Escolar Documentos
Profissional Documentos
Cultura Documentos
ON
RATIO ANALYSIS OF L.G LTD.
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
MASTERS DEGREE IN BUSINESS ADMINISTRATION
OF
UTTARAKHAND TECHNICAL UNIVERSITY, DEHRADUN
SUBMITTED TO:
INTERNAL GUIDE EXTERNAL GUIDE
DR.ATUL AGGARWAL RUPAM PANDEY
Professors Assistant manager
IMS L.G. LTD. SELAQUI
Dehradun
SUBMITTED BY
AKSHAYPANWAR
(MB11B32)
This project has been made possible through the direct and indirect cooperation
I express my deep sense of thankful to the various sources both known and unknown
from where I obtained information, help, cooperation and support carrying out and
completing this project.
AKSHAY PANWAR
EXECUTIVE SUMMARY
TITLE PAGE
ACKNOWLEDGEMT
EXECUTIVE SUMMARY
INTRODUCTION TO THE STUDY
REAEARCH METHODOLOGY
COMPANY PROFILE
OBJECTIVE OF THE STUDY
REVIEW OF LITERATURE
FINANCIAL ANALYSIS AND FINDINGS
FINDINGS
SUGGESTIONS
BIBLOGRAPHY
OBJECTIVE OF THE STUDY
Selection of relevant data from the financial statement depending upon the
objective of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of calculated ratios with the ratios of the same firm in the past.
Interpretation of the ratio
Standards of comparison:
The ration analysis involves comparison for a useful interpretation of the financial
statements. A single ratio in itself does not indicate favorable or unfavorable condition.
It should be compared with some standard. Standards of comparison may consist of:
Past ratios, i.e. ratios calculated form the past financial statements of the same
firm;
Competitors ratios, i.e., of some selected firms, especially the most progressive
and successful competitor, at the same pint in time;
Industry ratios, i.e. ratios of the industry to which the firm belongs; and
Protected ratios, i.e., developed using the protected or proforma, financial
statements of the same firm.In this project calculating the past financial
statements of the same firm does ratio analysis.
3. Helps in communicating:-
The financial strength and weakness of a firm are communicated in a more easy
and understandable manner by the use of ratios. Thus, ratios help in communication and
enhance the value of the financial statements.
4. Helps in co-ordination:-
Ratios even help in co-ordination, which is of at most importance in effective
business management. Better communication of efficiency and weakness of an
enterprise result in better co-ordination in the enterprise
5. Helps in control:-
Ratio analysis even helps in making effective control of business.The weaknesses
are otherwise, if any, come to the knowledge of the managerial, which helps, in
effective control of the business.
b) Utility to shareholders/investors:-
An investor in the company will like to assess the financial position of the
concern where he is going to invest. His first interest will be the security of his
investment and then a return in form of dividend or interest. Ratio analysis will b
useful to the investor in making up his mind whether present financial position of the
concern warrants further investment or not.
C) Utility to creditors: -
The creditors or suppliers extent short-term credit to the concern. They are
invested to know whether financial position of the concern warrants their payments at a
specified time or not.
d) Utility to employees:-
The employees are also interested in the financial position of the concern
especially profitability. Their wage increases and amount of fringe benefits are related
to the volume of profits earned by the concern.
e) Utility to government:-
Government is interested to know overall strength of the industry. Various
financial statement published by industrial units are used to calculate ratios for
determining short term, long-term and overall financial position of the concerns.
Ratio analysis is very important in revealing the financial position and soundness
of the business. But, inspite of its advantages, it has some limitations which restrict its
use. These limitations should be kept in mind while making use of ratio analysis for
interpreting the financial the financial statements. The following are the main
limitations of ratio analysis:
1. False results:-
Ratios are based upon the financial statement. In case financial statement are in
correct or the data of on which ratios are based is in correct, ratios calculated will all so
false and defective. The accounting system it self suffers from many inherent
weaknesses the ratios based upon it cannot be said to be always reliable.
2. Limited comparability:-
The ratio of the one firm cannot always be compare with the performance of
other firm, if uniform accounting policies are not adopted by them. The difference in
the methods of calculation of stock or the methods used to record the deprecation on
assets will not provide identical data, so they cannot be compared.
3. Absence of standard universally accepted terminology:-
Different meanings are given to a particular term, egg. Some firms take profit
before interest and tax; others may take profit after interest and tax. A bank overdraft is
taken as current liability but some firms may take it as non-current liability. The ratios
can be comparable only when all the firms adapt uniform terminology.
1. Current ratio
2. Quick Ratio
The liquidity refers to maintenance of cash, bank balance, which are easily
convertible into cash in order to meet the liabilities as and when arising. So the
liquidity ratio study the firms short term solvency and its ability to pay of its
liabilities. It should be intuitive to observe that a firm, no matter how profitable
it is, cannot continue to exist unless it is able to meet its obligations as they
arise. The day to day problems of financial management consists of highly
important task of finding sufficient cash to meet current obligations. To the
extent that a firm has to make payments to its suppliers before it is paid to for
the goods and services it provides, a cash short fall has to be met, usually
through the short-term borrowings. The liquidity ratios are devised to keep a
track on the extent of the firms exposure to the risk that it will meet its short-
term obligation
These ratios as a group are intended to provide information about a firms
liquidity and the primary concern is the firms ability to pay its current
liabilities. The liquidity ratios provide a quick measure of liquidity of the firm
by establishing relationship between its current assets and current liabilities.
If a firm does not have sufficient liquidity, it may not be in a position to meet
its commitments and thereby loose its credit worthiness.
THE ACTIVITY RATIO
The Activity Ratios are also called the Turnover Ratios or Performance Ratios
as they highlight the ability of management to convert or turn over assets of the
firm into Sales. Activity Ratios measure the efficiency of a firm in employing
the available resources. Such ratio reflects the degree of effectiveness of fund
utilization in the business activity.
A Turnover Ratio or an Activity Ratio is a measure of movement and thus
indicates as to how frequently an account has moved/turned over a period.
These Ratios make a comparative study of the level of sales and the investment
into various assets accounts.
A sharp rise in this ratio may indicate that a company is expanding too quickly,
and is allowing sales to increase more rapidly then the underlying asset base.
Conversely a reduction in the ratio can indicate a decline in efficiency or fall in
demand for the firms product.
These ratios are usually calculated with reference to sales/cost of goods sold
and are expressed in terms of rate or times.
The last group of financial ratios and probably the most often used group of
ratios are the Profitability Ratios. The Profitability Ratios measure the
Operational efficiency of the firm.
There are two groups of persons who are may be specifically interested in the
analysis of the profitability of the firm.
The management which is interested in overall profitability
The Shareholders who are interested in ultimate return available to them.
The performance of the firm can be evaluated in terms of its earnings with
reference to a given level of assets or sales or owners interest etc.
Profitability ratios based on Sales of the Firm
Profits are a factor of sales and are earned indirectly as a part of sales revenue.
So whenever a firm makes sales, it earns profit. But how much? How is the
total sales revenue is going to be used for meeting the cost of goods sold,
indirect expenses and return to shareholders etc. All this aspect can be
analyzed with the help of Profitability Ratio
LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet the obligations as they become
due. Liquidity ratios measure the ability of the firm to meet its current obligations
(liabilities). The liquidity ratios reflect the short-term financial strength and solvency
of a firm. In fact, analysis of liquidity needs the preparation of cash budgets and cash
and funds flow statements; but liquidity ratios, by establishing a relationship
between cash and other current assets to current obligations, provide a quick
measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity, and also that it does not have excess liquidity. The failure of a company to
meet its obligations due to lack of sufficient liquidity, will result in a poor credit
worthiness, loss of credit worthiness, loss of creditors confidence, or even in legal
tangles resulting in the closure of the company. A very high degree of liquidity is
also bad; idle assets earn nothing. The firms funds will be unnecessarily tied up in
current assets. Therefore, it is necessary to strike a proper balance between high
liquidity and lack of liquidity.
The most common ratios which indicate the extent of liquidity are lack of it, are:
(i) Current ratio
(ii) Quick ratio.
(iii)Cash ratio and
(iv)Networking capital ratio.
1.2 RESEARCH METHODOLOGY
LGE DAC has been making ceaseless efforts to create a new culture in our daily life to
present convenience to all its customers all over the world.
In the midst of the revolutionary era never experience before, LG has taken the
initiative to be at the forefront. For instance, LGE DAC introduced the world first
internet home network products among many other market innovative products in the
global appliance market last year. A futuristic life you have only dreamed about is now
available to you.
This and many more is attributed to LGE DACs product leadership and innovative
activities, LGE DAC is achieving rapid growth to become the leading global home
appliance company. LG DAC is recognized in the market along the world for its
innovative home appliances.
LGE DACs success is based on their Fast Innovative activity, which in tern is based on
LGE DACs management philosophy of Great Company, Great people (GCGP). It
believes that a great company produce great people and great people makes a great
company and this synergistic relationship is the foundation of their success.
At present, 5300 employee of 72 domestic and overseas establishments lead the way in
the global electronics industry.
As their Digital LG Vision has progressed, they have reached a place where they are
now, setting new standards worldwide in the digital technologies and products. For
instance, their internet-featured home appliance digital TVs, next generation mobile
handsets and other digital products are on the global leading edge.
As for the future business cores, LGE have directed their energies in Research and
Development for the home network technologies and introduced the worlds first home
network appliances.
At DAC, Total Productivity control, 3 by 3 and 6sigma have been the vehicles driving
the innovation activities which made them the pioneers in the digital world.
At the Digital Appliance Company (DAC), one of the LGs three-holding companies,
the mid-term goal is becoming a global major player in the digital appliance field by
2005.
Since the 1960s, DACs full-scale global markets in 160 countries and establish
manufacturing plants, sales and branch offices in key global locations today.
Welcoming the revolution from home appliances and internet-featured appliances to
diverse home appliances, DAC is in the lead in the digital appliance industry.
CORE VALUES
HUMAN RESOURCE
Today the organisation draws its strength from the highly motivated workforce
which consists of qualified, trained and experienced Managers, Engineers, Supervisors
and Workmen, ever willing to meet the exacting and changing demands of the
enlightened customers, and wholly committed to working towards the companys vision
of leadership in the Transformer Industry.
While the Workmen and Supervisors undergo the induction training, the
Graduate Engineers undergo a vigorous one-year training programme to gain skill,
knowledge and competence, in order that they can measure upto the challenging tasks
and assume higher responsibilities.
Employees at various levels and from diverse functions are exposed to various
Technical and Behavioral training programmes based on the identified needs for self-
development and for the enhancement of organisational effectiveness.
Review of literature:
Financial statements have two major uses in financial analysis .first, they are used to
present a historical recover of the firms financial development. Second, they are used
for a course of action for the firm.
A performance financial statement is prepared for a future period. It is the financial
managers estimate of the firms future performance.
The operation and performance of a business depends on many individuals are
collective decisions that are continually made by its management team. Every one of
these decisions ultimately causes a financial impact, for better or works on the
condition and the periodic results of the business. In essence, the process of managing
involves a series of economic choices that activates moments of financial resources
connected with the business.
Some of the decisions made by management one will be the major, such as investment
in a new facility, raising large amounts of debts or adding a new line of products or
services. Most other decisions are part of the day to day process in which every
functional area of the business is managed. The combine of effect of all decisions can
be observed periodically when the performance of the business is judged through
various financial statements and special analysis.
These changes have profoundly affected all our lives and it is important for
corporate managers, share holders, tenders, customers and suppliers to investment and
the performance of the corporations on which then relay. All who depend on a
corporation for products, services, or a job must be med about their companys ability
to meet their demands time and in this changing world. The growth and development of
the corporate enterprises is reflected in their financial statement.
The ratio is the indicator of the firms commitment to meet its short-term
liabilities. It is an index of the concerns financial stability since it shows
the extent to which the Current Asset exceeds Current Liabilities. A very
high ratio is not desirable which means less efficient use of funds, slow
moving stock, and increase in debtors, Cash and Bank balance lying idle. It
also means excessive dependence on long-term sources of fund, which are
costlier than Current Liabilities and can results in lowering down the
profitability of the concern. A very low ratio can mean that the concern is
not maintaining adequate Cash balances that can result in Bad Credit
Image, loss of Creditors confidence. An ideal ratio is 2:1,which means
creditors will be able to get their payment in full.
In 2007-2008 &2008-09 ratio was high at 3.86 & 3.89 resp. that means that
company has an extensive investment in current asset that does not provide a
significant return.
In 2009-10 positioned improved & current ratio was at 2.66 mainly because of
significant decrease in Cash/Bank, from 69.10crore in 2008-09 to 23.43crore in
2009-10.In 2011-12 the ratio was most satisfactory and was at 2.08.
CURRENT RATIO
The ratio helps in cash budgeting since the flow of cash can be worked out on the
basis of sales.
YEAR CREDIT SALES AVG. DEBTOR D.T.R.
2007-2008 914.77 109.27 8.37
2008-2009 1042.58 103.79 10.05
2009-2010 1166.46 127.93 9.12
2010-2011 1163.19 128.88 9.02
2011-2012 1232.29 118.31 10.41
It was low in year 2007-08 and was at 8.37, which increased to 10.05 in 2008-09 as
a result of increase in Credit Sales but Avg. Debtors remaining somewhat constant.
In 2009-10 & 2010-11 Debtors Turnover Ratio reduced to 9.12 & 9.02 resp. mainly
due to increase in the amount of Avg. Debtors by 23%, while sales increased by
only 12%.
In 2011-12 the positioned improved as Sales increased while Avg. Debtors declined
and was at 10.41There is no ideal ratio. In LG Electronics the policy they follow is
that the Credit given to Debtors should be less than the Credit given by the
Creditors to the Company. Since the ratio is on increase it is Positive sign for the
company.
2. FIXED ASSET TURNOVER RATIO=NET SALES/FIXED ASSET
The ratio indicates the extent to which the investments in fixed assets contribute
towards sales. If compared with previous periods, it indicates whether the investment
in fixed assets has been judicious or not.
In 2007-08 Fixed Asset Turnover Ratio was 3.84, which increased to 4.15 as with the
application of only 5% increase in Fixed Asset, sales increase by 14%
In year 2010-2011 there was a slight decline of in the ratio as with the increase in
Fixed Asset the sale revenue declined.
In the year 2011-12 Fixed Asset Turnover Ratio increased significantly and was 6.02
as sales increased but Fixed Asset declined as in the year 2011-12 there was a decline
in BUILDING, PLANT, FURNITURE and OFFICE EQUIPMENTS by 23%, and
depreciation increased by 20%
The increasing ratio is a good sign for LG Electronics . LG Electronics per rupee
sales generated by per rupee of tangible asset maintained by the firm is increasing.
3. CURRENT ASSET TURNOVER RATIO
=NETSALES/CURRENTASSET
This ratio measures the per rupee sales generated by per rupee of current asset
being maintained. An increasing ratio is a good sign for the company.
In 2007-08 Current Asset Turnover Ratio was 3.34 which reduced in 2008-09 to
3.14 as CA increased by 21% while Sales increased by only 14% Current Asset
increased as a result of increase in Sundry Debtors and Cash & Bank Balance.
In 2009-10/2010-11 there was an increase in the ratio as current asset decreased
while Sales increased, decrease in Current Asset. was mainly due to decrease in
Cash & Bank Balance.
In 2011-12 Current Asset again increased mainly due to the increase in Inventories.
So there was a fall in the ratio. So it is a bit of concern for the company.
It is suggested that the level of inventories should be brought down, as there was
increase in inventories by 12% while sales increased by only 6%. The company
was not producing keeping in view the sales prospects.
4. TOTAL ASSET TURNOVER RATIO=SALES/TOTAL ASSET
The ratio measures the per rupee sales generated by per rupee of total assets being
maintained by the company
There is no ideal ratio, it should be compared with the ratio of previous years of the
same firm if the ratio is increasing it is a good sign for the company.
In 2007-08/2008-09 the ratio was 1.78 & 1.79 resp.
In 2009-10 it increased to 2.15 which was mainly due to the fall in Current asset,
which forms a part of total asset.
In 2010-11 the ratio decreased due to fall in sales revenue.
In 2011-12 the ratio increased due to fall in total asset and increase in Net Sales.
Since the ratio has increased it is a good sign for LG Electronics as it indicates that
sale as a percentage of total assets have increased.
5. WORKING CAPITAL TURNOVER RATIO
=SALES/NET WORKING CAP.
NET WORKING CAPITAL=CURRENT ASSET- CURRENT LIABILITIES
This is also known as Working Capital Leverage Ratio. This ratio indicates whether
or not Working Capital has been effectively utilized in making sales. In case a
company can achieve higher volume of sales with relatively small amount of
working capital, it is an indication of the operating efficiency of the company. The
higher the Working Capital Turnover ratio, the lower is the investment in the
working capital and higher would the profitability.
In the year 2007-08 the ratio was 4.51 which reduced to 4.22 as a result of increase
in Net Working Capital, which was mainly due to substantial increase in Current
Asset in comparison with Current Liabilities.
In year 2009-10 the ratio improved to 6.22 which was due to decrease in net working
capital by 24% while sales increase by 12%.
In 2011-12 the ratio was 7.12%, as a result of increase in sales.
Working capital ratio of LG Electronics is increasing which is a positive sign for the
company.
The sales of the company have increased with less investment in working capital.
In 2007-08 the ratio was 1.45 which continuously declined for all the above period
and was at 0.66 in the year 2011-12. Decrease in the ratio is mainly due assets being
financed more by shareholders funds then by external equities. Total debt decreased
by 21% from 2009-10 to 2011-12 while owners equity increased in the same period
leading to fall in debt equity ratio by 23%.
The larger the ratio, the more is the amount of risk assumed by creditors, and the
claims of the creditors against the assets of the firm.
As the ratio has decreased in case of LG Electronics it is a good sign for the
company.
2. PROPRIETORY RATIO=OWNERS EQUITY/TOTAL ASSET
It establishes relationship between the proprietors funds and the total tangible
assets. It measures the conservatism of capital structure and shows the extent of
shareholders funds in total assets employed in the business. The ratio focuses the
attention on the general financial strength of the enterprise. The ratio is of
particular importance to the creditors who can find out the proportion of
shareholders fund in the total asset employed in the business. A high ratio will
indicate a relatively little danger to the creditors etc. in case of winding up of the
business. A low proprietary ratio indicates greater risk to the creditors since in the
event of losses a part of their money may be lost. A ratio below 50% may be
alarming for the creditors.
YEAR OWNER EQUITY TOTAL ASSET RATIO
2007-2008 251.66 512.08 0.49
2008-2009 312.99 582.41 0.53
2009-2010 354.81 543.24 0.65
2010-2011 396.89 544.69 0.72
2011-2012 408.69 537.54 0.76
In 2007-08 the ratio was 0.49 which increased continuously and was at 0.76 in the
year 2011-12
The increase in the ratio was due to increase in owners equity as a result of
increase in Reserves & Surplus. The positioned has improved which means
relatively higher degree of security for the company. An enterprise is considered
financially weak if it has relatively small investment in firm in comparison to
creditors. A low proprietary ratio would indicate a relatively larger degree of
security for the company.
For LG Electronics owners equity in total asset has increased.
It is a good sign for the Company
3. SOLVENCY RATIO=EXTERNAL EQUITY/TOTAL ASSET
The ratio of external equity to total asset is a variant of the proprietary ratio. This
ratio measures the proportion of the firms assets that are financed by creditors. To
the creditors, a low ratio would ensure greater security for extending credit to the
firm.
In the year 2007-08 the ratio was .94, which decreased to .80 mainly due to
increase in Net Worth as a result of increase in PAT from 50.10crore to 73.43crore a
rise of 55%. An ideal ratio is considered to be1: 1
LG Electronics has achieved this ideal ratio. It is a good sign for the company.
5. INTEREST COVERAGE RATIO=EBIT/FIXED INTEREST
CHARGES
This ratio is also called times interest earned ratio and it measures the ability of the
firm to pay the fixed interest liabilities. The higher the ratio, better it is both for the
firm and for the lenders. For the firm the probability of committing defaults is
reduced and for the lenders the firm is considered less risky.
YEAR EBIT FIX.INT.CHARGES RATIO
2007-2008 84.07 32.47 2.58
2008-2009 106.40 25.11 4.23
2009-2010 114.77 29.66 3.86
2010-2011 99.47 23.94 4.15
2011-2012 112.62 17.08 6.59
In the year 2007-08 the ratio was 2.58, which increased to 4.23 as a result of
decrease in Fixed Interest Charges which reduced to 3.86 due to rise in the fixed
interest charges from 25.11crore to 29.66crore. For the next two years the ratio
increased as a result of fall in the interest charges and was at 6.59 in the year 2011-
12.
As the ratio in case of LG Electronics has increased it is a good sign for the
company.
It is seen that though the loan funds had decreased from 289crore in 2011-2012 to
196crore in 2009-2010 the Fixed interest charges has increased from 25.11crore to
29.66crore. This is due to the fact that a debt burden was paid off in the month of
March for which interest was paid for the whole year.
It is also called as average mark up ratio. The Gross Profit is the difference between
sales revenue and the cost of generating those sales. Therefore, the gross profit
amount and the gross profit ratio depend upon the relationship between selling price
and cost of production including direct expenses. The gross profit ratio reflects the
efficiency with which it produces/purchases goods. The gross profit ratio should be
analyzed and studied as a time series.
The Gross profit ratio for the company is on an increase mainly due to the
continuous increase in the Gross profit, which is mainly due to the increase in sales
as a percentage of direct expenses is more.
A gross profit ratio of 50% means that on every 1-rupee sale, the firm is earning a
gross profit of 50paise.
This ratio indicates the degree to which the selling price of goods per unit may
decline without resulting in losses from operations to the firm.
NET PROFIT RATIO=(NET PROFIT/NET SALES)*100
Net profit is the revenue over expenses in a particular accounting year. It is the net
result of the working of the company during a particular year. This ratio is widely
used as measure of overall profitability and is very useful to proprietors.
It measures the efficiency of management in generating additional revenue over
and above the total cost of operations. It measures the overall efficiency in
manufacturing, administrative, selling and distributing the product.
Net profit ratio in the year 2007-08 was 5.47, which increased to 7.42 in the year
2008-09 because of 54% increase in Net Profit
In 2009-10 the ratio fell to 6.67 because Net profit increase by less than 1% while
sales increased by 12%
In 2010-11 the ratio further fell to 5.53 as a result of decrease in net profit by 17%
In 2011-12 the ratio increased because of rise in net profit by 32%
Since the ratio has increased it is considered a good sign for the company.
3. OPERATIN MARGIN=PBDIT/SALES PBDIT-OTHER INCOME
The Operating Profit refers to the pure operating profits of the firm i.e. the profit
generated by the operation of the firm and hence is calculated before considering any
financial charges, non operating income/loss and tax liability etc. The OP ratio shows
the percentage of pure profit earned on every 1 rupee of sale made. OP ratio would be
less than the Gross Profit ratio as Selling and Administrative Expenses, Financial
Expenses; Depreciation charges are deduced to arrive at OP. The OP ratio in
conjunction with the gross profit ratio depicts whether changes in the profitability of
the firm are caused by changes in the manufacturing efficiency or administrative
efficiency.
In the year 2007-08 and 2008-09 the operating margin improved marginally
But in the year 2004-05 the margin rose to 10.15 from 8.96 in 2008-09 due to increase
in PBDIT
The margin declined to 9.16 in the year 2010-11 due to fall in PBDIT
The margin again improved in 2011-12 to 10.25 due to better figure of PBDIT.
This is a well-known and widely used indicator of the profitability because it can
be easily compared to the previous EPS figures and the EPS figures of other
companies. The aim of every company should be wealth maximization or to
increase the earnings of the shareholders. The EPS helps in determining the
Market Price of the Equity Share of the Company. A comparison of EPS of the
company with another will also help in deciding whether the equity share capital is
being effectively used or not. It also helps in estimating the companys capacity to
pay dividend to its equity shareholders.
The EPS has increased from the year 2007-08 to 2008-09 but in the year 2010-11
the EPS Fell from 2.73 in 2010-11 to 2.26 due to fall in the PAT
In 2011-12 the EPS increased to 2.98 due to increase in PAT by 32%.
The increase in the EPS is a good sign for any company as it increases the
confidence of the equity shareholders on the company.
It is a good sign for LG Electronics .
Dividend per share in 2007-2008 was Rs.5, which was increased to Rs.10 in the
year 2008-09 and remained same for the next year
In the year 2010-11 the DPS fell to Rs.5 as PAT reduced during this period
In 2011-12 the DPS was again at Rs.14 due to increase in PAT.
It is a good sign for the company as well as for the shareholders as the DPS have
increased.
This is the ratio between the DPS and the EPS of the firm, i.e. it refers to the
proportion of EPS that has been distributed by the company as dividend.
As the percentage of DP ratio has increased it is a good sign for the shareholders,
whose earnings are increasing.
EXPENSES RATIO
The expense ratios are the measure of cost control and are computed by establishing
relationship between different expense items and the sales. In a firm total expense
can of operations can be subdivided into.
(A) Cost of Goods Sold
(B) Total Material Cost
(C) Selling and Administrative Expenses
(D) Advertisement Expenses
(E) Employee cost ratio
(F) Return on owners equity
(G) Return on capital employed
The cost of goods sold ratio has decreased continuously from 54.11 in 2007-08
To 50.65 in 2011-12. The company is spending less on direct expenses but still the
sales are increasing which is good for the company.
It is complimentary of gross profit ratio. If cost of goods sold were 50%, gross profit
would be 50%.
(B) TOTAL MATERIAL COST RATIO
= (MATERIAL COST/NET SALES)*100
It measures the amount spent on material (Direct) for producing goods, that is
contributing to Sales.
YEAR MATERIAL COST NET SALES RATIO
2007-2008 458.49 914.77 50.10
2008-2009 526.94 1042.58 50.54
2009-2010 538.47 1166.46 46.16
2010-2011 515.61 1163.19 44.32
2011-2012 521.18 1232.29 42.29
As the ratio is on a fall, it is a very good sign for the company, as the sales are
increasing more in relation to the amount spent on Material.
It measures the amount that the company is spending on selling its product.
It takes into account all the indirect expenses.
The ratio is showing an increasing trend, which is not good for the company.
The company is spending more on selling and administration but the returns in form of
sales are not increasing in relation to the spending.
The company should have a check on the indirect expenses, it has to find out the item
of expenses which is not given returns in a Positive manner.
This ratio measure the amount spent on advertisement and publicity and the
percentage it is contributing to sales.
YEAR ADV. EXP. NET SALES RATIO
2007-2008 114.34 914.77 12.49
2008-2009 120.01 1042.58 11.51
2009-2010 146.07 1166.46 12.52
2010-2011 154.45 1163.19 13.27
2011-2012 159.96 1232.29 12.98
Since the ratio has decreased it is considered a good sign for the company as,
though the advertisement expenditure has increased by 4%. Advertisement expenses
as a percentage of sales have decreased.
However the company has to keep a check on this expense as out of total selling and
administrative expense the company is spending around 40% on Advertisement
expenses.
(E) EMPLOYEE COST RATIO
= (EMPLOYEE COST/NET SALES)*100
This ratio measure the amount spent on Employees wages and salaries and the
percentage it is contributing to sales.
YEAR EMP. COST NET SALES RATIO
2007-2008 54.88 914.77 5.91
2008-2009 63.13 1042.58 6.05
2009-2010 77.69 1166.46 6.66
2010-2011 84.48 1163.19 7.26
2011-2012 93.81 1232.29 7.61
As the ratio is increasing it is a good sign for the company as it is looking after the
employees welfare by increasing their salaries. Also it would motivate the
employees.
One of the most widely used ratios is the return on Capital Employed/Assets. Since
assets are used to generate income, the higher the income, the more productive assets
were during the period. The return on Capital Invested is a concept that measures the
Profit that a firm earns on investing a Unit of Capital. The inclusion of interest is
conceptually sound because total assets have been financed from the pool of funds
supplied by creditors and owners.
2. LG has got a very sound working capital management particular cash and
debtors.
3. The liquidity position of the corporation is very safe which can be easily judged
from the interpretation of liquidity ratios like current ratio, quick ratio and
absolute ratio. This means that LG is in a quite credit worthy position.
4. LG has a sound capital and asset base which also indicates that it is in a position
to clear all its current liabilities. Infact it has become a debt free company.
6. Liquidity ratios have continuously gone under various fluctuations in the last five
years. How ever the ratios are more than the industry standard. This indicates excess
cash is maintained in the organization.
7. Turnover ratios are also in line with the standards.
Suggestions
The company has a good record of quality of goods in the market with best of my
enquiry and investigations.
They should see that the debtors should be collected with in a specified time by the
company. So, that they can discharge some of its creditors or current liabilities and
avoid payment of interest.
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