Ratio Analysis

PROJECT REPORT

ON

“RATIO ANALYSIS”

SUBMITTED BY:-

STELLA BALASUBRAMANIAM

ROLL NO: - 46

MASTER OF COMMERCE (PART-II)

ADVANCED FINANCIAL MANAGEMENT

(SEM-III)

2015-2016

PROJECT GUIDE:-

PROF.NEELAM SHAIKH

K.G JOSHI COLLEGE OF ARTS & N.G.BEDEKAR

COLLEGE OF COMMERCE.

1

VIDYA PRASARAK MANDAL, THANE

K. G. JOSHI COLLEGE OF ARTS &

N. G. BEDEKAR COLLEGE OF COMMERCE

CERTIFICATE

OF

PROJECT WORK

This is certify that Mr. / Ms. This is certify that Mr. / Ms. STELLA BALASUBRAMANIAMSTELLA BALASUBRAMANIAM Of Of

M.Com. (Advanced Accountancy) Part.: II, Semester: 3rd Roll No. : 46, hasM.Com. (Advanced Accountancy) Part.: II, Semester: 3rd Roll No. : 46, has

undertaken & completed the project work titled undertaken & completed the project work titled “RATIO ANALYSIS”.“RATIO ANALYSIS”. During the During the

academic year 2014-2015.academic year 2014-2015.

Under the guidance of Mr. / Ms. Prof.Under the guidance of Mr. / Ms. Prof.NEELAM SHAIKH.NEELAM SHAIKH.

Submitted on _____________ to this college in fulfillment of the curriculumSubmitted on _____________ to this college in fulfillment of the curriculum

of of MASTER OF COMMERCE ( ADVANCED ACCOUNTANCY ) MASTER OF COMMERCE ( ADVANCED ACCOUNTANCY )

UNIVERSITY OF MUMBAI.UNIVERSITY OF MUMBAI.

This is a bonafide project work & the information presented is True &This is a bonafide project work & the information presented is True &

original to the best of our knowledge and belief .original to the best of our knowledge and belief .

PROJECT GUIDE EXTERNAL EXAMINERPROJECT GUIDE EXTERNAL EXAMINER

2

DECLARATION:-

I Ms. STELLA BALASUBRAMANIAM student of K.G. JOSHI COLLEGE

OF ARTS & N.G.BEDEKAR COLLEGE OF COMMERCE. (SEM-III,) HERE

BY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON “RATIO

ANALYSIS” in the academic year 2015-2016.

The information submitted is true and original to the best of my knowledge.

DATE:-

Student signature

STELLA BALASUBRAMANIAM

PLACE: - THANE

3

ACKNOWLEDGEMENT:-

I express my grateful thanks’ to project guide Prof. NEELAM SHAIKH

For her timely guidance and help rendered at every stage of the project work.

I would also like to thank my friends who were also a great support while

working on the project.

I also wish to express my regards to the librarian for her co-operation in

providing me with necessary reference materials.

I also express my thanks to faculty members and for co-operation and

help given in completing this project.

S

4

INDEX:-

Sr.

NumberParticulars

Page

Number

1 Executive Summary

2 Overview of Indian Paint Industry

3 Company profile

4 Need for the study

5 Objective of study

6 Research Methodology

7 Introduction to Ratio Analysis

8 Data collection and Interpretation

9 Findings

10 Suggestions and Conclusion

11 Limitations

Bibliography

5

COMPANY PROFILE:-

ABOUT KANSAI NEROLAC PAINTS LTD. (KNPL):-

Kansai Nerolac Paints ltd is India‘s second largest paint company with group turnover of

about Rs.1170/- crore per annum. It is market leader in industrial coating business in India

and second largest in the Decorative Paints market. KNP Co. Ltd of Japan holds 69.27%

equity of KNPL. Kansai Paint is one of the top ten companies in the world. The company has

technical tie ups with reputed foreign collaborations such as Oshima Kogyo,E.I. Du Pont,

NTT, Nihon Parkerizing and Ameron in the field of speciality & High performance coatings.

Kansai Nerolac Paints Ltd. has the reputation in being innovative, creating value, delivering

quality and service.

KNPL has manufacturing locations at Lote in Maharashtra, Perungudi in Tamil Nadu,

Jainpur in Uttar Pradesh, Bawal in Haryana and Hosur in Tamil Nadu. The corporate office

is situated at Lower Parel in Mumbai.

The total strength of the employees is about 2000 spread over in corporate office,

manufacturing plant, zonal, regional, and area offices.

Nerolac is well established brand in Decorative Coatings. It has widespread distribution/

marketing network with over 11000 dealers and 65 depots. Product ranges of Decorative

Coatings include exterior and interior finishes, wood finishes, auto refinishes, and certain

speciality products. The product range in automotive coating includes Pre-treatment

Chemicals, Electro Deposition Primers, PVC sealers, Mono coats & Metallics finishes, Clear

Coatings etc.

KNPL has very good research and development set up. It engages over 175 paint

technologists for continuous developing superior products. KNPL is a professionally

managed company with young and vibrant team with an average age of 37 years.

6

HISTORY:-

Kansai Nerolac is one of the largest paints companies in India having a significant presence

in industrial as well as decorative sectors.

Kansai Nerolac embarked their journey in 1920 as Gahagan Paints and Varnish Co. Ltd. at

Lower Parel in Bombay.

In 1930, three British companies merged to formulate Lead Industries Group Ltd.

In 1933, Lead Industries Group Ltd. acquired entire share capital of Gahagan Paints in 1933

and thus, Goodlass Wall (India) Ltd. was born.

Subsequently, by 1946, Goodlass Wall (India) Ltd. was known as Goodlass Wall Pvt. Ltd.

In 1957, Goodlass Wall Pvt. Ltd. grew popular as Goodlass Nerolac Paints (Pvt.) Ltd. Also, it

went public in the same year and established itself as Goodlass Nerolac Paints Ltd.

In 1976, Goodlass Nerolac Paints Ltd. became a part of the Tata Forbes Group on acquisition

of a part of the foreign shareholdings by Forbes Gokak.

In 1983, Goodlass Nerolac Paints Ltd. strengthened itself by entering in technical

collaboration agreements with Kansai Paint Co. Ltd., Japan and Nihon Tokushu Toryo

Co.Ltd.Japan.

In 1986, Goodlass Nerolac Paints Ltd. turned into a joint venture of the Tata Forbes and the

Kansai Paint Co. Ltd., with the latter acquiring 36% of its share capital.

In 2000, Kansai Paint Company Ltd., Japan took over the entire stake of Tata Forbes group

and thus GNP became a wholly owned subsidiary of Kansai Paint Company Ltd.

7

In 2006, on the 11th of July, Goodlass Nerolac Paints Ltd. name has been changed to Kansai

Nerolac Paints Ltd.

Vision of KNPL:

“KNPL its unique vision to leverage global technology for servicing customer with superior

coating system built on innovative and superior product and world class solution to

strengthen its leadership in industrial coating and propel for leadership in architectural

coating all to the delight of its stake holder”.

Management:

Being the second largest paint company in India, it spread over the country with employee

strength of around 2000. An efficient management provides the conducive work atmosphere

to develop and grow.

Customers of Kansai Nerolac Paints ltd.:

I. Bajaj Auto Ltd.

II. Maruti Udyog Ltd.

III. Godrej & Boyce

IV. Mahindra & Mahindra

V. Samsung

VI. Ashok Leyland

VII. Toyota Kirloskar Motors Ltd.

VIII. Aditya Birla Group

IX. Hero Honda

8

AWARD & RECOGNITION:-

Golden Peacock Environment Management Award 2009- Winner

Symbiosis centre for management –Lean and six sigma excellence

-As a participant

Greentech Environment Excellence Award 2008 in chemical sector- Awarded by

Greentech foundation, New Delhi.

ECS Manufacturing Excellence Level 2 Certificate in April 2008

Goodlass Nerolac Paint Ltd C2E- Commitment to Excellence in May 2006

Lote has achieved recognition to their outstanding performance in commitment for

excellence in Human Resource Care in May 2006

9

FUNCTIONS OF FINANCE & ACCOUNTS DEPARTMENT:-

Accounting function is necessary is a necessary input into the finance function

i.e. accounting is a sub-function of finance. Accounting generates information \ data relating

to operations/ activities of the firm. The end product of accounting constitutes financial

statements such as Balance sheet, The Income Statement and The Statement of changes in

Financial position/ sources and uses of funds statement/ Cash flow statement. The

information contained in these statements and reports assists Financial Managers in assessing

the past performance & future direction of the firm and meeting the legal obligation, such as

payment of taxes and so on. Thus Accounting and Finance are functionally closely related.

Various Sections in Accounts Department

1. Financial:

Funds are arranged from head office for the payment of expenses, engineering

bills, transportation bills etc. Reports are maintained related to operating expenses that means

total expenses during the month like, salary, wages, freight, welfare etc.

2. Excise:

Accounts of modvat received and payment of the central excise duty on the

finished goods dispatches.

3. Sales Tax:

Accounts of vat received on purchase and payment of vat on finished goods

dispatches.

The various duties and responsibilities of Accounts department in KNPL Lote plant:

1. Recording day-to-day operating expenses

2. Excise duty analysis

3. Transportation bill passing

4. Engineering bill passing

5. Powder coating bill passing

6. Day-to-day cash transactions

7. MIS Activities

10

NEED FOR THE STUDY:-

The study has great significance and provides benefits to various parties whom

directly or indirectly interact with the company.

It is beneficial to management of the company by providing crystal clear picture

regarding important aspects like liquidity, leverage, activity and profitability.

The study is also beneficial to employees and offers motivation by showing how

actively they are contributing for company’s growth.

The investors who are interested in investing in the company’s shares will also get

benefited by going through the study and can easily take a decision whether to invest

or not to invest in the company’s shares.

11

OBJECTIVES OF STUDY:-

The major objectives of the resent study are to know about financial strengths and weakness

of KANSAI NEROLAC PAINTS LIMITED through FINANCIAL RATIO ANALYSIS.

The main objectives of resent study aimed as :

To evaluate the performance of the company by using ratios as a yardstick to measure

the efficiency of the company.

To understand the liquidity, profitability and efficiency positions of the company

during the study period.

To evaluate and analyze various facts of the financial performance of the company.

To make comparisons between the ratios during different periods.

Secondary Objectives:

To study the present financial system at KANSAI NEROLAC PAINTS LIMITED.

To determine the Profitability, Liquidity Ratios.

To simplifies and summarizes a long array of accounting data and makes them

understandable.

12

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem.

it may be understood as a science of studying how research is done scientifically. So, the

research methodology not only talks about the research methods but also considers the logic

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

Research Design:

Descriptive research is used in this study because it will ensure the minimization of

bias and maximization of reliability of data collected. The researcher had to use fact and

information already available through financial statements of earlier years and analyze these

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.

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

purpose were decided.

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.

Primary Data:

Primary data are those data, which is originally collected afresh.

In this project, Questionnaire Method and Interview Method has been used for

gathering required information.

Sources of Data:

The sources of data are from the annual reports of the company from the year 2007-

2008 to 2009-2010.

Methods of Data Analysis:

13

The data collected were edited, classified and tabulated for analysis. The analytical

tools used in this study.

Analytical Tools Applied:

The study employs the following analytical tools:

Comparative statement.

Common Size Statement.

Trend Percentage.

Ratio Analysis.

RATIO ANALYSIS:-

14

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 the calculation and comparison of ratios, which are

derived from the information in a company’s financial statements. The level and historical

trends of these ratios can be used to make inferences about a company’s financial condition,

its operations and attractiveness as an investment. The information in the statements is used

by

Trade creditors, to identify the firm’s ability to meet their claims i.e. liquidity position

of the company.

Investors, to know about the present and future profitability of the company and its

financial structure.

Management, in every aspect of the financial analysis. It is the responsibility of the

management to maintain sound financial condition in the company.

Ratio Analysis:

The term “Ratio” refers to the numerical and quantitative relationship between

two items or variables. This relationship can be exposed as

Percentages

Fractions

Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to interpret the

financial statements. So that the strengths and weaknesses of a firm, as well as its historical

performance and current financial condition can be determined. Ratio reflects a quantitative

relationship helps to form a quantitative judgment.

Ratios Are Useful For Several Parties Such As:

1) Investors, both present as well as potential investors.

2) Financial analyst.

15

3) Mutual funds.

4) Stock broker and stock exchange authorities.

5) Government.

6) Tax department.

7) Competitors.

8) Research analysts and students.

9) Company’s management.

10) Creditors and Suppliers

11) Lending Institutions – Banks and Financial Institutions

12) Financial Manager

13) Other Interested parties like credit rating agencies etc.

Nature of Ratio Analysis:

Ratio analysis is a technique of analysis and Interpretation of financial

statements. It is the process of establishing and interpreting various ratios for helping in

making certain decisions. It is only a means of understanding of financial strengths and

weaknesses of a firm. There are a number of ratios which can be calculated from the

information given in the financial statements, but the analyst has to select the appropriate data

and calculate only a few appropriate ratios. The following are the four steps involved in the

ratio analysis.

Selection of relevant data from the financial statements depending upon the objective

of the analysis.

Calculation of appropriate ratios from the above data.

Comparison of the calculated ratios with the ratios of the same firm in the past, or the

ratios developed from projected financial statements or the ratios of some other firms

or the comparison with ratios of the industry to which the firm belongs.

Classification of Ratios:

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A) Liquidity Ratios

It is also known as liquidity ratios. it includes the following

1) Measures ability of a company to meet its current obligations.

2) Indicates short term financial stability of a company.

3) Indicates present cash solvency and ability to remain solvent in times of adversities.

To measure the liquidity of a firm the following ratios can be calculated

Current ratio

Quick (or) Acid-test (or) Liquid ratio

(a) Current Ratio:

Current ratio is useful to find out solvency of the company. High current ratio

indicates that company will be able to pay its debt maturity within a year. Low current ratio

indicates that company will not be able to meet its short term debts.

Minimum standard current ratio is 2:1.

Current Assets

Current Ratio=

Current Liabilities

(b) Quick Ratio:

Quick ratio is also known as acid test ratio. It indicates immediate ability of

a company to pay off its current obligations. And also shows the solvency and financial

soundness of the business. Greater the ratio stronger the financial position of the

company.

The standard quick ratio should be 1:1

Quick Assets

Quick Ratio=

17

Quick Liabilities

B) Profitability Ratios:

The primary objectives of business undertaking are to earn profits. Because

profit is the engine, that drives the business enterprise.

It measures the overall efficiency of the business. It indicates whether

utilization of business assets and funds are done efficiently and best way or not , so as to

generate adequate profits or returns.

Profitability ratios fall in two categories:

a) Related To Sales:

1) Gross Profit Ratio:

It shows the operating efficiency of the business. It measures the efficiency of

production as well as pricing. Decrease in the ratio indicates reduction in selling price or

increase in the cost of production or decline in the business activity. Increase in the ratio

indicates increase in the selling price or reduction in the cost of production.

Gross Profit

Gross Profit Ratio = X 100

Sales

2) Operating Profit Ratio:

It indicates profitability of entire business after meeting all operating cost

including direct and indirect cost of administrative and distribution expenses.

Operating Profit

Operating Profit Ratio: X 100

Sales

18

3) Net Profit Ratio:

It shows the overall efficiency of the business. Higher the ratio indicates

higher efficiency of business and better utilization of total resources. In addition it indicates

efficiency of financing operations as well as tax management.

Net profit after tax

Net Profit Ratio: X 100

Sales

b) Related To Investment Of Capital Employed:

1) Return On Investment:

It measures the overall performance of the company that is utilization of total resources and

funds available with the company. Higher the ratio better utilization of funds. It indicates

earning capacity of the business. It measures the management performance.

EBT But AT

Return on Investment: X 100

Total Assets/ Liability

2) Return On Net Worth Or Proprietors Funds:

It measures the productivity of shareholders funds. Higher the ratio indicates better utilization

of shareholders funds or higher productivity of owner’s funds. It helps to investor to compare

the earning capacity of company with that of other companies.

Net Profit after Tax

Return on Net Worth: X 100

Equity Shareholder Fund

19

C) Turnover Ratio-

It measures how efficiently the assets are employed. These ratios are

expressed in number of times the assets is used during the period.

1) Inventory Turnover Ratio:

It indicates number of times the replacement of inventory during the given

period usually a year. Higher the ratio more efficient is the management of inventory. But

higher inventory turnover ratio is not always good if it is lower level of inventory because it

invites problem of frequency stock outs and loss of sales and customer or goodwill.

Cost of Goods Sold

Inventory Turnover Ratio:

Average Stock in Hand

2) Average Collection Period:

It indicates credit and collection policy and also indicates efficiency in

management of debtors. Smaller no. of dates, higher will be the efficiency of the collection

department.

Avg. collection period should not exceed 1.5 times the credit period allowed.

Receivable (Debtors)

Avg. Collection Period:

Average Sales per Day.

3) Receivable Turnover Ratio:

20

The ratio indicates average credit period enjoyed by debtors.

Debtors + Bills Receivable

Receivable Turnover Ratio: X 100

Total Credit Sales

4) Fixed Asset Turnover Ratio:

It indicates efficiency in the utilization of fixed assets like plant and machinery by

management.

Net Sales

Fixed Assets Turnover Ratio =

Fixed Assets

5) Total Asset Turnover Ratio =

It indicates how efficiently the assets are employed overall. It indicates

relationships between the amount invested in the assets and the result accrues in terms of

sales.

Net Sales

Total Asset Turnover Ratio =

Total Assets

6) Creditors Turnover Ratio:

It indicates the how the credit period enjoyed by the creditors.

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Net Credit Purchases

Creditors Turnover Ratio=

Average Creditors

D) Financial Ratio –

1) Capital Gearing Ratio:

This ratio indicates the relationship between preferential capital, debenture.

Term loan and capital which does not carry fixed rate of interest or dividend.

When the ratio is more than one then the capital is said to be highly geared that means low

equity share capital and greater amount of preference share capital, debenture, long term loan.

When the ratio is less than one then the capital is said to be very lowly geared

that means low earning per share. Equity shareholder will control the company. It results in

over capitalization.

Preferential Capital + Debenture + Term Loan

Capital Gearing Ratio:

Equity Share Capital + Reserve and Surplus

2) Proprietary Ratio:

It measures the relationship between funds invested in business by the owners

with the total funds invested in business. It indicates long run solvency of the business. High

ratio means company is less dependent on outside funds and company is quite solvent. Low

ratio indicates company is more dependent on outside funds solvency and solvency may be

danger.

Proprietary Fund

22

Proprietary Ratio:

Total Assets

3) Stock Working Capital Ratio:

It indicates weightage of stock in the current assets or in the working funds. It

indicates strength and weaknesses of working capital; high ratio indicates slow movement in

stock and also reflects better management of inventory as well as working capital.

Stock

Stock Working Capital Ratio:

Working Capital

E) Financial Leverage Ratio:

It indicates financial structure of the organization that is proportion of debts as

compare to owner’s fund.

1) Debt Equity Ratio:

Higher the ratio less secured is the creditors, lower the ratio creditors enjoy

higher degree of safety.

Debt

Debt Equity Ratio:

Equity

2) Debt Asset Ratio:

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It indicates the percentage of the total asset created by the company through

short term and long term debt. Higher the ratio less safe is the creditors and vice versa.

Debt

Debt Asset Ratio:

Total Assets

3) Long Term Debt to Total Capitalization:

It explains the relationship between long term debts borrowed from

outsiders with owner’s contribution. Lower the ratio better is the solvency of the business

and safer is the creditor so far as his repayment.

Long Term Debt

Long Term Debt to Total Capitalization:

Total Capital Employed

4) Interest Coverage Ratio:

This indicates earning capacity of the business to pay its interest burden.

Higher the ratio business can easily pay the interest.

Earnings before Interest and Tax

Interest Coverage Ratio:

Interest

F) Dividend Ratio:

24

These ratios for a particular company are relevant for an investor for

making an investment decision as to whether he should invest in the share of the company.

1) Earnings per Share:

This ratio indicates weather over a given period their have been change in

the wealth per share holder. Other the ratio increases the possibility for the higher dividends

and increase in the market price of the shares.

Earnings after Tax – Preference Dividend

Earnings per Share:

No. Of Shares Paid Up

2) Price Earnings Ratio:

It indicates relationship between market price of the share and the current

earnings per share. It helps to determine the future price of the share.

Market Price per Share

Price Earnings Ratio:

Earning Per Equity Share

3) Payout Ratio:

It indicates how much proportion of the earning per share is retaining for

plaguing back and portion distributed as dividend to the share holder.

Dividend per Equity Shares

Payout Ratio:

25

Earnings per Share

4) Dividend Yield Ratio:

It indicates the ultimate current return which investor will get as a

percentage of is investment. It indicates the feature like the profitability and dividend policy

of the company. When dividend yield is lower than the expected return, market price for the

share may fall in future or vice versa.

Equity Dividend

Dividend per Share:

No. Of Equity Shares

Dividend per Share

Dividend Yield

Market Price per Share

Interpretation of the Ratios:

The Interpretation of ratios is an important factor. The inherent limitations of ratio analysis

should be kept in mind while interpreting them. The impact of factors such as price level

changes, change in accounting policies, window dressing etc.

Guidelines or Precautions for Use of Ratios:

The calculation of ratios may not be a difficult task but their use is not easy.

Following guidelines or factors may be kept in mind while interpreting various ratios is

Accuracy of financial statements

Objective or purpose of analysis

26

Selection of ratios

Use of standards should also be kept in mind when attempting to interpret ratios.

8. DATA ANALYSIS AND INTERPRETATION

27

8.1 Financial stability Ratios:

To measure the liquidity of a firm the following ratios can be calculate the following

ratios,

a) CURRENT RATIO:

Current Asset

Current Ratio:

Current Liabilities

Table 8.1.a:

(Rupees in lakhs)

Year Current Assets Current Liabilities Ratio

31-3-07 48468.47 21582.46 2.2:1

31-3-08 51764.02 27739.78 1.8:1

31-3-09 49807.77 32808.36 1.5:1

ANALYSIS AND INTERPRETATION:

28

The current ratio of the firm measures the short term solvency. It indicates the

rupees of current asset available for each rupee of current liabilities.

The above chart shows that decline trend from the F.Y. 2007 to F.Y. 2009.

This is mainly due to increasing creditors from F.Y. 2007 to F.Y. 2009. In the F.Y. 2007-08 it

shows 2.2:1 which was higher than the standard ratio i.e. 2:1. There was continuous decline

in the current ratio which is not good sign for the company.

b) QUICK RATIO:

Quick Asset

Quick Ratio:

Quick Liabilities

Table 8.1.b:

(Rupees in lakhs)

Year Quick Asset Quick Liabilities Ratio

31-3-07 23199.99 21582.46 1.07:1

31-3-08 27062.4 27739.78 0.975:1

31-3-09 28573.68 32808.36 0.870:1

29


The above chart indicates the decline trend from the F.Y. 2007 to F.Y. 2009. In the

F.Y. 2008 and F.Y. 2009 the quick ratio of the company was below standard that means large

part of current asset of the firm is tie up in slow moving and unsellable investment of Finish

goods and also slow moving of debts, but, the overall trend shows declining which is not a

positive sign for KNPL.

8.2. PROFITABILITY RATIO

A) RELATED TO SALES

a) Operating Profit Ratio:

Earnings before Interest Taxes

Operating Profit Ratio: X 100

Sales

Table 8.2.A.a:

(Rupees in lakhs)

YearEarning Before

Interest TaxesSales Ratio

31-3-07 15542.89 129345.66 12.02 %

31-3-08 16759.11 139992.48 11.97 %

31-3-09 14272.70 139639.94 10.22 %

30


The above chart shows that there was a continuous decreased in the ratio. That

means the ratio was decreased from 12.02% in FY 2007-08 to 10.22% in FY 2009-10. This is

due to increases in the expenditure of the company.

b) Net Profit Ratio:

Net Profit

Net Profit Ratio: X 100

Sales

Table 8.2.A.b:

(Rupees in lakhs)

Year Net Profit Sales Ratio

31-3-07 10202.8 129345.66 7.88 %

31-3-08 11702.72 139992.48 8.35 %

31-3-09 10136.19 139639.94 7.25 %

31

Ratio

6.5

7

7.5

8

8.5

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


The above chart indicates the Net Profit Ratio in 2007-08 was 7.88 % which

further increases to 8.35% in FY 2008-09. Further it had fallen to 7.25% in FY 2009-10. That

means company suffers the losses after the FY 2008-09. In FY 2008-09 the net profit was

high to increase in the sales of the company.

(B) RELATED TO CAPITAL EMPLOYED

a) Return on investment:

Earnings before interest but after tax

Return on investment: X 100

Total asset / liability

Table 8.2.B.a:

(Rupees in lakhs)

32

Year

Earnings Before

Interest But After

Tax

Total Asset /

LiabilityRatio

31-3-07 10378.39 65912.12 15.74 %

31-3-08 11929.75 73746.32 16.17 %

31-3-09 10257.99 75662.49 13.55 %

Return on investment

12.00%13.00%14.00%15.00%16.00%17.00%

31-3-07 31-3-08 31-3-09

Year

Rat

io

Ratio

ANALYSIS AND INTERPRETATION

It can be found that the return on investment ratio of KNPL was slightly

increased in first two years. Further it was decreased by 0.13% which implies an ineffective

decisions made by the managers.

(b) Return on Net Worth or Proprietor’s Funds:

Net Profit after Tax

Return on net worth: X 100

Equity shareholder fund

Table 8.2.B.b:

(Rupees in lakhs)

YearNet Profit after

Tax

Equity shareholder

fundRatio

33

31-3-07 10202.8 51721.18 19.72 %

31-3-08 11702.72 59875.12 19.54 %

31-3-09 10136.19 66299.87 15.28 %

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


This ratio indicates how well the firm has used the resources of owner. The

earning of a satisfactory result is the most desirable objective of the business. This ratio is

important to present as well as prospective shareholders and also of great concern to

management.

The above chart shows that the ratio was almost constant in first two years.

Further it declined to 15.28% this is due to increased in the reserve and surplus of the

company.

Higher the ratio indicates better utilization of recourses but in KNPL It shows

decreasing trend which is not good.

8.3. TURNOVER RATIOS:

a) Inventory turnover ratio:

Net Sales

34

Inventory turnover ratio:

Closing Stock

Table 8.3.a:

(Rupees in lakhs)

Year Net Sales Closing Stock Ratio

31-3-07 129345.66 19996.18 6.46 times

31-3-08 139992.48 19926.90 7.02 times

31-3-09 139639.94 17063.39 8.18 times


The above chart shows that the stock gets converted into cash was 6.46 times,

7.02 times and 8.18 times in the FY 2007 to 2009 respectively.

If we compared the figures of sales and inventory of first two years, the level

of inventory is almost same, but in the FY 2008 and09 the sales was increased with low cost

of inventory which implies the management is successful to reduce the cost involved for

management of inventory.

b) Average Collection Period:

Receivable (Drs)

Average collection period:

Average sales per day

35

Table 8.3.b:

(Rupees in lakhs)

Year Receivable (Drs)Average sales per

dayRatio

31-3-07 20994.41 129345.66 59.24days

31-3-08 23637.37 139992.48 61.62 days

31-3-09 20957.29 139639.94 54.77 days


The above chart shows that the collection period was high in FY 2008-09 i.e. 62 days. This

means, a very long collection period would imply either for credit selection or an inadequate

collection. The average collection period short in FY 2009-10 which means that better is a

credit management and prompt payment on the part of debtors.

36

c) Receivable turnover ratio:

Credit sales

Receivable turnover ratio:

Average debtors

Table 8.3.c:

(Rupees in lakhs)

Year Credit sales Average debtors Ratio

31-3-07 129345.66 20994.41 6.1times

31-3-08 139992.48 23637.37 5.9 times

31-3-09 139639.94 20957.29 6.6 times


This ratio indicates the average credit period enjoyed by debtors. The above

chart shows that the customers to whom the credit sales are made pay 6.1times, 5.9 times &

6.6 times in the FY 2007 to respectively. In the FY 2008-09 THE DEBTORS TURNOVER

RATIO was low which indicates the absence of a strict credit policy and also point out that

there were delayed to recover the revenue from sales. This point out into the huge block up of

working capital in book debt.

37

It was high in FY 2009-10 i.e. 6.6 times which indicate prompt payment on

the part of debtors. Overall debtor’s turnover ratio was good.

d) Fixed Asset Turnover Ratio:

Net sales

Fixed asset turnover ratio:

Fixed assets

Table 8.3.d:

(Rupees in lakhs)

Year Net sales Fixed assets Ratio

31-3-07 129345.66 22538.61 5.73 times

31-3-08 139992.48 24140.44 5.79 times

31-3-09 139639.94 23861.99 5.85 times


It indicates efficiency in the utilization of fixed assets like plant and machinery

by management.

From the above chart the fixed asset turnover ratio of KNPL slowly increases

over period of time. From this we can say that a company has been successful to manage and

38

utilized its assets. Also a company has been more effective in using the investment in fixed

assts to generate revenue.

e) Total Asset Turnover Ratio:

Net sales

Total asset turnover ratio:

Total asset

Table 8.3.e:

(Rupees in lakhs)

Year Net sales Total asset Ratio

31-3-07 129345.66 65912.12 1.962 times

31-3-08 139992.48 73746.32 1.898 times

31-3-09 139639.94 75662.49 1.845 times

1.75

1.8

1.85

1.9

1.95

2

31-3-07 31-3-08 31-3-09

year

rati

o

Ratio


The total asset turnover ratio indicates the firm’s ability to generate sales from all financial

resources.

39

From the above chart the total asset turnover ratio was decreased from 1.9 times in FY 2007-

08 to 1.8 in FY 2009-10. The total asset turnover of the company was 1.8 times implies that

KNPL generate a sell of Rs. 1.8 for one rupee investment in fixed and current asset together.

f) Creditor’s Turnover Ratio:

Net credit purchases

Creditor’s turnover ratio:

Average creditors

Table 8.3.f:

(Rupees in lakhs)

YearNet credit

purchasesAverage creditors Ratio

31-3-07 84723.95 15906.86 5.3 times

31-3-08 89136.85 18430.47 4.8 times

31-3-09 92418.41 23007.12 4.0 times


The above chart dips from 5.3 times to 4.0 times from the FY 2007-08 to FY 2009-10. From

this we can interpret that KNPL has successful to manage its creditors because, over the years

trend is declining.

40

0

1

2

3

4

5

6

31-3-07 31-3-08 31-3-09

Year

Rat

io Ratio

8.4 Financial ratio

a) Proprietary ratio:

Proprietary Fund

Proprietary ratio: X 100

Total assets

Table 8.4.a

(Rupees in lakhs)

Year Proprietary fund Total assets Ratio

31-3-07 51721.18 65912.12 78.46 %

31-3-08 59875.12 73746.32 81.19 %

31-3-09 66299.62 75662.49 87.62 %

Ratio

70.00%

75.00%

80.00%

85.00%

90.00%

31-3-07 31-3-08 31-3-09

Year

Rat

io

Ratio


41

From the above chart the ratio was consistently increased in three years. The

ratio was high in the FY 2009-10 i.e. 0.87%. It indicates the company is quite solvent.

b) Stock working capital ratio:

Stock

Stock working capital ratio:

Working capital

Table 8.4.b:

(Rupees in lakhs)

Year Stock Working capital Ratio

31-3-07 19996.18 26886.01 74.37%

31-3-08 19926.90 24024.24 82.94%

31-3-09 17063.39 16999.41 100.37%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


The above chart shows the continuous increase in the trend of the ratio. The

weightage of stock in the current assets is high in the FY 2009 – FY 2010 as compare to other

FY. That means there was a slow movement of stock.

8.5 Financial Leverage Ratio:

42

It indicates financial structure of the organization that is proportion of debts as compare to

owner’s fund.

a) Debt Equity Ratio:

Debt

Debt equity ratio:

Equity

Table 8.5.a:

(Rupees in lakhs)

Year Debt Equity Ratio

31-3-07 12657.80 51721.18 24.47%

31-3-08 12480.40 59875.12 20.84%

31-3-09 9362.62 66299.62 14.12%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


This ratio is useful to judge long term financial solvency of a firm. This ratio

reflects the relative claim of creditor and shareholder against the assets of the firm.

From the above chart the debt equity ratio of the KNPL was consistently

declined from 24.47% in FY 2007-08 to 14.12% in FY 2009-10.The low debt equity ratio in

FY 2009-10 indicates the firm had less claims from outsiders as compared to those of owner.

b) Debt Asset Ratio:

Debt

43

Debt asset ratio:

Total assets

Table 8.5.b:

(Rupees in lakhs)

Year Debt Total assets Ratio

31-3-07 12657.80 65912.12 19.20%

31-3-08 12480.40 73746.32 16.92%

31-3-09 9362.62 75662.49 12.37%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


From the above chart the debt asset ratio was consistently decreased from

19.20% in FY 2007-08 to 12.37% in FY 2009-10. That means at beginning creditors of

KNPL bear the high risk than the other years.

c) Long Term Debt to Total Capitalization:

Long term debt

Long term debt to total capitalization:

Total capital employed

44

Table 8.5.c:

(Rupees in lakhs)

Year Long Term DebtTotal Capital

EmployedRatio

31-3-07 4660.29 65912.12 7.07%

31-3-08 4603.14 73746.32 6.24%

31-3-09 1608.29 75662.49 2.12%

0.00%

2.00%

4.00%

6.00%

8.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


The above chart indicates that the ratio was consistently decreased from 7.07%

in FY 2007-08 to 2.12% in FY 2009-10, means that KNPL is successful to manage its long

term debt which further implies that the KNPL is in better position in terms of solvency.

d) Interest Coverage Ratio:

Earning before interest and tax

Interest coverage ratio:

Interest

Table 8.5.d:

(Rupees in lakhs)

YearEarnings Before

Interest And TaxInterest Ratio

31-3-07 15718.48 175.59 89.51times

45

31-3-08 16986.14 227.03 74.91 Times

31-3-09 14505.05 212.8 68.16 Times

0

20

40

60

80

100

31-3-07 31-3-08 31-3-09

Year

Rat

io Ratio


From the above chart the trend of the ratio was decreased from 89.51 times in

FY 2007-08 to 68.16 times in FY 2009-10. From this, it indicates that KNPL is trying to

reduce its interest burden which is good sign for both i.e. there creditors and shareholders.

8.6 Dividend Ratio:

These ratios for a particular company are relevant for an investor for making an investment

decision as to whether he should invest in the share of the company.

a) Earnings per Share:

Earning after tax – preference dividend

Earning per share:

No. of shares paid up

Table 8.6.a:

46

(Rupees in lakhs)

Year

Earnings After

Tax – Preference

Dividend

No. Of Shares Paid

UpRatio

31-3-07 10202.08 255.07666 39.99

31-3-08 11702.72 269.45986 43.43

31-3-09 10136.19 269.45986 37.61

34

36

38

40

42

44

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(R

s.)

Ratio


From the above chart the EARNING PER SHARE of the company was high

in FY 2008-09 i.e. Rs.43.43. This means that as compare to the other FY there has been

increase in wealth per shareholder.

b) Payout Ratio:

Dividend per equity share

Payout ratio: X 100

Earnings per share

Table 8.6.b:

(Rupees in lakhs)

47

YearDividend per

equity share

Earning per equity

shareRatio

31-3-07 12.14 39.99 30.35%

31-3-08 12.00 43.43 27.63%

31-3-09 12.00 37.61 31.90%

25.00%26.00%27.00%28.00%29.00%30.00%31.00%32.00%33.00%

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(%

)

Ratio


It indicates how much proportion of the earning per share is retaining for

plugging back and portion distributed as dividend to the share holder.

The above chart indicates that the pay out ratio was high in FY 2009-10 i.e.

31.90%. If the divided pay out ratio is subtracted from 100, retention ratio is obtained. Means

that in KNPL the retention ratio from FY 2007 to FY 2009 was 69.65%, 72.37%, 68.1%

respectively and KNPL is ploughed back its maximum percentage of its profit.

c) Dividend per shares ratio:

Equity dividend

Dividend per share:

No. of equity shares

Table 8.6.c:

(Rupees in lakhs)

Year Equity Dividend No. Of Equity Ratio

48

Shares

31-3-07 309879000 25507666 Rs. 12.14

31-3-08 323352000 26945986 Rs. 12.00

31-3-09 323352000 26945986 Rs. 12.00

11.9

11.95

12

12.05

12.1

12.15

12.2

31-3-07 31-3-08 31-3-09

YEAR

RA

TIO

(R

s.)

Ratio


The dividend per share ratio of the KNPL was almost same i.e. Rs. 12 in the

FY 2007 to FY 2009.But if we compared earning per share with Dividend per share it shows

that Earning per share is more than Dividend per share. In this case of Earning per share,

adjustment of bonus or right issue should be made while calculating Dividend per share over

the year.

49

CONCLUSION:-

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

management a company cannot in this competitive world. A Prudent financial Manager has

to measure the working capital policy followed by the company.

On a whole Kansai Nerolac Paints Limited has once again demonstrated its

potential to ride through the difficult times. Despite the slowdown in its growth, it has

determined to grab numerous opportunities that are facing Indian Paint Industry.

So from this we can conclude that there is a better opportunities for investors

to invest in this company.

50

BIBLIOGRAPHY:-

Financial Management: M Y KHAN AND P K JAIN Fifth Edition

FINANCIAL MANAGEMENT - I. M. PANDEY

Financial Management (BMS): MR. Kale.

Kansai Nerolac Paint’s magazines, brochures etc.

Annual Reports of the Kansai Nerolac Paints Ltd.

o 88th annual report 2007-08

o 89th annual report 2008-09

www.nerolac.com

Search Engine : www.google.com

51

http://www.nerolac.com/

Documents

Ratio Analysis