RATIO ANAYLSIS

Ratios are defined as, Relationships expressed in quantitative fear, between figures which have cause and effect relationships, or which are connected with each other in some manner or the other". Ratio analysis is an age old technique of financial analysis. It is the process of determining and presenting the relationships of items and group of items in the financial statements. "The information provided by the financial statements in absolute form is historical and static, conveying ray little meaning to the users. Accounting ratios are designed to show how one number is related to another and the meaning of such relationship. A ratio is worked out by dividing one number with another.

ADVANTAGES OF RATIO ANALYSIS

The following are the advantages of ratio analysis:

FORECASTING
Ratios reveal trends in cost, sales, projects and other inter related facts, which will be helpful in forecasting future events

MANAGERIAL CONTROL
Ratio can be used as instrument of control regarding sales costs and profit.

FACILITATES COMMUNICATION
Ratios facilitate the communication function of management as ratios convey the information relating to the present and future quickly, forcefully and clearly

MEASURING EFFICIENCY
Ratios help to know operation efficiency by comparison of present ratios with those of the past working and also with other firm in the industry

FACILITING INSTRUMENT DECISION

Ratios help in computing return on investment, this helps in exercising effective decision regarding profitable avenues of investment.

USEFUL IN MEASURING FINANCIAL SOLVENCY

This ratio indicates the liquidity position of the company and the proportion of borrowed funds to local resources which reveal the short term and long term solvency position of a firm.

INTER FIRM COMPARISIONS

The technique of inter firm comparison can be carried out successfully only with the help of ratio analysis.

CLASSIFICATION
Ratios are classified in several ways Different approaches are used for classifying ratios. Ratios are used for the purpose of assessing profitability, activity or operating efficiency and financial position of a concern. Based on the purpose, the ratios are classified as 1. Profitability ratios, 2. Turn over ratios, 3. Financial ratios or solvency ratios.

PROFITABLITY RATIO
Profitability is an indication of the efficiency with which the operations of the business are carried on. Profit making is the main objective of the business. Aim of every business concern is to earn maximum profits in absolute terms. Owners are interested to know the profitability as it indicates the return which the can get on their investments. Ability to make maximum profit from optimum utilization of resources by a business concern is termed as profitability.

GROSS PROFIT RATIO

This ratio expresses relationship between gross profit and net sales.

SIGNIFICANCE
The gross profit ratio indicates the extend 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 products. Yet the gross profit ratio is one of the very important ratios for measuring profitability of the firm.

FORMULA
Gross profit Net sales *100

CALCULATIONS Year 2009-2010 Gross Profit( Rs in millions) Net sales ( Rs in millions ) Gross Profit Ratio INTERPRETATION

2010-2011

2011-2012

RETURN ON SHAREHOLDERS FUNDS

This ratio signifies the return on shareholders funds .This ratio establishes the profit from the shareholders point of view

SIGNIFICANCE
This ratio is an effect to measure the profitability of the business. This is an index to know whether the main objective of the business (i.e.) realization of satisfactory net income is achieved.

Formula
Net profit after interest and tax Shareholders funds * 100

CALCULATIONS Year Net profit after interest and tax

( Rs in millions )

2009-2010

2010-2011

2011-2012

Shareholders funds
( Rs in millions )

Return on Shareholders Funds INTERPRETATION TURNOVER RATIOS:

The ratio indicates the efficiency with which the capital employed is rotated in the business. The overall profitability of the business depends on two factors 1.the rate on return on capital employed 2. Turnover .higher the rate of rotation, the greater will be profitability.

FIXED ASSET TURNOVER RATIO

This Ratio indicates the extend to which the investments in fixed assets contribute towards sales.

FORMULA
Net Sales Fixed asset (net)

SIGNIFICANCE
Fixed asset turnover ratio indicates the contribution of investments in fixed asset towards sales. If compared with the previous perios , it indicates whether the investment in fixed asset has been judicious or not

CALCULATIONS Year Net sales

( Rs in millions)

2009-2010

2010-2011

2011-2012

Fixed Asset
( Rs in millions)

Fixed Asset Turnover Ratio INTERPRETATION WORKING CAPITAL TURNOVER RATIO

This ratio indicates whether or not working capital has been effectively utilized in making sales.

SIGNIFICANCE
Working capital turnover ratio indicates the velocity of the utilization of net working capital. The ratio measures the efficiency with which the working capital is been used by a firm. This ratio can at best be used by making comparative and trend analysis for different firms in the same industry and for various periods.

FORMULA Net sales Working capital CALCULATIONS Year Net sales

(Rs in millions)

2009-2010

2010-2011

2011-2012

Working Capital
(Rs in millions)

Working Capital Turnover Ratio INTERPRETATION

SOLVENCY RATIOS
Solvency or financial ratio includes all ratios which express financial position of the concern. The financial ratio is also called as balance sheet ratio. Financial position may concern differently to different persons interested in the business concern. The financial ratios are also analyzed to find judicious use of funds. The significant financial ratio is classified as short term solvency ratio and long term solvency ratio.

CURRENT RATIO

The ratio of current asset to current liabilities is called as current ratio. In order to measure the short term liquidity or solvency of a concern, the comparison of current asset to current liability is applicable.

SIGNIFICANCE
Current ratio indicates the ability of a concern to meet its current obligation as and when they are due for payment. A very high current ratio does not indicate efficiency since it means less efficient use of funds. A high current ratio also indicates dependence on long term source of raising funds. Long term funds are more expensive than current liabilities .A ratio less than 2 indicate inadequate current liabilities

FORMULA Current ratio = Current asset Current liabilities IDEAL RATIO is 2: 1

CALCULATIONS Year Current assets (Rs in millions) Current Liabilities

( Rs in millions )

2009-2010

2010-2011

2011-2012

Current Ratio INTERPRETATION

PROPRIETORY RATIO
It is a variant of debt-equity ratio. It establishes relationship between the proprietors or shareholders funds and the total tangible assets.

SIGNIFICANCE
This ratio focuses the attention on the general financial strength of the business enterprise. The ratio is of particular importance to the creditors who can find out the proportion of shareholders funds in the total assets employed in the business. A high proprietary ratio will indicate a relatively little danger to the creditors a low proprietary ratio indicates greater risk to the creditors. A ratio below 50% maybe alarming for the creditors since they may have to loose heavily in the event of companys liquidation on account of heavy losses.

FORMULA Shareholders Funds Total tangible assets CALCULATIONS Year Shareholders funds
(Rs in millions)

2009-2010

2010-2011

2011-2012

Total tangible assets

(Rs in millions)

Proprietary Ratio INTERPRETATION

CONCLUSION
From the analysis of the ratios it is found that short term solvency position of the company is not satisfactory .The Proprietary ratio reveals that the shareholders funds have not been effectively utilized. From the turnover ratios it is found that Working Capital ratio has been effectively utilized towards making sales