Ratio Analysis Naresh 2

INTRODUCTION
Financial management is that managerial activity which is concerned with

planning and controlling of the firms financial resources. The subject of finance
management is of immense interest to both academicians and practicing managers.
Finance management provides them with conceptual and analytical insights to make
those decisions skillfully.
Meaning of financial management:

From the various definitions of the term business finance given above, it can
be concluded that the term business finance mainly involves, raising of funds, and
their effective utilization keeping in view the over all objectives of the firm.
Definition:
According to Financial management is concerned with the efficient use of an
important economic resource namely capital funds.
-SOLOMAN
According to Financial management is the application of the planning and control
of the finance function.
- HOWARD AND UPTION
V.S.U.P.G CENTRE,KAVALI
1. Scope of Finance:
Firm creates manufacturing capacities for production of goods; some provide
service to customers. They sell their goods (or) service to earn profit. They raise
funds to acquire manufacturing and other facilities. Thus the three most important
activities of a business firm are;
Production
Marketing
Finance
A firm secures whatever capital it needs and employees it (finance activity) in

activities which generate returns on invested capital (Production and Marketing
activities).
Analysis of Financial Statements:

A financial statement is an organized collection of data according to logical
and consistent accounting procedures. It purposes is to convey an understanding of
some financial aspects of a business firm.
Thus the term Financial Statements generally refers to two basic statements.
Income Statement
Balance Sheet
Balance Sheet:
Balance Sheet is a statement showing the amount of a companys assets on
one side and liabilities and capital on the other. It shows the financial condition of a
company at the end of a given period usually at the end of one-year period. Balance
sheet shows how the money has been available to the business of the company and
how the money is employed in varies assets.
Profit and Loss Account:

Earning profit is the principal objective of all business enterprises and profit
and loss account is the document, which indicates the extent of success achieved by
the business in meeting this objectives. Profits are of primary importance to the
Board of Directors in evaluating the management of a company, to shareholders in
making investment decisions and to bank and other creditors in judging the
repayment capacities and abilities of the company.
Nature of Financial Statement:

Financial statements are prepared for the purpose of presenting periodical review
or report on the progress by the management and deal with the following:
a) Status of the Investment in the Business, and
b) Result achieved during the period under review.
The Data exhibited in these financial statements are the result of the
combined effect of objectives of financial statements as follow:
I. Recorded facts.
II. Accounting conventions.
III. Postulates or assumptions made to implement conventions procedures.
IV. Personal judgments used in the applications of conventions and
postulates and
V. Accounting Standards and guidance notes.
1) Recorded facts:
Only those facts which are recorded in the business books will be
reflected in the financial statements .
2) Accounting Conventions:
It will not reflect the true position of the business as the actual position of the
business will definitely be better as compare to the position depicted from the
financial statement.
3) Personal Judgment:
Personal Judgment of the accountant again will reflect the preparation of
financial statements.
The following points reflect truly the nature of financial statements of business
entities;
(i)
These are reports (or) summarized reviews about the performance,

achievements and weaknesses of the business.
(ii)
These are prepared at the end of the accounting period so that various
parities may take decision of their future actions in respect of the
relationship with the business.
(iii)
These statements are prepared as per accounting concepts and

conventions.
(iv)
It is influenced by the personal judgment of the accountant these

judgments may relate to valuation of inventory depreciation of fixed assets
and while making distinction between Capital and Revenue.
Importance of Financial Statements:

The information given in the financial statement is very useful to a number of
parties as given below;
1) Owners :
The owners provide funds for the operations of a business and they
want to know whether their funds are being properly utilized /not. The financial
statements prepared from time to time satisfy their curiosity.
2) Creditors:
Creditors want to know the financial position of a concern before
giving loans (or) granting credit. The financial statements help them in judging
such position.
3) Investors:
Prospective investors, who want to invest money in a firm would like
to make an Analysis of the financial statements of that firm to know how safe
proposed investment will be.
4) Employees :
Employees are interested in the financial position of a concern they
serve, particularly when payment of bonus depends upon the size of the
profits earned. They correct; so they become interested in the preparation of
correct profit and loss account.
5) Government:
Central and state Government are interested in the financial
statements because they reflect the earning for a particular periods for
purpose of taxation. Moreover, these financial statements are used for
compiling statistics concerning business which, in turn, help in compiling

national Accounts.
6) Research Scholars:
The financial statements being a mirror of the financial position of a
firm are of immense value to the research scholar who wants to make a study
into financial operations of a particular firm.
7) Consumers :
Consumers might be interested in the financial statements, because a
careful study of financial statements may provide information about the prices
being charged by the firm.
8) Managers :
Management is the art of getting things done through others. This
requires that the Subordinates are doing work properly. Financial statements
are an aid in this respect because they serve the manager in appraising the
performance of the subordinate.
9) The Management:
Financial statements and accounts are of a very great help in
understanding the progress, position and prospects of the business. Financial
statements, by helping the management to be acquired with the cause of the
business results, enables them of formulate appropriate course of action for
the future. A comparative analysis of financial statements should enable
management to see the trends in the progress and position of and make
suitable modifications in policies to advert unfavorable position.
10) The Public:
Business is a social entity. Various groups of society, through not
directly connected with business, position and prospect of a business
enterprise. These groups are financial analysts, trade associations, labor
unions, financial press, Students and teachers, etc., It is only through the
published financial statements that the people can analyze,
judge and
comment upon the business enterprise.
11) The shareholders and the Lenders:

The financial statement servers as a useful guide for the shareholders
the suppliers and the lenders of a company. It is through critical examination
of the financial statements that these groups can come to know about the
efficiency and effectiveness of the management and position, progress and
prospects of the company. For this purpose, it is necessary that the financial
statements should contain accurate, complete and systematic facts and
figures. So that these people can gets a full and accurate idea regarding the
present position and future of the company.
12) The Labor and Trade Unions:
In India, workers are entitled to Bonus, under the payments of Bonus Act,
1965 depending upon the size of the profit as disclosed by audited profit and
loss account. Thus, profit and loss account becomes greatly important to the
workers. In financial statement, the size of profit and the profitability achieved
are greatly relevant for wage negotiation.
Types of Financial Statements Analysis:

1. Horizontal Analysis: When Financial Statements for a number of years are
reviewed and analyzed, is called Horizontal Analysis. As it is based on data
from year rather than on one data or period of time as a whole, this is also
known as Dynamic Analysis. This is very useful for Long-term trend analysis
and planning.
2. Vertical Analysis: It is frequently used for referring to ratios developed for
one data or for one accounting period. Vertical Analysis is also called Static
Analysis. This is not very conductive to proper analysis of the firms financial
position and its interpretation as it does not enable to study data in
perspective. This can only be provided by study conducted over a number.
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Techniques of analysis & Interpretation:

The following technique can be used in connection with analysis and
interpretation of financial statements.
1) Comparative Financial Statements
2) Common Size Statements
3) Trend Percentage Analysis
4) Funds Flow Statements
5) Cash Flow Statements
6) Net Working Capital Analysis
7) Ratio Analysis
RATIO ANALYSIS
Ratio analysis is the process of determining and interpreting numerical
relationship based on financial statements. A ratio is a statistical yard stick that
provides a measure of the relationship between variables of figures. This relationship
can be expressed as a percentage of as quotient.
Ratio analysis is a powerful tool of financial analysis. The absolute accounting
figures reported in the financial statements do provide a meaning full understanding
of the performance and financial position of the firm. Ratio help summarize large
quantities of financial data and to make qualitative judgment about the firms financial
performances.
Ratio analysis is the systematic use of ratio to interpret the Financial
Statements so that the strength and weakness of a firm as well as its historical
performance and current financial position can be determined. The rational of ratio
analysis lies in the fact that it makes related information comparable. A single figure
by it self has no meaning but when expressed in terms of related figure. It yields
significant inferences.
Ratio Analysis is one of the tool or technique of management according. It is
most widely used for financial statements, such as profit and loss account or the
income statement, balance sheet. The financial statements are revealing the
financial position. These financial statements are really useful to the executives,
owners, creditors, investors etc,. Based upon the financial statements, users can
form judgment about the operating performance of the firm and financial position of
the firm. A creditor can ascertain the liability position of the firm that is the ability of
the firm to repay its current liabilities. The management of the firm analyzes the
financial statement to judge the operating efficiency of the firm. The shareholders
(Owners) analyze the financial statement of the firm to find out the profitability. The
investors analyze the financial statements of the firm to know the ability of the firm to
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pay interest regularly. The future plans of the firm should be laid down in the view of
firms financial strengths and weakness. The financial statement contains the items
relating profit and loss of a firm. But these figures are not enough to be much use, if
they are consider individual items comparison in financial statements relationship
between two accounting figures, expressed mathematically.
Meaning of Ratio:
A ratio is a comparison of the numerator with the denominator. In other words,
ratio expresses the significant relationship between two figures. A percentage is also
a ratio multiplies by 100.
Definition:
According to Prof. Spring field, Prof. Mass & Merrium defined the indicated
quotient of two mathematical expression and as The relationship two / More
variables. or the relationship between two or more things.
Nature and Scope of Ratio analysis:

Ratio analysis is effective tool of financial analysis available to a financial
analyst. Ratio analysis is a one of the tool (or) technique of financial analysis. Ratio
analysis is a process of determining and interpreting numerical relationship of
different figures in the financial statements. It is statistical yardstick the provides a
measure of relationship between two accounting figures; this relationship can be
expressed in the terms of percentage or as a quotient.
There are several ratios, which an analyst can adopt, but the type of ratios he
would precisely use depends upon the purpose for which the analysis is made. Ratio
analysis simplifies the understanding of financial statements. It facilitates inter-firm
comparison. Ratio analysis is useful not only to the insider, but also to outsider like
creditors, investors etc.
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Significance of Ratio Analysis:

Ratio analysis is of great help of commercial bankers, trade creditors and
institutional lenders; they judge the ability of borrowing enterprises by observing
various ratios like the current ratio, acid test ratio turnover of receivables. Inventory
turnover coverage of interest by the level of earnings.
Ratio analysis also helps long term creditors in knowing the ability of
borrowing enterprises to pay interest principle incase earning decline they find
valuable the ratios of total debt to equity and total debt to total assets.
Investors in shares judge the performance of the company by observing the
per shares into ratios like earning per share. Book value per share market price per
share dividends per share etc.,
Lastly ratio analysis is of grate use of the management of the firm.
Management of the firm interested in every aspects of ratio analysis as it is their over
all responsibility to see that the resources of the firm are used most efficiently and
effectively and that the firm financial conditions is sound.
Standards for Comparison:

For making a proper use of ratios it is essential to have fixed standard for
comparison. A ratio by it self has very little meaning unless it is compared to some
appropriate standard selection of proper standard of comparison is a most important
element is ratio analysis the four most common standard used in ratio analysis are
as follows ;
1) Absolute
2) Historical
3) Horizontal
4) Budgeted
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1) Absolute:
Absolute standards are those; which become generally recognized as
being desirable regardless of the type of company the time stage of business
cycle (or) objective of the analyst.
2) Horizontal:
Historical standards involve
comparing a company own past
performance as a standard for the present on future. But these standards may
not provide a sound basis for judgment as the historical figure may not have
represented an acceptable standard.
3) Historical:
In case of horizontal standards one company is compared with another
on with average of other companies of the same nature. It is called as Intra
firm comparison.
4) Budgeted :
The budgeted standard is arrived at after preparing the budget for a
period. Ratios developed from actual performance are compared to the
planned ratios in the budget to examine the degree of accomplishment to the
anticipated target of the firm.
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OBJECTIVES OF RATIOS ANALYSIS

The objectives of ratio analysis are as follows:
1. Analysis the financial position of the firm by using the various accounting
ratios.
2. To know the liquidity position of the firm that is the firms relative strengths and
weakness of the firm.
3. To compare financial position of the firm in the current year with the previous
year financial position.
4. To know the season effects in the firm, that is the cost position of the firm
between the profit making and loss making period.
5. To help the management in planning, controlling and decision making.
6. To find out the solution to the unfavorable financial conditions and financial
performance.
10.To take the suitable corrective measures when the firms financial conditions
and performance are unfavorable to the firm when compared to other firms in the
same industry.
A financial statement contain income statement showing sales, purchases,
revenue, tax, expenses etc., on the other side, the balance sheet shows the
liabilities and assets position during the year.
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LIMITATIONS OF RATIO ANALYSIS

Ratio analysis is very important in revealing the financial position and
soundness of the business. But, in spite of its advantages, it has some limitations
which restrict its use. These limitations should keep in mind while making use of ratio
analysis for interpreting the financial statements. The following are the main
limitations of accounting ratios.
1. False results if based on incorrect accounting data: Accounting ratios can
be correct only if the data (On which they are based) are correct. Sometimes,
the information given in the financial statements affected by widow dressing,
i.e., showing position better than what actually is.
2. Variation in accounting methods: The two firms results are comparable
with the help accounting ratios only if they follow the same accounting
methods or basis comparison will become difficult if the two concerns follow
the different methods of providing depreciation or valuing stock. Similarly, if
the two firms are following two different standards or methods, an analysis by
reference to the ratios would be misleading.
3. Only one method of analysis: Ratio analysis is only beginning and gives just
a fraction of information needed for decision making. Therefore, to have a
comprehensive analysis of financial statements, ratio should be used alone
with other methods of analysis.
4. No common standards: It is very difficult to lay down, common standards for
comparison because circumstances differ from concern to concern and the
nature of industry, For E.g., a business with current ratio more than 2:1 might
not be in a position to pay current liabilities in time because of an unfavorable
distribution of current asset in relation to liquidity. On the other hand another
business with a current ratio of even less than 2:1 might not be experiencing
any difficulty. Any difficulty in making the payment of current liabilities in time
because of its favorable distribution of current assets in relation to liquidity.
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5. Different meaning assigned to the same term: Different firms in order to

calculate ratio may assign different meanings. For e.g., profit for the propose
of calculating ratio maybe taken as profit after charging interest and tax or
profit before tax, but after interest or profit after tax and interest. This may
affect the calculation of ratio in different firms and such ratio when used for
comparison may lead to wrong conclusion.
6. No use if ratios are worked out for insignificant and unrelated figures:
Accounting ratios may be worked for any two insignificant and unrelated
figures as ratio of sales and investment in government securities. Such ratios
may be misleading. Ratio should be calculated on the basis of cause and
effect relationship. One should be clear as to what cause is and what effect is
before calculating a ratio between two figures.
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SHORT-TERM OR LIQUIDITY RATIO:

There are the ratios, which measure the short-term solvency or financial
position of the firm. These Ratios are calculated to comment upon the short-term
paying capacity of a concern or the firms ability to meet its current obligations.
The different types of solvency ratios are
1. Current Ratio
2. Quick Ratio
3. Inventory to Working capital Ratio
1)
Current
Ratio:
The
current
ratio
is
calculated
by
dividing
current assets by current liabilities.

Current Assets include cash and other assets can be converted into cash with
in normal course of the business (that is normal 12 months) such as bills receivable,
securities, advances, outstanding accrued income, prepaid expenses. All obligations
maturing with in year are included in current liabilities. Thus, current liabilities include
bills payable, sundry creditors, provision for income tax, unclaimed dividend and
long-term maturing in the current year. Current Ratio measures the firms short-term
solvency position. It indicates the availability of current asset in rupees for every one
rupee current liability. If the ratio means more than two means that the firm has more
current assets, high liquidity position of the firm is poor.
Standard or Ideal Current Ratio is 2:1
The current Assets fixed at twp times the current liabilities. The idea behind
his fixation is to leave a margin of safety to cover any fall in the value of current
assets and also leave he sufficient working capital after the payment of current
liabilities. Current assets twice of current liabilities or more consider to be
satisfactory.
Current Assets
Current Ratio=
---------------------Current Liabilities
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2).Quick Ratio: The Quick or Acid test ratio is a more common measure of the
firms liquidity. This ratio establishes a relationship between quick or liquid assets
and current liabilities. An asset is liquid, if it can convert into cash immediately
without loss of value.
Quick Assets
Quick / Acid Test Ratio=
--------------------Current Liabilities
Quick Assets include cash and book debts (Debtors and Bills Receivables)
only. Inventory are excluded because it takes time to sell finished goods and convert
raw material and work-in-progress into finishes goods and uncertainty as to whether
or not the inventories can be sold. A quick ratio of 1:1 consider satisfactory.
3).Inventory to Working Capital ratio: It is the ratio of inventory to working capital.
Inventory to working capital ratio is usually expressed as a Percentage. It is
expressed as
Inventory
Inventory to Working capital Ratio=
------------------------ x100
Working Capital
This ratio indicates the proportion of working capital tied up in

inventories or stocks. It is also indicates whether there is over stocking or under
stocking. As per the standard inventory to working capital ratio the inventories more
than 75% of working capital. As such a low inventory to working capital ratio (that is a
ratio of less than 75%) indicates under stocking, and so high liquid position, while a
high inventory to working capital ratio (i.e., a ratio over 75%) indicates over stocking
capital and so, a low liquid position.
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LONG-TERM SOLVENCY RATIOS (LEVERAGE RATIOS)

Long-term solvency ratio conveys a firms ability to meet the interest/costs and
repayment schedule of its long term obligations. These ratios are helpful to
management improper administration of capital. It also helps the creditors to know
the capacity of a business concern to pay debt in the future. The various ratios are:
a) Debt Equity Ratio
b) Proprietary Ratio
c) Fixed Assets To Net Worth Ratio
d) Current Asses To Net Worth Ratio
e) Current Liabilities TO Net Worth Ratio
a)
Debt-Equity Ratio:
The term Debt signifies total indebtedness of the company as shown by its
short and long-term obligations.

Equity refers to the aggregate ownership interest measured by the total share
capital plus any reserves, which may rightly and legitimately be appropriate to the
shareholders.
Ideal Debt equity Ratio usually recommended is 2:1 As such, if the debt is
less than two times the equity, the logical conclusion is that the financial structure of
the concern is sound. On the other hand, if the debt is more than two times the
equity, the conclusion is the financial structure of undertaking is weak
Debt
Debt Equity Ratio=
----------Equity
b)
Proprietary Ratio:
It is a variant of the Debt equity ratio. It is the ratio, which express the
relationship between the net worth or equity and total assets.

Share Holders Fund or Net worth
Proprietary Ratio=
----------------------------------------Total Assets
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I. It is an index of the amount of the proprietors funds invested on the total

assets of a concern.
Generally a standard proprietary ratio is 0.5:1. That says the higher the
propitiatory ratio the stronger is the financial position of the concern and lower the
proprietary ratio, the weaker is the financial position of the enterprise.
c) Fixed Assets To Net Worth Ratio:
It is the ratio between fixed assets to Net Worth.
Net Fixed Assets
Fixed Assets To Net Worth Ratio=
---------------------Net worth
This ratio indicates the proportion of fixed assets financed by the owner. In
other works it indicates as what extent the owners have invested funds on the fixed
assets, which constitute the main structure of the business.
The standard or Ideal fixed asset to net worth ratio for an under taking is 2/3
or 67%. It should not be more than this.
d) Current Assets to Net worth Ratio:
It is the ratio between current assets and net worth.
Current Assets
Current Assets to Net worth Ratio= ------------------Net worth
This ratio indicates the proportion of current assets financed by the owners.
There is no standard for this ratio but one can say that if this ratio s high the financial
strength is good and if it is low the financial position of the concern is weak.
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e) Current liabilities To Net worth Ratio:

A current liability to net worth ratio is the ratio between current liabilities to
Net worth.
Current Liabilities
Current liabilities To Net worth Ratio: =------------------------Net worth
This ratio indicates the relative contribution of the short- term creditors and
the owners in the capital of an enterprise. The desirable level set for this ratio is 1/3.
So, if the actual ratio is very high, it would mean that the liability base of the concern
will not provide an adequate cover for long-term creditors.
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TURNOVER RATIOS
a) Stock Turnover Ratio:
This ratio indicates whether investment in inventory is efficiency used or not.
It, therefore, explains whether investment in inventories within proper limits or not.
The ratio calculated as follows
Cost of goods sold
Stock Turnover Ratio=
----------------------------Average Inventory
b) Receivable Turnover or Debtors Turnover or Debtors velocity:

It is the ratio, which indicate the relationship between debtors, and sales, it
indicates the number of days the debt is to be collected in a year.
Total Debtors
Debtors Turnover Ratio= ---------------------------X 360 days
Net Credit Sales
This ratio indicates the rate at which debts are collected influences the liquidity
of the concerns.
Debt Collection Period Ratio:
This is the ratio, which indicates the extent to which Debt has been collected
in time. In other words the ratio, which indicates the average time taken by the firm to
collect debts. It is the ratio, which indicate the average collection period or the
average period of credit allowed to debtors. If the actual period of credit allowed is
more than the normal period of credit or the ideal period of credit like 30 days the
indication is that the credit period is not efficient.
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c) Creditors Turnover Ratio or Creditors Velocity:

Creditors Turnover Ratio is the ratio between creditors and purchases. It is the
ratio, which indicates the number of days the creditors are to be paid in the year.
Total Creditors
Creditors Turnover Ratio= ----------------------------- X 360 days
Net Credit Purchases
This indicates the rate at which payments are made to creditors or the number
of times payments are made to creditors.
Debt payment period:
This ratio indicate the average period of credit received from creditors further
a comparison of this ratio with debt collection period ratio will indicate the time lag
between the two period of credit and the time lag between to credit periods will
indicate the duration for which working capital is required to be arranged. The Debt
payment as calculated is compared with the standard or ideal payment viz., 30 days
and conclusions are drawn.
d) Cash Turnover Ratio:
It is the ratio between cash and Turnover or Sales.
Net Annual Sales
Cash Turnover Ratio=
----------------------Cash
This ratio indicates the extent to which cash resources are utilized by the
enterprise. It is also helpful in determining the liquidity of a concern. The standard or
ideal cash turnover ratio is 10:1.
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e) Working Capital Turnover Ratio:

It is the ratio between working capital and turnover.
Net Sales
Working Capital Turnover Ratio= -------------------Working Capital
This ratio indicates the efficient or inefficient utilization of the working capital of
an enterprise. There is no standard or ideal working capital ratio. But one can say
that the higher the working capital turnover ratio the greater is efficiency. It should be
noted that a very high working capital turnover ratio means over trading, and a very
low working capital turnover ratio means under trading. None of which is good for a
concern.
f) Fixed Assets Turnover Ratio:
Fixed Assets Turnover Ratio is the ratio between fixed assets and turnover.
Fixed assets, here, means net fixed assets, i.e., fixed assets less depreciation. This
ratio indicates as to what extent the fixed assets of a concern have contributed to
sales.
Net Sales
Fixed Assets Turnover Ratio= -------------------Fixed Assets
The standard or ideal ratio Fixed Assets Turnover Ratio is 5 times. So, a Fixed
Assets Turnover Ratio of 5 times or more indicates better utilization of fixed assets. It
may be noted that a very Fixed Assets Turnover Ratio means under trading, which is
not good for the business.
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g) Current Assets Turnover Ratio:

Current Assets Turnover Ratio is the ratio between current assets and sales
(Net Sales).
Net Sales
Current Assets Turnover Ratio= ---------------------Current Assets
This ratio indicates the contribution of current assets to net sales. There is no
standard or idea Current Assets Turnover Ratio. Yet, the inference is that a high
Current Assets Turnover Ratio is an indication of better utilization of current assets
on the other hand; a low Current Assets Turnover Ratio suggests that the current
assets have not been utilized effectively.
h) Total Assets Turnover Ratio:
This is the ratio between total assets and Net Sales.
Net Sales
Total Assets Turnover Ratio= ----------------------Total Assets
This ratio indicates the efficiency or inefficiency in the use of total resources or
assets of a concern. The standard ratio is that the sales should be at least two times
the value of the assets. A total assets turnover ratio of 2 times or more indicates that
the assets of a concern have been utilized effectively.
i) Sales to Net worth Ratio:
It is also called as owned capital turnover ratio. It is the ratio between net
annual sales and net worth that is owners fund.
Net Sales
Sales to Net worth Ratio= ------------------Net worth
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This ratio is good index of the utilization of the owners fund. It is also
indicates, whether there is over trading or under trading. Again it indicates whether
there is over capitalization. If the volume of sales in relation to net worth is
reasonable, the indication is the owners funds have been effectively utilized.
PROFITABILITY RATIOS
They are the ratios which measures the profitability of a concern. In other
words they are ratios which reveal the total effect of the business transaction on the
profit position on an enterprise and indicated how far the enterprise has been
successful in its aim.
a) Gross Profit Ratio: It is the ratio, which express the relationship between gross
profit and sales.
Gross Profit
Gross Profit Ratio=
-------------------- x 100
Net Sales
This ratio indicastes the gross results of trading or the overall margin within
which a business undertaking most limit its operation expenses to earn sufficient
profit. It also indicates whether the average markup on the goods has been
maintained or not.
b) Net Profit Ratio:

Net Profit
Net Profit Ratio= ------------------- x 100
Net Sales
This ratio indicates the quantum of profit earned by concern. A high net profit
ratio indicates that the profitability of the concern is good. A low net profit ratio
indicates that the profitability of the enterprise is poor.
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c) Return on Equity or Net worth or Shareholders Fund Ratio: It is the ratio,

which express the relationship between Net profit and Shareholders Fund.
Profit after Tax
Return on Equity= -------------------- x 100
Net worth
o This ratio indicates the productivity of shareholders fund.

o It also gives the shareholders and idea of the return of their funds.
o It is also useful for inter-firm and inters industry comparison.
The standard or ideal net profit to net worth is about 13%.
d) Earnings per Share: It measures the profit available to the Equity share
holders on a per share basis, that is, the amount that they can get on every share
held. It is calculated by dividing the profits available to the share holders by the
number of the outstanding shares. The profits available to the ordinary share
holders are represented by net profits after taxes and preference dividend.
Profit after taxes
Earnings per Share= ---------------------------Number of shares
Statement of the Problem:

Research simply means a search for facts, answer to question and solution to
problems. Research is a systematic and logical study of an issue or problem or
phenomenon through scientific method. It is a systematic an objective analysis
generations principle resulting in predication and possibly ultimate control of events.
A research design is arrangements of condition for collection and analysis of
data in a manner that aims to combine relevance to the research purpose with
economy procedure. There various research design but descriptive and analytical
research design is more suitable for study.
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This research is by and large a desk research and involved the following
methods
a) Scanning through standards textbooks to understand the theory behind
financial performance appraisal.
b) Decision regarding the study period in this case was decided to be for a
period of 5 years.
c) Collection of companies specific literature i.e., company profile and
annual reports over this study period.
d) Identification of financial rations likely to reflect financial performance
adequately in this case it was calculated to be (a) Solvency rations (b)
Activity ratios (c) Profitability rations.
e) Calculations of these ratios over the study period and tabulation.
f) Finally forwarding certain recommendation and conclusion to the
company in question.
By and large the above research design was employed for the study.
NEED AND PURPOSE OF THE STUDY

The ultimate performance indicator of any company could financial indicative
because obviously all costs and efficiencies will get reflected in the financial mirror,
once again reason for variations in the financial position could be several.
By analyzing systematically the identified financial ratios, which reflect financial
performance well and adequately, the company could understand its own position
overtime. Such a broad understanding will be of a great relevance to the manger of
the company investors (Present potential) as well as to any other party/parties
interested in the company
In other words financial performance evaluation will serve as any eye opener to
any company and the company in question is no exception has this study.
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OBJECTIVES OF THE STUDY

Main objectives of the study:
A thorough review of literature to have an understanding of theory behind
performance appraisal
Examine of the financial performance of the company over the study period
2005-06to2009-2010.
To know how efficiently the company is using its resources.
To apply certain financial ratios to analyze the performance of the company.

To draw valid conclusions and recommendations based on this study.
METHODOLOGYCAL ASSUMPTION
This research is based on the data collected from primary and secondary source:
Primary sources:
Part of the information is collected from discussions with various officials in
the finance department and other officers of the department.
Secondary sources:
Most of the information is collected from the financial statements and
information brochures of the organization. And also some other information is
collected from books and financial, accounting journals available in the area of the
study.
28
SCOPE OF THE STUDY
This project is as a reference guide or as a source of information. It

gives the idea about the financial analysis of a firm.
The main objective of the study was to the study was to put into
practical the theoretical aspect of the study into real life work
experience.
The study aims to study the liquidity position of the firm. Ratio analysis
has been used to analyses the financial position of the firm.
It deals with analysis an interpretation of data collected through the

sources primary and secondary data. Graphs and diagrams and
tabulation method are used to analyze and interpret the data collect.
LIMITATIONS OF THE STUDY

Through sincere attempt has been during the study, certain limitations cannot
be avoided. There are:
Ratio analysis is a widely used technique to evaluate the financial position
and performance of a business but these is certain problem in using
ratios. The analyst should be aware of these problems.
The major constraint for the study was the timing of the study the
vastness of the financial statement was another factor of limitation. The
study is based on the data given by the official and report of the company
the confidentiality of some facts and figures are also limitations
29
Financial statement analysis is based on balance sheet, Profit and loss

account prepared as per accounting practice. This practice is some cases
may lead window-dressing to cover up bad financial position.
Financial statements analysis is suffer from inherent weakness of
accounting practice such as their nature matching principle etc.,
This study is based on only 5 years.
DAIRY INDUSTRY IN INDIA

The dairy industry in India is going through major changes with the
liberalization policies of the government and the restructuring of the Economy.
These have brought greater participation of the private sector.
This is also
consistent with global trends which could hopefully lead greater integration at Indian
dairying with the world market for milk and milk product.
After stagnating to 80 million tones for 20 years between 1950 and 1970
Indian Milk production began to rise. Crossing 30 million tones in 1980 and 59
million tones in 1992. Today India Ranks as the world second largest milk producer
after the U.S.
REVIEW OF DAIRYING IN INDIA:
The main study of Indian farmers has been agriculture and allied occupations
farm animals especially cattle, have been an integral part of rural India for thousand
of years.
30
During the year 1920 military farms were established to supply adequate Raw
Milk to the stators. These military farms were well maintained and even their stages
were raising improved animals. Else were in urban areas, dairying was largely left in
hands at traditional producers. Middlemen, debates of private vendors.
Article I.
DAIRY SCENARIO:
Milk is an important nutritious food. It is more important to infants and old
people. Large number of people depends upon milk as an important source of

nourishment. India with its vast population gives sentimental attachment to milk as a
good food. Milk is substance with 1.029 to 1.035 specific gravity and contains fat
minerals proteins and vitamins. The government of India encouraged Co-operative
societies for production of milk and its products and setting up of process of large
milk units.
India is today the second largest producer of the milk in the world. Second
only is the U.S.A. contributing 11% of the world market. The production of milk in
India is 577 Lakhs of tones per year. It may be seen that the milk procurement by
the organized sector is presently, a fraction of the total milk available. There is
sufficient scope for procurement of milk and for the growth of the milk sector. With
high quality technology and expertise available indigenously and with the milk and
milk products order announce by the government enabling the private sector to deal
directly with the farmer.
Organized handling of milk would lead to proper procurement measures,

which would in turn be beneficial to farmers. Remunerative price to farmers would
lead to better care of cattle and thereby set in motion a healthy cycle of increased
availability of good milk.
31
WORLD FOCUS ON INDIAN DAIRY:
Indian dairying is emerging as a Sunrise Industry India represents one of the

worlds largest and fastest growing markets for milk and milk products due to the
increasing disposable incomes among the 250 million strong classes.
Two main reasons for the world focus on India are one, the low cost economy; and
two the liberalization process initiated since 1991. Other important factors include:
low inflation rate, inexpensive labor the presence of the worlds third largest pool of
technical man power, the worlds largest democracy. Efforts
to
increase
milk
product by dairy farmers are strongly influenced by the degree to which demand
signals are transmitted through the marketing system. Co-operatives have played
an important role in transmitting the message of urban market demand to them.
SECTION I.1
COMPETITIVE ADVANTAGES OF INDIAN DAIRY
In the emerging liberalized global scenario, trade distorting agricultural

policies has been the focus of the GATT multilateral trade negotiation. With the
liberalization of agricultural trade under the new GATT regime, the heavy subsidies
prevalent in the dairy sectors in the countries of the European Union as well as in the
US will have to be brought down in the next few years. The competitive advantages
of the Indians diary industry are then considered to be substantial.
With the
substantial and continued investments in building up milk production . India can

emerge as a major exporter of dairy products, at least by the early part of the next
century, even though an prospects may meet with considerable opposition form the
advanced dairy nations and this opposition is likely to focus significantly on quality
issues.
32
It is therefore necessary to evolve a long-term dairy industry policy that will

not only sustain but also enhance production and productive levels. This would
require ensuring remunerative and increased returns. To the farmer while ensuring
supply of increased fluid milk needs of the urban population at reasonable prices.
SECTION I.2
SECTION I.3
COMPANY PROFILE
As the years passed, APDDCF built up the infrastructure needed to

meet every requirement of dairying, the procurement of milk from over 800,000 dairy
farmers spread across Andhra Pradesh. Or getting it ready for nationwide
distribution . It all happened within the vast Dairy plant network of APDDCF through
extensive use of high technology and management acumen honed to steer such a
widespread operation and brought prosperity to the State many times.
The Federation has drawn up more comprehensive system for procurement
and processing of milk.
A dedicated research cell is actively pursuing way and means of bettering

quality. Collaborations with global experts are also being sought, all in an attempt to
remain at the forefront of modern dairying in India where QUALITY will be the watch
word.
(a) REACHING OUT OF THE WORLD

APPDDCF began its exports efforts thirteen years ago and has gained
significant ground abroad. It has spread its marketing network in the Gulf and is
exploring the possibility of exporting dairy products like Butter, Cheese Spread, UHT
Milk, Sterilized Cream etc., to other Countries. The Federation has been meeting
33
the tastes of divergent cultures, while bringing back the pleasures of home to Non Resident Indians.
Today, APDDCF is in the process of acquiring capabilities to join the big
league in dairy technology from USA, UK, Australia, New Zealand and the
Netherlands.
SECTION I.4 VIJAYA DAIRY AT A GLANCE

Name of the Organization
Vijaya Dairy Limited
Nature of the Business
Liquid Milk, Ghee, Butter Milk,

And Butter
Basic Raw Materials
Milk
Procuring the raw Material
Cooperative Milk
Society Boots.
Year of Establishment
1969
Plant Location
Venkateshwara puram, Nellore
Plant Capacity (per day)
75000 Liters
Promoters
AP Milk Co Operative
Society, Hyderabad
(I) DAIRY DEVELOPMENT ACTIVITIES IN NELLORE DISTRICT

During the year 1969, the Nellore dairy was started with initial capacity of
12,000 liters per day mostly to collect milk from surrounding villages. After wares
due to increases in procurement the handling capacity was expanded to 40,000 liters
per day during the year. 1979. The Milk Chilling Centre at Kavali was started during
the year 1977 with an initial capacity of 6,000 liters per day. Similarly the Milk chilling
Center at Venkatagiri was started during the year 1981 with the same capacity.
34
During the year 1985, due to the increase in Milk Procurement in the District.
He handling of milk Chilling Centre Kavali and Venkatagiri has been increased from
6,000 liters to 12,000 per day. In the year 1986 the Nellore Milk Union was register
under AP Co-operative Societies Act 1964.
Due to further increase in Milk Procurement the present handling capacity of

Nellore dairy is expanded to 40,000 Lts. To 75,000 Lts. Per day and Milk Chilling
Center Kavali also expended from 12,000 Liters 20,000 liters per day under O.F. III
Programmed in 1993. Another Milk Chilling Center in the District at Duttalur with
handling capacity of 10,000 liter per day was started in month of October 1995 and
subsequently expanded 20,000 liters per day during 1998.
At present there are nearly 57,360 milk producers supplying Milk to Nellore
Union.
Out of which there are small farmers 23, 960 marginal farmers 8,300.
Among these milk producers there are schedule cast 8,152 schedule tribes 697,
back ward class 11,612 and the remaining other casts are supplying milk to this
union and they are being benefited financially by sales of milk by an amount of
Rs.210 Lakhs is being paid the Milk Producers per month.
The date related to the above development of Nellore dairy has been shown
following table.
35
TABLE 3.1
PERFORMANCE OF DAIRY IN NELLORE (Dist)
CAPACITY PER
DAY
PRESENT PER
DAY
PEAK ON ANY
DAY OF THE
YEAR
1) Nellore Dairy
75,000 Liters
36,000 Liters
43,000 Liters
2) Kavali Dairy
30,000 Liters
12,000 Liters
17,000 Liters
3) Venkatagiri
Dairy
12,000 Liters
12,000 Liters
12,000 Liters
4) Duttalur
Dairy
22,000 Liters
22,000 Liters
22,000 Liters
NAME OF THE UNIT
Source: Field Survey
LIQUIDITY OR SHORT TERM FINANCIAL POSITION:

These are the ratios, which measure the short-term solvency or
financial position of the firm.
(1) Current Ratio
Table 4.1 Analyze that Current Ratio measures the liquidity position of the
company. The ideal or standard ratio is 2:1During 2007-08, the current ratio of the
company was 3.40 times. This indicates that for every one rupee of current
liability of company has Rs. 3.40 of current assets. The liquidity position of the
company is sound during 2007-0 to 2009-10 but it is not satisfactory in the
remaining two years.
36
TABLE4.1
Current Ratio of NDMPMACU Ltd, Nellore.
Year
Current Assets
Current Liabilities
Ratio
2007 08
14,96,71,863.40
4,39,50,009.69
3.40
2008 09
12,17,12,159.70
4,53,71,717.31
2.68
2009 10
13,46,73,606.50
4,58,14,099.46
2.94
2010 11
9,72,63,576.60
5,38,45,532.04
1.81
2011 12
9,29,07,853.50
6,14,64,091.06
1.51
2) Quick Ratio:
37
Table 4.2 Analyze that Quick ratio of the company. In 2011-12 it is decreased
Year
Quick Assets
Current Liabilities
Ratio
2007 08
6,59,95,352.86
4,39,50,009.69
1.50
2008 09
3,69,79,294.11
4,53,71,717.31
0.82
2009 10
3,25,79,726.39
4,58,14,099.46
0.71
2010 11
63,96,257.05
5,38,45,532.04
0.12
2011 12
50,95,170.40
6,14,64,091.06
0.11
to0.11 but it standard ratio is 1:1 High quick ratio is an indication that the firm is liquid
and has ability to meet is current obligations in time.
TABLE 4.2
Quick Ratio of NDMPMACU Ltd, Nellore.
38
3) Inventory to Working Capital ratio:

Table 4.3 Analyze that the company is maintaining high inventory to working
capital. This ratio is increasing up 2006-07 10.92 to 2008-09 12.13. But decreases
in 2009-10 6.49 and in 2010-11 4.66 . It is fluctuating in nature.
TABLE 4.3
Working capital ratio of NDMPMACU Ltd , Nellore .
39
LONG-TERM OR SOLVENCY RATIOS:

Long term solvency ratios convey a firms ability to meet the interest/costs and
repayment schedule of its long term obligations.
(a)
Debt Equity Ratio:

Table 4.4 Analyze that the debt equity ratio. It is the showing increasing
trend during the study period in the year 2011-12 the debt equity ratio is highest
i.e., 6.14 ideal ratio is 2:1. The logical conclusion is the financial structure of the
company is sound.
TABLE 4.4
Debt Equity Ratio of NDMPMACU Ltd, Nellore.
Year
2007 08
2008 09
2009 10
2010 11
2011 12
Debt
Equity
4,39,50,009.69
1,00,16,244.06
4,53,71,717.31
100,16,244.06
4,58,14,099.46
1,00,16,244.06
5,38,45,532.04
1,00,16,244.06
6,14,64,091.06
1,00,16,244.06
40
Ratio
4.39
4.53
4.57
5.38
6.14
Year
Net Worth
Total Assets
Ratio
2007 08
1,57,60,660.57
17,89,08,280.49
8.81
2008 09
1,35,23,727.19
15,24,82,011.85
8.87
2009 10
1,74,26,721.09
16,70,28,733.69
10.44
2009 10
1,87,68,423.65
13,03,75,000.76
14.40
2011 12
1,79,19,320.90
12,61,26,134.62
14.21
(b)Proprietary Ratio:
41
Table 4.5 Analyze that the proprietary ratio and it is lightly increasing, it is an
indication that the proprietary or shareholder funds are increasing. In the last year
the proprietary ratio is 14.21.
TABLE 4.5
Proprietary Ratio of NDMPMACU Ltd, Nellore.
42
TABLE 4.6
Fixed Assets to Net worth Ratio of NDMPMACU Ltd, Nellore.
Year
Net fixed assets
Net Worth
Ratio
2007 08
2,92,36,417.10
1,57,60,660.57
1.86
2008 09
3,07,69,852.10
1,35,23,727.19
2.28
2009 10
3,23,55,127.10
1,74,26,721.09
1.86
2010 11
3,31,11,424.10
1,87,68,423.65
1.76
2011 12
3,32,18,281.10
1,79,19,320.90
1.85
(c)Fixed Assets To Net Worth Ratio:

Table 4.6 Analyze that the ratio indicates the proportion of fixed
assets financed by the owner. From 2007-08 to 2008-09 the ratio is increasing.
Means, proprietors funds are mostly sunk in fixed assets. But, now it shows a
decreasing trend it is a good condition.
TABLE 4.6
Fixed Assets to Net worth Ratio of NDMPMACU Ltd, Nellore.
TURNOVER RATIOS:
43
(a) Inventory Turnover Ratio:

Table 4.7 Analyze that the ratio indicates whether investment in inventory is
efficiently used or not. The above table shows that the stock turnover ratios
increasing trend from 2007-08 to 2010-11 like 17.72, 29.58, 33.23, 37.72, but it is
increasing greatly in 2011-12 i.e., 121.79. The stock is turned into goods in every
short period.
Year
Cost of goods sold
Average
stock
Times
2007 08
10,82,99,800.48
61,13,168.00
17.72
2008 09
28,56,25,886.83
96,54,602.50
29.58
2009 10
30,38,73,459.19
91,43,450.75
33.23
2010 11
23,22,00,770.31
61,56,621.75
37.72
2011 12
19,51,61,894.62
16,02,460.50
121.79
TABLE 4.7
Stock Turnover Ratio of NDMPMACU Ltd, Nellore.
44
TABLE 4.8
Debtors Turnover Ratio of NDMPMACU Ltd , Nellore.
Year
2007 08
2008 09
2009 10
2010 11
2011 12
Net Credit Sales
Total Debtors
12,41,65,209.85
2,07,09,771.03
31,80,29,188.98
2,50,46,931.23
32,45,56,695.20
3,69,83,552.52
25,62,91,925.62
3,72,70,882.63
22,62,03,417.22
3,74,73,350.63
No. of Days
5.99
12.69
8.77
6.88
6.04
(b) Debtors Turnover Ratio:

Table 4.8 Analyze that the debtors turnover ratio table during the year 2011-12
is 6.04 and previous year 2010-11 is 6.88 because it indicates generally the debtor
turnover the more efficient is the management of credit.
TABLE 4.8
Debtors Turnover Ratio of NDMPMACU Ltd , Nellore.
TABLE 4.9
45
Debtors Collection Period of NDMPMACU Ltd , Nellore
Year
2007 08
Total Debtors
Net Credit
Sales
2,07,09,771.03
12,41,65,209.85
2008 09
2,50,46,931.23
2009 10
3,69,83,552.52
2010 11
2011 12
31,80,29,188.98
32,45,56,695.20
3,72,70,882.63
25,62,91,925.62
3,74,73,350.63
22,62,03,417.22
No. of Days
60
28
41
52
60
(c) Debtors Collection Period:

Table 4.9 Analyze that the ratio indicates the rate at which debts are
collected and it influences the liquidity of the concerns. The following table
shows that up to 2008-09 the collection period is decreased, it is good to the
company, but from 2010-11 to 2011-12 it is increasing, means the company
should control the debtors.
TABLE 4.9
Debtors Collection Period of NDMPMACU Ltd , Nellore.
TABLE 4.10
46
Creditors Collection Period of NDMPMACU Ltd , Nellore.
(d)
Year
Total Creditors
Net Credit
Purchases
No. of days
2007 08
58,78,830.25
9,84,66,571.06
21
2008 09
40,71,498.79
24,85,54,296.70
2009 10
37,14,216.31
26,24,50,404.99
2010 11
77,48,411.17
18,65,11,454.91
15
2011 12
1,00,27,318.18
15,85,60,219.86
23
Creditors Collection Period:

Table 4.10 Analyze that the ratio, which indicates the number of times the
creditors are paid in a year. The creditor collection period is showing a decreasing
trend, it is 21 days in the year 2007-08, in 2009-10 5 days, in 2010-11 15 days, in the
current year the debt payment period is 23 days. The company should control those.
TABLE 4.10
Creditors Collection Period of NDMPMACU Ltd , Nellore.
47
TABLE 4.11
Cash Turnover Ratio of NDMPMACU Ltd, Nellore.
Year
Net Annual Sales
Cash
Ratio
2007 08
12,41,65,209.85
6,59,95,352.86
1.88
2008 09
31,80,29,188.98
3,69,79,294.11
8.60
2009 10
32,45,56,695.20
3,25,79,726.39
10.12
2010 11
25,62,91,925.62
63,96,257.05
40.12
2011 12
22,62,03,417.22
50,95,170.04
44.48
e) Cash Turnover Ratio:

Table 4.11 Analyze that the ratio between cash and Turnover or Sales. The
above table shows that the firm is maintaining a low cash balance. The cash
turnover is showing a fluctuating trend it is 1.88 in the year 2007-08 and in the year
2009-10 it is 10.12. In the year 2011-12 it is 44.48. The firm has to maintain a
constant level of cash.
TABLE 4.11
Cash Turnover Ratio of NDMPMACU Ltd, Nellore.
48
TABLE 4.12
Working Capital Turnover Ratio of NDMPMACU Ltd, Nellore.
Year
Net Sales
Working
Capital
Ratio
2007 08
12,41,65,209.85
10,57,21,853.70
1.17
2008 09
31,80,29,188.98
7,63,40,442.39
4.17
2009 10
32,45,56,695.20
8,88,59,507.04
3.65
2010 11
25,62,91,925.62
4,34,18,044.56
5.90
2011 12
22,62,03,417.22
3,14,43,762.44
7.19
f) Working Capital Turnover Ratio:

Table 4.12 Analyze that the ratio between working capital and
turnover. The above table shows that except in 2010-11 Working Capital Turnover
Ratio is increasing trend. But, in the 2011-12 it is increasing to 7.19, means it is
under trading.
TABLE 4.12
Working Capital Turnover Ratio of NDMPMACU Ltd, Nellore.
49
TABLE 4.13
Fixed Assets Turnover Ratio of NDMPMACU Ltd, Nellore.
Year
2007 08
2008 09
2009 10
2010 11
2011 12
Net Sales
12,41,65,209.85
Fixed Assets
Ratio
2,92,36,417.10
4.25
31,80,29,188.98
3,07,69,852.10
32,45,56,695.20
3,23,55,127.10
25,62,91,925.62
22,62,03,417.22
10.34
10.03
3,31,11,424.10
7.74
3,32,18,281.10
6.81
TABLE 4.13
(g) Fixed Assets Turnover Ratio:

Table 4.13 Analyze that the ratio indicates as to what extent the fixed
assets of a concern have contributed to sales. Fixed assets, here, means net fixed
assets, i.e., fixed assets less depreciation. The standard or ideal ratio Fixed Assets
Turnover Ratio is 5 times. The above table shows that the ratio is more than the ideal
ratio, means it is good for business.
50
TABLE 4.13
h) Current Assets Turnover Ratio:

Table 4.14 Analyze that the Current Assets Turnover Ratio is the ratio
between current assets and sales (Net Sales). The above table shows that the ratio
decreasing up to 2009-10 and it is increased in 2010-11 it is 2.64. In the year2011-12
the ratio is 2.44, this indicates that the firm is utilizing current assets efficiently.
TABLE 4.14
Current Assets Turnover Ratio of NDMPMACU Ltd, Nellore.
51
Year
Net Sales
Current Assets
Ratio
2007 08
12,41,65,209.85
14,96,71,863.40
0.83
2008 09
31,80,29,188.98
12,17,12,159.70
2.61
2009 10
32,45,56,695.20
13,46,73,606.50
2.41
2010 11
25,62,91,925.62
9,72,63,576.60
2.64
2011 12
22,62,03,417.22
9,29,07,853.50
2.44
52
i) Total Assets Turnover Ratio:

Table 4.15 Analyze that the ratio between total assets and Net
Sales. The above table shows the total assets turnover ratio is increasing trend it is
0.98 in the year 2007-08 and has been increased to 1.79, in the year2011-12 this
indicates that the firm is utilizing assets efficiently.
Year
Net Sales
Total Assets
Ratio
2007 08
12,41,65,209.85
17,89,08,280.49
0.69
2008 09
31,80,29,188.98
15,24,82,011.85
2.08
2009 10
32,45,56,695.20
16,70,28,733.69
1.94
2010 11
25,62,91,925.62
13,03,75,000.76
1.97
2011 12
22,62,03,417.22
12,61,26,134.62
1.79
TABLE 4.15
Total Assets Turnover Ratio of
53
NDMPMACU Ltd, Nellore.
Year
2007 08
2008 09
2009 10
Gross Profit
Net Sales
Ratio
15865409.37
12,41,65,209.85
12.78
32403302.15
31,80,29,188.98
10.19
20683236.01
32,45,56,695.20
6.37
25,62,91,925.62
9.40
22,62,03,417.22
13.72
2010 11
24091155.31
2011 12
31041522.60
PROFITABILITY RATIOS
54
They are ratios which reveal the total effect of the business transaction on the
profit position on an enterprise and indicated how far the enterprise has been
successful in its aim.
a) Gross Profit Ratio:
Table 4.16 Analyze that the ratios which express the relationship
between gross profit and sales. The above table shows the fluctuating trend of gross
profit margin the company. The gross profit ratio of the company in the 2007-08 is
12.78 and it is decreased. In the year 2010-11 to 9.40. And it is increased in the
2011-12 to 13.72.The firm has to try to maintain a fixed gross profit margin.
TABLE 4.16
Gross Profit Ratio of NDMPMACU Ltd , Nellore .
b).Return on Equity or Shareholders Fund Ratio:

Table 4.17 Analyze that the ratio, which express the relationship
between profit after tax and Shareholders Fund.
The above table shows that
decreasing in nature. But, it is increasing in 2011-12, in this year the ratio is 6.47 and
in 2009-10 it is 1.82. It is again increasing in current year .The company has not
satisfy the share holders.
55
TABLE 4.17
Return on Equity Ratio of NDMPMACU Ltd , Nellore .
Year
Profit after Tax
Net Worth
Ratio
2007 08
3,61,02,881.55
1,57,60,660.57
1.45
2008 09
1,62,57,158.53
1,35,23,727.19
1.20
2009 10
3,17,08,352.68
1,74,26,721.09
1.82
2010 11
1,14,08,421.63
1,87,68,423.65
1.11
2011 12
2,04,48,192.60
1,79,19,320.90
6.47
56
c).Earnings per Share:

Table 4.18 Analyze that the profit available to them. Equity share
holders on a per share basis, that is, the amount that they can get on every share
held. The above table shows that fluctuating trend of earning per share between
Rs.1.14and Rs.3.61.
TABLE 4.18
Earning per share of NDMPMACU Ltd , Nellore .
Year
Profit after Tax
Number of
Shares
EPS
Rs.
2007 08
3,61,02,881.55
1,00,00,000.00
3.61
2008 09
1,62,57,158.53
1,00,00,000.00
1.63
2009 10
3,17,08,352.68
1,00,00,000.00
3.17
2010 11
1,14,08,421.63
1,00,00,000.00
1.14
2011 12
2,04,48,192.60
1,00,00,000.00
2.04
57
FINDINGS:
Current Ratio measures the liquidity position of the company. The ideal or
standard ratio is 2:1. The liquidity position of the company is sound during
2006-07 to 2008-09. But it is not satisfactory in the remaining two years.
Generally a quick ratio 1:1 is considered to represent satisfactory current
financial conditions. NDMPMACU Ltd is having very poor liquidity position.
Debt equity ratio it is having that increasing trend during the study period
year 2010-11 the debt equity ratio is highest i.e. 6.14 ideal ratios is 2:1.
The logical conclusion is the financial structure of the company is sound.
The proprietary ratio during the year 2007-08 is 8.81 and it is lightly
increasing. It is an indication that the proprietary or shareholders funds are
increasing in the year 2011-21 ratios is 14.21.
The inventory turnover ratio during the year 2011-12 is increasing greatly
i.e, 121.79. The high inventory turnover is indication of good management.
58
The debtors turnover ratio during year 2011-12 is 6.04 and previous year
2010-11 is 6.88 because it indicates generally the debtor turnover the
more efficient is the management of credit.
The cash turnover ratio during the year 2011-12 is 44.18 however the
improvement in the cash position has been achieved there after the
companys capable of meeting all each commitment promptly.
The fixed assets turnover ratio increased from 2007-08 to 2009-10 from
4.25 to 10.03 and in 2011-12 6.81 is decreasing.
Total assets turnover ratio has increased from 0.69 in the year 2007-08 to
1.79 in the year 2011-12 ratio shows the firm ability gradually sales from
all sources committed total sales it represents the firm efficiency in work
performance.
Gross profit margin ratio is fluctuating throughout the year in the 2007-08
is 12.78 and it is decreased in the year 2010-11 to 9.40 and it is increased
in the 2011-12 to 13.72. The firm has to try to maintain a fixed gross profit
margin.
The return on equity shows that decreasing in trend. Thus, the company
has not satisfied its share holders. But in 2011-12 this year increasing the
ratio is 6.47.
It is fluctuating trend of earning per share between in the year 2010-11 is
1.14 and 2007-08 is 3.61.
59
SUGGESTIONS:
The company liquidity position is not up to the market. It is suggested to

improve the liquidity position.
The cash ratio is lower for some year and very excess for some other years.
So the cash reserves must be standardized.
It is suggested to Gross profit decreased comparatively than previous year.

So, the Gross profit must be improved.
The Net profit of the company should be improved as the company so far
losses from the last 5 years.
It is suggested to return on equity capital should be improved by overcoming
the losses for the last 2 years.
60
It is suggested to the company should maintain the fixed rate of working

capital.
It is suggested to improve the earning per share.
BIBLIOGRAPHY
1. Khan. M.Y & Jain P.K, Financial management 3rd Edition; New Delhi, Tata
Mcgraw Hills, 2002.
2. Pandey I.M, Financial management 11th Edition; Bombay, Vikas Publishers,
2005.
3. Prasanna Chadra; Financial Management 4th Edition. New Delhi , Tata Mcgraw Hills.
2002.
4. Sharma R.K & Shashik Gupta; Management Accounting 10TH Edition;

Bombay, Kalyani Publishers, 2005 .
WEBSITE
www.google.com
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INTRODUCTION

Financial management is that managerial activity which is concerned with

Meaning of financial management:

A firm secures whatever capital it needs and employees it (finance activity) in

Analysis of Financial Statements:

Profit and Loss Account:

Nature of Financial Statement:

V. Accounting Standards and guidance notes.

These are reports (or) summarized reviews about the performance,

These statements are prepared as per accounting concepts and

It is influenced by the personal judgment of the accountant these

Importance of Financial Statements:

compiling statistics concerning business which, in turn, help in compiling

comment upon the business enterprise.

11) The shareholders and the Lenders:

Types of Financial Statements Analysis:

Techniques of analysis & Interpretation:

Nature and Scope of Ratio analysis:

Significance of Ratio Analysis:

Standards for Comparison:

comparing a company own past

OBJECTIVES OF RATIOS ANALYSIS

LIMITATIONS OF RATIO ANALYSIS

5. Different meaning assigned to the same term: Different firms in order to

SHORT-TERM OR LIQUIDITY RATIO:

current assets by current liabilities.

This ratio indicates the proportion of working capital tied up in

LONG-TERM SOLVENCY RATIOS (LEVERAGE RATIOS)

short and long-term obligations.

relationship between the net worth or equity and total assets.

I. It is an index of the amount of the proprietors funds invested on the total

e) Current liabilities To Net worth Ratio:

b) Receivable Turnover or Debtors Turnover or Debtors velocity:

c) Creditors Turnover Ratio or Creditors Velocity:

e) Working Capital Turnover Ratio:

g) Current Assets Turnover Ratio:

b) Net Profit Ratio:

c) Return on Equity or Net worth or Shareholders Fund Ratio: It is the ratio,

o This ratio indicates the productivity of shareholders fund.

Statement of the Problem:

NEED AND PURPOSE OF THE STUDY

OBJECTIVES OF THE STUDY

To apply certain financial ratios to analyze the performance of the company.

SCOPE OF THE STUDY

This project is as a reference guide or as a source of information. It

It deals with analysis an interpretation of data collected through the

LIMITATIONS OF THE STUDY

Financial statement analysis is based on balance sheet, Profit and loss

DAIRY INDUSTRY IN INDIA

REVIEW OF DAIRYING IN INDIA:

people. Large number of people depends upon milk as an important source of

Organized handling of milk would lead to proper procurement measures,

WORLD FOCUS ON INDIAN DAIRY:

Indian dairying is emerging as a Sunrise Industry India represents one of the

COMPETITIVE ADVANTAGES OF INDIAN DAIRY

In the emerging liberalized global scenario, trade distorting agricultural

substantial and continued investments in building up milk production . India can

It is therefore necessary to evolve a long-term dairy industry policy that will

As the years passed, APDDCF built up the infrastructure needed to

A dedicated research cell is actively pursuing way and means of bettering

(a) REACHING OUT OF THE WORLD

SECTION I.4 VIJAYA DAIRY AT A GLANCE

Vijaya Dairy Limited

Nature of the Business