BHEL-EPD, BANGALORE

CALCULATION OF THE RATIOS

A. Liquidity Ratios

1. Current Ratios
It is a ratio of current assets to current liabilities. It shows a firms
ability to cover its current assets with current assets.

= current assets
Current liabilities

Current assets Current liabilities Current ratios

Year
(Rs. In 000’s) (Rs. In 000’s)
2001-02 283586 184127 1.54
2002-03 339340 196952 1.722
2003-04 449907 262649 1.71
2004-05 565357 296377 1.90
2005-06 555765 293070 1.896

Current ratios

1.5

1
Current ratios
0.5

0
2001- 2002- 2003- 2004- 2005-
02 03 04 05 06

Inference:
The ideal ratio is 2:1
In the year 2001, 2002, 2003, 2004&2005 the ratios are less than two but
more than 1.5 so it is considered as satisfactory. The day-to-day operation of the
business may suffer because of not meeting the current liabilities.

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2. Quick ratio
This ratio shows the ability of the business to meet its immediate
financial commitment. This ratio is the ‘acid test’ of a concern’s
financial soundness.

= quick assets
Current liabilities

liquid assets Current liabilities

Year quick ratio
(Rs. In 000’s) (Rs. In 000’s)
2001-02 165298 184127 .899
2002-03 226323 196952 1.149
2003-04 281708 262649 0.996
2004-05 275758 296377 0.9304
2005-06 287815 293070 0.982

quik ratio

1.2

0.8

0.6 quik ratio

0.4

0.2

0
2001-02 2002-03 2003-04 2004-05 2005-06

Inference:
Generally a quick ratio of 1:1is considered satisfactory. In year 2003, 2004
& 2005 the ratios are good .in year 2002 the ratio was high indicating idealness of
funds.

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3. Ratio inventory to working capital

In order to ascertain that there is no overstocking, the ratio of
inventory to working capital should be calculated

= inventory
Working capital

inventory working capital inventory to working capital

Year (Rs. In 000’s) (Rs. In 000’s) ratio
2001-02 118288 99459 1.18
2002-03 113017 142388 0.79
2003-04 188199 187261 1.005
2004-05 285999 268900 1.06
2005-06 267950 262695 1.02

inventory toworkingcapital ratio

1.2
1
0.8
0.6
inventory to
0.4 workingcapital
0.2 ratio

0
20 20 20 20 20
01- 02- 03- 04- 05-
02 03 04 05 06

Inference:
The ideal ratio is1:1
In the year 2001, 2003, 2004&2005 the ratio are more than one indicating that
inventory has exceeded the amount of working capital which is due to
overstocking of inventory

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B .profitability ratio

1. Gross profit ratio

This ratio indicates the average margin on the goods sold. This ratio expresses
the relationship between gross profit and sales.

= Gross profit X 100

Net sales

gross profits net sales

Year (Rs. In 000’s) (Rs. In 000’s) gross profit ratio

2001-02 5264 10473 50.26
2002-03 4111 8237 49.9
2003-04 4672 9144 51.09
2004-05 4714 11073 42.5
2005-06 4889 12633 38.7

gross profit ratio

60

50

40

30
gross profit ratio
20

10

0
2001- 2002- 2003- 2004- 2005-
02 03 04 05 06

Inference:
The ideal ratio is 30% in the year from 2001 to2005 was higher than
the ideal this indicate to the lower cost of goods sold due to lower production
which is a sign of good management.

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2. Net profit ratio

The net profit ratio is the overall measure of firm’s
ability to turn each rupee of sales into profit. This is a ratio of net
profit to net sales.
= Net profit
Net sale

net profit net sales

Year (Rs. In 000’s) (Rs. In 000’s) net profit ratio

2001-02 1175 10473 11.21
2002-03 145 8237 1.76
2003-04 143 9144 0.115
2004-05 352 11073 3.178
2005-06 332 12633 2.6
net profit ratio

12

10

6 net profit ratio

0
2001-02 2002-03 2003-04 2004-05 2005-06

Inference:
The ideal ratio is 105
Higher the ratio the better it is as it gives advantageous position to survive in
the face of rising cost of production and selling price. In year 2001 the ratio
was favorable but in years 2002, 2003,2004 and 2005 the ratio was less this is
due to wage revision.

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BHEL-EPD, BANGALORE

3. Return on investment (ROI)

This ratio indicates how well the management has utilized the fund
supplied by the owner and creditor. This ratio measures overall profitability .it
is calculated as follows
= profit before interest and tax
Capital employed

PBIT capital employed

Year (Rs. In 000’s) (Rs. In 000’s) ROI

2001-02 132100 275356 47.97
2002-03 21200 261538 8.1
2003-04 21100 230104 9.16
2004-05 40200 283496 14.18
2005-06 41100 282628 14.54
ROI

50
45
40
35
30
25 ROI
20
15
10
5
0
2001-02 2002-03 2003-04 2004-05 2005-06

Inference:
The higher the ratio, the more efficient the use of capital
employed. To increase this company should increase the PBIT
so the return on capital employed will be good in year 2001 the
ratio was good but it gradually started decreasing .

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4-.Expenses ratio
This ratio shows the percentage of net sales that is absorbed by cost
of good sold and the operating expenses. It is calculated as follows
=manufacturing administration, selling &distribution expenses
Net sales

year Expenses Net sales Expenses ratio

(Rs.in 000;s) (Rs.in 000;s) ( %)

2001-2002 68246 1047219 6.51

2002-2003 60581 823701 7.36
2003-2004 195521 9144400 21
2004-2005 267420 1107300 24.25
2005-2006 279781 1232600 22.6
Expenses ratio( %)

25

20 Expenses ratio(
%)
15

10

0
2002- 2004-
2003 2005

Inference:
The ideal ratio is less than 10%
The lesser the ratio the better it is this shows higher profit margin of profit to
meet non-operating expenses in tear2001&2002 the ratio was favorable but in
year 2003,2004&2005 the ratio was higher this shows smaller margin of
profit.

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BHEL-EPD, BANGALORE

4. Return on shareholder funds

This ratio measures the return on equity of the shareholders. It shows

profitability of an enterprise. It shows ratio to net profit to owner’s equity.
= net profit after taxes and interest X 100
Shareholders funds

year Net profit Shareholders ROE

(Rs in 000’s) funds(Rs in 000’s) (%)
2001-2002 117453 275356 42.65
2002-20003 14460 232161 6.23
2003-2004 14277 914400 6.37
2004-2005 35162 283499 12.4
2005-2006 33253 282628 11.7

ROE(%)

45
40
35
30
25
20 ROE(%)
15
10
5
0
2001- 2002- 2003- 2004- 2005-
2002 20003 2004 2005 2006

Inference:
The ideal ratio is 10%
A high rate on return is favored by investor .in year 2001 the return is good.
Therefore, the ratio was favorable. In year 2002, 2003, 2004 there is an adverse
effect as the profit made during the year is less due to higher personal payment
because of wage revision.

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BHEL-EPD, BANGALORE

Turnover ratio
1. inventory turnover ratio
This ratio gives the rate at which stock are converted into sales
and into cash. This ratio established a relationship between cost of goods sold
during a given period and average amount of inventory held during that period.
=cost of goods sold(sales)
Average stock

Year Sales Average stocks Inventory turnover

(Rs in 000’s) (Rs in 000’s) Ratio(times)
2001-2002 1047300 133903 7.82
2002-2003 823700 150608 5.46
2003-2004 914400 150608 6.0713
2004-2005 1107300 238899 4.63
2005-2006 1263300 2787745 4.53

Inventory turnover Ratio(times)

8
7
6
5
4
Inventory turnover
3 Ratio(times)
2
1
0
2001- 2003- 2005-
2002 2004 2006

Inference:
The ratio should not be too high or too low .too low level of stock, which
result in stock out position. the high ratio will result in blockage of inventory
which is also not favorable.
In year 2001 to 2005, the ratio was average, which is favorable.

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BHEL-EPD, BANGALORE

2. Debtors turnover ratio

This ratio indicates the relationship between net credit sales and trade
debtors. It shows the rate at which cash is generated by the turn over the
debtors. It is computed as follows:
= credit sales
Average debtors
Average collection period:
It is the number of days required to collect the debt. it is
computed as follows.
=number of working days
Debtor’s turnover ratio
Year Net credit sales Average debtors Debtors turnover Collection
(Rs in 000’s) (Rs in 000’s) ratio(times) period(days)
2001-2002 1047219 120344.5 8.7 42
2002-2003 823701 157374 5.23 69
2003-2004 914400 213606 4.28 84
2004-2005 1107300 235147 4.7 77
2005-2006 1263300 244736.5 5.16 70

ss
Debtors turnover ratio(times)

9
8
7
6
5
4 Debtors turnover
3 ratio(times)
2
1
0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

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BHEL-EPD, BANGALORE

Collection period(days)

90
80
70
60
50
40 Collection
30 period(days)
20
10
0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

Inference:
The higher the value of ratio, the more efficient management of debtors.
In all the year the turnover is less than 10 times which is considered an average.
The number of days for collection of debt is 60-70 days.
In all the year, the debt is collected within the standard collection period.
Therefore, there is no credit sales pending and it shows the quality of debtors since
it ventilates the speed at which debtors are collected.

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BHEL-EPD, BANGALORE

3. Capital turnover ratio

This ratio shows the efficiency of capital employed in the business by
computing how many times capital employed is turned over in a stated period.

= sales
Capital employed

Year Sales capital employed capital turnover

(Rs in 000’s) (Rs in 000’s) Ratio(times)

2001-2002 252394 252394 4.14
2002-2003 823700 227168 3.36
2003-2004 914400 230104 3.39
2004-2005 1107300 283496 3.9
2005-2006 1263300 282628 4.46

capital turnover Ratio(times)

4.5
4
3.5
3
2.5
2 capital turnover
1.5 Ratio(tim es)
1
0.5
0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

Inference:
The higher the ratio, the greater are the profits
The idea turnover should be than 5 times. In all the year i.e., 2001,2002,2003,2004
& 2005. The turnover was average, which is favorable.

4. Fixed assets turnover ratio

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BHEL-EPD, BANGALORE

His ratio measures the efficiency of the assets use. This ratio expresses the
number of times fixed assets are being turned over in a stated period.
= sales
Net fixed assets

Year Sales net fixed assets fixed assets turnover

(Rs in 000’s) (Rs in 000’s) Ratio(times)

2001-2002 252394 142888 7.32
2002-2003 823700 476296 1.73
2003-2004 914400 488621 1.18
2004-2005 1107300 509636 2.17
2005-2006 1263300 531490 2.37

fixed assets turnover Ratio(times)

8
7
6
5
4 fixed assets
3 turnover
Ratio(times)
2
1
0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

Inference:
The ideal turnover ratio is 10 times. The higher the ratio, the better is the
performance. In all the year the turnover is less than 10 times which is regarded as
average. In year 2001 the ratio was favorable due to effective use of the assets
which resulted in higher sales volume coupled with lower overhead charges and
proper utilization of the available capacity.

5. Working capital turnover ratio

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BHEL-EPD, BANGALORE

This ratio shows the number of times working capital is turned-over in a

stated period

=sales
Networking capital

Year Sales net working capital working capital turnover

(Rs in 000’s) (Rs in 000’s) Ratio(times)

2001-2002 252394 99459 10.52
2002-2003 823700 1422388 5.78
2003-2004 914400 187261 4.88
2004-2005 1107300 268900 4.117
2005-2006 1263300 531490 4.808

working capital turnover Ratio(times)

12

10

6
working capital
4 turnover Ratio(times)

0
2001- 2002- 2003- 2004- 2005-
2002 2003 2004 2005 2006

Inference:
The ideal ratio is 10 times.
The higher is the ratio, the lower the investment in working capital and greater
are the profits. In year 2001-2002, the ratio was good. However, in year 2002,
2003, 2004&2005 ratio started decreasing to overcome this company should
concentrate more on its current assets.

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BHEL-EPD, BANGALORE

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