Description
Project report on ratio analysis of SUPER TANNERY LTD. KANPUR
1
A
Project Report On
Ratio Analysis of
“Super Tannery Ltd.”
Post Graduate Diploma In Management (Finance)
Submitted in partial fulfillment of the requirements for award of
Post Graduate Diploma In Management of Dr Virender Swarup Institute Of
Computer Studies Kanpur
Submitted by,
Kunal Ramani
P. No.: 09305952444
Guided by,
Assistant Prof./ Lecturer Ms Deepshikha Biswas,
Dr. VSICS
Saket Nagar
Kanpur
2
ACKNOWLEDGEMENT
“The satisfaction euphoria that accompanies the successful completion of any work would be
incomplete unless we mention the name of the persons, who made it possible, whose constant
guidance and encouragement served as a beacon of light and crowned our efforts with
success.” I consider it a privilege to express through the pages of this report, a few words of
gratitude and respect to those who guided and inspired in the completion of this project.” I
am deeply indebted to Mrs. Sumegha Bhatia for giving me the opportunity to do this interesting
project and the timely suggestions & valuable guidance.
My sincere thanks to Ms Deepshikha Biswas (Assistant professor/ lecturer PGDM dept.) who has
guided me and provided valuable insight during the project. He constantly encouraged me and showed
the right path from day one up until the completion of my project.
I express my deep sense of gratitude to finance manager Mr. Mahboob Alam and External guide
(HR executive) Mr. Mansur Thakur for providing necessary information and kind cooperation.
Kunal Ramani
3
Certificate of Internal Guide
This is to certify that the project titled Ratio Analysis of Super Tannery Ltd.
is a bonafide work carried out by Kunal Ramani a candidate for the Summer
internship in finance sector of Post Graduate Diploma In Management of Dr.
Virender Swarup Institute Of Computer Studies, Kanpur under my complete
guidance and direction.
Signature of guide
Name: Ms. Deepshikha Biswas
Date: Designation: Lecturer (PGDM)
Place: Kanpur Institute: Dr. VSICS
4
Contents
Sr. No. Topic Page No.
1. Rationale of the study 6-7
2. Objectives of the Study 8-9
3. Profile of the company 10-24
4. Review of Literature 25 – 41
5. Research Methodology 42-45
6. Consolidated balance sheet of last three
years
46-48
7. Data analysis and interpretations 49 – 71
8. Findings 72-74
9. Limitations of the study 75-76
10. Appendix 77 - 78
11. Bibliography 79-80
5
Chapter – 1
Rationale of
the Study
6
RATIONALE OF THE STUDY
Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk
and return relationships of firms of different sizes. It compares historical performance and
current financial condition of the company. The term ratio refers to the numerical or
quantitative relationship between two items or variables. This relationship can be expressed
as
(i). Percentages, (ii). Fraction, (iii). Proportion of numbers.
These alternative methods of expressing items which are related to each other are for
purposes of financial analysis, referred to as ratio analysis. It should be noted that computing
the ratios does not add any information not already inherent in the above figures of profits
and sales. What the ratios do is that they reveal the relationship in a more meaningful way so
as to enable equity investors; management and lenders make better investment and credit
decisions.
The rationale of ratio analysis lies in the fact that it makes related information comparable. A
single figure by itself has no meaning but when expressed in terms of a related figure, it
yields significant inferences. For instance, the fact that the net profits of a firm amount to,
say, Rs 10 lakhs throws no light on its adequacy or otherwise. The figure of net profit has to
be considered in relation to other variables. How does it stand in relation to sales? What does
it represent by way of return on total assets used or total capital employed? If therefore net
profits are shown in terms of their relationship with items such as sales, assets, capital
employed, equity capital and so on, meaningful conclusions can be drawn regarding their
adequacy. To carry the above example further, assuming the capital employed to be Rs 50
lakhs and Rs 100 lakhs, the net profit are 20 per cent and 10 per cent respectively. Ratio
analysis thus as a quantitative tool, enable analysis to draw quantitative answers to questions
such as: Are the net profits adequate? Are the assets being used efficiently? Is the firm
solvent? Can the firm meet its current obligations and so on?
So, ratio analysis is one of the techniques of financial analysis where ratios are used as a
yardstick for evaluating the financial condition and performance of a firm. Analysis and
interpretation of various accounting ratio gives a skilled and experienced analyst, a better
understanding of the financial condition and performance of the firm than what he could have
obtained only through a perusal of financial statements.
7
Chapter – 2
Objectives of
the Study
8
OBJECTIVES OF THE STUDY
To understand the importance and use of different types of ratios in business.
To assess the liquidity of the company.
To evaluate the financial condition and profitability of the company.
To know the working capital requirement of the company.
To compare the past performance of the company systematically.
To identify the financial strengths and weakness of the company.
To find out the utility of financial ratios in credit analysis and determining the financial
capability of the firm.
9
Chapter – 3
Profile of the
Company
10
PROFILE OF THE COMPANY
Super Tannery Ltd (STL), established in 1953, started operations by processing 50 Buffalo
hides per day, converting them into Vegetable Tanned Leather for shoe soles. Since then, the
company, well guided by a professional approach, has marked an important name for itself in the
world leather map, making it, one of the oldest and well reputed business houses of Northern
India.
Strong belief in value addition led the company to innovate new products by adding value to the
existing ones. From the time of producing leather for shoe soles, the company's product range
now includes:
Leather for:
? Safety and Casual
Footwear
? Upholstery
? Lining
? Shoe soles
? Equestrian equipment
Footwear:
? Military
? Safety
? Casual and Formal
? Kids
Accessories:
? Bags
? Belts
? Jackets
? Jewellery
STL owns and operates 5 independent manufacturing facilities, producing articles of the highest
quality for leading European and American brands. Employing more than 2000 people, with
annual sales of over USD 55 Million, the company has its customers in more than 40 countries.
It has offices and warehouses in the United Kingdom, United Arab Emirates, Malaysia and China.
STL's obsession with quality and social responsibility has led the company to achieve ISO
9001:2000, ISO 14001:2004 and SA 8000:2001 certifications. Stringent norms for procurement,
processing, production and dispatch have transformed STL as one of the most reputed
manufacturing entities.
11
MANAGEMENT TEAM OF THE COMPANY
Managing Director
Mr. Iftikharul Amin
Email : [email protected]
Joint Managing
Director
Mr. Iqbal Ahsan
Email : [email protected]
Mr. Veqarul Amin
Email : [email protected]
Director
Mr. Imran Siddiqui
Email : [email protected]
Mr. Arshad Khan
Email : [email protected]
Mr. Mohammad Imran
Email : [email protected]
Chief Financial Officer
Mr. R.S. Singh
Email : [email protected]
Product Manager
(Footwear)
Mr. Mubashirul Amin
Email : [email protected]
Production Manager
(Footwear)
Mr. Huzaifa Yasir
Email : [email protected]
Business Development
Manager (Leather)
Mr. Mohammad Javed
Email : [email protected]
Business Development
Manager (Footwear)
Mr. Debasish Chakraborty
Email : [email protected]
Mr. Khawar Mumtaz
Email : [email protected]
Mr. Mohammad Arif
Email : [email protected]
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Import Manager
Mr. Tarun Bhowmick
Email : [email protected]
General Manager
(Leather)
Mr. S.Q.A. Abidi
Email : [email protected]
Product Manager
(Leather)
Mr. Tanveer Amin
Email : [email protected]
Sales Manager
(Domestic)
Mr. Arun Sethi
Email : [email protected]
Business Manager
(Accessories)
Mr. Aman Siddiqui
Email : [email protected]
Sourcing Manager
Mr. Ceceil James
Email : [email protected]
13
AWARDS AND CERTIFICATES OF THE COMPANY
AWARDS:
Awards Given By Year
Council of Leather Export
1
st
Prize for Exporting
Council of Leather
Export
2007-2008
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 2005-2006
State Export Award
2
nd
Prize for Exporting
Govt. of U.P. 2003-2004
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1996-1997
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1993-1994
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1987-1988
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1983-1984
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1982-1983
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1980-1981
14
CERTIFICATES OF THE COMPANY
Certificate Given By Year
Certificate of 7 Star
Exporter
Udyog Nideshalya 2002-2003
Certificate of 4 Star
Exporter
Udyog Nideshalya 1995-1996
15
SOCIAL RESPONSIBILITY OF THE COMPANY
STL believes in total commitment to society. The company runs an organization known as AMIN
WELFARE TRUST (AWT) , which follows the motto of "Promoting Hope in Life."
This trust has taken up a number of social causes in the field of EDUCATION & HEALTHCARE.
Education: AWT is about to launch (Jan '10) a state
of the art educational institution to be known as
Super International School with an aim to provide
world class education at a reasonable cost. The
school is proposed to be affiliated with the C.B.S.E board and is
equipped with the latest infrastructure required for a healthy and
constructive approach to education. To know more, please visit
www.superinternationalschool.com
Healthcare: AWT operates a hospital known as Chaudhry
Ehsan Kareem Hospital, well equipped with the most
modern machinery and infrastructure, in the industrial area
of Jajmau in Kanpur City, providing healthcare facilities in a
number of fields in including Neurology, Vision,
Endocrinology, Dentistry and Pre/Post Maternal Care.
16
STL is committed to continuous technological innovation, physical and chemical standardization
and improvement to achieve high standards of product quality and customer satisfaction
Key factors that keep the company one step ahead:
1. 1-Extensive interaction with the latest technological developments.
2. 2-Presence in all major trade fairs, seminars and workshops for optimum knowledge up
gradation.
3. 3-Well qualified and progressive workforce.
Laboratory: The tannery units of the company work under guidance of a well equipped
laboratory conducting physical and chemical tests. It
also has a pilot tannery to conduct trials of new
leathers at a small scale before its implementation in
bulk production. The laboratory has all the
requisites to perform tests of leather as per EN, ISO
and DIN standards. STL was among the first
companies from Kanpur to provide certification as
per the REACH gridlines of European Chemicals
Agency.
Design Studio: The footwear units of the company conduct their production as per the guidance
of a newly built, state of the art designing cell, lead by well qualified shoe technologists and
designers. Due to a rapid change in the product profile over the past few years, this studio was
installed keeping in mind, the ever changing tastes and preferences of the customers, while
keeping time frame into consideration.
Quality Assurance: A major factor which keeps the company
ahead is its obsession with total quality, which includes products of
the highest standards, quick and efficient customer service, leading
to complete customer satisfaction. Factors like these help the
company to retain customers, some of them, for as long as 30 years.
17
When the leather industry enough developed, the pollution of air and water increased and the
stage reached where scientists started thinking on making better use or reuse of material which
caused pollution keeping in mind the economical factor else no industrialist would accept the
change.
Special emphasis has been laid on use of low waste technology with
minimum possible expenditure and maximum quality production
because it is natural for any industrialists to resist a change unless it
is likely to give better quality production with least expenditure.
Pollution is given the last priority by them whereas we give it the
first priority.
At Super Tannery, we are very much cautious about pollution. We
have our own water treatment and chrome recovery plant in
which we collect the drain water full of nickel, chromium and many
more harmful substances. Our deep interest is in green and clean
environment.
The chrome is used in the processing of skins in which 65% is consumed during the process while
35% goes waste. The presence of chrome in the discharged water of tanneries is hazardous for
public health as its excessive use can cause severe skin diseases. To minimize the danger we have
water treatment plant to purify water to its maximum possible level.
We believe to contribute in safe and healthy environment. Super Tannery is an eco friendly
tannery.
? 1-We at Super are committed to provide a safe and healthy working environment for our
employees by adopting a proactive approach.
?
? 2-It is part of our work ethic to ensure that safety, health and environment safeguards are
in place right from the inception to the execution stage.
?
? 3-We accept the need for constant up gradation of safety & health standards
commensurate with the rapid changing technology in production.
18
19
UNITED KINGDOM
SUPER TANNERY (UK) LTD.
Contact Person : Mr. Asim Rahat
(Business Development Manager)
Registered Office
Imperial House,
St. Nicholas Circle,
Leicester LEI 4LF
United Kingdom Phone : +44 116 242 4087
Mobile : +44 759 539 0900
Fax : +44 116 242 4086
Email :[email protected]
UNITED ARAB EMIRATES
SUPER TANNERY UAE FZE
Contact Person : Mr. R. Islam
(Business Development Manager)
Registered Office
Ware House No. A2-16,
Post Box - 8290
Saifzone, Sharjah
U.A.E. Mobile : +971503825131
Fax : +971 65572327
Email :[email protected]
MALAYSIA
SUPER TANNERY LTD.
Contact Person : Mr. Shahbaz Khan
(Country Operations Manager)
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Registered Office
B-12-6, PV8, Platinum Hill,
Jalan Melati Utama 5, Taman Melati,
Setapak. Kuala Lumpur.
Phone : +60341610049
Mobile : +60 166084763
Email :[email protected]
CHINA
SUPER TANNERY LIMITED, WENZHOU OFFICE
Contact Person : Ms. Tian Huifang (Rosy Tian), Anthony Cox
(General Representative)
Room 1702, No.5 Building, Group 8 of Xintian Yuan,
Xue Yuan Dong Road, Lu Cheng District,
Wenzhou City, China
Tel : +86-577-88903015
Fax ::+86-577-88903015
Mobile : Rosy Tian : +86-15018777735 ,
Anthony Cox : +86-13380014859
Email : [email protected], [email protected]
Chinese Address:
?????????????????
Contact Person : ???, Anthony Cox
(General Representative)
??????????????5?1702
Tel : +86-577-88903015
Fax ::+86-577-88903015
Mobile : Rosy Tian : +86-15018777735 ,
Anthony Cox : +86-13380014859
Email : [email protected], [email protected]
21
Company’s Mission:-
"Setting the stage for exhibiting progress" The Bombay Exhibition Centre is driven to emerge
as a purpose-built Convention and Exhibition Centre which offers organizers, participants
and visitors, a touch of Indian hospitality backed up by robust infrastructure for the
successful culmination of any event.
“Leave Blank” The Realty Group imbibes best practices for facilities development and
management, which delivers a secure and pleasant working environment for its client and their
employees.
"The pioneers in meshing global designs with local manufacturing talent" The Engineering
Group delivers stable and functional tools which delivers customer satisfaction and trust,
backed up by a constant improvement in design, cost efficiency, delivery and after sales
service.
Company’s Vision:-
“The company is committed to customer satisfaction by providing excellent / world class
facilities and services for their exhibitions & events and become top exhibition centre in
India and Abroad.”
Company’s Value:-
STL Group will act with absolute honesty & integrity in dealing with its Customers,
Employees, Stakeholders and Society at large.
STL will always care for its customers by delivering value to them & delight them
through quality products & services.
STL will encourage creativity & innovation across the organization and offer equal
opportunity for growth to all employees through a culture of meritocracy, teamwork,
Commitment & discipline.
STL will always adopt fair practices and will aim to become a symbol of Trust &
Reliability for all stakeholders. It will strive to maximize value for shareholders as
well as all stakeholders in a balanced manner.
22
Company’s Policy:-
Indabrator firmly believe that quality cannot happen. It has to be built into the product. It is
committed to provide products and services of a quality that meet the needs and expectations
of customers at a competitive price and Achieve product quality excellence by continual
improvement through strictly adhering to quality management system as per ISO – 9001
2000 requirements.
It is committed to continually improve environmental conditions by utilizing environment
friendly technique to control potential hazards, reduce risk factors and improve
environmental conditions through strictly adhering to environment management system as
per ISO 14000: 2004 requirements.
It is committed to provide training & tools for safe operation systems to continually improve
occupational health & safety of interested parties as per OSHA 180001: 1999 guidelines.
It is committed to comply with current applicable statutory & regulatory requirements for
production, environment management, occupational health & safety management
STL's obsession with quality and social responsibility has led the company to achieve ISO
9001:2000, ISO 14001:2004 and SA 8000:2001 certifications. Stringent norms for procurement,
processing, production and dispatch have transformed STL as one of the most reputed
manufacturing entities.
A major factor which keeps the company ahead is its obsession with total quality, which includes
products of the highest standards, quick and efficient customer service, leading to complete
customer satisfaction. Factors like these help the company to retain customers, some of them, for
as long as 30 years.
23
Mission and Values:-
Its Mission is to become the largest Surface Preparation System provider in Asia, Malaysia, China and
UAE known for its quality, technology, fully integrated range, innovation, dynamism, ethical behavior
and business results; and build long lasting customer relationships that will make it their preferred
supplier.
? Honesty and Integrity: STL group will act with absolute honesty and integrity in
dealing with its customers, employees, stakeholders and society at large.
? Care and Concern: STL group will always care for its customers by delivering
value to them and delight them through quality products and services.
? Teamwork: STL will encourage creativity and innovation across the organization
and offer equal opportunity for growth to all employees through a culture of
meritocracy, team work, commitment and discipline.
? Trust and Reliability: STL will always adopt fair practices and thereby, will aim to
become a symbol of trust and reliability for all stakeholders. It will strive to maximize
value for its stakeholders in a balanced manner.
Quality Certifications:-
Customer satisfaction is the hallmark that has earned it several accolades and honors. This
has given it a competitive edge over other players functioning in the same industry.
Following are some of the citations bestowed on Super Tannery Limited.
ISO 9001 : 2000
ISO 14001:2004
ISO 18001:1999.
24
Chapter – 4
Review of
Literature
25
REVIEW OF LITERATURE
Meaning of Ratio:-
Ratios are relationships expressed in mathematical terms between figures which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures which are not at all connected with each other. Moreover,
absolute figures are also unfit for comparison.
Ratio can be expressed in two ways:
(1). Times: - When one value is divided by another, the unit used to express the quotient is
termed as “Times”. For example, if out of 100 students in a class, 80 are present, the
attendance ratio can be expressed as follows:
= 80 / 100 = .8 Times
(2). Percentage: - If the quotient obtained is multiplied by 100, the unit of expression is
termed as “Percentage”. For instance, in the above example, the attendance ratio as a
percentage of the total number of students is as follows:
= .8 X 100 = 80%
Accounting ratio are, therefore mathematical relationships expressed between inter-connected
accounting figures.
26
Following are the objectives of ratio analysis technique:
A financial ratio is a relationship between two financial variables. It helps to ascertain
the financial condition of a firm.
In ratio analysis, the liquidity ratio measures the firm’s ability to meet current
obligations and is calculated by establishing relationships between current assets and
current liabilities.
The profitability ratio measure the overall performance of the firm by determining the
effectiveness of the firm in generating profit and are calculated by establishing
relationship between profit figures on the one hand and sales and assets on the other.
The main objective of using this technique to judge the performance of the business.
Ratio throws light on the profitability of the business, solvency position of the
business, liquidity of the business etc.
Comparisons of ratios of a business enterprise either with ratios of the same concern
for past periods or with ratio of the concern for same period or both, reveals the
weakness of the business and the point of its strengths. Points of weakness are further
investigated and corrective action is taken.
Thus, ratios are useful and perhaps the indispensable part of financial analysis. They
provide the analyst of underlying conditions.
27
Ratio analysis is relevant in assessing the performance of a firm in respect of the
following aspects:
Liquidity position
Long term solvency
Operating efficiency
Overall profitability
Inter firm comparison
Trend analysis
We can use ratio analysis to try to tell us whether the business
is profitable
has enough money to pay its bills
could be paying its employees higher wages
is paying its share of tax
is using its assets efficiently
has a gearing problem
is a candidate for being bought by another company or investor
28
Importance of Ratio Analysis:-
As a tool of financial management, ratios are of crucial significance. The importance of ratio
analysis lies in the fact that it presents facts on a comparative basis and enables the drawing
of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:
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 obligations 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 on its short-maturing debt usually within a year as well as to repay the
principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios
are particularly useful in credit analysis by banks and other suppliers of short-term
loans.
Long-term Solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability of a
firm. This aspect of the financial position of a borrower is of concern to the long-term
creditors, security analyst and the present and potential owners of a business. The
long-term solvency is measured by the leverage or capital structure and profitability
ratios which focus on earning power and operating efficiency. Ratio analysis reveals
the strengths and weaknesses of a firm in this respect. The leverage ratios for instance
will indicate whether a firm has a reasonable proportion of various sources of finance
or if it is heavily loaded with debt in which case its solvency is exposed to serious
strain. Similarly, the various profitability ratios would reveal whether or not the firm
is able to offer adequate return to its owners consistent with the risk involved.
Operating Efficiency:-
Yet another dimension of the usefulness of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of efficiency in the
management and utilization of its assets. The various activity ratios measure this kind
of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon
the sales revenues generated by the use of its assets-total as well as its
components.
29
Overall Profitability:-
Unlike the outside parties which are interested in one aspect of the financial position
of a firm, the management is constantly concerned about the overall profitability of
the enterprise. That is, they are concerned about the ability of the firm to meet its
short-term as well as long-term obligations to its creditors, to ensure a reasonable
return to its owners and secure optimum utilization of the assets of the firm. This is
possible if an integrated view is taken and all the ratios are considered together.
Inter-firm Comparison:-
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 and comparison with industry averages. A single figure of a particular
ratio is meaningless unless it is related to some standard or norm. One of the popular
techniques is to compare the ratios of a firm with the industry average. It should be
reasonably expected that the performance of a firm should be in broad conformity
with that of the industry to which it belongs. An inter-firm comparison would
demonstrate the firm’s position vis-a-vis its competitors. If the results are at variance
either with the industry average or with those of the competitors, the firm can seek to
identify the probable reasons and in that light, take remedial measures. Ratio analysis
provides data for inter-firm comparison. Ratios highlight the factors associated with
successful and unsuccessful firms. They also reveal strong firms and weak firms,
over-valued and under-valued firms.
Make Intra-firm Comparison Possible:-
Ratio analysis also makes possible comparison of the performance of the different
division of the firm. The ratios are helpful in deciding about their efficiency or
otherwise in the past and likely performance in the future.
Trend Analysis:-
Finally, ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of affirm is improving or deteriorating over the years. This is
made possible by the use of trend analysis. The significance of trend analysis of ratio lies in the fact
that the analysts can know the direction of movement, that is, whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward.
On the other hand, though the present level may be satisfactory but the trend may be a declining one.
Simplifies Financial Statements:-
Ratio analysis simplifies the comprehension of financial statements. Ratios tell the
whole story of change in the financial condition of the business.
30
Help in Planning:-
Ratio analysis helps in planning and forecasting. Over a period of time a firm or
industry develops certain norms that may indicate future success or failure. If
relationship changes in firm’s data over different time periods, the ratios may provide
clues on trends and future problems.
Thus, “ratios can assist management it its basic function of forecasting, planning,
coordination, control and communication”.
Limitation of the Ratio Analysis:-
Ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various
limitations. The operational implication of this is that while using ratios, the conclusions
should not be taken on their face value. Some of the limitations which characterise ratio
analysis are as follows:
Difficulty in Comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated with their
comparability. One technique that is employed is inter-firm comparison. But such
comparisons are vitiated by different procedures adopted by various firms. The
differences may relate to:
Differences in the basis of inventory valuation
Different depreciation methods
Estimated working life of assets, particularly of plant and equipments
Amortization of intangible assets like goodwill, patents and so on
Amortization of deferred revenue expenditure such as preliminary expenditure
and discount on issue of shares
Capitalization of lease
Treatment of extraordinary items of income and expenditure and so on.
31
Secondly, apart from different accounting procedures, companies may have different accounting
periods, implying differences in the composition of the assets particularly current assets. For these
reasons, the ratios of two firms may not be strictly comparable.
Another basis of comparison is the industry average. This presupposes the availability, on a
comprehensive scale, of various ratios for each industry group over a period of time. If, however, as is
likely, such information is not compiled and available, the utility of ratio analysis would be limited.
Impact of Inflation:-
The second major limitation of the ratio analysis as a tool of financial analysis is associated with price
level changes. This, in fact, is a weakness of the traditional financial statements which are based on
historical costs. And implication of the is feature of the financial statements as regards ratio analysis is
that assets acquired at different periods are, in effect, shown at different prices in the balance sheet, as
they are not adjusted for changes in the price level. As a result, ratio analysis will not yield strictly
comparable and therefore dependable results. To illustrate, there are two firms which have identical
rates of returns on investments, say 15 per cent. But one of these had acquired its fixed assets when
prices were relatively low, while the other one had purchased them when prices were high. As a result
the book value of the fixed assets of the former type of firm would be lower, while that of the latter
higher. From the point of view of profitability, the return on the investment of the firm with a lower
book value would be over-stated. Obviously, identical rates of returns on investment are not indicative
of equal profitability of the two firms. This is a limitation of ratios.
Conceptual Diversity:-
Yet another factor which influences the usefulness of ratios is that there is difference
of opinion regarding the various concepts used to compute the ratios. There is always
room for diversity of opinion as to what constitutes shareholders’ equity, debt, assets,
and profit and so on. Different firms may use these terms in different senses or the
same firm may use them to mean different things at different times.
Reliance on a single ratio for a particular purpose may not be a conclusive indicator.
For instance, the current ratio alone is not an adequate measure of short-term financial
strength; it should be supplemented by the acid-test ratio, debtor turnover ratio and
inventory turnover ratio to have a real insight into the liquidity aspect.
Limitation of Financial Statements:-
Ratios are based only on the information which has been recorded in the financial statements.
Financial statements suffer from a number of limitations, the ratios derived there from, therefore, are
also subject to those limitations. For example, nonfinancial changes through important for the business
are not revealed by the financial statements. If the management of the company changes, it may have
ultimately adverse effects on the future profitability of the company but this cannot be judged by
having a glance at the financial statements of the company. Similarly, the management has a choice
about the accounting policies.
32
Different accounting policies may be adopted by management of different companies regarding
valuation of inventories, depreciation, research and development expenditure and treatment of
deferred revenue expenditure, etc. The comparison of one firm with another on the basis of ratio
analysis without taking into account the fact of companies having different accounting policies, will
be misleading and meaningless. Moreover, the management of the firm itself may change its
accounting policies form one period to another. It is, therefore, absolutely necessary that financial
statements
are they subjected to close scrutiny before an analysis attempted on the basis of accounting ratio. The
financial analyst must carefully examine the financial statements and make necessary adjustments in
the financial statements on the basis of disclosure made regarding the accounting policies before
undertaking financial analysis.
The growing realization among accountants all over the world, that the accounting policies should be
standardized, has resulted in the establishment of International Accounting Standards Committee
which has issued a number of International Accounting Standards. In our country, the Institute of
Chartered Accountants of India has established Accounting Standards Board for formulation of
requisite accounting standards. The accounting Standards Board had already issued nineteen standards
including AS-1: Disclosure of accounting Policies. The standard AS-1 has been made mandatory in
respect of accounting periods beginning on or after 1.4.1991. It is hoped that in the years to come,
with the progressive standardization of accounting policies, this problem will be solved to a great
extent.
Ratio alone are not adequate:-
Ratios are only indicators; they cannot be taken as final regarding good or bad financial position of the
business. Other things have also to be seen. For example, a high current ratio does not necessarily
mean that the concern has a good liquid position in case current assets mostly comprise outdated
stocks. It has been correctly observed, “Ratio must be used for what they are – financial fools. Too
often they are looked upon as ends in themselves rather than as a means to an end. The value of a
ratio should not be regarded as good or bad inter se. It may be an indication that a firm is weak or
strong in a particular area, but it must never be taken as proof”. Ratios may be linked to railroads.
They tell the analyst, “Stop, look, and listen”.
Window Dressing:-
The term window dressing means manipulation of accounts in a way so as to conceal vital facts and
present the financial statement in a way to show a better position that what is actually is. On account
of such a situation, presence of a particular ratio may not be a definite indicator of good or bad
management. For example, a high stock turnover ratio is generally considered to be an indication of
operational efficiency of the business. But this might have been achieved by unwarranted price
reductions or failure to maintain proper stock of goods.
33
Similarly, the current ratio may be improved just before the Balance Sheet date by postponing
replenishment of inventory. For example, if a company has got current assets of Rs. 4000 and current
liabilities of Rs. 2000, the current ratio is 2, which is quite satisfactory. In case the company purchases
goods of Rs. 2000 on credit, the current assets would go up to Rs. 6000 and current liabilities to Rs.
4000. Thus, reducing the current ratio to 1.5. The company may, therefore, postpone the purchases for
the early next year so that its current ratio continues to remain at 2 on the Balance
Sheet date. Similarly, in order to improve the current ratio, the company may pay off certain pressing
current liabilities before the Balance Sheet date. For example, if in the above case the company pays
current liabilities of Rs. 1000, the current liabilities would stand reduced to Rs. 1000, current assets
would stand reduced to Rs. 3000 but the current ratio would go up to 3.
No Fixed Standards:-
No fixed standards can be laid down for ideal ratios. For example, current ratio is generally considered
to be ideal if current assets are twice the current liabilities. However, in case of those concerns which
have adequate arrangements with their bankers for providing funds when they require, it may be
perfectly ideal if current assets are equal to slightly more than current liabilities.
It is, therefore, necessary to avoid many rules of thumb. Financial analysis is an individual matter and
value for a ratio which is perfectly acceptable for one company or one industry may not be at all
acceptable in case of another.
Ratios are a Composite of Many Figures:-
Ratios are a composite of many different figures. Some cover a time period, others are at an instant of
time while still others are only averages. It has been said that, a man who has his head in the oven and
his feet in the ice-box is on the average, comfortable”! Many of the figures used in the ratio analysis
are no more meaningful than the average temperature of the room in which this man sits. A balance
sheet figure shows the balance of the account at one moment of one day. It certainly may not be
representative of typical balance during the year. It may, therefore, be concluded that ratio analysis, if
done mechanically, is not only misleading but also dangerous. It is indeed a double edged sword
which requires a great deal of understanding and sensitivity of the management process rather than
mechanical financial skill. It has rightly been observed: “The ratio analysis is an aid to management in
taking correct decisions, but as a mechanical substitute for thinking and judgment, it is worse than
useless. The ratio if discriminately calculated and wisely interpreted can be a useful tool of financial
analysis”. Finally, ratios are only a post-mortem analysis of what has happened between two balance
sheet dates. For one thing, the position in the interim period is not revealed by ratio analysis.
Moreover, they give no clue about the future.
In brief, ratio analysis suffers from some serious limitations. The analyst should not be
carried away by its oversimplified nature, easy computation with a high degree of precision.
The reliability and significance attached to ratios will largely depend upon the quality of data
on which they are based. They are as good as the data itself. Nevertheless, they are an
important tool of financial analysis.
34
Financial Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the
information in a company's financial statements. The level and historical trends of these ratios can be
used to make inferences about a company's financial condition, its operations and attractiveness as an
investment.
Financial ratios are calculated from one or more pieces of information from a company's
financial statements. For example, the "gross margin" is the gross profit from operations
divided by the total sales or revenues of a company, expressed in percentage terms. In
isolation, a financial ratio is a useless piece of information. In context, however, a financial
ratio can give a financial analyst an excellent picture of a company's situation and the trends
that are developing.
A ratio gains utility by comparison to other data and standards. Taking our example, a gross
profit margin for a company of 25% is meaningless by itself. If we know that this company's
competitors have profit margins of 10%, we know that it is more profitable than its industry
peers which are quite favourable. If we also know that the historical trend is upwards, for
example has been increasing steadily for the last few years, this would also be a favorable
sign that management is implementing effective business policies and strategies.
Financial ratio analysis groups the ratios into categories which tell us about different facets of
a company's finances and operations. An overview of some of the categories of ratios is given
below.
Leverage Ratios which show the extent that debt is used in a company's capital
Structure.
Liquidity Ratios which give a picture of a company's short term financial situation or
Solvency.
Operational Ratios which use turnover measures to show how efficient a company is
in its operations and use of assets.
Profitability Ratios which use margin analysis and show the return on sales and
capital employed.
Solvency Ratios which give a picture of a company's ability to generate cash flow and
pay it financial obligations.
35
Types of Ratios:-
Liquidity Ratios
Liquidity refers to the ability of a firm to meet its short-term financial obligations
when and as they fall due.
The main concern of liquidity ratio is to measure the ability of the firms to meet their
short-term maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation.
Current Ratio
The Current Ratio expresses the relationship between the firm’s current assets and its current
liabilities. Current assets normally include cash, marketable securities, accounts receivable
and inventories. Current liabilities consist of accounts payable, short term notes payable,
short-term loans, current maturities of long term debt, accrued income taxes and other
accrued expenses (wages).
Current Ratio = Current Assets / Current Liabilities
The rule of thumb says that the current ratio should be at least 2 that are the current assets
should meet current liabilities at least twice.
Quick Ratio
Measures assets that are quickly converted into cash and they are compared with current
liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.
inventories.
The quick ratio, also referred to as acid test ratio, examines the ability of the business to
cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick
ratio is calculated as follows
Quick Ratio / Acid-test Ratio = Quick Assets / Current Liabilities
Clearly this ratio will be lower than the current ratio, but the difference between the two (the
Gap) will indicate the extent to which current assets consist of stock.
Turnover Ratio
The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Another way of
examining the liquidity is to determine how quickly certain current assets are converted into cash. The
ratios to measure these are referred to as turnover ratios. In fact, liquidity ratios are not independent of
activity ratios. Poor debtor or inventory turnover ratios limit the usefulness of the current and acid-test
ratios. Both obsolete / unsalable inventory and uncollectible debtors are unlikely to be sources of cash.
Therefore, the liquidity ratios should be examined in conjunction with relevant turnover ratios
affecting liquidity.
36
Inventory Turnover Ratio:
It is computed by dividing the cost of goods sold by the average inventory. Thus,
Inventory Turnover Ratio = Cost of Goods sold / Average Inventory
This ratio measures the stock in relation to turnover in order to determine how often the stock
turns over in the business.
It indicates the efficiency of the firm in selling its product. It is calculated by dividing the cost
of goods sold by the average inventory.
The ratio shows a relatively high stock turnover which would seem to suggest that the
business deals in fast moving consumer goods.
The trend shows a marginal increase in days which indicates a slowdown of stock
turnover.
The high stock turnover ratio would also tend to indicate that there was little chance
of the firm holding damaged or obsolete stock.
Debtors Turnover Ratio
It is determined by dividing the net credit sales by average debtors outstanding during the
year. Thus,
Debtors turnover ratio = Net credit sales / Average debtors
Net credit sales consist of gross credit sales minus returns, if any, from customers. Average debtors
are the simple average of debtors including bills receivable at the beginning and at the end of the year.
The analysis of the debtors’ turnover ratio supplements the information regarding the liquidity of one
item of current assets of the firm. The ratio measures how rapidly receivables are collected. A high
ratio is indicative of shorter time-lag between credit sales and cash collection.
Creditors Turnover Ratio
It is a ratio between net credit purchases and the average amount of creditors outstanding
during the year. It is calculated as follows:
Creditors Turnover Ratio = Net credit purchases / Average Creditors
A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that
accounts are to be settled rapidly. The creditor’s turnover ratio is an important tool of analysis as a
firm can reduce its requirement of current assets by relying on supplier’s credit. The extent to which
trade creditors are willing to wait for payment can be approximated by the creditors’ turnover ratio.
37
Financial Leverage Ratios
The ratios indicate the degree to which the activities of a firm are supported by
creditors’ funds as opposed to owners.
The relationship of owner’s equity to borrowed funds is an important indicator of
financial strength.
The debt requires fixed interest payments and repayment of the loan and legal action
can be taken if any amounts due are not paid at the appointed time. A relatively high proportion of
funds contributed by the owners indicate a cushion (surplus) which shields creditors against possible
losses from default in payment.
The greater the proportion of equity funds, the greater the degree of financial strength.
Financial leverage will be to the advantage of the ordinary shareholders as long as the
rate of earnings on capital employed is greater than the rate payable on borrowed
funds.
Debt to Equity ratio
This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the
relative position of the equity holders and the lenders and indicates the company’s policy on
the mix of capital funds. The debt to equity ratio is calculated as follows:
Debt–Equity Ratio = Long-term Debt / Shareholders’ Equity
Debt to Total Capital Ratio
The relationship between creditors’ funds and owner’s capital can also be expressed in terms of
another leverage ratio. This is the debt to total capital ratio. Here, the outside liabilities are related to
the total capitalization of the firm and not merely to the shareholder’s equity. Essentially, this type of
capital structure ratio is a variant of the D/E, ratio described above. In can be calculated as follows:
Debt to Total Capital Ratio = Total Debt / Total Assets
Profitability Ratios
Profitability is the ability of a business to earn profit over a period of time. Although the
profit figure is the starting point for any calculation of cash flow, as already pointed out,
profitable companies can still fail for a lack of cash.
A company should earn profits to survive and grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by management of
a company should be aimed at maximizing profits, irrespective of social consequences.
38
The ratios examined previously have tendered to measure management efficiency and risk.
Profitability is a result of a larger number of policies and decisions. The profitability ratios
show the combined effects of liquidity, asset management (activity) and debt management
(gearing) on operating results. The overall measure of success of a business is the
profitability which results from the effective use of its resources.
Gross Profit Margin
Normally the gross profit has to rise proportionately with sales.
It can also be useful to compare the gross profit margin across similar businesses
although there will often be good reasons for any disparity.
This indicates that the rate in increase in cost of goods sold are less than rate of
increase in sales, hence the increased efficiency.
Gross Profit Margin = Gross Profit / Sales X 100
Net Profit Margin
This is a widely used measure of performance and is comparable across companies in similar
industries. The fact that a business works on a very low margin need not cause alarm because
there are some sectors in the industry that work on a basis of high turnover and low margins,
for examples supermarkets and motorcar dealers.
What is more important in any trend is the margin and whether it compares well with similar
businesses. However, to know how well the firm is performing one has to compare this ratio
with the industry average or a firm dealing in a similar business.
Net Profit Margin = Net Profit / Sales X 100
Earnings per Share (EPS)
Whatever income remains in the business after all prior claims, other than owners claims (i.e. ordinary
dividends) have been paid, will belong to the ordinary shareholders who can then make a decision as
to how much of this income they wish to remove from the business in the form of a dividend, and how
much they wish to retain in the business. The shareholders are particularly interested in knowing how
much has been earned during the financial year on each of the shares held by them. For this reason,
earnings per share figure must be calculated.
Clearly then, the earning per share calculation will be:
EPS = Net Profit available to Equity – holders / Number of ordinary shares outstanding
39
Dividend Pay-out Ratio
D/P ratio is also known as pay-out ratio. It measures the relationship between the earnings belonging
to the ordinary shareholders and the dividend paid to them. In other words, the D/P ratio shows what
percentage share of the net profits after taxes and preference dividend is paid out as dividend to the
equity-holders. It can be calculated by dividing the total dividend paid to the owners by the total
profits / earnings available to them. Alternatively, it can be found out by dividing the DPS by the EPS.
Thus,
D/P Ratio = Dividend per ordinary Share (DPS) / Earnings per share (EPS) X 100
Activity Ratios
If a business does not use its assets effectively, investors in the business would rather take their money
and place it somewhere else. In order for the assets to be used effectively, the business needs a high
turnover.
Unless the business continues to generate high turnover, assets will be idle as it is impossible to buy
and sell fixed assets continuously as turnover changes. Activity ratios are therefore used to assess how
active various assets are in the business.
Total Assets Turnover
Asset turnover is the relationship between sales and assets
The firm should manage its assets efficiently to maximize sales.
The total asset turnover indicates the efficiency with which the firm uses all its assets
to generate sales.
It is calculated by dividing the firm’s sales by its total assets.
Generally, the higher the firm’s total asset turnover, the more efficiently its assets
have been utilized.
Total Assets Turnover Ratio = Cost of Goods Sold / Average Total Assets
Fixed Asset Turnover
The fixed assets turnover ratio measures the efficiency with which the firm has been using its
fixed assets to generate sales.
Generally, high fixed assets turnovers are preferred since they indicate a better
efficiency in fixed assets utilization.
40
It appears that the activity of the business is relatively constant, with a slight upward
trend.
The ratio also confirms that the business places a much greater reliance on working
capital than it does on the fixed assets as the fixed assets (2012 and 2013) turned over
more quickly than stock turnover.
Fixed Assets Turnover = Cost of Goods Sold / Average Fixed Assets
41
Chapter – 5
Research
Methodology
42
RESEARHC METHODOLOGY
The focus of this chapter is on the methodology used for the collection of data for research. Data
constitutes the subject matter of the analyst. The primary sources of the collection of sources of the
collection of data are observations, Interviews and the questionnaire technique. The secondary sources
are collections of data are from the printed and annually published materials. A questionnaire form is
prepared to secure responses to certain questions. It is device for securing answers to questions by
using a form. The questionnaire technique is economical and time saving and is an important tool of
collecting information.
Research Design:
A research design is the detailed blue print used to guide a research study towards its objective. It
helps to collect, measure and analysis of data. The study undertaken is of Descriptive Historical
Research Method. Descriptive research is those which are connected with describing the
characteristics of the particular topic. “Research design is the plan, structure, and strategy of
investigation conceived so as to obtain answers to research questions & to control variance”.
The definition consists of three important terms-plan, structure & strategy.
The plan is an outline of the research scheme on which the researcher is to work. The structure of the
research is a more specific outline or the scheme & the strategy shows how the research will be carried
out, specifying the methods to be used in the collection & analysis of data.
Methods of research design:- There are basically three important methods of research
design. These are:
(a) Exploratory research design:- In the case of exploratory research, the focus is on
the discovery of ideas. In a business where sales have been declining for the past few
months, the management may conduct a quick study to find out what could be the
possible explanations. In such a case an exploratory study may be conducted to find the
most likely cause.
An exploratory study is generally based on the secondary data that are readily available.
It does not have a formal & rigid design as the researcher may have to change his focus
or direction, depending on the availability of new ideas & relationships among variables.
Since the objective of the exploratory research is to generate new ideas, respondents
should be given sufficient freedom to express themselves. Sometimes a group of
respondents is brought together & a focus group interview is held. Such an interview may
be very helpful provided respondents shake off their initial inhibition & participate in the
discussion without any reservations.
43
(b) Descriptive research design:-
Descriptive studies are undertaken in many circumstances. When the researcher is
interested in knowing the characteristics of certain groups such as age, gender,
education level, occupation, income etc., a descriptive study may be necessary. The
objective of such a study is to answer the “who, what, when, where & how” of the subject
under investigation.
Descriptive studies are well-structured. It is necessary that the researcher gives sufficient
thought to framing research questions & deciding the types of data to be collected & the
procedure to be used for this purpose. If he is not careful in the initial stages, he may find
that either the data collected are inadequate or the procedure used is cumbersome or
expensive.
Descriptive studies can be divided into two broad categories:
(i) Cross-sectional studies:- A cross-sectional study is concerned with a sample of
elements from a given population. Thus, it may deal with households, dealers, retail
stores or other entities. Data on a no. of characteristics from the sample elements are
collected & analyzed. Cross-sectional studies are of two types- field studies & surveys.
Field studies have their strengths &
weaknesses. One major strength is that they are close to real life, & they cannot be
criticized on the ground that they are remote from real settings or are artificial. Field
studies are more socially significant than other types of study. While investigating the
behavior & preferences of people, many other related issues, though not so obvious,
also get answered. Thus, studies of this type have considerable social significance.
Another type of cross-sectional study is survey research. A major strength of survey
research is its wide scope. Detailed information can be obtained from a sample of large
population. Besides, it is economical as more information can be collected per unit of
cost. Also, it is obvious that a sample survey needs less time than a census enquiry.
(ii) Longitudinal studies:- Longitudinal studies are based on panel data & panel
methods. A panel is a sample of respondents who are interviewed & then re-interviewed
from time to time. Generally, panel data relate to the repeated measurements of the
same variables. Each family included in the panel, records its purchases of a no. of
products at regular intervals, say, weekly, monthly or quarterly. Over a period of time,
such data will reflect changes in the buying behavior of families.
44
(c) Causal research designs:-
As the name implies a causal design investigates the cause & effect relationship
between two or more variables. Suppose a manufacturer has sold his products at two
points of time, & t2. The sale in t2 is much higher than that in the previous year.
During the year, the firm has also launched an advertising campaign for its product. The
manufacturer is interested in knowing whether advertising has caused the increase in
sales in the year t2.
Secondary data:
Secondary data highlights the contextual familiarities for primary data collection. It provides
rich insights into the research process.
Secondary data is collected through magazine, reference books, journal, articles, websites etc.
Secondary data like balance sheet and profit and loss account and cash flow statement collected
through company and company websites and part of theory from reference books.
Tools and Techniques –
In this industry project work the ratio analysis technique has been used. In this project ratio
analysis technique is used for interpretation and evaluation of financial statements.
Chapter – 6
45
Consolidated
balance sheet of
last three years
46
Balance Sheet
47
Continue…………
Chapter – 7
48
Data
Collection and
Analysis
DATA ANALYSIS AND INTERPRETATION
49
1. LIQUIDITY RATIOS
A. Current Ratio:-
The current ratio of a firm measures its short-term solvency, that is, its ability to meet shortterm
obligations as a measure of short-term/current financial liquidity; it indicates the rupees
of current assets (cash balance and its potential source of cash) available for each rupee of
current liability/obligation payable. The higher the current ratio, the larger is the amount of
rupees available per rupee of current liability, the more is the firm’s ability to meet current
obligations and the greater is the safety of funds of short-term creditors. Thus, current ratio,
in a way, is a measure of margin of safety to the creditors. It is calculated as follows:
Current Ratio = Current Assets / Current Liabilities
Calculation of Current Ratio with Diagram: (Rs. In Crores)
Diagram of Current Ratio:-
2.18
2.3
1
0
0.5
1
1.5
2
2.5
March'10 March'11 March'12
Current Ratio
I nterpretation:-
Particulars Mar '10 Mar '11 Mar '12
Current Assets 120.74 137.57 118.71
Current Liabilities 55.15 59.61 117.61
Current Ratio 2.18 2.30 1.00
50
Current ratio 2:1 shows excellent liquidity position of the firm.
Current ratio between 1:1 to 2:1 shows satisfactory position of the company.
Ratio less than 1:1 shows no liquidity at all.
Generally current ratio should 2:1 but as per our calculation in Mar'10 it was 2.18, it means
company has 2.18 rupees current assets against current liability on rupees 1. Company has
less current assets than current claims against them. In Mar'12 Company’s current ratio is
1.00 which is not satisfactory.
B. Acid-Test / Quick Ratio:-
51
The term quick assets refers to current assets which can be converted into cash immediately
or at a short notice without diminution of value. Included in this category of current assets are
(1) cash and bank balance; (2) short-term marketable securities and (3) debtors/receivables.
Thus, the current assets which are excluded are: prepaid expenses and inventory.
It is calculated as follows:
Quick Ratio = Liquid Assets / Liquid Liabilities
Calculation of Quick Ratio with Diagram:
Diagram of Quick Ratio:-
0.66
0.75
0.97
0
0.2
0.4
0.6
0.8
1
1.2
March'10 March'11 March'12
Quick Ratio
Interpretation:-
Particulars Mar '10 Mar '11 Mar '12
Liquid Assets 24.73 44.46 64.12
Liquid Liabilities 37.38 59.33 65.79
Quick Ratio (In
Times)
0.66 0.75 0.97
52
Generally quick ratio of 1:1 represents a satisfactory current financial condition. But we have
seen in table that not evens a single year it has achieved. In all three years liquid ratios are less
than 1.It indicates that firm has found difficult to meet its obligations because its quick assets
are lesser than current liabilities. Similarly both year Mar'10 and Mar'11 the company suffers
from the same position. It has increased to 0.97 in Mar'12.
2. TURN OVER RATIOS
53
A. I nventory Turnover:
This ratio measures the stock in relation to turnover in order to determine how often the stock
turns over in the business. It is calculated as follows:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Calculation of Inventory Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Inventory Turnover Ratio:-
9.29
11.58
9.03
0
2
4
6
8
10
12
14
March'10 March'11 March'12
Inventory Turnover Ratio
Interpretation:-
It indicates the efficiency of the firm in selling its product. In Mar'10 inventory turnover is 2
times and in Mar'11 it is 9 times in a year. High inventory turnover ratio is good from view
point of liquidity. We can say company sells its product fast.
Particulars Mar '10 Mar '11 Mar '12
Cost Of Goods Sold 37.24 50.62 46.44
Average Inventory 4.01 5.14 4.37 5.14
Inventory Turnover
Ratio (In Times)
9.29 11.58 9.03
54
B: Debtors Turnover Ratio:-
It is determined by dividing the net credit sales by average debtors outstanding during the
year. The analysis of the debtors’ turnover ratio supplements the information regarding the
liquidity of one item of current assets of the firm. The ratio measures how rapidly receivables
are collected. It is calculated as follows:-
Debtors Turnover Ratio = Net credit sales / Average Debtors
Calculation of Debtors Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Debtors Turnover Ratio:-
7.29
7.93
6.68
6
6.5
7
7.5
8
8.5
March'10 March'11 March'12
Debtors Turnover Ratio (Times)
Note: - It is assumed that 60% sale is on credit and 40% on cash.
Interpretation:-
The company’s debtor’s turnover ratio of Mar'10 7.29 times, in Mar'11 7.93 times in a year
which indicates company collects its receivable rapidly. We can say year to year the shorter
time lag between credit sales and collection.
Particulars Mar '10 Mar '11 Mar '12
Net Credit Sales 39.90 63.22 56.81
Average Debtors 5.47 7.97 8.50
Debtors Turnover Ratio
(Times)
7.29 7.93 6.68
55
B. Debtors Collection Period:-
The ratio indicates the extent to which the debts have been collected in time. It gives the
average debt collection period. Debtors Collection Period is calculated from following
formula:
Debtors Collection Period = 360 / Debtors Turnover Ratio
Calculation of Debtors Collection Period Ratio with Diagram: (Rs. In Crores)
Diagram of Debtors Collection Period:-
109
54
45
0
20
40
60
80
100
120
March'10 March'11 March'12
Debtors Collection Period (in Days)
Interpretation: -
According to debtor collection period from above table, Company was following liberal
credit policy as its collection period of Mar'10 was 109 days. Thus, to decrease the debt
collection period the company has to adopt certain policy s to attract the customers to pay
debts. Policies like trade credit, cash credit. We can see that company has reduced its debtors
collection period during these years it means now a days it follows strict credit policy.
Particulars Mar '10 Mar '11 Mar '12
Days in Years 360 360 360
Debtors Turnover 3.30 6.68 7.93
Debtors Collection Period (in
Days)
109 54 45
56
D. Creditors Turnover ratio:
It is calculated as follows:-
Creditors Turnover Ratio = Net Credit Purchases / Average Creditors
Calculation of Creditors Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Creditors Turnover Ratio:-
2.61
3.22
2.99
0
0.5
1
1.5
2
2.5
3
3.5
March'10 March'11 March'12
Creditor turnover Ratio
Interpretation:-
Above stated graph indicates that in Mar'10 Company has settled its creditor’s accounts 2.61
times in a year. In Mar'11 it had increased by 3.22 which show that company had settled its
account rapidly. From Mar'11 to Mar'12 it has paid its creditor’s account average of 3 times.
If creditor’s turnover ratio is high company’s requirements of working capital will increase
and vice-a-versa.
Particulars Mar '10 Mar '11 Mar '12
Net Credit Purchase 20.58 32.94 33.54
Average Creditors 7.86 10.20 11.21
Creditors Turnover
Ratio
(times per year)
2.61 3.22 2.99
57
E. Creditor’s Payment Period:-
It is calculated as follows:-
Creditor’s Payment Period = 360 / Creditors Turnover Ratio
Calculation of Creditor’s Payment Period with Diagram: (Rs. In Crores)
Diagram of Creditor’s Payment Period:-
123
111
120
105
110
115
120
125
March'10 March'11 March'12
Creditor's Paymeny Period
Interpretation:-
We can analyze that in Mar'10 Company has paid its creditor after 123 days. After that this period is
decreasing which shows strict collection policy followed by suppliers. Company has to settle its
payments within short span to time. 1n Mar'12 company makes payment after 120 days which is
comparatively lower than previous years, it means for this year suppliers has given lesser credit
period to the company.
Particulars Mar '10 Mar '11 Mar '12
Days in Years 360 360 360
Creditors Turnover
Ratio
2.92 3.22 2.99
Creditor’s Payment
Period
(in Days)
123 111 120
58
F. Fixed Asset Turnover:
The fixed assets turnover ratio measures the efficiency with which the firm has been using its
fixed assets to generate sales. It is calculated by dividing the firm’s sales by its net fixed
assets as follows:
Fixed Asset Turnover Ratio = COGS / Average Fixed Asset
Calculation of Fixed Asset Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Fixed Asset Turnover Ratio:-
0.71
0.54
0.35
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
March'10 March'11 March'12
Fixed Asset Turnover Ratio
Interpretation:-
Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in fixed assets
utilization. From the above calculations company’s fixed assets turnover ratio is continuously decreasing.
In year Mar’10 it is 0.71 and in Mar’12 it is 0.35. It means company’s efficiency of managing and utilizing
its assets goes down. Company is not utilizing its fixed assets at fullest capacity.
Particulars Mar '10 Mar '11 Mar '12
Cost of Goods Sold 37.24 50.62 46.44
Average Fixed Asset 52.79 93.50 132.28
Fixed Asset Turnover Ratio
(In
Times)
0.71 0.54 0.35
59
G. Total Assets Turnover Ratio:
Total Assets turnover ratio indicates the efficiency with which firm uses all its assets to
generate sales. It is calculated as follows:
Total Assets Turnover Ratio = Sale / Average Total Assets
Calculation of Total Asset Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Asset Turnover Ratio:-
1.17
1.46
1.12
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
March'10 March'11 March'12
Assets Turnover Ratio
Interpretation:-
Here, we can interpret that company’s asset turnover ratio in Mar’10 is 1.17 which is not
ideal and in Mar’11 there is negligible improvement is seen that the ratio is 1.46. In Mar’12 it
has decreased, in Mar’12 it is 1.12 which indicates under utilization of available resources
and presence of idle capacity. In operational term, it implies that the firm can expand its
activity level (in terms of production and sales) without requiring additional capital
investment.
Particulars Mar '10 Mar '11 Mar '12
Sale 141.47 202.04 208.87
Average Total Assets
120.74 137.57 185.27
Assets Turnover Ratio (In
Times)
1.17 1.46 1.12
60
3. LEVERAGE or CAPITAL STRUCTURE RATIO
A. Debt to Equity ratio:
This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the
relative position of the equity holders and the lenders and indicates the company’s policy on
the mix of capital funds. The debt to equity ratio is calculated as follows:
Debt to Equity Ratio = Long Term Debt / Shareholders’ Fund
Calculation of Debt to Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Debt to Equity Ratio:-
1.76
1.4
0.14
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
March'10 March'11 March'12
Debt to Equity Ratio
Interpretation:-
Company debt-equity ratio in Mar'10 is 1.76 and after that in each year it is decreasing. In Mar'12 it
has raised capital from long term debt. This proportion of debt-equity in Mar'09 does not indicate
good financial position.
Particulars Mar '10 Mar '11 Mar '12
Long Term Debt
85.77 75.70 8.54
Shareholder Fund
48.51 54.01 59.10
Debt to Equity Ratio
(In Times)
1.76 1.40 0.14
61
B: Debt – Assets Ratio:
Debt-asset ratio measures the share of the total assets financed by outside funds. It is
calculated as follows:
Debt – Assets Ratio = Total Debt / Total Assets
Calculation of Debt – Assets Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Debt - assets Ratio:-
0.3
0.23
0.27
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
March'10 March'11 March'12
Debt – Assets Ratio
Interpretation:-
Above calculation intimates the debt asset ratio in Mar’10 is 0.30 which has decreased in
Mar’11 in 0.23. In Mar’07 Company was not having even single rupees debt, which
indicates its financial strength. For Mar’12 Company’s debt has increased but comparatively
its assets have also increased. So we can say that there is a margin of safety available to
company as well as lender.
Particulars Mar '10 Mar '11 Mar '12
Total Debt 38.08 45.94 50.55
Total Assets
124.22 197.80 185.27
Debt – Assets Ratio
0.30 0.23 0.27
62
C. Interest Coverage Ratio
Interest coverage ratio measures the debt servicing capacity of a firm insofar as fixed interest
on long-term loan is concerned. It is determined by dividing the operating profits or earnings
before interest and taxes (EBIT) by the fixed interest charges on loans. It is calculated as
follows:
Interest Coverage Ratio = EBIT / Interest
Calculation of Interest Coverage Ratio with Diagram: (Rs. In Crores)
Diagram of Interest Coverage Ratio:-
17.02
25.87
43.75
0
5
10
15
20
25
30
35
40
45
50
March'10 March'11 March'12
Interest Coverage Ratio
Interpretation:-
Company’s interest coverage ratio in Mar’10 is 17.02. It has increased in each year after
Mar’10. In Mar’11 it was 25.87. In Mar’12 interest coverage ratio was comparatively increased to
43.75. From all above, we can interpret that company is having unused debt capacity.
Particulars Mar '10 Mar '11 Mar '12
EBIT
48.36 62.35 92.77
Interest
2.84 2.41 2.12
Interest Coverage
Ratio
17.02 25.87 43.75
63
4. PROFITABILITY RATIOS
A. Gross Profit Ratio:
A lower gross profit ratio, generally indicates high cost of goods sold due to the unfavorable
purchasing polices, lesser sales, lower selling prices, excessive competition, over investment
in plant and machinery. Gross profit ratio is decreasing, which means the profitability of the
company is decreasing.
? Normally the gross profit has to rise proportionately with sales.
? It can also be useful to compare the gross profit margin across similar businesses
although there will often be good reasons for any disparity.
It is calculated as follows:
Gross Profit Ratio = Gross Profit / Sales * 100
Calculation of Gross Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Gross Profit Ratio:-
76.73 76.71
69.44
64
66
68
70
72
74
76
78
March'10 March'11 March'12
Gross Profit Ratio
Particulars Mar '10 Mar '11 Mar '12
Gross Profit
141.47 202.04 208.87
Sales
184.36 263.35 300.77
Gross Profit Ratio
76.73 76.71 69.44
64
Interpretation:-
The gross profit margin reflects the efficiency with which management produces each unit of
the product. This ratio indicates the average spread between the cost of goods sold and the
sales revenue.
In the financial year Mar'10 the gross profit was 76.73% and in financial year Mar'12 it is
69.44%. It indicates higher sales price without a corresponding increasing in the cost of
goods sold or decreasing in cost of sales.
65
B. Net Profit Ratio:
This is a widely used measure of performance and is comparable across companies in similar
industries. The fact that a business works on a very low margin need not cause alarm because
there are some sectors in the industry that work on a basis of high turnover and low margins,
for examples supermarkets and motorcar dealers. It is calculated as follows:-
Net Profit Ratio = Profit after Tax / Net Sales * 100
Calculation of Net Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Net Profit Ratio:-
3.21
2.95
2.74
2.5
2.6
2.7
2.8
2.9
3
3.1
3.2
3.3
March'10 March'11 March'12
Net Profit Ratio
I nterpretation:
This ratio indicates the firm s capacity to face adverse economic conditions such as price
competition, low demand etc. obviously, higher the ratio, the better is the profitability. In the
financial year Mar'10 the net profit was 3.21% and in Mar'12 it was decreasing by 2.74%
which ensure inadequate return to the owner.
Particulars Mar '10 Mar '11 Mar '12
Net Profit
4.55 5.98 5.74
Sales
141.47 202.04 208.87
Net Profit Ratio
3.21 2.95 2.74
66
C. Operating Profit Ratio:
Operating Profit means profit before interest and tax. The term interest means interest on
long term borrowings, interest on short term borrowing will be deducted for computing
operating profit. A high operating margin indicates the healthy operating efficiency and
pricing strategy of a company and vice-versa.
The term net profit here means, net income after interest and tax it is different from the net
operating profit which is used for computing the return on total capital employed in the
business. This is because the shareholders are interested in total income after tax including
net non operating income. It is calculated as follows:-
Operating Profit Ratio = Earnings before interest and taxes (EBIT) / Net Sales * 100
Calculation of Operating Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Operating Profit Ratio:-
34.18
30.86
44.41
0
5
10
15
20
25
30
35
40
45
50
March'10 March'11 March'12
Operating Profit Ratio
Particulars Mar '10 Mar '11 Mar '12
EBIT
48.36 62.35 92.77
Net Sales
141.47 202.04 208.87
Operating Profit
Ratio
34.18 30.86 44.41
67
I nterpretation:
The operating ratio measures the relationship between operating profits and sales. This ratio
adjusts the managerial efficiency in earnings profits which may not be reflected in net profit
to sales ratio if net profit includes a higher non operating expenses or income.
In the financial year Mar'10 ratio was 34.18% in Mar'11 the company’s sales was higher but
earning was lower therefore its operating profit ratio was decreasing by 30.86%. In Mar'12
operating profit is 44.41% which indicates company higher managerial efficiency.
68
D. Earnings per Share:-
One of the way of measuring profitability of shareholders investment to calculate earnings
per share. EPS shows the profitability of the firm on a per share basis, it doesn’t reflect how
much is paid as dividend and how much retained in the business. It is calculated as follows:-
EPS = Profit after tax – Preference share dividend / No. Of equity shares
Calculation of Earnings per Share with Diagram: (Rs. In Crores)
Diagram of Earnings per Share:-
0.42
0.55
0.53
0
0.1
0.2
0.3
0.4
0.5
0.6
March'10 March'11 March'12
Earnings per Share
I nterpretation:-
The earnings per share are a good measure of the profitability and when compared with E.P.S
of previous 3 years, it gives a view of the comparative earnings power of a firm. Calculated
for 3 years indicates the earning power of the company is increasing. The earnings per share
of the company for three years for Mar’10 are 0.42% which increased up to 0.55% in the
year Mar’11. Earnings per share are increasing for the year Mar’10 to Mar’12. EPS is
increasing as profit available for appropriation is increasing and Number of equity shares is
constant for the three years.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
NO. of Equity Shares
outstanding
10.79 10.79 10.80
EPS
0.42 0.55 0.53
69
E. Return on Assets:
This ratio is computed to know the productivity of the total assets. It is calculated as follows:-
Return on Assets = PAT / Average Total Assets * 100
Calculation of Return on Assets Ratio with Diagram: (Rs. In Crores)
Diagram of Return on Assets Ratio:-
11.72
13.24
9.84
0
2
4
6
8
10
12
14
March'10 March'11 March'12
Return on Assets
I nterpretation:-
The ROA measures the profitability of the total funds/investments of a firm. In Mar'10
Return on asset ratio of the company is 11.72. In Mar’11 it has increased 13.24 respectively. This
indicates assets are effectively utilizing in the company. In Mar’12 return on assets is decreasing by
9.84 which means company’s assets are enable to generate sufficient revenue against their cost.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
Average Total Assets
38.82 45.16 58.28
Return on Assets
11.72 13.24 9.84
70
F. Return on Equity:
Return on equity measures the return on the owner’s investment in the firm. It is used to see
the profitability of owner’s investment. It is calculated as follows:-
Return on Equity = PAT / Shareholders Fund * 100
Calculation of Return on Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Return on Equity Ratio:-
9.37
11.07
9.71
8.5
9
9.5
10
10.5
11
11.5
March'10 March'11 March'12
Return on Equity
Interpretation:-
ROE indicates how well the firm has used the resources of owners. In fact, this ratio is one of
the most important relationships in financial analysis. The earnings of a satisfactory return are
the most desirable objective of business. This ratio is, thus, of great interest to the present as
well as the prospective shareholders and also of great concern to management, this has the
responsibility of maximizing the owners’ welfare.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
Shareholder Fund
48.51 54.01 59.10
Return on Equity
9.37 11.07 9.71
71
Chapter – 8
Findings
72
FINDINGS
As Company’s current ratio is not satisfactory so it should increase current assets in
comparison to current liabilities.
As company’s fixed assets turnover ratio is continuously decreasing it means it has
under utilization of available resources. So it can expand its activity level without any
additional capital investment.
Liquid ratio is decreasing it may result in difficulties of meeting current obligation.
Company utilized its resources efficiently having high inventory turnover ratio and
operating with reduced cost.
It can reduce the need of working capital by availing credit period from suppliers.
Company is not making optimum utilization of fixed assets as its fixed assets turnover
ratio is continuously decreasing.
Recently proportion of debt in comparison to equity capital is higher in Mar’12 which results
in cash outflow in the form of interest.
73
Departments in Super Tannery Limited
1- Accounts and Finance Department
2- Import Department
3- Export Department
4- Time Office Department
5- Raw-Hide Purchase Department
6- Raw-Hide Storing Department
7- Dispatch Department
8- Production Department
9- Sales Department
10- Chemical Purchase Department
74
Chapter – 9
Limitations
75
LIMITATIONS OF THE STUDY
Ratio analysis of particular company is limited to that company. There are lot of
variation in inventory valuation and deprecation methods, estimated working life of
assets etc. are varying as per different companies.
Ratio analysis is affected by inflation.
It may lack complete and accurate financial information due to some confidential
matters of the company.
Time given by the company to carry out research was limited.
The data provided by the company was not sufficient and accurate.
Data was kept confidential, so I have to depend on the company’s balance sheet and profit
and loss account.
76
Chapter – 10
Appendix
77
APPENDIX
Balance sheet of Last Three Years 2009-10 to 2011-12
Profit and Loss Account of Last Three Years 2009-10 to 2011-12
Annual Brief Result
78
Chapter – 11
Bibliography
79
BIBLIOGRAPHY
? Web sites:
www.supertannery.com Dated 08/06/2013
NAME OF THE
BOOK
AUTHOR EDITION PAGE NO.
Financial Management KHAN &
P K JAIN
Sixth reprint
2008
Fifth Edition
6.1 – 6.41
Financial Management I M PANDEY Ninth
Edition
517 – 541
Management
Accounting and
Financial Control
DR. S N
MAHESHWARI
Thirteenth
Edition
2007
B.23 – B.76
80
doc_860545689.docx
Project report on ratio analysis of SUPER TANNERY LTD. KANPUR
1
A
Project Report On
Ratio Analysis of
“Super Tannery Ltd.”
Post Graduate Diploma In Management (Finance)
Submitted in partial fulfillment of the requirements for award of
Post Graduate Diploma In Management of Dr Virender Swarup Institute Of
Computer Studies Kanpur
Submitted by,
Kunal Ramani
P. No.: 09305952444
Guided by,
Assistant Prof./ Lecturer Ms Deepshikha Biswas,
Dr. VSICS
Saket Nagar
Kanpur
2
ACKNOWLEDGEMENT
“The satisfaction euphoria that accompanies the successful completion of any work would be
incomplete unless we mention the name of the persons, who made it possible, whose constant
guidance and encouragement served as a beacon of light and crowned our efforts with
success.” I consider it a privilege to express through the pages of this report, a few words of
gratitude and respect to those who guided and inspired in the completion of this project.” I
am deeply indebted to Mrs. Sumegha Bhatia for giving me the opportunity to do this interesting
project and the timely suggestions & valuable guidance.
My sincere thanks to Ms Deepshikha Biswas (Assistant professor/ lecturer PGDM dept.) who has
guided me and provided valuable insight during the project. He constantly encouraged me and showed
the right path from day one up until the completion of my project.
I express my deep sense of gratitude to finance manager Mr. Mahboob Alam and External guide
(HR executive) Mr. Mansur Thakur for providing necessary information and kind cooperation.
Kunal Ramani
3
Certificate of Internal Guide
This is to certify that the project titled Ratio Analysis of Super Tannery Ltd.
is a bonafide work carried out by Kunal Ramani a candidate for the Summer
internship in finance sector of Post Graduate Diploma In Management of Dr.
Virender Swarup Institute Of Computer Studies, Kanpur under my complete
guidance and direction.
Signature of guide
Name: Ms. Deepshikha Biswas
Date: Designation: Lecturer (PGDM)
Place: Kanpur Institute: Dr. VSICS
4
Contents
Sr. No. Topic Page No.
1. Rationale of the study 6-7
2. Objectives of the Study 8-9
3. Profile of the company 10-24
4. Review of Literature 25 – 41
5. Research Methodology 42-45
6. Consolidated balance sheet of last three
years
46-48
7. Data analysis and interpretations 49 – 71
8. Findings 72-74
9. Limitations of the study 75-76
10. Appendix 77 - 78
11. Bibliography 79-80
5
Chapter – 1
Rationale of
the Study
6
RATIONALE OF THE STUDY
Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk
and return relationships of firms of different sizes. It compares historical performance and
current financial condition of the company. The term ratio refers to the numerical or
quantitative relationship between two items or variables. This relationship can be expressed
as
(i). Percentages, (ii). Fraction, (iii). Proportion of numbers.
These alternative methods of expressing items which are related to each other are for
purposes of financial analysis, referred to as ratio analysis. It should be noted that computing
the ratios does not add any information not already inherent in the above figures of profits
and sales. What the ratios do is that they reveal the relationship in a more meaningful way so
as to enable equity investors; management and lenders make better investment and credit
decisions.
The rationale of ratio analysis lies in the fact that it makes related information comparable. A
single figure by itself has no meaning but when expressed in terms of a related figure, it
yields significant inferences. For instance, the fact that the net profits of a firm amount to,
say, Rs 10 lakhs throws no light on its adequacy or otherwise. The figure of net profit has to
be considered in relation to other variables. How does it stand in relation to sales? What does
it represent by way of return on total assets used or total capital employed? If therefore net
profits are shown in terms of their relationship with items such as sales, assets, capital
employed, equity capital and so on, meaningful conclusions can be drawn regarding their
adequacy. To carry the above example further, assuming the capital employed to be Rs 50
lakhs and Rs 100 lakhs, the net profit are 20 per cent and 10 per cent respectively. Ratio
analysis thus as a quantitative tool, enable analysis to draw quantitative answers to questions
such as: Are the net profits adequate? Are the assets being used efficiently? Is the firm
solvent? Can the firm meet its current obligations and so on?
So, ratio analysis is one of the techniques of financial analysis where ratios are used as a
yardstick for evaluating the financial condition and performance of a firm. Analysis and
interpretation of various accounting ratio gives a skilled and experienced analyst, a better
understanding of the financial condition and performance of the firm than what he could have
obtained only through a perusal of financial statements.
7
Chapter – 2
Objectives of
the Study
8
OBJECTIVES OF THE STUDY
To understand the importance and use of different types of ratios in business.
To assess the liquidity of the company.
To evaluate the financial condition and profitability of the company.
To know the working capital requirement of the company.
To compare the past performance of the company systematically.
To identify the financial strengths and weakness of the company.
To find out the utility of financial ratios in credit analysis and determining the financial
capability of the firm.
9
Chapter – 3
Profile of the
Company
10
PROFILE OF THE COMPANY
Super Tannery Ltd (STL), established in 1953, started operations by processing 50 Buffalo
hides per day, converting them into Vegetable Tanned Leather for shoe soles. Since then, the
company, well guided by a professional approach, has marked an important name for itself in the
world leather map, making it, one of the oldest and well reputed business houses of Northern
India.
Strong belief in value addition led the company to innovate new products by adding value to the
existing ones. From the time of producing leather for shoe soles, the company's product range
now includes:
Leather for:
? Safety and Casual
Footwear
? Upholstery
? Lining
? Shoe soles
? Equestrian equipment
Footwear:
? Military
? Safety
? Casual and Formal
? Kids
Accessories:
? Bags
? Belts
? Jackets
? Jewellery
STL owns and operates 5 independent manufacturing facilities, producing articles of the highest
quality for leading European and American brands. Employing more than 2000 people, with
annual sales of over USD 55 Million, the company has its customers in more than 40 countries.
It has offices and warehouses in the United Kingdom, United Arab Emirates, Malaysia and China.
STL's obsession with quality and social responsibility has led the company to achieve ISO
9001:2000, ISO 14001:2004 and SA 8000:2001 certifications. Stringent norms for procurement,
processing, production and dispatch have transformed STL as one of the most reputed
manufacturing entities.
11
MANAGEMENT TEAM OF THE COMPANY
Managing Director
Mr. Iftikharul Amin
Email : [email protected]
Joint Managing
Director
Mr. Iqbal Ahsan
Email : [email protected]
Mr. Veqarul Amin
Email : [email protected]
Director
Mr. Imran Siddiqui
Email : [email protected]
Mr. Arshad Khan
Email : [email protected]
Mr. Mohammad Imran
Email : [email protected]
Chief Financial Officer
Mr. R.S. Singh
Email : [email protected]
Product Manager
(Footwear)
Mr. Mubashirul Amin
Email : [email protected]
Production Manager
(Footwear)
Mr. Huzaifa Yasir
Email : [email protected]
Business Development
Manager (Leather)
Mr. Mohammad Javed
Email : [email protected]
Business Development
Manager (Footwear)
Mr. Debasish Chakraborty
Email : [email protected]
Mr. Khawar Mumtaz
Email : [email protected]
Mr. Mohammad Arif
Email : [email protected]
12
Import Manager
Mr. Tarun Bhowmick
Email : [email protected]
General Manager
(Leather)
Mr. S.Q.A. Abidi
Email : [email protected]
Product Manager
(Leather)
Mr. Tanveer Amin
Email : [email protected]
Sales Manager
(Domestic)
Mr. Arun Sethi
Email : [email protected]
Business Manager
(Accessories)
Mr. Aman Siddiqui
Email : [email protected]
Sourcing Manager
Mr. Ceceil James
Email : [email protected]
13
AWARDS AND CERTIFICATES OF THE COMPANY
AWARDS:
Awards Given By Year
Council of Leather Export
1
st
Prize for Exporting
Council of Leather
Export
2007-2008
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 2005-2006
State Export Award
2
nd
Prize for Exporting
Govt. of U.P. 2003-2004
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1996-1997
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1993-1994
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1987-1988
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1983-1984
State Export Award
1
st
Prize for Exporting
Udyog Nideshalya 1982-1983
State Export Award
Excellent Prize for
Exporting
Govt. of U.P. 1980-1981
14
CERTIFICATES OF THE COMPANY
Certificate Given By Year
Certificate of 7 Star
Exporter
Udyog Nideshalya 2002-2003
Certificate of 4 Star
Exporter
Udyog Nideshalya 1995-1996
15
SOCIAL RESPONSIBILITY OF THE COMPANY
STL believes in total commitment to society. The company runs an organization known as AMIN
WELFARE TRUST (AWT) , which follows the motto of "Promoting Hope in Life."
This trust has taken up a number of social causes in the field of EDUCATION & HEALTHCARE.
Education: AWT is about to launch (Jan '10) a state
of the art educational institution to be known as
Super International School with an aim to provide
world class education at a reasonable cost. The
school is proposed to be affiliated with the C.B.S.E board and is
equipped with the latest infrastructure required for a healthy and
constructive approach to education. To know more, please visit
www.superinternationalschool.com
Healthcare: AWT operates a hospital known as Chaudhry
Ehsan Kareem Hospital, well equipped with the most
modern machinery and infrastructure, in the industrial area
of Jajmau in Kanpur City, providing healthcare facilities in a
number of fields in including Neurology, Vision,
Endocrinology, Dentistry and Pre/Post Maternal Care.
16
STL is committed to continuous technological innovation, physical and chemical standardization
and improvement to achieve high standards of product quality and customer satisfaction
Key factors that keep the company one step ahead:
1. 1-Extensive interaction with the latest technological developments.
2. 2-Presence in all major trade fairs, seminars and workshops for optimum knowledge up
gradation.
3. 3-Well qualified and progressive workforce.
Laboratory: The tannery units of the company work under guidance of a well equipped
laboratory conducting physical and chemical tests. It
also has a pilot tannery to conduct trials of new
leathers at a small scale before its implementation in
bulk production. The laboratory has all the
requisites to perform tests of leather as per EN, ISO
and DIN standards. STL was among the first
companies from Kanpur to provide certification as
per the REACH gridlines of European Chemicals
Agency.
Design Studio: The footwear units of the company conduct their production as per the guidance
of a newly built, state of the art designing cell, lead by well qualified shoe technologists and
designers. Due to a rapid change in the product profile over the past few years, this studio was
installed keeping in mind, the ever changing tastes and preferences of the customers, while
keeping time frame into consideration.
Quality Assurance: A major factor which keeps the company
ahead is its obsession with total quality, which includes products of
the highest standards, quick and efficient customer service, leading
to complete customer satisfaction. Factors like these help the
company to retain customers, some of them, for as long as 30 years.
17
When the leather industry enough developed, the pollution of air and water increased and the
stage reached where scientists started thinking on making better use or reuse of material which
caused pollution keeping in mind the economical factor else no industrialist would accept the
change.
Special emphasis has been laid on use of low waste technology with
minimum possible expenditure and maximum quality production
because it is natural for any industrialists to resist a change unless it
is likely to give better quality production with least expenditure.
Pollution is given the last priority by them whereas we give it the
first priority.
At Super Tannery, we are very much cautious about pollution. We
have our own water treatment and chrome recovery plant in
which we collect the drain water full of nickel, chromium and many
more harmful substances. Our deep interest is in green and clean
environment.
The chrome is used in the processing of skins in which 65% is consumed during the process while
35% goes waste. The presence of chrome in the discharged water of tanneries is hazardous for
public health as its excessive use can cause severe skin diseases. To minimize the danger we have
water treatment plant to purify water to its maximum possible level.
We believe to contribute in safe and healthy environment. Super Tannery is an eco friendly
tannery.
? 1-We at Super are committed to provide a safe and healthy working environment for our
employees by adopting a proactive approach.
?
? 2-It is part of our work ethic to ensure that safety, health and environment safeguards are
in place right from the inception to the execution stage.
?
? 3-We accept the need for constant up gradation of safety & health standards
commensurate with the rapid changing technology in production.
18
19
UNITED KINGDOM
SUPER TANNERY (UK) LTD.
Contact Person : Mr. Asim Rahat
(Business Development Manager)
Registered Office
Imperial House,
St. Nicholas Circle,
Leicester LEI 4LF
United Kingdom Phone : +44 116 242 4087
Mobile : +44 759 539 0900
Fax : +44 116 242 4086
Email :[email protected]
UNITED ARAB EMIRATES
SUPER TANNERY UAE FZE
Contact Person : Mr. R. Islam
(Business Development Manager)
Registered Office
Ware House No. A2-16,
Post Box - 8290
Saifzone, Sharjah
U.A.E. Mobile : +971503825131
Fax : +971 65572327
Email :[email protected]
MALAYSIA
SUPER TANNERY LTD.
Contact Person : Mr. Shahbaz Khan
(Country Operations Manager)
20
Registered Office
B-12-6, PV8, Platinum Hill,
Jalan Melati Utama 5, Taman Melati,
Setapak. Kuala Lumpur.
Phone : +60341610049
Mobile : +60 166084763
Email :[email protected]
CHINA
SUPER TANNERY LIMITED, WENZHOU OFFICE
Contact Person : Ms. Tian Huifang (Rosy Tian), Anthony Cox
(General Representative)
Room 1702, No.5 Building, Group 8 of Xintian Yuan,
Xue Yuan Dong Road, Lu Cheng District,
Wenzhou City, China
Tel : +86-577-88903015
Fax ::+86-577-88903015
Mobile : Rosy Tian : +86-15018777735 ,
Anthony Cox : +86-13380014859
Email : [email protected], [email protected]
Chinese Address:
?????????????????
Contact Person : ???, Anthony Cox
(General Representative)
??????????????5?1702
Tel : +86-577-88903015
Fax ::+86-577-88903015
Mobile : Rosy Tian : +86-15018777735 ,
Anthony Cox : +86-13380014859
Email : [email protected], [email protected]
21
Company’s Mission:-
"Setting the stage for exhibiting progress" The Bombay Exhibition Centre is driven to emerge
as a purpose-built Convention and Exhibition Centre which offers organizers, participants
and visitors, a touch of Indian hospitality backed up by robust infrastructure for the
successful culmination of any event.
“Leave Blank” The Realty Group imbibes best practices for facilities development and
management, which delivers a secure and pleasant working environment for its client and their
employees.
"The pioneers in meshing global designs with local manufacturing talent" The Engineering
Group delivers stable and functional tools which delivers customer satisfaction and trust,
backed up by a constant improvement in design, cost efficiency, delivery and after sales
service.
Company’s Vision:-
“The company is committed to customer satisfaction by providing excellent / world class
facilities and services for their exhibitions & events and become top exhibition centre in
India and Abroad.”
Company’s Value:-
STL Group will act with absolute honesty & integrity in dealing with its Customers,
Employees, Stakeholders and Society at large.
STL will always care for its customers by delivering value to them & delight them
through quality products & services.
STL will encourage creativity & innovation across the organization and offer equal
opportunity for growth to all employees through a culture of meritocracy, teamwork,
Commitment & discipline.
STL will always adopt fair practices and will aim to become a symbol of Trust &
Reliability for all stakeholders. It will strive to maximize value for shareholders as
well as all stakeholders in a balanced manner.
22
Company’s Policy:-
Indabrator firmly believe that quality cannot happen. It has to be built into the product. It is
committed to provide products and services of a quality that meet the needs and expectations
of customers at a competitive price and Achieve product quality excellence by continual
improvement through strictly adhering to quality management system as per ISO – 9001
2000 requirements.
It is committed to continually improve environmental conditions by utilizing environment
friendly technique to control potential hazards, reduce risk factors and improve
environmental conditions through strictly adhering to environment management system as
per ISO 14000: 2004 requirements.
It is committed to provide training & tools for safe operation systems to continually improve
occupational health & safety of interested parties as per OSHA 180001: 1999 guidelines.
It is committed to comply with current applicable statutory & regulatory requirements for
production, environment management, occupational health & safety management
STL's obsession with quality and social responsibility has led the company to achieve ISO
9001:2000, ISO 14001:2004 and SA 8000:2001 certifications. Stringent norms for procurement,
processing, production and dispatch have transformed STL as one of the most reputed
manufacturing entities.
A major factor which keeps the company ahead is its obsession with total quality, which includes
products of the highest standards, quick and efficient customer service, leading to complete
customer satisfaction. Factors like these help the company to retain customers, some of them, for
as long as 30 years.
23
Mission and Values:-
Its Mission is to become the largest Surface Preparation System provider in Asia, Malaysia, China and
UAE known for its quality, technology, fully integrated range, innovation, dynamism, ethical behavior
and business results; and build long lasting customer relationships that will make it their preferred
supplier.
? Honesty and Integrity: STL group will act with absolute honesty and integrity in
dealing with its customers, employees, stakeholders and society at large.
? Care and Concern: STL group will always care for its customers by delivering
value to them and delight them through quality products and services.
? Teamwork: STL will encourage creativity and innovation across the organization
and offer equal opportunity for growth to all employees through a culture of
meritocracy, team work, commitment and discipline.
? Trust and Reliability: STL will always adopt fair practices and thereby, will aim to
become a symbol of trust and reliability for all stakeholders. It will strive to maximize
value for its stakeholders in a balanced manner.
Quality Certifications:-
Customer satisfaction is the hallmark that has earned it several accolades and honors. This
has given it a competitive edge over other players functioning in the same industry.
Following are some of the citations bestowed on Super Tannery Limited.
ISO 9001 : 2000
ISO 14001:2004
ISO 18001:1999.
24
Chapter – 4
Review of
Literature
25
REVIEW OF LITERATURE
Meaning of Ratio:-
Ratios are relationships expressed in mathematical terms between figures which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures which are not at all connected with each other. Moreover,
absolute figures are also unfit for comparison.
Ratio can be expressed in two ways:
(1). Times: - When one value is divided by another, the unit used to express the quotient is
termed as “Times”. For example, if out of 100 students in a class, 80 are present, the
attendance ratio can be expressed as follows:
= 80 / 100 = .8 Times
(2). Percentage: - If the quotient obtained is multiplied by 100, the unit of expression is
termed as “Percentage”. For instance, in the above example, the attendance ratio as a
percentage of the total number of students is as follows:
= .8 X 100 = 80%
Accounting ratio are, therefore mathematical relationships expressed between inter-connected
accounting figures.
26
Following are the objectives of ratio analysis technique:
A financial ratio is a relationship between two financial variables. It helps to ascertain
the financial condition of a firm.
In ratio analysis, the liquidity ratio measures the firm’s ability to meet current
obligations and is calculated by establishing relationships between current assets and
current liabilities.
The profitability ratio measure the overall performance of the firm by determining the
effectiveness of the firm in generating profit and are calculated by establishing
relationship between profit figures on the one hand and sales and assets on the other.
The main objective of using this technique to judge the performance of the business.
Ratio throws light on the profitability of the business, solvency position of the
business, liquidity of the business etc.
Comparisons of ratios of a business enterprise either with ratios of the same concern
for past periods or with ratio of the concern for same period or both, reveals the
weakness of the business and the point of its strengths. Points of weakness are further
investigated and corrective action is taken.
Thus, ratios are useful and perhaps the indispensable part of financial analysis. They
provide the analyst of underlying conditions.
27
Ratio analysis is relevant in assessing the performance of a firm in respect of the
following aspects:
Liquidity position
Long term solvency
Operating efficiency
Overall profitability
Inter firm comparison
Trend analysis
We can use ratio analysis to try to tell us whether the business
is profitable
has enough money to pay its bills
could be paying its employees higher wages
is paying its share of tax
is using its assets efficiently
has a gearing problem
is a candidate for being bought by another company or investor
28
Importance of Ratio Analysis:-
As a tool of financial management, ratios are of crucial significance. The importance of ratio
analysis lies in the fact that it presents facts on a comparative basis and enables the drawing
of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:
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 obligations 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 on its short-maturing debt usually within a year as well as to repay the
principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios
are particularly useful in credit analysis by banks and other suppliers of short-term
loans.
Long-term Solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability of a
firm. This aspect of the financial position of a borrower is of concern to the long-term
creditors, security analyst and the present and potential owners of a business. The
long-term solvency is measured by the leverage or capital structure and profitability
ratios which focus on earning power and operating efficiency. Ratio analysis reveals
the strengths and weaknesses of a firm in this respect. The leverage ratios for instance
will indicate whether a firm has a reasonable proportion of various sources of finance
or if it is heavily loaded with debt in which case its solvency is exposed to serious
strain. Similarly, the various profitability ratios would reveal whether or not the firm
is able to offer adequate return to its owners consistent with the risk involved.
Operating Efficiency:-
Yet another dimension of the usefulness of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of efficiency in the
management and utilization of its assets. The various activity ratios measure this kind
of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon
the sales revenues generated by the use of its assets-total as well as its
components.
29
Overall Profitability:-
Unlike the outside parties which are interested in one aspect of the financial position
of a firm, the management is constantly concerned about the overall profitability of
the enterprise. That is, they are concerned about the ability of the firm to meet its
short-term as well as long-term obligations to its creditors, to ensure a reasonable
return to its owners and secure optimum utilization of the assets of the firm. This is
possible if an integrated view is taken and all the ratios are considered together.
Inter-firm Comparison:-
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 and comparison with industry averages. A single figure of a particular
ratio is meaningless unless it is related to some standard or norm. One of the popular
techniques is to compare the ratios of a firm with the industry average. It should be
reasonably expected that the performance of a firm should be in broad conformity
with that of the industry to which it belongs. An inter-firm comparison would
demonstrate the firm’s position vis-a-vis its competitors. If the results are at variance
either with the industry average or with those of the competitors, the firm can seek to
identify the probable reasons and in that light, take remedial measures. Ratio analysis
provides data for inter-firm comparison. Ratios highlight the factors associated with
successful and unsuccessful firms. They also reveal strong firms and weak firms,
over-valued and under-valued firms.
Make Intra-firm Comparison Possible:-
Ratio analysis also makes possible comparison of the performance of the different
division of the firm. The ratios are helpful in deciding about their efficiency or
otherwise in the past and likely performance in the future.
Trend Analysis:-
Finally, ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of affirm is improving or deteriorating over the years. This is
made possible by the use of trend analysis. The significance of trend analysis of ratio lies in the fact
that the analysts can know the direction of movement, that is, whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward.
On the other hand, though the present level may be satisfactory but the trend may be a declining one.
Simplifies Financial Statements:-
Ratio analysis simplifies the comprehension of financial statements. Ratios tell the
whole story of change in the financial condition of the business.
30
Help in Planning:-
Ratio analysis helps in planning and forecasting. Over a period of time a firm or
industry develops certain norms that may indicate future success or failure. If
relationship changes in firm’s data over different time periods, the ratios may provide
clues on trends and future problems.
Thus, “ratios can assist management it its basic function of forecasting, planning,
coordination, control and communication”.
Limitation of the Ratio Analysis:-
Ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various
limitations. The operational implication of this is that while using ratios, the conclusions
should not be taken on their face value. Some of the limitations which characterise ratio
analysis are as follows:
Difficulty in Comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated with their
comparability. One technique that is employed is inter-firm comparison. But such
comparisons are vitiated by different procedures adopted by various firms. The
differences may relate to:
Differences in the basis of inventory valuation
Different depreciation methods
Estimated working life of assets, particularly of plant and equipments
Amortization of intangible assets like goodwill, patents and so on
Amortization of deferred revenue expenditure such as preliminary expenditure
and discount on issue of shares
Capitalization of lease
Treatment of extraordinary items of income and expenditure and so on.
31
Secondly, apart from different accounting procedures, companies may have different accounting
periods, implying differences in the composition of the assets particularly current assets. For these
reasons, the ratios of two firms may not be strictly comparable.
Another basis of comparison is the industry average. This presupposes the availability, on a
comprehensive scale, of various ratios for each industry group over a period of time. If, however, as is
likely, such information is not compiled and available, the utility of ratio analysis would be limited.
Impact of Inflation:-
The second major limitation of the ratio analysis as a tool of financial analysis is associated with price
level changes. This, in fact, is a weakness of the traditional financial statements which are based on
historical costs. And implication of the is feature of the financial statements as regards ratio analysis is
that assets acquired at different periods are, in effect, shown at different prices in the balance sheet, as
they are not adjusted for changes in the price level. As a result, ratio analysis will not yield strictly
comparable and therefore dependable results. To illustrate, there are two firms which have identical
rates of returns on investments, say 15 per cent. But one of these had acquired its fixed assets when
prices were relatively low, while the other one had purchased them when prices were high. As a result
the book value of the fixed assets of the former type of firm would be lower, while that of the latter
higher. From the point of view of profitability, the return on the investment of the firm with a lower
book value would be over-stated. Obviously, identical rates of returns on investment are not indicative
of equal profitability of the two firms. This is a limitation of ratios.
Conceptual Diversity:-
Yet another factor which influences the usefulness of ratios is that there is difference
of opinion regarding the various concepts used to compute the ratios. There is always
room for diversity of opinion as to what constitutes shareholders’ equity, debt, assets,
and profit and so on. Different firms may use these terms in different senses or the
same firm may use them to mean different things at different times.
Reliance on a single ratio for a particular purpose may not be a conclusive indicator.
For instance, the current ratio alone is not an adequate measure of short-term financial
strength; it should be supplemented by the acid-test ratio, debtor turnover ratio and
inventory turnover ratio to have a real insight into the liquidity aspect.
Limitation of Financial Statements:-
Ratios are based only on the information which has been recorded in the financial statements.
Financial statements suffer from a number of limitations, the ratios derived there from, therefore, are
also subject to those limitations. For example, nonfinancial changes through important for the business
are not revealed by the financial statements. If the management of the company changes, it may have
ultimately adverse effects on the future profitability of the company but this cannot be judged by
having a glance at the financial statements of the company. Similarly, the management has a choice
about the accounting policies.
32
Different accounting policies may be adopted by management of different companies regarding
valuation of inventories, depreciation, research and development expenditure and treatment of
deferred revenue expenditure, etc. The comparison of one firm with another on the basis of ratio
analysis without taking into account the fact of companies having different accounting policies, will
be misleading and meaningless. Moreover, the management of the firm itself may change its
accounting policies form one period to another. It is, therefore, absolutely necessary that financial
statements
are they subjected to close scrutiny before an analysis attempted on the basis of accounting ratio. The
financial analyst must carefully examine the financial statements and make necessary adjustments in
the financial statements on the basis of disclosure made regarding the accounting policies before
undertaking financial analysis.
The growing realization among accountants all over the world, that the accounting policies should be
standardized, has resulted in the establishment of International Accounting Standards Committee
which has issued a number of International Accounting Standards. In our country, the Institute of
Chartered Accountants of India has established Accounting Standards Board for formulation of
requisite accounting standards. The accounting Standards Board had already issued nineteen standards
including AS-1: Disclosure of accounting Policies. The standard AS-1 has been made mandatory in
respect of accounting periods beginning on or after 1.4.1991. It is hoped that in the years to come,
with the progressive standardization of accounting policies, this problem will be solved to a great
extent.
Ratio alone are not adequate:-
Ratios are only indicators; they cannot be taken as final regarding good or bad financial position of the
business. Other things have also to be seen. For example, a high current ratio does not necessarily
mean that the concern has a good liquid position in case current assets mostly comprise outdated
stocks. It has been correctly observed, “Ratio must be used for what they are – financial fools. Too
often they are looked upon as ends in themselves rather than as a means to an end. The value of a
ratio should not be regarded as good or bad inter se. It may be an indication that a firm is weak or
strong in a particular area, but it must never be taken as proof”. Ratios may be linked to railroads.
They tell the analyst, “Stop, look, and listen”.
Window Dressing:-
The term window dressing means manipulation of accounts in a way so as to conceal vital facts and
present the financial statement in a way to show a better position that what is actually is. On account
of such a situation, presence of a particular ratio may not be a definite indicator of good or bad
management. For example, a high stock turnover ratio is generally considered to be an indication of
operational efficiency of the business. But this might have been achieved by unwarranted price
reductions or failure to maintain proper stock of goods.
33
Similarly, the current ratio may be improved just before the Balance Sheet date by postponing
replenishment of inventory. For example, if a company has got current assets of Rs. 4000 and current
liabilities of Rs. 2000, the current ratio is 2, which is quite satisfactory. In case the company purchases
goods of Rs. 2000 on credit, the current assets would go up to Rs. 6000 and current liabilities to Rs.
4000. Thus, reducing the current ratio to 1.5. The company may, therefore, postpone the purchases for
the early next year so that its current ratio continues to remain at 2 on the Balance
Sheet date. Similarly, in order to improve the current ratio, the company may pay off certain pressing
current liabilities before the Balance Sheet date. For example, if in the above case the company pays
current liabilities of Rs. 1000, the current liabilities would stand reduced to Rs. 1000, current assets
would stand reduced to Rs. 3000 but the current ratio would go up to 3.
No Fixed Standards:-
No fixed standards can be laid down for ideal ratios. For example, current ratio is generally considered
to be ideal if current assets are twice the current liabilities. However, in case of those concerns which
have adequate arrangements with their bankers for providing funds when they require, it may be
perfectly ideal if current assets are equal to slightly more than current liabilities.
It is, therefore, necessary to avoid many rules of thumb. Financial analysis is an individual matter and
value for a ratio which is perfectly acceptable for one company or one industry may not be at all
acceptable in case of another.
Ratios are a Composite of Many Figures:-
Ratios are a composite of many different figures. Some cover a time period, others are at an instant of
time while still others are only averages. It has been said that, a man who has his head in the oven and
his feet in the ice-box is on the average, comfortable”! Many of the figures used in the ratio analysis
are no more meaningful than the average temperature of the room in which this man sits. A balance
sheet figure shows the balance of the account at one moment of one day. It certainly may not be
representative of typical balance during the year. It may, therefore, be concluded that ratio analysis, if
done mechanically, is not only misleading but also dangerous. It is indeed a double edged sword
which requires a great deal of understanding and sensitivity of the management process rather than
mechanical financial skill. It has rightly been observed: “The ratio analysis is an aid to management in
taking correct decisions, but as a mechanical substitute for thinking and judgment, it is worse than
useless. The ratio if discriminately calculated and wisely interpreted can be a useful tool of financial
analysis”. Finally, ratios are only a post-mortem analysis of what has happened between two balance
sheet dates. For one thing, the position in the interim period is not revealed by ratio analysis.
Moreover, they give no clue about the future.
In brief, ratio analysis suffers from some serious limitations. The analyst should not be
carried away by its oversimplified nature, easy computation with a high degree of precision.
The reliability and significance attached to ratios will largely depend upon the quality of data
on which they are based. They are as good as the data itself. Nevertheless, they are an
important tool of financial analysis.
34
Financial Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the
information in a company's financial statements. The level and historical trends of these ratios can be
used to make inferences about a company's financial condition, its operations and attractiveness as an
investment.
Financial ratios are calculated from one or more pieces of information from a company's
financial statements. For example, the "gross margin" is the gross profit from operations
divided by the total sales or revenues of a company, expressed in percentage terms. In
isolation, a financial ratio is a useless piece of information. In context, however, a financial
ratio can give a financial analyst an excellent picture of a company's situation and the trends
that are developing.
A ratio gains utility by comparison to other data and standards. Taking our example, a gross
profit margin for a company of 25% is meaningless by itself. If we know that this company's
competitors have profit margins of 10%, we know that it is more profitable than its industry
peers which are quite favourable. If we also know that the historical trend is upwards, for
example has been increasing steadily for the last few years, this would also be a favorable
sign that management is implementing effective business policies and strategies.
Financial ratio analysis groups the ratios into categories which tell us about different facets of
a company's finances and operations. An overview of some of the categories of ratios is given
below.
Leverage Ratios which show the extent that debt is used in a company's capital
Structure.
Liquidity Ratios which give a picture of a company's short term financial situation or
Solvency.
Operational Ratios which use turnover measures to show how efficient a company is
in its operations and use of assets.
Profitability Ratios which use margin analysis and show the return on sales and
capital employed.
Solvency Ratios which give a picture of a company's ability to generate cash flow and
pay it financial obligations.
35
Types of Ratios:-
Liquidity Ratios
Liquidity refers to the ability of a firm to meet its short-term financial obligations
when and as they fall due.
The main concern of liquidity ratio is to measure the ability of the firms to meet their
short-term maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation.
Current Ratio
The Current Ratio expresses the relationship between the firm’s current assets and its current
liabilities. Current assets normally include cash, marketable securities, accounts receivable
and inventories. Current liabilities consist of accounts payable, short term notes payable,
short-term loans, current maturities of long term debt, accrued income taxes and other
accrued expenses (wages).
Current Ratio = Current Assets / Current Liabilities
The rule of thumb says that the current ratio should be at least 2 that are the current assets
should meet current liabilities at least twice.
Quick Ratio
Measures assets that are quickly converted into cash and they are compared with current
liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.
inventories.
The quick ratio, also referred to as acid test ratio, examines the ability of the business to
cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick
ratio is calculated as follows
Quick Ratio / Acid-test Ratio = Quick Assets / Current Liabilities
Clearly this ratio will be lower than the current ratio, but the difference between the two (the
Gap) will indicate the extent to which current assets consist of stock.
Turnover Ratio
The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Another way of
examining the liquidity is to determine how quickly certain current assets are converted into cash. The
ratios to measure these are referred to as turnover ratios. In fact, liquidity ratios are not independent of
activity ratios. Poor debtor or inventory turnover ratios limit the usefulness of the current and acid-test
ratios. Both obsolete / unsalable inventory and uncollectible debtors are unlikely to be sources of cash.
Therefore, the liquidity ratios should be examined in conjunction with relevant turnover ratios
affecting liquidity.
36
Inventory Turnover Ratio:
It is computed by dividing the cost of goods sold by the average inventory. Thus,
Inventory Turnover Ratio = Cost of Goods sold / Average Inventory
This ratio measures the stock in relation to turnover in order to determine how often the stock
turns over in the business.
It indicates the efficiency of the firm in selling its product. It is calculated by dividing the cost
of goods sold by the average inventory.
The ratio shows a relatively high stock turnover which would seem to suggest that the
business deals in fast moving consumer goods.
The trend shows a marginal increase in days which indicates a slowdown of stock
turnover.
The high stock turnover ratio would also tend to indicate that there was little chance
of the firm holding damaged or obsolete stock.
Debtors Turnover Ratio
It is determined by dividing the net credit sales by average debtors outstanding during the
year. Thus,
Debtors turnover ratio = Net credit sales / Average debtors
Net credit sales consist of gross credit sales minus returns, if any, from customers. Average debtors
are the simple average of debtors including bills receivable at the beginning and at the end of the year.
The analysis of the debtors’ turnover ratio supplements the information regarding the liquidity of one
item of current assets of the firm. The ratio measures how rapidly receivables are collected. A high
ratio is indicative of shorter time-lag between credit sales and cash collection.
Creditors Turnover Ratio
It is a ratio between net credit purchases and the average amount of creditors outstanding
during the year. It is calculated as follows:
Creditors Turnover Ratio = Net credit purchases / Average Creditors
A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that
accounts are to be settled rapidly. The creditor’s turnover ratio is an important tool of analysis as a
firm can reduce its requirement of current assets by relying on supplier’s credit. The extent to which
trade creditors are willing to wait for payment can be approximated by the creditors’ turnover ratio.
37
Financial Leverage Ratios
The ratios indicate the degree to which the activities of a firm are supported by
creditors’ funds as opposed to owners.
The relationship of owner’s equity to borrowed funds is an important indicator of
financial strength.
The debt requires fixed interest payments and repayment of the loan and legal action
can be taken if any amounts due are not paid at the appointed time. A relatively high proportion of
funds contributed by the owners indicate a cushion (surplus) which shields creditors against possible
losses from default in payment.
The greater the proportion of equity funds, the greater the degree of financial strength.
Financial leverage will be to the advantage of the ordinary shareholders as long as the
rate of earnings on capital employed is greater than the rate payable on borrowed
funds.
Debt to Equity ratio
This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the
relative position of the equity holders and the lenders and indicates the company’s policy on
the mix of capital funds. The debt to equity ratio is calculated as follows:
Debt–Equity Ratio = Long-term Debt / Shareholders’ Equity
Debt to Total Capital Ratio
The relationship between creditors’ funds and owner’s capital can also be expressed in terms of
another leverage ratio. This is the debt to total capital ratio. Here, the outside liabilities are related to
the total capitalization of the firm and not merely to the shareholder’s equity. Essentially, this type of
capital structure ratio is a variant of the D/E, ratio described above. In can be calculated as follows:
Debt to Total Capital Ratio = Total Debt / Total Assets
Profitability Ratios
Profitability is the ability of a business to earn profit over a period of time. Although the
profit figure is the starting point for any calculation of cash flow, as already pointed out,
profitable companies can still fail for a lack of cash.
A company should earn profits to survive and grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by management of
a company should be aimed at maximizing profits, irrespective of social consequences.
38
The ratios examined previously have tendered to measure management efficiency and risk.
Profitability is a result of a larger number of policies and decisions. The profitability ratios
show the combined effects of liquidity, asset management (activity) and debt management
(gearing) on operating results. The overall measure of success of a business is the
profitability which results from the effective use of its resources.
Gross Profit Margin
Normally the gross profit has to rise proportionately with sales.
It can also be useful to compare the gross profit margin across similar businesses
although there will often be good reasons for any disparity.
This indicates that the rate in increase in cost of goods sold are less than rate of
increase in sales, hence the increased efficiency.
Gross Profit Margin = Gross Profit / Sales X 100
Net Profit Margin
This is a widely used measure of performance and is comparable across companies in similar
industries. The fact that a business works on a very low margin need not cause alarm because
there are some sectors in the industry that work on a basis of high turnover and low margins,
for examples supermarkets and motorcar dealers.
What is more important in any trend is the margin and whether it compares well with similar
businesses. However, to know how well the firm is performing one has to compare this ratio
with the industry average or a firm dealing in a similar business.
Net Profit Margin = Net Profit / Sales X 100
Earnings per Share (EPS)
Whatever income remains in the business after all prior claims, other than owners claims (i.e. ordinary
dividends) have been paid, will belong to the ordinary shareholders who can then make a decision as
to how much of this income they wish to remove from the business in the form of a dividend, and how
much they wish to retain in the business. The shareholders are particularly interested in knowing how
much has been earned during the financial year on each of the shares held by them. For this reason,
earnings per share figure must be calculated.
Clearly then, the earning per share calculation will be:
EPS = Net Profit available to Equity – holders / Number of ordinary shares outstanding
39
Dividend Pay-out Ratio
D/P ratio is also known as pay-out ratio. It measures the relationship between the earnings belonging
to the ordinary shareholders and the dividend paid to them. In other words, the D/P ratio shows what
percentage share of the net profits after taxes and preference dividend is paid out as dividend to the
equity-holders. It can be calculated by dividing the total dividend paid to the owners by the total
profits / earnings available to them. Alternatively, it can be found out by dividing the DPS by the EPS.
Thus,
D/P Ratio = Dividend per ordinary Share (DPS) / Earnings per share (EPS) X 100
Activity Ratios
If a business does not use its assets effectively, investors in the business would rather take their money
and place it somewhere else. In order for the assets to be used effectively, the business needs a high
turnover.
Unless the business continues to generate high turnover, assets will be idle as it is impossible to buy
and sell fixed assets continuously as turnover changes. Activity ratios are therefore used to assess how
active various assets are in the business.
Total Assets Turnover
Asset turnover is the relationship between sales and assets
The firm should manage its assets efficiently to maximize sales.
The total asset turnover indicates the efficiency with which the firm uses all its assets
to generate sales.
It is calculated by dividing the firm’s sales by its total assets.
Generally, the higher the firm’s total asset turnover, the more efficiently its assets
have been utilized.
Total Assets Turnover Ratio = Cost of Goods Sold / Average Total Assets
Fixed Asset Turnover
The fixed assets turnover ratio measures the efficiency with which the firm has been using its
fixed assets to generate sales.
Generally, high fixed assets turnovers are preferred since they indicate a better
efficiency in fixed assets utilization.
40
It appears that the activity of the business is relatively constant, with a slight upward
trend.
The ratio also confirms that the business places a much greater reliance on working
capital than it does on the fixed assets as the fixed assets (2012 and 2013) turned over
more quickly than stock turnover.
Fixed Assets Turnover = Cost of Goods Sold / Average Fixed Assets
41
Chapter – 5
Research
Methodology
42
RESEARHC METHODOLOGY
The focus of this chapter is on the methodology used for the collection of data for research. Data
constitutes the subject matter of the analyst. The primary sources of the collection of sources of the
collection of data are observations, Interviews and the questionnaire technique. The secondary sources
are collections of data are from the printed and annually published materials. A questionnaire form is
prepared to secure responses to certain questions. It is device for securing answers to questions by
using a form. The questionnaire technique is economical and time saving and is an important tool of
collecting information.
Research Design:
A research design is the detailed blue print used to guide a research study towards its objective. It
helps to collect, measure and analysis of data. The study undertaken is of Descriptive Historical
Research Method. Descriptive research is those which are connected with describing the
characteristics of the particular topic. “Research design is the plan, structure, and strategy of
investigation conceived so as to obtain answers to research questions & to control variance”.
The definition consists of three important terms-plan, structure & strategy.
The plan is an outline of the research scheme on which the researcher is to work. The structure of the
research is a more specific outline or the scheme & the strategy shows how the research will be carried
out, specifying the methods to be used in the collection & analysis of data.
Methods of research design:- There are basically three important methods of research
design. These are:
(a) Exploratory research design:- In the case of exploratory research, the focus is on
the discovery of ideas. In a business where sales have been declining for the past few
months, the management may conduct a quick study to find out what could be the
possible explanations. In such a case an exploratory study may be conducted to find the
most likely cause.
An exploratory study is generally based on the secondary data that are readily available.
It does not have a formal & rigid design as the researcher may have to change his focus
or direction, depending on the availability of new ideas & relationships among variables.
Since the objective of the exploratory research is to generate new ideas, respondents
should be given sufficient freedom to express themselves. Sometimes a group of
respondents is brought together & a focus group interview is held. Such an interview may
be very helpful provided respondents shake off their initial inhibition & participate in the
discussion without any reservations.
43
(b) Descriptive research design:-
Descriptive studies are undertaken in many circumstances. When the researcher is
interested in knowing the characteristics of certain groups such as age, gender,
education level, occupation, income etc., a descriptive study may be necessary. The
objective of such a study is to answer the “who, what, when, where & how” of the subject
under investigation.
Descriptive studies are well-structured. It is necessary that the researcher gives sufficient
thought to framing research questions & deciding the types of data to be collected & the
procedure to be used for this purpose. If he is not careful in the initial stages, he may find
that either the data collected are inadequate or the procedure used is cumbersome or
expensive.
Descriptive studies can be divided into two broad categories:
(i) Cross-sectional studies:- A cross-sectional study is concerned with a sample of
elements from a given population. Thus, it may deal with households, dealers, retail
stores or other entities. Data on a no. of characteristics from the sample elements are
collected & analyzed. Cross-sectional studies are of two types- field studies & surveys.
Field studies have their strengths &
weaknesses. One major strength is that they are close to real life, & they cannot be
criticized on the ground that they are remote from real settings or are artificial. Field
studies are more socially significant than other types of study. While investigating the
behavior & preferences of people, many other related issues, though not so obvious,
also get answered. Thus, studies of this type have considerable social significance.
Another type of cross-sectional study is survey research. A major strength of survey
research is its wide scope. Detailed information can be obtained from a sample of large
population. Besides, it is economical as more information can be collected per unit of
cost. Also, it is obvious that a sample survey needs less time than a census enquiry.
(ii) Longitudinal studies:- Longitudinal studies are based on panel data & panel
methods. A panel is a sample of respondents who are interviewed & then re-interviewed
from time to time. Generally, panel data relate to the repeated measurements of the
same variables. Each family included in the panel, records its purchases of a no. of
products at regular intervals, say, weekly, monthly or quarterly. Over a period of time,
such data will reflect changes in the buying behavior of families.
44
(c) Causal research designs:-
As the name implies a causal design investigates the cause & effect relationship
between two or more variables. Suppose a manufacturer has sold his products at two
points of time, & t2. The sale in t2 is much higher than that in the previous year.
During the year, the firm has also launched an advertising campaign for its product. The
manufacturer is interested in knowing whether advertising has caused the increase in
sales in the year t2.
Secondary data:
Secondary data highlights the contextual familiarities for primary data collection. It provides
rich insights into the research process.
Secondary data is collected through magazine, reference books, journal, articles, websites etc.
Secondary data like balance sheet and profit and loss account and cash flow statement collected
through company and company websites and part of theory from reference books.
Tools and Techniques –
In this industry project work the ratio analysis technique has been used. In this project ratio
analysis technique is used for interpretation and evaluation of financial statements.
Chapter – 6
45
Consolidated
balance sheet of
last three years
46
Balance Sheet
47
Continue…………
Chapter – 7
48
Data
Collection and
Analysis
DATA ANALYSIS AND INTERPRETATION
49
1. LIQUIDITY RATIOS
A. Current Ratio:-
The current ratio of a firm measures its short-term solvency, that is, its ability to meet shortterm
obligations as a measure of short-term/current financial liquidity; it indicates the rupees
of current assets (cash balance and its potential source of cash) available for each rupee of
current liability/obligation payable. The higher the current ratio, the larger is the amount of
rupees available per rupee of current liability, the more is the firm’s ability to meet current
obligations and the greater is the safety of funds of short-term creditors. Thus, current ratio,
in a way, is a measure of margin of safety to the creditors. It is calculated as follows:
Current Ratio = Current Assets / Current Liabilities
Calculation of Current Ratio with Diagram: (Rs. In Crores)
Diagram of Current Ratio:-
2.18
2.3
1
0
0.5
1
1.5
2
2.5
March'10 March'11 March'12
Current Ratio
I nterpretation:-
Particulars Mar '10 Mar '11 Mar '12
Current Assets 120.74 137.57 118.71
Current Liabilities 55.15 59.61 117.61
Current Ratio 2.18 2.30 1.00
50
Current ratio 2:1 shows excellent liquidity position of the firm.
Current ratio between 1:1 to 2:1 shows satisfactory position of the company.
Ratio less than 1:1 shows no liquidity at all.
Generally current ratio should 2:1 but as per our calculation in Mar'10 it was 2.18, it means
company has 2.18 rupees current assets against current liability on rupees 1. Company has
less current assets than current claims against them. In Mar'12 Company’s current ratio is
1.00 which is not satisfactory.
B. Acid-Test / Quick Ratio:-
51
The term quick assets refers to current assets which can be converted into cash immediately
or at a short notice without diminution of value. Included in this category of current assets are
(1) cash and bank balance; (2) short-term marketable securities and (3) debtors/receivables.
Thus, the current assets which are excluded are: prepaid expenses and inventory.
It is calculated as follows:
Quick Ratio = Liquid Assets / Liquid Liabilities
Calculation of Quick Ratio with Diagram:
Diagram of Quick Ratio:-
0.66
0.75
0.97
0
0.2
0.4
0.6
0.8
1
1.2
March'10 March'11 March'12
Quick Ratio
Interpretation:-
Particulars Mar '10 Mar '11 Mar '12
Liquid Assets 24.73 44.46 64.12
Liquid Liabilities 37.38 59.33 65.79
Quick Ratio (In
Times)
0.66 0.75 0.97
52
Generally quick ratio of 1:1 represents a satisfactory current financial condition. But we have
seen in table that not evens a single year it has achieved. In all three years liquid ratios are less
than 1.It indicates that firm has found difficult to meet its obligations because its quick assets
are lesser than current liabilities. Similarly both year Mar'10 and Mar'11 the company suffers
from the same position. It has increased to 0.97 in Mar'12.
2. TURN OVER RATIOS
53
A. I nventory Turnover:
This ratio measures the stock in relation to turnover in order to determine how often the stock
turns over in the business. It is calculated as follows:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Calculation of Inventory Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Inventory Turnover Ratio:-
9.29
11.58
9.03
0
2
4
6
8
10
12
14
March'10 March'11 March'12
Inventory Turnover Ratio
Interpretation:-
It indicates the efficiency of the firm in selling its product. In Mar'10 inventory turnover is 2
times and in Mar'11 it is 9 times in a year. High inventory turnover ratio is good from view
point of liquidity. We can say company sells its product fast.
Particulars Mar '10 Mar '11 Mar '12
Cost Of Goods Sold 37.24 50.62 46.44
Average Inventory 4.01 5.14 4.37 5.14
Inventory Turnover
Ratio (In Times)
9.29 11.58 9.03
54
B: Debtors Turnover Ratio:-
It is determined by dividing the net credit sales by average debtors outstanding during the
year. The analysis of the debtors’ turnover ratio supplements the information regarding the
liquidity of one item of current assets of the firm. The ratio measures how rapidly receivables
are collected. It is calculated as follows:-
Debtors Turnover Ratio = Net credit sales / Average Debtors
Calculation of Debtors Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Debtors Turnover Ratio:-
7.29
7.93
6.68
6
6.5
7
7.5
8
8.5
March'10 March'11 March'12
Debtors Turnover Ratio (Times)
Note: - It is assumed that 60% sale is on credit and 40% on cash.
Interpretation:-
The company’s debtor’s turnover ratio of Mar'10 7.29 times, in Mar'11 7.93 times in a year
which indicates company collects its receivable rapidly. We can say year to year the shorter
time lag between credit sales and collection.
Particulars Mar '10 Mar '11 Mar '12
Net Credit Sales 39.90 63.22 56.81
Average Debtors 5.47 7.97 8.50
Debtors Turnover Ratio
(Times)
7.29 7.93 6.68
55
B. Debtors Collection Period:-
The ratio indicates the extent to which the debts have been collected in time. It gives the
average debt collection period. Debtors Collection Period is calculated from following
formula:
Debtors Collection Period = 360 / Debtors Turnover Ratio
Calculation of Debtors Collection Period Ratio with Diagram: (Rs. In Crores)
Diagram of Debtors Collection Period:-
109
54
45
0
20
40
60
80
100
120
March'10 March'11 March'12
Debtors Collection Period (in Days)
Interpretation: -
According to debtor collection period from above table, Company was following liberal
credit policy as its collection period of Mar'10 was 109 days. Thus, to decrease the debt
collection period the company has to adopt certain policy s to attract the customers to pay
debts. Policies like trade credit, cash credit. We can see that company has reduced its debtors
collection period during these years it means now a days it follows strict credit policy.
Particulars Mar '10 Mar '11 Mar '12
Days in Years 360 360 360
Debtors Turnover 3.30 6.68 7.93
Debtors Collection Period (in
Days)
109 54 45
56
D. Creditors Turnover ratio:
It is calculated as follows:-
Creditors Turnover Ratio = Net Credit Purchases / Average Creditors
Calculation of Creditors Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Creditors Turnover Ratio:-
2.61
3.22
2.99
0
0.5
1
1.5
2
2.5
3
3.5
March'10 March'11 March'12
Creditor turnover Ratio
Interpretation:-
Above stated graph indicates that in Mar'10 Company has settled its creditor’s accounts 2.61
times in a year. In Mar'11 it had increased by 3.22 which show that company had settled its
account rapidly. From Mar'11 to Mar'12 it has paid its creditor’s account average of 3 times.
If creditor’s turnover ratio is high company’s requirements of working capital will increase
and vice-a-versa.
Particulars Mar '10 Mar '11 Mar '12
Net Credit Purchase 20.58 32.94 33.54
Average Creditors 7.86 10.20 11.21
Creditors Turnover
Ratio
(times per year)
2.61 3.22 2.99
57
E. Creditor’s Payment Period:-
It is calculated as follows:-
Creditor’s Payment Period = 360 / Creditors Turnover Ratio
Calculation of Creditor’s Payment Period with Diagram: (Rs. In Crores)
Diagram of Creditor’s Payment Period:-
123
111
120
105
110
115
120
125
March'10 March'11 March'12
Creditor's Paymeny Period
Interpretation:-
We can analyze that in Mar'10 Company has paid its creditor after 123 days. After that this period is
decreasing which shows strict collection policy followed by suppliers. Company has to settle its
payments within short span to time. 1n Mar'12 company makes payment after 120 days which is
comparatively lower than previous years, it means for this year suppliers has given lesser credit
period to the company.
Particulars Mar '10 Mar '11 Mar '12
Days in Years 360 360 360
Creditors Turnover
Ratio
2.92 3.22 2.99
Creditor’s Payment
Period
(in Days)
123 111 120
58
F. Fixed Asset Turnover:
The fixed assets turnover ratio measures the efficiency with which the firm has been using its
fixed assets to generate sales. It is calculated by dividing the firm’s sales by its net fixed
assets as follows:
Fixed Asset Turnover Ratio = COGS / Average Fixed Asset
Calculation of Fixed Asset Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Fixed Asset Turnover Ratio:-
0.71
0.54
0.35
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
March'10 March'11 March'12
Fixed Asset Turnover Ratio
Interpretation:-
Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in fixed assets
utilization. From the above calculations company’s fixed assets turnover ratio is continuously decreasing.
In year Mar’10 it is 0.71 and in Mar’12 it is 0.35. It means company’s efficiency of managing and utilizing
its assets goes down. Company is not utilizing its fixed assets at fullest capacity.
Particulars Mar '10 Mar '11 Mar '12
Cost of Goods Sold 37.24 50.62 46.44
Average Fixed Asset 52.79 93.50 132.28
Fixed Asset Turnover Ratio
(In
Times)
0.71 0.54 0.35
59
G. Total Assets Turnover Ratio:
Total Assets turnover ratio indicates the efficiency with which firm uses all its assets to
generate sales. It is calculated as follows:
Total Assets Turnover Ratio = Sale / Average Total Assets
Calculation of Total Asset Turnover Ratio with Diagram: (Rs. In Crores)
Diagram of Asset Turnover Ratio:-
1.17
1.46
1.12
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
March'10 March'11 March'12
Assets Turnover Ratio
Interpretation:-
Here, we can interpret that company’s asset turnover ratio in Mar’10 is 1.17 which is not
ideal and in Mar’11 there is negligible improvement is seen that the ratio is 1.46. In Mar’12 it
has decreased, in Mar’12 it is 1.12 which indicates under utilization of available resources
and presence of idle capacity. In operational term, it implies that the firm can expand its
activity level (in terms of production and sales) without requiring additional capital
investment.
Particulars Mar '10 Mar '11 Mar '12
Sale 141.47 202.04 208.87
Average Total Assets
120.74 137.57 185.27
Assets Turnover Ratio (In
Times)
1.17 1.46 1.12
60
3. LEVERAGE or CAPITAL STRUCTURE RATIO
A. Debt to Equity ratio:
This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the
relative position of the equity holders and the lenders and indicates the company’s policy on
the mix of capital funds. The debt to equity ratio is calculated as follows:
Debt to Equity Ratio = Long Term Debt / Shareholders’ Fund
Calculation of Debt to Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Debt to Equity Ratio:-
1.76
1.4
0.14
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
March'10 March'11 March'12
Debt to Equity Ratio
Interpretation:-
Company debt-equity ratio in Mar'10 is 1.76 and after that in each year it is decreasing. In Mar'12 it
has raised capital from long term debt. This proportion of debt-equity in Mar'09 does not indicate
good financial position.
Particulars Mar '10 Mar '11 Mar '12
Long Term Debt
85.77 75.70 8.54
Shareholder Fund
48.51 54.01 59.10
Debt to Equity Ratio
(In Times)
1.76 1.40 0.14
61
B: Debt – Assets Ratio:
Debt-asset ratio measures the share of the total assets financed by outside funds. It is
calculated as follows:
Debt – Assets Ratio = Total Debt / Total Assets
Calculation of Debt – Assets Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Debt - assets Ratio:-
0.3
0.23
0.27
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
March'10 March'11 March'12
Debt – Assets Ratio
Interpretation:-
Above calculation intimates the debt asset ratio in Mar’10 is 0.30 which has decreased in
Mar’11 in 0.23. In Mar’07 Company was not having even single rupees debt, which
indicates its financial strength. For Mar’12 Company’s debt has increased but comparatively
its assets have also increased. So we can say that there is a margin of safety available to
company as well as lender.
Particulars Mar '10 Mar '11 Mar '12
Total Debt 38.08 45.94 50.55
Total Assets
124.22 197.80 185.27
Debt – Assets Ratio
0.30 0.23 0.27
62
C. Interest Coverage Ratio
Interest coverage ratio measures the debt servicing capacity of a firm insofar as fixed interest
on long-term loan is concerned. It is determined by dividing the operating profits or earnings
before interest and taxes (EBIT) by the fixed interest charges on loans. It is calculated as
follows:
Interest Coverage Ratio = EBIT / Interest
Calculation of Interest Coverage Ratio with Diagram: (Rs. In Crores)
Diagram of Interest Coverage Ratio:-
17.02
25.87
43.75
0
5
10
15
20
25
30
35
40
45
50
March'10 March'11 March'12
Interest Coverage Ratio
Interpretation:-
Company’s interest coverage ratio in Mar’10 is 17.02. It has increased in each year after
Mar’10. In Mar’11 it was 25.87. In Mar’12 interest coverage ratio was comparatively increased to
43.75. From all above, we can interpret that company is having unused debt capacity.
Particulars Mar '10 Mar '11 Mar '12
EBIT
48.36 62.35 92.77
Interest
2.84 2.41 2.12
Interest Coverage
Ratio
17.02 25.87 43.75
63
4. PROFITABILITY RATIOS
A. Gross Profit Ratio:
A lower gross profit ratio, generally indicates high cost of goods sold due to the unfavorable
purchasing polices, lesser sales, lower selling prices, excessive competition, over investment
in plant and machinery. Gross profit ratio is decreasing, which means the profitability of the
company is decreasing.
? Normally the gross profit has to rise proportionately with sales.
? It can also be useful to compare the gross profit margin across similar businesses
although there will often be good reasons for any disparity.
It is calculated as follows:
Gross Profit Ratio = Gross Profit / Sales * 100
Calculation of Gross Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Gross Profit Ratio:-
76.73 76.71
69.44
64
66
68
70
72
74
76
78
March'10 March'11 March'12
Gross Profit Ratio
Particulars Mar '10 Mar '11 Mar '12
Gross Profit
141.47 202.04 208.87
Sales
184.36 263.35 300.77
Gross Profit Ratio
76.73 76.71 69.44
64
Interpretation:-
The gross profit margin reflects the efficiency with which management produces each unit of
the product. This ratio indicates the average spread between the cost of goods sold and the
sales revenue.
In the financial year Mar'10 the gross profit was 76.73% and in financial year Mar'12 it is
69.44%. It indicates higher sales price without a corresponding increasing in the cost of
goods sold or decreasing in cost of sales.
65
B. Net Profit Ratio:
This is a widely used measure of performance and is comparable across companies in similar
industries. The fact that a business works on a very low margin need not cause alarm because
there are some sectors in the industry that work on a basis of high turnover and low margins,
for examples supermarkets and motorcar dealers. It is calculated as follows:-
Net Profit Ratio = Profit after Tax / Net Sales * 100
Calculation of Net Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Net Profit Ratio:-
3.21
2.95
2.74
2.5
2.6
2.7
2.8
2.9
3
3.1
3.2
3.3
March'10 March'11 March'12
Net Profit Ratio
I nterpretation:
This ratio indicates the firm s capacity to face adverse economic conditions such as price
competition, low demand etc. obviously, higher the ratio, the better is the profitability. In the
financial year Mar'10 the net profit was 3.21% and in Mar'12 it was decreasing by 2.74%
which ensure inadequate return to the owner.
Particulars Mar '10 Mar '11 Mar '12
Net Profit
4.55 5.98 5.74
Sales
141.47 202.04 208.87
Net Profit Ratio
3.21 2.95 2.74
66
C. Operating Profit Ratio:
Operating Profit means profit before interest and tax. The term interest means interest on
long term borrowings, interest on short term borrowing will be deducted for computing
operating profit. A high operating margin indicates the healthy operating efficiency and
pricing strategy of a company and vice-versa.
The term net profit here means, net income after interest and tax it is different from the net
operating profit which is used for computing the return on total capital employed in the
business. This is because the shareholders are interested in total income after tax including
net non operating income. It is calculated as follows:-
Operating Profit Ratio = Earnings before interest and taxes (EBIT) / Net Sales * 100
Calculation of Operating Profit Ratio with Diagram: (Rs. In Crores)
Diagram of Operating Profit Ratio:-
34.18
30.86
44.41
0
5
10
15
20
25
30
35
40
45
50
March'10 March'11 March'12
Operating Profit Ratio
Particulars Mar '10 Mar '11 Mar '12
EBIT
48.36 62.35 92.77
Net Sales
141.47 202.04 208.87
Operating Profit
Ratio
34.18 30.86 44.41
67
I nterpretation:
The operating ratio measures the relationship between operating profits and sales. This ratio
adjusts the managerial efficiency in earnings profits which may not be reflected in net profit
to sales ratio if net profit includes a higher non operating expenses or income.
In the financial year Mar'10 ratio was 34.18% in Mar'11 the company’s sales was higher but
earning was lower therefore its operating profit ratio was decreasing by 30.86%. In Mar'12
operating profit is 44.41% which indicates company higher managerial efficiency.
68
D. Earnings per Share:-
One of the way of measuring profitability of shareholders investment to calculate earnings
per share. EPS shows the profitability of the firm on a per share basis, it doesn’t reflect how
much is paid as dividend and how much retained in the business. It is calculated as follows:-
EPS = Profit after tax – Preference share dividend / No. Of equity shares
Calculation of Earnings per Share with Diagram: (Rs. In Crores)
Diagram of Earnings per Share:-
0.42
0.55
0.53
0
0.1
0.2
0.3
0.4
0.5
0.6
March'10 March'11 March'12
Earnings per Share
I nterpretation:-
The earnings per share are a good measure of the profitability and when compared with E.P.S
of previous 3 years, it gives a view of the comparative earnings power of a firm. Calculated
for 3 years indicates the earning power of the company is increasing. The earnings per share
of the company for three years for Mar’10 are 0.42% which increased up to 0.55% in the
year Mar’11. Earnings per share are increasing for the year Mar’10 to Mar’12. EPS is
increasing as profit available for appropriation is increasing and Number of equity shares is
constant for the three years.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
NO. of Equity Shares
outstanding
10.79 10.79 10.80
EPS
0.42 0.55 0.53
69
E. Return on Assets:
This ratio is computed to know the productivity of the total assets. It is calculated as follows:-
Return on Assets = PAT / Average Total Assets * 100
Calculation of Return on Assets Ratio with Diagram: (Rs. In Crores)
Diagram of Return on Assets Ratio:-
11.72
13.24
9.84
0
2
4
6
8
10
12
14
March'10 March'11 March'12
Return on Assets
I nterpretation:-
The ROA measures the profitability of the total funds/investments of a firm. In Mar'10
Return on asset ratio of the company is 11.72. In Mar’11 it has increased 13.24 respectively. This
indicates assets are effectively utilizing in the company. In Mar’12 return on assets is decreasing by
9.84 which means company’s assets are enable to generate sufficient revenue against their cost.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
Average Total Assets
38.82 45.16 58.28
Return on Assets
11.72 13.24 9.84
70
F. Return on Equity:
Return on equity measures the return on the owner’s investment in the firm. It is used to see
the profitability of owner’s investment. It is calculated as follows:-
Return on Equity = PAT / Shareholders Fund * 100
Calculation of Return on Equity Ratio with Diagram: (Rs. In Crores)
Diagram of Return on Equity Ratio:-
9.37
11.07
9.71
8.5
9
9.5
10
10.5
11
11.5
March'10 March'11 March'12
Return on Equity
Interpretation:-
ROE indicates how well the firm has used the resources of owners. In fact, this ratio is one of
the most important relationships in financial analysis. The earnings of a satisfactory return are
the most desirable objective of business. This ratio is, thus, of great interest to the present as
well as the prospective shareholders and also of great concern to management, this has the
responsibility of maximizing the owners’ welfare.
Particulars Mar '10 Mar '11 Mar '12
PAT
4.55 5.98 5.74
Shareholder Fund
48.51 54.01 59.10
Return on Equity
9.37 11.07 9.71
71
Chapter – 8
Findings
72
FINDINGS
As Company’s current ratio is not satisfactory so it should increase current assets in
comparison to current liabilities.
As company’s fixed assets turnover ratio is continuously decreasing it means it has
under utilization of available resources. So it can expand its activity level without any
additional capital investment.
Liquid ratio is decreasing it may result in difficulties of meeting current obligation.
Company utilized its resources efficiently having high inventory turnover ratio and
operating with reduced cost.
It can reduce the need of working capital by availing credit period from suppliers.
Company is not making optimum utilization of fixed assets as its fixed assets turnover
ratio is continuously decreasing.
Recently proportion of debt in comparison to equity capital is higher in Mar’12 which results
in cash outflow in the form of interest.
73
Departments in Super Tannery Limited
1- Accounts and Finance Department
2- Import Department
3- Export Department
4- Time Office Department
5- Raw-Hide Purchase Department
6- Raw-Hide Storing Department
7- Dispatch Department
8- Production Department
9- Sales Department
10- Chemical Purchase Department
74
Chapter – 9
Limitations
75
LIMITATIONS OF THE STUDY
Ratio analysis of particular company is limited to that company. There are lot of
variation in inventory valuation and deprecation methods, estimated working life of
assets etc. are varying as per different companies.
Ratio analysis is affected by inflation.
It may lack complete and accurate financial information due to some confidential
matters of the company.
Time given by the company to carry out research was limited.
The data provided by the company was not sufficient and accurate.
Data was kept confidential, so I have to depend on the company’s balance sheet and profit
and loss account.
76
Chapter – 10
Appendix
77
APPENDIX
Balance sheet of Last Three Years 2009-10 to 2011-12
Profit and Loss Account of Last Three Years 2009-10 to 2011-12
Annual Brief Result
78
Chapter – 11
Bibliography
79
BIBLIOGRAPHY
? Web sites:
www.supertannery.com Dated 08/06/2013
NAME OF THE
BOOK
AUTHOR EDITION PAGE NO.
Financial Management KHAN &
P K JAIN
Sixth reprint
2008
Fifth Edition
6.1 – 6.41
Financial Management I M PANDEY Ninth
Edition
517 – 541
Management
Accounting and
Financial Control
DR. S N
MAHESHWARI
Thirteenth
Edition
2007
B.23 – B.76
80
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