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INTRODUCTION

OBJECTIVE:

## To understand the information contained in financial statements with a

view to know the strength or weaknesses of the firm and to make forecast about
the future prospects of the firm and thereby enabling the financial analyst to
take different decisions regarding the operations of the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the
general (qualitative) factors of a company. The other side considers tangible
and measurable factors (quantitative). This means crunching and analyzing
numbers from the financial statements. If used in conjunction with other
methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance
sheet, income statement, and cash flow statement. It's comparing the number
against previous years, other companies, the industry, or even the economy in
general. Ratios look at the relationships between individual values and relate
them to how a company has performed in the past, and might perform in the
future.

MEANING OF RATIO:
A ratio is one figure express in terms of another figure. It is a
mathematical yardstick that measures the relationship two figures, which are
related to each other and mutually interdependent. Ratio is express by dividing
one figure by the other related figure. Thus a ratio is an expression relating one
number to another. It is simply the quotient of two numbers. It can be expressed
as a fraction or as a decimal or as a pure ratio or in absolute figures as “ so

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## many times”. As accounting ratio is an expression relating two figures or

accounts or two sets of account heads or group contain in the financial
statements.

## MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of
items or group of items in the financial statement are computed, determined
and presented.
Ratio analysis is an attempt to derive quantitative measure or guides
concerning the financial health and profitability of business enterprises. Ratio
analysis can be used both in trend and static analysis. There are several ratios
at the disposal of an annalist but their group of ratio he would prefer depends
on the purpose and the objective of analysis.

## While a detailed explanation of ratio analysis is beyond the scope of this

section, we will focus on a technique, which is easy to use. It can provide you
with a valuable investment analysis tool.

## This technique is called cross-sectional analysis. Cross-sectional analysis

compares financial ratios of several companies from the same industry. Ratio
analysis can provide valuable information about a company's financial health. A
financial ratio measures a company's performance in a specific area. For
example, you could use a ratio of a company's debt to its equity to measure a
company's leverage. By comparing the leverage ratios of two companies, you
can determine which company uses greater debt in the conduct of its business.
A company whose leverage ratio is higher than a competitor's has more debt
per equity. You can use this information to make a judgment as to which
company is a better investment risk.

However, you must be careful not to place too much importance on one ratio.
You obtain a better indication of the direction in which a company is moving
when several ratios are taken as a group.

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OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization-
A) Solvency-
1) Long term
2) Short term
3) Immediate
B) Stability
C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) Effective utilization of resources
H) Leverage or external financing

FORMS OF RATIO:

## Since a ratio is a mathematical relationship between to or more variables

/ accounting figures, such relationship can be expressed in different ways as
follows –

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 &
the preference share capital is Rs. 5,00,000, the ratio of equity share capital to
preference share capital is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be described as 4
times that of preference share capital. Similarly, the cash sales of a firm are

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Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to
cash sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying
that the credit sales are 2.5 times that of cash sales.

C] As a percentage:

## In such a case, one item may be expressed as a percentage of some

other item. For example, net sales of the firm are Rs.50,00,000 & the amount of
the gross profit is Rs. 10,00,000, then the gross profit may be described as 20%
of sales [ 10,00,000/50,00,000]

## The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard ratio
may be the past ratio of the same firm or industry’s average ratio or a projected
ratio or the ratio of the most successful firm in the industry. In interpreting the
ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless
the calculated ratio is compared with some predetermined standard. The
importance of a correct standard is oblivious as the conclusion is going to be
based on the standard itself.

TYPES OF COMPARISONS

## 1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare
them with the ratio or ratios of some other selected firm in the same industry at
the same point of time. So it involves the comparison of two or more firm’s

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financial ratio at the same point of time. The cross section analysis helps the
analyst to find out as to how a particular firm has performed in relation to its
competitors. The firms performance may be compared with the performance of
the leader in the industry in order to uncover the major operational
inefficiencies. The cross section analysis is easy to be undertaken as most of
the data required for this may be available in financial statement of the firm.

## The analysis is called Time series analysis when the performance of a

firm is evaluated over a period of time. By comparing the present performance
of a firm with the performance of the same firm over the last few years, an
direction of progress of the firm. Time series analysis helps to the firm to assess
whether the firm is approaching the long-term goals or not. The Time series
analysis looks for (1) important trends in financial performance (2) shift in trend
over the years (3) significant deviation if any from the other set of data\

3] Combined analysis:

If the cross section & time analysis, both are combined together to study
the behavior & pattern of ratio, then meaningful & comprehensive evaluation of
the performance of the firm can definitely be made. A trend of ratio of a firm
compared with the trend of the ratio of the standard firm can give good results.
For example, the ratio of operating expenses to net sales for firm may be higher
than the industry average however, over the years it has been declining for the
firm, whereas the industry average has not shown any significant changes.

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The combined analysis as depicted in the above diagram, which clearly shows
that the ratio of the firm is above the industry average, but it is decreasing over
the years & is approaching the industry average.

## In order to use the ratio analysis as device to make purposeful

conclusions, there are certain pre-requisites, which must be taken care of. It
may be noted that these prerequisites are not conditions for calculations for
meaningful conclusions. The accounting figures are inactive in them & can be
used for any ratio but meaningful & correct interpretation & conclusion can be
arrived at only if the following points are well considered.

1) The dates of different financial statements from where data is taken must
be same.
2) If possible, only audited financial statements should be considered,
otherwise there must be sufficient evidence that the data is correct.

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## 3) Accounting policies followed by different firms must be same in case of

cross section analysis otherwise the results of the ratio analysis would be
distorted.
4) One ratio may not throw light on any performance of the firm. Therefore,
a group of ratios must be preferred. This will be conductive to counter
checks.
5) Last but not least, the analyst must find out that the two figures being
used to calculate a ratio must be related to each other, otherwise there is
no purpose of calculating a ratio.

CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO

USER
STATEMENT

## 1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM
2] REVENUE 3] ACTIVITY RATIO CREDITORS
STATEMENT 4] PROFITABILITY 2] RATIO FOR
RATIO RATIO SHAREHOLDER

4] RATIO FOR
LONG TERM
CREDITORS

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## Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet , P& P A/C, or
both. One-way of classification of ratios is based upon the sources from which
are taken.
1] Balance sheet ratio:
If the ratios are based on the figures of balance sheet, they are called
Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of
debt to equity. While calculating these ratios, there is no need to refer to the
Revenue statement. These ratios study the relationship between the assets &
the liabilities, of the concern. These ratio help to judge the liquidity, solvency &
capital structure of the concern. Balance sheet ratios are Current ratio, Liquid
ratio, and Proprietory ratio, Capital gearing ratio, Debt equity ratio, and Stock
working capital ratio.

2] Revenue ratio:
Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratio study the relationship between the profitability &
the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio,
Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio.

3] Composite ratio:
These ratios indicate the relationship between two items, of which one is
found in the balance sheet & other in revenue statement.
There are two types of composite ratios-
a) Some composite ratios study the relationship between the profits & the
investments of the concern. E.g. return on capital employed, return on
proprietors fund, return on equity capital etc.
b) Other composite ratios e.g. debtors turnover ratios, creditors turnover
ratios, dividend payout ratios, & debt service ratios

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BASED ON FUNCTION:

## Accounting ratios can also be classified according to their functions in to

liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover
ratios.

1] Liquidity ratios:
It shows the relationship between the current assets & current liabilities
of the concern e.g. liquid ratios & current ratios.

2] Leverage ratios:
It shows the relationship between proprietors funds & debts used in
financing the assets of the concern e.g. capital gearing ratios, debt equity ratios,
& Proprietory ratios.

3] Activity ratios:
It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors turnover
ratios.

4] Profitability ratios:
a) It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios
b) It shows the relationship between profit & investment e.g. return on
investment, return on equity capital.

5] Coverage ratios:
It shows the relationship between the profit on the one hand & the claims
of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt
service ratios.

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BASED ON USER:
1] Ratios for short-term creditors:
Current ratios, liquid ratios, stock working capital ratios
2] Ratios for the shareholders:
Return on proprietors fund, return on equity capital

## 3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses
ratios
4] Ratios for long-term creditors:
Debt equity ratios, return on capital employed, proprietor ratios.

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LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year)
obligations. The ratios, which indicate the liquidity of a company, are Current
ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below

CURRENT RATIO
Meaning:
This ratio compares the current assests with the current liabilities. It is also
known as ‘working capital ratio’ or ‘ solvency ratio’. It is expressed in the form of
pure ratio.
E.g. 2:1
Formula:

Current assets
Current ratio =

Current liabilities

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The current assests of a firm represents those assets which can be, in the
ordinary course of business, converted into cash within a short period time,
normally not exceeding one year. The current liabilities defined as liabilities
which are short term maturing obligations to be met, as originally contemplated,
with in a year.
Current ratio (CR) is the ratio of total current assets (CA) to total current
liabilities (CL). Current assets include cash and bank balances; inventory of raw
materials, semi-finished and finished goods; marketable securities; debtors (net
of provision for bad and doubtful debts); bills receivable; and prepaid expenses.
Current liabilities consist of trade creditors, bills payable, bank credit, provision
for taxation, dividends payable and outstanding expenses. This ratio measures
the liquidity of the current assets and the ability of a company to meet its short-
term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets converted
into cash in the operating cycle of the firm and provides the funds needed to
pay for CL. The higher the current ratio, the greater the short-term solvency.
This compares assets, which will become liquid within approximately twelve
months with liabilities, which will be due for payment in the same period and is
intended to indicate whether there are sufficient short-term assets to meet the
short- term liabilities. Recommended current ratio is 2: 1. Any ratio below
indicates that the entity may face liquidity problem but also Ratio over 2: 1 as
above indicates over trading, that is the entity is under utilizing its current
assets.

LIQUID RATIO:

Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare
the quick assets with the quick liabilities. It is expressed in the form of pure
ratio. E.g. 1:1.

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The term quick assets refer to current assets, which can be converted into,
cash immediately or at a short notice without diminution of value.

Formula:

Quick assets
Liquid ratio =

Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA
refers to those current assets that can be converted into cash immediately
without any value strength. QA includes cash and bank balances, short-term
marketable securities, and sundry debtors. Inventory and prepaid expenses are
excluded since these cannot be turned into cash as and when required.

QR indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. This is a fairly stringent measure of
liquidity because it is based on those current assets, which are highly liquid.
Inventories are excluded from the numerator of this ratio because they are
deemed the least liquid component of current assets. Generally, a quick ratio of
1:1 is considered good. One drawback of the quick ratio is that it ignores the
timing of receipts and payments.

CASH RATIO
Meaning:
This is also called as super quick ratio. This ratio considers only the absolute
liquidity available with the firm.
Formula:
Cash + Bank + Marketable securities
Cash ratio =
Total current liabilities

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Since cash and bank balances and short term marketable securities are the
most liquid assets of a firm, financial analysts look at the cash ratio. If the super
liquid assets are too much in relation to the current liabilities then it may affect
the profitability of the firm.

INVESTMENT / SHAREHOLDER

## EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the
organization. An earnings per Share represents earning of the company
whether or not dividends are declared. If there is only one class of shares, the
earning per share are determined by dividing net profit by the number of equity
shares.
EPS measures the profits available to the equity shareholders on each share
held.

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Formula:
NPAT
Earning per share =
Number of equity share

The higher EPS will attract more investors to acquire shares in the company as
it indicates that the business is more profitable enough to pay the dividends in
time. But remember not all profit earned is going to be distributed as dividends
the company also retains some profits for the business

## DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share
held.

Formula:

## Dividend per Share =

Number of Ordinary Shares

## DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to
equity shareholders out of the profit available to the equity shareholders.

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Formula:

## Dividend per share

Dividend Pay out ratio = *100
Earning per share

D/P ratio shows the percentage share of net profits after taxes and after
preference dividend has been paid to the preference equity holders.

GEARING

## CAPITAL GEARING RATIO:-

Meaning:
Gearing means the process of increasing the equity shareholders return
through the use of debt. Equity shareholders earn more when the rate of the
return on total capital is more than the rate of interest on debts. This is also
known as leverage or trading on equity. The Capital-gearing ratio shows the
relationship between two types of capital viz: - equity capital & preference
capital & long term borrowings. It is expressed as a pure ratio.

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Formula:
Preference capital+ secured loan
Capital gearing ratio =
Equity capital & reserve & surplus
Capital gearing ratio indicates the proportion of debt & equity in the financing of
assets of a concern.

PROFITABILITY
These ratios help measure the profitability of a firm. A firm, which generates a
substantial amount of profits per rupee of sales, can comfortably meet its
operating expenses and provide more returns to its shareholders. The
relationship between profit and sales is measured by profitability ratios. There
are two types of profitability ratios: Gross Profit Margin and Net Profit Margin.

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## GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is defined
as the excess of the net sales over cost of goods sold or excess of revenue
over cost. This ratio shows the profit that remains after the manufacturing costs
have been met. It measures the efficiency of production as well as pricing. This
ratio helps to judge how efficient the concern is I managing its production,
purchase, selling & inventory, how good its control is over the direct cost, how
productive the concern , how much amount is left to meet other expenses &
earn net profit.

Formula:

Gross profit
Gross profit ratio = * 100

Net sales
NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is
usually expressed in the form of a percentage.

Formula:

NPAT
Net profit ratio = * 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures the overall
efficiency of production, administration, selling, financing, pricing and tax

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management. Jointly considered, the gross and net profit margin ratios provide
an understanding of the cost and profit structure of a firm.

## RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of the
total funds employed in the firm. The term fund employed or the capital
employed refers to the total long-term source of funds. It means that the capital
employed comprises of shareholder funds plus long-term debts. Alternatively it
can also be defined as fixed assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors and the
owners of a firm. It is the sum of long-term liabilities and owner's equity. ROCE
indicates the efficiency with which the long-term funds of a firm are utilized.

Formula:
NPAT
Return on capital employed = *100
Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted into
cash. They are also called efficiency ratios or asset utilization ratios as they
measure the efficiency of a firm in managing assets. These ratios are based on
the relationship between the level of activity represented by sales or cost of
goods sold and levels of investment in various assets. The important turnover
ratios are debtors turnover ratio, average collection period, inventory/stock
turnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These
are described below:

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## DEBTORS TURNOVER RATIO (DTO)

Meaning:
DTO is calculated by dividing the net credit sales by average debtors
outstanding during the year. It measures the liquidity of a firm's debts. Net
credit sales are the gross credit sales minus returns, if any, from
customers. Average debtors are the average of debtors at the beginning
and at the end of the year. This ratio shows how rapidly debts are
collected. The higher the DTO, the better it is for the organization.
Formula:
Credit sales
Debtors turnover ratio =

Average debtors

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## INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:
ITR refers to the number of times the inventory is sold and replaced during the
accounting period.
Formula:
COGS
Stock Turnover Ratio =
Average stock

ITR reflects the efficiency of inventory management. The higher the ratio, the
more efficient is the management of inventories, and vice versa. However, a
high inventory turnover may also result from a low level of inventory, which may
lead to frequent stock outs and loss of sales and customer goodwill. For
calculating ITR, the average of inventories at the beginning and the end of the
year is taken. In general, averages may be used when a flow figure (in this
case, cost of goods sold) is related to a stock figure (inventories).

## FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets.

Formula:
Net sales
Fixed assets turnover =
Net fixed assets
This ratio measures the efficiency with which fixed assets are employed. A high
ratio indicates a high degree of efficiency in asset utilization while a low ratio
reflects an inefficient use of assets. However, this ratio should be used with
caution because when the fixed assets of a firm are old and substantially
depreciated, the fixed assets turnover ratio tends to be high (because the
denominator of the ratio is very low).

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PROPRIETORS RATIO:
Meaning:
Proprietary ratio is a test of financial & credit strength of the business. It relates
shareholders fund to total assets. This ratio determines the long term or
ultimate solvency of the company.
In other words, Proprietary ratio determines as to what extent the owner’s
interest & expectations are fulfilled from the total investment made in the
Proprietary ratio compares the proprietor fund with total liabilities. It is usually
expressed in the form of percentage. Total assets also know it as net worth.
Formula:
Proprietary fund
Proprietary ratio = OR

Total fund

Shareholders fund

Proprietary ratio =
Fixed assets + current liabilities

## STOCK WORKING CAPITAL RATIO:

Meaning:
This ratio shows the relationship between the closing stock & the working
capital. It helps to judge the quantum of inventories in relation to the working
capital of the business. The purpose of this ratio is to show the extent to which
working capital is blocked in inventories. The ratio highlights the predominance
of stocks in the current financial position of the company. It is expressed as a
percentage.
Formula:
Stock
Stock working capital ratio =
Working Capital

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Stock working capital ratio is a liquidity ratio. It indicates the composition &
quality of the working capital. This ratio also helps to study the solvency of a
concern. It is a qualitative test of solvency. It shows the extent of funds blocked
in stock. If investment in stock is higher it means that the amount of liquid
assets is lower.

## DEBT EQUITY RATIO:

MEANING:
This ratio compares the long-term debts with shareholders fund. The
relationship between borrowed funds & owners capital is a popular measure of
the long term financial solvency of a firm. This relationship is shown by debt
equity ratio. Alternatively, this ratio indicates the relative proportion of debt &
equity in financing the assets of the firm. It is usually expressed as a pure ratio.
E.g. 2:1

Formula:
Total long-term debt

## Debt equity ratio =

Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process
of the increasing the equity shareholders return through the use of debt.
Leverage is also known as ‘gearing’ or ‘trading on equity’. Debt equity ratio
shows the margin of safety for long-term creditors & the balance between debt
& equity.

## RETURN ON PROPRIETOR FUND:

Meaning:
Return on proprietors fund is also known as ‘return on proprietors equity’ or
‘return on shareholders investment’ or ‘ investment ratio’. This ratio indicates

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the relationship between net profit earned & total proprietors funds. Return on
proprietors fund is a profitability ratio, which the relationship between profit &
investment by the proprietors in the concern. Its purpose is to measure the rate
of return on the total fund made available by the owners. This ratio helps to
judge how efficient the concern is in managing the owner’s fund at disposal.
This ratio is of practical importance to prospective investors & shareholders.
Formula:
NPAT
Return on proprietors fund = * 100
Proprietors fund

## CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which payments are
made to the supplier for purchase made from them. It is a relation between net
credit purchase and average creditors
Net credit purchase
Credit turnover ratio =
Average creditors

Months in a year
Average age of accounts payable =
Credit turnover ratio

## Both the ratios indicate promptness in payment of creditor purchases. Higher

creditors turnover ratio or a lower credit period enjoyed signifies that the
creditors are being paid promptly. It enhances credit worthiness of the
company. A very low ratio indicates that the company is not taking full benefit of
the credit period allowed by the creditors.

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## 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 & enables the drawing of interference regarding the
performance of a firm. Ratio analysis is relevant in assessing the performance
of a firm in respect of the following aspects:
1] Liquidity position,
2] Long-term solvency,
3] Operating efficiency,
4] Overall profitability,
5] Inter firm comparison
6] Trend analysis.

1] LIQUIDITY POSITION: -
With the help of Ratio analysis conclusion 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 obligation 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 ratio of a firm.
The liquidity ratio are particularly useful in credit analysis by bank & other
suppliers of short term loans.

## 2] LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial
viability of a firm. This respect of the financial position of a borrower is of
concern to the long-term creditors, security analyst & the present & potential
owners of a business. The long-term solvency is measured by the leverage/
capital structure & profitability ratio Ratio analysis s that focus on earning power
& operating efficiency.

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## Ratio analysis reveals the strength & 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

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from
the viewpoint of management, is that it throws light on the degree of efficiency
in management & utilization of its assets. The various activity ratios measures
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.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the
financial position of a firm, the management is constantly concerned about
overall profitability of the enterprise. That is, they are concerned about the
ability of the firm to meets its short term as well as long term obligations to its
creditors, to ensure a reasonable return to its owners & secure optimum
utilization of the assets of the firm. This is possible if an integrated view is taken
& all the ratios are considered together.

## 5] INTER – FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but
also serves as a stepping-stone to remedial measures. This is made possible
due to inter firm comparison & comparison with the 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

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## 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 firms position vice-versa its
competitors. If the results are at variance either with the industry average or
with the those of the competitors, the firm can seek to identify the probable
reasons & in light, take remedial measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into
account. In other words, whether the financial position of a firm is improving or
deteriorating over the years. This is made possible by the use of trend analysis.
The significance of the 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.

## Financial ratios are essentially concerned with the identification of

significant accounting data relationships, which give the decision-maker insights
into the financial performance of a company. The advantages of ratio analysis
can be summarized as follows:

##  Ratios facilitate conducting trend analysis, which is important for

decision making and forecasting.
 Ratio analysis helps in the assessment of the liquidity, operating
efficiency, profitability and solvency of a firm.
 Ratio analysis provides a basis for both intra-firm as well as inter-firm
comparisons.

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##  The comparison of actual ratios with base year ratios or standard

ratios helps the management analyze the financial performance of
the firm.

## LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

1] Information problems

##  Ratios require quantitative information for analysis but it is not decisive

 The figures in a set of accounts are likely to be at least several months
out of date, and so might not give a proper indication of the company’s
current financial position.
 Where historical cost convention is used, asset valuations in the balance
sheet could be misleading. Ratios based on this information will not be
very useful for decision-making.

##  When comparing performance over time, there is need to consider the

changes in price. The movement in performance should be in line with
the changes in price.
 When comparing performance over time, there is need to consider the
changes in technology. The movement in performance should be in line
with the changes in technology.
 Changes in accounting policy may affect the comparison of results
between different accounting years as misleading.

28

3] Inter-firm comparison

##  Companies may have different capital structures and to make

comparison of performance when one is all equity financed and another
is a geared company it may not be a good analysis.
 Selective application of government incentives to various companies
may also distort intercompany comparison. comparing the performance
of two enterprises may be misleading.

 Inter-firm comparison may not be useful unless the firms compared are
of the same size and age, and employ similar production methods and
accounting practices.
 Even within a company, comparisons can be distorted by changes in the
price level.
 Ratios provide only quantitative information, not qualitative information.
 Ratios are calculated on the basis of past financial statements. They do
not indicate future trends and they do not consider economic conditions.

## PURPOSE OF RATIO ANLYSIS:

1] To identify aspects of a businesses performance to aid decision making
2] Quantitative process – may need to be supplemented by qualitative
Factors to get a complete picture.
3] 5 main areas:-
 Liquidity – the ability of the firm to pay its way
 Investment/shareholders – information to enable decisions to be made
on the extent of the risk and the earning potential of a business
investment
 Gearing – information on the relationship between the exposure of the
business to loans as opposed to share capital

29

##  Profitability – how effective the firm is at generating profits given sales

and or its capital assets
 Financial – the rate at which the company sells its stock and the
efficiency with which it uses its assets

## ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creative technique in
the sense that it uses the same figure & information, which is already appearing
in the financial statement. At the same time, it is true that what can be achieved
by the technique of ratio analysis cannot be achieved by the mere preparation
of financial statement.
Ratio analysis helps to appraise the firm in terms of their profitability &
efficiency of performance, either individually or in relation to those of other firms
in the same industry. The process of this appraisal is not complete until the ratio
so computed can be compared with something, as the ratio all by them do not
mean anything. This comparison may be in the form of intra firm comparison,
inter firm comparison or comparison with standard ratios. Thus proper
comparison of ratios may reveal where a firm is placed as compared with earlier
period or in comparison with the other firms in the same industry.
Ratio analysis is one of the best possible techniques available to the
management to impart the basic functions like planning & control. As the future
is closely related to the immediate past, ratio calculated on the basis of
historical financial statements may be of good assistance to predict the future.
Ratio analysis also helps to locate & point out the various areas, which need the
management attention in order to improve the situation.
As the ratio analysis is concerned with all the aspect of a firms financial
analysis i.e. liquidity, solvency, activity, profitability & overall performance, it
enables the interested persons to know the financial & operational
characteristics of an organisation & take the suitable decision.

30

COMPANY PROFILE
THE COMPANY –

## APLAB Limited is a professionally managed Public Limited company

quoted on the Bombay Stock Exchange. Since its inception in 1962, APLAB
has been serving the global market with wide range of electronic products
meeting the international standards for safety and reliability such as UL, VDE
etc. They specialize in Test and Measurement Equipment, Power Conversion
and UPS Systems, Self-Service Terminals for Banking Sector and Fuel
Dispensers for Petroleum Sector. APLAB enjoys worldwide recognition for the
quality of its products, business integrity and innovative engineering skills.

31

 Aplab started its operation in October 1962.
 It is a professionally managed 40 years old public limited company.
 It is quoted on BOMBAY STOCK EXCHANGE.
 It serves customer global customer par excellence.
 It specialized in Test & measurement instruments, power conversion, &
UPS & fuel dispensers for petroleum sector.
 It enjoys worldwide recognition for the quality of its business integrity &
innovative engineering skills.

MISSION:
 To deliver high quality, carefully, engineered products, on time, with in
budget, as per the customer specification in a manner profitable to both,
our customers & so to us.

VISION:
 To be a global player, recognized for quality & integrity.
 To be the TOP INDIAN COMPANY as conceived by our customers.
 To be “ THE BEST ” company to work for, as rated by our employees.

GOAL:

32

##  Goal at Aplab is extract ordinary customer service as we provide our

customer needs in the personal service industry.

CORPORATE MISSION –
1] To achieve healthy and profitable growth of the company in the interest of our
customers & the shareholders.

## 2] To encourage teamwork, reward innovation and maintain healthy

interpersonal relations within the organization.

## 3] To expand knowledge and remain at the leading edge in technology to serve

the global market.

## 4] To understand the customer’s needs and provide solutions than merely

selling products.

## 5] To create intellectual capital by investing in hardware and embedded

software development.

## VALUES & BELIEFS:

Their values & beliefs required that they -
 Treat employees with respect & give them an opportunity for input on
how to continuously improve their service goals.
 Offer opportunities for growth, professional development & recognition.
 Provide most effective & corrective action, to resolve customer service
issues, to ensure customer satisfaction.
 Foster an open door policy, which encourages interaction, discussion &
ideas to improve work environment & increase productivity.
 “ Do it right the first time & every time” is their team commitment * our
way of doing business, it ensures as growth & prosperity.

33

## THE 21ST CENTURY SUCCESS –

APLAB had planned to enter the 21st Century with a program for a fast
and healthy growth in the global market based on company’s high technology
foundation and the reputation of four decades for prompt customer service and
as a reliable solution provider. After completing three years in the new era, we
can say with pride that we have been delivering our promises to our customers
and the shareholders.
APLAB has entered the field of Professional Services starting with the
Banking and the Petroleum Industry. Focus on developing embedded system
software has been also enhanced. We believe that professional services sector
is poised to grow at a very rapid pace.

## Quality at APLAB is a part of our people’s attitude. Entire organization is

committed to create an environment that encourages individual excellence and
a personal commitment to quality. In APLAB, “Quality is everybody’s
responsibility” and all strive to “do it right the first time”. It is therefore natural
that APLAB Limited is certified for quality with ISO 9001:2000 registration.

QUALITY POLICY:
 Aplab will deliver to its customer products & services that consistently
meet or exceed their requirement.
 Aplab will achieve this by total commitment & involvement of every
individual.
 Aplab will encourage its employees & suppliers to develop quality
products prevent defects & make continual improvement in all
processes.

QUALITY OBJECTIVE:

34

##  Aplab is an ISO 9001:2000 certifies company.

 100% customer satisfaction.
 On time delivery every time reduction is out going PPM to 10,000
[4 sigma]

## Developing innovative products with the latest technology is the core

strength of APLAB. The Science & Technology Ministry of the Govt. of India
accredits our R&D Laboratories. We have a large team of dedicated, highly
qualified skilled engineers who excel in the latest state-of-the-art-technology.
APLAB is recognized not only for manufacturing standard products but also in
providing solutions and services as per the customer specifications. We spend
more than 4% of the company revenue in Research & Development activities.
Specific areas in which the company carries out R&D
1. Development of new product especially hi-tech intelligent product &
electronic transaction control system.
2. Improvement in the existing products & production processes, import
substitution.
3. Development of products to suit exports markets.
4. Customizing the products to the customer’s specifications & adaptation
of imported technology.
The company has achieved its position of leadership in the Indian
instrumentation industry & continuous to maintain it through its strong grip of
technology. Almost all the products manufactured by the company are import

35

## substitution items, which are fully developed in house. It has resulted in

considerable saving of foreign exchange. With the company, R&D is an ongoing
process. The ministry of science & technology, Government of India, recognizes
the company’s R&D.
Through a continuous interaction with production& Quality Assurance
Department takes up redesign of existing products. This is done to achieve
state of the art in our design & to bring about improvement to get maximum
performance / cost ratio.

## FUTURE PLAN OF ACTION

Major R&D activity is concentrated around up gradation of product
design & re-alignment of production processes to bring about improved quality
at lower cost. This will greatly help the company in facing competition in local
markets from foreign companies.

EXPORT

## APLAB currently exports over 25% of its production to Western Europe,

Canada & USA. Over 30 million U.S. Dollars worth of Power Systems and Test
Instruments from APLAB are today operational in UK, Germany, France,
Sweden, Belgium, Canada, and USA & Australia.

36

## APLAB’S ORGANISATION CHART

EXECUTIVE
CHAIRMAN

MANAGING
DIRECTOR
REGIOAL
DIRECTOR MAEKETING MUMBAI
NEWDELHI
[TECHNICAL DIRECTOR SECUNDA-
BANGLORE
CHENNAI
GENERAL
MANAGER

## FINANCE G.M G.M. MATERIAL G.M. G.M.

MANAGER PROD. MARKETING MANAGER ELTRAC DESIGN
& PROD. &
DESIGN
DEVLOP-
MENT

37

OFFICERS

STAFF

WORKERS

PRODUCTS OF APLAB:
a. TEST & MEASUREMENT INSTRUMENTS
b. HIGH POWER AC SYSTEMS (UPS, Frequency Converter,
Inverter, Isolation Transformer)
c. HIGH POWER DC SYSTEMS (DC Power Supply, DC
Uninterruptible Power Supply)
d. ATM INSTACASH
e. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC
CONVERTERS, SMPS, INVERTERS, STABILIZER, LINE
CONDITIONER, ISOLATION TRANSFORMER

ATM INSTACASH
The Banking Automation
Division of APLAB was
launched in 1993, when we
introduced INSTACASH-
India’s first indigenously
manufactured ATM
INSTACASH demonstrated
APLAB’s skills in design,
hardware manufacturing
and software integrations.

38

Our in house R&D group is constantly striving to scan the rapidly changing
technology and offer suitable end to end solutions. We are into Self Service
Delivery Systems, MICR Cheque Processing and Smart Card based solutions.
The latest is IMAGEENABLED Cheque Processing solution- QUICKCLEAR.

APLAB LIMITED

## BALANCE SHEET AS AT 31ST MARCH 2002

(RS.’000)
AS AT 31ST 2002 AS AT 31ST 2002
SOURCES OF FUNDS
SHAREHOLDERS FUND
Share capital 5,00,00
Reserves and surplus 16,29,69
21,29,69
LOANS
Secured 12,13,48
Unsecured 3,67,99
15,81,47
DEFFERED TAX LIABILITY (NET) 1,06,85
TOTAL 38,18,01

APPLICATION OF FUNDS
FIXED ASSETS
Gross block 15,90,33
Less: depreciation 10,32,96
Net block 5,57,37
Capital work in progress 54,36
6,11,73
INVESTMENT 1,22,32
CURRENT ASSESTS, LOANS &
Inventories 19,09,77
Sundary debtors 18,49,35
Cash & bank balances 3,31,32
46,70,80
CURRENT LIABLITIES &
PROVISIONS
Current liabilities 15,36,09

39

Provisions 57,57
15,93,66
NET CURRENT ASSESTS 30,77,14
MISCELLANEOUS EXPENDITURE 6,84
Total 3818,01

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2002

(RS.’000)

## AS AT 31-3- 2002 AS AT 31-3-2002

INCOME:
Sales and operating earnings 48,19,19
Other income 80,50
Variation in stock 1,31,07
50,30,76
EXPENCES:
Materials consumed 18,97,28
Payments to & provision for 9,95,04
employees
Manufacturing expenses 2,21,37
Excise duty 65,05
Other expenses 5,76,71
Interest & finance charges 2,60,22
Depreciation 1,05,37
Less: transferred to revaluation 1,15 1,04,22
49,81,64
PROFIT BEFORE TAX 49,12
PROVISION FOR TAXATION
Current tax 24,42
Deferred tax liability / (Assets) 4,02
PROFIT AFTER TAX 20,68
Balance brought forward from previous
year 1
Balance available for appropriation 20,69

Appropriations:
General reserve 20,68
Surplus / (loss) carried to B/S 1
Proposed dividend
Tax on proposed dividend

40

20,69
Basic earning per share (rupee)
0.41
0.41

(RS.’000)

## AS AT 31-3- 2003 AS AT 31-3- 2003

SOURCES OF FUNDS
SHAREHOLDERS FUND
Share capital 5,00,00
Reserves and surplus 16,55,19
21,55,19
LOANS
Secured 10,27,55
Unsecured 4,53,16
14,80,71
DEFFERED TAX LIABILITY (NET) 87,21
TOTAL 37,23,11

APPLICATION OF FUNDS
FIXED ASSETS
Gross block 17,40,97
Less: depreciation 11,40,93
Net block 6,00,04
Capital work in progress 29,74
6,29,78
INVESTMENT 1,47,26
CURRENT ASSESTS, LOANS &
Inventories 19,02,79
Sundary debtors 19,05,76
Cash & bank balances 3,95,25
51,02,42
CURRENT LIABLITIES &
PROVISIONS
Current liabilities 20,41,56
Provisions 1,20,76
21,62,32

41

## NET CURRENT ASSESTS 29,40,10

MISCELLANEOUS EXPENDITURE 5,97
TOTAL 37,23,11

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2003

(RS.’000)

## AS AT 31-3- 2003 AS AT 31-3- 2003

INCOME:
Sales and operating earnings 59,62,22
Other income 15,04
Variation in stock (59,27)
59,17,99
EXPENCES:
Materials consumed 22,41,60
Payments to & provision for 10,63,96
Employees
Manufacturing expenses 2,69,99
Excise duty 72,69
Other expenses 7,62,23
Interest & finance charges 2,36,57
Depreciation 1,07,97
Less: transferred to revaluation 1,03 1,06,94
57,91,50
PROFIT BEFORE TAX 1,26,49
PROVISION FOR TAXATION
Current tax 63,19
Deferred tax liability / (Assets) (19,64)
PROFIT AFTER TAX 82,94
Balance brought forward from previous
year 1
Balance available for appropriation 82,95

Appropriations:
General reserve 26,50
Surplus / (loss) carried to B/S 4
Proposed dividend 50,00
Tax on proposed dividend 6,41
82,95
Basic earning per share (rupee) 1.66

42

(RS.’000)

## AS AT 31-3- 2004 AS AT 31-3- 2004

SOURCES OF FUNDS
SHAREHOLDERS FUND
Share capital 5,00,00
Reserves and surplus 17,42,59
22,42,59
LOANS
Secured 11,38,86
Unsecured 5,58,29
16,97.15
DEFFERED TAX LIABILITY (NET) 95,33
TOTAL 40,35,07

APPLICATION OF FUNDS
FIXED ASSETS
Gross block 18,41,58
Less: depreciation 12,40,03
Net block 6,01,55
Capital work in progress 15,29
6,16,84
INVESTMENT 1,48,34
CURRENT ASSESTS, LOANS &
Inventories 21,46,20
Sundary debtors 19,51,56
Cash & bank balances 4,49,74
53,98,08
CURRENT LIABLITIES &
PROVISIONS
Current liabilities 18,16,17
Provisions 3,12,02
21,28,19
NET CURRENT ASSESTS 32,69,89
TOTAL 40,35,07

43

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2004

(RS.’000)

## AS AT 31-3- 2004 AS AT 31-3-2004

INCOME:
Sales and operating earnings 73,90,47
Other income 31,39
Variation in stock 53,99
74,75,85
EXPENCES:
Materials consumed 28,51,40
Payments to & provision for 12,94,47
employees
Manufacturing expenses 3,07,51
Excise duty 70,08
Other expenses 9,17,94
Interest & finance charges 2,46,30
Depreciation 1,10,89
Less: transferred to revaluation 93 1,09,96
72,00,99
PROFIT BEFORE TAX 2,74,86
PROVISION FOR TAXATION
Current tax 1,19,50
Deferred tax liability / (Assets) 8,13
PROFIT AFTER TAX 17294
Balance brought forward from previous
year 4
Balance available for appropriation 1,72,98

Appropriations:
General reserve 88,30
Surplus / (loss) carried to B/S 7
Proposed dividend 75,00
Tax on proposed divident 9,61
1,72,98
Basic earning per share (rupee) 3.46

44

(RS.’000)

## AS AT 31-3- 2005 AS AT 31-3- 2005

SOURCES OF FUNDS
SHAREHOLDERS FUND
Share capital 5,00,00
Reserves and surplus 19,14,91
24,14,91
LOANS
Secured 17,23,12
Unsecured 5,36,89
22,60,01
DEFFERED TAX LIABILITY (NET) 92,02
TOTAL 47,66,94

APPLICATION OF FUNDS
FIXED ASSETS
Gross block 21,64,89
Less: depreciation 13,43,05
Net block 8,21,84
Capital work in progress -
8,21,84
INVESTMENT 2,32,91
CURRENT ASSESTS, LOANS &
Inventories 19,32,88
Sundary debtors 23,06,67
Cash & bank balances 6,04,64
58,48,21
CURRENT LIABLITIES &
PROVISIONS
Current liabilities 16,55,15
Provisions 4,80,87
21,36,02
NET CURRENT ASSESTS 37,12,19
TOTAL 47,66,19

PROFIT & LOSS ACCOUNT FOR THE ENDED 31ST MARCH 2005

45

(RS.’000)
AS AT 31-3- 2005 AS AT 31-3 2005
INCOME:
Sales and operating earnings 74,20,31
Other income 41,69
Variation in stock (38,45)
74,23,55
EXPENCES:
Materials consumed 25,91,83
Payments to & provision for 13,54,15
employees
Manufacturing expenses 2,71,41
Excise duty 75,41
Other expenses 8,44,78
Interest & finance charges 2,15,82
Depreciation 1,26,68
Less: transferred to revaluation 84 1,25,84
70,00,24
PROFIT BEFORE TAX 4,23,31
PROVISION FOR TAXATION
Current tax 1,50,84
Deferred tax liability / (Assets) (3,31)
PROFIT AFTER TAX 2,75,78
Balance brought forward from previous 7
year
Balance available for appropriation 2,75,85

Appropriations:
General reserve 1,73,20
Surplus / (loss) carried to B/S 3
Proposed dividend 90,00
2,75,85
Basic earning per share (rupee) 5.52

## CALCULATIONS AND INTERPRETATION OF RATIO’S

1] CURRENT RATIO:

46

Formula:
Current assets
Current ratio =
Current liabilities

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Current assets 46,70,80 51,08,39 53,98,08 58,28,21
Current liabilities 15,93,66 21,62,32 21,28,19 21,36,02
Current ratio 2.93 2.36 2.53 2.72

In Aplab company the current ratio is 2.72:1 in 2004-2005. it means that
for one rupee of current liabilities, the current assets are 2.72 rupee are
available to the them. In other words the current assets are 2.72 times the
current liabilities.
Almost 4 years current ratio is same but current ratio in 2004-2005 is bit higher,
which makes company more sound. The consistency increase in the value of
current assets will increase the ability of the company to meets its obligations &
therefore from the point of view of creditors the company is less risky.
The available working capital with the company is in increasing order.
2001-2002 - 30,77,14
2002-2003 - 29,46,07
2003-2004 - 32,69,89
2004-2005 - 36,92,19
The company has sufficient working capital to meets its urgency/
obligations. A company has a high percentage of its current assets in the form
of working capital, cash that would be more liquid in the sense of being able to
meet obligations as & when they become due. From this working capital, the
company meets its day-to-day financial obligations.
Thus, the current ratio throws light on the company’s ability to pay its
current liabilities out of its current assets. The Aplab Company’s has a very
good liquidity position of company.

47

2] LIQUID RATIO:
Formula:
Quick assets
Liquid ratio =

Quick liabilities

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Quick assets 21,80,67 23,01,01 24,01,30 29,11,31
Quick liabilities 15,93,66 21,62,32 21,28,19 21,36,02
Liquid ratio 1.36 1.06 1.12 1.36

The liquid or quick ratio indicates the liquid financial position of an
enterprise. Almost in all 4 years the liquid ratio is same, which is better for the
company to meet the urgency. The liquid ratio of the Aplab Company has
increased from 1.12 to 1.36 in 2004-2005. Day to day solvency is more sound
for company in 2004-2005 over the year 2003-2004.
This indicates that the dependence on the short-term liabilities &
creditors are less & the company is following a conservative working capital
policy.
Liquid ratio of Company is favorable because the quick assets of the
company are more than the quick liabilities. The liquid ratio shows the
company’s ability to meet its immediate obligations promptly.

3] PROPRIETORY RATIO:
Formula:
Proprietary fund
Proprietary ratio = OR

Total fund

Shareholders fund
Proprietary ratio =
Fixed assets + current liabilities

48

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Proprietary fund 21,29,69 21,55,19 22,42,59 24,14,91
Total fund 52,82,53 57,38,17 66,14,92 66,70,05
Proprietary ratio 40 37.55 33.90 36.20

The Proprietary ratio of the company is 36.20% in the year 2004-2005. It
means that the for every one rupee of total assets contribution of 36 paise has
come from owners fund & remaining balance 66 paise is contributed by the
outside creditors. This shows that the contribution by outside to total assets is
more than the owners fund. This Proprietary ratio of the Company shows a
downward trend for the last 4 years. As the Proprietary ratio is not favorable the
Company’s long-term solvency position is not sound.

## 4] STOCK WORKING CAPITAL RATIO:

Formula:
Stock
Stock working capital ratio =
Working Capital

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Stock 19,09,77 19,02,79 21,46,20 19,32,88
Working Capital 30,77,14 29,46,07 32,69,89 37,12,19
Stock working 62.06 64.58 65.63 52.06
capital ratio

This ratio shows that extend of funds blocked in stock. The amount of
stock is increasing from the year 2001-2002 to 2003-2004. However in the year
2004-2005 it has declined to 52%. In the year 2004-2005 the sale is increased
which affects decrease in stock that effected in increase in working capital in
2004-2005.
It shows that the solvency position of the company is sound.

49

## 5] CAPITAL GEARING RATIO:

Formula:
Preference capital+ secured loan
Capital gearing ratio =
Equity capital & reserve & surplus

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Secured loan 12,13,48 10,27,56 11,38,86 1,72,312
Equity capital & 21,29,69 21,55,19 22,42,59 2,41,491
reserves &
surplus
Capital gearing 56.97 47.67 50.78 71
ratio

Gearing means the process of increasing the equity shareholders return
through the use of debt. Capital gearing ratio is a leverage ratio, which indicates
the proportion of debt & equity in the financing of assets of a company.
For the last 3 years [i.e.2001-2002 TO 2003-2004] Capital gearing ratio is all
most same which indicates, near about 50% of the fund covering the secured
loan position. But in the year 2004-2005 the Capital-gearing ratio is 71%. It
means that during the year 2004-2005 company has borrowed more secured
loans for the company’s expansion.

## 6] DEBT EQUITY RATIO:

Formula:
Total long term debt

## Debt equity ratio =

Total shareholders fund

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Long term debt 15,81,47 14,80,70 16,97,15 22,60,01

## Shareholders 21,29,69 21,55,19 22,42,59 24,14,91

50

fund
Debt Equity Ratio 0.74 0.68 0.75 0.93

The debt equity ratio is important tool of financial analysis to appraise the
financial structure of the company. It expresses the relation between the
external equities & internal equities. This ratio is very important from the point of
view of creditors & owners.
The rate of debt equity ratio is increased from 0.74 to 0.93 during the
year 2001-2002 to 2004-2005. This shows that with the increase in debt, the
shareholders fund also increased. This shows long-term capital structure. The
lower ratio viewed as favorable from long term creditors point of view.

## 7] GROSS PROFIT RATIO:

Formula:

Gross profit
Gross profit ratio = * 100
Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Gross profit 24,54,48 37,65,90 45,57,45 42,37,52
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Gross profit Ratio 56.48 73.80 66.27 62.22

51

## Gross profit Ratio

80
60
40 Gross profit Ratio
20
0
2001- 2002- 2003- 2004 -
2002 2003 2004 2005

The gross profit is the profit made on sale of goods. It is the profit on
turnover. In the year 2001-2002 the gross profit ratio is 56.48%. It has
increased to 73.80% in the year 2002-2003 due to increase in sales without
corresponding increase in cost of goods sold. However the gross profit ratio
decreased to 66.27% in the year 2003-2004.
It is further declined to 62.22% in the year 2004-2005, due to high cost of
purchases & overheads. Although the gross profit ratio is declined during the
year 2002-2003 to 2004-2005. The net sales and gross profit is continuously
increasing from the year 2001-2002 to 2004-2005.

8] OPERATING RATIO:
Formula:
COGS+ operating expenses
Operating ratio = *100
Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

COGS + 18,90,98 + 21,96,32 + 28,33,02 + 2,57,226+
Operating 2,21,37 + 2,69,98 + 3,07,51 + 27,141+
expenses 5,76,71 7,62,23 9,17,94 84,478
Net sales 43,45,46 51,02,37 68,76,89 6,80,978
Operating ratio 61.88% 63.27% 59% 54.16%

52

The operating ratio shows the relationship between costs of activities &
net sales. Operating ratio over a period of 4 years when compared that indicate
the change in the operational efficiency of the company.
The operating ratio of the company has decreased in all 4 year. This is
due to increase in the cost of goods sold, which in 2001-2002 was 61.88%, in
2002-2003 was 63.27%, in 2003-2004 was 59% & in 2004-2005 it is 54.16%.
though the cost has increased in 2002-2003 as compared to 2001-2002, it is
reducing continuously over the next two years, indicate downward trend in cost
but upward / positive trend in operational performance.

9] EXPENSE RATIO:
The ratio of each item of expense or each group of expense to net sales is
known as ‘Expense ratio’. The expense ratio brings out the relationship
between various elements of operating cost & net sales. Expense ratio
analyzes each individual item of expense or group of expense& expresses them
as a percentage in relation to net sales.

A] MANUFACTURING EXPENSES:
Formula:
Manufacturing expenses
Manufacturing expense ratio = *100
Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Manufacturing 2,21,37 2,69,98 3,07,51 2,71,41
expenses
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Manufacturing 5% 5.29% 4.47% 3.98%
expenses ratio

53

The manufacturing expense is shows the downward trend. During the year
2001–2002 to 2002-2003 the manufacturing expense increased because there
is increase in the charges like labour, rent , power & electricity, repair to plant &
machinery & miscellaneous works expenses. The manufacturing expense
during the year 2001-2002 to 2004-2005 is decreased from 5% to 3.96%. This
indicates that the company has control over the manufacturing expense.

B] OTHER EXPENSES:
Formula:
Other expenses
Other expense ratio = *100
Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Other expenses 5,76,71 7,62,23 9,17,94 8,44,78
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Other expenses 13.2% 14.93% 13.34% 12.40%
ratio

The other expense of company is increased during the 2001-2002 to 2003-
2004, because increase in the charges of rent of office, equipment lease rental,
charges. But during the year 2004-2005 the other expenses is decrease from
& publicity, transport charges, commission & discount, sales tax & purchase tax
. This indicates that the company also controlling the other expenses.

54

## 10) NET PROFIT RATIO

Formula:
NPAT
Net profit ratio = * 100

Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

NPAT 20,98 82,94 1,72,94 2,75,78
Net sales 434546 51,02,37 68,76,89 68,09,78
Net profit ratio 0.48 1.6 2.5 4.04

NET PROFIT

5
4
3
2
1
0
2001-2002 2002-2003 2003-2004 2004-2005

The net profit ratio of the company is low in all year but the net profit is
increasing order from this ratio of 4 year it has been observe that the from
2001-2002 to 2004-2005 the net profit is increased i.e. in 2003 it is increased by
1.12 in 2003-2004 by 0.9 & in 2004-2005 by 1.54.
Profitability ratio of company shows considerable increase. Company’s
sales have increased in all 4 years & at the same time company has been
successful in controlling the expenses i.e. manufacturing & other expenses.
It is a clear index of cost control, managerial efficiency & sales
promotion.

55

## 11] STOCK TURNOVER RATIO:

Formula:
COGS
Stock Turnover Ratio =
Average stock

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

COGS 18,90,98 21,96,32 28,33,02 25,72,26
Average stock 5,49,90 5,97,58 6,73,11 6,89,30
Stock Turnover 3.4 3.6 4.20 3.73
Ratio

Stock turnover ratio shows the relationship between the sales & stock it
means how stock is being turned over into sales.
The stock turnover ratio is 2001-2002 was 3.4 times which indicate that
the stock is being turned into sales 3.4 times during the year. The inventory
cycle makes 3.4 round during the year. It helps to work out the stock holding
period, it means the stock turnover ratio is 3.4 times then the stock holding
period is 3.5 months [12/3.4=3.5months]. This indicates that it takes 3.5 months
for stock to be sold out after it is produced.
For the last 4 years stock turnover ratio is lower than the standard but it
is in increasing order. In the year 2001-2002 to 2004-2005 the stock turnover
ratio has improved from 3.4 to 3.73 times, it means with lower inventory the
company has achieved greater sales. Thus, the stock of the company is moving
fast in the market.

## 12] RETURN ON CAPITAL EMPLOYED:

Formula:
NPAT
Return on capital employed = *100
Capital employed

56

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

NPAT 20,68 82,94 1,72,94 2,75,78
Capital employed 38,18,01 37,23,11 40,35,07 47,66,93
Return on capital 0.54 2.23 4.28 5.79
employed

The return on capital employed shows the relationship between profit &
investment. Its purpose is to measure the overall profitability from the total
funds made available by the owner & lenders.
The return on capital employed of Rs.5 indicate that net return of Rs.5 is
earned on a capital employed of Rs.100. this amount of Rs.5 is available to take
care of interest, tax,& appropriation.
The return on capital employed is show-increasing trend, i.e. from 0.54 to 5.79.
All of sudden in 2001-2002 the return on capital employed increased from 0.54
to 5.79. This indicates a very high profitability on each rupee of investment &
has a great scope to attract large amount of fresh fund.

## 13] EARNING PER SHARE:

Formula:
NPAT
Earning per share =
Number of equity share

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

NPAT 20,98,000 82,94,000 1,72,94,000 2,75,78,000
No.ofequity share 50,00,000 50,00,000 50,00,000 50,00,000
Earning per share 0.41 1.66 3.46 5.52

Earning per share is calculated to find out overall profitability of the
company. Earning per share represents the earning of the company whether or
not dividends are declared.
The Earning per share is 5.52 means shareholder gets Rs. 5.52 for each
share of Rs. 10/-. In other words the shareholder earned Rs. 5.52 per share.

57

The net profit after tax of the company is increasing in all years.
Therefore the shareholders earning per share is increased continuously from
2001-2002 to 2004-2005 by 0.41 to 05.52. This shows it is continuous capital
appreciation per unit share by 0.41 to 05.52.

The above diagram shows the Earning per share and Dividend per share
is increasing rapidly. It is beneficial to the shareholders and prospective investor
to invest the money in this company.

## 14] DIVIDEND PAYOUT RATIO:

Formula:
Dividend per share
Dividend Pay out ratio = * 100
Earning per share

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Dividend per - 1 1.50 1.80
share
Earning per share 0.41 1.66 3.46 5.52
Dividend payout - 60.24 43.35 32.60
ratio

58

In the year 2002-2003 and 2003-2004 the Dividend pay out ratio is 60.24
and 43.35 respectively. In the year 2002-2003 the company has declared the
dividend 60.24 and the balance 39.76 is retained with them for the expansion.
The company has not earned more profit in the year 2001-2002 hence the
company has not declared dividend in the year 2001-2002. However the
company has declared more dividends in the year 2002-2003 as the company
has sufficient profit. In the year 2004 the company has declared 1.50 dividends
per share hence the earning per share has doubled. From this one can say that
the company is more conservative for expansion.

## 15] COST OF GOODS SOLD:

Formula:
COGS
Cost of goods sold Ratio = * 100
Net sales

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

COGS 18,90,98 21,96,32 28,33,02 25,72,26
Net sales 43,45,46 51,02,37 68,76,89 68,09,78
Cost of goods 43.51 43.04 41.19 37.77
sold ratio

This ratio shows the rate of consumption of raw material in the process
of production. In the year 2001-2002 the cost of goods sold ratio is 43.51% so
the gross profit is 56.49%. it indicates that in 2001-2002, the 43% of raw
material is consumed in the process of production.
During the last 4 years the rate of cost of goods sold ratio is continuously
decreasing however the gross profit & sales is increased during the same
period.

59

## 16] CASH RATIO:

Formula:
Cash + Bank + Marketable securities

Cash ratio =
Total current liabilities

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Cash + Bank + 3,31,32 3,95,25 4,49,74 6,04,64
Marketable
securities
Total current 15,93,66 21,62,32 21,28,19 21,36,02
liabilities
Cash ratio 0.20 0.18 0.21 0.28

This ratio is called as super quick ratio or absolute liquidity ratio. In the
year 2001-2002 the cash ratio is 0.20 & then it is decreased to 0.18 in the year
2002-2003. Then again it is increased to 0.21 in the year 2003-2004 & 0.28 in
the year 2004-2005.
This shows that the company has sufficient cash, bank balance, & marketable
securities to meet any contingency.

## 17] RETURN ON PROPRIETORS FUND:

Formula:
NPAT
Return on proprietors fund = * 100
Proprietors fund

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

NPAT 20,68 82,94 1,72,94 2,75,78
Proprietors fund 21,29,69 21,55,19 22,42,59 24,14,91
Return on 0.97 3.84 7.71 11.41
proprietors fund

60

Return on proprietors fund shows the relationship between profits &
investments by proprietors in the company. In the year 2002-2003 the return on
proprietors fund is 3.84% it means the net return of Rs. 3 approximately is
earned on the each Rs. 100 of funds contributed by the owners.
During the last 4 years the rate of return on proprietors fund is in
increasing order. The return on proprietors fund during the year 2001-2002 to
2004-2005 is increased from 0.97% to 11.41%.
It shows that the company has a very large returns available to take care
of high dividends, large transfers to reserve etc. & has a great scope to attract
large amount of fresh fund from owners.

## 18] RETURN ON EQUITY:

Formula:
NPAT
Return on equity share capital = * 100
No. of equity share
YEAR 2001-2002 2002-2003 2003-2004 2004 -2005
NPAT 20,68 82,94 1,72,94 2,75,78
No. of equity 50,000 50,000 50,000 50,000
share
Return on equity 4.13 16.5 34.58 55
share capital

This ratio shows the relationship between profit & equity shareholders
fund in the company. It is used by the present / prospective investor for deciding
whether to purchase, keep or sell the equity shares.
In the year 2002-2003 the return on proprietors fund is 16.5%, which
means the net return of Rs. 16, is earned on the each Rs.100 of the funds
contributed by the equity shareholders.
The rate of return on equity share capital is increased from4.13% to 55%
during the year 2001-2002 to 2004-2005. This shows that the company has a
very large returns available to take care of high equity dividend, large transfers

61

to reserve, & also company has a great scope to attract large amount to fresh
funds by issue of equity share & also company has a very good price for equity
shares in the BSE.

## 19] OPERATING PROFIT RATIO:

Formula:
Operating profit
Operating profit ratio = *100
Net sales

Operating profit ratio shows the relationship between operating profit &
the sales. The operating profit is equal to gross profit minus all operating
expenses or sales less cost of goods sold and operating expenses.
The operating profit ratio of 7.11% indicates that average operating
margin of Rs.7 is earned on sale of Rs. 100. this amount of Rs. 7 is available for
meeting non operating expenses. In the other words operating profit ratio 7.11%
means that 7.11% of net sales remains as operating profit after meeting all
operating expenses.
During the last 4 years the operating profit ratio is increased from 7.11%
to 9.38%. It indicates that the company has great efficiency in managing all its
operations of production, purchase, inventory, selling and distribution and also
has control over the direct and indirect costs. Thus, company has a large
margin is available to meet non-operating expenses and earn net profit.

Formula:

## Net credit purchase

Credit turnover ratio =
Average creditors

62

Months in a year
Average age of accounts payable =
Credit turnover ratio

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Net credit 21,21,43 22,71,80 29,08,61 25,29,04
purchase
Average creditors 5,88,42 7,91,21 6,96,86 7,80,39
Credit turnover 3.6 times 3.6 times 4 times 3 times
ratio
Average age of 3.3 months 3.3 months 3 months 4 months
accounts payable

The creditors turnover ratio shows the relationship between the credit purchase
and average trade creditors. It shows the speed with which the payments are
The credit turnover ratio of 4, indicate that the creditors are being turned
over 4times during the year. It indicates the number of rounds taken by the
credit cycle of payables during the year.
There is no standard ratio in absolute term. The creditors ratio for the
year 2001-2002 and 2002-2003 as good as the same, but it is increased by 3.6
to 4 in 2003-2004.this means the company has settled the creditors dues very
fastly than the previous year.
DEBTORS TURNOVER RATIO:
Formula:
Credit sales
Debtors turnover ratio =
Average debtors

Days in a year
Debt collection period =
Debtor’s turnover

63

## YEAR 2001-2002 2002-2003 2003-2004 2004 -2005

Credit sales 47,77,48 55,21,33 74,87,36 68,09,78
Average debtors 18,49,35 19,05,76 19,51,56 23,06,67
Debtors turnover 2.5 times 2.8 times 3.8 times 2.9 times
ratio
Debt collection 146 days 130 days 96 days 125 days
period

Debtor’s turnover ratio is alternative known as “ Accounts Receivable
Turnover Ratio”. This ratio measures the collectibility of debtors & other
accounts receivable, it means the rate at which the trade debts are being
collected.
The Debtors turnover ratio of 2.5 indicates that the debtors are being
turned over 2.5 times during the year. It means that the credit cycle of debtors
makes 2.5 rounds during the year. It helps to workout the debt collection period
i.e. 146 days [365/ 2.5 = 146]. This indicates that it take146 days on an average
for the debtors to be settled. Debt collection period indicates the duration of the
credit cycle of the debtors.
The Debtors turnover ratio is almost same during the year 2001-2002 to
2004-2005, which indicates that the debts are being collected at a fast speed
during the year. The operating cycle of the debtors is short. In other words the
debts collection period is short which result into less chance of bad debts.

64

## SUMMARY OF FINANCIAL POSITION OF APLAB LIMITED

After going through the various ratios, I would like to state that:
• The short-term solvency of the company is quite satisfactory.
• Immediate solvency position of the company is also quite satisfactory.
The company can meet its urgent obligations immediately.
• Credit policies are effective.
• Over all profitability position of the company is quite satisfactory.
• Stock turnover rate is satisfactory. Stock of the company is moving fast
in the market.
• The company is paying promptly to the suppliers.
• The return on capital employed is satisfactory.

The management should take care of inventory management and speed up the
movement of stock. Effective selling technique or product modification may be
adopted to face the competitors and to improve the financial position of the
company by taking appropriate decisions.

65

CONCLUSION:
The focus of financial analysis is on key figures contained in the financial
statements and the significant relationship that exits. The reliability and
significance attach to the ratios will largely on hinge upon the quality of data on
which they are best. They are as good for as bad as the data it self.
Financial ratios are a useful by product of financial statement and
provide standardized measures of firms financial position, profitability and
riskiness. It is an important and powerful tool in the hands of financial analyst.
By calculating one or other ratio or group of ratios he can analyze the
performance of a firm from the different point of view.
The ratio analysis can help in understanding the liquidity and short-term
solvency of the firm, particularly for the trade creditors and banks. Long-term
solvency position as measured by different debt ratios can help a debt investor
or financial institutions to evaluate the degree of financial risk. The operational
efficiency of the firm in utilizing its assets to generate profits can be assessed
on the basis of different turnover ratios. The profitability of the firm can be
analyzed with the help of profitability ratios.
However the ratio analyses suffers from different limitations also. The
ratios need not be taken for granted and accepted at face values. These ratios
are numerous and there are wide spread variations in the same measure.
Ratios generally do the work of diagnosing a problem only and failed to provide
the solution to the problem.

66

BIBLIOGRAPHY

REFERENCE BOOKS –
 FINANCIAL MANAGEMENT
Theory, Concepts & problems
R.P.RUSTAGI

 FINANCIAL MANAGEMENT
Text and problems

## M.Y. KHAN AND P. K. JAIN

 MANAGEMENT ACCOUNTING

AINAPURE

 FINANCIAL MANAGEMENT

L.N. CHOPDE
D.N. CHOUDHARI
S.L. CHOPDE

## ANAUAL REPORTS OF APLAB LIMITED

 2001-2002
 2002-2003
 2003-2004
 2004-2005

WEBSIDES -

 www.bizd.ac.uk/compfact/ratio