16. RATIO ANALYSIS A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.
17. ADVANTAGES OF RATIOS ANALYSIS Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages / Benefits of ratio analysis: Simplifies financial statements:It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.
18. LIMITATIONS OF RATIOS ANALYSIS The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. Comparative study required:Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. Ratios 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. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in different way. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.
20. PROFITABILITY RATIOS Gross Profit Ratio = Indicates the relationship between net sales revenue and the cost of goods sold. This ratio should be compared with industry data as it may indicate insufficient volume and excessive purchasing or labor costs. Net Profit Ratio = A measure of net income generated by each rupee of sales. Operating Ratio = A measure of the operating income generated by each rupee of sales.
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22. Liquid /Acid Test / Quick Ratio = A measurement of the liquidity position of the business. The quick ratio compares the cash plus cash equivalents and accounts receivable to the current liabilities. The primary difference between the current ratio and the quick ratio is the quick ratio does not include inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will be lower than its current ratio. It is a stringent test of liquidity.
26. Working Capital Turnover Ratio = Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company's working capital is working too hard.
27. Fixed Assets Turnover Ratio= Measures the capacity utilization and the quality of fixed assets.
28. Current Assets Turnover Ratio= Measures the capacity utilization and the quality of current assets.
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30. Return On Capital Employed (ROCE) Ratio = Measures the income earned on the invested capital.
31. Earnings Per Share Ratio = Measure to calculate the earning after taking PAT into consideration.
33. Book Value Per Share= Measures the book value per share.
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35. Interest Coverage Or Debt Service Ratio = Indicates a company's capacity to meet interest payments. Uses EBIT (Earnings Before Interest and Taxes)
36. Total Debt Ratio= Provides information about the company's ability to absorb asset reductions arising from losses without jeopardizing the interest of creditors.
41. 2008= 17.02 Comment:- As we see from the above figures that gross profit is fluctuating, the company has to take certain measures to increase its gross profit in order to increase its profitability position.
46. 2008= 12.24Comment:- The net profit is ranging from 11-12, which is satisfactory, but if it wants to improvise further it has to decrease expenses & increase sales or both.
51. 2008= 17.20Comment:- The companyâs operating ratio is decreasing in 2008, so the company has to decrease its operating expenses, for increasing the profitability.
71. 2008= 42.50Comment:- DPS was increasing consistently, but in 2008 it has quite high change in 2008, which suggest that high dividend to itâs shareholderâs.
81. 2008= 0.66Comment:- The Companyâs current ratio is not ideal. It will have to increase itâs current assets or decrease itâs current liabilities or both in order to increase its liquidity position. Ideal is 2:1.
91. 2008= 14.43Comment:- The Companyâs cash ratio has increased which suggest that the company is maintaining ideal cash and short term investments.
92. CURRENT ASSET TURNOVER RATIO Current Assets Turnover Ratio= Net Sales/ C. Assets 2004= 9.41 2005= 9.20 2006= 8.70 2007= 7.75 2008= 9.10 Comment:- The Companyâs current asset turn over ratio is fluctuating but itâs ideal.
93. FIXED ASSET TURNOVER RATIO Fixed Asset Turnover Ratio= Net Sales/Fixed Asset 2004= 5.33 2007= 6.10 2005= 5.61 2008= 3.20 2006= 5.77 Comment:- Company needs to improve itâs fixed asset turn over ratio by increasing sales or by fixed asset or by both
94. TOTAL ASSET TURNOVER RATIO Total Assets Turnover Ratio= Net Sales/Fixed Assets + Current Assets 2004= 6.81 2005= 7.67 2006= 8.02 2007= 9.52 2008= 10.29 Comment:- The Companyâs total assets turn over ratio has increased consistently, which is considerably good.
95. WORKING CAPITAL TURNOVER RATIO Working Capital Turnover Ratio= Net Sales/ Current Assets- C. Liabilities 2004= 12.42 2005= 12.02 2006= 12.01 2007= 10.02 2008= 11.39 Comment:- The companyâs working capital turn over ratio is fluctuating, however it has increased in 2008 which is ideal.
96. INVENTORY TURNOVER RATIO Inventory Turnover Ratio= COGS Or Sales/Avg. Stock 2004= 10.34 2005= 9.87 2006= 10.28 2007= 8.79 2008= 11.39 Comments:- The inventory turn over ratio is fluctuating however, its increasing in 2008, which suggest that the company is having less stock with it.
97. DEBTORS TURNOVER RATIO Debtors Turn Over Ratio= Sales/Avg. Receivables 2004= 77.05 2005= 87.32 2006= 65.35 2007= 64.09 2008= 87.37 Comments:- The debtors turn over has increased which suggest higher activity ratio.
98. AVERAGE COLLECTION PERIOD Average Collection Period= 365/ Debtors Ratio 2004= 4.74 2005= 4.18 2006= 5.85 2007= 5.70 2008= 4.20 Comment:- The average collection period has decreased which is ideal as the debtors are paying early, which reduces the risk.
103. 2008= 0.02Comment:- The companyâs debt equity ratio is fluctuating which suggests that the company has lesser loan funds which is considerably good.
108. 2008= 0.02Comment:- The Companyâs total debt is fluctuating and is less when compared to equity and debt, which suggest that the leverage level is ideal.
118. 2008= 473.22Comments:- The Companyâs Interest coverage is fluctuating but in the year 2008 it has decreased ,it has to increase itâs profits as they are less in 2008.
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120. The companyâs needs to improve itâs profitable position which is ideal, but less when compared to other years, in order to earn return on the resources committed to business.
121. The companyâs liquidity position is satisfactory but not ideal, as the current assets and the current liabilities have being considerably decreased when compared to previous year, in order to meet itâs current obligations.
122. The companyâs leverage or capital gearing ratios are improving and the companyâs total debt is less, and it has secured loans rather than unsecured loans which holds good trust among the suppliers for the company & it can also raise additional capital from public as it offers profitable and stable dividends.
123. The activity ratio of the company is i.e. current asset turn over ratio needs to be improved, the rest of the ratios give satisfactory result.