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GENERAL INTRODUCTION
for a span of 6
weeks, under the guidance of Mr. B.D.Roy the vice president of Versa Lites and
Luminaries and Ms. A. SAHANA, M.Sc., MBA, M.Phil, faculty guide for Summer
Project.
A project is scientific and systematic study of real issue or a problem intended and
skills. The study can deal with a small or a big issue in an organization. The problem can
be from any discipline of Management. It can even be a case study where a problem has
been dealt with through the process of management. The essential requirement of a
project is that it should avail scientific collection analysis and interpretation of data
leading to valid conclusion.
Working on a particulars project is the best way to practice what we have learnt
theoretically. Project work provides us an opportunity to investigate a problem and apply
our knowledge in practical situation.
The chief objective of the summer project is to familiarize myself with functions of
firm & their performance, thereby exposed practically to understand the functions of the
organization.
Versa lites was started in the year 1985/86 with eight persons. It is basically a
knowledge-based company in lighting, which is a combination of, know how, know why,
THE OXFORD COLLEGE OF ENGINEERING
and know what embedded into one entity. Versa lites is focused on designing and
manufacturing environmental friendly and energy conserving lighting products at the
economical prices. The hierarchy that present in the organization is horizontal. Versa lites
and luminaries offers wide range of products to its industrial customers, they are wide
range of ballasts, transformers for fluorescent lamps. Company products are about 25 in
number with some products done only to order. In spite of all the odds company face,
they believe in right service and value for money to their customers. Company
sincerely replaced all the chokes which have run bad within the warranty period.
Companys major products are Pattis and Chokes, Miniature fluorescent lamps,
Circular fluorescent lamps, 2 D lamps, parallel fluorescent lamps, High pressure
mercury vapour lamps, High pressure sodium vapour lamps. Versa lites manufacture/
fabricate original equipment products for GE, PHILIPS and WIPRO. These companies
i.e., GE, PHILIPS and WIPRO specify the products or approve/ accept Versalites
products with due testing. GE, PHILIPS and WIPRO sell Versalites products in their
respective brand name. Versalites also sell their products to people approved by GE like
Fluolite and Dhruv electricals. Also versalites sell their products under its brand name
versalites to wholesalers, retailers and local customers depending on demand.
1. b. EXECUTIVE SUMMARY
A STUDY ON RATIO ANALYSIS AT VERSA LITES AND LUMINARIES
PVT. LTD. BANGLORE
Ratio Analysis is an important technique of analyzing the financial statement and
it helps the analyst to make quantitative judgment with regard to concerns financial
position and performance.
An efficient financial management is becoming inevitable for every manager in
todays corporate world. When initially the stress was on the internal analysis of the firm,
procurement of funds, management of assets and allocation of capital, the present
importance has shifted to decision making within the firm. With the modern aspect of
finance function the responsibilities of the finance manager has also increased. In the
process of making optional decision, he makes use of certain analytical tools in the
analysis, planning and control activities of the firm. Financial analysis is an essential
prerequisite for making sound financial decisions.
This report helps to understanding the volume of the profit and its reasonableness
and it also helps to understand the movement of profit over a period of time. It reveals the
reason for the variation in the profit and present position of the company.
Any one would like to know its position against its competitors. The ultimate
performance indicator of any company is the financial parameters, because invariably all
costs efficiencies; activities and solvency position of the company will be reflected in the
financial mirror.
These ratios help to identifying the financial strength and weakness of the firm by
properly establishing relationship between the items of the balance sheet and the profit
and loss account and also knowing the profitability, efficiency and growth of the
company.
The sources of data is Versa Lites previous years balance sheet. The firm has
utilized its asset in the formal manner to yield maximum profit. The net income position
is fairly good. The earning power of the firm improved in the last 4 years. The cash
balance in the firm is very poor. The working capital level in the firm is very high. There
is a mismatch between debts to asset position. The interest coverage proportion is in
match with industry standard.
from last four years. Since finance is an important parameter of every business concern to
determine the growth and profitability the study of the topics sounds momentous.
Purpose of the Study
The study was conducted in Versalites and Luminaries for the purpose of
fulfillment of curriculum.
The main purpose is to make the thorough study on the growth and working of
the company from its inception till date.
The purpose is to assess the companys trend specifically for last four years
with regard to operational performance.
To examine the factors affecting the financial and operational performance of
a company.
The main focus is to identify the loopholes of the company and give suitable
solution to the problem based on analysis.
2.3 Objectives for the study:
2.4 METHODOLOGY
This is a Descriptive Research Method that aims at studying the Ratio Analysis
followed at the Versalites and Luminaries Pvt. Ltd.
The quality of the project work depends on the methodology adopted for the
study. Methodology, in turn, depends on the nature of the project work. The use of proper
methodology is an essential part of any research. In order to conduct the study
scientifically, suitable methods & measures are to be followed.
In order to determine the essential features; the study has been designed to collect
the views and information about the Ratio techniques followed by the managers who are
party to the same and the various employees of the organization. The data has been
collected through the information provided by the managers and employees of the
organization.
Data Collection
The data collection is one of the important aspect in the research design purely
because, it is the way that how we can get answer to the research question.
Data Details: - Data relating to firm is required for the study i.e., about the profit and
loss Account, and Balance sheet for calculating various ratios.
The data is collected in two ways:
Primary Data
Secondary Data
Primary Data:The primary data collection is one of the key tools used by the researcher for data
collection. It is the first hand information collected by the researcher from the
respondents directly. Primary data is collected through observation and communication.
Secondary Data:The secondary data is another form of data collection, where the data is collected
from the existing records, company manual and form previously carried out research
work.
All the details are collected from secondary sources only. Secondary data includes
the annual reports, financial reports of the company etc., discussion with the concerned
officials has also helped to verify and evaluate the variations and results either to confirm
it.
3. THEORETICAL OVERVIEW
INTRODUCTION TO FINANCE
Finance is lifeblood of the economy. It is one of the major components, which
activities and stimulates the overall growth of the economy. Finance is a body of
principles and theories, which deals with rising, and acquiring of funds on reasonable
terms, and use of money by the acquirer.
In the modern money oriented economy, finance is one of the basic foundations of
all kinds of economic activities. It is a master key, which provides access to all the
sources for being employed in manufacturing and merchandising activities. It is rightly
said that, Business needs money to make more money. Efficient management of every
business enterprise is closely linked with efficient management of finance. Hence, a wellknit financial system directly contributes to the growth of the economy.
10
The functions of a financial manager are to plan cautiously, control and execute the
financial objectives with great care. He should review and control the financial decision
to commit or recommit the funds to new or outgoing uses. Thus, in addition to raising
funds, financial management is directly concerned with production, marketing and other
functions of an enterprise.
The main functions of business finance are:
1. Funds requirement decision.
2. Financing or capital-mix decision.
THE OXFORD COLLEGE OF ENGINEERING
11
Financial management:
Sound financial management is necessary in every organization. Collins Brooks has
remarked that, Bad production management and sales management have stain hundreds,
but, a faulty financial management have stain in thousands.
Financial management is managerial activity, which is concerned with the
anticipation of financial needs, acquiring financial resources, allocating funds in business,
administrating the allocating of funds and accounting and reporting to the management
over the financial matters.
Objectives of financial management:
The firms investment and financing decision are unavoidable and continuous. In
order to make them rational, the firm must have certain goals.
12
Marketing
department
Research
Operations
department
department
Finance
department
Information
Purchase
department
department
Human
resource
department
13
14
The funds required during the operations are planned and provided by the finance
department. All the expenses meet during the time of operations are recorded in the book.
Ratio analysis:
Ratio analysis is the most widely used method for the analysis of financial
statements. The item of figures found in the financial statements will be very useful only
when one item is compared with another item. Ratio is a term that establishes relationship
between two mathematical figures. In other words RATIO is an expression of
quantities relationship between two numbers. A relationship between two quantities,
normally expressed as the quotient of one dividend by the other.
15
For example: Rs.5 crores net profits may look impressive, but the firms performance
can be said to be good or bad only when the net profit figure is related the firms
investment. The relationship between two accounting figures, expressed mathematically,
is known as financial ratio (or simply as ratio). Ratio helps to summaries large quantities
of financial data and to make qualitative judgment about the firms financial
performance.
Liquidity position:
With the help of ratio analysis conclusions can be drawn regarding the liquidity
position of a firm the liquidity position of a firm would be satisfactory if it is able to meet
its current obligation when they become due. A firm can be said to have the ability to
meet its short term liabilities if it has sufficient liquid funds to pay the interest and its
short maturing debt usually with a year as well the principle.
16
Ratio analysis is equally useful for accessing the long term financial viability of a
firm this aspect of the financial position of a borrower us of concern to the long term
creditor security analysis and the present and potential owners of a business the long term
solvency is measured by leverage/capital structure and profitability ratios which focus on
earning power of a firm in the respect.
Operating efficiency:
Yet another dimension of the usefulness of the ratio analysis relevant from the view
point of management is it throws light on the degree of efficiency in the management and
utilization of its asset, it would be recalled that the various activity ratios measure this
kind of operation efficiency in the fact the solvency of the firm is in the ultimate analysis
dependence upon the sales revenues generated by the use of its assets total as well as its
components.
Over profitability:
Unlike the outside parties are interested in the financial position of a firm the
management is concerned about the overall profitability of the enterprises that is they are
concerned about the ability of the firm to meet its short term as well as long term
obligation to its owners and secure, optimum utilization of asset of a firm. This is
possible if integrated view is taken and all ratios considered together.
Inter-firm comparison:
17
Ratio analysis not only throws light on the financial position of a firm but also
serves as a stepping stone to remedial measures this is made possible due to inter-firm
comparison with industry averages and single figures of particular ratio is meaningless
unless it related to some standard or norm one, the popular techniques is to compare the
ratios of a firm with the industry averages it should be reasonable expected that the
performance of a firm should be broad conformity with the industry to which it belongs.
As inter-firm comparison would demonstrate the relative position vis--vis competitors.
Helps in decision-making:
Financial statements are prepared primarily for decision-making. But the information
provided in financial statement is not an end in itself and no meaningful conclusion can
be drawn from these statements alone. Ratio analysis helps in decisions from the
information provided in these financial statements.
Helps in financing forecasting and planning:
Ratio analysis is of much help in financing forecasting and planning. Planning is
looking ahead and the ratios calculated for a number of years work as a guide for the
future. Meaningful conclusion can be drawn for future from these ratios. Thus, ratio
analysis helps in forecasting and planning.
Utility to investors:
An investor will like to assess the financial position of the concern where he is going
to invest. His first interest will be the security of his investment and then return in the
form of dividend or interest. Ratio analysis will be useful to the investors in making up
his mind whether present financial position of the concern warrants future investment or
not.
THE OXFORD COLLEGE OF ENGINEERING
18
Utility to creditors:
The creditors or suppliers extend short-term credit to the concern. Current and acid
test ratios will give an idea about the current financial position of the concern.
Benefits to employees:
The employees are also interested in the financial position of the concern especially
profitability. Various profitability ratios like gross profit, operating profit, net profit etc.,
enable employees to put forward their viewpoints for the increase of wage and other
benefits.
19
20
4. Personal bias:
Ratios are only means of financial analysis and not an end itself. Ratios have to be
interpreted and different people interpret the same ratio in different way.
5. Incomparable:
Not only industries differ in their nature but also two firm of the similar business
widely differ in their size and accounting procedure, it makes compression of ratios
difficult and misleading due to various financial terms used in the ratio analysis.
Ratio analysis is merely a tool of financial statement; hence ratios become useless
if separated from, the statement from which they are computed.
21
4.
22
23
LIQUIDITY RATIOS
These ratios are also called as working capital ratios or short term solvency ratio.
Liquidity means the firms ability to meet the short term obligations of the firm.
Therefore the relationships are drawn between the current assets (sources for meeting
short term obligations) and current liabilities. The firm should ensure that it does not
suffer from lack of liquidity, and also that 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 creditors confidence and a very high degree of liquidity is also
bad because it results in blocking of funds or idle assets earn nothing. Therefore, it is
necessary to strike a proper balance between high liquidity and lack of liquidity.
Current ratio
The current ratio measures its short-term liquidity or solvency of a company that is
ability to meet short-term obligation. The higher the current ratio larger the amount of
rupees available per rupee of current liability, the more the firms availability to meet the
current obligations and the greater safety of funds of short term creditors.
24
Current assets refer to all assets which change there form and substance and which
are ultimately converted into cash during normal operating cycle of business which is
normally 12 months. Current assets include cash in hand, cash at bank, sundry debtors,
bills receivables, short term investments, prepaid expenses, accrued incomes, inventory,
loans and advances.
Current liabilities refer to short term obligations or liabilities which are required to be
repaid within a period of one year they include sundry creditors, bills payable, provisions
for income tax proposed dividend, outstanding expenses.
Short-term creditors prefer a high current ratio since it reduces their risk.
Shareholders may prefer a lower current ratio so that more of the firms assets are
working to grow the business. Typical values for the current ratio vary by firm and
industry. For example, firms in cyclical industries may maintain a higher current ratio in
order to remain solvent during downturns and the standard current ratio (Ideal) is 2:1 i.e.,
for every one current liability their should be two current assets to be maintained.
Current Ratio= (Current Assets) / (Current Liabilities)
Table-1
Table showing analysis of Current Ratio
particulars
Current
As on 2005 As on2006
As on 2007 As on 2008
14886242.52 17752618.54 18678959.71 28413364.27
Assets
Current
25
liabilities
Current
1.16:1
1.45:1
1.60:1
1.45:1
Ratio
Interpretation
The current ratio from the above calculation is worth 1.16 in 2005. It has been
increased in 2006 to 1.45 and in the year 2007 it has increased to 1.60. In 2008, it
decreased to 1.45 for every 1current liability. Firm needs to maintain more current assets
in order to meet its short-term obligations. Even though the company is not maintaining
the current assets according to the standards i.e., 2:1 they are just managing to meet the
current liabilities. We can conclude that the ratio is favorable as the current asset is
slightly higher than the current liabilities, its liquidity position can be interpreted to be
satisfactory.
26
Graph-1
Graph showing analysis of current ratio
1.6
1.6
1.45
1.4
1.2
1.45
1.16
1
0.8
current ratio
0.6
0.4
0.2
0
2005
2006
2007
2008
27
Debtors/receivables.
The Inventory is omitted to ascertain the intrinsic ability to realize the cash. It is true
that the inventories are the assets on which the largest losses occur in the event of
liquidation. The acid test helps in identifying the ability to command cash without
disposing inventory, because it is assumed that inventory will not supply cash as readily
as debtors or cash. The acid test is therefore, supposed to be improved, stringent, version
of the current ratio in measuring the liquidity of an enterprise and the standard ratio is 1:1
is considered to be satisfactory and this differs from firm to firm.
Quick Ratio = Quick assets (Current Assets Inventories) / Current Liabilities
28
Table-2
Table showing analysis of Acid Test Ratio
Particulars
Quick
Assets
Current
Liabilities
Quick Ratio 0.87:1
0.87:1
1.02:1
0.79:1
Interpretation
Quick ratio is calculated to work out the liquidity of a business. In the year 2005
and 2006 it is 0.87 and it increased in 2007 to 1.02and in the year 2008 it decreased to
0.79. The standard for Quick ratio is 1:1. In the year 2007 it had a good liquidity position
when compared to other years. The idea behind this is that the inventory forms 50% part
of Current Assets. Therefore there is a need to reduce the Quick ratio to 1:1. Since the
sundry debtor is more, the ratio always tends to be high. However, the Inventories cannot
THE OXFORD COLLEGE OF ENGINEERING
29
be considered because, the Inventory in the balance sheet forms the closing stock and any
further computation based on the inventory will not yield realistic figure.
Graph-2
Graph showing analysis of Acid Test Ratio
30
Cash Ratio
Since cash is the most liquid asset and it is to be analyzed and it is equivalent to
current liabilities. Trade investment or marketable securities are equivalent of cash;
therefore, they may be included in the computation of cash ratio\
As on 2006
11932.65
As on 2007
39800.65
As on 2008
9304.15
Bank Bal.
Current
Liabilities
Cash Ratio
0.00058:1
0.00097:1
0.0034:1
0.00047:1
Interpretation:
31
The Cash ratio is less than the standard ratio. The Cash ratio is not at all near to the
standard cash ratio. The reason behind this is that the Cash and Bank balances present in
the organization are very low when compared to other component of the current assets.
The Liquid funds will never yield benefit to the organization. The reason is that the Cash
in hand of the bank balances in the Current account will yield nothing over the period.
The standard for the cash ratio is 0.5:1. If Cash accumulates or is deficit in the
business, then the need will arise to analyze and necessary arrangements to be made for
the purpose of maintaining adequate liquidity.
Graph-3
Graph showing analysis of Cash Ratio
0.0035
0.0034
0.003
0.0025
0.002
Cash ratio
0.0015
0.00097
0.001
0.0005
0
0.00058
2005
0.00047
2006
2007
2008
32
The difference between current assets and current liabilities excluding short-term
bank borrowings is called Net Working capital. The Net Working capital is often used as
the measure of firms liquidity. It is considered that, between two firms, the one having
Net Working Capital has greater ability to meet its current obligations. This is not
necessarily so; the measure of liquidity is a relationship, rather than a difference between
current assets and current liabilities. Net Working Capital however measures the firms
potential reservoir of funds. It can be related to net assets (or net current assets).
Net Assets includes total of current assets and NWC is difference of current asset &
current liabilities.
NWC Ratio = Net Working Capital / Net Assets
Table-4
Table showing analysis of Net Working Capital Ratio
Particulars
Net
As on 2005
2079994.51
As on 2006
5519561.60
As on 2007
7019732.49
As on 2008
8828156.04
working
capital
Net Assets
NWC Ratio
33
Interpretation
Net Working Capital Ratio is significantly increasing over the years. Net working
capital ratio is also high because of different attributes.
o Normal increase in the Working Capital requirement will be present in each
financial year.
o As the amount of sundry debtors is more, it will in turn vary the Working
Capital Position.
Graph-4
Graph showing analysis of Net Working Capital Ratio
34
Leverage Ratios
The short-term creditors like bankers and suppliers of raw materials are more
concerned with the firms current debt-paying ability. On the other hand, long-term
creditors, like debenture holders, financial institution etc are more concerned with the
firms long-term financial strength.
Financial Leverage refers to the use of Debt finance. While Debt capital is a
cheaper source of finance, it is also a riskier source of finance. Leverage ratios help in
assessing the risk arising from the use of debt capital. Two types of ratios are commonly
used to analyze the financial leverage: Structural ratios and Coverage ratios. The
important structural ratios are Debt - Equity and Debt Assets ratio. Coverage ratios
show the relationship between debt servicing commitments and the sources for meeting
THE OXFORD COLLEGE OF ENGINEERING
35
these burdens. The important Coverage ratios are: Interest coverage ratio, Fixed Charges
ratios Debt service Coverage ratio.
Particulars
Debt
As on 2005
3089989.83
Capital
Assets
(Fixed
As on 2006
7547886.88
As on 2007
8353755.00
As on 2008
8969767.9
Current)
Debt
0.17:1
0.35:1
0.38:1
0.28:1
Asset Ratio
36
Interpretation
In the year 2005 the debt asset ratio was high as 0.17 and in the year 2007 it has
decreased to 0.28. The Leverage ratios are computed based on the fact that the short term
loans are also considered as the Debts for the firm. It is also taken into consideration that
the firms are liable to pay the interest to them.
The debt ratio of 0.17 in 2005 means that lenders have financed 17% of net assets
and correspondingly in the year 2006 it increases to 35%, in 2007 it is 38%, and in 2008
it is 28%.
It obviously implies that owners have provided the remaining finances. They have
financed: 1-0.54=0.83, 1-0.35=0.65, 1-0.38=0.62, 1-0.28=0.72, respectively in 2005, 06,
07 & 08 respectively.
Graph-5
Graph showing analysis of Debt Asset Ratio
37
38
amount of sales. Activity ratios are employed to evaluate the efficiency with which the
firm manages and utilizes its assets.
The important Turn over ratio is: Inventory Turnover Ratio, average collection period,
Debtor Turnover Ratio, Fixed Asset Turnover, and Total Asset Turnover Ratio.
Table-6
Table showing analysis of Inventory Turn Over Ratio
Particulars
Sales
39
3208985.00
5424146.00
6953702.5
9793133.5
Stock *
Inventory
13.58:1
9.26
9.42
7.15
Turnover
Ratio
Interpretation
Inventory turnover ratio so computed shows bad sign in the movement of stocks in the
company. The Inventory turnover ratio has decreased over the past four years. The
Inventory turnover ratio has decreased because of many reasons such as non sequential
orders from the customers, and inadequate supply of raw materials from the suppliers.
Graph-6
Graph showing analysis of Inventory Turn over Ratio
40
41
Table-7
Table showing analysis of Debtors Turnover Ratio
Particulars
Sales
Average
Account
Receivables
Debtor
4.47:1
5.12:1
6.10:1
5.22:1
turnover
ratio
Interpretation
As this ratio measures how rapidly debts are collected. Debtors turnover indicates
the number of times debtor turnover each year.
DTR is increasing from year to year as in the year 2005 it is 4.47 times, in 2006
increased to 5.12 times and in 2007 it is 6.1 times but in the year 2008 it has reduced to
5.22 times. The average accounts receivables in the year is also increasing, this results in
the increase in DTR.
Graph-7
Graph showing analysis of Debtors Turnover Ratio
42
43
Particulars
Average
As on 2005 As on 2006
10278400.95 10316881.09
As on 2007
11087513.06
As on 2008
14549705.72
Debtors
Average
126022.36
144653.06
185202.47
208232.59
71.32
59.87
69.87
Daily
Credit Sales
Average
81.56
Collection
Period
Interpretation
The average collection period measures the quality of debtors since it indicates
the speed of their collection
The Average Collection Period is nearly 69.87 days. The Collection Period is in
between when compared to that of past 4 years. This indicates the firms steady
performance in the collection of debt. The reason may be attributed to high Debtors
Turnover ratio, higher will be the Average collection period. Even though, the company
performance is with in the standard limits, it is necessary for the company to maintain the
collection period at the lowest level as maintained in the past years.
Graph-8
Graph showing the Average Collection Period
Average Collection Period for the Past 5 years
44
45
Table-9
Table showing the analysis of Fixed Assets Turn over Ratio
Particulars
Sales
Fixed assets
Fixed asset
turn
As on 2005
45998160.08
3839132.00
11.98:1
As on 2006
52798366.08
3598812.00
14.67:1
As on 2007
67598900.53
3418541.00
19.77:1
As on 2008
76004897.01
3628540.00
20.95:1
over
ratio
Interpretation
Fixed asset turnover ratio is increasing over the years. In the years 2005 it was
11.98 and in the year 2008 it is increased to 20.95. Fixed Asset Turnover ratio indicates
the efficiency in the utilization of fixed assets by the firm. But since the firm has got
older assets, it also needs to be viewed that the value derived out of Fixed Assets
Turnover ratio is high and gives indication that the assets are utilized to the best
maximum level.
Graph-9
Graph showing the analysis of Fixed Assets Turnover Ratio
Fixed Assets Turnover Ratio in comparison with previous year figures
46
47
company. The Total Assets indicate the Fixed Assets as well as Current Assets in the
organization. This ratio shows the firms ability in generating sales from all financial
resources committed to total assets
Total Asset Turnover Ratio = Net Sales / Total Assets
Table-10
Table showing the analysis of Total Assets Turnover Ratio
2.47:1
3.06:1
2.37:1
turnover
ratio
Interpretation
The Total asset turn over ratio form the above calculation is worth 2.46 in 2005. It
has been increased in 2006 to 2.47 and in the year 2007 it has increased to 3.06. But in
THE OXFORD COLLEGE OF ENGINEERING
48
the year 2008 it has decreased to 2.37. It indicates that the total assets turnover of 2.46
times in 2004 implies that firm generates a sale of Rs 2.46 for one rupee investment in
fixed and current assets together, likewise sale of Rs 2.47, 3.06 and 2.37 in 2005, 2006,
2007and 2008 respectively for one rupee investment in assets.
Graph-10
Graph showing the analysis of Total Assets Turnover
Profitability ratios
49
The operating efficiency of a firm and its ability to ensure adequate returns to its
shareholders depends ultimately on the profits earned by it. The profitability of a firm can
be measured by its profitability ratios.
Profitability reflects the final result of business operations. There are two types of
profitability ratios (1) Profit margin ratios. (2) Rate of return ratios. Profit margin ratios
show relationship between profit and sales. The two popular profit margin ratios are:
Gross profit margin ratio and Net profit margin ratio. Rate of return ratios reflect the
relation between profit and Investment. The most important rate of return measure is
Earning Power.
Table-11
Table showing the analysis of Gross Profit Margin Ratio
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50
Particulars
Gross Profit
Net Sales
Gross Profit
As on 2005
2401057.23
45998160.08
0.052
As on 2006
2577289.52
52798366.08
0.049
As on 2007
3363986.02
67598900.53
0.050
As on 2008
5944041.31
76004897.01
0.078
ratio
Interpretation
A high ratio of gross profits to sales is a sign of good management as it implies
that the cost of production of the firm is relatively low. As we can see in the year 2005 it
is 5.2% and in the year 2007 it is 5.0 %and in 2008 it is 7.8% where it is increasing from
years by reducing cost of production. Even though in the year 2006 there is slight
downfall in gross profit that is 4.9% it has increased to 7.8% in 2008 this shows there is
normal growth in gross profit for the company.
Therefore company needs to concentrate on the direct expense in order to see that the
gross profit margin is increased
Graph-11
Graph showing the analysis of Gross Profit Margin Ratio
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52
Table-12
Table showing the analysis of Net Profit Margin Ratio
Particulars
Net Profit
Net Sales
Net Profit
As on 2005
627977.04
45998160.08
0.014
As on 2006
606086.52
52798366.08
0.011
As on 2007
764805.63
67598900.53
0.011
As on 2008
1102534.00
76004897.01
0.015
ratio
Interpretation
The net profit margin on sales had slightly increased in the year 2005 it was
0.014, but it reduced in 2006 and 2007 to 0.011 and again it increased to 0.015 in 2008
profitability of the business has increased. The reason may be better utilization of
resources and cutting down of indirect cost. This ratio is the overall measure of firms
ability to turn each rupee sales into net profit.
Graph-12
Graph showing the analysis of Net Profit Margin Ratio
53
54
Earning Power
Particulars
Profit
As on 2005
2401057.23
As on 2006
2577289.52
As on 2007
3363986.02
As on 2008
5944041.31
before
Interest &
Taxes
Average
Total Assets
Earning
0.13
0.12
0.15
0.18
Power
Interpretation
The Earning Power ratio was high in the year 2008. The earning power of the
business also increased when compared to last year as in the year 2005 it is 0.13, in 2006
it is 0.12 and in 2007 it is 0.15, compared to this in 2008 it has increased to 0.18 the
reason behind is the proportionate increase in profit before interest and tax in compare to
assets..
THE OXFORD COLLEGE OF ENGINEERING
55
Graph-13
Graph showing the Earning Power
DU-PONT ANALYSIS
THE OXFORD COLLEGE OF ENGINEERING
56
Return on Total Assets = Net Profit Margin * Total assets Turnover Ratio
Net Profit / Total Assets = (Net Profit / Net sales) * (Net Sales / Total Assets)
Table-14
Table showing the Du-Pont Analysis
Particulars
Net Profit
Net Sales
Total Assets
Return on
As on 2005
627977.04
45998160.08
18725374.52
0.034
As on 2006
606086.52
52798366.08
21351430.54
0.028
As on 2007
764805.63
67598900.53
22097500.71
0.035
As on 2008
1102534.00
76004897.01
32041904.27
0.034
Total Assets
Interpretation
57
Du-Pont analysis also proved that the company is having a good net profit margin
when compared to previous years. The net profit is moving constant when compared to
years this shows the consistency. Company has maintained standard performance in the
year 2005, 2007 and in 2008 that is 0.034, 0.035 and 0.034 respectively. But it has
decreased in the financial year 2006. The increase in the sales position also contributes an
increase in the return on total asset.
Graph-14
Graph showing the Du-Pont Analysis
58
2. The Working Capital level in the organization is also poor compared to previous years
that should increase as it affects the day-to- day transaction. The company should
make sure that proper Current Assets needs to be maintained to meet the Current
liabilities as already mentioned. It is therefore very much important from all aspects
that company should either adopt the policy of working on maintaining Current
liabilities. The strategy should be in tune with maximizing the profits for the
Company. Any deviation in its primary objective will affect its productivity level as
well as hamper its performance in Industrial level.
3. There is a mismatch in Debt to asset position in Versa Lites. It is very much important
for SSI to maintain Current assets; otherwise there will always be a problem of
liquidity for current assets to match the current liabilities. The Current Assets level
should at least match 50% of Current Liabilities in SSI.
4. The Interest coverage ratio is in tune with the Industry standards. The average 7%
will yield in positive results as the company is running under profit. The coverage of
59
Interest on the profit before Interest & Taxes will be very nominal & will have very
less influence on the companys profitability.
5. The Debtors Turnover ratio is an important one in analyzing the companys average
collection period. The Debtors Turnover has been good in the year 2006 as compared
to those other 4years. This needs to be improved in the future years also. Collection
agents need to be appointed so that the collection can be mobilized faster & the
improvement will be brought in the profitability position of the company. This is very
much important, as the collection from debtors will impact the profitability position
of the company.
6. The average collection period of the company is at its worst compared to the last 4
years. It needs to improve on the present position & make sure that there is some
form of benchmark needs to be fixed & the company tries to attain it in its each
financial year. This is very much important as the company will be having continuous
& regular cash inflows regularly & will reduce the level of liability on the company.
7. The Fixed Assets turnover depicts the utilization of fixed assets to the sales done by
the organization. This depicts the productive performance of the fixed assets when
compared to the sales done by the organization in the last 4-5 years. This is very
much important in case of manufacturing or production based companies.
8. However, when we analyze the profitability position of the Versa Lites, the company
is running under profit. The Profitability ratios are positive as the firm is running
under profit. The strategy should be base lined to achieve good results in different
phases outlined for small-scale industries.
60
9. The Net Income of the Versa Lites is very large at nearly 15% in the financial year
2005. The Net Income needs to be stabilized to earn good profitability position for the
year. This is very important, as the good profitability will bring in better prospects for
the company. However the Total Income in comparison to the total assets has
performed better in comparison to all the 5 years is a good sign for the company.
10. The earning power of the company compared to the last five year this year it has
decreased. The company should strategize on improving its earning power to the core
maximum level.
11. As far as the Total Assets is concerned the importance of current assets is taken into
consideration when compared to the fixed assets for valuating the Total Assets
turnover ratio. The importance of current assets in the evaluation of turnover ratio is
considered for calculating the overall profitability position of the company with
respect to the total assets of the company. The significance of current assets in
evaluating the Total Assets turnover is more in Versa Lites when compared to the
other service based industry. This is because the production Industry will yield
significantly more in the current assets when compared to fixed assets. This is one of
the reasons for production companies to maintain the level of current assets at 80%
compared to current liabilities. The increased sales & depreciated assets will yield
good ratio. Versa Lites has utilized the assets in the formal manner to yield maximum
profits. It is therefore in the year 2008; the company is earning good position in the
profitability compared to last 4 years.
61
6 SUGGESTIONS.
Versa Lites &Luminaries is a small scale industry engaged in manufacturing chokes and
Patti fittings.
It is important for the Versa Lites to maintain stability & Viability in its
operations. It is therefore very much important for Versa Lites to bring in productivity in
all its class of operations. The Creation of benchmark is very much important for setting
up a standard & ensuring the attainment of its objectives. The ratio analysis brings out
many aspects where the valuation ratios & profitability ratios are very much favor in the
case of Versa Lites. However, Versa Lites has made profits during last four financial
years.
They need focus on all the factors in order to reduce direct as well as in direct cost
in order to increase the Net profits of the company even though there is a normal growth
in the firm.
There is a still need for Versa Lites to analyze on key factors, which are
influencing the productivity levels for Versa Lites. Deep in-depth analysis on the Sundry
debtors, problems involved in financing the current liabilities steps to be taken to see to
that the sundry debtors are maintained to a standard level. Versa Lites should set up the
objectives, analyze the factors of production, and thereby maximize the profits for the
organization.
62
Rs.
PROPRIETOR,
ASSETS
FIXED ASSETS:
Rs
1965245.00
Mrs. GAYATHRI(BAL.b/f)
1057548.33
151001.00
1500000.00
48165.00
2557548.33
Motor Cars
670854.00
627977.04
1003867.00
3185525.37
Less: Drawings
Bal C/F\
Investment Allowance Reserve
204991.00
2980534.37
2773.00
CURRENT ASSETS:
371510.36
Deposits
601936.82
326735.34
155625.40
1416319.13
Advances to suppliers
103207.20
Unsecured Loans
975425.00
Closing Stock
3739520.00
Sundry Debtors
10278400.95
Cash on hand
MISCELLANEOUS
7552.15
63
EXPENDITURE:
Profit & loss A/c(B/F)
154170.69
CURRENT LIABILITIES
Sundry Creditors(Trade)
12525698.11
28490.00
58478.90
Outstanding expenses
193581.00
TOTAL
18879545.21 TOTAL
18879545.21
Rs
2678450.00
Purchases
Wages
4971490.34
Sales
INCOME Rs
45998160.08
3739520.00
4006320.70
G/P c/d.
2401057.23
TOTAL
49737680.08 TOTAL
49737680.08
Administration expenses
1791452.06
G/P b/d
2401057.23
257700.35
25300.65
Donations
6000.00
Interest received
22541.51
Depreciation
256161.00
Miscellaneous Income
492438.17
Miscellaneous expenses
2047.11
64
627977.04
2941337.56
TOTAL
2941337.56
ASSETS
FIXED ASSETS:
Rs
3598812.00
606086.52
1724657.41
CURRENT ASSETS:
7547886.88
Closing Stock
7108772.00
Sundry Debtors
10316881.09
11932.65
315032.80
CURRENT LIABILITIES
MISCELLANEOUS
EXPENDITURE:
12233056.94
TOTAL
154170.69
21505601.23
21505601.23
65
INCOME Rs
52798366.08
Sales
Purchases
Wages
3604881.00
Manufacturing expenses
2234711.79
G/P c/d.
TOTAL
2577289.52
59907138.08 TOTAL
59907138.08
Administration expenses
1315605.38
G/P b/d
2577289.52
542324.00
20100.35
Depreciation
240320.00
Interest received
23400.00
Miscellaneous Income
83546.03
TOTAL
2704335.90
606086.52
2704335.90
7108772.00
Rs.
PROPRIETOR,
ASSETS Rs
FIXED ASSETS:
As per Schedule
Mrs. GAYATHRI(BAL.b/f)
1724657.41
96000.00
764805.63
3418541.00
66
2585463.04
Less: Drawings
408808.16
154170.69
Balance C/F
2022484.19
CURRENT ASSETS:
5642401.32
Deposits
443287.00
134373.00
309726.00
189162.31
Closing Stock
6798633.00
60339.73
Sundry Debtors
11087513.06
892053.64
Cash on hand
39800.65
Unsecured Loans
CURRENT LIABILITIES
1435425.00
Sundry Creditors(Trade)
11384663.22
62034.30
274564.00
TOTAL
22097500.71 TOTAL
22097500.71
Sales
INCOME Rs
67598900.53
67
Purchases
6798633.00
Wages
6842056.08
Manufacturing expenses
5894899.96
G/P c/d.
3363986.02
TOTAL
74397533.53 TOTAL
Administration expenses
1851629.73
548871.77
G/P b/d
3363986.02
28324.39
147432.70
Donations
17718.87
Interest received
14247.20
Depreciation
338474.00
Miscellaneous Income
24158.47
764805.63
3549824.39
TOTAL
3549824.39
74397533.53
Rs.
PROPRIETOR,
ASSETS
FIXED ASSETS:
Rs
1827503.00
Mrs. GAYATHRI(BAL.b/f)
2022484.19
88484.00
2905917.31
40417.00
1102534.00
Motor Cars
497270.00
6030935.50
1427626.73
68
Less: Drawings
Bal C/F\
2544007.36
TOTAL
3881300.73
3486928.14
Less: Deprecation
252760.73
WDV C/F.
3628540.00
CURRENT ASSETS:
SECURED LOANS
Deposits
406640.00
1399.00
530080.40
186189.00
130000.00
7346754.90
Closing Stock
12787634.00
Sundry Debtors
14549705.72
Cash on hand
9304.15
UNSECURED LOANS
Mr. H.R. Sreenatha Rao
735425.00
400000.00
300000.00
19274065.97 EXPENDITURE:
311142.26
MISCELLANEOUS
TOTAL
32041904.27 TOTAL
M/S VERSA LITES, BANGALORE
32041904.27
Rs
6798633.00
Purchases
12787634.00
Wages
5876114.96
18798799.17
16065871.55
G/P c/d.
5944041.31
TOTAL
107591330.2 TOTAL
Sales
INCOME Rs
76004897.01
107591330.2
69
G/P b/d
5944041.31
3765991.15
32540.58
802629.58
Interest received
13886.00
100000.00
Miscellaneous Income
49934.28
Donations
11852.00
Miscellaneous Expenses
4634.71
Depreciation
252760.73
1102534.00
6040402.17
TOTAL
6040402.17
70