A PROJECT REPORT ON

RATIO ANALYSIS OF LIC AND BIRLA SUN LIFE INSURANCE

SUBMITTED BY
MR/MISS ZINE SAGAR VIJAY SANGITA,
ROLL NO: 6279
M.Com. SEM- II
(ADVANCE ACCOUNTANCY)
ACADEMIC YEAR: 2014-15

Under the guidance of PROJECT GUIDE

PROF. S.V.RANE
PROF.ANURADHA GANESH

SUBMITTED TO UNIVERSITY OF MUMBAI

MULUND COLLEGE OF COMMERCE
S N ROAD, MULUND (WEST)
MUMBAI - 400080

DECLARATION FROM THE STUDENT

I, ZINE SAGAR VIJAY SANGITA ROLL No. 6279 Student of Mulund College
Of Commerce, S. N. Road, Mulund (West) 400080, studying in M.Com Part- I
hereby declare that I have completed the project on
RATIO ANALYSIS OF LIC AND BIRLA SUN LIFE INSURANCE
under the guidance of project guide Prof. during the academic year 2014-15. The
information submitted is true to the best of my knowledge.

Date: 03rd March, 2015

Signature

Place : Mulund

CERTIFICATE
I, Prof., hereby certify that Mr/Miss ZINE SAGAR VIJAY SANGITA Roll No.
6279 of Mulund College of Commerce, S. N. Road, Mulund (West), Mumbai
-400080 of M.com Part I (Advanced Accountancy) has completed her project on
RATIO ANALYSIS OF LIC AND BIRLA SUN LIFE INSURANCE
during the academic year 2014-15. The information submitted is true and original
to the best of my knowledge.

Project Guide

External guide

Co-coordinator

Principal

Date: 03rd March , 2015

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Principal of Mulund College

of Commerce DR. (Mrs.) ParvathiVenkatesh, Course - Coordinator Prof. Rane
and our project guide Prof., for providing me an opportunity to do my
project

work

on

RATIO ANALYSIS OF LIC AND BIRLA SUN LIFE

INSURANCE. I also wish to express my sincere gratitude to the non teaching staff of our college. I sincerely thank to all of them in helping me
to carrying out this project work. Last but not the least, I wish to avail
myself of this opportunity, to express a sense of gratitude and love to my
friends and my beloved parents for their mutual support, strength, help and
for everything.

DATE: 03rd March, 2015.

SIGNATURE

PLACE: MULUND

Chapter - 1

Introduction
In any activity of life there is a possibility that a desired event may
fail to occur and that pecuniary (financial) loss may arise. In adventures by
sea the ship may fail to make the port (remember Titanic!); or the cargo may
be damaged or lost. In the adventure of life itself, the life may fail and death
may occur, causing suffering to dependants. Death comes to all sooner or
later, and it is the only truth in this world. The rest as they say is all maya
(illusion). So if death is the only truth, then why do we ignore the
implications of the event? Because of the nature of its permanence, and all
pervasive; death requires understanding the financial implications on the
dependents. Life insurance is therefore the most important of all forms of
insurance. Its significance pales the other forms of not just insurance but
also all investment instruments. The theory of insurance, in general terms,
may be expressed to mean that the good fortune of the many compensates
for the misfortune of the few. The consequences of such misfortunes cannot
be in many instances borne by the individual, and so the insurance company
is prepared to shoulder the burden of these consequences in exchange for an
assessed payment for the risk undertaken. Those who avail themselves of
this service know that such misfortunes will occur but do not know to whom,
and when, and they are willing to make such contributions to a common fund
to buy the right to be compensated of misfortunes if they should befall them.

The insurance company is concerned with any factor that may affect
normal longevity, and once the contract is entered into, and premiums are
regularly paid by the policyholder, the company is at a risk on a permanent
contract which it cannot break.
From the collation of a vast amount of data, an assessment can be
made of the rate of mortality or the likelihood of death occurring at each
age. Numbers can be quoted, but which individuals will die at each age
cannot be stated. Consequently, all who pay life insurance premiums to the
common fund do so with the same willingness that the fund shall be used to
compensate the estates of those contributors at whatever age in life they
may die, within their respective contract period. This is the basic theory of
life insurance. However increasing emphasis on investment aspects has
tended to overshadow the primary purpose of protection against premature
death.

What Is Life Insurance?

A life insurance policy is a contract with an insurance company. In

exchange for premiums (payments), the insurance company provides a
lump-sum payment, known as a death benefit, to beneficiaries in the event
of the insured's death.
Typically, life insurance is chosen based on the needs and goals of the
owner. Term life insurance generally provides protection for a set period of
6

time, while permanent insurance, such as whole and universal life, provides
lifetime coverage. It's important to note that death benefits from all types of
life insurance are generally income tax-free.

The date of maturity, or

Specified dates at periodic intervals, or

Unfortunate death, if it occurs earlier.

1. That of dying prematurely leaving a dependent family to fend for itself.

2. That of living till old age without visible means of support.

Chapter -2
Life Insurance Vs. Other Savings
Contract Of Insurance:
A contract of insurance is a contract of utmost good faith technically
known as uberrima fides. The doctrine of disclosing all material facts is
embodied in this important principle, which applies to all forms of insurance.
At the time of taking a policy, policyholder should ensure that all
questions in the proposal form are correctly answered. Any
misrepresentation, non-disclosure or fraud in any document leading to the
acceptance of the risk would render the insurance contract null and void.
Protection:
Savings through life insurance guarantee full protection against risk of
death of the saver. Also, in case of demise, life insurance assures payment of
7

the entire amount assured (with bonuses wherever applicable) whereas in

other savings schemes, only the amount saved (with interest) is payable.
Aid To Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since
payments can be made effortlessly because of the 'easy instalment' facility
built into the scheme. (Premium payment for insurance is either monthly,
quarterly, half yearly or yearly).
For example: The Salary Saving Scheme popularly known as SSS, provides a
convenient method of paying premium each month by deduction from one's
salary.
In this case the employer directly pays the deducted premium to LIC.
The Salary Saving Scheme is ideal for any institution or establishment
subject to specified terms and conditions.
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of
any policy that has acquired loan value. Besides, a life insurance policy is
also generally accepted as security, even for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax
and wealth tax. This is available for amounts paid by way of premium for life
insurance subject to income tax rates in force.
Assessees can also avail of provisions in the law for tax relief. In such
cases the assured in effect pays a lower premium for insurance than
otherwise.
Money When You Need It:

A policy that has a suitable insurance plan or a combination of different

plans can be effectively used to meet certain monetary needs that may arise
from time-to-time.
Children's education, start-in-life or marriage provision or even
periodical needs for cash over a stretch of time can be less stressful with the
help of these policies.
Alternatively, policy money can be made available at the time of one's
retirement from service and used for any specific purpose, such as, purchase
of a house or for other investments. Also, loans are granted to policyholders
for house building or for purchase of flats (subject to certain conditions).

Chapter -3

Who Can Buy A Policy?

Any person who has attained majority and is eligible to enter into a
valid contract can insure himself/herself and those in whom he/she has
insurable interest.
Policies can also be taken, subject to certain conditions, on the life of
one's spouse or children. While underwriting proposals, certain factors such
as the policyholders state of health, the proponent's income and other
relevant factors are considered by the Corporation.
Insurance For Women

Prior to nationalization (1956), many private insurance companies

would offer insurance to female lives with some extra premium or on
restrictive conditions. However, after nationalization of life insurance, the
terms under which life insurance is granted to female lives have been
reviewed from time-to-time.
At present, women who work and earn an income are treated at par
with men. In other cases, a restrictive clause is imposed, only if the age of
the female is up to 30 years and if she does not have an income attracting
Income Tax.

Medical And Non-Medical Schemes

Life insurance is normally offered after a medical examination of the
life to be assured. However, to facilitate greater spread of insurance and also
to avoid inconvenience, LIC has been extending insurance cover without any
medical examination, subject to certain conditions.
With Profit And Without Profit Plans
An insurance policy can be 'with' or 'without' profit. In the former,
bonuses disclosed, if any, after periodical valuations are allotted to the policy
and are payable along with the contracted amount.
In 'without' profit plan the contracted amount is paid without any
addition. The premium rate charged for a 'with' profit policy is therefore
higher than for a 'without' profit policy.
10

Keyman Insurance
Keyman insurance is taken by a business firm on the life of key
employee(s) to protect the firm against financial losses, which may occur
due to the premature demise of the Keyman.

Chapter -4

About the company

The story of insurance is probably as old as the story of mankind. The

same instinct that prompts modern businessmen today to secure themselves
against loss and disaster existed in primitive men also. They too sought to
avert the evil consequences of fire and flood and loss of life and were willing
to make some sort of sacrifice in order to achieve security. Though the
concept of insurance is largely a development of the recent past, particularly
after the industrial era past few centuries yet its beginnings date back
almost 6000 years.

11

Life Insurance in its modern form came to India from England in the
year 1818. Oriental Life Insurance Company started by Europeans in
Calcutta was the first life insurance company on Indian Soil. All the insurance
companies established during that period were brought up with the purpose
of looking after the needs of European community and Indian natives were
not being insured by these companies. However, later with the efforts of
eminent people like Babu Muttylal Seal, the foreign life insurance companies
started insuring Indian lives. But Indian lives were being treated as substandard lives and heavy extra premiums were being charged on them.
Bombay Mutual Life Assurance Society heralded the birth of first Indian life
insurance company in the year 1870, and covered Indian lives at normal
rates. Starting as Indian enterprise with highly patriotic motives, insurance
companies came into existence to carry the message of insurance and social
security through insurance to various sectors of society. Bharat Insurance
Company (1896) was also one of such companies inspired by nationalism.
The Swadeshi movement of 1905-1907 gave rise to more insurance
companies. The United India in Madras, National Indian and National
Insurance in Calcutta and the Co-operative Assurance at Lahore were
established in 1906. In 1907, Hindustan Co-operative Insurance Company
took its birth in one of the rooms of the Jorasanko, house of the great poet
Rabindranath Tagore, in Calcutta. The Indian Mercantile, General Assurance
and Swadeshi Life (later Bombay Life) were some of the companies
established during the same period. Prior to 1912 India had no legislation to
regulate insurance business. In the year 1912, the Life Insurance Companies
Act, and the Provident Fund Act were passed. The Life Insurance Companies
Act, 1912 made it necessary that the premium rate tables and periodical
valuations of companies should be certified by an actuary. But the Act
discriminated between foreign and Indian companies on many accounts,
putting the Indian companies at a disadvantage.

12

The first two decades of the twentieth century saw lot of growth in
insurance business. From 44 companies with total business-in-force as
Rs.22.44 crore, it rose to 176 companies with total business-in-force as
Rs.298 crore in 1938. During the mushrooming of insurance companies
many financially unsound concerns were also floated which failed miserably.
The Insurance Act 1938 was the first legislation governing not only life
insurance but also non-life insurance to provide strict state control over
insurance business. The demand for nationalization of life insurance industry
was made repeatedly in the past but it gathered momentum in 1944 when a
bill to amend the Life Insurance Act 1938 was introduced in the Legislative
Assembly. However, it was much later on the 19th of January, 1956, that life
insurance in India was nationalized. About 154 Indian insurance companies,
16 non-Indian companies and 75 provident were operating in India at the
time of nationalization. Nationalization was accomplished in two stages;
initially the management of the companies was taken over by means of an
Ordinance, and later, the ownership too by means of a comprehensive bill.
The Parliament of India passed the Life Insurance Corporation Act on the
19th of June 1956, and the Life Insurance Corporation of India was created
on 1st September, 1956, with the objective of spreading life insurance much
more widely and in particular to the rural areas with a view to reach all
insurable persons in the country, providing them adequate financial cover at
a reasonable cost.
LIC had 5 zonal offices, 33 divisional offices and 212 branch offices,
apart from its corporate office in the year 1956. Since life insurance
contracts are long term contracts and during the currency of the policy it
requires a variety of services need was felt in the later years to expand the
operations and place a branch office at each district headquarter. Reorganization of LIC took place and large numbers of new branch offices were
13

opened. As a result of re-organization servicing functions were transferred to

the branches, and branches were made accounting units. It worked wonders
with the performance of the corporation. It may be seen that from about
200.00 crores of New Business in 1957 the corporation crossed 1000.00
crores only in the year 1969-70, and it took another 10 years for LIC to
cross 2000.00 crore mark of new business. But with re-organization
happening in the early eighties, by 1985-86 LIC had already crossed
7000.00 crore Sum Assured on new policies.
Today LIC functions with 2048 fully computerized branch offices, 109
divisional offices, 8 zonal offices, 992 satellite offices and the Corporate
office. LICs Wide Area Network covers 109 divisional offices and connects all
the branches through a Metro Area Network. LIC has tied up with some
Banks and Service providers to offer on-line premium collection facility in
selected cities. LICs ECS and ATM premium payment facility is an addition to
customer convenience. Apart from on-line Kiosks and IVRS, Info Centres
have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai,
Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of
providing easy access to its policyholders, LIC has launched its SATELLITE
SAMPARK offices. The satellite offices are smaller, leaner and closer to the
customer. The digitalized records of the satellite offices will facilitate
anywhere servicing and many other conveniences in the future.
LIC continues to be the dominant life insurer even in the liberalized
scenario of Indian insurance and is moving fast on a new growth trajectory
surpassing its own past records. LIC has issued over one crore policies
during the current year. It has crossed the milestone of issuing 1,01,32,955
new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67%
over the corresponding period of the previous year.

14

From then to now, LIC has crossed many milestones and has set
unprecedented performance records in various aspects of life insurance
business. The same motives which inspired our forefathers to bring
insurance into existence in this country inspire us at LIC to take this
message of protection to light the lamps of security in as many homes as
possible and to help the people in providing security to their families.
Some of the important milestones:
1907: The Indian Mercantile Insurance Ltd. set up, the first company to
transact all classes of general insurance business.
1957: General Insurance Council, a wing of the Insurance Association of
India, frames a code of conduct for ensuring fair conduct and sound business
practices.
1968: The Insurance Act amended to regulate investments and set minimum
solvency margins and the Tariff Advisory Committee set up.
1972: The General Insurance Business (Nationalisation) Act, 1972
nationalised the general insurance business in India with effect from 1st
January 1973.
107 insurers amalgamated and grouped into four companies viz. the
National Insurance Company Ltd., the New India Assurance Company Ltd.,
the Oriental Insurance Company Ltd. and the United India Insurance
Company Ltd. GIC incorporated as a company.

OBJECTIVES OF LIC

Spread Life Insurance widely and in particular to the rural areas and to
the socially and economically backward classes with a view to reaching
all insurable persons in the country and providing them adequate
financial cover against death at a reasonable cost.

Maximize mobilization of people's savings by making insurance-linked

savings adequately attractive.

Bear in mind, in the investment of funds, the primary obligation to its

policyholders, whose money it holds in trust, without losing sight of
15

the interest of the community as a whole; the funds to be deployed to

the best advantage of the investors as well as the community as a
whole, keeping in view national priorities and obligations of attractive
return.

Conduct business with utmost economy and with the full realization
that the moneys belong to the policyholders.

Act as trustees of the insured public in their individual and collective

capacities.

Meet the various life insurance needs of the community that would
arise in the changing social and economic environment.

Involve all people working in the Corporation to the best of their

capability in furthering the interests of the insured public by providing
efficient service with courtesy.

Promote amongst all agents and employees of the Corporation a sense

of participation, pride and job satisfaction through discharge of their
duties with dedication towards achievement of Corporate Objective.

Chapter -5

Balance Sheet
PARTICULARS

MARCH 2013

MARCH 2012

101.00

101.00

Share Application Money

0.00

0.00

Peference Share Capital

0.00

0.00

6,380.29

5,581.21

54,975.35

44,614.54

SOURCES OF FUNDS
Owners' Fund
Equity Share Capital

Reserves & Surplus

Loan Funds
Secured Loans
16

Unsecured Loans

3,729.83

3,255.37

Total

65,186.47

53,552.12

115.25

108.15

Less: Revaluation Reserve

0.00

0.00

Less: Accumulated Depreciation

52.88

45.92

Net Block

62.37

62.24

Capital Work-in-progress

0.00

14.53

184.63

164.03

Current Assets, Loans & Advances

80,313.23

64,191.79

Less : Current Liabilities &

Provisions

15,373.76

10,880.45

Total Net Current Assets

64,939.47

53,311.34

0.00

0.00

65,186.47

53,552.12

USES OF FUNDS
Fixed Assets
Gross Block

Investments
Net Current Assets

Miscellaneous Expenses not written

Total

Chapter -6

Profit and Loss Statement

PARTICULARS

MARCH 2013

MARCH 2012

7,575.92

6,114.86

Material Consumed

0.00

0.00

Manufacturing Expenses

0.00

0.00

90.41

72.44

0.00

110.85

262.78

202.46

0.00

0.00

353.18

385.75

Income :
Operating Income
Expenses

Personnel Expenses
Selling Expenses
Adminstrative Expenses
Expenses Capitalised
Cost Of Sales

17

Operating Profit

7,222.74

5,729.11

82.96

23.09

Adjusted PBDIT

7,305.70

5,752.21

Financial Expenses

5,924.60

4,591.07

Depreciation

7.53

7.42

Other Write offs

0.00

0.00

1,373.57

1,153.72

350.36

316.72

1,023.21

837.00

Non Recurring Items

0.00

77.09

Other Non Cash adjustments

0.00

0.11

Reported Net Profit

1,023.21

914.20

Earnigs Before Appropriation

1,712.14

1,445.03

191.77

181.68

0.00

0.00

32.35

29.42

1,488.02

1,233.93

Other Recurring Income

Adjusted PBT
Tax Charges
Adjusted PAT

Equity Dividend
Preference Dividend
Dividend Tax
Retained Earnings

Chapter -7

Established in 2000, Birla Sun Life Insurance Company Limited (BSLI)

is a joint venture between the Aditya Birla Group, a well known and trusted
name globally amongst Indian conglomerates and Sun Life Financial Inc,
leading international financial services organization from Canada. The local
knowledge of the Aditya Birla Group combined with the domain expertise of
Sun Life Financial Inc., offers a for midable protection for its customers'
future.

18

With an experience of over 10 years, BSLI has contributed significantly

to the growth and development of the life insurance industry in India and
currently ranks amongst the top 6 private life insurance
companies in the country.
Known for its innovation and creating industry benchmarks, BSLI has
several firsts to its credit. It was the first Indian Insurance Company to
introduce "Free Look Period" and the same was made mandatory by
IRDA for all other life insurance companies. Additionally, BSLI pioneered the
launch of Unit Linked Life Insurance plans amongst the private players in
India. To establish credibility and further transparency, BSLI also enjoys the
prestige to be the originator of practice to disclose portfolio on
monthly basis. These category development initiatives have helped BSLI be
closer to its policy holders expectations, which gets further accentuated by
the complete bouquet of insurance products (viz. pure term plan, life stage
products, health plan and retirement plan) that the company offers.
Birla Sun Life Insurance Company Limited (BSLI) is a joint venture
between the Aditya Birla Group, a well known Indian conglomerate and Sun
Life Financial Inc., one of the leading international financial services
organisations from Canada. With an experience of over a decade, BSLI has
contributed to the growth and development of the Indian life insurance
industry, and currently is one of the leading life insurance companies in the
country. BSLI offers a complete range of offerings, comprising of protection
solutions, children's future solutions, wealth with protection solutions,
health and wellness solutions, as well as retirement solutions; it has an
extensive distribution reach of over 500 cities through its network of over
550 branches, over 1,05,000 empanelled advisors, and over 100
partnerships with corporate agents, brokers and banks. The AUM of Birla
Sun Life Insurance is close to Rs. 22,300 Crores and it has a robust capital
base of over Rs. 2,200 Crores, as on 30th September, 2013.
Some of the important milestones:

1914

World War I many Sun Life employees contribute to the war effort, and the
companys sales force helps to distribute war bonds.

19

In Montreal, construction begins on the landmark building known around the

world as The Sun Life Building, the largest of its era in the British Empire. Its
final phase is completed in 1933.

1919

Sun Life is the first Canadian company to offer group insurance within a few
years its an important provider of group plans throughout North America.

1920

Sun Life now has operations in 55 countries around the world.

1930s

Sun Life faces the challenges of the Great Depression. By 1936, company assets
are rising again. In 1937, dividends are paid to shareholders for the first time
since 1932.

1940- 1945

World War II The company is a leading subscriber of Canadian, British and

American war bonds and many of its employees join the war effort overseas. In
1940, the Bank of England begins using a vault three floors beneath the Sun Life
building in Montreal to safeguard $5 billion in foreign securities.

Post- War Years

Around the world, economic and political changes cause Sun Life to leave many
markets, but its good reputation serves it well when those same countries reopen in future years.

1956

The company enters the health and accident insurance business.

1958

Sun Life is a pioneer in technology, buying its first computer a 24-ton Univac II
which sits on a half-acre of space in the companys head office.

1962

20

Sun Life becomes a mutual company, buying back its shares for $65 million in
total.

1973

The company opens its new U.S. headquarters in Wellesley Hills near Boston.

OBJECTIVE
To determine and analyze the Market Potential of the Birla Sun LifeInsurance
Company in Lucknow City.
To study the overall scenario currently prevailing in the market, namely,the per
capital income, purchasing power, occupation, literacy rate, etc
.
To study and determine the competitor position in the market.

Chapter -8

Balance Sheet
(Rs. in Crores)
Particulars
SOURCES OF FUNDS :
Share Capital
Reserves Total
Total Shareholders Funds
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
APPLICATION OF FUNDS :
Gross Block
Less : Accumulated Depreciation
Less:Impairment of Assets
21

Mar-13

Mar-12

120.31
6,509.69
6,630.00
982.34
3,000.80
3,983.14
10,613.14

113.62
5,564.97
5,678.59
1,052.21
3,508.91
4,561.12
10,239.71

4,499.83
2,533.30
0.00

4,122.33
2,375.16
0.00

Net Block
Lease Adjustment
Capital Work in Progress
Investments
Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank
Loans and Advances
Total Current Assets
Less : Current Liabilities and Provisions
Current Liabilities
Provisions
Total Current Liabilities
Net Current Assets
Miscellaneous Expenses not written off
Deferred Tax Assets
Deferred Tax Liability
Net Deferred Tax
Total Assets
Contingent Liabilities

1,966.53
0.00
210.69
6,134.66

1,747.17
0.00
201.02
5,597.95

1,393.28
2,807.26
55.52
360.50
4,616.56

1,320.69
1,689.88
596.95
621.09
4,228.61

1,942.40
190.23
2,132.63
2,483.93
0.00
70.88
226.21
-155.33
10,640.48
2,574.30

1,555.92
157.70
1,713.62
2,514.99
0.00
58.72
216.94
-158.22
9,902.91
1,569.81

Chapter -9

Profit and Loss Statement

(Rs. in Crores)

22

Particulars
INCOME :
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
EXPENDITURE :
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing Expenses
Selling and Administration Expenses
Miscellaneous Expenses
Less: Pre-operative Expenses Capitalised
Total Expenditure
Operating Profit
Interest
Gross Profit
Depreciation
Profit Before Tax
Tax
Fringe Benefit tax
Deferred Tax
Reported Net Profit
Extraordinary Items
Adjusted Net Profit
Adjst. below Net Profit
P & L Balance brought forward
Statutory Appropriations
Appropriations
P & L Balance carried down
Dividend
Preference Dividend
Equity Dividend %
Earnings Per Share-Unit Curr
Earnings Per Share(Adj)-Unit Curr
Book Value-Unit Curr

23

Mar-13

Mar-12

10,267.97
513.47
9,754.50
209.25
12.34
9,976.09

8,855.67
422.19
8,433.48
189.54
92.54
8,715.56

5,830.83
868.50
596.73
423.97
921.50
206.26
0.00
8,847.79
1,128.30
372.23
756.07
219.18
536.89
116.38
0.00
-2.54
423.05
3.61
419.44
0.00
51.33
0.00
307.04
167.34
78.14
0.01
65.00
35.19
35.19
551.53

4,964.66
755.64
545.57
411.25
775.69
304.58
0.00
7,757.39
958.17
324.81
633.36
203.06
430.30
100.30
0.00
-15.39
345.39
-70.14
415.53
0.00
28.19
0.00
322.25
51.33
68.11
0.01
60.00
30.42
30.42
500.22

Chapter -10

Ratio Analysis
A financial ratio (or accounting ratio) is a relative magnitude of two
selected numerical values taken from an enterprise's financial statements.
24

Often used in accounting, there are many standard ratios used to try to
evaluate the overall financial condition of a corporation or other organization.
Financial ratios may be used by managers within a firm, by current and
potential shareholders (owners) of a firm, and by a firm's creditors. Financial
analysts use financial ratios to compare the strengths and weaknesses in
various companies.If shares in a company are traded in a financial market,
the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as
an equivalent percent value, such as 10%. Some ratios are usually quoted
as percentages, especially ratios that are usually or always less than 1, such
as earnings yield, while others are usually quoted as decimal numbers,
especially ratios that are usually more than 1, such as P/E ratio; these latter
are also called multiples. Given any ratio, one can take its reciprocal; if the
ratio was above 1, the reciprocal will be below 1, and conversely. The
reciprocal expresses the same information, but may be more
understandable: for instance, the earnings yield can be compared with bond
yields, while the P/E ratio cannot be: for example, a P/E ratio of 20
corresponds to an earnings yield of 5%.
Values used in calculating financial ratios are taken from the balance
sheet, income statement, statement of cash flows or (sometimes) the
statement of retained earnings. These comprise the firm's "accounting
statements" or financial statements. The statements' data is based on the
accounting method and accounting standards used by the organization.
Financial ratios quantify many aspects of a business and are an
integral part of the financial statement analysis. Financial ratios are
categorized according to the financial aspect of the business which the ratio
measures. Liquidity ratios measure the availability of cash to pay
debt.Activity ratios measure how quickly a firm converts non-cash assets
25

to cash assets. Debt ratios measure the firm's ability to repay long-term
debt. Profitability ratios measure the firm's use of its assets and control of
its expenses to generate an acceptable rate of return. Market ratios
measure investor response to owning a company's stock and also the cost of
issuing stock. These are concerned with the return on investment for
shareholders, and with the relationship between return and the value of an
investment in companys shares.
Financial ratios allow for comparisons

between companies

between industries

between different time periods for one company

between a single company and its industry average

Ratios generally are not useful unless they are benchmarked against
something else, like past performance or another company. Thus, the ratios
of firms in different industries, which face different risks, capital
requirements, and competition are usually hard to compare.
Financial ratios may not be directly comparable between companies that
use different accounting methods or follow various standard accounting
practices. Most public companies are required by law to use generally
accepted accounting principles for their home countries, but private
companies, partnerships and sole proprietorships may not use accrual basis
accounting. Large multi-national corporations may use International
Financial Reporting Standards to produce their financial statements, or they
may use the generally accepted accounting principles of their home country.
There is no international standard for calculating the summary data
26

presented in all financial statements, and the terminology is not always

consistent between companies, industries, countries and time periods.
It refers to the systematic use of ratios to interpret the financial
statements in terms of the operating performance and financial position of a
firm. It involves comparison for a meaningful interpretation of the financial
statements. In view of the needs of various uses of ratios the ratios, which
can be calculated from the accounting data are classified into the following
broad categories
A. Liquidity Ratio
B. Turnover Ratio
C. Solvency or Leverage ratios
D. Profitability ratios

A. LIQUIDITY RATIO:
It measures the ability of the firm to meet its short-term obligations,
that is capacity of the firm to pay its current liabilities as and when they fall
due. Thus these ratios reflect the short-term financial solvency of a firm. A
firm should ensure that it does not suffer from lack of liquidity. The failure
to meet obligations on due time may result in bad credit image, loss of
creditors confidence, and even in legal proceedings against the firm on the
other hand very high degree of liquidity is also not desirable since it would
imply that funds are idle and earn nothing. So therefore it is necessary to
strike a proper balance between liquidity and lack of liquidity. The various
ratios that explains about the liquidity of the firm are:
1. Current Ratio
2. Acid Test Ratio / quick ratio
CURRENT RATIO
The current ratio measures the short-term solvency of the firm. It
establishes the relationship between current assets and current liabilities. It
is calculated by dividing current assets by current liabilities. Current assets
27

include cash and bank balances, marketable securities, inventory, and

debtors, excluding provisions for bad debts and doubtful debtors, bills
receivables and prepaid expenses. Current liabilities includes sundry
creditors, bills payable, short- term loans, income-tax liability, accrued
expenses and dividends payable.
Current Ratio = Current Asset
Current Liabilities
ACID TEST RATIO / QUICK RATIO
It has been an important indicator of the firms liquidity position and is used
as a complementary ratio to the current ratio. It establishes the relationship
between quick assets and current liabilities. It is calculated by dividing quick
assets by the current liabilities.Quick assets are those current assets, which
can be converted into cash immediately or within reasonable short time
without a loss of value. These include cash and bank balances, sundry
debtors, bills receivables and short-term marketable securities.
Acid Test Ratio = Quick Assets
Current liabilities

B. TURNOVER RATIO:
Turnover ratios are also known as activity ratios or efficiency ratios with
which a firm manages its current assets. The following turnover ratios can
be calculated to judge the effectiveness of asset use.
1.
2.
3.
4.

Inventory Turnover Ratio

Debtor Turnover Ratio
Creditor Turnover Ratio
Assets Turnover Ratio
INVENTORY TURNOVER RATIO
This ratio indicates the number of times the inventory has been converted
into sales during the period. Thus it evaluates the efficiency of the firm in
managing its inventory. It is calculated by dividing the cost of goods sold by
average inventory.
Inventory Turnover Ratio = Cost of goods sold
28

Average Inventory
The average inventory is simple average of the opening and closing balances
of inventory. (Opening + Closing balances / 2). In certain circumstances
opening balance of the inventory may not be known then closing balance of
inventory may be considered as average inventory
DEBTOR TURNOVER RATIO
This indicates the number of times average debtors have been converted
into cash during a year. It is determined by dividing the net credit sales by
average debtors.

Debtor Turnover Ratio = Net Credit Sales

Average Trade Debtors
Net credit sales consist of gross credit sales minus sales return. Trade
debtor includes sundry debtors and bills receivables. Average trade debtors
(Opening + Closing balances / 2). When the information about credit sales,
opening and closing balances of trade debtors is not available then the ratio
can be calculated by dividing total sales by closing balances of trade debtor.
Debtor Turnover Ratio = Total Sales
Trade Debtors

INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory has been converted
into sales during the period. Thus it evaluates the efficiency of the firm in
managing its inventory. It is calculated by dividing the cost of goods sold by
average inventory.
Inventory Turnover Ratio = Cost of goods sold
Average Inventory
29

The average inventory is simple average of the opening and closing balances
of inventory. (Opening + Closing balances / 2). In certain circumstances
opening balance of the inventory may not be known then closing balance of
inventory may be considered as average inventory
DEBTOR TURNOVER RATIO
This indicates the number of times average debtors have been converted
into cash during a year. It is determined by dividing the net credit sales by
average debtors.
Debtor Turnover Ratio = Net Credit Sales
Average Trade Debtors
Net credit sales consist of gross credit sales minus sales return. Trade
debtor includes sundry debtors and bills receivables. Average trade debtors
(Opening + Closing balances / 2).
When the information about credit sales, opening and closing balances of
trade debtors is not available then the ratio can be calculated by dividing
total sales by closing balances of trade debtor
Debtor Turnover Ratio = Total Sales
Trade Debtors

ASSETS TURNOVER RATIO

The relationship between assets and sales is known as assets turnover ratio.
Several assets turnover ratios can be calculated depending upon the groups
of assets, which are related to sales.
a)
b)
c)
d)
e)

Total asset turnover.

Net asset turnover
Fixed asset turnover
Current asset turnover
Net working capital turnover ratio

30

 TOTAL ASSET TURNOVER

This ratio shows the firms ability to generate sales from all financial
resources committed to total assets. It is calculated by dividing sales by
total assets.
Total asset turnover = Total Sales
Total Assets

NET ASSET TURNOVER

This is calculated by dividing sales by net assets.

Net asset turnover = Total Sales
Net Assets
Net assets represent total assets minus current liabilities. Intangible and
fictitious assets like goodwill, patents, accumulated losses, deferred
expenditure may be excluded for calculating the net asset turnover.

FIXED ASSET TURNOVER

This ratio is calculated by dividing sales by net fixed assets. Net fixed assets
represent the cost of fixed assets minus depreciation.
Fixed asset turnover = Total Sales
Net Fixed Assets
CURRENT ASSET TURNOVER
It is divided by calculating sales by current assets
Current asset turnover = Total Sales
Current Assets

NET WORKING CAPITAL TURNOVER RATIO

A higher ratio is an indicator of better utilization of current assets and

working capital and vice-versa (a lower ratio is an indicator of poor
31

utilization of current assets and working capital). It is calculated by dividing

sales by working capital. Working capital is represented by the difference
between current assets and current liabilities.
Net working capital turnover ratio =
Total Sales
Working Capital
C. SOLVENCY OR LEVERAGE RATIO:
The solvency or leverage ratios throws light on the long term solvency of a
firm reflecting its ability to assure the long term creditors with regard to
periodic payment of interest during the period and loan repayment of
principal on maturity or in predetermined instalments at due dates. There
are thus two aspects of the long-term solvency of a firm.
a. Ability to repay the principal amount when due
b. Regular payment of the interest.
The ratio is based on the relationship between borrowed funds and owners
capital it is computed from the balance sheet, the second type are calculated
from the profit and loss a/c. The various solvency ratios are
1. Debt equity ratio
2. Proprietary (Equity) ratio
3. Fixed assets to net worth ratio
4. Fixed assets to long term funds ratio
5. Debt service (Interest coverage) ratio
1. DEBT EQUITY RATIO
Debt equity ratio shows the relative claims of creditors (Outsiders) and
owners (Interest) against the assets of the firm. Thus this ratio indicates
the relative proportions of debt and equity in financing the firms assets. It
can be calculated by dividing outsider funds (Debt) by shareholder funds
(Equity)
Debt equity ratio = Outsider Funds (Total Debts)
Shareholder Funds or Equity
The outsider fund includes long-term debts as well as current liabilities. The
shareholder funds include equity share capital, preference share capital,
reserves and surplus including accumulated profits. However fictitious
32

assets like accumulated deferred expenses etc should be deducted from the
total of these items to shareholder funds. The shareholder funds so
calculated are known as net worth of the business.
2. PROPRIETARY (EQUITY) RATIO
This ratio indicates the proportion of total assets financed by owners. It is
calculated by dividing proprietor (Shareholder) funds by total assets.
Proprietary (equity) ratio = Shareholder funds
Total assets
3. FIXED ASSETS TO NET WORTH RATIO
This ratio establishes the relationship between fixed assets and shareholder
funds. It is calculated by dividing fixed assets by shareholder funds.
Fixed assets to net worth ratio = Fixed Assets X 100
Net Worth
The shareholder funds include equity share capital, preference share capital,
reserves and surplus including accumulated profits. However fictitious
assets like accumulated deferred expenses etc should be deducted from the
total of these items to shareholder funds. The shareholder funds so
calculated are known as net worth of the business.

4. FIXED ASSETS TO LONG TERM FUNDS RATIO

Fixed assets to long term funds ratio establishes the relationship between
fixed assets and long-term funds and is calculated by dividing fixed assets by
long term funds.
Fixed assets to long term funds ratio = Fixed Assets X 100
Long-term Funds
5. DEBT SERVICE (INTEREST COVERAGE) RATIO
This shows the number of times the earnings of the firms are able to cover
the fixed interest liability of the firm. This ratio therefore is also known as
Interest coverage or time interest earned ratio. It is calculated by dividing
the earnings before interest and tax (EBIT) by interest charges on loans.
33

Debt Service Ratio = Earnings before interest and tax (EBIT)

Interest Charges

D.PROFITABILITY RATIO:
The profitability ratio of the firm can be measured by calculating various
profitability ratios. General two groups of profitability ratios are calculated.
a. Profitability in relation to sales.
b. Profitability in relation to investments.
Profitability in relation to sales
1. Gross profit margin or ratio
2. Net profit margin or ratio
3. Operating profit margin or ratio
4. Operating Ratio
5. Expenses Ratio

1. GROSS PROFIT MARGIN OR RATIO

It measures the relationship between gross profit and sales. It is calculated
by dividing gross profit by sales. Gross profit is the difference between sales
and cost of goods sold.
Gross profit margin or ratio = Gross profit X 100
Net sales
2. NET PROFIT MARGIN OR RATIO
It measures the relationship between net profit and sales of a firm. It
indicates managements efficiency in manufacturing, administrating, and
selling the products. It is calculated by dividing net profit after tax by sales.
34

Net profit margin or ratio = Earnings after tax X 100

Net Sales
3. OPERATING PROFIT MARGIN OR RATIO
It establishes the relationship between total operating expenses and net
sales. It is calculated by dividing operating expenses by the net sales.
Operating profit margin or ratio = Operating expenses X 100
Net sales
Operating expenses includes cost of goods produced/sold, general and
administrative expenses, selling and distributive expenses.
4. EXPENSES RATIO
While some of the expenses may be increasing and other may be declining
to know the behavior of specific items of expenses the ratio of each
individual operating expenses to net sales should be calculated. The various
variants of expenses are
Cost of goods sold = Cost of goods sold X 100
Net Sales
Administrative Expenses Ratio = Administrative Expenses X 100
Net sales
Selling & distribution expenses ratio = Selling and distribution expensesX100
Net sales
5. OPERATING PROFIT MARGIN OR RATIO
Operating profit margin or ratio establishes the relationship between
operating profit and net sales. It is calculated by dividing operating profit by
sales. Operating profit is the difference between net sales and total
operating expenses. (Operating profit = Net sales cost of goods sold
administrative expenses selling and distribution expenses.)
Operating profit margin or ratio = Operating Profit X 100
Net sales

35

PROFITABILITY IN RELATION TO INVESTMENTS

1. Return on gross investment or gross capital employed
2. Return on net investment or net capital employed
3. Return on shareholders investment or shareholders capital employed.
4. Return on equity shareholder investment or equity shareholder capital
employed.

1. RETURN ON GROSS CAPITAL EMPLOYED

This ratio establishes the relationship between net profit and the gross
capital employed.

The term gross capital employed refers to the total

investment made in business.

The conventional approach is to divide

Earnings After Tax (EAT) by gross capital employed.

Return on gross capital employed = Earnings After Tax (EAT) X 100
Gross capital employed

2. RETURN ON NET CAPITAL EMPLOYED

It is calculated by dividing Earnings Before Interest & Tax (EBIT) by the net
capital employed. The term net capital employed in the gross capital in the
business minus current liabilities.

Thus it represents the long-term funds

supplied by creditors and owners of the firm.

Return on net capital employed = Earnings Before Interest & Tax X 100
Net capital employed

3. RETURN ON SHARE CAPITAL EMPLOYED

This ratio establishes the relationship between earnings after taxes and the
shareholder investment in the business. This ratio reveals how profitability

36

the owners funds have been utilized by the firm. It is calculated by dividing
Earnings after tax (EAT) by shareholder capital employed.
Return on share capital employed = Earnings after tax X 100
Shareholder capital employed

4. RETURN ON EQUITY SHARE CAPITAL EMPLOYED

Equity shareholders are entitled to all the profits remaining after the all
outside claims including dividends on preference share capital are paid in
full. The earnings may be distributed to them or retained in the business.
Return on equity share capital investments or capital employed establishes
the relationship between earnings after tax and preference dividend and
equity shareholder investment or capital employed or net worth.

It is

calculated by dividing earnings after tax and preference dividend by equity

shareholders capital employed.
Return on equity share capital employed
= Earnings after tax (EAT), preference dividends X 100
Equity share capital employed

5. EARNINGS PER SHARE

IT measure the profit available to the equity shareholders on a per share
basis.

It is computed by dividing earnings available to the equity

shareholders by the total number of equity share outstanding

Earnings per share = Earnings after tax Preferred dividends (if any)
Equity shares outstanding

37

6. DIVIDEND PER SHARE

The dividends paid to the shareholders on a per share basis in dividend per
share. Thus dividend per share is the earnings distributed to the ordinary
shareholders divided by the number of ordinary shares outstanding.
Dividend per share = Earnings paid to the ordinary shareholders
Number of ordinary shares outstanding

7. DIVIDENDS PAY OUT RATIO (PAY OUT RATIO)

It measures the relationship between the earnings belonging to the equity
shareholders and the dividends paid to them.

It shows what percentage

shares of the earnings are available for the ordinary shareholders are paid
out as dividend to the ordinary shareholders.

It can be calculated by

dividing the total dividend paid to the equity shareholders by the total
earnings available to them or alternatively by dividing dividend per share by
earnings per share.
Dividend pay our ratio (Pay our ratio) =
Total dividend paid to equity share holders
Total earnings available to equity share holders

8. DIVIDEND AND EARNINGS YIELD

While the earnings per share and dividend per share are based on the book
value per share, the yield is expressed in terms of market value per share.
The dividend yield may be defined as the relation of dividend per share to
the market value per ordinary share and the earning ratio as the ratio of
earnings per share to the market value of ordinary share.
Dividend Yield =

Dividend Per share

38

Market value of ordinary share

9. PRICE EARNING RATIO

The reciprocal of the earnings yield is called price earnings ratio.

It is

calculated by dividing the market price of the share by the earnings per
share.
Price earnings (P/E) ratio = Market price of share
Earnings per share

Chapter -12

Calculation of Ratios

1. Gross Profit Ratios :-

Gross Profit 100

Net sales
39

Sales COGS

100

Net sales
Current year

7575.92 353.18 100

7575.92

Previous year

95.33%

6114.86-385.75

100

6114.86
=

93.69%

Comments : This ratio indicates the relationship between gross profit

and net sales. It is a profitability ratio which shows the efficiency of the
company to earn trading surplus.
2 .Net operating profit Ratio

:- Net operating profit 100

Net Sales

Current Year

1023.21 100
7575.92

=
Previous year

13.35%
914.20 100
6114.86

14.89%

3. Net Profit before Tax Ratio :- Net Profit Before Tax 100
Net Sales
40

Current Year

1373.57 100
7575.92

=
Previous year

18.13%

1153.72 100
6114.86

18.86%

4. Expense Ratio : Employee Benefit Expense Ratio 100

Net Sales
Current Year

90.41 100
7575.92

=
Previous Year

1.19 %
72.44 100
6114.86

1.18 %

6. Depreciation and Amortisation Expenses Ratio =

Depreciation and Amortisation Expenses 100
Net Sales
Current Year

7.53 100
7575.92

41

Previous Year

0.09%

7.42 100
6114.86

=
7. Finance Cost Ratio

0.12 %
Finance Cost 100
Net Sales

Current Year

5,924.60 100
7575.92

Previous Year

78.20%

4,591.07 100
6114.86

75.08%

Comments: This ratio shows the relationship between a particular

expenses and net sales. HIGHER the ratios LOWER the profitability and vice
versa.
8.

Current Ratio

Current Assets
Current Liabilities

Current Year

80313.23
15373.36

5.22:1
42

Previous Year

64191.79
10880.45

5.89 : 1

COMMENTS Current ratio is also known as Bankers Ratio/Working

Capital Ratio. This ratio shows the relationship between current assets and
current liabilities. It also shows the short term solvency position of the
organisation. Ideal current ratio should be 2:1.
9. Stock to Working Capital ratio: Closing Stock 100
Working Capital
Current Year

5257.94 100
4958.05

=
Previous Year

103.04 %

4858.99 100
4018.92

120.90 %

COMMENTS This ratio shows the relationship between closing stock

and working capital. It also shows the immediate solvency and indicated that
how much proportion out of the working capital is invested in stocks. Ideally
it should be less than 100 %.
10.Proprietory ratio

Proprietors funds 100

Total Assets

43

Current Year

55209.68 100
101876.93

=
Previous Year

54.09 %
52216.46 100
95802.99

54.50 %

COMMENTS :- This ratio shows the relationship between proprietors

fund and total assets. It also shows long tern stability and solvency position
of the organisation. Ideally it should be between 65 % to 70 %.
11. Debt Equity Ratio

Borrowed funds
Proprietors funds

Current Year

23636.51
55209.68

= 42.82: 100

Previous Year

21418.82
55216.46

= 38.79 : 100
COMMENTS: - This ratio shows the relationship between borrowed
funds and proprietors funds. It also shows the composition and structure of
the capital invested in the business. Standard ratio should be 2:1
44

12. Debtors Turn Over Ratio = Net Credit Sales

Average Receivables
= Net Credit Sales
Average (Debtors + Bills receivables)
Current Year

38199.43
796.92

= 47.93 times
Previous Year

= 33933.46
904.08
= 37.53 times

Comments :- This ratio is an activity ratio which shows the number of

times good sold to debtors and payment received from them. HIGHER the
ratio is FAVAROUBLE and vice versa.

13. Debtors Velocity Ratio

= 12
Debtors T/o Ratio

Current Year

= 12
47.93
= 0.25 months

Previous Year

= 12
45

37.53
= 0.31 months
COMMENTS :- This ratio shows the quickness in collection of dues
from the debtors. LOWER the ratio is FAVOURAVBLE and vice versa.
14. Creditors Turn Over Ratio = Net Credit Purchases
Average Payables
= Net Credit Purchases
Average (Creditors + Bills payables)
Current Year

9877.40
6369.91

= 1.55 times
Previous Year

8014.37
5883.92

= 1.36 times
Comments :- This ratio is an activity ratio which shows the number of
times goods purchased on credit basis and payments made to creditors.
HIGHER the ratio is FAVOURABLE and vice versa.

46

Years
Debt-Equity Ratio
Long Term Debt-Equity Ratio
Current Ratio
Fixed Assets
Inventory
Debtors
Interest Cover Ratio
PBIDTM (%)
PBITM (%)
PBDTM (%)
CPM (%)
APATM (%)
ROCE (%)
RONW (%)
PE
EBIDTA
DivYield
PBV
EPS

Mar-13
0.7
0.2
0.9
2.4
7.6
4.6
2.4
11.0
8.9
7.4
6.3
4.1
8.6
6.8
27.8
1,128.3
0.7
1.8
35.2

Chapter -14

Bibliography
T.Y.B.COM book of University of Mumbai-Managements accounting
Books of T.Y.B.COM of Financial Accounting Dr.VarshaAinapur
M.com Part II books Advanced Financial AccountingIII

47

Mar-12
0.7
0.3
0.8
2.2
7.0
6.3
2.6
11.9
9.6
8.3
7.0
4.7
9.0
7.5
30.7
958.2
0.6
1.9
30.4

Webligraphy

http://economictimes.indiatimes.com/lic-housing-financeltd/stocks/companyid-10823.cms

http://www.investopedia.com/terms/r/ratioanalysis.asp

http://en.wikipedia.org/wiki/Financial_ratio

http://www.demonstratingvalue.org/resources/financial-ratio-analysis

http://www.moneycontrol.com/financials/lichousingfinance/ratios/LIC

http://www.indiainfoline.com/Markets/Company/Fundamentals/KeyRatios/Adsitya-Birla-Nuvo-Ltd/500303

48