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ANALYSIS AND
INTERPRETATION
Introduction:
Analysis and Interpretation are the two most essential steps in the process of
analyzing the Financial Statements of a concern with the help of various financial
ratios.
Regression Statistics
Multiple R 0.898868805
R Square 0.807965128
Adjusted R 0.615930256
Square
Standard 4090678.244
Error
Observations 3
ANOVA df SS MS F Significance F
df SS MS F Significanc
eF
Regression 1 7.63E+1 7.63E+1 5.46599 0.257307
0 0 1
Residual 1 1.4E+10 1.4E+10
Total 2 9.03E+1
0
ANALYSIS
Interest and loan funds have R-square at 0.84 which shows there is a high
degree of relationship between interest and loan funds. This also shows that
with increase or decrease in loan funds there is an increase or decrease in
interest liability of the firm. Here the X variable is positive which shows that
there is a positive relation between interest and loan funds. We can say in
future if the company borrows money with every increase in Loan funds the
interest liability of the firm also goes up by 0.061. The value of the X
intercept is 706548.1463 that shows the value of interest when loan funds is
zero.
The residual model plot is showing a random pattern, as we observe one
residuals marked at the higher end of the X axis and one residual marked at
the lower end while the third one is marked on the y axis indicating a good fit
for a linear model.
3. The investment in total asset is depended on the sources of shareholder’s
funds. Here total asset is the depended variable and shareholders fund is the
independent variable.
df SS MS F Significanc
eF
Regression 1 2.22E+1 2.22E+1 11.9835 0.179029
4 4 3
Residual 1 1.85E+1 1.85E+1
3 3
Total 2 2.4E+14
ANALYSIS
The r-square is 0.96 which shows that there is again a high degree of regression
between shareholder’s fund and total asset. The total asset increases or decreases
similarly with an increase or decrease in the value of shareholder’s fund. The slope
of the line is 0.90 which shows that with every increase in shareholders fund the total
asset also increases by 0.90. The X intercept is 10052598 which shows the value of
total asset when the shareholders fund is bought down to zero.
The residual again is a scatter diagram which shows that axis indicating a good fit for
a linear model.
4. The net profit a firm earns is affected by the interest obligation a firm has to bear.
So, the net profit is the dependent variable and the interest is the independent
variable.
PARTICULAR 2007-08 2008-09 2009-10
S
Net Profit 11853662 14127702 24252540
Interest 595190 362622 786848
df SS MS F Significanc
eF
Regression 1 4.64E+1 4.64E+1 1.1414 0.478954
3 3 9
Residual 1 4.07E+1 4.07E+1
3 3
Total 2 8.71E+1
3
ANALYSIS
The r-square for net profit and interest is 0.53 which shows there is a mild
realtionship existing between interest and net profit. The relationship between the
variables is not high but definately a relation exist between the variables. The slpoe
of the line is - 22.6 which shows that when there is an increse in net profit there is
22.6 decrease in interest. This shows that in future if company wants to increase its
net profit it has to decrease its interest. The X- intercept is 3552396 which is the net
profit the firm will achieve if the company no interest obligations.
If we join the points on the residual plots we will get a cyclical figure which
indicates it is not a good fit for a linear model. We need more variables to analyse
this equation.
5. The net sale of the company is a key determinant of the company’s gross
profit. In the linear equation net sales is the independent variable and the
gross profit is the dependent variable.
df SS MS F Significanc
eF
Regression 1 1.73E+1 1.73E+1 59.1328 0.082326
4 4 9
Residual 1 2.93E+1 2.93E+1
2 2
Total 2 1.76E+1
4
6. The amount a company needs is depended on the need for these funds. The
time horizon of the investment and monetary obligation tied with such
decision. So, the amount a company raises by loan is depended on how much
a company needs for purchasing net block..
df SS MS F Significanc
eF
Regression 1 2.07E+1 2.07E+1 88.7800 0.067313
3 3 9
Residual 1 2.34E+1 2.34E+1
1 1
Total 2 2.1E+13
df SS MS F Significanc
eF
Regression 1 3.38E+1 3.38E+1 0.1438 0.769216
1 1 5
Residual 1 2.35E+1 2.35E+1
2 2
Total 2 2.69E+1
2
ANALYSIS
There is a low degree of regression between the share holders fund and net block.
The R-square is only 0.12 which shows that both shareholders fund and net block of
the company are hardly related to each other. Movement of the independent variable
that is net block does not have a substantial impact on the shareholders fund. The X
variable is 0.03522 that is in future if we increase the net block by one the
shareholders fund will also increase by 0.035. This is positive which signifies that
both move in the same direction. The intercept is 15718362 which shows that the in
future if the net block is bought down to zero then the shareholders fund will remain
at 15718362.
The If we join the points on the residual plots we will get a cyclical figure which
indicates it is not a good fit for a linear model. We need more variables to analyse
this equation.
8. The company granting debt facilities to its customers gives extra facilities to
its customers and normally result in increase in sales for the company. Here
we try to analyse the impact of sundry debtors on the sales.
df SS MS F Significanc
eF
Regression 1 3.52E+1 3.52E+1 3.7077 0.304938
4 4 2
Residual 1 9.48E+1 9.48E+1
3 3
Total 2 4.46E+1
4
ANALYSIS
The r-square is 0.78 which shows that there is existence of a relationship between the
sales and sundry debtors. The sales and sundry debtors are not that far apart from the
straight line. The X variable is -63.912 which shows that with every increase in
sundry debtors the sales decline by 63.912. The sales and sundry debtors have a
negative relationship. In future if the company’s sundry debtors come down to zero
then the company’s sale will remain 124449895.1.
If we join the points on the residual plots we will get a cyclical figure which
indicates it is not a good fit for a linear model. We need more variables to analyse
this equation.
PARTICULARS 31st 31st Increase/ % of Increase
March,2008 March,2009 (Decrease) or ( Decrease)
I SOURCE OF FUNDS
1.SHARE HOLDER'S
FUNDS
(a) Share Capital 9600000 9600000 - -
(b) Reserves & Surplus 54155090 61734064 7578974 13.99
TOTAL (1) 63755090 71334064 7578974 13.99
2.DEFERRED TAX 1102656 726880 (375776) (34.07)
LIABILITY
3.LOAN FUNDS
Secured 412930 3776 (409154) (99.08)
Unsecured 0 5800000 5800000 100
TOTAL (2) 412930 5803776 5390846 1305.5
TOTAL SOURCE OF 65270676 77864720 12594044 19.29
FUNDS (1+2+3)
II. APPLICATION OF
FUNDS :
FIXED ASSETS :
Gross Block 65407666 65771866 (36420 (0.55682)
0)
Less : Depreciation 46621636 48769520 (2147884 (4.60705)
)
Net Block 18786030 17002346 1783684 9.494736
CURRENT ASSETS,
LOANS & ADVANCES :
Inventories 4938960 2931840 2007120 40.63851
2. The share capital has remained same from 2007-08 to 2008-09 but there has
been a increase in reserve and surplus by 13.99% which suggest that
company may be looking for a possible expansion or purchase of assets like
machinery.
3. There has been a slight decrease in gross block by .055% which suggest that
during the year the year there has been sale of asset.
4. The sundry debtors have decreased by 86.57% which shows that the firm has
opted for more of cash sales rather than credit sales which will definitely
improve the working capital of the firm and also will decrease the collection
of debt cost of the firm.
5. The investment has decreased by 8.40% , the cash and bank balances of the
firm has also decreased by 23.10% so the firm has less liquid asset in the fy
2008-09 compared to 2009-10.Company has also decreased its loans and
advances by almost 30% which shows that firm is in need for cash as it is
collecting the loans and advances given by the firm. We see that firm is trying
to capitalize the liquid asset it has, These signifies that either the firm is in
need for funds to fulfil its long term needs
6. The current liabilities of the firm has increased by 32 % while the current
assets has decreased by 22% at the same time which again signifies the need
for short term fund requirements for the firm.
7. The health of the firm seems to be deteriorating in fy-2008-09 compared to
2007-08 the company’s borrowings is going up while the company is
financing its short term needs by liquidating its assets like investments and
recovering the loans and advances advanced by it. Sundry debtors of the
company have increased while at the same time the current liabilities have
increased
ANALYSIS
1. The company has brought down its liability to zero. It has cleared off both
the secured and unsecured debt. This will definitely bring down the
interest liability in the coming years. We can also say that debts were
paid at the mid or end of the year as the company has paid some interest
for the fy-2009-10 .
2. The reserve and surplus has decreased by about a quarter which might
have been a possible way to finance the paying off loan funds which the
company has bought down to zero.
3. The gross block of the company has decreased again in the fy 2009-10
which signifies the possible sell of asset pertaining to the block.
4. The investments have again in this year decreased by 15% which might
have been used to pay off the debt obligation of the firm.
7. In the year 2009-10 the current liabilities has also decreased by 6% which
is a good signal for the company.
1. The sales of the company have declined by 4% and even the other income
have also declined by 3% which shows that the demand for company’s
product have declined in the fy 2008-09 from the fy 2007-08.
2. The expenses of the company have also decreased by 6.5% which might have
been due to the decrease in the sales.
3. The interest obligation of the firm has also declined which is a good signal of
the firm.
4. Although the sales and income of the company has decreased but still the
gross profit of the company has increased this is because the expenses,
interest and depreciation has also decreased.
5. The total tax obligation has declined by 38 % which has which shows that the
company has used its resources carefully and managed its tax carefully.
6. The company’s net profit after tax has increased by 17 % which is due to the
decline in the tax liability and decrease in sales.
7. The overall condition of the company has declined although there has been a
increase net profit as the sales and other income of the company has declined.
The profit has increased due to decrease in expenses.
2. The other income of the company has also declined which is not a good sign
for the company.
3. The expenses of the company has declined by 22% which is not a good sign
for the company has declined it can due to the declining sales. The decline in
expenses cannot be termed as a good sign for the company as this is due to
the decline in sales.
4. The interest rate obligation of the firm has gone down as the company pays
off most of its debt in this year. This is huge relief to the company as there is
the burden on the profits of the company will be brought down.
5. The total expenses of the firm has come down in the Fy-2009-10 which is
largerly due to the decrease in expenses and interest obligation.
7. The net profit for the year has come down by 60% this is also due to the huge
decline in sales and other income. This is not a good situation for the
company.
8. The overall condition of the firm has come down in the fy 2009-10 as
compared to 2008-09 this is signified by decline in net and gross profits, low
sales and other income.
PARTICULARS 31st % 31st % 31st %
March,20 March,2009 March,201
08 0
I LIABILITIES
1.SHARE HOLDER'S
FUNDS
(a) Share Capital 9600000 10.54 9600000 9.29 9600000 8.03
(b) Reserves & Surplus 54155090 59.49 61734064 59.76 77068096 64.50
TOTAL (1) 63755090 70.04 71334064 69.05 86668096 72.54
2.DEFERRED TAX 1102656 1.21 726880 0.70 443790 0.37
LIABILITY
3.LOAN FUNDS
Secured 412930 0.45 3776 0.003 0 0
Unsecured 0 0 5800000 5.61 0 0
TOTAL (2) 412930 0.45 5803776 5.61846 0 0
8
4.CURRENTLIABILITI
ES
Current Liabilities 18099440 19.88 12322518 11.9290 10.92
7 13055061
Provisions 7651000 8.40 13110960 12.6923 16.16
4 19309070
25750440 28.29 25433478 24.6214 27.08
1 32364131
TOTAL LIABILITIES 91021117 100 103298198 100 100
(1+2+3 +4) 119476017
II. TOTAL ASSETS
FIXED ASSETS :
Gross Block 65407666 71.85 65771866 63.6718 58.12
4 69441620
Less : Depreciation 46621636 51.22 48769520 47.2123 42.07
6 50264356
Net Block 18786030 20.63 17002346 16.4594 16.05
8 19177264
INVESTMENTS 11629206 12.77 12606996 12.2044 14433770 12.08
7
CURRENT ASSETS,
Inventories 4938960 5.42 2931840 2.83823 2.81
3361760
Sundry Debtors 272032 0.29 507554 0.49134 0.078
8 94011
Cash & Bank Balances 22898564 25.15 28189574 27.2895 32.24
1 38524727
Loans & Advances 32496325 35.70 42059888 40.7169 36.73
6 43884486
60605881 66.58 73688856 71.3360 71.86
5 85864982
TOTAL ASSETS 91021117 100 103298198 100 100
119476017
ANALYSIS
1. The reserves and surplus form the major part of liabilities side of the
company. The reserves and surplus of the company has increased over the
year from 2007-08,2008-09 and 2009-10. While this is opposite for the share
capital % of total liabilities which is constantly on a decline in this years.
2. The secured loan earlier formed .45% of the total liabilities of the company
but this has been declining in the subsequent years we also see that the
company has finally bought it to zero. This will mean lesser interest burden
for the firm and may result in increase in profits.
3. The unsecured loans formed 6% of the total liability in the second year while
it was zero in the first year and it was again bought down to zero in the last
year. The sudden rise in unsecured funds may be to fulfil certain short term
needs of the company.
4. The current liabilities have also constantly declined in the three years which
is a good signal for the company.
5. The gross block has constantly declined in the three years. Gross block are a
major part of the company total assets as it forms 60-70% of the total asset of
the firm. This needs to be most carefully managed.
6. The investment in all the years have declined by a small margin which shows
that the company. Investment form 12% of the company’s total assets.
7. The loan and advances advanced by the firm is forms the other major part of
the company’s total asset. It ranges from 35-40%. They are increasing in all
the three years as the percentage of the total assets.
8. The total current assets of the company forms 65-70% of the company’s total
assets while the fixed assets form 30-40% of the company’s total assets.
I. LIQUIDITY RATIO:
1. CURRENT RATIO:
The current ratio is a popular financial ratio used to test a company's liquidity
(also referred to as its current or working capital position) by deriving the proportion
of current assets available to cover current liabilities. Current ratio means how much
amount of current asset a firm has to pay one rupee of current liabilities. Hence this
ratio judges the efficiency of the company to meet is short term requirements and
also its liquidity position.
TABLE 5.1
PARTICULARS 2007 – 08 2008 – 09 2009 - 10
GRAPH 5.1
Interpretation:
Green Assam Company private limited has taken a good care of its
liquidity position over the past three years. The current ratio of the company has been
over the standard norms all the three years, it being 2.35:1, 2.90:1, and 2.65:1 in
2008, 2009 and 2010 respectively. The working capital position of the firm is very
strong and it has available resources to meet its short term liabilities. This is a
positive sign for the company.
2. QUICK RATIO
The quick ratio, also known as the quick assets ratio or the acid-test ratio -
is a liquidity indicator that further refines the current ratio by measuring the amount
of the most liquid current assets there are to cover current liabilities.
The quick ratio is more conservative than the current ratio because it
excludes inventory and other current assets, which are more difficult to turn into
cash. Therefore, a higher ratio means a more liquid current position. A liquid ratio of
1:1 is considered ideal.
Where,
Quick assets = current assets – inventory – prepaid expenses
TABLE 5.2
GRAPH 5.2
INTERPRETATION:
The company maintains a strong liquidity status. The liquid ratio of the
company is 2.16, 2.78 and 2.55 respectively for years 2008, 2009 and 2010. This
means the company has Rs 2.55 amount of liquid assets in 2010 to pay off Re 1
amount of current liability, which reflects its efficiency in liquidity management. The
company has also succeeded in maintaining a consistency in keeping good liquid
ratio, as for all the three years, the ratio is above the ideal ratio of 1:1.
This ratio gains much significance only when it is used in conjunction with
the current and liquid ratios. A standard of 0.5 : 1 absolute liquidity ratio is
considered an acceptable norm. That is, from the point of view of absolute liquidity,
fifty paisa worth of absolute liquid assets are considered sufficient for one rupee
worth of liquid liabilities.
TABLE 5.3
GRAPH 5.3
INTREPRETATION:
The absolute liquid ratio of Green Assam Company Pvt. Ltd is 0.89:1 in
2007-08, 1.11:1in 2008-09 and 1.89:1 in 2009-10. The company keeps a good level
of absolute liquid assets, which includes only cash in this case, as the company donot
have any short-term investments. The ideal ratio is 0.50:1, and the company is above
the standard ratio in all the three years. This also shows that the short-term credibility
of the company is good as any organization would not hesitate in giving credit to the
company, its absolute liquidity being so strong.
TABLE 5.4
GRAPH 5.4
INTREPRETATION:
The debt equity ratio of the Green Assam Company Pvt Ltd is 0.37:1 in the
year 2009-10. This indicates that the company relies on owners funds to finance most
of its capital requirements. The amount of borrowed fund available in the company is
40 paisa compared to every rupee of share capital, while the ideal ratio says that a
company should have 2 rupees of borrowed funds for every 1 rupee of capital. The
company is enjoying the fruits of financial leverage, which could help the firm earn
even higher profits.
2. PROPRIETARY RATIO
This ratio indicates the extent to which Tangible Assets are financed by
Owner’s Fund.
The higher this Proprietary ratio denotes that the shareholders have provided
the funds to purchase the assets of the concern instead of relying on other sources of
funds like bank borrowings, trade creditors and others. However, too high a
proprietary ratio means that management has not effectively utilize cheaper sources
of finance like trade and long term creditors. 0.5 : 1 is considered as ideal
proprietary ratio
Where,
Shareholder’s funds = Share capital + reserves – fictitious assets
TABLE 5.5
GRAPH 5.5
INTERPRETATION:
Proprietary ratio shows the extent to which the owner’s funds are utilized to
acquire fixed assets. In 2009-10, the proprietary ratio of the company is 0.99:1,
which means that the company has 99 paisa financed from owner’s fund, for every
rupee of fixed assets. This shows that the debt liability of the firm is too less and the
company don’t need to pay any interest. But the company is not availing the benefits
of leveraging as around 99% of the fixed assets are financed by owners. The ideal
ratio is .50:1. Hence, the ratio is both favourable as well as unfavourable for the
company.
3. INTEREST COVERAGE RATIO
The interest coverage ratio is used to determine how easily a company can
pay interest expenses on outstanding debt. The ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) by the company's interest
expenses for the same period.
The lower the ratio, the more the company is burdened by debt expense.
The ability to stay current with interest payment obligations is absolutely critical for
a company as a going concern. While the non-payment of debt principal is a
seriously negative condition, a company finding itself in financial/operational
difficulties can stay alive for quite some time as long as it is able to service its
interest expenses
TABLE 5.6
INTERPRETATION:
The interest coverage ratio of Green Assam Company Pvt. Ltd for the
year is 30.82 times. This means the net profit of the company before paying its
interest and taxes is 30.82 times that of the interest. This makes it very clear that the
company faces no problem in paying off the interest due on its long term
borrowings are the net profit is much higher than the interest. The institutional fund
providers would feel very secure giving additional loans to the company if needed
as the company has maintained high interest coverage ratio for the past three years
as well. This also indicates that the company should focus on borrowed funds for
additional capital as the company is not taking the advantages of financial leverage.
TABLE 5.7
GRAPH 5.7
INTERPRETATION:
From the above findings it will not be wrong to say that the inventory
management of Green Assam Company Pvt. Ltd is very efficient. The inventory
turnover ratio of the company for the year 2009-10 is 39.09 times, which indicates
that in the year 2009, the inventory of the company was converted into sales for
39.09 times, which is quite high. The company needs to keep such high inventory
turnover because the main product of the company is tea, which is perishable in
nature. The tea produced by the company, is in high demand in the local markets,
and has ready buyers for all the produced.
2. ACCOUNTS REVEIVABLES TURNOVER RATIO
The two basic components of Account’s Receivables turnover ratio are net
credit annual sales and average trade debtors. The trade debtors for the purpose of
this ratio include the amount of Trade Debtors & Bills Receivables. This ratio is
expressed in ‘Times’
Debtor’s turnover ratio indicates the number of times the debtors are
turned over a year. The higher the value of debtors turnover the more efficient is the
management of debtors or more liquid the debtors are.
TABLE 5.8
Note: The credit sales of the company are 10% of its total sales.
GRAPH 5.8
INTERPRTATION:
The debtor’s turnover ratio of Green Assam Company Pvt. Ltd. is
40.89 times in 2009-10, which is very high as compared to the standard ratio,
that is around 6 times. The reason for such high debtor’s turnover ratio is that
most of the output of the company is sold in auction, which gives very small
period for repayment. The demand of the tea produced by the firm is also
very high, which reduces the debt repayment period. The company has
maintained high debtors turnover ratio over the past few years.
TABLE 5.9
GRAPH 5.9
INTERPRETATION:
The average collection period of Green Assam Pvt. Ltd is 9.51 days. This
shows that the collection policy of the company is very strong and the company has
good quality of debtors who are very prompt in payment. But this may also be a bit
harsh on the part of the debtors if the company is trying to be too strict in terms on
debt repayment, and may lead to long term loss for the firm. The demand of the tea
produced by the firm is very high, which reduces the debt repayment period.
4. ACCOUNT’S PAYABLE TURNOVER RATIO
Creditor’s turnover ratio indicates the number of times the creditors are
turned over a year. A high creditor’s turnover ratio shows that the creditors are paid
promptly. This situation enhances the credit worthiness of the company. However a
very favorable ratio to this effect also shows that the business is not taking the full
advantage of credit facilities allowed by the creditors.
TABLE 5.10
INTERPRETATION:
The creditor’s turnover ratio of the firm for the year 2009-10 is 0.85
times. This signifies that the creditors of the company turns 0.85 times in a year. The
creditor’s turnover ratio for Green Assam Company Pvt. Ltd. seems to be
misleading. When the Assistant accountant of the firm was contacted, it was
informed that the purchases is low because the company uses tea leaves grown in
their own tea estate. On the other hand, the creditors includes the amount payable to
the estates who provide tea leaves to meet the deficit, as well as other suppliers like
suppliers of tools, oils and lubricants, etc.
The two components of the ratio are cost of sales and the net working
capital. If the information about cost of sales is not available the figure of sales may
be taken as the numerator. Net working capital is found by deduction from the total
of the current assets the total of the current liabilities.
The working capital turnover ratio measures the efficiency with which the
working capital is being used by a firm. A high ratio indicates efficient utilization of
working capital and a low ratio indicates otherwise. But a very high working capital
turnover ratio may also mean lack of sufficient working capital which is not a good
situation.
TABLE 5.11
GRAPH 5.11
INTERPRETATION:
The working capital turnover ratio of the company for the year 2009-10 is
2.30 times which shows efficient management of working capital in the company.
This also signifies that the working capital in the firm is adequate enough to carry out
the daily workings of the company and also meet the short term liabilities. The firm
is also seen to be consistently maintaining high working capital turnover ratio over
the past three years. Although there is a dip in working capital turnover ratio as
compared to 2007-08, it is still not dissatisfactory.
TABLE 5.12
GRAPH 5.12
INTERPRETATION:
The company is maintaining a fixed asset turnover ratio of 6.41 times for
the year 2009-10. This indicates efficient utilization of fixed assets for generation of
sales. There is a also a steady growth in the fixed asset turnover ratio of the firm over
the past three years, from 5.28 in 2007-08 to 5.62 in 2008-09 and 6.41 in 2009-10.
The main reason for a high fixed asset turnover ratio would be use of high – tech
machineries and optimum utilization of resources.
Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed
as a percentage. It expresses the relationship between gross profit and sales. The
basic components for the calculation of gross profit ratio are gross profit and net
sales. Net sales means sales minus sales returns. Gross profit would be the difference
between net sales and cost of goods sold.
Gross profit ratio may be indicated to what extent the selling prices of goods
per unit may be reduced without incurring losses on operations. It reflects efficiency
with which a firm produces its products. As the gross profit is found by deducting
cost of goods sold from net sales, higher the gross profit better it is. Ideal GP Ratio
is 25% to 30%. The rate of gross profit must be enough to cover all operating and nn
operating expenses and leave sufficient amount of profits for owners.
TABLE 5.13
GRAPH 5.13
INTERPRETATION:
Net profit ratio is the ratio of net profit (after taxes) to net sales. It is
expressed as percentage. The two basic components of the net profit ratio are the net
profit and sales. The net profits are obtained after deducting income-tax and,
generally, non-operating expenses and incomes are excluded from the net profits for
calculating this ratio. Thus, incomes such as interest on investments outside the
business, profit on sales of fixed assets and losses on sales of fixed assets, etc are
excluded.
This ratio also indicates the firm's capacity to face adverse economic
conditions such as price competition, low demand, etc. Obviously, higher the ratio
the better is the profitability.
TABLE 5.14
GRAPH 5.14
INTERPRETATION:
Green Assam Company Pvt. Ltd. has a net profit ratio of 14.27% for the
year 2009-10. The net profit of the company after paying off all its liabilities is
14.27% of the net sales in 2009-10, which shows that the company is earning a high
rate on returns. A high net profit ratio means the company could give more dividends
to its shareholders or could keep the funds in reserves to fund for further expansion
or advancement of machineries and technology. Also, there is a steady growth in net
profit ratio of the company over past three years.
3. OPERATING PROFIT RATIO
It is the ratio between operating profit and sales. Operating profit is the
excess of gross profit over the operating cost. It is also called Earnings or Profit
before Interest and Tax. It indicates the operating efficiency or inefficiency of a
business in terms of operating profit.
The operating profit margin ratio indicates how much profit a company
makes after paying for variable costs of production such as wages, raw materials, etc,
as well as other operating expenses like office expenses, selling and distribution
expenses, etc. It is expressed as a percentage of sales and shows the efficiency of a
company controlling the costs and expenses associated with business operations.
This ratio uncovers situations where a company is relying on actions other than
operations to generate an income. Investing activities and sales of assets generate
revenue, but these actions are not usually sustainable and regular as maintaining a
steady flow of sales.
TABLE 5.15
INTERPRETATION
The operating profit ratio of Green Assam Company Pvt. Ltd shows that
in the year 2009-10, the company is earning 19 paisa of operating profit for every
rupee of sales made. Even after paying off all the operating expenses, profit left to
the company before paying interest and taxes in 19.72% in year 2009-10. The growth
rate of the company in terms of operating profit is quite good, as the operating profit
ratio increases from 11.95% in 2007-08 to 14.80% in 2008-09 and further to 19.72%
in 2009-10. The reason for high operating profit ratio in 2009 may be due to increase
in net sales of the company, which is allowing company to enjoy the fruits of
economies of large scale.
4. RETURN ON CAPITAL EMPLOYED
TABLE 5.16
INTERPRETATION
5. RETURN ON ASSETS
This ratio indicates how profitable a company is relative to its total assets.
The return on assets (ROA) ratio illustrates how well management is employing the
company's total assets to make a profit. The ROA ratio is calculated by comparing
net income to average total assets, and is expressed as a percentage.
The higher the return, the more efficient management is in utilizing its asset
base. A low rate of return on assets indicates that the inability of the management to
convert its investments into funds. This ratio is basically judged by comparing the
rateof return of current year to that of the preceding years.
The need for investment in current and non-current assets varies greatly
among companies. Capital-intensive businesses (with a large investment in fixed
assets) are going to be more asset heavy than technology or service businesses.
TABLE 5.17
GRAPH 5.17
INTERPRETATION:
The return on assets ratio of Green Assam Company Pvt. Ltd is 27.84%
for the year 2009-10. This indicates that the net profit of the firm (before interest and
taxes) is 27.84% of that of the fixed assets. This shows a highly efficient
management of resources at the company. The company is hearing high returns on
the investment made on assets. The rate of return on assets is seen to be constant over
2007-08 and 2008-09 but there us a steep increase in the rate in year 2009-10, which
would probably because of purchase of new and better machineries.