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Ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise, intelligible and understandable form. As per Myers Ratio analysis is a study of relationship among various financial factors in a business Ratio analysis is an important and powerful technique or method, generally, used for analysis of Financial Statements. Ratios are used as a yardstick for evaluating the financial condition and performance of a firm. Analysis and interpretation of various accounting ratios gives a better understanding of financial condition and performance of the firm in a better manner than the perusal of financial statements. 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.

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. A ratio or financial ratio is a relationship between two accounting figures, expressed mathematically. Ratio Analysis helps to ascertain the financial condition of the firm. In financial analysis, a ratio is compared against a benchmark for evaluating the financial position and performance of a firm. Financial ratios help to summarise large quantities of financial data to make qualitative judgment about the firms financial performance. Ratios are the symptoms of health of an organisation like blood pressure, pulse or temperature of an individual. Ratios are the indicators for further investigation. Ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise, intelligible and understandable form.

As per Myers Ratio analysis is a study of relationship among various financial factors in a business


The objective of ratio analysis is to judge the earning capacity, financial soundness and operating efficiency of a business organization. The use of ratio in accounting and financial management analysis helps the management to know the profitability, financial position and operating efficiency of an enterprise.

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 shortterm 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. 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

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: 1) CURRENT RATIO 2) QUICK RATIO OR ACID TEST RATIO 3) CASH RATIO 4) NETWORKING CAPITAL RATIO

The process of magnifying the

shareholder's return through the employment of debt is called "trading on equity". T 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: 1) DEBT EQUITY RATIO 2) TOTAL DEBT RATIO 3) CAPITAL EMPLOYED TO NET WORTH RATIO OR EQUITY RATIO.

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: 1) INVENTORY TURUOVER RATIO. 2) WORKING CAPITAL TURNOVER RATIO. 3) DEBTORS TURNOVER RATIO.


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:

1) 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.

2) 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 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 I net sales.


Ratio analysis is necessary to establish the relationship between two accounting figures to highlight the significant information to the management or users who can analyse the business situation and to monitor their performance in a meaningful way.

The following are the Use of ratio analysis: It facilitates the accounting information to be summarized and simplified in a required form

It highlights the inter-relationship between the facts and figures of various segments of business.

Ratio analysis helps to remove all type of wastages and inefficiencies.

It provides necessary information to the management to take prompt decision relating to business.

It helps to the management for effectively discharge its functions such as planning, organizing, controlling, directing and forecasting.

Ratio analysis reveals profitable and unprofitable activities. Thus, the management is able to concentrate on unprofitable activities and consider to improve the efficiency.


Ratio analysis is used as a measuring rod for effective control of performance of business activities.

Ratios are an effective means of communication and informing about financial soundness made by the business concern to the proprietors, investors, creditors and other parties.

Ratio analysis is an effective tool which is used for measuring the operating results of the enterprises.

It facilitates control over the operation as well as resources of the business.

Effective co-operation can be achieved through ratio analysis.

Ratio analysis provides all assistance to the management to fix responsibilities.

Ratio analysis helps to determine the performance of liquidity, profitability and solvency position of the business concer



Ratio analysis is one of the most powerful tools of financial management. They are simple and easy to understand. Ratio analysis provides useful clues to investigate further. They must always be compared with: Previous ratios in order to assess trends Ratios achieved in other comparable companies

Ratios by themselves mean nothing as they have serious limitations. While using the ratios,caution has to be exercised in respect of the following.Ratio analysis is one of the important techniques of determining the performance of financial strength and weakness of a firm. Though ratio analysis is relevant and useful technique for the business concern, the analysis is based on the information available in the financial statements. There are some situations, where ratios are misused, it may lead the management to wrong direction.

The following are some of the limitations: Ratio analysis is used on the basis of financial statements. Number of limitations of financial statements may affect the accuracy or quality of ratio analysis.

Ratio analysis heavily depends on quantitative facts and figures and it ignores qualitative data. Therefore this may limit accuracy.

Ratio alysis is a poor measure of a firm's performance due to lack of adequate standards laid for ideal ratios.

It is not a substitute for analysis of financial statements. It is merely used as a tool for measuring the performance of business activities.

Ratio analysis clearly has some latitude for window dressing.

It makes comparison of ratios between companies which is questionable due to differences in methods of accounting operation and financing.

Ratio analysis does not consider the change in price level, as such, these ratio will not help in drawing meaningful inferences.

1) False Results: If Financial Statements are not correct Financial Ratio Analysis will also be correct.

2) Different meanings are put on different terms: Elements and sun-elements are not uniquely defined. An enterprise may work out ratios on the basis of profit after Tax and interest while others work on profit before interest and Tax .So, the Ratios will also be different


so cannot be compared. But before comparison is to be done the basis for calculation of ratio should be same.

3) Not comparable : if different firms follow different accounting Policies.Two enterprises may follow different Policies like some enterprises may charge

depreciation at straight line basis while others

charge at diminishing value. Such

differencesmay adversely affect the comparison of the financial statements.

4) Affect of Price level changes: Normally no consideration is given to price level changes in the accounting variables from which ratios are computed.

Changes in price level affects the comparability of Ratios. This handicaps the utility of accounting ratios.

5) Ignores qualitative factors: Financial Ratios are on the basis of quantitative analysis only. But many times qualitative facts overrides quantitative aspects . For Example: Loans are given on the basis of accounting Ratios but credit ultimately depends on the character and managerial ability of the borrower. Under such circumstances, the conclusions derived from ratio analysis would be misleading.


6) Ratios may be worked out for insignificant and unrelated figures. Example: A ratio may be worked out for sales and investment in govt. securities. Such ratios will only be misleading. Care should be exercised to work out

ratios between only such figures which have cause and effect relationship. One should be reasonably clear as to what is the cause and what is the effect.

7) Difficult to evolve a standard Ratio: It is very difficult to evolve a standard ratio acceptable at all times as financial and economic scenario are dynamic. Again the underlying conditions for different firms and different industries are not similar, so an acceptable standard ratio cannot be evolved.

8) Window Dressing: Financial Ratios will be affected by window dressing. Manipulations and window dressings affect the financial statements so they are going to affect the f. ratios also. Therefore a particular ratio may not be a definite indicator of good or bad management.

9) Personal Bias: Ratios have to be interpreted, but different people may interpret same ratios in different ways. Ratios are only tools of financial analysis but personal judgment of the analyst is more important. If he does not posses requisite qualifications or is biased in interpreting the ratios, the conclusion drawn prove misleading.



Gross Profit Ratio :

Gross Profit Ratio established the relationship between gross profit and net sales. This ratio is calculated by dividing the Gross Profit by Sales. It is usllally indicated as percentage. Gross Profit Ratio = Gross Profit Net Sales Gross Profit Net Sales = = * 100

Sales Cost Of Good Sold Gross Sales Sales Return

Higher Gross Profit Ratio is an indication that the firm has higher profitability. It also reflects the effective standard of performance of firm's business. Higher Gross Profit Ratio will be result of the following factors. (1) (2) (3) (4) Increase in selling price, i.e., sales higher than cost of goods sold. Decrease in cost of goods sold with selling price remaining constant. Increase in selling price without any corresponding proportionate increase in cost. Increase in the sales mix.

A low gross profit ratio generally indicates the result of the following factors : (1) (2) Increase in cost of goods sold. Decrease in selling price.

(3) Decrease in sales volume. (4) (5) High competition. Decrease in sales mix.


Current Ratio establishes the relationship between current Assets and current Liabilities. It attempts to measure the ability of a firm to meet its current obligations. In order to compute this ratio, the following formula is used : Current Ratio = Current Assets Current Liabilities The two basic components of this ratio are current assets and current liabilities. Current asset normally means assets which can be easily converted in to cash within a year's time. On the other hand, current liabilities represent those liabilities which are payable within a year. (1) (2) Current ratio helps to measure the liquidity of a firm. It represents general picture of the adequacy of the working capital position of a company. (3) (4) It indicates liquidity of a company. It represents a margin of safety, i.e., cushion of protection against current creditors. (5) It helps to measure the short-term financial position of a company or short-term solvency of a firm. (6) Current ratios cannot be appropriate to all busineses it depends on many other factors. (7) Window' dressing is another problem of current ratio, for example, overvaluation of closing stock. (8) It is a crude measure of a firm's liquidity only on the basis Of quantity and not quality of current assets.



Quick Ratio also termed as Acid Test or Liquid Ratio. It is supplementary to the current ratio. The acid test ratio is a more severe and stringent test of a firm's ability to pay its short-term obligations 'as and when they become due. Quick Ratio establishes the relationship between the quick assets and current liabilities. In order to compute this ratio, the below presented formula is used : Quick Ratio = Quick Assets Current Liabilities Quick Ratio can be calculated by two basic components of quick assets and current liabilities Quick Assets = Current Assets- (Inventories+ Prepaid expenses)

Current liabilities represent those liabilities which are payable within a year. The ideal Quick Ratio of I:I is considered to be satisfactory. High Acid Test Ratio is an indication that the firm has relatively better position to meet its current obligation in time. On the other hand, a low value of quick ratio exhibiting that the firm's liquidity position is not good. (I) Quick Ratio helps to measure the liquidity position of a firm. (2) (3) It is used as a supplementary to the current ratio. It is used to remove inherent defects of current ratio.

Operating Ratio is calculated to measure the relationship between total operating expenses and sales. The total operating expenses is the sum total of cost of goods sold, office and administrative expenses and selling and distribution expenses. In other words,

this ratio indicates a firm's ability to cover total operating expenses. In order to compute this ratio, the following formula is used : Operating Ratio = Operating Cost Net Sales Operating Cost = * 100

Cost of goods sold + Administrative Expenses + Selling and Distribution Expenses

Net Sales

Sales - Sales Return (or) Return Inwards.


Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net Profit to Sales Ratio. This ratio reveals the firm's overall efficiency in operating the business. Net profit Ratio is used to measure the relationship between net profit (either before or after taxes) and sales. This ratio can be calculated by the following formula : Net Profit Ratio = Net Profit After Tax Net Sales * 100

Net profit includes non-operating incomes and profits. Non-Operating Incomes such as dividend received, interest on investment, profit on sales of fixed assets, commission received, discount received etc. Profit or Sales Margin indicates margin available after deduction cost of production, other operating expenses, and income tax from the sales revenue. Higher Net Profit Ratio indicates the standard performance of the business concern. (1) This is the best measure of profitability and liquidity. (2) It helps to measure overall operational efficiency of the business concern. (3) It facilitates to make or buy decisions.


(4) It helps to determine the managerial efficiency to use a firm's resources to generate income on its invested capital. (5) Net profit Ratio is very much useful as a tool of investment evaluation.


This ratio is also called as ROL This ratio measures a return on the owner's or shareholders' investment. This ratio establishes the relationship between net profit after interest and taxes and the owner's investment. Usually this is calculated in percentage. This ratio, thus. can be calculated as : Return on Investment Ratio = Net Profit (after interest and tax) -----------------------Shareholders' Fund (or) Investments


Shareholder's Investments

Equity Share Capital + Preference Share Capital + Reserves and Surplus- Accumulated Losses

Net Profit

Net Profit - Interest and Taxes.

(1) This ratio highlights the success of the business from the owner's point of view. (2) It helps to measure an income on the shareholders' or proprietor's investments. (3) This ratio helps to the management for important decisions making. (4) It facilitates in determining efficiently handling of owner's investment.


Return on Capital Employed Ratio measures a relationship between profit and capital employed. This ratio is also called as Return on Investment Ratio. The term return means Profits or Net


Profits. The term Capital Employed refers to total investments made in the business. The concept of capital employed can be considered further into the following ways : (a) Gross Capital Employed (b) Net Capital Employed (c) Average Capital Employed (d) Proprietor's Net Capital Employed In order to compute this ratio, the below presented formulas are used: Return on Capital Employed = Net Profit After Taxes Gross Capital Employed Return on Capital Employed = * 100

Net Profit After Taxes Before Interest Gross Capital Employed * 100


Earning Per Share Ratio (EPS) measures the earning capacity of the concern from the owner's point of view and it is helpful in determining the price of the equity share in the market place. Earning Per Share Ratio can be calculated as : Earning Per Share Ratio = Net Profit After Tax and Preference Dividend No. of Equity Shares (1) This ratio helps to measure the price of stock in the market place. (2) This ratio highlights the capacity of the concern to pay dividend to its shareholders. (3) This ratio used as a yardstick to measure the overall performance of the concern.



This ratio highlights the relationship between payment of dividend on equity share capital and the profits available after meeting tax and preference dividend. This ratio indicates the dividend policy adopted by the top management about utilization of divisible profit to pay dividend or to retain or both. The ratio, thus, can be calculated as : Dividend Payout Ratio = Equity Dividend Net Profit After Tax and Preference Dividend *100

Dividend Payout Ratio

Dividend Per Equity Share Earning Per Equity Share * 100


Dividend Yield Ratio indicates the relationship is established between dividend per share and market value per share. This ratio is a major factor that determines the dividend income from the investors' point of view. It can be calculated by the following formula :

Dividend Yield Ratio

Dividend Yield Ratio Market Value Per Share * 100


This ratio highlights the earning per share reflected by market share. Price Earning Ratio establishes the relationship between the market price of an equity share and the earning per equity share. This ratio helps to find out whether the equity shares of a company are undervalued or not. This ratio is also useful in financial forecasting.

This ratio is calculated as : Price Earning Ratio = Market Price Per Equity Share Earning Per Share


This ratio is also called as Inventory Ratio or Stock Velocity Ratio. Inventory means stock of raw materials, working in progress and finished goods. This ratio is used to measure whether the investment in stock in trade is effectively utilized or not. It reveals the relationship between sales and cost of goods sold or average inventory at cost price or average inventory at selling price. Stock Turnover Ratio indicates the number of times the stock has been turned over in business during a particular period. While using this ratio, care must be taken regarding season and condition. Price trend. supply condition etc. In order to compute this ratio, the following formulae are used : Stock Turnover Ratio = Net Sales Average Inventory at Cost Stock Turnover Ratio = Net Sales Average Inventory at Selling Price Stock Turnover Ratio = Cost of Goods Sold Average Inventory at Cost (1) This ratio indicates whether investment in stock in trade is efficiently used or not. (2) This ratio is widely used as a measure of investment in stock is within proper limit or not. (3) This ratio highlights the operational efficiency of the business concern.


(4) This ratio is helpful in evaluating the stock utilization. (5) It measures the relationship between the sales and the stock in trade. (6) This ratio indicates the number of times the inventories have been turned over in business during a particular period.


Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio or Debtor's Velocity. Receivables and Debtors represent the uncollected portion of credit sales. Debtor's Velocity indicates the number of times the receivables are turned over in business during a particular period. In other words, it represents how quickly the debtors are converted into cash. It is used to measure the liquidity position of a concern. This ratio establishes the relationship between receivables and sales. Two kinds of ratios can be used to judge a firm's liquidity position on the basis of efficiency of credit collection and credit policy. They are (A) Debtor's Turnover Ratio and (B) Debt Collection Period. These ratios may be computed as : Debtor's Turnover Ratio = Net Credit Sales Average Receivables Or Average Accounts Receivable


Creditor's Turnover Ratio is also called as Payable Turnover Ratio or Creditor's Velocity. The credit purchases are recorded in the accounts of the buying companies as Creditors to Accounts Payable. The Term Accounts Payable or Trade Creditors include sundry creditors and

bills payable. This ratio establishes the relationship between the net credit purchases and the average trade creditors. Creditor's velocity ratio indicates the number of times with which the payment is made to the supplier in respect of credit purchases. Two kinds of ratios can be used for measuring the efficiency of payable of a business concern relating to credit purchases. They are: (1) Creditor's Turnover Ratio (2) Creditor's Payment Period or Average Payment Period. The ratios can be calculated by the following formulas: Creditor's Turnover Ratio = Net Credit Purchases Average Accounts Payable Net Credit Purchases Average Accounts Payable = = Total Purchases - Cash Purchases Opening Payable + Closing Payable 2 A high Creditor's Turnover Ratio signifies that the creditors are being paid promptly. A lower ratio indicates that the payment of creditors are not paid in time. Also, high average payment period highlight the unusual delay in payment and it affect the creditworthiness of the firm. A low average payment period indicates enhancing the creditworthiness of the company.


This ratio highlights the effective utilization of working capital with regard to sales. This ratio represent the firm's liquidity position. It establishes relationship between cost of sales and networking capital. This ratio is calculated as follows : Working Capital Turnover Ratio = Net Sales Working Capital Net Sales = Gross Sales - Sales Return


Work Capital

Current Assets - Current Liabilities

It is an index to know whether the working capital has been effectively utilized or not in making sales. A higher working capital turnover ratio indicates efficient utilization of working capital, i.e., a firm can repay its fixed liabilities out of its working capital. Also, a lower working capital turnover ratio shows that the firm has to face the shortage of working capital to meet its day-to-day business activities unsatisfactorily.


This ratio indicates the efficiency of assets management. Fixed Assets Turnover Ratio is used to measure the utilization of fixed assets. This ratio establishes the relationship between cost of goods sold and total fixed assets. Higher the ratio highlights a firm has successfully utilized the fixed assets. If the ratio is depressed, it indicates the under utilization of fixed assets. The ratio may also be calculated as: Fixed Assets Turnover Ratio = Cost of Goods Sold Total Fixed Assets

Components of Fixed Assets (or) Non-Current Assets (1) Goodwill (2) Land and Building (3) Plant and Machinery (4) Furniture and Fittings (5) Trade Mark (6) Patent Rights and Livestock


(7) Long-Term Investment (8) Debt Balance of Profit and Loss Account (9) Discount on Issue of Shares (10) Discount on Issue of Debenture (11) Preliminary Expenses (12) Other Deferred Expenses (14) Government or Trust Securities (15) Any other immovable Prosperities


This ratio measures the efficiency of capital utilization in the business. This ratio establishes the relationship between cost of sales or sales and capital employed or shareholders' fund. This ratio may ill so be calculated as : Capital Turnover Ratio = Cost of Sales Capital Employed Components of Capital Employed (Shareholders' Fund + Long-Term Loans) (1) Equity Share Capital (2) Preference Share Capital (3) Debentures (4) Long-Tenn Loans (5) Share Premium (6) Credit Balance of Profit and Loss Account (7) Capital Reserve


(8) General Reserve (9) Provisions (10) Appropriation of Profits


This ratio also termed as External - Internal Equity Ratio. This ratio is calculated to ascertain the firm's obligations to creditors in relation to funds invested by the owners. The ideal Debt Equity Ratio is 1: 1. This ratio also indicates all external liabilities to owner recorded claims. It may be calculated as Debt - Equity Ratio = External Equities Internal Equities The term External Equities refers to total outside liabilities and the term Internal Equities refers to all claims of preference shareholders and equity shareholders' and reserve and surpluses. Debt - Equity Ratio = Total Long-Term Dept Shareholders' Funds

Proprietary Ratio is also known as Capital Ratio or Net Worth to Total Asset Ratio. This is one of the variant of Debt-Equity Ratio. The term proprietary fund is called Net Worth. This ratio shows the relationship between shareholders' fund and total assets. It may be calculated as : Proprietary Ratio = Shareholders' Fund Total Assets Shareholders' Fund = Preference Share Capital + Equity Share Capital

+ All Reserves and Surplus. Total Assets = Tangible Assets + Non-Tangible Assets + Current Assets (or) All Assets including Goodwill This ratio used to determine the financial stability of the concern in general. Proprietary Ratio indicates the share of owners in the total assets of the company. It serves as an indicator to the ~reditors who can find out the proportion of shareholders' funds in the total assets employed in the business. A higher proprietary ratio indicates relatively little secure position in the event of solvency of a concern. A lower ratio indicates greater risk to the creditors. A ratio below 0.5 is alarming for the creditors.


This ratio also called as Capitalization or Leverage Ratio. This is one of the Solvency Ratios. The term capital gearing refers to describe the relationship between fixed interest and/or fixed dividend bearing securities and the equity shareholders' fund. It can be calculated as shown below:

Capital Gearing Ratio

Equity Share Capital Fixed Interest Bearing Funds

Equity Share Capital

Equity Share Capital + Reserves and Surplus = Debentures + Preference Share Capital + Other Long-Tenn Loans.

Fixed Interest Bearing Funds

A high capital gearing ratio indicates a company is having large funds bearing fixed interest and/or fixed dividend as compared to equity share capital. A low capital gearing ratio


represents preference share capital and other fixed interest bearing loans are less than equity share capital.



CURRENT RATIO: Formula Current Assets/Current Liabilities 2009-2010 1.45 2010-2011 1.56 2011-2012 1.82

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009-10 2010-2011 2011-12 Series 1 Series 2 Series 3


SIGNIFICANCE: This ratio is calculated for knowing short term solvency of the organization. This ratio indicates the solvency of the business i.e. ability to meet the liabilities of the business as and when they fall due. The Current Assets are the sources from which the current liabilities are to be met. Certain authorities have suggested that in order to ensure solvency of a concern current assets should be twice the current liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon the nature of industry. The standard Current Ratio applicable to the Indian industries is 1.33:1. Here the Current Ratio of Kalyani Steels Ltd indicates that it has got sufficient assets to pay off short term liabilities as and when they fall due. The company has maintained its short term solvency through out the years and it is improving its short term solvency status which is appreciable.

ACID TEST RATIO: Formula Liquid Assets/Liquid 2009-2010 1.17 2010-2011 1.24 2011-2012 1.35


1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 2009-10 2010-11 2011-12

Series 1 Series 2 Series 3

SIGNIFICANCE: This ratio serves as a realistic guide to the short term solvency of the company. It is a measure of the extent to which liquid resources are immediately available to meet current obligation. In so far as it eliminates inventories as part of Formula 2003-2004 2004-2005 20052006 Liquid Assets/Liquid Liabilities 1.17 1.24 1.35 current ratio, this is a more rigorous test of liquidity than the Current Asset Ratio and when used in conjunction with it, gives a better picture of the firms ability to meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is considered to be ideal and standard. Here the Acid Ratios of Kalyani Steels Ltd through out the years considered indicates that it has adequate assets which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off immediately. It must be remembered that the


company is improving its Acid Test Ratio year by year at a constant rate which is appreciable as such higher the liquid ratio better the situation.


1) Fixed Assets Turnover Group:Formula Net Sales/Fixed Assets

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2009-10 2010-11 2011-12 Series 1 Series 2 Series 3

2009-2010 2.65

2010-2011 4.31

2011-20 3.1


SIGNIFICANCE:This ratio measures the efficiency in the utilization of fixed assets. This ratio indicates whether the fixed assets are being fully utilized. It is an important measure of the efficient and profit earning capacity of the business. Normally standard ratio is taken as five times.

The financial year 2003-04 had not so good fixed asset turnover ratio. The financial year 2004-05 had an appreciable fixed assets turnover ratio indicating fixed assets are turned over more number of times. This was due to around 72% growth in sales. This shows better asset management policy as compared to the past year. The same ratio came down to 3.12 times in the financial year 2005-06 due to fall in sales by around 31.48%.

2) WORKING CAPITAL TURNOVER RATIO: Formula Net Sales/Working Capital 2009-2010 8.63 2010-2011 8.48 2011-2012 3.33


10 9 8 7 6 5 4 3 2 1 0 2009-10 2010-11 2011-12 Series 1 Series 2 Series 3

SIGNIFICANCE: This ratio signifies achievement of maximum sales with less investment in working capital. As such higher the ratio better will be the situation. The financial year 2003-04 and 2004-05 saw excellent ratio as the company was able to achieve maximum sales with less investment in working capital which shows better working capital management policy. It must be remembered that working capital ratio has been increasing through out the years but the financial year 2005-06 failed to maintain the past records due to fall in sales by 31.48%. The year 2005-06 had heavy investments in working capital which shows rise in activity.



Net Sales/Current Assets





This ratio indicates capability of the organization in efficient use of current assets. This ratio indicates whether current assets are fully utilized. It indicates the sales generated per rupee of investment in current assets. The financial year 2004-05 had good current asset turnover ratio because it had excellent sales in that year. It must remembered that investments in current assets are increasing year by year at constant rate but the company failed to register growth in sales and its sales fell down by 31.48%.

4) CAPITAL TURNOVER RATIO: Formula Sales/Capital Employed 2003-2004 2004-2005 2005-2006




SIGNIFICANCE: This ratio indicates whether capital employed is turned over in the form of sales more number of times. As such higher the capital turnover better will be situation. The financial year 2004-05 had acceptable ratio because it had better sales as compared to other two years. Due to addition or purchase of fixed assets and heavy investments in


working capital due to rise in activity, the capital turnover ratio for 2005-06 came down as compared previous years.

5) INVENTORY TURNOVER RATIO: Formula Net Sales/Average Inventory 2003-2004 2004-2005 2005-2006




SIGNIFICANCE: It is an indication of the velocity with which merchandize moves through the business. This is a test of inventory to discover possible trouble in the form of overstocking or overvaluation. A low inventory turnover may reflect dull business, overinvestment in inventory or accumulation of absolute and unsaleable goods. A high inventory turnover indicates relatively lower amount of working capital locked in inventories. The financial year 2003-04 had excellent inventory turnover ratio locking up smaller part of funds in inventory. The company had low inventory turnover ratio for the year 2004-05 thus indicating over investment in inventory but it has improved in the financial year 2006 indicating less investment in inventory.

SOLVENCY GROUP 1) Debt-Equity Ratio: Formula External Liabilities/ Shareholders Fund


2003-2004 1.24

2004-2005 1.39

2005-2006 1.07

SIGNIFICANCE: It is a measure of financial strength of a concern. Lower the ratio greater the security available to the creditors. A satisfactory current ratio and ample working capital may not always be a guarantee against insolvency if the total liabilities are inordinately large. The purpose of this ratio is to derive an idea of the amount of capital supplied be the owners and of assets cushion available to creditors on liquidation. Generally 1:2 ratio is acceptable, but the ratio of at least 1:1 is desirable as banks even do accept this. The greater the interest of the owners as compared with that of the creditors, the more satisfactory is the financial structure of the business because in such a situation the management is less handicapped by interest charges and debt repayment requirements. A company having a stable profit can afford to operate on a relatively high debt-equity ratio; whereas in the case of a company having an unstable profit, a high debt-equity ratio reflects a speculative situation. Too much reliance on external equities may indicate undercapitalization, whereas too much reliance on internal equities may lead to overcapitalization. All the financial years considered has debt-equity ratio more than 1:1, which is appreciable and acceptable indicating equal amount of interest of the owners as compared with that of creditors.

2) PROPRIETARY RATIO: Formula Total Assets*100/Owners Fund 61.38% 51% 56.93% 2003-2004 2004-2005 2005-2006


SIGNIFICANCE: This ratio is normally a test of strength of credit-worthiness of the concern. To the extent the percentage of liability increase or the percentage of capital dwindles, the credit strength of the concern deteriorates. A high proprietary ratio is however a frequently indicative of over-capitalization and an exercise investment in fixed assets. A low proprietary ratio on the other hand is a symptom of undercapitalization and an excessive use of creditors funds to finance the business. The financial year 2003-04 had good proprietary ratio as it indicates assets are financed to the extent of 69% by the owners funds and the balance is financed by the outsiders. The year 2004-05 had fall in proprietary ratio but in the year 2005-06 the company has improved due to rise in reserve and surplus due to appreciable profits in the last financial year.

3) CAPITAL EMPLOYED RATIO:Formula Fixed Assets*100/Capital Employed 2003-2004 57.54% 2004-2005 52.27% 2005-2006 41.39%

SIGNIFICANCE: Normally a proprietor should provide all the funds required to purchase fixed assets. If the capital employed ratio exceeds 100%, it indicates that the company has used shortterm funds for acquiring fixed assets, which policy is not desirable. When the amount of proprietor funds exceeds the value of fixed assets i.e when the percentage is less that 100, a part of the net working capital is supplied by the shareholders, provided that there are no other non-current assets. Though it is not possible to lay down a rigid standard as

regards the percentage of capital which should be invested in fixed assets in each industry there always is a maxim which should not be exceeded so that the harmony among the fixed assets, debtors and stock is not disturbed. The ratio should generally be 65%.



PROFIT RATIO: 2003-2004 2004-2005 2005-2006

Formula Gross Profit*100/Sales




SIGNIFICANCE: This ratio indicates the degree to which selling prices of goods per unit may decline without resulting in losses on operations for the firm. A high gross profit ratio as compared with that of the other firm in the same industry implied that the firm in question produces its products at lower cost. It is a sign of good management. A low gross profit ratio may indicate unfavorable purchasing and make-up policies, the inability of management to develop sales volume, theft, damage, bad maintenance, market reduction in selling prices not accompanied by proportionate decrease in the cost of goods etc.

2) NET PROFIT RATIO: Formula Net Profit(after taxes)*100/Sales 2.38% 4.98% 17.07%




SIGNIFICANCE: This ratio differs from the ratio of operating profits to net sales in as much as it is calculated after adding non-operating incomes, like interest, dividends on investments etc to operating profits and deducting non-operating expenses such as loss on sale of old assets, provisions for legal damage etc. from such profits. The ratio is widely used as a measure of over-all profitability and is very useful to the proprietors. Reading along with the operating ratio it gives an idea of the efficiency as well as profitability of the business to a limited extent. The company has improved its net profits by 6.17 times in the year 2005-06 from the 2003-04 which is appreciable which shows considerable proportion of net sales to the owners and shareholders after all costs, charges and expenses including income tax, have been deducted.



RETURN ON ASSETS: Formula Net Profit*100/Assets 2003-2004 2004-2005 2005-2006




SIGNIFICANCE:The ratio is a measure of the return on the total resources of the business enterprise. It shows how efficiently management has used the funds provided be the creditors and the owners. It can be referred that the financial year 2003-04 had not so good ratio because of high operating expenses. However the company is improving year by year at a constant rate. The financial year 2005-06 had 17.33% as returns on its various resources which is appreciable.

2) RETURN ON CAPITAL EMPLOYED: Formula PAT+Int*100/Capital Employed 3.65% 13.70% 23.86% 2003-2004 2004-2005 2005-2006

SIGNIFICANCE: Return on capital employed measures the profitability of the capital employed in the business. A high business return on capital employed indicates better and profitable use of long term funds of owners and creditors. As such a high return capital employed will always be preferred. The company has rising trend of return on capital employed indicating efficient use of funds of the creditors and owners by the management which is appreciable.

3) RETURN ON SHAREHOLDERS FUND: Formula PAT*100/Total Shareholders Funds 2003-2004 2004-2005 2005-2006




SIGNIFICANCE:The ratio shows how well the firm used the resources of the owner. This ratio is a measure of the profitableness of an enterprise. The realization of a satisfactory net income is the major objective is being achieved. The financial year 2003-04 had low returns on shareholders fund as compared


to next financial years. However the management of the company is improving in utilizing the resources of the owner in efficient way.


CAPITAL GEARING RATIO: Formula Eq Cap+Res&Sur/Pref Share&Loan Cap 2003-2004 2004-2005 2005-2006




SIGNIFICANCE: The ratio is a means of analysis of the capital structure. If the proportion of preference shares and loan capital is high, or where the proportion of ordinary share capital is low, capital is said to be highly geared and reverse is the position in low gearing. Low gearing indicates that the equity share capital is not paid an adequate return because the profits are swallowed up by the high charges in the form of interest and dividends. Capital gearing signifies the process of maintaining a desired and appropriate gear ratio in an enterprise. When inflationary conditions are expected, high gearing is to be employed and in the period marked by trade depression, low gearing should be employed. Here the company is geared which indicates that it attempts to employ fixed income bearing securities in the capital structure with an intention to increase the earnings of the shareholders.


Mannapuram Gold
BALANCE SHEET AS AT 31ST MARCH 2013 As at 31.03.2012 (Rs.)

Note I. SOURCES OF FUNDS SHAREHOLDER'S FUNDS (a) Share Capital (b) Reserves and Surplus (c) Money Received against Share Warrants NON-CURRENT LIABILITIES (a) Long-term borrowings (b) Deferred Tax Liability (c) Other Long Term Liabilities (d) Long Term Provisions CURRENT LIABILITIES (a) Short Term Borrowings (b) Trade Payable (c) Other Current Liabilities (d) Short-term provisions 7 8 9 10 4 5 6 2 3

As at 31.03.2013 (Rs.)

1,682.41 22,746.73 -

1,682.31 22,128.13 -

13,611.62 524.48 -

10,717.42 128.88 -

68,252.61 387.58 19,315.51 757.52

72,313.61 370.56 11,833.63 1,593.88





(a) Fixed Assets (i) Tangible assets (ii) Intangible assets (iii) Capital Work-in-progress (iv) Intangible assets under Developments (b) Non Current Investments (c) Deferred tax assets(net) (d) Long Term Loans and Advances (e) Other Non Current Assets CURRENT ASSETS (a) Current Investments (b) Trade Receivables (c) Cash and cash equivalents (d) Short Term Loans and advances (e) Other current assets 14 15 16 17 18 6,925.70 8,836.08 99,985.93 6,642.38 2,082.39 8,177.08 96,621.46 10,356.57 12 13 11 2,027.04 77.88 307.14 50.03 468.31 428.16 1,529.81 2,163.72 76.53 144.04 100.03 188.98 523.02 334.60

TOTAL Ratio's
1 Current Assets to Current Liability 2 Fixed Assets to Balance Sheet 3 Current Assets to Balance Sheet 4 Current Liabilities to Balance sheet 5 Cash & Cash Equivalent to Total current assets 6 Non Current Liabilities to Total Liabilities



1.38 136.15 0.02 0.02 0.96 0.97 0.70 0.71 0.07 0.07 0.11 0.09 47

a Mannapuram Gold STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED 31ST MARCH 2013 For the year ended 31st March 2013 (Rs.) For the year ended 31st March 2012 (Rs.)


Revenue from Operation Other Income

19 20

22,173.14 468.14

26,155.48 402.97

TOTAL REVENUE EXPENDITURE Cost of Material consumed Purchase of Stock in Trade Change in Inventories Employee Benefit Expenses Financial Cost Depreciation and Amortization Other Expenses TOTAL EXPENSES PROFIT BEFORE EXCEPTIONAL AND EXTRAORDINARY ITEMS AND TAX EXCEPTIONAL ITEMS PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX 21 22 23 24 25 26

22,641.28 3,409.32 11,894.86 617.09 3,654.97 19,576.24

26,558.45 3,090.11 10,891.00 482.86 3,322.42 17,786.39


8,772.06 -




EXTRAORDINARY ITEMS PROFIT / (LOSS) BEFORE TAXATION TAX EXPENSE: Current Income Tax Deferred Tax Asset Deferred Tax Liability



1,260.04 (279.32) 980.72

2,959.36 (101.91) 2,857.45

PROFITS / (LOSS) FOR THE PERIOD Earning per share (1) Basic (2) Diluted



2.48 2.48

7.06 7.03


The company has strong short term liquidity position as both the liquidity ratios are favorable and appreciable which concludes that company has got sufficient assets to pay off short term debts as and when they fall due. The company had excellent turnover of various assets in the year 2004-2005 as the sales rose by 72% indicating better assets management policy. The assets were efficiently employed to generate maximum sales. However for the year 2005-2006 the turnover ratios suffered because of fall in sales by 31.48% and also there was rise in activity as compared to past years. For inventory turnover the year 2004-2005 was crucial as it had minimum investment in different inventories avoiding thus blockage of funds. The company has strong solvency position as all the solvency ratios are favorable. Debt-equity ratio is favorable indicating equal share of owners and creditors. The working capital ratio indicates the company has funded for working capital through long term funds which represents accepted finance policy. The proprietary ratio indicates around 60% of assets are financed by owners fund which indicates reasonable creditworthiness to the company. The company has got excellent gross profit ratio and the trend is rising which is appreciable indicating efficiency in production cost. The net profit for the year 2005-2006 is excellent and it is 6.17 times past year indicating reduction in operating expenses and large proportion of net sales available to the shareholders of company. The company has excellent overall profitability ratios indicating effective use of funds provided be shareholders and creditors. According to the capital gearing ratio the company is geared by including fixed income bearing securities with an intention to increase the income of shareholders.


Following books were referred for carrying out the project: Financial Management M Y Khan/ P K Jain Financial Management I M Pandey Financial Management S M Inamdar Management Accounting M G Patkar

Annual Reports from 2003-2004 to 2004-2005 of Mannapuram Gold Following websites were referred: www. Mannapuram Gold.com www.bharatforge.com www.google.com