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RATIO .......................................................................................................................................................... 2 ANALYSIS ................................................................................................................................................... 2 MEANING AND CLASSIFICATION OF RATIOS ................................................................................... 2 Classification of ratios .................................................................................................................................. 4 Leverage or Capital Structure Ratio.............................................................................................................. 5 Activity Ratio or Turnover Ratio .................................................................................................................. 7 RATIO .......................................................................................................................................................... 10 CALCULATIONS ............................................................................................................................................ 10 Net Profit Ratio. .......................................................................................................................................... 11 Profitability Ratios ...................................................................................................................................... 13 Leverage or Capital Structure Ratio............................................................................................................ 14 Liquidity Ratio ............................................................................................................................................ 17 LIQUIDITY RATIO ................................................................................................................................... 19 TURNOVER RATIOS. .............................................................................................................................. 20 MANAGEMENT RELATED RATIOS ..................................................................................................... 25 TATA STEELS........................................................................................................................................... 31 Calculation and interpretation of various categories of ratios. ................................................................... 31 Leverage or Capital Structure Ratio............................................................................................................ 35 Liquidity Ratio ............................................................................................................................................ 39 Debtors Turnover Ratio .............................................................................................................................. 43 MANAGEMENT RELATED RATIOS ..................................................................................................... 47 [9] ................................................................................................................... Error! Bookmark not defined. CONCLUSION ......................................................................................................................................... 53
Page 1
Meaning of Ratio:A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.According to Accountants Handbook by Wixom, Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers. Ratio may be expressed in the following three ways:
1.
It is expressed by the simple division of one number by another. For example, if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of Current assets to current liabilities will be 2:1.
2.
In this type, it is calculated how many times a figure is, in comparison to another figure. For example , if a firms credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors.
Page 2
3.
Percentage:
In this type, the relation between two figures is expressed in hundredth. For example, if a firms capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%
Page 3
Classification of ratios
Formula:Gross Profit Ratio = Gross Profit / Net Sales *100 b) Net Profit Ratio
This ratio shows the relationship between net profit and sales. It may be calculated by two methods
c) Operating Ratio
This ratio measures the proportion of an enterprise cost of sales and operating expenses in comparison to its sales.
Formula:Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100
Page 4
a) Debt Ratio
Page 5
Liquidity Ratio
It refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called Short-term Solvency Ratio. These ratios are used to assess the shortterm financial position of the concern. They indicate the firms ability to meet its current obligation out of current resources. In the words of Salomon J. Fink, Liquidity is the ability of the firms to meet its current obligations as they fall due.
a) Current Ratio
This ratio explains the relationship between current assets and current liabilities of a business.
Formula:Current Ratio = Current Assets/ Current Liabilities b) Quick Ratio or Acid Test Ratio
Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
Formula:Quick Ratio = Liquid Assets/ liquid Liabilities c) Net Working Capital Ratio:
This ratio indicates the companys liquidity position.
Formula:
Net Working Capital = Current Asset Current Liabilities
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Page 7
Formula:sales revenue / working capital (Current assets Current liabilities) e) Return on Equity Shareholders Funds
Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholders.
Formula:Return on Equity Shareholders Funds = Net Profit (after int., tax &
preference dividend) / Equity Shareholders Funds *100
Formula: Earning Per Share = Net Profit Dividend on Preference Shares / No. of Equity
Shares
Page 8
Page 9
2009 2010
= 35.33%
= 31.83%
= 46.31%
Interpretation:This ratio indicates an average gross margin earned on a sale of Rs 100. Higher the ratio, the more efficient is the production or purchase management. In current year ratio is comparatively higher than the previous year.
Page 10
= 20.085%
= 21.56%
= 15.829%
Interpretation:The ratio indicates an average net margin earned on a sale of Rs 100. The current year net profit has decreased compared to last two years. It implies that proportion of administrative and selling expense have increased a bit.
Page 11
Sales
= 75.33%
= 80.39%
= 56.18%
Interpretation :The ratio indicates an average of net margin earned on a sale of Rs 100. In the current year operating ratio implies is 56.18% is consumed by operating expense and 43.82% left to cover tax and earning. Lower the ratio, greater is the operating profit to cover the non operating expenses, to pay dividend and to create reserves and vice versa.
Page 12
Profitability Ratios
90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2009-10 2010-11 2011-12 GP Ratio NP Ratio Op. Exp. Ratio
Page 13
= 0.21
=0.637
= 0.6768
Interpretation :
It indicates the amount of total assets with the company in front of total liabilities. More the debt ratio, it shows that there are more assets compared to liabilities. The debt ratio has increased in current year comparatively.
Page 14
2 Debt-Equity Ratio.
o
Calculation:2010 2011
*100
2009 2010
4235.16
2011 2012
*100
= 62.7%
= 63.6%
= 79.79%
Interpretation:The Margin of safety to long-term Debt. A low debt equity ratio implies the use of more equity than debt. which means a larger safety margin for debt provides since owners equity is treated as a margin of safety by debenture holder and vice-versa. Here the ratio is similar in all the three years.
Debt Ratio
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2009-10 2010-11 2011-12 Debt Ratio
Page 15
Debt-Equity Ratio
DedtEquity Ratio
90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2009-10 2010-11 2011-12 DedtEquity Ratio
Page 16
2010 2011
2011 2012
= 1.385
= 1.72
= 0.7
Interpretation:- Current ratio in the year 2011-12 is poor then compared to the year 2009-10 and 2010-11, which shows the amount of liquidity position as a whole is satisfactory in 2010-11 because, ideal current ratio is 2:1.
2. Quick Ratio
o
Working Note:-
a. Quick Assets = Current Assets Stock. b. Quick Liability=Current liability- Bank o/d
Formulae:-Quick Ratio =
Page 17
Calculation:2009 2010
4548.20
2010 2011
2011 2012
= 1.07
= 1.253
= 0.465
Interpretation
It indicates rupees of quick assets available for each rupee of liability due on short term notice. Quick ratio of 1:1 is considered to be satisfactory ratio. If firm has a ratio of more than 1 , it may not be meeting its short term obligation in time. But in the current year the ratio has declined which may be due to efficiency in meeting its short term obligations in time because of its very efficient debtors management.
Page 18
LIQUIDITY RATIO
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009-10 2010-11 2011-12 Current Ratio Quick Ratio
Page 19
TURNOVER RATIOS.
2010 2011
2011 2012
= 11.304
= 11.10
= 10.59
Interpretation :
It indicates the speed with which the inventory is converted into sales. In general, a high ratio indicates efficient performance. A too high ratio may be the result of a very low inventory levels which may result in frequent stock outs and thus the firm may incur high stock out costs. On the other hand, a too low ratio may be the result of excessive inventory levels, slow moving or obsolete inventory and thus, the firm may incur high carrying costs. Thus, a firm should have neither a very high ratio or low ratio. Here the companys inventory ratio has declined comparatively which may be due to poor performance in sales.
Page 20
2009 2010
7367.59
= 11.838
= 12.99
= 14.732
Interpretation
The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. It shows the efficiency of collection policy of the firm. High Debtors T/O ratio =shorter debtors ratio = quick recovery of money. Low debtors T/O ratio = higher debtor ratio = delay in recovery of money. The current year ratio suggest satisfactory position than the previous year as the ratio is increasing.
Page 21
2010 2011
2011 2012
= 0.3668
= 0.3628
= 0.328
Interpretation: The objective of this ratio is to calculate How efficiently assets are employed in business. This ratio suggests how a rupee of assets contribute to earn sales more the ratio more efficiently assets are used in gainful operation. In current year the total assets t/o ratio is Rs 0.328, which is decreasing than the previous year. It suggests that there is not proper utilization of assets in the firm.
Page 22
2010 2011
2011 2012
= 0.21
= 0.3628
= N.A.
Interpretation:The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In the current year, the current liabilities have exceeded the current assets.
Page 23
Inventory T/O Ratio Debtors' T/ Ratio Asset T/O Ratio Working Capital T/O Ratio
Page 24
MANAGEMENT RELATED RATIOS Return on Equity Shareholders Funds Working note Calculation:2009 2010
1479.68*100
2010 2011
*100
2011 2012
*100
= 21.93%
= 23.7%
=19.47%
Formulae:- = Net Profit (after int., tax & preference dividend) / Equity Shareholders
Funds *100
Interpretation:The objective of computing this ratio is to find out how efficiently the funds belonging to the shareholders (equity and preference) have been used. This ratio indicates the firms ability of generating profit per 100 rupees of shareholders funds. Higher the ratio, the more efficient the management and utilization of shareholders funds. Here the company in current year has not utilized the funds efficiently compared to last two years.
Page 25
Return on investment:
Profit After Tax + Interest (1-T) _____ Long Term Liabilities + Shareholders Fund
2011 2012
*100
1614.409
*100
= 24.67%
= 14.70%
=12.75%
Interpretation:
Higher the ratio, the more efficient the management and utilization of Capital Invested. Here, the companys ratio has declined compared to last two years.
Page 26
2009 2010
14796800000
= Rs.15.89
= Rs.22.09
= Rs.22.58
Formulae:- = Net Profit Dividend on Preference Shares / No. of Equity Shares Interpretation:
EPS helps in determining the market price of the equity share of the company. The EPS is increasing gradually from 2009-10 to 2011-12 , which is good for the company.
2010 2011
2011 2012
= 1.25
= 1.50
=1.59
Page 27
Interpretation:Due to increase in the profits, company is paying more dividend as compared to the last year two years therefore the current year ratio is satisfactory.
=15.94
Interpretation:-
Page 28
25.00%
20.00%
15.00%
ROE ROI
10.00%
5.00%
Page 29
25
20
Page 30
2009 2010
= 34.47%
= 38.215%
= 61.09%
Interpretation:This ratio indicates an average gross margin earned on a sale of Rs 100. Higher the ratio, the more efficient is the production or purchase management. In the current year ratio is comparatively higher than the last two years.
Page 31
= 20.17%
= 23.355%
= 19.73%
Interpretation:The ratio indicates an average net margin earned on a sale of Rs 100.The current year net profit has decreased compared to last year.
Page 32
Calculation:2009 2010
25021.98
2010 2011
2011 2012
= 72.85%
= 66.88%
= 56.58%
interpretation :The ratio indicates an average of net margin earned on a sale of Rs 100. In the current year operating ratio implies is 56.58% is consumed by operating expense and 43.42% left to cover tax and earning. Lower the ratio, greater is the operating profit to cover the non operating expenses, to pay dividend and to create reserves and vice versa.
Page 33
PROFITABILITY RATIO
80.00% 70.00% 60.00% 50.00% GP Ratio 40.00% 30.00% 20.00% 10.00% 0.00% 2009-10 2010-11 2011-12 NP Ratio Op. Exp. Ratio
Page 34
= 0.467
= 0.4388
= 0.429
Interpretation:
The debt ratio has declined in current year as compared to the last two years. It indicates the amount of total assets with the company in front of total liabilities. More the debt ratio, it shows that there are more assets compared to liabilities.
Page 35
3 Debt-Equity Ratio.
o
Calculation:2010 2011
* 100
2009 2010
25239.20
2011 2012
* 100
= 68.28%
= 60.28%%
= 46.35%
Interpretation:The Margin of safety to long-term Debt. A low debt equity ratio implies the use of more equity than debt. which means a larger safety margin for debt provides since owners equity is treated as a margin of safety by debenture holder and vice-versa. Here the ratio has decreased to 46.35% in the current year compared which is good for the company.
Page 36
Debt Ratio
0.47 0.46 0.45 0.44 0.43 0.42 0.41 2009-10 2010-11 201-12
Debt Ratio
Page 37
Page 38
2010 2011
2011 2012
= 1.36
= 2.201
= 0.76
Interpretation:Current ratio in the year 2011-12 is poor then compared to the year 2009-10 and 201011, which shows the amount of liquidity position as a whole is unsatisfactory in 2010-11 because, ideal current ratio is 2:1.
Page 39
3. Quick Ratio
o
Working Note:-
a. Quick Assets = Current Assets Stock. c. Quick Liability=Current liability- Bank o/d
Formulae:-Quick Ratio =
Calculation:2009 2010
9792.7
2010 2011
2011 2012
= 1.088
= 1.9075
= 0.47
Interpretation
It indicates rupees of quick assets available for each rupee of liability due on short term notice. Quick ratio of 1:1 is considered to be satisfactory ratio. If firm has a ratio of more than 1 , it may not be meeting its short term obligation in time. The ratio has increased in 2010-11 and then decreased in 2011-12 to 0.47 which may be due to efficiency in meeting its short term obligations in time because of its very efficient debtors management.
Page 40
LIQUIDITY RATIOS
2.5
0.5
Page 41
Calculation:2009 2010
25021.98
2010 2011
2011 2012
= 18.297
= 21.196
= 21.42
Interpretation :
It indicates the speed with which the inventory is converted into sales. In general, a high ratio indicates efficient performance. A too high ratio may be the result of a very low inventory levels which may result in frequent stock outs and thus the firm may incur high stock out costs. On the other hand, a too low ratio may be the result of excessive inventory levels, slow moving or obsolete inventory and thus, the firm may incur high carrying costs. Thus, a firm should have neither a very high ratio or low ratio. Here the companys inventory ratio has increased comparatively which may be due to good performance in sales.
Page 42
2009 2010
25021.98
= 57.54
= 68.67
= 37.537
Interpretation
The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. The objective of computing this ratio is to determine the efficiency with which the trade debtors are managed. It shows the efficiency of collection policy of the firm. High Debtors T/O ratio =shorter debtors ratio = quick recovery of money. Low debtors T/O ratio = higher debtor ratio = delay in recovery of money. The current year ratio suggests the unsatisfactory position than the previous year as the ratio is deccreasing.
Page 43
2010 2011
2011 2012
= 0.34
= 0.328
= 0.352
Interpretation:-
The objective of this ratio is to calculate how efficiently assets are employed in business. This ratio suggests how a rupee of assets contribute to earn sales. More the ratio more efficiently assets are used in gainful operation. In current year the total assets t/o ratio is Rs 0.352, which is increasing than the previous year. It suggests that there is proper utilization of assets in the firm.
Working Capital Turnover Ratio Working note Calculation:Formulae:- sales revenue / working capital (Current assets Current liabilities)
2009 2010
25021.98
2010 2011
2011 2012
= 7.7059
= 2.224
= N.A.
Page 44
Interpretation:
The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In the current year, the current liabilities have exceeded the current assets.
Page 45
TURNOVER RATIOS
80 70 60 50 40 30 20 10 0 2009-10 2010-11 2011-12 Inventory T/O Debtors T/O Total Assests T/O Working Capital T/O
Page 46
MANAGEMENT RELATED RATIOS Return on Equity Shareholders Funds Working note Calculation:2009 2010
5046.80
2010 2011
*100
2011 2012
*100
= 6.10%
= 14.60%
=12.725
Formulae:- = Net Profit After int.& tax / Equity Shareholders Funds *100
Interpretation:The objective of computing this ratio is to find out how efficiently the funds belonging to the shareholders (equity and preference) have been used. This ratio indicates the firms ability of generating profit per 100 rupees of shareholders funds. Higher the ratio, the more efficient the management and utilization of shareholders funds. Here the company in current year has not utilized the funds efficiently compared to last year.
Page 47
6102.68
*100
= 15.88% =14.78%
*100
= 15.559%
Interpretation:
Higher the ratio, the more efficient the management and utilization of Capital Invested. Here, the companys ratio has declined compared to last two years.
Page 48
Page 49
2009 2010
50468000000 887214196
= Rs.56.88
= Rs.71.576
= Rs.68.88
Formulae:- = Net Profit Dividend on Preference Shares / No. of Equity Shares Interpretation:EPS helps in determining the market price of the equity share of the company. The EPS has increased in 2010-11,but has decreased in the current year.
Page 50
2010 2011
2011 2012
= Rs.8
= Rs.12
= Rs. 12
Interpretation:-
=5.426
Page 51
`Interpretation:-
Price earnings ratio is the ratio between market price per equity share & earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company & is widely used by investors to decide whether or not to buy shares in a particular company. Here, the price earning ratio is 15.94.
YEAR
Page 52
CONCLUSION
The net profit of the Tata steel pvt. ltd. in 2009-10, has declined from
20.17% to 19.73% in 2011-12 and the percentage of Rate of Return on investment has also declined gradually from 0.155% to 0.1478%. The Current ratio was 1.36% in 200910and is now declined to 0.7610% in 2011-12.
The net profit of the Jindal steel pvt. ltd. in 2009-10, has declined from
20.0852% to 15.829% in 2011-12 and the percentage of Rate of Return on investment has also declined gradually from 0.147% to 0.1275%. The Current ratio was 1.385% in 2009-10and is now declined to 0.70% in 2011-12
Page 53