sales, N.P. is

obtained when operating expenses, interest and taxes are deducted from gross profit.

Net Profit Ratio = profit after tax / sales * 100

Operating profit ratio

The operating profit can be calculated by dividing operating profit by net sales.

The operating profits includes net profit = non operating expenses (interest to be paid,

income tax, loss on sale of assets) minus non operating income (interest on dividend,

profit on sale of asset) or gross profit minus operating expenses (administrative and

selling expenses). Operating profit ratio = operating profit / net sales.


Ratio Analysis

RESEARCH & METHODOLOGY

4.1 NEED FOR THE STUDY

Ratio analysis is a powerful tool of financial analysis. Financial analysis is the

process of determining strength and weakness of the industry establishing a strategic

relationship between the components of balance sheet and profit and loss account.

Financial performance evaluation has great influences on the development and progress

of the industry.

4.2 OBJECTIVES

To know the financial position of the ZUARI CEMENT Ltd.

To study the liquidity position of ZUARI CEMENT Ltd.

To Analyze the profitability, of ZUARI CEMENT Ltd.

To suggest a better way if any for the business growth.

4.3 Methodology

• Source of data

The study is purely based on the secondary data. The data of zuari cement

limited for the year 2005 to 2009 is used in this study. The secondary data has been

collected from the profit and loss account, balance sheet of zuari cement limited.


Ratio Analysis

Financial tools

Ratio analysis.

Period of study

5 year annual reports are used that is 2005 to 2009.

4.4 SCOPE OF THE STUDY

The purpose of the study was to know the financial performance of the unit. For

this the ratio analysis tool was most suitable. This would reveal the solvency position of

the unit. The trend of sales and profitability for the past 5 years was calculated to know if

any deviation occurred and to know the reasons for it. However the study hard its own

limitation like ratio analysis is a post-mortem analysis and the data utilized were

secondary in nature etc. The scope of the present study is limited to the following aspects.

4.5 LIMITATIONS OF THE STUDY

• The study is based on the information provided by the organization in the form of

various annual reports.

• Detailed analysis could not be carried for the project work because of the limited

time span.

• Less scope of gathering data

• The analysis was confined to Zuari cement ltd. Only


Ratio Analysis

5.1 LIQUIDITY RATIOS

Current ratio

Current ratio is calculated by dividing the current assets by current liabilities.

Current assets include cash and those assets that can be converted into cash within a

year , such as marketable securities , debtors and inventories .prepaid expenses also

includes in current assets .current liabilities include creditors , bills payable , arrived

expenses , short term bank loan , income tax liability and long term debt maturing in the

current year.

Current ratio represents a margin of safety for creditors. Current ratio of 2 to 1 or

more is considered satisfactory. The higher the current ratio the greater the margin of

safety. The larger the amount of current assets in ratio to current liabilities the more the

firms ability to meet its current obligations.

Current assets

Current ratio= -------------------------

Current liabilities

Table 5.1.1 current ratio


Year Current assets (Rs in lakhs)

Current liabilities (Rs in lakhs)

Current ratio ( in times )

2004-05 8879.5 3877.84 2.29

2005-06 8167.5 3509.59 2.33

2006-07 10725.94 3922.48 2.73

2007-08 27336.1 14506.15 1.88

2008-09 24288.00 25214.04 0.96

PercentageCurrent ratio

2.29 2.33

2.73

1.88

0.96

0

0.5

1

1.5

2

2.5

3

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

Years

Ratio Analysis

Chart 5.1.1

INFERENCE

The Ratio is above standard ratio (2:1) all years i.e. 2004-05 to 2008- 09 Ratios:

2.29, 2.33 , 2.73, 1.88, and 0.96 respectively.


Ratio Analysis

Quick ratio

Establishes a relationship between quick or liquid, Assets and liabilities. An asset is a

Liquid if it can be converted into cash immediately. Inventories are considered to be less

liquid. The quick ratio is found out by dividing quick assets by current liabilities. A quick

ratio of 1to1 is considered to represent a satisfactory current financial condition.

Current assets-inventories

Quick ratio= -------------------------------------

Current liabilities

Table 5.1.2 Quick ratio


Year Quick assets (Rs in lakhs)


Quick ratio ( in times )

2004-05 6597.58 3877.84 1.70

2005-06 5664.30 3509.59 1.61

2006-07 7611.37 3922.48 1.94

2007-08 23365.09 14506.15 1.61

2008-09 18216.65 25214.04 0.72

PercentageQuick ratio

1.7 1.61

1.94

1.61

0.72

0

0.5

1

1.5

2

2.5

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

Years

Ratio Analysis

Chart 5.1.2

INFERENCE

The Ratio is above standard ratio (1:1) all years i.e. 2003-04 to 2007- 08 Ratios:

1.7:1, 1.6:1, 1.0:1, 1.6:1, and 0.7:1 respectively.


Ratio Analysis

Cash ratio

Cash is the most liquid asset. A financial analyst may examine cash ratio and its

Equivalent to current liabilities. Trade investment or marketable securities are

Equivalent of cash. The standard ratio is 0.5:1or 50:100(%).

Cash & bank + marketable securities

Cash ratio= -------------------------------------------------------

Current liabilities

Table 5.1.3 cash ratio


Year Cash & bank (Rs in lakhs)


Cash ratio ( in times )

2004-05 1716.40 3877.84 0.44

2005-06 1290.71 3509.59 0.37

2006-07 1383.35 3922.48 0.35

2007-08 12012.16 14506.15 0.83

2008-09 4773.47 25214.04 0.18

Cash ratio

0.440.37 0.35

0.83

0.18

00.1

0.20.3

0.40.5

0.60.7

0.80.9

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

Years

Percentage

Ratio Analysis

Chart 5.1.3

INFERENCE

The Ratio is above standard ratio (0.5:1) all years i.e. 2003-04 to 2007- 08 Ratios:

0.44, 0.37, 0.35, 0.83 and 0.18 respectively


Ratio Analysis

Networking capital ratio

The difference between current assets and current liabilities excluding short-term bank

barrowing is collected net working capital or net current assets. Net working capital ratio

is some times used as measure of a firm’s liquidity. It is considered that between two

firms. The one having the larger networking capital has the greater ability to meet its

current obligations.

The ratio is calculated as:

Net working capital= current assets-current liabilities

Net assets= fixed assets + current assets

Net working capital

Net working capital ratio= ----------------------------

Net assets

Table 5.1.4 Net working capital ratio


Year Net working capital (Rs in lakhs)

Net assets (Rs in lakhs)

Net working capital ratio ( in times )

2004-05 5001.66 45357.34 0.11

2005-06 4657.91 42070.25 0.11

2006-07 6803.46 42684.40 0.16

2007-08 12829.95 107415.94 0.12

2008-09 926.04 150822.72 0.01

Net working capital ratio

0.11 0.11

0.16

0.12

0.01

00.02

0.040.06

0.080.1

0.120.14

0.160.18

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

Per

cent

age

Ratio Analysis

Chart 5.1.4

INFERENCE

Net working capital ratio is sometimes used as a measure of firm’s liquidity.

During the period from 2003-04 to 2007-08 the ratios are 0.11, 0.11, 0.16, 0.12, 0.01.


Ratio Analysis

5.2 LEVERAGE RATIOS

Financial leverage refers to the use of debt finance ratios help in assessing

the risk arising from the use of debt capital. To judge the long-term financial position of

the firm, financial leverage ratios are calculated. The ratios indicate mix of funds

provided by owners and lenders.

Debt equity ratio

Several debt equity ratios are utilized to analyze the out siders funds of a firm. And the total shareholders fund

Total debt

Debt equity ratio= ---------------------------

Net worth

Total debt = secured loans + unsecured loans

Net worth = share capital + reserves and surplus

Table 5.2.1 Debt equity ratio

Year Total debt (Rs in lakhs)

Net worth (Rs in lakhs)

Debit equity ratio ( in times )

2004-05 28089.02 64698.07 0.43

2005-06 27198.47 64698.07 0.42

2006-07 25198.62 64698.07 0.39

2007-08 16454.93 80846.56 0.20


Debit equity ratio

0.43 0.420.39

0.20.25

00.05

0.10.15

0.20.25

0.30.35

0.40.45

0.5

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

Years

P er ce nt ag e

Ratio Analysis 2008-09 24948.24 100619.28 0.25

Chart 5.2.1

INFERENCE

The debt equity ratio has been decreased from 0.43 in 2003-04 to 0.25 in 2007-08.

This is due to decrease in debt funds. It is good sign for the company.


Ratio Analysis

Total debt ratio The debt-equity ratio is determined to ascertain the soundness of the long term financial policies of the company. It is also known as external internal equity ratio.

Total debt = secured loans + unsecured loans

Capital employed = share capital + reserves and surplus + total debt

Total debt

Total debt ratio = -------------------------

Capital employed

Table 5.2.2 Total debt ratio

Year Total debt (Rs in lakhs)

Capital employed (Rs in lakhs)

Total debt ratio ( in times )

2004-05 28089.02 92787.09 0.30

2005-06 27198.47 91896.54 0.30

2006-07 25198.62 89896.69 0.28

2007-08 16454.93 97301.49 0.17

2008-09 24948.24 125567.52 0.20


Total debt ratio

0.3 0.30.28

0.170.2

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

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

Years

P er ce nt ag e

Ratio Analysis

Chart 5.2.2

INFERENCE

The total debt ratio has been decreased from 0.30 in 2003-04 to 0.20 in 2007-

08. This is due to decrease in debt funds. It represents the company having low debt ratio.

So, the company is flexible in the firms operation.


Ratio Analysis

Capital employed to net worth ratio /equity

The ratio can be calculated by dividing capital employed or net assets by net

worthy. Network includes share capital and reserves and surplus. Generally,

capital employed or net assets to net worth ratio should be more than one.

Capital employed

Equity ratio = --------------------------

Net worth

Capital employed = share capital + reserves and surplus + total debt

Net worth = share capital + reserves and surplus

Table 5.2.3 Capital employed to net worth ratio

Year Capital employed (Rs in lakhs)

Net worth (Rs in lakhs)

Capital employed to net worth ratio ( in times )

2004-05 92787.09 64698.07 1.43

2005-06 91896.54 64698.07 1.42

2006-07 89896.69 64698.07 1.39

2007-08 97301.49 80846.56 1.20

2008-09 125567.52 100619.28 1.25


Capital employed to net worth ratio1.43 1.42

1.39

1.2

1.25

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

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

P er ce nt ag e

Ratio Analysis

Chart 5.2.3

INFERENCE

The capital employed to net worth ratio has been decreased from 1.43 in

2003-04 to 1.25 in 2007-08. This is due to decrease in debt funds.


Ratio Analysis

5.3 ACTIVITY RATIOS

Activity ratios are employed to evaluate the efficiency with which the firm

manages and utilizes its assets. These ratios are also called Turnover ratios. Because they

indicate the speed with assets are being converted into sales.


Inventory turnover ratio is a measure of liquidity. It indicates the

speed at which the inventory is sold out. A high turnover ratio indicates that the

inventory is out Fast and a low turnover ratio show a sale of inventory. This ratio

indicates the efficiency of the firm in selling its products.

Cost of goods sold

Inventory turnover ratio = ---------------------------------

Average inventory

Cost of goods sold = sales – gross profit

Average inventory = opening stock + closing stock / 2



10.25

12.22

6.24

10.549.24

0

2

4

6

8

10

12

14

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

P er ce nt ag e

Ratio Analysis

Table 5.3.1 Inventory turn over ratio

Year Cost of goods sold (Rs in lakhs)

Inventory (Rs in lakhs)

Inventory turnover ratio ( in times )

2004-05 25509.56 2487.69 10.25

2005-06 29237.39 2392.56 12.22

2006-07 16825.32 2696.36 6.24

2007-08 36172.58 3430.26 10.54

2008-09 46374.89 5021.18 9.24

Chart 5.3.1

INFERENCE

The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 10.25, 12.22, 6.24, 10.54

and 9.24 respectively.


Ratio Analysis

Working capital turn over ratio

In this ratio numerator is sales and denominator is net working

capital. It shows how many times net working capital goes into sales. Higher the

ratio, the lower the investment tied in working capital and vice versa. Very high

working capital turnover is not desirable, since it pushes the enterprise into financial

stracts. Lower magnitude of the ratio is a reflection of low utilization of working

capital.

Sales Working capital turnover ratio = ------------------------------------- Working Capital

Net working capital = total current assets – total current liabilities

Table 5.3.2 Working capital turnover ratio

Year Sales (Rs in lakhs)

Net working capital (Rs in lakhs)

Working capital turnover ratio ( in times )

2004-05 29021.15 5001.66 5.80

2005-06 32605.16 4657.97 7.00

2006-07 41516.72 3187.96 13.02

2007-08 99378.92 12829.95 7.75

2008-09 117521.84 926.04 126.90


Working capital turnover ratio

5.8 7 13.02 7.75

126.9

0

20

40

60

80

100

120

140

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

Years

P er ce nt ag e

Ratio Analysis

Chart 5.3.2

INFERENCE

The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 5.80, 7.00, 13.02, 7.75



Ratio Analysis

Debtor’s turnover ratio

It indicates the number of times debtor’s turnover each year. If it is high that

indicates the effectiveness of management in collecting debts. Generally, the higher the

value of debtor’s turnover, the more efficient is the management of credit.

Sales

Debtors turnover ratio = -----------------------

Average debtors

Table 5.3.3 Debtors turn over ratio

Year Sales (Rs in lakhs)

Debtors (Rs in lakhs)

debtors turnover ratio ( in times )

2004-05 29021.15 3109.72 9.33

2005-06 32605.16 2467.39 13.21

2006-07 39689.62 943.79 42.05

2007-08 99378.92 2531.00 39.26

2008-09 117521.84 2640.09 44.51



9.3313.21

42.0539.26

44.51

0

10

20

30

40

50

2004-05 2005-06 200-07 2007-08 2008-08

Year

P er ce nt ag e

Ratio Analysis

Chart 5.3.3

INFERENCE

The Ratios OF all years i.e. 2003-04 to 2007- 08 Ratios: 9.33, 13.21, 42.05, 39.26



Ratio Analysis

Debtors collection period

Debtors collection period indicates the speed of the collection

of debts by the firm. If the firm is collecting the debts in time then that will good for the

firm. The shorter collection period is the better quality of debtors.

No. Of days in a year (360)

Debtors collection period = --------------------------------------


(or)

Average debtors / credit sales*365

Table 5.3.4 Debtors collection period

Year Credit sales (Rs in lakhs)

Debtors (Rs in lakhs)

Debtors collection period (in days)

2004-05 29021.15 3109.72 39

2005-06 32605.16 2467.39 27

2006-07 39689.62 943.79 9

2007-08 99378.32 2531.00 10

2008-09 117521.84 2640.09 8


Debtor’s collection period (day)

39

27

9 10 8

0

5

10

15

20

25

30

35

40

45

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

Year

P er ce nt ag e

Ratio Analysis

Chart 5.3.4

INFERENCE

The days of all years i.e. 2003-04 to 2007- 08 days: 39, 27, 9, 10and 8

respectively


Ratio Analysis

5.4 PROFITABILITY RATIOS

Profitability ratios are calculated to measure the operating efficiency of the

company. Besides management of the company, creditors and owners are also interested

in the profitability of the firm.

Creditors want to get interest and repayment of principal regularly. Owners want to get a

required rate of return on their investment. This is possible only when the company earns

enough profits.

Generally two major types of profitability ratios.

Profitability in relation to sales.

Profitability in relation to investment.

Gross profit ratio

The gross profit ratio indicates the extent to which sales of goods per unit

may decline with out May loss in the operations of the firm. This is also known as

“Gross profit margin” (or) Gross profit margin on sales. The gross profit is the

difference between sales and cost of goods sold.

Gross profit (sales-cost of goods sold)

Gross profit ratio = ___________________________ x 100

Net sales


Gross profit ratio

45.3941.06

47.3

63.6 60.54

0

10

20

30

40

50

60

70

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

Year

Pe

rc en ta ge

Ratio Analysis

Table 5.4.1 Gross profit ratio

Year Gross profits (Rs in lakhs)

Net sales (Rs in lakhs)

Gross profit ratio ( in times )

2004-05 13172.03 29021.15 45.39

2005-06 13369.03 32605.16 41.06

2006-07 18776.27 39689.62 47.30

2007-08 63206.34 99378.92 63.60

2008-09 71146.95 117521.84 60.54

Chart 5.4.1

INFERENCE

The ratio of all years i.e. 2003-04 to 2007-08 ratios 45.39, 41.06, 47.30,

63.60, 60.54 respectively.


Ratio Analysis

Net profit margin ratio

Net profit is obtained when operating expenses; Interest and taxes

are subtracted from the gross profit. The net profit margin ratio is measured by dividing

profit after tax by sales. The ratio also indicates the firm’s capacity to withstand adverse

economic conditions.

Net profit

Net profit margin ratio = ---------------------- x 100

Net sales

Table 5.4.2 Net profit ratio

Year Net profit (Rs in lakhs)


Net profit ratio ( in times )

2004-05 -2747.91 29021.15 -9.47

2005-06 -2104.92 32605.16 -6.46

2006-07 2265.11 39689.62 5.71

2007-08 18057.74 99378.92 18.17

2008-09 19772.72 117521.84 16.82


Net profit ratio

-9.47-6.46

5.71

18.17 16.82

-15

-10

-5

0

5

10

15

20

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

Year

P er ce nt ag e

Ratio Analysis

Chart 5.4.2

INFERENCE

The first two years the ratios are -9.47, -6.46. After three years the ratios are 5.71,

18.17, 16.82. The net profit ratio of the company is in increased trend. It shows that the

net profit is increasing year by year.



-0.12 -0.59

31.61

61.68 64.15

-10

0

10

20

30

40

50

60

70

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

Years

Pe

rc en ta ge

Ratio Analysis


This ratio establishes the relationship between operating profit and sales.

Operating profit

Operating profit ratio = --------------------------------- x 100

Net sales

Table 5.4.3 Operating profit ratio

Year Operating profit (Rs in lakhs)


Operating profit ratio ( in times )

2004-05 -35.05 29021.15 -0.12

2005-06 -190.94 32605.16 -0.59

2006-07 13883.70 43921.16 31.61

2007-08 61291.86 99378.92 61.68

2008-09 75391.89 117521.84 64.15

Chart 5.4.3


Ratio Analysis INFERENCE

The operating profit ratio has been increasing from -0.12 in 2003-04 to 64.15 in

2007-08. This is due to increase in operating profit.

6.1 FINDINGS

During the study period, the current ratio of the company in the first 3 years

was above the standard norm 2:1. But from the year 2007-08, it started

decreasing and reached to 0.96 in 2008-09.

In the year 2009, the Quick ratio was decreased to 0.72 from 1.61 times in

2007-08 due to decrease in the cash balance. It was also decreased from 1.94

in 2006-07 to 1.61 in 2007-08. Even in 2005-06, it was decreased to 1.61 from

1.70 in 2004-05.

The standard cash ratio is 0.5:1. In the years 2009, 2007, 2006, and 2005 were

0.18, 0.35, 0.37, and 0.44 were below standard. But in the year 2007-08 the

company maintained standard cash ratio.

The Net working capital ratio was 0.11 in the years 2005, 2006. In subsequent

years 2007, 2008 and 2009 it was 0.16, 0.12, and 0.01 respectively. It means

that company was not in a position to meet its current obligations.

The debt equity ratio was 0.43 in 2004-05 and 0.42 in 2005-06. But in later

years it decreased to 0.39 in 2006-07 and to 0.17 in 2007-08. But it was

increased to 0.20 in 2008-09.


Ratio Analysis Total debt ratio has been decreased from 0.30 in 2004-05 to 0.20 in 2008-09.

This is due to decrease in debt funds.

The capital employed to net wroth ratio was decreased continuously from 1.43

in 2005-06 to 1.25 in 2008-09. This is due to increase in debt funds.

Except in 2005-06, the inventory turn over ratio decreased from 10.25 times in

2004-05 to 9.24 in 2008-09. In 2005-06, it was 12.22.

Debtors turn over ratio of the firm for the year 2005 to 2009 was increased

continuously from 9.33 in 2004-05 to 44.51 in 2008-09.

Debtors collection period of the firm. In the year 2009 from 39, 27 and 10

(days) in 2005, 2006, and 2008 years. That means the company collection

period is good.

Gross profit ratio was 45.39 in the year 2005. In subsequent years 2005 to

2009, it was 41.06, 47.30, 63.60 and 60.54 respectively.

Net profit ratio was -9.47 in the year 2005. In later years 2006 to 2009, it was

-6.46, 5.71, 18.17 and 16.82 respectively. The ratios are in increasing trend.

The varies between from -9.46 to 16.82.


Ratio Analysis

6.2 SUGGESTIONS

• The company should maintain current assets to improve the liquidity position of

the company.

• The debt equity ratio is to be improved as the low debt equity implies a greater

claim of owners than creditors.

• The company shall reduce its selling and distribution expenses which lead to

increase the profitability of the company.

• Debtor’s turnover ratio was too high due to increased sales, Hence the company is

suggested to take precaution to avoid bad debts.


Ratio Analysis

CONCLUSION

This study reveals that the over all the performance of the Zuari

cement ltd was not satisfactory. The financial position of the company should be

fluctuating years. And the company should take necessary steps in order to improve the

liquidity and profitability positions.


Ratio Analysis

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2005

SLNO PARTICULARS AMOUNT Rs in lakhs

1. INCOMES Sales(GROSS) 35851.44 LESS: excise duty 6830.29 Sales(net) 29021.15 Other income 236.60

29257.752. EXPENDITURE

Purchase of finished goods for resale 155.08Manufacturing and other expenses 25591.08Depreciation 2850.33Interest and other finance charges 2949.46Decrease in stocks of work-in-process and finished goods

459.71

32005.66


Ratio Analysis Loss before extraordinary item 2747.91Loss for the year 2747.91Debit balance brought forward from previous year

11756.35

Debit balance carried to balance sheet 14504.26

BALANCE SHEET AS ON 31st MARCH, 2005

SNO PARTICULARS AMOUNT Rs in lakhs

AMOUNT Rs in lakhs

1. SOURCES OF FUNDS: Share holders funds: Share capital 42796.14 Reserves and surplus 21901.93 64698.07 Loans funds : Secured loans 19018.51 Unsecured loans 9070.51 28089.02 TOTAL 92789.09

2. APPLICATION OF FUNDS: fixed assets: Gross block 53331.74 (-) depreciation 16982.13 Net block 36349.61 Capital work-in-progress 128.23 36477.84 Investments 36525.14


Ratio Analysis Current assets Inventories 2281.92 Sundry debtors 3109.72 Cash and bank balances 1716.40 Loans and advances 1771.46

8879.50(-)current liabilities and Provisions current liabilities 3827.41 Provisions 50.43

3877.84 Net current assets 5001.66 miscellaneous expenditure 278.19 profit and loss account 14504.26 TOTAL 92787.09

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH,2006

SLNO PARTICULARS AMOUNT Rs in lakhs

1. INCOMES Sales(GROSS) 39889.16 LESS: excise duty 7284.81 Sales(net) 32605.16 Other income 419.40

33024.562. EXPENDITURE

Purchase of finished goods for resale 1574.49Manufacturing and other expenses 28082.30Depreciation 2839.05Interest and other finance charges 2333.38Decrease in stocks of work-in-process and finished goods

92.77


Ratio Analysis 34921.99

Loss before Extraordinary item (for employees) 2104.86

Loss for the year 2104.92Debit balance brought forward from previous year

14504.26

Debit balance carried to balance sheet 16609.18



AMOUNT Rs in lakhs

1. SOURCES OF FUNDS: Share holders funds: Share capital 42796.14 Reserves and surplus 21901.93 64698.07 Loans funds : Secured loans 17431.03 Unsecured loans 9767.41 27198.44 TOTAL 91896.51

2. APPLICATION OF FUNDS: fixed assets: Gross block 53350.07 (-) depreciation 19787.74 Net block 33762.33 Capital work-in-progress 140.42 33902.75


Ratio Analysis investments 36557.57 Current assets Inventories 2503.20 Sundry debtors 2467.39 Cash and bank balances 1290.71 Loans and advances 1906.20

8167.50(-)current liabilities and Provisions current liabilities 3381.60 Provisions 127.90

3509.59 Net current assets 4657.91 miscellaneous expenditure 169.10 profit and loss account 16609.18 TOTAL 91896.51

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH,2007


1. INCOME Sale of manufactured goods 47905.48(-)excise duty 6388.76

41516.72 Sale of traded goods 2404.44 Other income 432.61

44353.77 2. Expenditure

Cost of goods sold 16825.32 Personnel cost 1777.20 Other expenses 9234.53 Depreciation 2200.41 Amortization of good will -


Ratio Analysis Interest and other finance cost 871.49

30908.95 Profit before tax 13444.82 Provision for tax Current tax 982.00 MAT credit of earlier years - MAT credit for the year - Fringe benefit tax 28.00 Deferred tax charge - Profit for the year 12434.82Debit balance in profit and loss a/c brought forward 14344.07 Balance in profit and loss a/c carried forward 1909.25



1. SOURCES OF FUNDS shareholders funds: Share capital 42796.14 Reserves and surplus 21901.93

64698.07

Loan funds Secured loans 6760.49 Un secured loans 8943.65Deferred tax liability(net) - TOTAL

80402.212. APPLICATION OF FUNDS


Ratio Analysis Fixed assets Gross block 53811.03 (-)accumulated depreciation 24043.25 Net block 29.767.78 Capital work-in-progress 3453.60

33221.38 Investments 42083.62Current assets, loan and advances inventories 2889.51 Sundry debtors 1866.11 Cash and bank balances 1576.48 Loans and advances 3442.81

9774.91 Current liabilities and provisions Current liabilities 6020.09 provisions 566.95 6586.95 Net current assets 3187.96 Debit balance in profit and loss account 1909.25

TOTAL 80402.21

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2008


1. INCOME Sale of manufactured goods 116900.24(-)excise duty 17521.32

99378.32 Sale of traded goods - Other income 1832.29


Cost of goods sold 36172.58 Personnel cost 3604.81 Other expenses 25119.28 Depreciation 5204.23 Amortization of good will 1799.20 Interest and other finance cost 950.93


Ratio Analysis 72851.03

Profit before tax 28360.18 Provision for tax Current tax 6542.84 MAT credit of earlier years 982.00 MAT credit for the year 713.59 Fringe benefit tax 115.83 Deferred tax charge 5339.36 Profit for the year 18057.36Debit balance in profit and loss a/c brought forward 1909.25 Balance in profit and loss a/c carried forward 16148.49




80846.56

Loan funds Secured loans 4168.45 Un secured loans 12286.48Deferred tax liability(net) 5659.36 TOTAL


Fixed assets


Ratio Analysis Gross block 89683.71 (-)accumulated depreciation 29850.93 Net block 59832.78 Capital work-in-progress 20247.06


27336.10 Current liabilities and provisions Current liabilities 13132.52 provisions 1373.63 14506.15 Net current assets 12829.95 Debit balance in profit and loss account -

TOTAL 102960.85


Ratio Analysis PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2009


1. INCOME Sale of manufactured goods, gross 137728.95(-)excise duty 20207.11

Sale of traded goods 117521.84 Other income 1807.18


Cost of goods sold 46374.89 Personnel cost 4030.09 Other expenses 29017.00 Depreciation 5377.68 Amortization of good will 1799.20 Interest 534.19

87133.05 Profit before tax 32195.97 Provision for tax Current tax 12881.45 MAT credit of earlier years - MAT credit for the year - Fringe benefit tax 60.00 Deferred tax(credit)/ charge 518.20 Profit after tax 19772.72 Balance in profit and loss a/c brought forward 16148.49 Balance in profit and loss a/c carried forward 35921.21


Ratio Analysis




100619.28

Loan funds Secured loans 10342.31 Un secured loans 14605.93Deferred tax liability(net) 5141.16 TOTAL


Fixed assets Gross block 91539.87 (-)accumulated depreciation 36353.10 Net block 55186.77 Capital work-in-progress 71347.95


24288.00 Current liabilities and provisions Current liabilities 22479.86 provisions 2734.18 25214.04 Net current assets 926.04 Debit balance in profit and loss account -

TOTAL 130708.68


Ratio Analysis BIBLIOGRAPHY

JAMES C.VANN HORNE, “Financial Management”, 9th edition Prentice – Hall

of India Private Limited, New Delhi, 1994.

KHAN M.Y. & JAIN P.K, “Financial Management”, 2nd Edition Tata Mc. Graw-

Hill Publishing Co. Ltd., New Delhi.

PANDEY I.M., “Financial Management”, 7th Edition, Vikas Publishing House

Pvt. Ltd., New Delhi, 1995.

KOTHARI C.R.,” Research Methodology”, 2nd Edition, Wishwa Prakasham, New

Delhi, 1990.

MAHESWARI S.N., “Financial Management”, 4th Edition, Sultan Chand & Sons,

New Delhi. 1997.

PRASANNA CHANDRA., ”Financial Management”, 3rd Edition, Tata McGraw-

Hill Publishing Co., Ltd., New Delhi, 1984.

WEBSITE BROWSED

www.google.com

www.zuaricementltd.com


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Ratio Analysis