ANALYSIS OF SHORT-TERM FINANCIAL POSITION

OR
TEST OF SOLVENCY

The short-term obligations of a firm can be met only when there are sufficient liquid assets.
Therefore, a firm must ensure that it does not suffer from lack of liquidity or the capacity to pay
its current obligations. It is very important to have a proper balance in regards to the liquidity of
the firm. Two types of ratios can be calculated for measuring short-term financial position or short-
term solvency of the firm.

(A) Liquidity ratios.

(B) Current Assets Movement or Efficiency Ratios.

(A) LIQUIDITY RATIOS

Liquidity refers to the ability of a concern to meet its current obligations and when these become
due. The short-term obligations are met by realizing amounts from current, floating or circulating
assets. The current assets should either be liquid or near liquidity. These should be convertible into
cash for paying obligations of short-term nature. To measure liquidity of a firm, following ratios
can be calculated.
(i) Current Ratio
(ii) Quick or Acid Test or liquid Ratio
(iii) Absolute Liquid Ratio or cash position Ratio

CURRENT RATIO:
Current ratio may be defined as the relationship between current assets and current liabilities. This
ratio, also known as working capital ratio, is a measure of liquidity and is most widely used to
make the analysis of short-term financial position or liquidity of affirm it is calculated with the
help of following formula:

FORMULA = Current Assets

Current liabilities

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 Year Current asset Current Liability Current Ratio
2018 246.51 117.16 2.104045749
2017 238.71 109.65 2.177017784
2016 276.23 79.63 3.468918749
2015 230.35 63.03 3.654608916
2014 230.9 104.77 2.203875155

INTERPRETATION: A ratio equal or near to the rule of thumb of 2:1 i.e. current asset doubles
the current liabilities is considered to be satisfactory. As per the above table current ratio of PTL
is satisfactory as it is greater than 2:1 for last five years.

QUICK/ LIQUID/ OR ACID TEST RATIO:

Quick Ratio, also known as Acid Test or Liquid Ratio, is a more rigorous test of liquidity than the
current ratio. The term ‘liquidity’ refers to the ability of a firm to pay short-term obligations as and
when they become due. An asset is said to be liquid if it can be converted into cash within a short
period without loss of value. Quick ratio can be calculated with the help of following formula:

FORMULA = Quick Asset

Current Liabilities

year Current asset inventories Quick asset Current liability quick ratio
2018-19 246.51 47.44 199.07 117.16 1.6991294
2017-18 238.71 31.92 206.79 109.65 1.8859097
2016-17 276.23 26.08 250.15 79.63 3.141404
2015-16 230.35 27.75 202.6 63.06 3.2128132
2014-15 230.9 33.14 197.76 104.77 1.8875632
INTERPRETATION: As a rule of thumb or as a convention quick ratio 1:1 is considered
satisfactory. Above table shows that quick ratio of PTL for last five years is greater than standard
norms of 1:1 and has shown good liquidity position.

ABSOLUTE LIQUID OR CASH RATIO:

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Some authorities are of opinion that the absolute liquid should be calculated together with current
ratio and acid test ratio so as to exclude even receivable from current assets and find out absolute
liquid assets.

FORMULA = Absolute Liquide Assets

Current Liabilities
Absolute Liquid Assets=Cash & Bank +Short-term Securities

Year Absolute liquid asset current liability cash ratio

2018-19 102.47 117.16 0.87461591
2017-18 123.55 109.65 1.126766986
2016-17 97.58 79.63 1.225417556
2015-16 118.15 63.03 1.874504204
2014-15 181.9 104.77 1.736184022

INTERPRETATION: The acceptable norm for this ratio is 0.5:1 or 1:2. As per the table in the
year 2018-19 the ratio is near to 1:2. For the last four years previous to financial year 2018-19 the
absolute liquid ratio was not up to the mark.

CURRENT ASSETS MOVEMENT OR EFFECIENCY/ ACTIVITY RATIOS:

Funds are invested in various assets in business to make sales and earn profits. The efficiency with
which assets are managed directly affects the volume of sales. The better the management of assets,
the larger is the amount of sales and the profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These ratios are also called
turnover ratios because they indicate the speed with which assets are converted or turned over into
sales. Current ratio and acid test ratio ignore the movement of current assets, it is important to
calculate the following turnover or efficiency ratios to comment liquidity or the efficiency with
which the liquid assets are being used by the firm.

(i) Inventory/ Stock turnover Ratio

(ii) Debtors turnover Ratio
(iii) Creditors/ payables Turnover Ratio
(iv)Working Capital Turnover Ratio

INVENTORY TURNOVER RATIO:

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Every firm has to maintain a certain level of inventory of finished goods to be able to meet the
requirements of business. But the level of inventory should be neither be too high nor too low.
Inventory turnover ratio also known as stock velocity ratio. It would indicate whether inventory
has been efficiently used or not. The purpose is to see whether the required minimum funds have
been locked up in inventory.

FORMULA = Net sales

Average Inventory at Cost

year net sales Average inventory ITR

2018-19 871.74 47.44 18.3756324
2017-18 766.9 31.92 24.0256892
2016-17 662.83 26.08 25.4152607
2015-16 523.17 27.75 18.852973
2014-15 536.01 33.14 16.1741098

INTERPRETATION: According to the table for the last five-year inventory turnover ratio of
PTL was highest in the 2016-17. After that it started decreasing. The declining inventory turnover
ratio of PTL shows the changing scenario adopted by the company of keeping inventory with
supplier instead if keeping with them.

DETORS/ RECEIVABLE TURNOVER RATIO:

A concern may sell goods on cash or credit. Volume of sales can be increased by following liberal
credit policy. But the effect of a liberal credit policy may result in tying up substantial funds of
firm in the form of trade debtors (or receivables, i.e. debtors plus bills receivables). Debtor turnover
ratio indicates the velocity of debt collection of firm. In simple words, it indicates number of times
average debtors are turned over during a year thus:

Debtor (receivable) Turnover Ratio = Net Credit Annual Sales

Average Trade Debtors

year net sales Average trade debtors DTR

2018-19 871.74 18.74 46.5176094
2017-18 766.9 15.27 50.2226588
2016-17 662.83 13.07 50.7138485
2015-16 523.17 7.49 69.8491322
2014-15 536.01 6.87 78.0218341

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INTERPRETATION: There is no rule of thumb which may be used as a norm to
interpret the ratio. From the year 2014-15 debtor turnover ratio of PTL is gradually
decreasing year by year. It was 78.02 in the year 2014-15 and 69.84 in the year
2015-16 which shows that the firm is not very efficient in managing its debtors.

AVERAGE COLLECTION PERIOD

The average collection period represents the average number of days for which a firm has to wait
before its receivables are converted into cash. The ratio can be calculated as follows:

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

year no of working days DTR average collection period

2018-19 365 18.74 19.47705443
2017-18 365 15.27 23.90307793
2016-17 365 13.07 27.92654935
2015-16 365 7.49 48.73164219
2014-15 365 6.87 53.12954876

INTERPRETATION: Generally shorter the average collection period the better is the quality of
debtors as it implies quick payment by debtors. Average collection period ratio of PTL shows
decrease in average collection period. It was 54 days in the year 2014-15 and 50 days in the year
2015-16 which shows better collection policy and credit terms of company.

CREDITORS/ PAYABLE TURNOVER RATIO:

In the course of business operations, a firm has to make credit purchases and incur short-term
liabilities. A supplier of goods, i.e. creditors, is naturally interested in finding out how much time
the firm is likely to take in repaying its trade creditors. Creditor Turnover ratio can be calculated
as follows:

FORMULA = Net Credit Annual Purchases

Average Trade Creditors

year net credit purchases average trade creditors CTR

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 2018-19 665.23 104.15 6.387229957
2017-18 587.56 98.47 5.96689347
2016-17 503.19 70.13 7.175103379
2015-16 404.91 54.01 7.49694501
2014-15 414.6 48.18 8.605230386

INTERPRETATION: Generally higher the creditor velocity better it is. Creditor turnover ratio
of PTL is going on decreasing from the year 2014-15 which shows that firm is not enjoying
actually the credit promised by the supplier.

AVERAGE PAYMENT PERIOD RATIO:

The average payment period ratio represents the average number of days taken by the firm to pay
its creditors. Average payment period can be calculated with the help of following formula.

Average Payment Period = No. of Working Days

Creditors Turnover Ratio

Year no. of working days CTR Average payment period ratio

2018-19 365 6.387229957 57.14527306
2017-18 365 5.96689347 61.17085915
2016-17 365 7.175103379 50.87034719
2015-16 365 7.49694501 48.68649824
2014-15 365 8.605230386 42.41606368

INTERPRETATION: Average payment period ratio represents the average number of days taken
by the firm to pay its creditors. Generally, lower the ratio better is the liquidity position of the firm.
Average payment period ratio of PTL shows good liquidity position of the company as it decreased
from 61 days in the year 2017-18 to 57 days in the year 2018-19, whereas the previous three years
it had been increasing which shows a very poor liquidity position.
WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the utilization of net working capital. This
ratio indicates the number of times the working capital is turned over in the course of a year. This
ratio measures the efficiency with which working capital is used by the firm.

Working Capital Turnover Ratio = Cost of Sales

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 Average Working Capital

year net sales Current Asset Current Liability Working Capital WCTR
2018-19 871.74 246.51 117.16 625.23 1.394270908
2017-18 766.9 238.71 109.65 528.19 1.451939643
2016-17 662.83 276.23 79.63 386.6 1.714511123
2015-16 523.17 230.35 63.03 292.82 1.786660747
2014-15 536.01 230.9 104.77 305.11 1.756776245

INTERPRETATION: Working capital position of the company is not as sound as it

should be. There is an increase in working capital from year 2014-15 to 2015-16
which shows the efficiency with which the working capital is being used by the firm.
But from 2015-16 there is a decrease in the working capital position.

ANALYSIS OF LONG-TERM FINANCIAL POSITION

OR
TEST OF SOLVENCY

The term ‘solvency’ refers to the ability of a concern to meet its long-term obligations. The long-
term indebtedness of a firm includes debenture holders, financial institutions providing medium-
and long-term loans and other credit selling goods on installment basis. Long term solvency ratios
indicate a firm’s ability to meet the fixed interest and costs and repayment schedules associated
with its long-term borrowing. The following ratios serve the purpose of determining the solvency
of the concern.
(i) Debt-Equity Ratio
(ii) Funded-Debt to Total Capitalisation Ratio
(iii) Proprietory or Equity Ratio
(iv) Solvency Ratio
(v) Fixed Assets to Proprietor’s Fund Ratio
(vi) Fixed Assets to Total Long-Term Funds
(vii) Ratio of Current Assets to Proprietor’s Funds

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(viii) Debt Service Ratio or Interest Coverage Ratio

DEBT-EQUITY RATIO:
Debt- Equity ratio, also known as External- Internal Ratio is calculated to measure the relative
claims of outsider and the owners (i.e. shareholders) against the firm’s assets. This ratio indicates
the relation between the external equities or the outsider’s funds and the internal equities or the
shareholders’ funds, thus:

Debt-Equity Ratio = Outsiders Fund or External Equities

Shareholders’ Funds or Internal Equities

Outsiders Funds= All debts/liabilities to outsiders, whether Long term or short term
Shareholders’ Funds= Equity Share Capital+ Preference Share Capital+ Capital reserves+
Revenue reserves+ Accumulated profits and surpluses – accumulated losses + Deferred expenses.
Year debt equity ratio
2014-15 11.14 225.85 0.049324773
2015-16 9.35 216.37 0.043213015
2016-17 9.16 270.95 0.033806975
2017-18 10.13 251.02 0.04035535
2018-19 8.49 199.65 0.042524418

INTERPRETATION: The ratio indicates the proportionate claims of owners and the outsiders
against the firm’s assets. The debt-equity ratio of PTL shows that the claim of outsiders has
increased and claim of owners has decreased from 2014-15 to 2016-17 continuously. But from
2016-17 to 2018-19, this shows that the claim of outsiders has decreased and claim of owner has
increased.
PROPRIETARY RATIO OR EQUITY RATIO:
A variant to the debt-equity ratio is the proprietary ratio. This ratio establishes the relationship
between shareholder’s funds to the total assets of the firm. It is an important ratio for determining
long-term solvency of a firm. The ratio can be calculated as under:

Proprietary Ratio = Shareholder’s Fund

Total Assets

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Shareholder’s Fund= Equity Share Capital+ Preference Share capital+ Undistributed
Profits+ Reserves& surpluses- (Accumulated Losses+ Deferred Expenses).
year shareholders fund total asset proprietary ratio
2018-19 237.98 366.28 64.97215245
2017-18 228.5 347.5 65.75539568
2016-17 283.37 372.16 76.14198194
2015-16 263.44 336.59 78.2673282
2014-15 212.07 325.34 65.18411508

INTERPRETATION: As equity ratio represents the relationship of owner’s fund to total assets,
higher the ratio or the share of shareholders in total capital of the company better is the solvency
position of the company. Equity ratio of PTL going on increasing from 2014-15 to 2016-17,which
indicates that the assets of the company can be lost without affecting the interest of creditors of
the company whereas it can be seen that from 2016-17 to 2018-19 it has decreased which indicates
that the assets of the company lost is affecting the interest of the creditors of the company.

FIXED ASSETS TO PROPRIETOR’S FUNDS RATIO:

The ratio establishes the relationship between fixed assets and shareholder’s funds. The ratio can
be calculated as follows.

Fixed asset to Proprietor’s Funds = Fixed Assets (After Depreciation)

Shareholders’ funds

year fixed assets shareholders fund Ratio

2018-19 112 237.98 47.06277838
2017-18 97.91 228.5 42.84901532
2016-17 92.08 283.37 32.49461834
2015-16 102.07 263.44 38.74506529
2014-15 88.63 212.07 41.79280426

INTERPRETATION: The ratio indicates the extent to which shareholders’ funds are sunk into
the fixed assets. A fixed asset to net worth ratio of PTL is going in decreasing from 2014-15 to
2016-17 but we can see an increase from the year 2016-17 to 2018-19.

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FIXED ASSETS TO TOLAL LONG TERM FUNDS:
A variant to the ratio of fixed assets to net worth is the ratio of fixed assets to total long-term funds
which are calculated as:

Fixed Assets Ratio = Fixed Assets (After Depreciation)

Total Long-Term Funds
Long Term Funds= Shareholder’s Fund+ Long-Term Borrowings

year fixed assets Total long- term fund Ratio

2018-19 112 249.12 44.95825305
2017-18 97.91 237.85 41.16459954
2016-17 92.08 292.53 31.47711346
2015-16 102.07 273.57 37.3103776
2014-15 88.63 220.56 40.1840769

INTERPRETATION: The ratio indicates the extent to which the totals of fixed assets are
financed by long-term funds of the firm. Generally, the total of fixed assets should be equal to the
total of long-term funds. Long-term funds of PTL for the last three years was more than fixed
assets, it means that a part of the working capital requirements is met out of the long-term funds
of the firm which is a good financial policy, whereas year 2014-15 to 2016-17 the ratio had been
decreasing.

RATIO OF CURRENT ASSETS TO PROPRIETOR’S FUNDS:

This ratio is calculated by dividing the total current assets by the amount of shareholders’ funds.

Current Assets to Proprietors’ Funds = Current Assets X 100

Shareholders’ Funds

year Current Assets shareholders fund Ratio

2018-19 246.51 237.98 103.5843348
2017-18 238.71 228.5 104.4682713
2016-17 276.23 283.37 97.48032608
2015-16 230.35 263.44 87.43926511
2014-15 230.9 212.07 108.8791437

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INTERPRETATION: The table shows the ratio is increasing continuously from the 2014-15.
The increasing trend shows the efficiency level of the company’s solvency position. But we can
see that earlier from the yea 2014-15 to 2015-16 there is a decrease in the ratio. The decreasing
trend of this ratio affects the solvency position of the company.

DEBT SERVICE RATIO OR INTEREST COVERAGE RATIO:

Net income or debt service ratio or simply debt service ratio is used to test the debt- serving
capacity of a firm. The ratio is also known as Interest Coverage Ratio or Fixed Charges Cover or
Times Interest Earned. This ratio is calculated as Follows

Debt Service Ratio = Net Profit before Interest And taxes

Fixed Interest Charges

year net profit fixed interest charged Ratio

2018-19 147.03 0.09 1633.666667
2017-18 140.54 1.01 139.1485149
2016-17 121.76 0.02 6088
2015-16 90.07 0.05 1801.4
2014-15 91.04 0.01 9104

INTERPRETATION: Long-term creditors of the firm are interested in knowing the firm’s
ability to pay interest on their long-term borrowings. Generally, higher the ratio, safer are the long-
term creditors because even if earnings of the firm fall the firm shall be able to meet its
commitments of fixed interest charges. Debt service ratio shows a huge increase as it is increased
from the year 2017-18 to the current year. Similarly, 2015-16 to 2016-17 there is a huge increase,
but there was a decrease in the year 2014-15 to 2015-16.

ANALYSIS OF PROFITABILITY OR PROFITABILITY RATIOS:

The primary objective of a business undertaking is to earn profits. Profit earning is considered
essential for the survival of the business.
In the words of Lord Keynes, “Profit is the engine that drives the business enterprise”. A business
needs profits not only for its existence but also for expansion and diversification. Profits are, thus,
a useful measure of overall efficiency of business. The various profitability ratios are discussed
below:

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GENERAL PROFITABILITY RATIOS
(i) Gross Profit Ratio
(ii) Operating Ratio
(iii) Operating Profit Ratio
(iv) Expenses Ratio
(v) Net Profit Ratio

GROSS PROFIT RATIO:

The gross profit ratio indicates the extent to which selling prices of goods per unit may decline
without resulting in losses on operations of a firm. It reflects the efficiency with which a firm
produces its product. It measures the relationship of gross profit to net sales and it us usually
represented as percentage. It is calculated as per following formula

Gross Profit Ratio = Gross Profit X 100

Net Sales

year Gross Profit net sales Ratio

2018-19 147.03 871.74 16.86626747
2017-18 140.54 771.15 18.2247293
2016-17 121.76 666.15 18.27816558
2015-16 90.07 525.91 17.12650453
2014-15 91.04 539.7 16.86863072

INTERPRETATION: There is no standard norm for gross profit ratio but it should be adequate
to provide for fixed charges, dividends and accumulation of reserves. Higher the gross profit ratio
betters the results. But gross profit ratio of PTL for the last three years going on decreasing. Due
to increase in competition and raw material cost the company was not able to increase its selling
price accordingly and due to this gross profit decreases, whereas earlier to that year it had increased
which indicates that there wasn’t much competition and raw material cost the company was able
to increase its selling price.

OPERATING RATIO:

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Operating ratio measures the cost of operations per rupee of sales. It establishes the relationship
between cost of goods sold and other operating expenses on the one hand and the sales on the other
and generally represented as a percentage

Operating Ratio = Operating Cost X 100

Net Sales

Operating Cost= Cost of goods sold+ operating expenses

year operating cost net sales Ratio

2018-19 740.09 871.74 84.89802005
2017-18 649.57 771.15 84.23393633
2016-17 561.6 666.15 84.30533664
2015-16 452.14 525.91 85.97288509
2014-15 464.98 539.7 86.15527145

INTERPRETATION: Higher the operating ratio, less favorable it is. Operating ratio of PTL
indicates that 90% of sales have been consumed by operating cost and only 10% is left to cover
interest charges, income-tax payment, dividend and the retention of profits as reserves. It is due to
the number of uncontrollable factors beyond the control of the firm.
OPERATING PROFIT RATIO:
This ratio is calculated by dividing operating profit by sales.

Operating Profit Ratio = Operating Profit X 100

Sales
Operating Profit= Net Sales – Operating Cost

year operating profit net sales Ratio

2018-19 131.65 871.74 15.10197995
2017-18 121.58 771.15 15.76606367
2016-17 104.55 666.15 15.69466336
2015-16 73.77 525.91 14.02711491
2014-15 74.72 539.7 13.84472855

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INTERPRETATION: Generally, higher the ratio better it is but the operating profit ratio of PTL
has been increased to 13.84% from 15.10%. It is due to number of uncontrollable factors beyond
the control of firm which affects the operating efficiency of the firm

EXPENSES RATIO:
Expenses ratio indicate the relationship of various expenses to net sales. The operating ratio reveals
the average total variation in expenses. But some of the expenses may be increasing while some
may be falling. Hence, expenses ratios are calculated to analyse the cause of variation of the
operating ratio.

Expenses Ratio = Particular Expense X 100

Net sales

year Operating and adm. expenses net sales Ratio

2018-19 44.24 871.74 5.074907656
2017-18 23.17 771.15 3.004603514
2016-17 198 666.15 29.72303535
2015-16 16.41 525.91 3.120305756
2014-15 10.72 539.7 1.986288679

INTERPRETATION: Lower the ratio, greater is the profitability and higher the ratio, lower is
the profitability. Expenses ratio of PTL going on increasing from 2014-15 to 2016-17, due to
increase in salaries, wages & bonus, taxes and export promotion and marketing. But from 2016-
17 it had decreased by a huge margin from 29.73% to 3%, whereas it had again increased from
2017-18 to 2018-19.

NET PROFIT RATIO:

Net profit ratio establishes a relationship between net profit (after tax) and sales, and indicates the
efficiency of management in manufacturing, selling, administrative and other activities of the firm.
It is calculated as:

Net Profit Ratio = Net Profit after tax X 100

Net Sales

Net Profit Ratio = Net Operating Profit X 100

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 Net Sales

year net profit after tax net sales Ratio

2018-19 82.42 871.74 9.454653911
2017-18 80.1 771.15 10.38708422
2016-17 68.84 666.15 10.33400886
2015-16 51.31 525.91 9.756422202
2014-15 51.84 539.7 9.605336298

year net operating profit net sales Ratio

2018-19 131.65 871.74 15.10197995
2017-18 121.59 771.15 15.76736044
2016-17 104.55 666.15 15.69466336
2015-16 73.76 525.91 14.02521344
2014-15 74.71 539.7 13.84287567

INTERPRETATION: Generally, higher the ratio better it is. But in case of PTL the Net profit
ratio is falling. It is highest in 2017-16 but after that it has declined but this decline is nominal.
Falling net profit ratio is indication of falling profitability so company should give it proper
attention.
CASH PROFIT RATIO:
This ratio measures the relationship between cash generated from operations and the net sales.
Thus,

Cash Profit Ratio = Cash Profit X100

Net Sales

year Cash Profit net sales Ratio

2018-19 101.96 871.74 11.69614793
2017-18 96.92 771.15 12.56824224
2016-17 85.12 666.15 12.77790287
2015-16 65.11 525.91 12.38044532
2014-15 65.04 539.7 12.05113952

INTERPRETATION: Cash profit ratio of PTL for first three years i.e. 2014-15 to 2016-17shows
an increase from 12.05% to 12.77%. After that it started decreasing for next two years due to
increase in expenses.

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OVERALL PROFITABILITY RATIOS:
Profits are measure of overall efficiency of a business. Overall profitability or efficiency of a
business can be measured in terms of profits related to investments made in the business. Various
overall profitability ratios are discussed below.
(i) Return on Shareholder’s Investment or Net worth Ratio
(ii) Return on Equity Capital
(iii) Earning per Share
(iv) Return on Capital Employed
(v) Capital Turnover Ratio

RETURN ON SHAREHOLDERS’ INVESTMENT

This ratio is popularly known as ROI is the relationship between net profits after interest on long-
term borrowings and income tax, because those will be the only profits available for shareholders
and the proprietors’ funds. Thus

Return on Shareholders’ Investment = Net Profit (after interest & tax)

Shareholders’ Funds

Year net profit after int. and tax shareholder's fund Ratio
2018-19 82.42 237.98 34.63316245
2017-18 80.1 228.5 35.05470460
2016-17 68.84 283.37 24.29332675
2015-16 51.13 263.44 19.40859399
2014-15 51.84 212.07 24.44475881

INTERPRETATION: This ratio reveals how well the resources of a firm are being used. Higher
the ratio better are the results. But the ROI ratio of PTL did not show satisfactory results as it going
on increasing after 2016-17. ROI of PTL was highest in the year 2017-18. This ratio also indicates
that the firm is able to face adverse economic condition such price competition, low demand etc.

RETURN ON EQUITY CAPITAL:

In real sense, ordinary shareholders are the real owner of the company. They assume the highest
risk in the company. Thus, they are more interested in the profitability of the company and

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performance of a company should be judged on the basis of return on equity capital of the
company. Return on equity capital is the relationship between profits of a company and its equity
capital can be calculated as:

Return on Equity Capital = Net Profit after tax- preference dividend

Equity Share Capital (Paid-up)

Year net profit after tax - preference dividend equity share capital Ratio
2018-19 82.42 12.13 6.794723825
2017-18 80.1 12.13 660.346249
2016-17 68.84 12.42 554.2673108
2015-16 51.31 12.42 413.1239936
2014-15 51.84 12.42 417.3913043

INTERPRETATION: This ratio is more meaningful to equity shareholders. Higher ratio is better. This
ratio is same as previous ratio, the only difference is that in previous ratio return on total investment is
calculated which includes preference share capital also whereas in ROE only equity capital is taken. In
PTL, preference share capital is not there so both the ratios are same.

EARNING PER SHARE (E.P.S):

Earnings per share is a small variation of return on equity capital and a good measure of
profitability. It is calculated with the help of following formula.

Earnings per Share = Net Profit after tax- Preference Dividend

No. of equity Shares

Year net profit after tax - preference dividend No. of shares Ratio
2018-19 82.42 1.212772219 67.96
2017-18 80.1 1.239554318 64.62
2016-17 68.84 1.242150848 55.42
2015-16 51.31 1.242372881 41.3
2014-15 51.84 1.241974126 41.74

INTERPRETATION: It is a good measure of profitability. E.P.S calculated for number of years

indicates whether or not earning power of company has increased. For the first three years from

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 the financial year 2015-16to 2018-19 it is going on increasing. The year which it had declined was
in the year 2015-16. The decline is due to adverse economic conditions.

RETURN ON CAPITAL EMPLOYED:

It establishes the relationship between profits and the capital employed. The term capital employed
can be defined in a number of ways. The most widely used definition of this term is

(a) Gross Capital Employed= Fixed Assets + Current Assets

(b) Net Capital Employed= Total Assets - Current Liabilities

(c) Proprietors’ Net Capital Employed= Fixed Assets + Current

Liabilities- outside liabilities
(Both long & short-term)

Return on capital employed = Adjusted net profit

Gross capital employed

Year Adjusted Net profit gross capital employed ratio

2018-19 82.42 366.28 22.5019111
2017-18 80.1 347.5 23.0503597
2016-17 68.84 372.16 18.4974205
2015-16 51.31 336.59 15.2440655
2014-15 51.84 325.34 15.9340997

Year Adjusted Net profit net capital employed ratio

2018-19 82.42 483.44 17.04865133
2017-18 80.1 457.15 17.52160122
2016-17 68.84 451.79 15.23716771
2015-16 51.31 399.62 12.83969771
2014-15 51.84 430.11 12.0527307

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 Year Adjusted Net profit Proprietors' net capital employed ratio
2018-19 82.42 483.44 17.04865133
2017-18 80.1 457.15 17.52160122
2016-17 68.84 451.79 15.23716771
2015-16 51.31 399.62 12.83969771
2014-15 51.84 430.11 12.0527307

INTERPRETATION: It is a prime test of the efficiency of business. A higher percentage of

capital employed will satisfy the owner that their money is profitably utilized. But this ratio of
PTL is not satisfying the owners of the company as this ratio decreased for last two years.

CAPITAL TURNOVER RATIO:

This ratio is calculated to measure the efficiency or effectiveness with which a firm utilizes its
resources or the capital employed.

Capital Employed= Fixed Assets +Working Capital

Capital Turnover Ratio = Cost of Goods Sold or Sales

Capital employed

Year Sales Capital employed ratio

2018-19 871.74 241.35 361.1932878
2017-18 771.15 226.97 339.7585584
2016-17 666.15 288.68 230.7572399
2015-16 525.91 269.39 195.2225398
2014-15 539.7 214.76 251.303781

INTERPRETATION: Above table indicates that after the increase in the ratio from the year
2015-16. The ratio decreased in the year 2015-16 with a huge margin.

MARKET TEST OR VALUATION RATIOS

(i) Dividend Yield Ratio

(ii) Dividend Pay-Out Ratio
(iii) Price earnings Ratio

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(iv) Earning Yield Ratio

DIVIDEND YIELD RATIO:

Shareholders are the real owners of a company and they are interested in real sense in the earning
distributed and paid to them as dividends. Therefore, dividend yield ratio is calculated to evaluate
the relationship between dividend per share paid and the market value of the share.

Dividend Yield Ratio = Dividend per Equity Share X 100

Market Price per Share

Dividend per Share = Dividend Paid to Shareholders

Number of Shares

Year Dividend per equity shares market price per share ratio
2018-19 4.122011542 82.44023083 0.05
2017-18 4.123031253 137.4343751 0.03
2016-17 3.46215781 86.55394525 0.04
2015-16 2.657004831 53.14009662 0.05
2014-15 2.657004831 53.14009662 0.05

INTERPRETATION: The ratio was constant in the year 2014-15 and 2015-16. But then it
decreased from the year 2016-17 to 2017-18 and then again increased in the year 2018-19.

DIVIDEND PAY-OUT RATIO:

It is calculated to find the extent to which earning per share have been retained in the business. It
is an important ratio because ploughing back of profits enables a company to grow and pay more
dividends in future.

Dividend Pay-out Ratio = Dividend per equity share X 100

Earnings per Share

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 Dividend per equity
earnings per share ratio
Year shares
2018-19 4.122011542 67.95 60.662422
2017-18 4.123031253 66.05 62.42288
2016-17 3.46215781 55.42 62.47127
2015-16 2.657004831 41.31 64.318684
2014-15 2.657004831 41.74 63.656081

INTERPRETATION: The ratio had ben decreasing continuously from the past four year. The
highest ratio was in the year 2015-16.

PRICE- EARNING RATIO:

The ratio is calculated to make an estimate of appreciation in the value of a company and is widely
used by investors to decide whether or not to buy shares in a particular company. The ratio is
calculated as:

Price-Earnings Ratio = Market Price per equity Share X 100

Earnings per Share

Year Market price per equity shares earnings per share ratio
2018-19 121.3 67.95 178.513613
2017-18 121.27 66.05 183.6033308
2016-17 121.2 55.42 218.6936124
2015-16 124.2 41.31 300.6535948
2014-15 124.2 41.74 297.5563009

INTERPRETATION: Generally, higher the ratio better it is. Price earnings ratio of PTL had been
rising from the year 2014-15 to 2015-16 but it again fell in the year 2016-17 and has been falling
continuously.

EARNING YIELD RATIO:

The ratio also shows a relationship between earning per share and market value of shares. It can
be calculated as follows:

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Earning Yield Ratio = Earnings per Share X 100
Market Price per Share

Year earnings per share Market price per equity shares ratio
2018-19 67.95 1359 0.05
2017-18 66.05 2201.666667 0.03
2016-17 55.42 1385.5 0.04
2015-16 41.31 826.2 0.05
2014-15 41.74 834.8 0.05

INTERPRETATION: The ratio had been constant in the year 2014-15 to 2015-16. From then it
decreased till the year 2017-18, but again increased in the year 2018-19.

LEVERAGE RATIO:
Leverage or capital structure ratio are calculated to test the long-term financial positions of affirm.
Leverage refers to relationship between various long-term forms of financing such as debentures,
preference share capital and equity share capital including reserves.

RATIO OF CURRENT LIABILITIES TO PROPRIETORS’ FUNDS:

The ratio establishes the relationship between current liabilities and the proprietors’ funds and
indicates the amount of long-term funds raised by the proprietors as against short-term borrowings.
It can be calculated as:

Current Liabilities to Shareholders’ Fund = Current Liabilities X 100

Shareholders’ Funds

Year current liability shareholder’s fund ratio

2018-19 117.16 237.98 0.492310278
2017-18 109.65 2228.5 0.049203500
2016-17 79.63 283.37 0.281010692
2015-16 63.03 263.44 0.239257515
2014-15 104.77 121.07 0.865367143

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INTERPRETATION: The ratio was highest in the year 2014-15.

RATIO OF RESERVES TO EQUITY CAPITAL:

The ratio establishes relationship between reserves and equity share capital. The ratio indicates
that how much profits are generally retained by the firm for future growth.

Reserve to Equity Capital = Reserves X 100

Equity Share Capital

Year Reserves equity share capital Ratio

2018-19 225.85 12.13 18.61912613
2017-18 216.37 12.13 17.83759275
2016-17 270.95 12.42 21.81561997
2015-16 251.02 12.42 20.21095008
2014-15 199.65 12.42 16.07487923

INTERPRETATION: The table indicates that the ratio is increasing from the year 2014-15 to
the year 2016-17 which is a good sign for the company. From the year 2016-17 it decreased in the
year 2017-18 but it again increased in the year 2018-19.

TREND ANALYSIS
This method determines the direction upwards and downwards and involves the computation of
percentage relationship that each statement item bears to the same item in base year. The figures
of base year are taken as 100 and trend ratio for other years is calculated on basis of base year.

TREND PERCENTAGES
(Base Year 2014-15=100)

Year net sales trend (%) profit before tax trend (%)
2014-15 871.74 100 127.4 100
2015-16 771.15 88.46100902 122.71 96.3186813

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 2016-17 666.15 76.41613325 105.46 82.7786499
2017-18 525.91 60.32876775 76.22 59.8273155
2018-19 539.7 61.91066144 77.83 61.0910518

INTERPRETATION:
SALES
From the above trend it is be seen that sales of PTL have been falling as the years passed by.
Initially it had decreased by a huge margin but from the next year it decreased with minimal
amount.

PROFITS
From the above trend it is seen that the profits were quite low in year 2017-18. After 2017-18 it
started increasing till the current year.it had been declining from the base year till 2017-18.

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