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Introduction
Financial analysis also called as financial statement analysis or accounting
analysis or Analysis of finance refers to an assessment of the viability,
stability and profitability of a business, sub-business or project.
Financial analysis is the selection, evaluation and interpretation of
financial data along with other pertinent information to assist in
investment and financial decision making. Financial analysis may be used
internally to evaluate issues such as employee performance, efficiency of
operations, and credit policies, and externally to evaluate potential
investment and the credit-worthiness of borrowers among other things.
It is performed by professionals who prepare reports using ratios that
make use of information taken from financial statements and other
reports. hese reports are usually presented to top management as one of
their bases in making business decisions.
!. "ontinue or discontinue its main operation or part of its
business.
#. $ake or purchase certain materials in the manufacture of its product.
%. Ac&uire or rent'lease certain machineries and e&uipment in
the production of its goods.
(. Issue stocks or negotiate for a bank loan to increase
its working capital.
). $ake decisions regarding investing or lending capital.
*. +ther decisions that allow management to make an informed
selection on various alternatives in the conduct of its business.
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Objectives
o 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.
Financial analysts often assess the following elements of a firm,
!. -rofitability - its ability to earn income and sustain growth in both
the short- and long-term. A company.s degree of profitability is usually
based on the income statement, which reports on the company.s results of
operations.
#. /olvency - its ability to pay its obligation to creditors and other third
parties in the long-term.
%. 0i&uidity - its ability to maintain positive cash flow, while satisfying
immediate obligations.
(. /tability - the firm.s ability to remain in business in the long run,
without having to sustain significant losses in the conduct of its business.
Assessing a company.s stability re&uires the use of both the income
statement and the balance sheet, as well as other financial and non-
financial indicators. etc.
). Investment'shareholders 1 information to enable decisions to be
made on the extent of the risk and the earning potential of a business
investment
*. 2earing 1 information on the relationship between the exposure of
the business to loans as opposed to share capital.
3. Financial 1 the rate at which the company sells its stock and the
efficiency with which it uses its assets.
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(Both 2 and 3 are based on the company's balance sheet, which
indicates the financial condition of a business as of a given point in
time.)
Methods of fnancial analysis
here are five methods of evaluating financial position of the company
and they are as follows
!. 4ori5ontal analysis
#. 6ertical analysis
%. "ommon-si5e statements
(. rend percentage
). 7atio analysis
Financial analysts often compare financial ratios through ratio analysis.
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INTRODUTION TO R!TIO !N!"#$I$ and
INT%RPR%TITION
OBJECTIVE:
o 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. +ne aspect looks at
the general 8&ualitative9 factors of a company. he other side considers
tangible and measurable factors 8&uantitative9. his means crunching and
analy5ing numbers from the financial statements. If used in conjunction
with other methods, &uantitative analysis can produce excellent results.
7atio 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. 7atios 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
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are related to each other and mutually interdependent. 7atio is express by
dividing one figure by the other related figure. hus a ratio is an expression
relating one number to another. It is simply the &uotient 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 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:
7atio 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.
7atio analysis is an attempt to derive &uantitative measure or guides
concerning the financial health and profitability of business enterprises.
7atio analysis can be used both in trend and static analysis. here 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.
<hile a detailed explanation of ratio analysis is beyond the scope of this
section, we will focus on a techni&ue, which is easy to use. It can provide
you with a valuable investment analysis tool.
his techni&ue is called cross-sectional analysis. "ross-sectional
analysis compares financial ratios of several companies from the same
industry. 7atio 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 e&uity to measure a company.s leverage. =y
comparing the leverage ratios of two companies, you can determine which
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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
e&uity. >ou can use this information to make a judgment as to which
company is a better investment risk.
4owever, you must be careful not to place too much importance on one
ratio. >ou obtain a better indication of the direction in which a company is
moving when several ratios are taken as a group.
OBJECTIVE OF RATIOS
7atio is work out to analy5e the following aspects of business organi5ation-
A9 /olvency-
!9 0ong term
#9 /hort term
%9 Immediate
=9 /tability
"9 -rofitability
?9 +perational efficiency
@9 "redit standing
F9 /tructural analysis
29 @ffective utili5ation of resources
49 0everage or external financing
FORMS OF RATIO:
/ince a ratio is a mathematical relationship between to or more variables '
accounting figures, such relationship can be expressed in different ways as
follows 1
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A As a !"re ratio:
For example the e&uity share capital of a company is 7s. #A,AA,AAA B the
preference share capital is 7s. ),AA,AAA, the ratio of e&uity share capital to
preference share capital is #A,AA,AAA, ),AA,AAA or simply (,!.
B As a rate o# ti$es:
In the above case the e&uity share capital may also be described as (
times that of preference share capital. /imilarly, the cash sales of a firm are
7s. !#,AA,AAA B credit sales are 7s. %A,AA,AAA. so the ratio of credit sales
to cash sales can be described as #.) C%A,AA,AAA'!#,AA,AAAD or simply by
saying that the credit sales are #.) times that of cash sales.
C As a !ercenta%e:
In such a case, one item may be expressed as a percentage of some other
item. For example, net sales of the firm are 7s.)A,AA,AAA B the amount of
the gross profit is 7s. !A,AA,AAA, then the gross profit may be described as
#AE of sales C !A,AA,AAA')A,AA,AAA
STE&S IN RATIO ANALYSIS
he ratio analysis re&uires two steps as follows,
!D "alculation of ratio
#D "omparing the ratio with some predetermined standards. he standard
ratio may be the past ratio of the same firm or industryFs average ratio or a
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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. he importance of a correct standard is oblivious
as the conclusion is going to be based on the standard itself.
TY&ES OF COM&ARISONS
he ratio can be compared in three different ways 1
' Cross section analysis:
+ne 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. /o it involves the comparison of two or
more firmFs financial ratio at the same point of time. he cross section
analysis helps the analyst to find out as to how a particular firm has
performed in relation to its competitors. he firms performance may be
compared with the performance of the leader in the industry in order to
uncover the major operational inefficiencies. he cross section analysis is
easy to be undertaken as most of the data re&uired for this may be
available in financial statement of the firm.
( Ti$e series analysis:
he analysis is called ime series analysis when the performance of a firm
is evaluated over a period of time. =y comparing the present performance
of a firm with the performance of the same firm over the last few years, an
assessment can be made about the trend in progress of the firm, about the
direction of progress of the firm. ime series analysis helps to the firm to
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assess whether the firm is approaching the long-term goals or not. he
ime series analysis looks for 8!9 important trends in financial
performance 8#9 shift in trend over the years 8%9 significant deviation if any
from the other set of dataG
) Co$*ine+ analysis:
If the cross section B time analysis, both are combined together to
study the behavior B pattern of ratio, then meaningful B 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.
he 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 B is approaching the industry average.
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&RE-RE,-ISITIES TO RATIO ANALYSIS
In order to use the ratio analysis as device to make purposeful
conclusions, there are certain pre-re&uisites, which must be taken care of.
It may be noted that these prere&uisites are not conditions for calculations
for meaningful conclusions. he accounting figures are inactive in them B
can be used for any ratio but meaningful B correct interpretation B
conclusion can be arrived at only if the following points are well
considered.
!9 he dates of different financial statements from where data is
taken must be same.
#9 If possible, only audited financial statements should be
considered, otherwise there must be sufficient evidence that the data is
correct.
%9 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.
(9 +ne ratio may not throw light on any performance of the firm. herefore,
a group of ratios must be preferred. his will be conductive to counter
checks.
)9 0ast 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.
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"!$$I&I!TION O& R!TIO
A.BASE/ ON FINANCIAL STATEMENT
Accounting ratios express the relationship between figures taken
from financial statements. Figures may be taken from =alance /heet , -B
- A'", or both. +ne-way of classification of ratios is based upon the
sources from which are taken.
' Balance s0eet ratio:
If the ratios are based on the figures of balance sheet, they are called
=alance /heet 7atios. @.g. ratio of current assets to current liabilities or
ratio of debt to e&uity. <hile calculating these ratios, there is no need to
refer to the 7evenue statement. hese ratios study the relationship
between the assets B the liabilities, of the concern. hese ratio help to
judge the li&uidity, solvency B capital structure of the concern. =alance
sheet ratios are "urrent ratio, 0i&uid ratio, and -roprietory ratio, "apital
gearing ratio, ?ebt e&uity ratio, and /tock working capital ratio.
( Re1en"e ratio:
7atio based on the figures from the revenue statement is called
revenue statement ratios. hese ratio study the relationship between the
profitability B the sales of the concern. 7evenue ratios are 2ross profit
ratio, +perating ratio, @xpense ratio, Het profit ratio, Het operating profit
ratio, /tock turnover ratio.
) Co$!osite ratio:
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hese ratios indicate the relationship between two items, of which one is
found in the balance sheet B other in revenue statement.
here are two types of composite ratios-
a9 /ome composite ratios study the relationship between the profits B the
investments of the concern. @.g. return on capital employed, return on
proprietors fund, return on e&uity capital etc.
b9 +ther composite ratios e.g. debtors turnover ratios, creditors turnover
ratios, dividend payout ratios, B debt service ratios
B. BASE/ ON F-NCTION:
Accounting ratios can also be classified according to their functions
in to li&uidity ratios, leverage ratios, activity ratios, profitability ratios B
turnover ratios.
' Li2"i+ity ratios:
It shows the relationship between the current assets B current
liabilities of the concern e.g. li&uid ratios B current ratios.
( Le1era%e ratios:
It shows the relationship between proprietors funds B debts used in
financing the assets of the concern e.g. capital gearing ratios, debt e&uity
ratios, B -roprietory ratios.
) Acti1ity ratios:
It shows relationship between the sales B the assets. It is also known
as urnover ratios B productivity ratios e.g. stock turnover ratios, debtors
turnover ratios.
3 &ro#ita*ility ratios:
a9 It shows the relationship between profits B sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios
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b9 It shows the relationship between profit B investment e.g. return on
investment, return on e&uity capital.
4 Co1era%e ratios:
It shows the relationship between the profit on the one hand B the claims
of the outsiders to be paid out of such profit e.g. dividend payout ratios B
debt service ratios.
C. BASE/ ON -SER:
' Ratios #or s0ort-ter$ cre+itors:
"urrent ratios, li&uid ratios, stock working capital ratios
( Ratios #or t0e s0are0ol+ers:
7eturn on proprietors fund, return on e&uity capital
) Ratios #or $ana%e$ent:
7eturn on capital employed, turnover ratios, operating ratios,
expenses ratios
3 Ratios #or lon%-ter$ cre+itors:
?ebt e&uity ratios, return on capital employed, proprietor ratios.
LI,-I/ITY RATIO: -
0i&uidity refers to the ability of a firm to meet its short-term 8usually up to
! year9 obligations. he ratios, which indicate the li&uidity of a company,
are "urrent ratio, Iuick'Acid-est ratio, and "ash ratio. hese ratios are
discussed below
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C-RRENT RATIO
his ratio compares the current assests with the current liabilities. It is
also known as Jworking capital ratioF or J solvency ratioF. It is expressed in
the form of pure ratio.
C"rrent assets
C"rrent ratio 5
C"rrent lia*ilities
he 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. he current liabilities defined as
liabilities which are short term maturing obligations to be met, as
originally contemplated, with in a year.
"urrent ratio 8"79 is the ratio of total current assets 8"A9 to total current
liabilities 8"09. "urrent assets include cash and bank balancesK inventory
of raw materials, semi-finished and finished goodsK marketable securitiesK
debtors 8net of provision for bad and doubtful debts9K bills receivableK and
prepaid expenses. "urrent liabilities consist of trade creditors, bills
payable, bank credit, provision for taxation, dividends payable and
outstanding expenses. his ratio measures the li&uidity of the current
assets and the ability of a company to meet its short-term debt obligation.
"7 measures the ability of the company to meet its "0, i.e., "A gets
converted into cash in the operating cycle of the firm and provides the
funds needed to pay for "0. he higher the current ratio, the greater the
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short-term solvency. his compares assets, which will become li&uid
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.
7ecommended current ratio is #, !. Any ratio below indicates that the
entity may face li&uidity problem but also 7atio over #, ! as above
indicates over trading, that is the entity is under utili5ing its current
assets.
LI,-I/ RATIO:
0i&uid ratio is also known as acid test ratio or &uick ratio. 0i&uid ratio
compare the &uick assets with the &uick liabilities. It is expressed in the
form of pure ratio. @.g. !,!.
he term &uick assets refer to current assets, which can be converted into,
cash immediately or at a short notice without diminution of value.
,"ic6 assets
Li2"i+ ratio 5
,"ic6 lia*ilities
Iuick 7atio 8I79 is the ratio between &uick current assets 8IA9 and "0.
IA refers to those current assets that can be converted into cash
immediately without any value strength. IA 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 re&uired.
I7 indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. his is a fairly stringent measure
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of li&uidity because it is based on those current assets, which are highly
li&uid. Inventories are excluded from the numerator of this ratio because
they are deemed the least li&uid component of current assets. 2enerally, a
&uick ratio of !,! is considered good. +ne drawback of the &uick ratio is
that it ignores the timing of receipts and payments.
CAS7 RATIO
his is also called as super &uick ratio. his ratio considers only the
absolute li&uidity available with the firm.
Cas0 8 Ban6 8 Mar6eta*le sec"rities
Cas0 ratio 5
Total c"rrent lia*ilities
/ince cash and bank balances and short term marketable securities are the
most li&uid assets of a firm, financial analysts look at the cash ratio. If the
super li&uid assets are too much in relation to the current liabilities then it
may affect the profitability of the firm.
INVESTMENT 9 S7ARE7OL/ER
EARNING &ER SA7RE:-
@arnings per /hare are calculated to find out overall profitability of the
organi5ation. An earnings per /hare represents earning of the company
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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 e&uity shares.
@-/ measures the profits available to the e&uity shareholders on each
share held.
N&AT
Earnin% !er s0are 5
N"$*er o# e2"ity s0are
he higher @-/ will attract more investors to ac&uire shares in the
company as it indicates that the business is more profitable enough to pay
the dividends in time. =ut remember not all profit earned is going to be
distributed as dividends the company also retains some profits for the
business
/IVI/EN/ &ER S7ARE:-
?-/ shows how much is paid as dividend to the shareholders on each
share held.
/i1i+en+ &ai+ to Or+inary S0are0ol+ers
/i1i+en+ !er S0are 5
N"$*er o# Or+inary S0ares
/IVI/EN/ &AYO-T RATIO:-
?ividend -ay-out 7atio shows the relationship between the dividend paid
to e&uity shareholders out of the profit available to the e&uity
shareholders.
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/i1i+en+ !er s0are
/i1i+en+ &ay o"t ratio 5 :';;
Earnin% !er s0are
?'- ratio shows the percentage share of net profits after taxes and after
preference dividend has been paid to the preference e&uity holders.
GEARING
CA&ITAL GEARING RATIO:-
2earing means the process of increasing the e&uity shareholders return
through the use of debt. @&uity shareholders earn more when the rate of
the return on total capital is more than the rate of interest on debts. his is
also known as leverage or trading on e&uity. he "apital-gearing ratio
shows the relationship between two types of capital vi5, - e&uity capital B
preference capital B long term borrowings. It is expressed as a pure ratio.
&re#erence ca!ital8 sec"re+ loan
Ca!ital %earin% ratio 5
E2"ity ca!ital < reser1e < s"r!l"s
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"apital gearing ratio indicates the proportion of debt B e&uity in the
financing of assets of a concern.
&ROFITABILITY
hese 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. he relationship between profit and sales is measured by
profitability ratios. here are two types of profitability ratios, 2ross -rofit
$argin and Het -rofit $argin.
GROSS &ROFIT RATIO:-
his ratio measures the relationship between gross profit and sales. It is
defined as the excess of the net sales over cost of goods sold or excess of
revenue over cost. his ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of
production as well as pricing. his ratio helps to judge how efficient the
concern is I managing its production, purchase, selling B inventory, how
good its control is over the direct cost, how productive the concern , how
much amount is left to meet other expenses B earn net profit.
Gross !ro#it
Gross !ro#it ratio 5 : ';;
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Net sales
NET &ROFIT RATIO:-
Het -rofit ratio indicates the relationship between the net profit B the
sales it is usually expressed in the form of a percentage.
N&AT
Net !ro#it ratio 5 : ';;
Net sales
his ratio shows the net earnings 8to be distributed to both e&uity and
preference shareholders9 as a percentage of net sales. It measures the
overall efficiency of production, administration, selling, financing, pricing
and tax management. Lointly considered, the gross and net profit margin
ratios provide an understanding of the cost and profit structure of a firm.
RET-RN ON CA&ITAL EM&LOYE/:-
he profitability of the firm can also be analy5ed from the point of view of
the total funds employed in the firm. he term fund employed or the
capital employed refers to the total long-term source of funds. It means
that the capital employed comprises of shareholder funds plus long-term
debts. Alternatively it can also be defined as fixed assets plus net working
capital.
"apital employed refers to the long-term funds invested by the creditors
and the owners of a firm. It is the sum of long-term liabilities and owner.s
e&uity. 7+"@ indicates the efficiency with which the long-term funds of a
firm are utili5ed.
N&AT
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Ret"rn on ca!ital e$!loye+ 5 :';;
Ca!ital e$!loye+
FINANCIAL
hese ratios determine how &uickly certain current assets can be
converted into cash. hey are also called efficiency ratios or asset
utili5ation ratios as they measure the efficiency of a firm in managing
assets. hese 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. he important turnover ratios are debtors turnover
ratio, average collection period, inventory'stock turnover ratio, fixed
assets turnover ratio, and total assets turnover ratio. hese are described
below,
/EBTORS T-RNOVER RATIO =/TO>
?+ is calculated by dividing the net credit sales by average debtors
outstanding during the year. It measures the li&uidity of a firm.s debts.
Het 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. his ratio shows how rapidly debts are
collected. he higher the ?+, the better it is for the organi5ation.
Cre+it sales
/e*tors t"rno1er ratio 5
A1era%e +e*tors
INVENTORY OR STOC? T-RNOVER RATIO =ITR>
I7 refers to the number of times the inventory is sold and replaced
during the accounting period.
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COGS
Stoc6 T"rno1er Ratio 5
A1era%e stoc6
I7 reflects the efficiency of inventory management. he higher the
ratio, the more efficient is the management of inventories, and vice versa.
4owever, a high inventory turnover may also result from a low level of
inventory, which may lead to fre&uent stock outs and loss of sales and
customer goodwill. For calculating I7, 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 8in this case, cost of goods sold9 is related to a
stock figure 8inventories9.
FI@E/ ASSETS T-RNOVER =FAT>
he FA ratio measures the net sales per rupee of investment in
fixed assets.
Net sales
FiAe+ assets t"rno1er 5
Net #iAe+ assets
his ratio measures the efficiency with which fixed assets are
employed. A high ratio indicates a high degree of efficiency in asset
utili5ation while a low ratio reflects an inefficient use of assets. 4owever,
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 8because the denominator of the ratio is very low9.
&RO&RIETORS RATIO:
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-roprietary ratio is a test of financial B credit strength of the
business. It relates shareholders fund to total assets. his ratio determines
the long term or ultimate solvency of the company.
In other words, -roprietary ratio determines as to what extent the
ownerFs interest B expectations are fulfilled from the total investment
made in the business operation.
-roprietary ratio compares the proprietor fund with total liabilities.
It is usually expressed in the form of percentage. otal assets also know it
as net worth.
&ro!rietary #"n+
&ro!rietary ratio 5
Total #"n+

S0are0ol+ers #"n+
&ro!rietary ratio 5
FiAe+ assets 8 c"rrent lia*ilities
STOC? BOR?ING CA&ITAL RATIO:
his ratio shows the relationship between the closing stock B the
working capital. It helps to judge the &uantum of inventories in relation to
the working capital of the business. he purpose of this ratio is to show
the extent to which working capital is blocked in inventories. he ratio
highlights the predominance of stocks in the current financial position of
the company. It is expressed as a percentage.
Stoc6
Stoc6 Cor6in% ca!ital ratio 5
Bor6in% Ca!ital
/tock working capital ratio is a li&uidity ratio. It indicates the
composition B &uality of the working capital. his ratio also helps to study
the solvency of a concern. It is a &ualitative test of solvency. It shows the
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extent of funds blocked in stock. If investment in stock is higher it means
that the amount of li&uid assets is lower.
/EBT E,-ITY RATIO:
his ratio compares the long-term debts with shareholders fund.
he relationship between borrowed funds B owners capital is a popular
measure of the long term financial solvency of a firm. his relationship is
shown by debt e&uity ratio. Alternatively, this ratio indicates the relative
proportion of debt B e&uity in financing the assets of the firm. It is usually
expressed as a pure ratio. @.g. #,!
Total lon%-ter$ +e*t
/e*t e2"ity ratio 5
Total s0are0ol+ers #"n+
?ebt e&uity ratio is also called as leverage ratio. 0everage means the
process of the increasing the e&uity shareholders return through the use of
debt. 0everage is also known as JgearingF or Jtrading on e&uityF. ?ebt
e&uity ratio shows the margin of safety for long-term creditors B the
balance between debt B e&uity.
RET-RN ON &RO&RIETOR F-N/:
7eturn on proprietors fund is also known as Jreturn on proprietors
e&uityF or Jreturn on shareholders investmentF or J investment ratioF. his
ratio indicates the relationship between net profit earned B total
proprietors funds. 7eturn on proprietors fund is a profitability ratio,
which the relationship between profit B investment by the proprietors in
the concern. Its purpose is to measure the rate of return on the total fund
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made available by the owners. his ratio helps to judge how efficient the
concern is in managing the ownerFs fund at disposal. his ratio is of
practical importance to prospective investors B shareholders.
N&AT
Ret"rn on !ro!rietors #"n+ 5 : ';;
&ro!rietors #"n+
CRE/ITORS T-RNOVER 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 cre+it !"rc0ase
Cre+it t"rno1er ratio 5
A1era%e cre+itors
Mont0s in a year
A1era%e a%e o# acco"nts !aya*le 5
Cre+it t"rno1er ratio
=oth the ratios indicate promptness in payment of creditor
purchases. 4igher 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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IMPORT!N% O& R!TIO !N!"#$I$
As a tool of financial management, ratios are of crucial significance. he
importance of ratio analysis lies in the fact that it presents facts on a
comparative basis B enables the drawing of interference regarding the
performance of a firm. 7atio analysis is relevant in assessing the
performance of a firm in respect of the following aspects,
!D 0i&uidity position,
#D 0ong-term solvency,
%D +perating efficiency,
(D +verall profitability,
)D Inter firm comparison
*D rend analysis.
' LI,-I/ITY &OSITION: -
<ith the help of 7atio analysis conclusion can be drawn
regarding the li&uidity position of a firm. he li&uidity 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 li&uid funds to pay the interest on its short
maturing debt usually within a year as well as to repay the principal. his
ability is reflected in the li&uidity ratio of a firm. he li&uidity ratio are
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particularly useful in credit analysis by bank B other suppliers of short
term loans.
( LONG TERM SOLVENCY: -
7atio analysis is e&ually useful for assessing the long-term financial
viability of a firm. his respect of the financial position of a borrower is of
concern to the long-term creditors, security analyst B the present B
potential owners of a business. he long-term solvency is measured by the
leverage' capital structure B profitability ratio 7atio analysis s that focus
on earning power B operating efficiency.
7atio analysis reveals the strength B weaknesses of a firm in this
respect. he 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.
/imilarly the various profitability ratios would reveal whether or not the
firm is able to offer ade&uate return to its owners consistent with the risk
involved.
) O&ERATING EFFICIENCY:
>et 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 B utili5ation of its assets. he 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.
3 OVERALL &ROFITABILITY:
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Mnlike 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. hat 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 B secure optimum utili5ation of the assets of the firm. his is
possible if an integrated view is taken B all the ratios are considered
together.
4 INTER D FIRM COM&ARISON:
7atio analysis not only throws light on the financial position of
firm but also serves as a stepping-stone to remedial measures. his is
made possible due to inter firm comparison B 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
techni&ues is to compare the ratios of a firm with the industry average. It
should be reasonably expected that the performance of a firm should be in
broad conformity with that of the industry to which it belongs. An inter
firm comparison would demonstrate the 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 B in light, take remedial measures.
E TREN/ 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. his is made possible
by the use of trend analysis. he significance of the trend analysis of ratio
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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.
+n the other hand, though the present level may be satisfactory but the
trend may be a declining one.
A/VANTAGES OF RATIO ANALYSIS
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. he advantages of
ratio analysis can be summari5ed as follows,
!. 7atios facilitate conducting trend analysis, which is important for
decision making and forecasting.
#. 7atio analysis helps in the assessment of the li&uidity, operating
efficiency, profitability and solvency of a firm.
%. 7atio analysis provides a basis for both intra-firm as well as inter-firm
comparisons.
(. he comparison of actual ratios with base year ratios or standard ratios
helps the management analy5e the financial performance of the firm.
LIMITATIONS OF RATIO ANALYSIS
7atio analysis has its limitations. hese limitations are described
below,
A. In#or$ation !ro*le$s
!. 7atios re&uire &uantitative information for analysis but it is not
decisive about analytical output .
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#. he 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 companyFs
current financial position.
%. <here historical cost convention is used, asset valuations in the
balance sheet could be misleading. 7atios based on this information
will not be very useful for decision-making.
B. Co$!arison o# !er#or$ance o1er ti$e
!. <hen comparing performance over time, there is need to
consider the changes in price. he movement in performance should be
in line with the changes in price.
#. <hen comparing performance over time, there is need to
consider the changes in technology. he movement in performance
should be in line with the changes in technology.
%. "hanges in accounting policy may affect the comparison of
results between different accounting years as misleading.
C. Inter-#ir$ co$!arison
!. "ompanies may have different capital structures and to make
comparison of performance when one is all e&uity financed and
another is a geared company it may not be a good analysis.
#. /elective application of government incentives to various companies
may also distort intercompany comparison. comparing the
performance of two enterprises may be misleading.
%. Inter-firm comparison may not be useful unless the firms compared
are of the same si5e and age, and employ similar production methods
and accounting practices.
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(. @ven within a company, comparisons can be distorted by changes in
the price level.
). 7atios provide only &uantitative information, not &ualitative
information.
*. 7atios are calculated on the basis of past financial statements. hey
do not indicate future trends and they do not consider economic
conditions.
&-R&OSE OF RATIO ANLYSIS:
!. o identify aspects of a businesses performance to aid decision
making.
#. Iuantitative process 1 may need to be supplemented by &ualitative
factors to get a complete picture.
%. ) main areas,-
a9 Li2"i+ity 1 the ability of the firm to pay its way
b9 In1est$ent9s0are0ol+ers 1 information to enable decisions
to be made on the extent of the risk and the earning potential of a
business investment
c9 Gearin% 1 information on the relationship between the exposure
of the business to loans as opposed to share capital
d9 &ro#ita*ility 1 how effective the firm is at generating profits
given sales and or its capital assets
e9 Financial 1 the rate at which the company sells its stock and the
efficiency with which it uses its assets
ROLE OF RATIO ANALYSIS:
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It is true that the techni&ue of ratio analysis is not a creative
techni&ue in the sense that it uses the same figure B information, which is
already appearing in the financial statement. At the same time, it is true
that what can be achieved by the techni&ue of ratio analysis cannot be
achieved by the mere preparation of financial statement.
7atio analysis helps to appraise the firm in terms of their
profitability B efficiency of performance, either individually or in relation
to those of other firms in the same industry. he 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. his
comparison may be in the form of intra firm comparison, inter firm
comparison or comparison with standard ratios. hus 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.
7atio analysis is one of the best possible techni&ues available to the
management to impart the basic functions like planning B 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. 7atio analysis also helps to locate B 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. li&uidity, solvency, activity, profitability B overall
performance, it enables the interested persons to know the financial B
operational characteristics of an organisation B take the suitable decision.
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OMP!N# PRO&I"%
There were about 2 footwear e!porting firms in "gra e!porting to
several countries, but besides these firms, there were also about #,
small$scale footwear$manufacturing units functioning in the town that
were yet to ma%e a brea%through in the world mar%et.
/ABAR TO/AY
An +4/A/ !NAA! B /A NAAA I/+ OAA! B !(AA! "ompany
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For more than wo decades, ?awar 2roup has controlled the
/pecification, -roduction, ?istribution and echnical information of
footwear technology. P?awar 2roupP was founded in P!O33P on the modest
scale in the city Agra. A move to set-up more Mnits were necessary to cope
with the abrupt increase in the volume of business. As a part of its
expansion and diversification drive, wo manufacturing Mnits came into
existence under the 2roup.
/ABAR FOOTBEAR IN/:-
It is a 2ovt. recogni5ed export house engaged in the manufacture B export
of $en.s Footwear i.e "lassic- "omfort "lassic B /port 0ine B all type of
Mppers.
/ABAR LS/:-
It is a 2ovt. recogni5ed export house engaged in the manufacture B export
of 0adies Footwear QFashion Q"omfort Q/porty Q<oven Ankled-$id-0ong
=oots, /hoes B /andals..
EA!ansion:-
In house production of -M, -7 /oles and /hoes. ?awar family is a large
and growing family. It extends beyond the people who work for ?awar
2roup. heir families are also an integral part of it. he 2roup shares the
hopes and aspirations of its people and their children. It goes out of its
way to reward their hard work and dedication.
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P/aksham ?awar $emorial rustP is a small but significant step in that
direction. Its a child education programme for the children of the workers.
In addition to this, it also provides monetary assistance to a large number
of its worker.s children studying in other schools.
he 2roup also works in association with a number of H2+.s to fulfill its
other social welfare commitments. It also organi5es regular health check-
ups for the families of its workers. =ut these efforts are not enough. here
is a lot more that needs to be done. Hobody understands it more than the
chairman of the 2roup, P$r. -uran ?awarP. 0@A?IH2 F7+$ 4@
F7+H
?awar 2roup is led from the front by P$r. -uran ?awarP, a pro-active
veteran from the shoe industry. $r. ?awar is a widely travelled person
and has been associated with the shoe industry for more than three
decades. 4e understands the dynamics of shoe business and how it is
conducted in the international market.
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<ith his clear vision and rock solid dedication, he has brought ?awar
2roup this far and continues to lead it with missionary 5eal.

4e is $r. -uran ?awar 8chairman9 concern for his people and
environment related issues that has endeared him to one and all. A visit to
2roup.s manufacturing facility and corporate office reflects these
concerns.
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$r. -rem Agarwal , 2eneral $anager is a seasoned professional who looks
after the day to day affairs of the company.
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O-R &EO&LE

?awar 2roup is indebted to its people for their unflinching support and
dedication. hey have stood by us in our good, bad and ugly times. hey
have crafted some of the finest shoes for most of the top names in
international footwear and fashion industry. hey have made us a force to
reckon with in the fiercely competitive global footwear industry.
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<e, at one end, have not failed them either. o begin with, we have
provided them with a world class working environment envied by many in
the industry. Its a ha5ard free, airy, well lit and well built working facility
we are talking about with clean toilets and ade&uate drinking water.
Its a facility that encourages performance by its ambience. 4ot Indian
summer is hardly a distraction. heir health is a matter of concern to us.
$edical check-ups by &ualified doctors are organised at regular intervals
to monitor their health and welfare. hen, there is a cafetaria for people
where they get subsidised food items.
here is a volleyball court in the front amidst sprawling greens. It has
witnessed many a competitive in-house tourneys. It is important for our
people to know the joy of winning and the agony of losing to each other.
=ut together they make a formidable team of NAA strong and highly
skilled people we are proud of.
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BOR? STRENGT7
For a company to stay ahead in terms of &uality and competitiveness, it
has to rely on the strength of its own infrastructure and resources. <e, at
?awar 2roup, realised it very early. oday, we not only have a most
modern manufacturing complex but also an array of sophisticated
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machines to produce a diverse range of world class footwear.

=esides a number of Italian 0asting $achines and 2erman "losing
$achines, there are other machines at various stages of production. he
assembly line manufacturing enhances production and ensure &uality.
+n-line Iuality "ontrol "hecks by seasoned professionals enable us to
monitor consistency in production of a particular order.
From shoe upper to complete shoes, everything is produced in-house
there by reducing production lead time and enhancing cost effectiveness.
+ver the years, the group has kept a sturdy pace with technological
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advances in footwear production. It has continuously upgraded its
infrastructure to produce &uality footwear.
Installe+ Ca!acity
(;;; !airs9+ay - La+ies S0oes
3;;; !airs9+ay - MenFs S0oes
'(;; !airs9+ay - C0il+ren s0oes
,-ALITY &OLICY
At ?awar, we look at &uality from a different perspective. "oncern for
&uality is ingrained in our system. It is an integral part of our thought
process. And that is how it has become a tangible aspect of our products.
>ou can see and feel it. Iuality is not talking about itK it is doing it. It
should be inherent in your belief system
+ver the years, we at ?awar, have evolved our own &uality policy turned
to the capabilities of our people. hey produce &uality because we provide
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them &uality environment and facilities. <e lead the crusade for &uality
from the front. At ?awar, &uality is people driven. <orkers produce it,
professionals inspect it and together they deliver it. From time to time our
people undergo orientation programmes conducted with the assistance of
technocrats to understand &ualitative aspects of products we make. o top
it all, the management of ?awar 2roup monitors the production process
to ensure that each footwear bears ?awar.s seal of .Iuality Always..
ACar+s
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ENVIRONMENT FRIEN/LY COM&ANY
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Inherent in the work culture of P?awar 2roupP is a deep concern for
conservation B -reservation of the environment. he sprawling greens in
front of its "orporate 4ead&uarters and $anufacturing facility is one such
example.A modern waste treatment plant has been installed to ensure its
surroundings are not polluted. he facility has been designed meticulously
to match international standards in terms of temperature control, noise
levels etc.
It has Ptop-of-the-line fire fightingP arrangements. he walls in the
working areas are fitted with fire fighting e&uipments and fire exits routes
are painted all over the work area. he electricity cables have been laid
under the watchful eyes of professionals as per the prescribed standards.
o educate our workers regarding the use of chemicals, regular
orientation programmes are conducted. +ur concern for our environment
and the measures we have taken to preserve it have got us an PI/+ !(AA!P
"ertification.
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RESEARC7 < /EVELO&MENT
?awar group is constantly innovating new designs. In sync with latest
trends in the @uropean standards, development of new designs goes on
round the year at our 7esearch and ?evelopment department.
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At ?awar group , commitment to provide high class and &uality service
continues, right from the designer.s sketchbook through to the
performance of our shoes on a customer.s foot.
?awar group has adopted latest footwear technology to give new
dimension to the creative designers.
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/uccess is never a matter of desire, it is the product of hard work and
vision. he phenomenal success of ?awar 2roup proves it. <ith effective
presence in more than P(AP countries and a turnover exceeding, the group
has been growing steadily.
It.s success is simply a by product of the implicit faith and confidence its
buyers have in its capabilities. It has never let them down. And that is
because their every re&uirement is met as per their exact specifications.
oday, the 2roup exports its footwear to some of the top names in fashion
and footwear business. PMnited "olours +f =enetton, 0umberjackP etc. are
some of the brands it makes footwear for.
+ur product range is exhibited in many prestigious fairs like P7iva ?el
2arda 8Italy9, 2?/ 82ermany9 and </A 8M/A9P.
For us at ?awar every customer, no matter big or small, counts. <henever
visiting our P"orporate head&uartersP in India, each customer is looked
after well. <e have even made independent work stations for them to
work with freedom. All the work stations are e&uipped with modern
telecommunication facilities. <e cherish the mutually rewarding
relationship we share with our customers worldwide.
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O-R MAIN MAR?ET
8!9 MR B @urope 8#9 /candinavia 8%9 Australia B Horth America
he brand P?A<A7P has been able to maintain its aura of
exclusivity and distinction in the global market. +ur brand P?A<A7P
cherish the dreams of people from across the world by providing footwear
of their choice. <ith the growing popularity, proliferation comes along.
he company has elaborated the brand concept by launching a
variety of sub-brands and shoes to suit different occasions. he new brand
were coined with attractive catchword, thus helping the customers finding
the right shoes. +ur range of brand caters to every need in footwear world.
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PRODUCTS
WOMENS COLLECTION 2012
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MENS COLLECTION (;'(


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'. C-RRENT RATIO:
C"rrent assets
C"rrent ratio 5
C"rrent lia*ilities
YEAR (;';-(;'' (;'' -(;'(
C"rrent assets 4)GHIG;I 4IG(IG('
C"rrent lia*ilities ('G(IG'H ('G)EG;(
C"rrent ratio (.4) (.J(
COMMENTS:
In dawar /hoe "ompany the current ratio is #.3#,! in #A!!-#A!#. It
means that for one rupee of current liabilities, the current assets are #.3#
rupee is available to the them. In other words the current assets are #.3#
times the current liabilities. "urrent ratio in #A!!-#A!# is bit higher, which
makes company more sound. he consistency increase in the value of
current assets will increase the ability of the company to meets its
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obligations B therefore from the point of view of creditors the company is
less risky. 8he available working capital company is in increasing order.
#A!A-#A!! - %#,*O,NO
#A!!-#A!# - %*,O#,!O
he 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 li&uid in the sense of
being able to meet obligations as B when they become due. From this
working capital, the company meets its day-to-day financial obligations.
hus, the current ratio throws light on the companyFs ability to pay
its current liabilities out of its current assets. he ?awar shoe "ompanyFs
has a very good li&uidity position of company.
(. LI,-I/ RATIO:
,"ic6 assets
Li2"i+ ratio 5

,"ic6 lia*ilities
YEAR (;';-(;'' (;'' -(;'(
,"ic6 assets (3G;'G); (HG''G)'
,"ic6 lia*ilities ('G(IG'H ('G)EG;(
Li2"i+ ratio '.'( '.)E
COMMENTS:
he li&uid or &uick ratio indicates the li&uid financial position of an
enterprise. he li&uid ratio of the ?awar shoe "ompany has increased
from !.!# to !.%* in #A!!-#A!#. ?ay to day solvency is more sound for
company in #A!!-#A!# over the year #A!A-#A!!.
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his indicates that the dependence on the short-term liabilities B
creditors are less B the company is following a conservative working
capital policy.
0i&uid ratio of "ompany is favorable because the &uick assets of the
company are more than the &uick liabilities. he li&uid ratio shows the
companyFs ability to meet its immediate obligations promptly.
). &RO&RIETORY RATIO:
&ro!rietary #"n+
&ro!rietary Ratio 5 ---------------------------
Total F"n+
s0are0ol+ers #"n+
&ro!rietary Ratio 5 ------------------------------------
FiAe+ assets8c"rr.Lia*ilities
YEAR (;';-(;'' (;'' -(;'(
&ro!rietary #"n+ ((G3(G4H (3G'3GH'
Total #"n+ EEG'3GH( EEGJ;G;4
&ro!rietary ratio )).H; )E.(;
COMMENTS:
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he -roprietary ratio of the company is %*.#AE in the year #A!!-
#A!#. It means that the for every one rupee of total assets contribution of
%* paise has come from owners fund B remaining balance ** paise is
contributed by the outside creditors. his shows that the contribution by
outside to total assets is more than the owners fund. his -roprietary ratio
of the "ompany shows a downward trend for the last # years. As the
-roprietary ratio is not favorable the "ompanyFs long-term solvency
position is not sound.
3. STOC? BOR?ING CA&ITAL RATIO:
Stoc6
Stoc6 Cor6in% ca!ital ratio 5
Bor6in% Ca!ital
YEAR (;';-(;'' (;'' -(;'(
Stoc6 ('G3EG(; 'HG)(GII
Bor6in% Ca!ital )(GEHGIH )JG'(G'H
Stoc6 Cor6in% ca!ital ratio E4.E) 4(.;E
COMMENTS:
his ratio shows that extend of funds blocked in stock. ?uring the
year #A!!-#A!# it has declined to )#E. In the year #A!!-#A!# the sale is
increased which affects decrease in stock that effected in increase in
working capital in #A!!-#A!#.
It shows that the solvency position of the company is sound.
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4. CA&ITAL GEARING RATIO:
&re#erence ca!ital8 sec"re+ loan
Ca!ital %earin% ratio 5
E2"ity ca!ital < reser1e < s"r!l"s

YEAR (;';-(;'' (;'' -(;'(
Sec"re+ loan ''G)IGIE 'GJ(G)'(
E2"ity ca!ital < reser1es < s"r!l"s ((G3(G4H (G3'G3H'
Ca!ital %earin% ratio 4;.JI J'
COMMENTS:
2earing means the process of increasing the e&uity shareholders
return through the use of debt. "apital gearing ratio is a leverage ratio,
which indicates the proportion of debt B e&uity in the financing of assets
of a company.
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?uring the year #A!!-#A!# the "apital-gearing ratio is 3!E. It means
that during the year #A!!-#A!# company has borrowed more secured
loans for the companyFs expansion.
E. /EBT E,-ITY RATIO:
Total lon% ter$ +e*t
/e*t e2"ity ratio 5
Total s0are0ol+ers #"n+
YEAR (;';-(;'' (;'' -(;'(
Lon% ter$ +e*t 'EGHJG'4 ((GE;G;'
S0are0ol+ers #"n+ ((G3(G4H (3G'3GH'
/e*t E2"ity Ratio ;.J4 ;.H)
COMMENTS:
he debt e&uity ratio is important tool of financial analysis to appraise the
financial structure of the company. It expresses the relation between the
external e&uities B internal e&uities. his ratio is very important from the
point of view of creditors B owners.
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he rate of debt e&uity ratio is increased from A.3) to A.O% during the
year #A!A-#A!! to #A!!-#A!#. his shows that with the increase in debt,
the shareholders fund also increased. his shows long-term capital
structure. he lower ratio viewed as favorable from long term creditors
point of view.
J. GROSS &ROFIT RATIO:
Gross !ro#it
Gross !ro#it ratio 5 : ';;
Net sales
YEAR (;';-(;'' (;'' -(;'(
Gross !ro#it 34G4JG34 3(G)JG4(
Net sales J)H;3J J3(;)'
Gross !ro#it Ratio EE.(J E(.((
COMMENTS:
he gross profit is the profit made on sale of goods. It is the profit on
turnover.he gross profit ratio decreased to *#.##E in the year #A!!-#A!#.
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?ue to high cost of purchases B overheads. Although the gross profit
ratio is declined during the year #A!A-#A!! to #A!!-#A!#. he net sales
and gross profit is continuously increasing from the year #A!A-#A!! to
#A!!-#A!#.
I. O&ERATING RATIO:
COGS8 o!eratin% eA!enses
O!eratin% ratio 5 :';;
Net sales

YEAR (;';-(;'' (;'' -(;'(
COGS 8 O!eratin% eA!enses (IG))G;( 8)G;JG4' 8
HG'JGH3
(G4JG((E8(JG'3'
8I3G3JI
Net sales J)H;3J J3(;)'
O!eratin% ratio 4HK 43.'EK
COMMENTS:
he operating ratio shows the relationship between costs of activities B
net sales. +perating ratio over a period of # years when compared that
indicate the change in the operational efficiency of the company.
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he operating ratio of the company has decreased in all # year. his is due
to increase in the cost of goods sold, which in #A!A-#A!! was )OE, in #A!!-
#A!# was )(.!*E, though the cost reducing continuously over the next
two years, indicate downward trend in cost but upward ' positive trend in
operational performance.
EXPENSE RATIO:
he ratio of each item of expense or each group of expense to net sales is
known as J@xpense ratioF. he expense ratio brings out the relationship
between various elements of operating cost B net sales. @xpense ratio
analy5es each individual item of expense or group of expenseB expresses
them as a percentage in relation to net sales.
H. MAN-FACT-RING E@&ENSES RATIO
M#%. eA!enses
M#%. eA!ense ratio 5 :';;
Net sales
YEAR (;';-(;'' (;'' -(;'(
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Man"#act"rin% eA!enses )G;JG4' (GJ'G3'
Net sales J)H;3J J3(;)'
Man"#act"rin% eA!enses ratio 3.3JK ).HIK
COMMENTS:
he manufacturing expense is shows the downward trend. he
manufacturing expense during the year #A!A-#A!! to #A!!-#A!# is
decreased from (.(3 to %.ONE. his indicates that the company has
control over the manufacturing expense.
';. OT7ER E@&ENSES RATIO
Ot0er eA!enses
Ot0er eA!ense ratio 5 :';;
Net sales
YEAR (;';-(;'' (;'' -(;'(
Ot0er eA!enses HG'JGH3 IG33GJI
Net sales J)H;3J J3(;)'
Ot0er eA!enses ratio ').)3K '(.3;K
COMMENTS:
?uring the year #A!!-#A!# the other expenses is decrease from !%.%(E to
!#.(AE. =ecause decrease in e&uipment lease rental, advertisement B
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publicity, transport charges, commission B discount, sales tax B purchase
tax . his indicates that the company also controlling the other expenses.
''. NET &ROFIT RATIO
N&AT
Net !ro#it ratio 5 : ';;
Net sales
YEAR (;';-(;'' (;'' -(;'(
N&AT 'GJ(GH3 (GJ4GJI
Net sales J)H;3J J3(;)'
Net !ro#it ratio (.) ).J
COMMENTS:
he net profit ratio of the company is low in all year but the net profit is
increasing order from this ratio of # year it has been observe that the from
#A!A-#A!! to #A!!-#A!# the net profit is increased i.e. in #A!# it is
increased by !.(.
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-rofitability ratio of company shows considerable increase.
"ompanyFs sales have increased in all # years B at the same time company
has been successful in controlling the expenses i.e. manufacturing B other
expenses.
It is a clear index of cost control, managerial efficiency B sales promotion.
'(. STOC? T-RNOVER RATIO:
COGS
Stoc6 T"rno1er Ratio 5
A1era%e stoc6
YEAR (;';-(;'' (;'' -(;'(
COGS (IG))G;( (4GJ(G(E
A1era%e stoc6 EGJ)G'' EGIHG);
Stoc6 T"rno1er Ratio 3.(; ).J)
COMMENTS:
/tock turnover ratio shows the relationship between the sales B
stock it means how stock is being turned over into sales.
he stock turnover ratio is #A!A-#A!! was (.#A times which indicate
that the stock is being turned into sales (.# times during the year. he
inventory cycle makes (.# round during the year. It helps to work out the
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stock holding period, it means the stock turnover ratio is (.# times then
the stock holding period is #.O months C!#'(.#S#.O monthsD. his
indicates that it takes #.O months for stock to be sold out after it is
produced.
For the last # years stock turnover ratio is lower than the standard
but it is in decreasing order. In the year #A!A-#A!! to #A!!-#A!# the stock
turnover ratio has improved from (.#A to %.3% times, it means with lower
inventory the company has achieved greater sales. hus, the stock of the
company is moving fast in the market.
'). RET-RN ON CA&ITAL EM&LOYE/:
N&AT
Ret"rn on ca!ital e$!loye+ 5 :';;
Ca!ital e$!loye+
YEAR (;';-(;'' (;'' -(;'(
N&AT 'GJ(GH3 (GJ4GJI
Ca!ital e$!loye+ 3;G)4G;J 3JGEEGH)
Ret"rn on ca!ital e$!loye+ 3.(I 4.JH
COMMENTS:
he return on capital employed shows the relationship between
profit B investment. Its purpose is to measure the overall profitability
from the total funds made available by the owner B lenders.
he return on capital employed of 7s.) indicate that net return of
7s.) is earned on a capital employed of 7s.!AA. this amount of 7s.) is
available to take care of interest, tax,B appropriation.
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he return on capital employed is show-increasing trend, i.e. from (.#N to
).3O. All of sudden in #A!A-#A!# the return on capital employed increased
from (.#N to ).3O. his indicates a very high profitability on each rupee of
investment B has a great scope to attract large amount of fresh fund.
'3. EARNING &ER S7ARE:
N&AT
Earnin% !er s0are 5
N"$*er o# e2"ity s0are

YEAR (;';-(;'' (;'' -(;'(
N&AT 'GJ(GH3G;;; (GJ4GJIG;;;
No. o# e2"ity s0are 4;G;;G;;; 4;G;;G;;;
Earnin% !er s0are ).3E 4.4(
COMMENTS:
@arning per share is calculated to find out overall profitability of the
company. @arning per share represents the earning of the company
whether or not dividends are declared.
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he @arning per share is ).)# means shareholder gets 7s. ).)# for each
share of 7s. !A'-. In other words the shareholder earned 7s. ).)# per
share.
he net profit after tax of the company is increasing in all years. herefore
the shareholders earning per share is increased continuously from #A!A-
#A!! to #A!!-#A!# by %.(* to A).)#. his shows it is continuous capital
appreciation per unit share by %.(* to A).)#.
'4. /IVI/EN/ &AYO-T RATIO:
/i1i+en+ !er s0are
/i1i+en+ &ay o"t ratio 5 : ';;
Earnin% !er s0are

YEAR (;';-(;'' (;'' -(;'(
/i1i+en+ !er s0are '.4; '.I;
Earnin% !er s0are ).3E 4.4(
/i1i+en+ !ayo"t ratio 3).)4 )(.E;
COMMENTS:
In the year #A!A-#A!! and #A!!-#A!# the ?ividend pay out ratio is (%.#)
and %#.*A respectively. In the year #A!A-#A!! the company has declared
the dividend (%.%) and the balance (*.*) is retained with them for the
expansion. 4owever the company has declared more dividends in the year
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#A!!-#A!# as the company has sufficient profit. In the year #A!# the
company has declared !.NA dividends per share hence the earning per
share has increased. From this one can say that the company is more
conservative for expansion.
'E. COST OF GOO/S SOL/:
COGS
Cost o# %oo+s sol+ Ratio 5 : ';;
Net sales
YEAR (;';-(;'' (;'' -(;'(
COGS (IG))G;( (4GJ(G(E
Net sales J)H;3J J3(;)'
Cost o# %oo+s sol+ ratio 3'.'H )J.JJ
COMMENTS:
his ratio shows the rate of consumption of raw material in the
process of production. In the year #A!A-#A!! the cost of goods sold ratio is
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(!.!OE so the gross profit is )N.N!E. it indicates that in #A!A-#A!!, the
(#E of raw material is consumed in the process of production.
?uring the last # years the rate of cost of goods sold ratio is
continuously decreasing however the gross profit B sales is increased
during the same period.

'J. CAS7 RATIO:
Cas0 8 Ban6 8 Mar6eta*le sec"rities
Cas0 ratio 5
Total c"rrent lia*ilities
YEAR (;';-(;'' (;'' -(;'(
Cas0 8 Ban6 8 Mar6eta*le sec"rities 3G3HGJ3 EG;3GE3
Total c"rrent lia*ilities ('G(IG'H ('G)EG;(
Cas0 ratio ;.(' ;.(I
COMMENTS:
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his ratio is called as super &uick ratio or absolute li&uidity ratio. In
the year #A!A-#A!! the cash ratio is A.#! B then it is increased to A.#N in
the year #A!!-#A!#.
his shows that the company has sufficient cash, bank balance, B
marketable securities to meet any contingency.
'I. RET-RN ON &RO&RIETORS F-N/:
N&AT
Ret"rn on !ro!rietors #"n+ 5 : ';;
&ro!rietors #"n+
YEAR (;';-(;'' (;'' -(;'(
N&AT 'GJ(GH3 (GJ4GJI
&ro!rietors #"n+ ((G3(G4H (3G'3GH'
Ret"rn on !ro!rietors #"n+ J.J' ''.3'
COMMENTS:
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7eturn on proprietors fund shows the relationship between profits B
investments by proprietors in the company. In the year #AA!A-#A!! the
return on proprietors fund is 3.3!E it means the net return of 7s. 3
approximately is earned on the each 7s. !AA of funds contributed by the
owners.
?uring the last # years the rate of return on proprietors fund is in
increasing order. he return on proprietors fund during the year #A!A-
#A!! to #A!!-#A!# is increased from 3.3! E to !!.(!E.
It shows that the company has a very large returns available to take
care of high dividends, large transfers to reserve etc. B has a great scope to
attract large amount of fresh fund from owners.
'H. RET-RN ON E,-ITY:
N&AT
Ret"rn on e2"ity s0are ca!ital 5 : ';;
No. o# e2"ity s0are
YEAR (;';-(;'' (;'' -(;'(
N&AT 'GJ(GH3 (GJ4GJI
No. o# e2"ity s0are 4;G;;; 4;G;;;
Ret"rn on e2"ity s0are ca!ital )3.4I 44
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COMMENTS:
his ratio shows the relationship between profit B e&uity
shareholders fund in the company. It is used by the present ' prospective
investor for deciding whether to purchase, keep or sell the e&uity shares.
In the year #A!A-#A!! the return on proprietors fund is %(.)NE,
which means the net return of 7s. %(, is earned on the each 7s.!AA of the
funds contributed by the e&uity shareholders.
he rate of return on e&uity share capital is increased from %(.)NE
to ))E during the year #A!A-#A!! to #A!!-#A!#. his shows that the
company has a very large returns available to take care of high e&uity
dividend, large transfers to reserve, B also company has a great scope to
attract large amount to fresh funds by issue of e&uity share B also
company has a very good price for e&uity shares in the =/@.
(;. O&ERATING &ROFIT RATIO:
O!eratin% !ro#it
O!eratin% !ro#it ratio 5 :';;
Net sales
COMMENTS:
+perating profit ratio shows the relationship between operating
profit B the sales. he operating profit is e&ual to gross profit minus all
operating expenses or sales less cost of goods sold and operating expenses.
he operating profit ratio of 3.!!E indicates that average operating
margin of 7s.3 is earned on sale of 7s. !AA. this amount of 7s. 3 is
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available for meeting non operating expenses. In the other words
operating profit ratio 3.!!E means that 3.!!E of net sales remains as
operating profit after meeting all operating expenses.
?uring the last # years the operating profit ratio is increased from
3.!!E to O.%NE. 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. hus,
company has a large margin is available to meet non-operating expenses
and earn net profit.
('. CRE/ITORS T-RNOVER RATIO:
Net cre+it !"rc0ase
Cre+it t"rno1er ratio 5
A1era%e cre+itors


Mont0s in a year
A1era%e a%e o# acco"nts !aya*le 5
Cre+it t"rno1er ratio
YEAR (;';-(;'' (;'' -(;'(
Net cre+it !"rc0ase (HG;IGE' (4G(HG;3
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A1era%e cre+itors EGHEGIE JGI;G)H
Cre+it t"rno1er ratio 3 ti$es ) ti$es
A1era%e a%e o# acco"nts !aya*le ) $ont0s 3 $ont0s
COMMENTS:
he creditors turnover ratio shows the relationship between the credit
purchase and average trade creditors. It shows the speed with which the
payments are made to the suppliers for the purchase made from them.
he credit turnover ratio of (, indicate that the creditors are being
turned over ( times during the year. It indicates the number of rounds
taken by the credit cycle of payables during the year.
here is no standard ratio in absolute term. he creditors ratio for
the year #A!!- #A!# is decreased by ( to % this means the company has
settled the creditors dues very fastly in the previous year.
((. /EBTORS T-RNOVER RATIO:
Cre+it sales
/e*tors t"rno1er ratio 5
A1era%e +e*tors
/ays in a year
/e*t collection !erio+ 5
/e*torLs t"rno1er
YEAR (;';-(;'' (;'' -(;'(
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Cre+it sales EJGIJG)E EHG;HGJI
A1era%e +e*tors 'HG4'G4E ()G;EGEJ
/e*tors t"rno1er ratio ).3 ti$es (.H ti$es
/e*t collection !erio+ ';J +ays '(4 +ays
COMMENTS:
his ratio measures the collectibility of debtors B other accounts
receivable, it means the rate at which the trade debts are being collected.
he ?ebtors turnover ratio of #.O indicates that the debtors are
being turned over #.O times during the year. It helps to workout the debt
collection period i.e. !#) days C%*)' #.O S !#)D. his indicates that it take
!#) days on an average for the debtors to be settled.
he ?ebtors turnover ratio is almost same during the year #A!A-
#A!! to #A!!-#A!#, which indicates that the debts are being collected at a
fast speed during the year. he operating cycle of the debtors is short.
$UMM!R# O& &IN!NI!" PO$ITION O& D!'!R $(O%
"IMIT%D
After going through the various ratios, I would like to state that,
!. he short-term solvency of the company is &uite satisfactory.
#. Immediate solvency position of the company is also &uite
satisfactory. he company can meet its urgent obligations immediately.
%. "redit policies are effective.
(. +ver all profitability position of the company is &uite
satisfactory.
). /tock turnover rate is satisfactory. /tock of the company is
moving fast in the market.
*. he company is paying promptly to the suppliers.
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3. he return on capital employed is satisfactory.
he management should take care of inventory management and speed up
the movement of stock. @ffective selling techni&ue or product
modification may be adopted to face the competitors and to improve the
financial position of the company by taking appropriate decisions.
ON"U$ION
he focus of financial analysis is on key figures contained in the
financial statements and the significant relationship that exits. he
reliability and significance attach to the ratios will largely on hinge upon
the &uality of data on which they are best. hey are as good for as bad as
the data it self.
Financial ratios are a useful by product of financial statement and
provide standardi5ed measures of firms financial position, profitability
and riskiness. It is an important and powerful tool in the hands of
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financial analyst. =y calculating one or other ratio or group of ratios he
can analy5e the performance of a firm from the different point of view.
he ratio analysis can help in understanding the li&uidity and short-
term solvency of the firm, particularly for the trade creditors and banks.
0ong-term solvency position as measured by different debt ratios can help
a debt investor or financial institutions to evaluate the degree of financial
risk. he operational efficiency of the firm in utili5ing its assets to
generate profits can be assessed on the basis of different turnover ratios.
he profitability of the firm can be analy5ed with the help of profitability
ratios.
4owever the ratio analyses suffers from different limitations also.
he ratios need not be taken for granted and accepted at face values.
hese ratios are numerous and there are wide spread variations in the
same measure. 7atios generally do the work of diagnosing a problem only
and failed to provide the solution to the problem.
)I)"IO*R!P(#
REFERENCE BOO?S D
'. FINANCIAL MANAGEMENT
heory, "oncepts B problems
7.-.7M/A2I
(. FINANCIAL MANAGEMENT
ext and problems
$.>. R4AH AH? -. R. LAIH
). MANAGEMENT ACCO-NTING
AIHA-M7@
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3. FINANCIAL MANAGEMENT
0.H. "4+-?@
?.H. "4+M?4A7I
/.0. "4+-?@

ANA-AL RE&ORTS OF /ABAR S7OE LIMITE/

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