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Introduction

Finance is the life blood of business. The word finance is comes from the Latin wovd t‘mis. Finance refers
to the management, creation and study of money. banking. credit, investments. assets and liabilities.
Finance is the study of how investors allocate theit assets over time under conditions of varying
uncertainty. Finance measures risks versus profits and the time value of money, and gives an indication
of the appropriateness of investments. Financial resources are scarce and limited, which needs proper
planning and control in order to achieve the best result out of the complex situation of risk and
uncertainty prevailing in the business world. The main tool used for the study is ratio analysis, trend
analysis and comparative balance sheet. The data are collected from the annual reports provided by the
company (Balance Sheet and Profit and Loss Account).

Financial statement information is used by both external and internal users, including investors,
creditors, managers, and executives. These users must analyze the information in order to make
business decisions, so understanding financial statements is of great importance. The overall objective
of financial performance is the examination of firm’s financial position and

returns in relation to risk. This must be done with a view to forecasting the firm’s future prospective.

‘Financial Statement Analysis’ involves a study of the financial statements of a company to ascertain its
prevailing state of affairs and the reasons thereof. Such a study would enable the public and investors to
ascertain whether one company is more profitability than the other and also to state the causes and
factors that are probably responsible. 1n the study of financial performance, ratios are used as index for
evaluating the financial position and

performance of the firm. The absolute accounting figures reported in the financial statement do

not provide a meaningful understanding of the financial performance of the firm.

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Mmmsptceilderived homthemndnpeclu.whwhwuawhedtomdm mm in the middle Ages. SPICCS tam wu


fonneriy epplted also to pungent or arm: lode. to inpatients of incense or perfume and to embelmmg
agents. 9pm. aromatic vegetable pvcdua «led us I 01an otcondiment. normally refers to the derivntiveo
from cenam herbs like WI. Leaves. M.

and Roots. 8pm ate defined as “a strongly flavored ot aromatic substance of vegetable origin. churned
from tropical plants. commonly used as a condiment”. In ancient times. spicewere I ptectoul u go“: and
as medicines. preservatives and perfumes. Indiathe land of spices plays I significant role In the global
spices market. No country in the world produces as many kinds of spice: 3 India comes from Kerala. an
Indian state. Spice and derivative market is booming because these product I'md applicators in a numba
of industries including pharmaceutical, medicine. beverages. food processing. personal hygiene products
to name or few developing countries especially in the Asian continent ate the majot' producers of
variety of spices. A large percentage of international and domestic trade takes place in the dried form.
India, Indonesia, China are few of the prime producers of a variety of high quality spice and also
significant contributors to the global spice.

The Asian condiments are famous for producing large amount of spices especially in India. India has
traditionally been known for its spice and culinary herb production. At present, India produces around
2.75 million tones of different spices valued at approximately 4.2 billion US 3, and holds the premier
position in the world spice market. Because of the varying climates in Indiafrom the tropical to
subtropical. 45C to OC temperatealmost all spices are grown in this country. In almost all of the 28

states and 7 union ten'itories of India, at least one spice is grown in abundance.

The growth in the spice producing sector can be attributed to the change in the life style patterns of the
consumes all over the world. Spice. aromatic. vegetable products were used as Havorings or the spices
dates back to 7000 years in the past. In the modem world. the major trust traditionally a country of
agriculture India needs the trade spices can improve the condiments normally refers to the derivatives
from certain herbs like seeds, leaves. bark. roots etc. They are used mainly for enhancing taste of the

food.

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Spice Industry Overview 3pm Industry has been witnessing phenomenal growth rates both in the
intemntionel and

domestic sector. The growth in this sector can be attributed to the change in the lifestyle pattern of the

consumers all over the world. The shift in the consumption trend towards natural product has also
contributed to the increased global demand of spice and culinary herbs. Spice and derivatives market is
booming because these products find applications in a number of industries including pharmaceutical.
medicine. beverages. food processing, personal hygiene product to name a few.

Developing countries especially in the Asian continent are the major producers of variety spices. A large
percentage of international and domestic trade takes place in the dried form. India, Indonesia. China are
few of the prime producers of a variety of high quality spices and also significant contributor: to the
global spice trade. The culinary herb market is also expanding though the production areas are widely
distributed. India is one of the prime producers and suppliers of raw herbs to USA. This is a

labour intensive industry; therefore producers must have a sound knowledge of the methods and
processes involved in the production of herbs and spices. l.l.3 India and Spices India is considered to be
the land of spices. Indian Spices paid an important role in the history of various lands, discovered or
destroyed, kingdoms built or brought down, wars won or lost. treaties signed or flouted. flavours sought
or offered. Spices have also played political role in the history. The use of spices from the East became a
status symbol by the year 1200 and the European preoccupation with the world of spice was bom. The
use of spice in food meant money and power, and the desire to acquire the precious status symbols led
to world exploration pan-global communication, trade. alliances and wars. Indian Spices also fitted into
philosophic concepts of improving health, since it was understood that they could affect the four
humors (blood, phlegm, yellow bile and black bile) and inliuence the corresponding moods (sanguine,
phlegmatic, choleric and melancholic). Thus, ginger would be used to heat the stomach and improve
digestion. Spices are typically heated in a pan with ghee or cooking oil before being added to a dish.
Lighter spices are added last, and spices with strong Havor should be added lirst. Curry is not a spice, but
a term which refers to any side dish in Indian Cuisine. It cou|d be with a gravy base or a dry item. A curry
typically contains several spices blend together. India

had a great value in spice producing and using.

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1.: COMPANY PROFILI

mmmoupwufoundedbyumm ME. MmClninnlnofthem He started his Mines With I dleem of making


“food product Ivuleble to the common man to the right pace" He stmed Its ectwmu as I humus With I
wholesale provmon store In I969 “Eestem 'l‘nding Agency" is formed In I973. Eastern Coffee and Curry
Powder established in I983 u I pioneer in the state to produce peeked curry powders. coffee powder and
food products Eastern Condiments Pvt Ltd was established In l99l, as expanded fonn of eastern

Coffee Ind Curry Powder. were employing 25 workers.


In I993 the company got spice board approval for starting export. In the same period the company
established a new pickle plant The company exports its products to kingdom of Saudi Arabia and the
united Arabia Emirates for the past few years and now It exports ptoduet to vmous parts of the world
like Middle East, UK, USA, Australia and Germany etc. In 1995 a

new plant was started at Theni and also Eastern spice and export established The period between2003
to 2005 it is the period of plant expansion and unification. In the same yea: the company got ISO 9001
certification. In 2007 the company got ISO 22000 certification. The company achieved 10 lakhs sales
targets during the year of 2008. Recent time the company launched a new product called ‘Eastea’. The
company holds 75% market share and it follow cash and entry method. The company follows direct
distribution and it had 96 routes. Now the company had 2200 employees and the last year tumover was
Rs. 556 Cr. The company plan to attamthetarget ofRs. sooo Cr by 2020. '

The production in the initial period was only lOOkg per day. In those days, the process of production was
enhanced from grinding to pulverizing and so the production could also help to preserve the natural
taste of the powder. As Eastern curry powder unit could not meet the increased demand, establishment
of Eastern condiments with high production capacity was an

absolutely necessary. From the initial production capacity of lOOkg per day, now it can produce around
l00 tons per day. The company started its functioning with only a few workers and established two
production units in Adimali, Kerala and in Theni at Tamilnadu, But now it has three another plants at
lrumpanapadi (Kothamangalam), Gaziabad (UtharPradesh) and Gundur (Andra Pradesh), and also a new
packing unit is placed in rasayani which is on installation. Now Eastern Condiments Pvt Ltd is noup with
an Amencan Company named as MECORMIC. They held 26% of share of the company.

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F111;, “4W ’5 Its MD 06kg”. l.2.l Meuge-ent The E‘stem group Is managed by I team of profession! and
family members. Late Mr ME MEERAN was the founder of the company. Mr Nnvu Meemn u the olnmmn
of the myk InaddmontothatMr SM. MuhammadJner EamMeemn W aW-MJMWW. M -C “0me luld I.z.2
Eastern Group of Compnnies CL” 7 '6 Eastem catty powders come from the Eastern group ofoompenm,
a group wuh dwene interests, and a world leader in Indian spices. .Eastem has ventured Into vanous
men like tyre renews, mattresses, gunnents, packaged foods, mineral water. public school and hm many
more [rojeets in its dream. 1.2.2.1 Eastern Curry Powder The company has provided their consumers
with consistently high quality powders and blends. Eastern Condiments operates from two modem
factories situated in the Western Ghats of South India 0 Natural Spice Powder Eastern Turmeric Powder
0 Eastern Chilli Powder Eastern Coriander Powder 0 Eastern Black Pepper Powder Eastern Cun'y Powder
1.2.2.2 Eastern Mattresse

Eastem Mattresses Pvt Ltd. was set up in 1999 to manufacturing rubberized coir mattresses with state of
art actoly in 'I'hodupuzha. The company is an ISO 9001-2000 eertihed company and ptoduces world
class mattresses They believe that the importance of sleep in improving the quality of our ltfe. Sunidra,
the popular brand of rubberiud coir mattress manufactured by Eastern Mattress Pvt. Ltd. is slowly
growing to be a market leader in the countty. Sunidra has won the prestigious certification approval
from the Government. 1.2.2.3 Eaten) Aqua Minerals

Eastern Aqua Mineral, a recently launched company was set up in the year 2000, entered the men of
packaged drinking water With state of art plant located in Kalady, Emakulam dist, Ken]; Eastern
packaged dunking water is all set to quench the thirst of millions of the people with mineral water of
highest purity standatds, high quality with Control 12 88 testing faciiitia and export supervision ensues a
quality product ofinternational standards.

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Water drawn from protected umiergound source I: purified. made beetem free W muluple hltnuons,
UVS packed usmg advanced technology to meet Intemwonal Web so u to maintain its natural pmpemee
The company also produces club soda from packaged dnnlung water. Eastern packaged drinking water is
also priced attractively In keeping Wllh Eastern Vision ofbnnging high quality products to the common
man at the right price. 1.2.2.4 Eastern Treads LTD.

Eastem Treads Ltd. is a public company engaged in the manufacturing of quality wocuted tread, cushion,
bonding gum and black vulcanizmg cement. It branches all ovel‘ India and has been showmg consistent
high performance and growth The factory has anmnl turn over 12
erotesanditislocamdmOnnukalaboutéOkm from Kochi hasastateoftheaninfnsu'ucmml

transport and communication facilities. The company is headed by Mr. Navas MMeeran, dynamic
youngster With a vision for future with over 12 yea: experience in the industry. Mr. Navas Meeran is the
winner ofKamal Palm Award for young enmepreneurs. 1.2.2.5 Eastern Clothing Company

King Richard, 8 brand of men's wear from the Eastem clothing company was setup in 1999
is yet another foray of Eastern into the world of men’s wear. It includes all the new mds of colour
combinations, designs, fashions of shins and trousers with a view to meet the aspiration of the working
class with a quality ready wear at responsible price in international styles. Excellent quality and nght
pricing has become the winning formula of the Eastern Group. Today Eastern is poised to take on new
nmrkets, the world over with products that meet the highest quality standards. The factory has a
production capacity of more that 15,000 shirts per month. Top quality fabrics are used in the
manufacture of shirts. The brand usually comes out with mostly fonnals and casual styles but also makes
small numbers of semi casual styles. For the distribution of King Richard. the company have exclusive
outlets all over Kerala and the company is planning to appoint franchisees as distributors where there
are exclusive showrooms to supply in textiles and muln brand stones in their area of operations.

1.2.2.6 EnterNewton Public School The Eastern group entered the area of education with the setting up
of the Eastern NEWTONS Public School at Adimaly. ldukki dist, Kerala Eastem

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Public School ensum high quality edmhon from kinder garden to higher secondary level: wuh C B S E
syllubus prowdmg all the nsidentlalfnenlmes Ind highly Imned feeulhes lo the

thousands of femmetending the hulls of ldukln dlsmn KenilMrs NabeesMeenn Is the pnncupll ofthls
esteemed Institution.

1.2.2.7 East Te

In recent times. the company launched a new woduct 1339 Tea‘ from Its produa hue ”taste and Strength
In every sip”, East TeaPremmm blended lea, from Eastern Ins Just entered the market with its signature
promise of taste and strength 1.2.3 COMPETITORS

The company has many competitors In the market because the condiments Industry 1\ also

small scale industry. So the company faces competitors mainly from three dufferem states . The
competitors are:

Kerala -------MELAM, SARAS, BRAHMINS, RUCHL NIRAPARA, DOUBLE HORSE


o KarnatakamMTR, SHAKTHI

Tamil Nadu--SAKTHI, ACHI

0 Urban market--Mehamn (Pakistan product) 1.2.4 PRODUCT PROFILE

India is considered to be the home of splces. Spices play a very important role in our

nanonal economy. The purity and freshness of Indian spices and spice powders has grown favorites in
India and all over the world. Spices are used in many countries as flavouring agents. They improve the
flavour and acceptability of cooked food and make them more delicious. hstern Condiments Pvt. Ltd. has
different varieties of spices, curry powders and pickles on its

product mix. The purity and freshness of Eastern curry powders made ‘Eastem’ a house hold name and
yew to be a leading brand in Kerala 1.2.4.] Eastern Product

Eastern Condiments Pvt Ltd have differem varieties of spices, curry powders, blended curry

powders-Masala, insmnt p|ckle powders and pickles. The company’s pickle market is mainly

concentrated in expomng. The different categories of products are as follows ”Spice Powder:

Eastern Turmeric Powdets

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Eastern Chilly Power

Eastern Coriander Power Easmm Biack Pepper Powder Eastern Ginger Powder .
Eastern Kashmiri Chilli.

b)Blended Spice Powder

0 Garam Masala

0 sambar powders

0 Rasam powders I Kulambu masala Pickle powders 0 Pav bhaji

o Channa masala Tandoori masala 0 Chicken masala o Chickenfry masala a Fish masala

Meet masala

Biriyani masala o Kebab masala

. Egg curry masala

c) Eastern pickles

o Mango

3 Ginger

Lemon

I Gooseberry 0 Mixed veg 0 Fish

0 Prawns '
Enstcm Chilly Power Eastern Coriander Power Eastern Black Pepper Powder

Eastern Ginger Powder

Eastern Kashmiri Chilli.

b)Blended Spice Powder

Garam Masala sambar powders Rasam powders Kulambu masala Pickle powders Pav bhaji Channa
masala Tandoori masala Chicken masala Chickenfry masala . Fish masala Meet masala Biriyani masala
Kebab masala

Egg cun'y masala

c) Eastern pickles

Mango Ginger Lemon Gwseberry Mixed Veg Fish

Plawns

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0 Garlic Tender mango

d) Beverages ' Adimali kapchoche) o Eastea (tea) 0 Eastern Chukkukappi 0 Eastern Packaged Drinking
Water
e) Eastern Rice Based products (for breakfast) 0 Punu podi o ldli podi 0 Dosa podi o Palhiri podi Appam
podi

1.3 INTRODUCTION TO THE TOPIC

FINANCIAL PERFORMANCE ANALYSIS AT EASTERN CONDIMENTS PVT. LTD, ADIMALY

Finance is the lifeblood.and nerve centre of a business,just as circulation of blood is essential in the
human body for maintaining Iife, finance is a very essential to smooth running of the business. financial
statements are the summarized statements and reports prepared by the business concern to disclose
their financial information and communicate them to the interested parties. The financial statements
are prepared for presentin g a periodical review or report on the progress of the

management and deal with the status of the investments in the business and the result achieved during

the specified period. Financial performance analysis involves the use of financial statements.

Financial performance analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing the relationshi

p between the items of balance sh prom and loss account. The analysis of financial statem eat and

em helps to estimate the efficiency of operation

of the firm. It helps to measure th e progress of the firm Future . prospects of the firm can also be

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dammed wnh the help of "mill Imlysll There for munch! “Ink 5. very inky: ln W a.) trend is muted.
8pm industry and business is fast growing one. Eustem u M to melt: I M III the m5... mice induvtry. It is
one of the biggest firm in the India it he. also expmded Its Mina. III the Middle w: countries. The eastern
condiments Pvt ltd attain the M for the outstanding MW of the company Rom spices board of India, for
last IS yeanJ’he financial pedonmnee ltdys'n of eLstet'n condiments Pvt ltd helps to get awareness about
the financial background of the m and also the functioning of successful organization . It gives an
opportunity to interact with the people working in the organization and financial structure of the
company. Therefore it is actually a means for bridging the gap between theory and practice. [.4 NEED
FOR THE STUDY The study has been made as a part of our curriculum. The study was made on overall
performance of the organization and with a special preference to the finance department. The project
work is carried out for getting an overall idea about the manageriaI performance of the firm for the
study and help to understand the overall financial performance of the industry. The

study also hopes to understand the function of financial department

LS OBJECTIVES OF THE STUDY

To study the liquidity position of the company.

To study the efficiency of the company in managing its assets.

To study the profitability of the firm.

To evaluate the existing positions of Eastern.

To offer suitable suggestions for the betterment of the company.

0/ To know whether the liquidity position of the company is sound or not.

0 To know whether the management has used its assets properly. 0 To identify the probability position
of the company.

. To give suggestions and recommendations on the basis of analysis


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2.Theoretical aspects of the topic

ll. FINANCIAL PERFORMANCE ANALYSIS Financial perforrnanee.analysis is the process of identifying the
financial strengths and

weaknesses of the firm by properly establishing the relationship between the items of balance sheet and

profit and loss account. Financial performance analysis involves the use of financial statements. A
financial statement is an organized collection of data. It will consist of balance sheet and profit and loss

account. Balance sheet shows the financial position of the firm at a given period of time. Income
statements reflect the performance of the firm over a given period of time. It is the summary of a lirm's
revenues and expenses over a specified period ending with net income or loss for the period.

Financial statements are prepared for the purpose of presenting a periodical review or report by
management and dealing with the state of investment in business and result achieved during the period
under review. Financial analysis is a vital apparatus for the interpretation of the financial statements.
“The analysis of financial statement is a process of evaluating the relationship between component part
of financial statements to obtain a better understanding of tirm’s position and performance”. (Institute
of cost and management accounts of India).

2.1.! OBJECTIVES OF FINANCIAL PERFORMANCE ANALYSIS

0 The financial performance ahalysis will help to identify financial strength and weakness and evaluate
the financial performance. The strength and weakness will indicate the financial performance of the
company. Financial ratio analysis can be used as an effective preliminary step in preparing plans for the

future. That is the ratio analysis will help the business firm to identify the performance and based

on this they can make plans for the future.


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l2

0 The llnnnelel performance ennlyIlI wlll help to Improve prol'lllhillty or euh now: The linmcul
performance analysis will help to mutton the trend: of the prollt end this will help the firm to impmve
prolitnhility.

o The financial performance analysis wlll help the buliness lirm to evaluating the existing l'mancwl
position. The l'tnanciul performance mlylls will help to impmve the ell'tciettey ol' the company in
managing the assets.

2.].3 USERS OF FINANCIAL ANALYSIS Various parties interested in the analysis of linancial statements ate
management. owner.

creditors. investors and other.

I) Management

Financial analysis helps the mahagcmcnt to spout out the financial weakness of the l'trms to take a
suitable correction action and to know the linnncial strength of the [inn to make best use. Management
is concerned with the help of business and thcrcl'otc it is the overall responsibility of the management to
see that the resources of thc lirm are used in the most clTIcicncy and that the l‘trm‘s financial condition
is Sound.

b) Shareholders

From the shareholders point of view. the analysis and interpretation is done with a view to ascertain
firms present and funher profitability. Since dividend is declared out of the profit of the company.

e) chenture holders
chenturc holders are concerned with future solvency and prolitability. They make use of linancial
analysis is to company to pay the principle parties outside and firm via owners. creditors. investors and
other interested parties like bankers. journalists. And interest amusements for the repayment ol‘debt
and the security available for the loan extended. d) Trade creditors

Since trade creditors are interested in the lirm's ability to need their claims over a short period of time.
Their analysis focus on the evaluation of the ftrm‘s liquidity position.

e) Government and public

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[8:11 pm, 13/10/2019] 卂千丂卂ㄥ 卩丂: ‘icd in understanding the whenlhoull of all Ihe mluunel Tim 8

mmem is also intone . . hm “2'3"" Purpose of Policy formulation. liceming quota fixation etc In the slrmlu
way the W mini) '

' ‘ he details of the industrial units ' .1 W m knowmgt :2 :K)LS AND TECHNIQUES OF FINANCIAL
STATEMENT ANALYSIS

The following me the most important tools and techniques of linancial statement analysis. 1. Common
sin financial statement analysis 2. Comparative financial statement analysis 3. Ratio analysis 4. Ttend
analysis

2.l.d.l COMMON SIZE FINANCIAL STATEMENT ANALYSIS

Common size financial statements are those in which figures reported are converted to percentages to
some common base. In the income statement the sale figure is assumed to be low and all figures are
expressed as percentages of sales. Similarly in the balance sheet the total of the assets or liability is
taken as NO and all the figures are expressed as pementages of this total. The conversion of balance
sheet and income statement line items to percentages of a total is often referred to as placing the
statements on a common size basis. For purpose ofcommon size statements, balance sheet line items
are presented as a percentage of total and income statements line items are presented as a total net
sales or gross revenue. Converting the company’s balance sheet and income statement to a common
size basis the analyst by identifies the trends. A common size statement also facilitates comparison with
another company’s data.

I. Common size balance sheet

In a common size balance sheet total assets or liabilities is taken as 100 and all the figures are expressed
as percentages of the total. A common size balance sheet foe different period helps to highlight the
trends in different items.

1). Common size income statements

In common size income statements, sales figure is assumed to be equal to IOO and all other figures of
cost or expenses are expressed as percentages of sales. Common size income statements for

different period help to reveal the efficiency of the firm.

PAGE 14

2J1.) COMPARATIVF "NAN! ML STAT! Ml NT ANALYSIS (‘ommwe "mull untentents ue those statements
Much have been designed at e ”y n I to pvovnde um: mgmwe to the mndmtion of various etemems of
l‘mmcnl pomon embodied a gamma: lnmuelemmtsngumof twootmonperiodstepleedudehyudetobalm
comma». 1h: comparative smcmcnls may show: 5. Absolute flgutes ii. Changes in Ihsolute liguns iii.
Absolute data in terms of percentage: iv. lnctense or decrease in terms of percentages

80th the income statements and balance sheet can be prepared in the form of comparative l'mancial
statements

a. Compantive income statement

The income statements disclose net profit and net loss on account of operations. A compamtive income
statement will show the absqlute figures for two or more periods, the absolute change from one period
to another if designed the change in terms of percentages.
h. Comparative balance sheet

Comparative balance sheet as on two or more different dates can be used for

comparing assets and liabilities and finding any increase or decrease in those items.

2.l.4.3 RATIO ANALYSIS The ratios analysis is the most powerful tool of financial statements analysis.
Ratios simply mean

one number expressed in terms of another. A ratio is a statistical yardstick by means of which
relationship between two or various figures can be compared or measured. Ratios show how one
number is related to another. The term “accounting ratios" is used to describe significant relationship
between figures shown on a balance sheet. in a profit and loss account, in a budgetary control system or
in any other part of accounting organizations.

Ratio analysis is a widely used tool of financial analysis; it is defined as the systematic use of ratios to
interpret the financial statements so that the strength and weakness of a firm as well as its historical

perfonnance and current financial condition can be determined. The term ratio refers to the numerical
or

PAGE 15

15

quantize: relationship between two items. This relationship can be expressed an

:( l )pctcemages(2)fmctions(3)proportion numbers. Computing 0! ratios does not add any information


not already inherent in the financial statements. The ratios meal that relationship in e meaningful my '0
II to enable us to draw conclusions from them. Financial ratios are a valuable and easy way to interpm
the number found in statements. It can'help to answer critical questions such is whether the business is
carrying excess debt or inventory. whether customers are paying according to terms, whether the
operating expenses are loo high and whether the company assets are being used properly to generate
income. When computing iinancial relationships a good indication of the company‘s financial strength
and weakness becomes clear. Examining these ratios over time provides some insight as to how
effectively the business is being operated. Many industries compile avenge industry ratios each year.
Average industry ratios oH'er the small business owner a means of comparing his or her company with

others within the same industry. In this manner they provide yet another measurement of an individual

company‘s strength or weakness. 2J.4.3.1 SIGNIFICANCE OF RATIO ANALYSIS 0 The ability of the tirm to
meet its current obligations. The extent to which the [inn has used its current obligations I The efficiency
with which the (inn is utilizing its various assets in generating sales revenue.

0 The overall operating efficiency and performance of the firm

2.!.4.3.2 ADVANTAGES OF RATIO ANALYSIS I Ratio analysis provides data for inter firm comparison with
which management can evaluate the

future marketing strategies. Standard ratios may be computed and comparison of actual ratios with
standard will help in

control. Ratio may be used as a measure ofefliciency of the firm.

C It helps in the assessment ofiiquidity, profitability. and solvency of the Firm.

2.1.4.3.3 DISADVANTAGES 0F RATIO ANALYSIS o It is difficult to decide a proper basis ofcomparison.

A single ratio usually does not convey much ofsensc. o There are no well accepted standards or rates of
thumb for all ratios that can be accepted as

norms.

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[8:34 pm, 13/10/2019] 卂千丂卂ㄥ 卩丂: I.


Like financial statements. ratio nlso sufl'm. from the inhcmn was! man of win Md. such as their historical
nature. Ratios of put hannot mrily indmum 01th: Mm

Change in accounting procedure by a firm oncn makes nlio llllylil misleading,

Financial statements can easily be window dressed to present I belle! piaure of in “mud III

pmtitahility position to outsiders.

. 2.l.4.3.4 CLASSIFICATION OF-ACCOUNTING RATIOS Ratios may be classified in a number of ways to suit
any paniculat putpole. Different lands of mics

Ire selected for din‘erenl types of situations. Mostly. the purpose for which the mic are used and the
kind ofdata available determine the nature of analysis. The various accounting mics cm be claimed as

follows.

1. Liquidity Rntios 2. Leverage Ratio 3. Activity Ratios / Turnover Ratio:

4. Prolitability Ratios l. LIQUIDITY RATIOS The term liquidity refers to the ability of the company to meet
its current liabilities. Liquidity mios

assess capacity of the firm to repay its short term liabilities. Thus, Liquidity ratios measure the firms"
ability to fulfill short term commitments out of its liquid assets.

To measure the liquidity of the concern, the following ratios can be calculated: i. Current ratio

Quick or acid test or liquid ratio Absolute liquid ratio or cash position ratio

ii. iii. LCurrent ratio Current ratio is a ratio between current assets and current liabilities of a firm for a
particulat period. This ratio establishes a relationship between current assets and current liabilities. The
objective of computing this ratio is to measure the ability of the firm to meet its short term liability. It
compares the current assets and current liabilities of the firm. This ratio is calculated as under:

Current Assets Current Liabilities

Current Ratio =

PAGE 17

l1

WAWthoumwhlchc-nhmwmdimmmnam'uh“. H exceedmsonewu. It includuCuh In hand. Cdut Bunk. Bill


”mm Ian M

Sundry debtors. Stock. humid expense. (‘umnt liabilities at those linhtlittu which an: expected to be paid
mthm I yet It “U0! Bin

payable; Sundry cmditots. Bank ovetdnh. vauion fot tn. outstatdmg expenses.

It indicates the amount or current assets availnble for upoyment ofcurmtt Ii-htlttia "ma ttmin.
dtcgmateristhcshon term solvutcyol'a iirmmdviccsvms. Howeveaveryhtutntioorvay low ratio is a matter
of concern. If the ratio is vety high it means the cm! assets In lying talc. Very low ntio means the short
term solvency or the firm is not goodIhus. the ideal cumnt ratio of a company is 2 : I i.e. to repay current
liabilities. then should be twice current assets 2. Quick ratio

Quick ratio is also known as Acid test or Liquid ratio. It is anothet' ratio to test the liability ofthc concern.
This ratio establishes a relationship between quick assets and current liabilities. This nlio measures the
ability of the firm to pay its current liabilities. The main purpose of this ratio is to mute the ability of the
Firm to pay its current liabilities. For the purpose of calcuIatittg this ratio. stock and prepaid expenses
are nol taken into account as these may not be convened into cash in a very short

period. This ratio is calculated as under:


, . _ Quick Assets Quick Ram) Current Llabilities

Quick ratio is a measure of the instant debt paying capacity of the business entetpr'tse. It is a measure
of the extent to which liquid resources are immediately available to meet current obligations. A

quick ratio of l :l is considered favorable for a company.

2. LEVERAGE RATIO

These ratios are also called efficiency ratios. These ratios measure the owner"s

stake in the business vis-é-vis that of outsiders. The long term solvency of the business can be examined

by using leverage ratios. 1 o judge the long term linancial position of the firm following ratios are
applied.

I. Debt Equity Ratio

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The debt-(o-equtty ntio (DIL) II a l'hnmill nllo indicating the relative mm of sed to linnnee I company:
use“. Closely rented to leveragin; the mo

ehueholdets' equity and debt u ' is use known 15 Risk. Gearing or Leverage. The two components are
one" tuken from the firm s helm

sheet or sutemenl of financial position (so-callcd book value). but the nlio may else be ukulued nun.
market values for both. if the company‘s debt and equity are puincly traded. or using a mbimm of

book value for debt and market value for equity financially. Total debt
Debt Equity Ratio mu“), An acceptable norm for this ratio is considered to be 22L A high ratio shows that
the claims of creditors are greater than those of owners. A very high ratio is unfavourable from the point
of view of Iirm. A high debt company is able té borrow funds on very restrictive terms and conditions. A
low debtequity ratio implies a greater claim of owners than creditors. From the point of view of
creditors. it

represents a satisfactory capital structure of the business.

2. Proprietary Ratio The proprietary ratio (also known as the equily ratio) is the proportion of
shareholders' equity to total assets, and as such provides a rough estimate of the amount of
capitalization cunently used to

support a business. If the ratio is high, this indicates that a company has a sufficient amount of equity to
support the functions of the business, and probably has room in its financial structure to take on
additional debt, if necessary. Conversely, a low ratio indicates that the business may be making use of

too much debt or trade payables, rather than equity, to support operations. To calculate the proprietary
ratio, divide total shareholders‘ equity by total assets. The tesuhs wt“

be mote representative of the company's true situation if you exclude goodwitl and intangibk assets

from the denominator. The more restrictive version of the formula is:

P . t R t‘ _ ShareholdersFunds roprlc ary a lo Total Assets

This ratio shows the financial strength of the company. It helps the creditors to ftnd out the proportion
of shareholders fund in the total assets. The acceptable norm of the ratio is \23. Higher ratio indicates a
secured position to creditors and a low ratio indicates greater risk to creditors. it indicates the

long term solvency of the firm.

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