PROJECT ENTITLED

ON
RATIO ANALYSIS OF JAY ENTERPRISES

INDEX

Chapter

Contents

Page
No.

Chapter 1
Chapter 2

Company Profile,
Research methodology,
Objectives of the study,
Scope Of The Study,
Type And Source Of Data,
Limitations,
Tools Of Analysis- Ratio
Analysis, Graphical Analysis

Chapter 3

Theoretical Background,

Chapter 4

Analysis and Interpretation,

Chapter 5

Findings, Suggestions and

Conclusion

EXECUTIVE SUMMARY
Project title: Financial Analysis
Company: Jay Enterprises.
Jay enterprise is an engineering firm established in 2007. It is into
manufacturing of precision auto components.

Financial analysis which is the topic of this project refers to an

assessment of the viability, stability and profitability of the business.
These financial reports are made with using the information taken from
financial statements of the firm and it is based on the significant tools of
ratio analysis and capital budgeting. These reports are usually presented
to top management as one of their basis in making crucial business
decisions.

During the summer training at Jay Enterprises, I had close connection

with preparation of financial ratios and capital budgeting which was made
with the help of professionals in the accounting team of the company.
This experience was an emphasis on the importance of these tools of
ratios and capital budgeting which could be the roots of decisions made
by management. In this project I have studied about what all financial
information is to be submitted to the Company so as to assure the
Companyer that the firm needs credit facility and has enough funds and
future projected profits to repay the borrowed amount after the stipulated
time.

So, I was influenced to allocate the aim of this project to study the details
about these ratios and tools of capital budgeting and their possible effects
on the decisions made by not only people inside the company but also the
outsiders such as investors.

Research framework:
This study is based on the data about Jay Enterprises, Pune MIDC for a
detailed study of its financial statements, documents and system ratios
and finally to recognize and determine the position of the company.

Types of data which helped to prepare this report:

1. First type is the primary data which was collected personally to be
used and studied to prepare and reach the objectives already
mentioned.
2. The secondary data which was already prepared so these data was
only used to reach the aims and objectives of this project. These
data has been collected from the financial reports of the company
already available. (Please refer annexure).

How the data was collected:

The sources of collecting the primary data was through interviews,
observation and questionnaire, however the secondary one was collected
from the financial statements already available.

CHAPTER 1
COMPANY PROFILE

CHAPTER 1
COMPANY PROFILE
Promoters and Company Profile
Name of Proprietor :

Mr. Jayesh Arjun Gaike

Name of unit

JAY Enterprises

Address

Plot no. A-73, Five Star Industrial Area, Pune

MIDC

Nature of business :

Manufacturing Precision Automobile

Components, Spare

Parts, Special Purpose

Tools, Engineering Job Works, Etc.

Education Qualification : B.E. (Mechanical), Pune

Competence of promoter : Proprietor has experience of more than 5 years

in the field of related activities and job work. He is also having good
relationship in industries.
Constitution

Proprietary concern

Registered office

Parth House, Plot No. 64,Vidya Nagar,

Pune, MIDC.

Experience of proprietor and technical feasibility of project:Rapidly advancing technology and pressure of social factors, added to
highly competitive and rapidly changing industrial environment, has
created a situation in which the success of an enterprise and possibly its

survival, depends to an increasing extent of the knowledge, skill and

experience of promoters, consequently any description of successful
management practice, particularly involving the application of specialized
techniques is useful and welcome.
The proprietor is technically qualified i.e. bachelor of Engineering in
Mechanical. The proprietor has passed B.E. in 2000 from Dr. Babasaheb
Ambedkar Marathwada, University. Thereafter proprietor worked with
Shamraj Engineering Works, as design engineer for 5 years. His father
Arjun Gaike is in this business from last 25 years and the business is
running in profits with good reputation in market. Proprietor has the
required experience to sustain in the cut throat market and well in touch
with the market trends which will beneficial for the growth and
prosperity.
JAY Enterprises is an engineering company established its business in
2007 and the firm is employing in all 15 employees. Out of which 10 are
skilled workers, 5 are unskilled worker, 2 are supervisors, 1 is an
accountant and 1 is staff manager. The following activities are carried out
by the firm: manufacturing automobile components, spare pats, special
purpose tools/machinery, engineering job work, etc. the firm is upgrading
technology for which it wants the finance in form of term loan for fixed
assets and cash credit for its working capital.

The expected growth in the production after purchase and installation will
be as follows:
ITEM

MONTHLY QTY.

Pin cum follower

12000

Governor bell

6000

Rocker fulcrum-038

7200

Rocker fulcrum-026

7200

Flange lube oil filter

7200

Starter plate

6000

CHAPTER 2
RESEARCH
METHODOLOGY

CHAPTER 2
RESEARCH METHODOLOGY

OBJECTIVES OF THE STUDY:

1. To study the steps involved in project formulation for analysis.
2. The second objective, however the most important one or in other
word the principle aim of this project is the understanding and
assessment of financial ratios based on the statements of the
company.
3. Through profitability ratios understand the profitability position of
the firm.
4. To find out the utility of financial ratio in credit analysis and
determining the Internal Rate of Return, Payback Period, Net
Present Value and financial capability of the firm.
5. The aim of the project is to recognize the position of the company
through ratios and data available. This recognition is a leading
factor in changes of each and every company and the base and root
of lots of management decisions.

SCOPE OF STUDY IS LIMITED TO THE 5 FINANCIAL YEARS

I.E.
1. 2008-2009 and
2. 2009-2010,
3. 2010-2011,
4. 2011-2012,
5. 2012-2013.

TYPE AND SOURCE OF DATA,

Sources of data:
Two types of data
1. Primary
2. Secondary
Primary data:
In primary data collection, the information and data has been collected
through questions raised to the Company personnel during the visit
followed by asking question from the Company staff regarding procedure
for giving business loan and enhancing knowledge about the repayment
procedure
Secondary data:
Secondary data is taken by the researcher from secondary source internal
and external the researcher must thoroughly search secondary data
sources before commissioning any effort for collecting primary data
Internal data from within the organisation
External data from outside the organisation

The secondary data were collected from the brochure of the Company, the
boards with the information displayed in the Company premises and,
from the Company we

LIMITATIONS OF THE STUDY

1. Data used is acquired from secondary resources; hence has certain
limitations.
2. Confidential data is not provided and allowed to use.
3. Time constraint- time duration given is limited. So, detailed
analysis is not possible.
4. Financial data shows position of the company on a particular date
only.

TOOLS OF ANALYSIS- RATIO ANALYSIS, GRAPHICAL

ANALYSIS

Financial statement analysis:

Financial analysis could be processed in many different ways, depending
on what we want to achieve. Financial analysis can be used as just a
monitoring tooling the selection of stocks in the secondary market. Or it
can be used as a forecasting tool for future financial conditions and
results. It may be used for evaluation and diagnosis of managerial,
operating or other problem areas.
Furthermore, financial analysis is a great and accurate base to rely which
reduces the guessing and uncertainty that presents in all decision making
situations. Financial analysis does not lessen the need for judgment but
rather establishes a sound and systematic basis for its rational application.
Who uses these analyses:
Financial statements are used and analyzed by a different group of
parties, these groups consists of people both inside and outside a
business. Generally, these users are:
A. Internal Users: are owners, managers, employees and other parties
who are directly connected with a company:

1.Owners and managers require financial statements to make important

business decisions that affect its continued operations. Financial analysis
is then performed on these statements to provide management with more
detailed information. These statements are also used as part of
management's report to its stockholders, and it form part of the Annual
Report of the company.

2. Employees also need these reports in making collective bargaining

agreements with the management, in the case of labor unions or for
individuals in discussing their compensation, promotion and rankings.

B. External Users: are potential investors, Company, government

agencies and other parties who are outside the business but need financial
information about the business for numbers of reasons.

1. Prospective investors make use of financial statements to assess the

viability of investing in a business. Financial analyses are often used by
investors and is prepared by professionals (financial analysts), thus
providing them with the basis in making investment decisions.

2. Financial institutions (Company and other lending companies) use

them to decide whether to give a company with fresh loans or extend debt
securities (such as a long-term Company loan).

3. Government entities (tax authorities) need financial statements to

ascertain the propriety and accuracy of taxes and duties paid by a
company.

4. Media and the general public are also interested in financial statements
of some companies for a variety of reasons.

Financial Ratio analysis

Ratio analysis is such a significant technique for financial analysis. It
indicates relation of two mathematical expressions and the relationship
between two or more things.

Financial ratio is a ratio of selected values on an enterprise's financial

statement. There are many standard ratios used to evaluate the overall
financial condition of a corporation or other organization. Financial ratios
are used by managers within a firm, by current and potential stockholders
of a firm, and by a firms creditor. Financial analysts use financial ratios
to compare the strengths and weaknesses in various companies.

Values used in calculating financial ratios are taken from balance sheet,
income statement and the cash flow of company, besides Ratios are
always expressed as a decimal values, such as 0.10, or the equivalent
percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business
is, if it has enough money to pay debts and we can even tell whether its
shareholders could be happy or not.

Financial ratios allow for comparisons:

1. between companies
2. between industries
3. between different time periods for one company
4. between a single company and its industry average

To evaluate the performance of one firm, its current ratios will be

compared with its past ratios. When financial ratios over a period of time
are compared, it is called time series or trend analysis. It gives an
indication of changes and reflects whether the firms financial
performance has improved or deteriorated or remained the same over that
period of time. It is not the changes that has to be determined, but more
importantly it must be recognized that why those ratios have changed.
Because those changes might be result of changes in the accounting
polices without material change in the firms performances.
Another method is to compare ratios of one firm with another firm in the
same industry at the same point in time. This comparison is known as the
cross sectional analysis. It might be more useful to select some
competitors which have similar operations and compare their ratios with
the firms. This comparison shows the relative financial position and
performance of the firm. Since it is so easy to find the financial
statements of similar firms through publications or medias this type of
analysis can be performed so easily.

To determine the financial condition and performance of a firm, its ratios

may be compared with average ratios of the industry to which the firm
belongs. This method is known as the industry analysis that helps to
ascertain the financial standing and capability of the firm in the industry
to which it belongs.

Industry ratios are important standards in view of the fact that each
industry has its own characteristics, which influence the financial and
operating relationships. But there are certain practical difficulties for this
method. First finding average ratios for the industries is such a headache
and difficult. Second, industries include companies of weak and strong so
the averages include them also. Sometimes spread may be so wide that
the average may be little utility. Third, the average may be meaningless
and the comparison not possible if the firms with in the same industry
widely differ in their accounting policies and practices.
What does ratio analysis tell us?
After such a discussion and mentioning that these ratios are one of the
most important tools that is used in finance and that almost every
business does and calculate these ratios, it is logical to express that how
come these calculations are of no importance.

What are the points that those ratios put light on them? And how can
these numbers help us in performing the task of management?

The answer to these questions is: We can use ratio analysis to tell us
whether the business
1.
2.
3.
4.
5.
6.
7.

is profitable
has enough money to pay its bills and debts
could be paying its employees higher wages, remuneration or so on
is able to pay its taxes
is using its assets efficiently or not
has a gearing problem or everything is fine
is a candidate for being bought by another company or investor and
more.

But as it is obvious there are many different aspects that these ratios can
demonstrate. So for using them first we have to decide what we want to
know, then we can decide which ratios we need and then we must begin
to calculate them.
Which Ratio for whom:
As before mentioned there are varieties of people interested to know and
read these information and analyses, however different people for
different needs. And it is because each of these groups has different type
of questions that could be answered by a specific number and ratio.

Therefore we can say there are different ratios for different groups, these
groups with the ratio that suits them is listed below:
1. Investors: these are people who already have shares in the business
or they are willing to be part of it. So they need to determine
whether they should buy shares in the business, hold on to the
shares they already have or sell the shares they already own. They

also want to assess the ability of the business to pay dividends. As

a result the Return on Capital Employed Ratio is the one for this
group.
2. Lenders: This group consists of people who have given loans to the
company so they want to be sure that their loans and also the
interests will be paid and on the due time. Gearing Ratios will suit
this group.
3. Managers: managers might need segmental and total information
to see how they fit into the overall picture of the company which
they are ruling. And Profitability Ratios can show them what they
need to know.
4. Employees: the employees are always concerned about the ability
of the business to provide remuneration, retirement benefits and
employment opportunities for them, therefore these information
must be find out from the stability and profitability of their
employers who are responsible to provide the employees their
need. Return on Capital Employed Ratio is the measurement that
can help them.
5. Suppliers and other trade creditors: businesses supplying goods
and materials to other businesses will definitely read their accounts
to see that they don't have problems, after all, any supplier wants to
know if his customers are going to pay them back and they will
study the Liquidity Ratio of the companies.
6. Customers: are interested to know the Profitability Ratio of the
business with which they are going to have a long term
involvement and are dependent on the continuance of presence of
that.
7. Governments and their agencies: are concerned with the
allocation of resources and, the activities of businesses. To regulate
the activities of them, determine taxation policies and as the basis

for national income and similar statistics, they calculate the

Profitability Ratio of businesses.
8. Local community: Financial statements may assist the public by
providing information about the trends and recent developments in
the prosperity of the business and the range of its activities as they
affect their area so they are interested in lots of ratios.
9. Financial analysts: they need to know various matters, for
example, the accounting concepts employed for inventories,
depreciation, bad debts and so on. Therefore they are interested in
possibly all the ratios.
10.Researchers: researchers' demands cover a very wide range of
lines of enquiry ranging from detailed statistical analysis of the
income statement and balance sheet data extending over many
years to the qualitative analysis of the wording of the statements
depending on their nature of research.

Classification of Ratios:
A financial ratio can give a financial analyst an excellent picture of a
company's situation and the trends that are developing. A ratio gains
utility by comparison to other data and standards.

Financial ratios quantify many aspects of a business and are an integral

part of financial statement analysis. Financial ratios are categorized
according to the financial aspect of the business which the ratio measures.
Although these categories are not fixed in all over the world however
there are almost the same, just with different names:

1. Profitability ratios which use margin analysis and show the return
on sales and capital employed.
2. Rate of Return Ratio (ROR) or Overall Profitability Ratio: The
rate of return ratios are thought to be the most important ratios by
some accountants and analysts. One reason why the rates of return
ratios are so important is that they are the ratios that we use to tell
if the managing director is doing their job properly.
3. Liquidity ratios measure the availability of cash to pay debt,
which give a picture of a company's short term financial situation.
4. Solvency or Gearing ratios measures the percentage of capital
employed that is financed by debt and long term finance. The
higher the gearing, the higher the dependence on borrowing and
long term financing. The lower the gearing ratio, the higher the
dependence on equity financing. Traditionally, the higher the level
of gearing, the higher the level of financial risk due to the increase
volatility of profits. It should be noted that the term Leverage is
used in some texts.
5. Turn over Ratios: or activity group ratios indicate efficiency of
organization to various kinds of assets by converting them to the
form of sales.
6. Investors ratios usually interested by investors.

Liquidity Ratios:

The two liquidity ratios, the current ratio and the acid test ratio, are the
most important ratios in almost the whole of ratio analysis and also the
simplest to use.

Liquidity ratios provide information about a firms ability to meet its

short- term financial obligations. They are particular interest to those
extending short term credit to the firm. Two frequently-used liquidity
ratios are current and quick ratio.

While liquidity ratios are most helpful for short-term creditors/suppliers

and Companies, they are also important to financial managers who must
meet obligations to suppliers of credit and various government agencies.
A company's ability to turn short-term assets into cash to cover debts is of
the utmost importance when creditors are seeking payment. Company
analysts and mortgage originators frequently use the liquidity ratios to
determine whether a company will be able to continue as a going
concern. A complete liquidity ratio analysis can help uncover weaknesses
in the financial position of the business. Generally, the higher the value of
the ratio, the larger the margin of safety that the company possesses to
cover short-term debts.

CHAPTER 3
THEORETICAL
BACKGROUND

CHAPTER 3
THEORETICAL BACKGROUND

Financial statements
Definition:
Financial statements (or financial reports) are formal records of a
business' financial activities. These statements provide an overview of a
business' profitability and financial condition in both short and long term.

There are three basic financial statements:

Balance sheet: also referred to as statement of financial position. It is a
statement of the book value of all of the assets and liabilities (including
equity) of a business at a particular date. A balance sheet is often
described as a "snapshot" of the company's financial condition on a given
date.
Income statement also called a Profit and Loss Statement (P&L), is a
financial statement that reports a company's results of operations over a
period of time for companies that indicates how revenue (money received
from the sale of products and services before expenses are taken out) is
transformed into net income (the result after all revenues and expenses
have been accounted for).The purpose of the income statement is to show
managers and investors whether the company made or lost money during
the period being reported.

Cash Flow statement: is a statement, which measures inflows and

outflows of cash on account of any type of business activity. The cash
flow statement also explain reasons for such inflows and outflows of cash
so it is a report on a company's cash flow activities, particularly its
operating, investing and financing activities.
Objective of the statements:
The objective of financial statements is to provide information
about the financial strength,
The objective of performance and changes in financial position of a
company
The objective of company which is useful for a wide range of users
in making economic decisions.

CHAPTER 4
ANALYSIS AND
INTERPRETATION

CHAPTER 4
ANALYSIS AND INTERPRETATION

Current ratio:
This ratio measures the solvency of the company in the short term.
Current assets are those assets, which can be converted in to cash within a
year. Current liabilities and provision are those liabilities that are payable
within a year. A current ratio2:1 indicates a highly solvent position.
Company consider a current ratio 1.33:1 as the minimum acceptable level
for providing working capital finance. The constituents of the current
assets are as important as the current assets themselves for evaluation of a
company solvency position.
Current asset
Current ratio =

__________________
Current liability

current ratio
2.50
2.00

current ratio

1.50
1.00
0.50
-

Interpretation:
A current ratio 2:1 indicates a highly solvent position. Company consider
a current ratio 1.33:1 as the minimum acceptable level for providing
working capital finance. It is high in year 2010-2011 therefore it is more
capable of paying its obligations. Thereafter it is low as comparatively
but under acceptable norms. CL is more in the year 2011-2012 which
shows a low ratio of 2.30 corresponding to the current assets in that year.

Quick liquid ratio:

The essence of this ratio is a test that indicates whether a firm has enough
short-term assets to cover its immediate liabilities without selling
inventory. So it is the backing available to liabilities that must be paid
almost immediately.

There are two terms of liquid asset and liquid liabilities in this formula,
Liquid asset is all current assets except the inventories and prepaid
expenses, because prepaid expenses cannot be converted to cash. The
liquid liabilities include all current liabilities except Company overdraft
and cash credit since they are not required to be paid off immediately.

Current assets, loans and advances inventories

Quick liquid ratio = ______________________________________
Current liabilities and provisions BOD

quick liquid ratio

1.40
1.20
1.00

quick liquid ratio

0.80
0.60
0.40
0.20
-

Interpretation:
A quick liquid ratio of 1:1 indicates highly solvent position. This ratio
serves as a supplement to the current ratio in analyzing liquidity. It is 1.13
(average) in our case. In the year 2010-2011 it is high which interprets
that the CA of the firm is fast moving.

Leverage ratios:
The long-term financial stability of the firm may be considered upon its
ability to meet all its liabilities, including those not currently payable. The
ratios which are important in measuring the long term solvency ratio are
as follows:Debt-equity ratio:
Capital is derived from two sources shares and loans. It is quite likely for
only shares to be issued when the company is formed but loans are
invariably raised at some later date. There are numerous reasons for
issuing loan capital.

Long term debt

Debt-equity ratio = ________________
Shareholders funds

The ratio indicates the relationship between loan funds and net worth of
the company, which is known as gearing. If the proportion of debt to
equity is low, a company is said to be low geared, and vice versa. A debt
equity ratio of 2:1 is the norm accepted by financial institutions for
financing of projects. Higher debt- equity ratio may be permitted for
highly capital intensive industries like petrochemicals, fertilizers, powers
etc. the higher the gearing, the more volatile the return to the
shareholders. A debt equity ratio, which shows a declines trend over the
years, is usually taken as a positive sign reflecting on increased cash

accrual and debt and debt repayment in act, one of the indicatory a unit
turning sick is a risky debt equity ratio.
Usually when calculating ratio, the preference share capital is excluded
from debt, but if the ratio is show effect of use of fixed interest sources on
earnings available to the shareholders then it is to be included. On the
other hand, if the ratio is to examine financial solvency then preference
shares shall form part of the capital.

debt-eqity ratio
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-

debt-eqity ratio

Interpretation:
In case of our organization there is improvement in D/E ratio year by
year. A debt-equity ratio, which shows a decline trend over the years, is
usually taken as positive sign reflecting on increased cash accrual and
debt and debt repayment in act. It is more in year 2008-2009 which
interprets the firm mostly rely on more debt may be for gross-operative
expenses.

Proprietary ratio:
It indicates the relationship between owners fund and total assets. And
shows the extent to which the owners fund are sunk in assets or different
kinds of it.
Shareholders net worth
Proprietary ratio = _______________________
Total assets

proprietary ratio
0.70
0.60
0.50
0.40
0.30
0.20
0.10
-

proprietary ratio

Interpretation:
The proprietary ratio is increasing year by year. It denotes that the
proprietors have provided the funds to purchase the assets of the concern
instead of relying on other sources of funds like Company borrowings,
trade creditors and others. It also indicates why the debt is decreasing
year by year.

Interest Coverage ratio:

This ratio measures the debt servicing capacity of a firm insofar as fixed
interest on long-term loan is concerned. It is determined by dividing the
EBIT by the fixed interest charges on loans. Thus,
EBIT
Interest coverage ratio = _______________________
Interest
This ratio indicates the extent to which a fall in EBIT is tolerable in that
the ability of the firm to service its interest payment would not be
adversely affected.

Interest coverage ratio

9
8
7
6

Interest coverage ratio

5
4
3
2
1
0

Interpretation:
Interest coverage of 8.54 times would imply that even if the firms EBIT
were to decline

to 8.54 of the present level, the operating profits

available for servicing the interest on loan would still be equivalent to the
claims of the lenders.

Debt service coverage ratio:

This ratio is the key indicator to the lender to assess the extent of ability
of the borrower to service the loan in regard to timely payment of interest
and repayment of loan instalment. It indicates whether the business is
earning sufficient profits to pay not only the interest charges, but also the
instalments due of the principal amount. The ratio is calculated as
follows:
Profit after taxes + Depreciation + Interest on loan
DSCR =

_________________________________________
Interest on loan + loan repayment in a year

A ratio of two is considered satisfactory by the financial institutions. The

greater DSCR indicates the better debt servicing capacity of the
organization. By means of cash flow projection, the borrower should
work DSCR for the entire duration of the loan. This will enable the lender
to take correct view of the borrowers repayments capacity.

DSCR
2.50
2.00
1.50

DSCR

1.00
0.50
-

Interpretation:
It is high in the first year of the concern, which is acceptable norm,
therefore it can service the debt sufficiently in this year. Servicing debt is
more in first year as also shown by debt-equity ratio therefore the ratio is
high in this year.

Asset management ratio:

Asset management ratios measure how effectively the firm employs its
resources. These ratios are also called activity or turnover ratios which
involves comparison between the level of sales and investment in various
accounts inventories, debtors, fixed assets, etc.
Asset management ratios are used to measure the speed with which
various accounts are converted into sales or cash. The following asset
management ratios are calculated for analysis.

Inventory turnover ratio:

Inventory turnover ratio measures how many times the companies
inventory has been sold. A considerable amount of a company capital
may be tied up in the financing of raw materials, work-in-progress and
finished goods. It is important to ensure that the level of stock is kept as
low as possible, consistent with the need to fulfil customers order in time.
The formula of ratio is;
Sales
Inventory turnover ratio = ____________________________
Average inventory

Inv.turn. Ratio
14.00
13.50
13.00
12.50

Inv.turn. Ratio

12.00
11.50
11.00
10.50
10.00

Interpretation:
The ratio in year 2008-2009 is low corresponding to other years which
show excessive inventory utilization than required. It declines in years
2011-2012 to 2012-2013 may be due to the stack up of inventory.

Average consumption period:

Average consumption period is obtained by dividing average inventory
by sales.
Average inventory X 365
Average consumption period =__________________________
Sales

Avg. cons. Ratio

33.00
32.00
31.00
30.00
29.00
28.00
27.00
26.00
25.00
24.00

Avg. cons. Ratio

Interpretation:
The average consumption period is 29 days a year which is acceptable by
the norms of firm.

Debtors turnover ratio:

Debtor turnover, which measures whether the amount of resources tied up
in debtors, is reasonable and whether the company has been efficient in
converting debtors into cash. The formula is;
Credit sales
Debtors turnover ratio = _____________________
Average debtors
The higher the ratio, the better the position.

Debt. Turn. Ratio

16.50
16.00
15.50
15.00
14.50
14.00
13.50
13.00

Debt. Turn. Ratio

Interpretation:
The ratio is more in the year 2009-2010 compared to other years which
indicates the collection period is low for this fiscal. Also the credit sales
is more corresponding to increase in debtors which illustrates a high ratio.

Debtors collection period:

Debtor s collection period, which measures how long it take to collect
amount from debtors. The actual collection period can be compared with
the stated credit terms of the company. If it is longer than those terms,
then this indicates some insufficiency in the procedure for collecting
debts.
Average debtors X 365
Debtors collection period = ______________________
Credit sales

Debt. Coll.period
26.00
25.00
24.00
23.00
22.00
21.00
20.00

Debt. Coll.period

Interpretation:
The average of debtors collection period is 23.82 which are lower than
the stated credit terms of the firm which is good for the firm. The
collection period is low in year 2009-2010 corresponding to other years
but debtors turnover ratio is high for this year which shows relaxation in
credit terms by the firm.

Creditors turnover ratio:

The term creditors include trade creditors and bills payable.
Credit purchases
Creditors turnover ratio = ____________________________
Average creditors

Cred.turn. Ratio
18.00
17.50
17.00
16.50
16.00
15.50
15.00

Cred.turn. Ratio

Interpretation:
A high turnover ratio indicates that payment to the creditors is quite
prompt but it also implies the full advantage of credit allowed by
creditors is not taken. A low ratio indicates that payment to creditors is
not quite prompt and it needs to be improved. In year 2010-2011 the ratio
is high which interprets that the accounts are settled rapidly.

Creditors payment period:

The measurement of the creditor turnover period shows the average time
taken to pay for goods and services purchased by the company. In general
the longer the credit period achieved the better, because delays in
payment mean that the operations of the company are being financed
interest free by suppliers of materials. If too long a period is taken to pay
creditors, the credit rating of the company may suffer.

Average creditors X 365

Creditors payment period = _________________________________
Credit purchases

Cred. Pay. Period

23.00
22.50
22.00

Cred. Pay. Period

21.50
21.00
20.50
20.00
19.50

Interpretation:
The creditors payment period is decreasing for the years 2008-2011
which is good for the firms credit rating. Thereafter it is increasing but in
accordance with acceptable norms.

Fixed asset turnover ratio:

This ratio will be analyzed further with ratios for each main category of
assets. This is a difficult set of ratios to interpret as asset values are based
on historic cost. An increase in the fixed figure may result from the
replacement of an asset at increased price or the purchase of an additional
asset intended to increases production capacity. The ratio of the
accumulated depreciation provision to the total of fixed asset at cost
might be used as an indicator of the average age of the assets; particularly
when depreciation rates are noted in the accounts.
Sales
Fixed asset turnover ratio = ______________________
Fixed asset

FA turn. Ratio
6.00
5.00
4.00

FA turn. Ratio

3.00
2.00
1.00
-

Interpretation:
A high fixed asset ratio indicates the capability of the firm to earn
maximum sales with the minimum investing in fixed assets. So it shows
that the firm is using its assets more efficiently. There is scope for further
investments in fixed assets after 2010-2011.

Total assets turnover ratio:

This ratio indicates the number of times total assets are being turned over
in a year. The higher the ratio indicates overtrading of total assets, while a
low ratio indicates idle capacity.
Sales
Total assets turnover ratio = ______________________
Total assets

TA turn. Ratio
2.50
2.00
1.50

TA turn. Ratio

1.00
0.50
-

Interpretation:
The ratio has increasing trend over the five year period which illustrates
that the firm is utilizing its total assets carefully year by year. The ratio in
year 2008-2009 to 2010-2011 shows the assets are at idle capacity and
can be utilized further.

Working capital turnover ratio:

This ratio indicates the extent of working capital turned over in achieving
sales of the firm. As its name suggests it is the relationship between
turnover and working capital. It is a measurement comparing the
depletion of working capital to the generation of sales over a given
period. This provides some useful information as to how effectively a
company is using its working capital to generate sales.

A company uses working capital to fund operations and purchase

inventory. These operations and inventory are then converted into sales
revenue for the company. 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.
Sales
Working capital turnover ratio = __________________________
Working capital

WC turn. Ratio
6.10
6.05
6.00
5.95
5.90
5.85
5.80
5.75
5.70
5.65
5.60

WC turn. Ratio

Interpretation:
The firm has increasing trend which is better because it means that the
firm is generating a lot of sales compared to the money it uses to fund the
sales. A firm uses WC to purchase inventory and convert inventory into
sales. As the inventory turnover is low in year 2008-2009 the WC is
underutilized.

Capital employed turnover ratio:

This ratio indicates efficiency in utilization of capital employed in
generating revenue.
The capital employed turnover ratio tells us the state of the relationship
between the shareholders' investment in the business and the sales that the
management of the business has been able to generate from it.
Sales
Capital employed turnover ratio = ___________________________
Capital employed

Cap. Emp turn. Ratio

3.50
3.00
2.50

Cap. Emp turn. Ratio

2.00
1.50
1.00
0.50
-

Interpretation:
The capital employed turnover ratio increases from 2008-2009 to 20102011 due to the decrease in capital employed. It means that the firm is
utilizing its capital wholly. The ratio is showing increasing trend in the
years thereafter also, because the sales are increasing in accordance with
capital employed.

Profitability ratios:
As the name itself suggests, this ratio is calculated to determine
profitability of the firm. The basic objective of almost every business is to
earn profit which is essential for survival of the business.

A business needs profits not only for its existence but also for its
expansion and diversification. The investors want inadequate return on
their investments, workers want higher wages, creditors want higher
security for interest and loan and the list could continue.

It is a class of financial metrics that are used to assess a business's ability

to generate earnings as compared to its expenses and other relevant costs
incurred during a specific period of time. For most of these ratios, having
a higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well.

Gross profit ratio:

The gross profit margin ratio tells us the profit a business makes on its
cost of sales. It is a very simple idea and it tells us how much gross profit
our business is earning.

Gross profit is the profit we earn before we take off any administration
costs, selling costs and so on. So we should have a much higher gross
profit margin than net profit margin.
High ratios are favourable in this, since it indicates the business is earning
a good return on the sale of its merchandise.
Gross profit X 100
Gross profit ratio = _______________________________________
Sales

GP ratio
20.30
20.20
20.10
20.00

GP ratio

19.90
19.80
19.70
19.60
19.50

Interpretation:
The average of gross profit margin is 19.91 which are good for the firm
for further growth. A high gross profit shows good management. The
trend shows that COGS is increasing year by year. It may also indicate
higher sales price without corresponding increase in COGS. It also
indicates unsatisfactory basis of valuation of stock.

Net profit margin ratio:

The ratio is designed to focus attention on the profit margin arising from
business operations before interest and tax is deducted. The convention is
to express profit after tax and interest as a percentage of sales.
This ratio reflects net profit margin on the total sales after deducting all
expenses but before deducting interest and taxation. This ratio measures
the efficiency of operation of the company. The net profit is arrived at
from gross profit after deducting administration, selling and distribution
expenses. The non operating incomes and expenses are ignored in
computation of net profit before tax, depreciation and interest.

Net profit before interest and tax X 100

Net profit margin ratio = __________________________
Sales

NP ratio
16.00
14.00
12.00
10.00

NP ratio

8.00
6.00
4.00
2.00
-

Interpretation:
There is substantial decline in administration, selling and distribution
expenses due to which there is low GP and high EBIT in year 2008-2009
to 2009-2010.

Cash profit ratio:

Cash profit ratio measures the cash generation in the business as a result
of the operations expressed in the terms of sales. The cash profit ratio is a
more reliable indicator of performance where there are sharp fluctuations
in the profit before tax and net profit from year to year owing to
difference in depreciation charged. Cash profit ratio evaluates the
efficiency of operations in terms of cash generation and is not affected by
the method of depreciation charged.
Cash profit
Cash profit ratio = _________________________________ x 100
Sales

Cash profit = net profit + depreciation.

cash profit ratio

14.00
12.00
10.00

cash profit ratio

8.00
6.00
4.00
2.00
-

Interpretation:
The cash profit ratio shows increasing trend over the span of five years
which illustrates that the cash generation of the firm is efficient for
further operations of the firm. It also illustrates the firm is using the
depreciation charge efficiently and effectively. A result of increasing trend
may be also the reason behind the increase in DSCR.

Return on capital employed:

The strategic aim of business enterprises is to earn a return on capital. If
any particular case, the return in the long run is not satisfactory, then the
deficiency should be corrected or the activity be abandoned for a more
favorable one. The rate of return on investment is determined by dividing
net profit or income by the capital employed or investment made to
achieve that profit.
ROCE consists of two components i.e. I) Profit margin. II) Investment
turnover.
It will be seen from the following formula that ROCE can be improved
by increasing one or both of its components i.e. the profit margin and the
investment turnover in any of the following ways:
Increasing the profit margin
Increasing the investment turnover
Increasing both profit margin and investment turnover.

Return on investment analyses provides a strong incentive for optimal

utilization of the assets of the company. This encourages managers to
obtain assets that will provide a satisfactory return on investment.
Net profit X 100
ROCE = ______________________
Capital employed

Ret. On cap. Emp

30.00
25.00
20.00

Ret. On cap. Emp

15.00
10.00
5.00
(5.00)

Interpretation:
The increasing trend of this ratio shows that the firm is providing a strong
incentive for optimal utilization of the assets. It also indicates that the
profit margin and investment turnover are increasing. It is commonly
used as a measure for comparing the performance between business and
for assessing whether a business generates enough returns to pay for its
cost of capital. The first year shows loss, it seems to have failed to
maintain the earning rate on the funds employed.

Return on assets:
The profitability of the firm is measured by establishing relation of net
profit with the total assets of the organization. This ratio indicates the
efficiency of utilization of assets in generating revenue.
Net profit after tax X 100
Return on assets = _______________________________
Total assets

Ret. On assets
20.00
15.00
10.00
5.00
(5.00)

Ret. On assets

Interpretation:
The ratio is showing increasing trend over the period of five years which
shows that the firm is utilizing its resources efficiently. There is scope for
expansion after year 2011-2012.
Sr.no. Ratios

Years
08-09

09-10 10-11 11-12 12-13

Current ratio

1.88

2.10

2.39

2.30

2.32

Quick liq. Ratio

1.05

1.12

1.28

1.09

1.02

Debt-equity ratio

3.04

1.81

0.86

0.31

0.00

Proprietary ratio

0.20

0.25

0.37

0.53

0.70

Interest cov. Ratio

2.20

2.74

3.67

5.11

8.54

DSCR

2.20

1.21

1.35

1.43

1.55

Inventory turn. Ratio

11.39

13.54

13.45

13.10

13.09

Avg. consume. Period

32.03

26.96

27.14

27.86

27.89

Debt turn. Ratio

14.40

16.35

15.66

15.20

15.14

10

Debts collect. Period

25.35

22.32

23.31

24.01

24.11

11

Credit. turn. Ratio

16.18

17.11

17.55

16.98

17.00

12

Credit. paym. Period

22.56

21.34

20.79

21.49

21.47

13

FA turn. Ratio

2.15

3.41

4.81

4.87

5.04

14

Total ass. turn. Ratio

1.30

1.60

1.89

2.05

2.17

15

WC turn. Ratio

5.77

6.01

6.04

6.06

6.07

16

Cap. emp. turn. Ratio

1.61

2.27

2.73

2.95

3.10

17

GP margin ratio

20.30

19.83

19.82

19.79

19.79

18

NP margin ratio

8.19

11.70

13.63

14.66

14.54

19

Cash profit ratio

9.69

10.05

10.72

11.29

12.14

20

Return on cap. emp.

(0.33) 8.97

17.94

24.17

27.66

21

Return on assets

(0.26) 6.31

12.44

16.77

19.32

CHAPTER 5
FINDINGS, SUGGESTIONS
AND CONCLUSION

CHAPTER 5
FINDINGS, SUGGESTIONS AND CONCLUSION

FINDINGS
1. Debt-equity ratio is marked by an increasing trend. The margin of
safety to the Company seems to be adequate.
2. Debt service coverage ratio is more in year 2008-2009 which is
affecting profitability of the firm.
3. Sales are more in year 2008-2009 compared to other years,
therefore it should be properly utilized (from Inventory turnover
ratio). Also investment in inventory in year 2009-2010 and year
2010-2011 shows that the firm is replenishing its stock in too many
small sizes.
4. The total assets turnover ratio for year 2008-2009 to year 20102011 shows the assets can be utilized more in these years. But as
this is new firm it is acceptable.
5. From gross profit margin ratio we can say that the valuation of
stock (closing or opening) is not efficient.
6. In year 2011-2012 and 2012-2013 the administration, selling and
distribution expenses are likely to be more as compared to other
years due to which the gross profit margin declines in those years.
Therefore it should be lowered as possible.

SUGGESTIONS

1. From proprietary ratio we can suggest that the firm should rely on
debt and own funds proportionately.
2. From debtors collection period we can suggest that in first year
2008-2009 the collection period should be lowered and should
maintain low turnover ratio.
3. Payment period is high in year 2008-2009 which can be lowered to
avail the benefits of delay.
4. Under-utilization of working capital is being done in year 20082009 which should be efficient.

CONCLUSION:
After completing this project titled Financial analysis it can be
concluded that:-

The business environment of the company is really good. The

companys track record is oriented towards profitable growth and
with strong fundamentals.
There is ability of the enterprise to generate cash and cash
equivalent in the future.
The average performance of the company is acceptable with the
industry standards.
As the ratios are in accordance with the industry standard, the
Company should appraise the creditworthiness of the firm.
It gives information about the economic resources controlled by the
enterprise.

CHAPTER 6
BIBLIOGRAPHY

CHAPTER 6
BIBLIOGRAPHY

Bibliography:

Financial Management, N.M. Vechalekar.

Financial Management, Ravi M. Kishore.