RATIO ANALYSIS:

Ratio analysis is a quantitative analysis of information contained in a

company's financial statements. Ratio analysis is used to evaluate various
aspects of a company's operating and financial performance such as its
efficiency, liquidity, profitability and solvency. Ratio analysis involves
evaluating the performance and financial health of a company by using data
from the current and historical financial statements.

DEFINITION:
Ratio analysis is a study of the relationship among various financial factors.
In a business as disclosed by a single set of standards and a study of trend of
these factors as shown in a series of statements -Prof.Myers.

IMPORTANCE OF RATIO ANALYSIS:

ANALYSIS OF FINANCIAL STATEMENTS: Ratio analysis is an
important technique of financial statement analysis. Accounting ratios are
useful for understanding the financial position of the company. Different
users such as investors, management, bankers and creditors use the ratio to
analyze the financial situation of the company for their decision making
purpose.

JUDGING EFFICIENCY: Accounting ratios are important for judging

the company's efficiency in term of its operations and management. They
help to judge how well the company has been able to utilize its assets and
earn profits.

LOCATING WEAKNESS: Accounting ratios can also be used in

locating weakness of the company's operation even though its overall
performance may be quite good. Management can then pay attention to the
weakness and remedies measurres to overcome them.

FORMULATING PLANS: Accounting ratios are used to establish

future trends of its financial performance, They help to formulate the
company's future plans.
COMPARING PERFORMANCE: It is essential for a company to
know how well it is performing over the years and as compared to the other
firms of the similar nature. Besides, it is also important to know how well its
different years. Ratio analysis facilitates such comparsion.

ADVANTAGES OF RATIO ANALYSIS: The following are the

advantages of ratio analysis:

· It simplifies the financial statements of the organization.

· It helps in comparing companies of different sizes with each other.

· it helps in trnd analysis which involves comparing a single company

over a period.

· It highlights the important information in simple terms quickly. A user

can judge a company by just looking at few numbers instead of
reading the whole financial statements.

· It helps the shareholdeers to take better decisions regarding their

investment in the company.

· It helps the creditors to understand the company better. It helps in taking

future decisions of the company.

CLASSIFICATION OF RATIO ANALYSIS:

· Profitability ratio

· Activity-turnover ratio

· Liquidity ratio

· Solvency ratio

PROFITABILITY RATIO: Profitability ratio indicates management's

ability to convert sales dollars into profits and cash flow. The common ratios
are gross margin, operating margin and net income margin. The gross
margin is the ratio of gross profit to sales. The gross profit is e4qual to sales
minus cost of goods sold. The operating margin is the ratio of operating
profits to sales and net income margin is the ratio net income to sales. The
operating profit is equal to the gross profit minus operating expenses, while
the net income is equal to the operating profit minus interest and taxes. The
return-on-assets ratio, which is the ratio of net income to total assets,
measures a company's effectiveness in deploying its assets to generate
profits. The return-on-investment ratio, which is the ratio of net income to
share holder's equity, indicates a company's ability to generate a return for its
owners.

A profitability ratio is a measure of profitability, which is a way to

measure a company's performance.

TYPES OF PROFITABILITY RATIOS:

Common profitability ratios used in analyzing a company's performance
include gross profit margin, operating margin, return on assets, return on
equity, return on sales, return on investment.

· Net profit ratio

· Gross profit ratio

· Price earning ratio

· Operating ratio

· Expense ratio

· Dividend yield ratio

· Dividend payout ratio

· Earnings per share ratio

· Return on capital employes ratio

ACTIVITY RATIO: Activity ratios are financial analysis tools used to

measure a business ability to convert its assets into cash.

Activity ratio (also known as turnover ratios) is a measure of the efficiency

of a firm or company in generating revenues by converting its production
into cash or sales. Generally a fast conversion increases revenues and profits.
Activity ratio shows how frequently the assets are converted into cash or
sales. Generally a fast conersion increases revenues and profits. Activity
ratio shows how frequently the assets are converted into cash or sales and
therefore are frequently used in conjuction with liquidity ratios for a deep
analysis of liquidity.

Some of mportant activity ratios are:

Inventory turnover ratios

Receivable turnover ratios

Average collection period

Accounts payable turnover ratios:

Average payment period

Asset turnover ratio

Working capital turnover ratio

Fixed assets turnover ratio.

LIQUIDITY RATIOS: A liquidity ratio is an indicator of whether a

company"s current assets will be sufficient to meet the comany's obligations
when they become due. Liquidity ratios analyze the ability of a company to
pay off both its current liabilities as they become due as well as their long
term liabilities as they become current. In otherwords these ratio shows the
cash levels of a company and the ability to turn other assets into cash to pay
off liabilities and other current obligations. It indicates the company ability
to pay its short tern bills is frequently referred to as short term solvency
position or liquidity position of business. Generally a business with
sufficient current and liquid assets to pay its current liabilities as and when
they become due is considered to have a strong liquidity posiition and a
business with insufficient current and liquid asset is considered to have weak
liquidity position. Short term credition like supplier of goods and
commercial banks use liquidity ratios to know whether the business has
adequate current and liquid asset to meet its current obligations. Financial
instititions hesitate to offer short term loans to business with weak short
term solvency position.

COMMONLY USED LIQUIDITU RATIOS ARE:

Current ratio or working capital ratio

Quick ratio or acid test ratio

Absolute liquid ratio

Current cash debt coverage ratio

SOLVENCY RATIO: Solvency ratio indicates financial stability

because they measure a company's debt relative to its assets and equity.
These ratios are very important for stock holders and creditors.

solvency ratios are normally used to:

· Analyze the capital structure of the company

· Evaluate the ability of the company to pay interest on long term

borrowings

· Evaluate the ability of the company to repay principle amount of the

long term loans (debentures, bomds, medium and long term loans).

Some frequently used long term solvency ratios are given below:

· Debt equity ratio

· Times interest earned ratio

· Proprietory ratio

· Fixed asset to equity ratio

· Current assets to equity ratio

· Capital gearing ratio

PROFITABILITY RATIO:
GROSS PROFIT RATIO: Gross profit ratio is a profitability ratio that
shows the relationship between gross profit and total net sales revenue. It is
a popular tool to evaluate the operational performance of the business. The
ratio is computed by dividing the gross profit figure by net sales.

FORMULA: Gross profit

SIGNIFICANCE: Gross profit is very important for any business. It

should be significant to cover all expenses and provide for profit. There is no
standard to interpret gross profit ratio. Generally, a higher ratio is considered
better. This ratio can be used the test the business condition by comparing it
with past year's ratio and with the ratio of other companies in the industry. A
consistent improvement in gross profit ratio over the past yeares is the
indicator of continues improvement. When the ratio is compared with that of
others in the industry, the analyst must see whether they use the same
accounting system and practices.

TABLE SHOWING GROSS PROFIT RATIO:

INTERPRETATION: Gross profit ratio for the year 14-15 was 51% this
increased to 54% in the year 15-16 and further increased to 57%. This
indicates the increasing trend. Since gross profit is sufficient to meet
operational expenses , it is favorable to the company.

NET PROFIT RATIO: A ratio of net profit to sales is called net profit.
It indicates the sales margin on sales. This is expressed as a percentage. The
main objective of calculating sales ratio is to determine the overall
profitability.

FORMULA:

SIGNIFICANCE:The net profit ratio is an indicator of an overall

efficiency of this business. Higher the net profit better the business.

TABLE SHOWING NET PROFIT RATIO:

INTERPRETATION: The net profit ratio have increased from 5.07% in

the year 14-15 to 9.2% in the year 15-16. Further there has been decrease in
the ratio to 6.6% in the year 16-17.This depicts the fluctuating trend, the
company should ensure to sustain its operational profit and strengthen its
financial position.

SOLVENCY RATIO:
DEBT EQUITY RATIO: The debt equity ratio is a financial ratio that
compares a company's total debt to total financing that comes from creditors
and investors.

FORMULA:
SIGNIFICANCE: The ratio indicates the proportion of owner's stake in
the business and the extend to which the firm depends upon outsiders for its
existence. A debt to equity ratio of 1 would mean that investors and creditors
have an equal stake in the business assets. A higher debt to equity ratio
indicates that more creditors financing is used than investor financing.

TABLE SHOWING DEBT EQUITY RATIO:

INTERPRETATION: The debt equity ratio for the year 14-15 was 0.64
which decreased to 0.49 in the year 15-16 and further again decreased to
0.39. This indicates that the company is more dependent on owners fund and
its long term solvency position is good.

FIXED ASSET RATIO: Fixed asset ratio explains whether the firm has
raised adequate long-term funds to meet its fixed assets requirement. Fixed
assets include "net fixed asstes" and trade investments including shares in
subsidiaries. Long term funds include share capital, reserves and long-term
loans.

FORMULA:

TABLE SHOWING FIXED ASSET RATIO:

INTERPRETATION: Fixed asset for the year 14-15 was 0.95 and it
increased to 0.97 in the year 15-16. There was decrease in the year 2016-17.
It indicates fixed assets are completely financed by long term funds and long
term solvency position of the company is good as it is less than 1.

TURNOVER RATIO:
INVENTORY OR STOCK TURNOVER RATIO: Stock turnover
ratio or inventory turnover ratio is calculated to ascertain the efficiency of
inventory management in the terms of capital investment. Stock turnover
ratio or inventory turnover ratio is also called as stock velocity ratio.The
rationable behind establishing the relationship between cost of sales and
average stock at cost price. This ratio is helpful in evaluating and review the
inventory policy. It indicates the number of times finished stock turnover
during particular accounting period.

FORMULA:

SIGNIFICANCE: The inventory turnover ratio signifies the liquidity of

a inventory. A high inventory turnover ratio indicates brisk sales. The ratio
is, therfore a measure to discover the possible trouble in the form of
overstocking or overvaluation. The stock position is known as the graveyard
of the balance sheet. If the sales are quick such a position would not arise
unless the stock consisrs of unsaleable items. A low inventory ratio results in
blocking of funds in inventorty which may ultimately results in h eavy losses
due to inventory becoming obsolete or deteriorate in quality.
TABLE SHOWING STOCK TURNOVER RATIO:

INTERPRETATION: The stock turnover ratio for the year 2014-15 was
5.37 and increased to 5.99 for the year 2015-16 and further increased in the
year 16-17 to 6.2. The increasing trend of stock turnover ratio is satisfactory
and should continue to maintain its stock level efficiently.

OVERALL PERFORMANCE OF SUNDARAM-CLAYTON

LIMITED:
The profitability ratio of the company is satisfactory as it has a increasing
trend in gross profit.The profitability position of the company is stable. The
turnover ratio of the company is satisfactory. The company has made
efficient use of fixed assets for making sales. The inventory turnover ratio
has also increased but the company should keep stock under control. Debt
equity ratio moves up in a positive trend.