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R A T I O A N A L Y S I S

Meaning and definition of ratio analysis :

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use
of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well
as its historical performance and current financial condition can be determined. The term ratio
refers to the numerical or quantitative relationship between two variables.

Significance or Importance of ratio analysis

o It helps in evaluating the firms performance:

With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of
the undertaking. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firms assets correctly, to increase
the investors wealth. It ensures a fair return to its owners and secures
optimum utilization of
firms assets.

o It helps in inter-firm comparison:

Ratio analysis helps in inter-firm comparison by providing necessary data.

An interfirm comparison indicates relative position.It provides the relevant
data for the comparison of the performance of different departments. If
comparison shows a variance, the possible reasons of variations may be
identified and if results are negative, the action may be intiated immediately
to bring them in line.

o It simplifies financial statement:

The information given in the basic financial statements serves no useful

Purpose unless it s interrupted and analyzed in some comparable terms.
The ratio analysis is one of the tools in the hands of those who want to know
something more from the financial statements in the simplified manner.

o It helps in determining the financial position of the concern:

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Ratio analysis facilitates the management to know whether the firms

financial position is improving or deteriorating or is constant over the years
by setting a trend with the help of ratios The analysis with the help of ratio
analysis can know the direction of the trend of strategic ratio may help the
management in the task of planning, forecasting and controlling.

o It is helpful in budgeting and forecasting:

Accounting ratios provide a reliable data, which can be compared, studied

and analyzed.These ratios provide sound footing for future prospectus. The
ratios can also serve as a basis for preparing budgeting future line of action.

o It is helpful in determining Liquidity position:

With help of ratio analysis conclusions can be drawn regarding the Liquidity
position of a firm. The liquidity positon of a firm would be satisfactory if it is
able to meet its current obligation when they become due. The ability to met
short term liabilities is reflected in the liquidity ratio of a firm.

o It is helpful in determining Long term solvency:

Ratio analysis is equally for assessing the long term financial ability of the
Firm. The long term solvency is measured by the leverage or capital
structure and profitability ratio which shows the earning power and operating
efficiency, Solvency ratio shows relationship between total liability and total
assets.

o It is helpful in determining Operating efficieny:

Yet another dimension of usefulness or ratio analysis, relevant from the view
point of management is that it throws light on the degree efficiency in the
various activity ratios measures this kind of operational efficiency.
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CLASSIFICATION OF RATIO

Accounting ratio may be broadly classified into following categories:-

1. Balance sheet ratio:- Ratios calculated from the different

items of the Balance sheet of a concern are called Balance Sheet
Ratios. eg. Current ratio, Liquid ratio,
Proprietory Ratio, Capital Gearing Ratio, Debt equity Ratio etc.

2. Revenue Statement Ratio:- Ratios calculated from the different

items of the Profit & Loss A/C of a firm are called Revenue Statement
Ratio. eg. Gross Profit Ratio, Net Profit Ratio, Operting Profit
Ratio, Stock Turnover Ratio etc.

3. Mixed Ratio:- Ratios computed by taking accounting data

from the Balance Sheet on the one hand and from Profit & Loss A/C
on the other, are called Balance Sheet and Revenue Statement
Ratios. eg. Net Profit to Proprietors Fund Ratio , Inventory
Turnover Ratio, Working Capital Ratio etc.
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C U R R E N T R A T I O
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its
current or working capital position) by deriving the proportion of current assets available to cover
current liabilities.

Formula :

Where, Current Assets = Inventories+Cash receivables+Cash& Bank+Accruals

+Loans&Advances+Bills receivable+Disposable investments
+Marketable securities+(Short term)+WIP+Prepaid expenses;

And Current Liabilities = Payables+Short term loans+Bank overdraft+Cash credit

+Outstanding Expenses+Provision for taxation+Proposed dividend

CURRENT RATIO
FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION
CURRENT ASSETS 4118.68 7091.31 7052.8

CURRENT LIABILITIES 1783.03 2311.98 2835.75

CA:CL 2.31 3.06 2.48

Analysis : The standard ratio in this case is 2 : 1. In the year 2007-2008, the ratio is higher
than 2006-2007 and 2008-2009. It reflects under trading or unemployed or
unutilized resources. This is a very bad sign of management.

Cause : In 2007-2008, Current Assets is proportionately higher than the years 2006-2007 and
2008-2009.
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QUICK RATIO

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further
refines the current ratio by measuring the amount of the most liquid current assets there are to
cover current liabilities.
The quick ratio is more conservative than the current ratio because it excludes inventory
and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means
a more liquid current position.

Formula :

Quick Assets = Current Assets Stock in Trade

Quick Liabilities = Current Liabilities Bank Overdraft

Quick Ratio
For the Year Ended
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

Quick Assets ( QA) 2142.5 4435.87 4763.87

Quick Liabilities ( QL) 1783.03 2311.98 2835.75

QA : QL 1.2 1.92 1.68

Analysis : The standard ratio in this case is 1 : 1. This means that for every Re.1 of Current
Liabilities, there should be Re.1 of Current Assets. This ratio is also used for testing
the solvency of the enterprise. In the year 2007-2008, that the companies position is solvent and
the company is not utilizing all of its current assets .

Cause : In 2007-2008, the Liquid Assets are proportionately higher than the year 2006-2007.
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D E B T- E Q U I T Y R A T I O
The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and
obligors have committed to the company versus what the shareholders have committed.

Similar to the debt ratio, a lower percentage means that a company is using less leverage and has
a stronger equity position.
Formula:

Long Term Debt = Secured Loans + Unsecured Loans

Shareholders Fund = Share Capital + Reserve

DEBT EQUITY RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

Long term Debt(A) 1383.01 5025.98 5580.14

Shareholder's Fund(B) 4879.8 6424.81 7336.15

A:B 0.28 0.78 0.76

Analysis : The standard ratio in this case is . 5 : 1.( Long-Term Debt : Shareholders Fund ).
The position of the creditors will be uncomfortable if the ratio is higher than this.The
analysis for the years 2007-2008 and 2008-2009 says that the position of the creditors is
uncomfortable.
Cause : In the years 2006-2007 and 2007-2008 both Secured and Unsecured loans have
increased more than proportionately. In the year 2007-2008 only Secured loan
increased more than proportionately.
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FIXED ASSETS RATIO

This ratio reveals the relation between the Fixed assets and Proprietors fund of a concern.
It also shows whether the financial planning of a concern is sound or not or how much of the
fixed assets are converted by the proprietors fund. The ratio is applicable for the purpose of
testing the solvency position and efficiency of the management.

Formula :

Fixed Assets = Gross Block Depreciation + Net Block + Capital Work In Progress

Proprietors Fund = Equity share capital + Preference Share Capital + Reserve and Surplus

FIXED ASSETS RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

FIXED ASSETS(FA) 3371.5 5470.67 6733.01

PROPTIETORS FUND(PF) 4879.8 6424.81 7336.15

FA : PF 0.69 0.85 0.92

Analysis : It reflects sound financial plan of the company.

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N E T P R O F I T R A T I O
The ratio indicates the ratio of the net profit to net sales. The amount left out of sales for the proprietors
fund may be known from the ratio. The ratio is very helpful for measuring the profitability of the
business. It is also helpful to measure the operational efficiency of the management of the concern. The
more the ratio, greater is the profitability of the business. Its expressed as :

Formula :

NET PROFIT RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

NET PROFIT ( NP ) 1539.75 2242.76 1632.01

NET SALES ( NS ) 11543.8 15353.08 17611.22

NP : NS 13.33 14.61 9.27

Analysis : The ratio of 2008-2009 is less than 2007-2008 and 2006-2007.

This means that the profit position has decreased from the previous years.

Cause : This has happened due to more than proportionate increase in :-

Material price and

Direct expenditure
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S T O C K T U R N O V E R R A T I O
The ratio is also known Inventory Turnover ratio. It expresses the relationship between sales
during the year and Average Inventory held during the year. Its expressed as:

Formula :

STOCK TURNOVER RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MLLION RS/MLLION RS/MLLION

COST OF GOODS SOLD ( CGS ) 6538.46 8430.82 10328.35

AVERAGE STOCK ( AS ) 1755.09 2315.81 2472.19

CGS : AS 3.73 3.64 4.18

Analysis : In 2008-2009, the ratio is higher than in the year 2007-2008. It shows a good sign of
management.

Cause : The turnover on the year 2008-2009 is greater than in the year 2007-2008.
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N E T P R O F I T

TO

P R O P R I E T O R S F U N D RATIO
The ratio shows the ratio of return on the proprietors fund. The higher the ratio, the greater is the
return. The ratio is helpful to measure the earning capacity of the concern.

Formula :

NET PROFIT TO PROPRIETORS FUND RATIO

FOR THE YEAR ENEDED
2006-2007 2007-2008 2008-2009
RS/MIILION RS/MIILION RS/MIILION

NET PROFIT ( NP ) 1539.75 2242.76 1632.01

PROPRIETORS FUND ( PF ) 4879.8 6424.81 7336.15

NP : PF 0.32 0.35 0.22

Analysis : The ratio is indicating that the earning capacity of the concern is decreasing from
2007-2008 to 2008-2009.

Cause : Comparing 2007 and 2008-2009 , that Net Profit in 2008-2009 is proportionately
smaller than 2007-2008.
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N E T P R O F I T T O F I X E D A S S E T S RA T I O
The ratio is helpful in comparing the Net Profit of the business with its Fixed Assets. This ratio
reveals the extent of utilization of Fixed Assets.

Formula :

NET PROFIT TO FIXED ASSETS RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MIILION RS/MIILION RS/MIILION

NET PROFIT (NP ) 1539.75 2242.76 1632.01

FIXED ASSETS (FA ) 3371.50 5470.67 6733.01

NP : FA 0.50 0.41 0.24

Analysis : The ratio analysis is showing less utilization of fixed assets in the year
2008 -2009 from the previous two years 2007-2008 and 2006-2007.

Cause : Comparing the ratios of the years 2007-2008 and 2008-2009 with respect to the year
2006-2007 ,Fixed Assets of 2007-2008 and 2008-2009 is proportionately higher than in the year
2006-2007.
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T U R N O V E R T O T O T A L A S S E T S RA T I O
This ratio is used for comparing Sales to the total Assets of the business. It also reveals the extent
of utilization of the the total assets in the business. The ratio proves the efficiency of the
management operational activities. The higher the ratio , the larger is the rate of return on capital
invested in total assets.

Formula

TURNOVER TO TOTAL ASSETS RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

TURNOVER ( T ) 12901.26 17023.71 19073.5

TOTAL ASSETS ( TA ) 7490.18 12561.98 13785.81

T : TA 1.72 1.36 1.38

Analysis : During 2006-2007 and 2007-2008 the ratio proves the inefficiency of the
management in operational activities. The rate of return on capital investment is not
sufficient of the company in the year 2007-2008.

Cause : Comparing 2006-2007 and 2007-2008 , we see that Total Assets ( specially
Fixed Assets ) is proportionately higher in the year 2007-2008 than in 2006-2007.
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D E B T O RS T U R N O V E R R A T I O

A N D

A V E R A G E C O L L E C T I O N P E R I O D
The ratio reveals the number of days the debtors enjoyed as credit period allowed to them. It
shows how quickly receivables or debtors are converted into cash. It is a test of the liquidity of the
debtors of a firm. This ratio is also analyzed to study the debt collection policy of an enterprise. A
large credit period indicates a very bad collection policy. Average collection period is nothing but
the number of days in a year divided by debtors Turnover ratio.

Formula :

DEBTOR'S TURNOVER RATIO AND AVERAGE COLLECTION PERIOD

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MLILION RS/MILLION RS/MILLION

Debtors 1318.13 2057.48 2413.03

Credit Sales 12901.26 17023.71 19073.5

DEBTORS
TURNOVER
RATIO 9.79 times 8.27 times 7.9 times

AVERAGE
COLLECTION
PERIOD 1.23 months 1.45 months 1.52 months
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Analysis : The ratio analysis is saying that the collection policy of the year 2006-2007 is in favour
of the management.

Cause : Debtors turnover ratio is inversely proportional to Average Collection Period.

Average Collection Period is increasing continuosly from 2006-2007 to 2008-2009 as
Debtors Turnover Ratio falls continuosly.
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W O R K I N G C A P I T A L T U R N O V E R R A T I O
It measures the number of times Sales is achieved to Working Capital. The higher the ratio the
better is the utilization of Working capital.

Formula :

Working Capital = Current Assets Current Liabilities

WORKING CAPITAL TURNOVER RATIO

FOR THE YEAR ENDED
2006-2007 2007-2008 2008-2009
RS/MILLION RS/MILLION RS/MILLION

SALES ( S ) 12901.26 17023.71 19073.5

WORKING CAPITAL ( WC ) 2335.65 4779.33 4217.05

S : WC 5.52 3.56 4.52

Analysis : The ratio of 2007-2008 is least than the previous two years 2006-2007 and 2008- 2009,
so it is indicating the bad utilization of Working Capital during the year 2007-2008.

Cause : In 2007-2008 , Working Capital is proportionately higher compared to 2006-2007.

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L I M I T A T I O N

1. Many ratios are calculated on the basis of the balance-sheet figures. These figures are as
on the balance-sheet date only and may not be indicative of the year-round position.

2. Comparing the ratios with past trends and with competitors may not give a correct picture
as the figures may not be easily comparable due to the difference in accounting policies,
accounting period etc.

3. It gives current and past trends, but not future trends.

4. Impact of inflation is not properly reflected, as many figures are taken at historical
numbers, several years old.

5. There are differences in approach among financial analysts on how to treat certain items,
how to interpret ratios etc.

6. The ratios are only as good or bad as the underlying information used to calculate them.
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CONCLUSION

On a final note , I would like to conclude that Pidilite Industries Ltd. has a decent financial
management.

Still then , theres enough room for improvement and further strengthening of its financial position.

By conducting RATIO ANALYSIS of the concern I have observed that the following areas or
items need special attention :

Proper utilization of Resources.

Timely using Current Assets.

Securing the position of Creditors by keeping Secured and Unsecured lines

within a particular limit.

Increasing return on Capital Assets.

Average collection period should be minimized.

Proper utilization of Working Capital.

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B I B L I O G R A P H Y

The relevant financial data of Pidilite Industries Ltd. for the financial year :-

2006-2007, 2007-2008 and 2008-2009 was acquired by referring to the following Annual

Reports / Websites:-

Pidilite Industries Annual Report : 2006-2007, 2007-2008 , 2008-2009

www.pidilite.com