Ratio Analysis

1
Ratio Analysis
EXECUTIVE SUMMARY
Ratio Analysis is one of the techniques of fnancial analysis where ratios
are used as a yardstick for evaluating the fnancial condition and
performance of a frm. Analysis and interpretation of various
accounting ratios gives a better understanding of fnancial condition
and performance of frm. Trend ratios indicate the direction of change
in the performance improvement, deterioration or constancy over
the year.
Objectives of the study
!. To help the management in its planning and forecasting
activities.
". To evaluate operational e#ciency, liquidity, and solvency of $%&.
'. To help the management in having e(ective control over the
activities of di(erent departments.
). To compare the previous fve years and present year
performance of the company.
*. To give suggestion and recommendation based on the study.
+or the study $irani sugars &td, is considered. The ratio analysis is done
using the ,ncome statements and -alance %heets of the company
between "..* to "../.
0ata ,nterpretation on trend ratio analysis is carried out at $%& at
1ulali cross Tq2 3udhol 0ist2 -agalkot 1arnataka %tate. +or study, of
fve years is considered and compared it4s performance over the period
of fve years. +or result analysis and 3% 56cel %oftware package are
2
Ratio Analysis
used. +rom the analysis, , am able to indicate following fnding of the
frm
!. +rom the current ratio it is found that the ratio is not satisfactory
because the 7 increase in current assets is less than the 7
increase in current liabilities during the year "..*"../.The
highest ratio recorded is '..) in "..* and the lowest ratio
recorded is ..)" in the year "..8.And less than the standard
ratio.
". +rom the gross proft ratio it is found that the ratio is satisfactory
during the last three years from "..8 to "../. The highest ratio
recorded in the year "..9 is "!.:* and the lowest ratio recorded
is ..!! in the year "..*.
'. +rom the operating proft ratio it is found that the ratio is highly
satisfactory during the considered fnancial years. The highest
ratio recorded is !....9 in the year "..8 and the lowest is ::.*:
in the year "..).
3
Ratio Analysis
I!TRO"UCTIO!
Ratio analysis is a technique of analy;ing the fnancial statement
of industrial concerns. $ow a day this technique is sophisticated and is
commonly used in business concerns. Ratio analysis is not an end but it
is only means of better understanding of fnancial strength and and
weakness of a frm.
Ratio analysis is one of the most powerful tools of fnancial
analysis which helps in analy;ing and interpreting the health of the
frm. Ratio4s are proved as the basic instrument in the control process
and act as back bone in schemes of the business forecast.
#ith the hel$ of %atio &e can dete%'ine
The ability of the frm to meet its current obligation.
The limit or e6tent to which the frm has used its borrowed funds.
The e#ciency with which the frm is utili;ing in generating sales
revenue.
The operating e#ciency and performance of the company .
Classi(cation of Ratios
Ratios can be classifed into di(erent categories depending
upon the basis of classifcation.
I) TRA"ITIO!A* C*ASSI+ICATIO!
Traditional <lassifcation has been on the basis of fnancial
statements, on which ratio may be classifed as follows.
!. =roft > &oss account ratios.
5.g. ?ross =roft Ratio, $et =roft Ratio, @perating Ratio etc
4
Ratio Analysis
".-alance sheet ratio.
5.g. <urrent Ratio, 0ebt 5quity Ratio, Aorking <apital Ratio etc
'. <ompositeB3i6ed ratio.
5.g. %tock Turnover Ratio, 0ebtors Turnover Ratios, +i6ed Assets
Turnover Ratio etc
+U!CTIO!A* C*ASSI+ICATIO! O+ RATIOS
+unctional ratios
!. &iquidity ratios
aC <urrent Ratio
bC Duick Ratio
". &everage Ratios
aC 0ebtequity Ratio
bC <urrent Asset to =roprietor4s fund Ratio
III) ,RO-A-I*ITY RATIOS
a. ?ross proft Ratio
b. @perating proft Ratio
c. Return on investment

IV) ACTIVITY RATIO
i. ,nventory Turnover Ratio
ii. Asset Turnover Ratio2
a. +i6ed Asset Turnover Ratio
b. <urrent Asset Turnover Ratio
iii. Aorking <apital Turnover Ratio.
5
Ratio Analysis
!"USTRY ,RO+I*E
The .isto%ical -ac/0%ound of the Indian Su0a% Indust%y
The sugar industry is proud to be an industry, which spreads the
taste of sweetness to the mankind. The history of origin of this industry
is as old as the history of main him self. %ugar is generally made from
sugarcane and beet. ,n ,ndia, sugar is produced mainly from sugarcane.
,ndia had introduced sugarcane all over the worlds and is a leading
country in the making sugar from sugarcane.
E%aint Fishwamitra4 is known as the research person of the
sugarcane in religious literature. Ae can fnd the e6ample of sugarcane
in Fedic literature also as well as sugarcane. Ae can also fnd the
reference of sugar and the sugarcane in =atanGali4s 3ahabashya and
6
Ratio Analysis
the treaty on the grammar of E=anini4. ?reek traveler E$iyarchus4 and
<hinese traveler ETai%ung4 have mentioned in their travelogue that the
people of ,ndia used to know the methods of making sugar and Guice
from sugarcane the great 5mperor Ale6ander also carried sugarcane
with him while returning to his country.
Thus from di(erent historical references and from some E=uranas4
it can be concluded that method of making sugar from sugarcane was
known To the people of -ihar. The historical evidences of sugar industry
prospering in ancient,ndia concrete and this has helped to develop and
prosper the cooperative sugar movement in ,ndia.
!ational Scena%io Of Su0a% Indust%y
The frst sugar mill in the country was set up in !/.' in the
Hnited =rovinces. There are *:: installed sugar mills, of which )*'
were in operation in the year "..".' and utili;ed !/).) million ton of
sugarcane I:/7 of total cane productionC to produce "..!) million tons
of sugar. About * lakhs workmen are directly employed in the sugar.
About * lakhs workmen are directly employed in the sugar industry
besides many in industries, which utili;e byproducts of sugar industry
as raw material.

,ndia is the largest consumer and second largest producer of
sugar in the world. The ,ndian sugar industry is the second largest
agroindustry located in the rural ,ndia. ,ndian sugar industry has been
a focal point for socioeconomic development in the rural areas. About
7
Ratio Analysis
*. million sugarcane farmers and a large number of agricultural
laborers are involved in sugarcane cultivation and ancillary activities,
constituting 8.*7 of the rural population. -esides, the industry
provides employment to about " million skilledBsemi skilled workers
and others mostly from the rural areas. The industry not only generates
power for its own requirement but surplus power for e6port to the grid
based on byproduct -agasses. ,t also produces ethyl alcohol, which is
used for industrial and potable uses, and can be used to the
manufacture 5thanol, an ecology friendly and renewable fuel for
blending with petrol.
The sugar industry in the country uses only sugarcane as inputJ
hence sugar companies have been established in large sugarcane
growing states like Httar =radesh, 3aharashtra, 1arnataka, ?uGarat,
Tamilnadu, and Andhra =radesh. ,n sugar year "..'.), these si6
states contribute more than 9*7of total sugar production in the
countryJ Httar =radesh, 3aharashtra, and 1arnataka together
contribute more than :*7of total production. The government of ,ndia
licensed new units with an initial capacity of !"*. T<0 up to the !/9.s
and with the revision in minimum economic si;e to "*.. T<0, the
?overnment issued licenses for setting up of "*.. T<0 plants
thereafter. The government delicensed sugar sector in the year of
!!.%eptember.!/99.
8
Ratio Analysis
The entrepreneurs have been allowed to set up sugar factories of
e6pand the e6isting sugar factories as per the technoeconomic
feasibility of the proGect. Kowever, they are required to maintain a
radial distance of !* kms from the e6isting sugar factory. After de
licensing, a number of new sugar plants of varying capacities have
been set up and the e6isting plants have substantially increased their
capacity.

There are *:: installed sugar mills in the country as on 3arch
'!
st
"..*, with a production capacity of !9. lack 3Ts of sugar, of which
only )*' are working. These mills are located in !9 states of the
country.
The secto% &ise b%ea/ u$1s as follo&s2
Table no23
%l.
$o.
%ector $o of factories
!. =rivate !9/
". =ublic :"
'. <o
operative
'!*
Total *::
9
Ratio Analysis
RATIO A!A*YSIS AT I!"USTRIES
Objectives of the study
:. To help the management in its planning and forecasting
activities.
To evaluate operational e#ciency, liquidity, and solvency of
$%&.
8. To help the management in having e(ective control over the
activities of di(eent departments.
9. To compare the previous fve years and present year
performance of the company.
10
Ratio Analysis
/. To give suggestion and recommendation based on the study.
*IMITATIO! O+ T.E STU"Y
!C The study is limited to few ratios because of non availability of
detailed fnancial data.
"C The study is used on secondary data such as annual report of the
company
'C The reliability and accuracy of calculation depends more on
information found in proft and loss aBc and balance sheet.
)C The study is confned only to a period of * years.
MET.O"O*O4Y
The study is conducted at $irani %ugars &td, 3udhol.
TqJ 3udhol, 0ist2 -agalkot.
%@HR<5% @+ 0ATA <@&&5<T,@$

The data is collected in two types
!C =R,3ARL 0ATA
"C %5<@$0ARL 0ATA
35 ,%i'a%y data
,t will be collected with the help of interaction with the employee of
$%&, and the internal guide.
65 Seconda%y data
Through Annual Reports of the company, 3aga;ine etc.
.ISTORY O+ !IRA!I SU4ARS *T")
11
Ratio Analysis
3Bs. $,rani %ugars &imited I$%&C, a company incorporated on the
:
th
0ec, !//* under the <ompanies Act, !/*: has applied for Term
&oan of Rs. !*./. crores to %ugar 0evelopment +undI%0+C for meeting
part of the capital cost of its proGect envisaging moderni;ation > up
gradation of e6isting sugar factory with an installed capacity of !"*.
T<0 to '8*. T<0 with substantial investment at 1ulali cross 3udhol Tq.
0ist2 -agalkot, 1arnataka %tate, $%& has included in the scope of the
proGect, the cogeneration of surplus power also at a total proGect cost
of about Rs. /8... crores. I%ugar unit Rs. *'... crores and
cogeneration unit Rs. ))... croresC. Total <ost of the =roGect, for the
%ugar plant e6pansion Rs. *'.. &akhs,IRs. )"... <rores for sugar and
!!... crores loading from cogeneration plant costC consisting of an
5quity <ontribution of Rs. *.'. <rores =romoters, Rs. !*./. crores
equity from %ugar development fund of ?ovt. of ,ndia > the balance of
Rs. '!.9. crores funded through Term &oans from the +inancial
,nstitutionsB-anks.
The funding for the cogeneration plant costing Rs. ))..... &akhs
is envisaged by obtaining Rs. '.9. &akhs from ,R50A, Rs )).... &akhs
from promoter4s contribution and Rs. 99. &akhs from sugar
development fund.
3Bs. $irani %ugars &imited I$%&C is a company registered under
the ,ndian <ompanies Act, !/*:, initially as =rivate &imited <ompany,
vide registration certifcate number .9B!/'). of !//* dated
.:.!".!//* by the registrar of companies in 1arnataka, -angalore,
12
Ratio Analysis
%ubsequently, the company has been converted into =ublic &imited
<ompany vide <ertifcate of ,ncorporation dated !*..".".." by R@<,
1arnataka, -angalore.
The unit was originally established in the year !//8/9 as a
modern 1handasari %ugar unit with a crushing capacity of *.. tones of
cane per day and later converted into white crystal sugar unit. This is
one amongst the earliest 1handasari unit in the country, which started
with a new technology like2
IaC Kigh pressure boiler I'".. ATAC
IbC 3ultiple e(ect pressure evaporator system with falling flm
evaporator and also with captive power generation.
%ubsequently making use of the ?overnment of ,ndia4s liberali;ed
policy, vide ?ovt. of ,ndia notifcation 0<%B%B!)B0T0 .".:!//9, which
permitted 1handasari sugar units to use vacuum system, they
moderni;ed the unit quickly by adding vacuum pans and vacuum
evaporators. The capacity of the plant was increased in stages to its
present capacity of !"*. T<0 during "..*.:. The plant runs fairly
e#ciently and is self su#cient in fuel and power. ,t has recorded an
average sugar recovery of over !! percent during !///"... crushing
season.
3Bs. $irani %ugar &itd. $ow proposes to e6pand the sugar factory
from the present capacity of !"*. T<0 to '8*. T<0 by adding a new
13
Ratio Analysis
plant of "*.. T<0, retaining the e6isting plant also. Also !: 3A <ogen
=ower =lant is part of the e6pansion. The proGect appraisal was done by
3ilton <onsultancy %ervices &imited, =une.
-AC74ROU!" O+ ,ROMOTERS
The key promoter of the company also <hairman of the company, 3r.
3urugesh R. $irani is 3ember of the &egislative AssemblyI3&AC,
?overnment of 1arnataka.
Table of Su0a% Cane C%ushed in di8e%ent yea%
%l.$
o
Lear <ane
<rushed
I,n &akhsC
Recovery 7 0uration
I0aysC
! !///"... ))*9/.!** 8.:! "..
" "..."..! /.*/8.9!" 9.9! "!"
' "..!".." 8)*)8.*' /.8* !9'
) "..""..' )*8'*.)' /.: !"!
* "..'"..) "8/*).:: /.9* //
: "..)"..* :'"').!:. 9.:! !**
8 "..*"..: )8))..8'. !.../ !:'
9 "..:"..8 !')"9:'.8*. !".!! "!!
/ "..8"..9 !9'!/.8.*)
'
!".*: "!'

MAR7ETI!4
3arketing is a social and managerial process by which individual
and group obtains what they need and what through creating, o(ering
14
Ratio Analysis
and e6changing products of values with others. This marketing is
important element in every organi;ation, which should be maintained
compulsory in a systematic manner.
This section will take care of all sale transactions like sale of
sugar, molasses, -agasse and scrap material. This section works by 8
employees including sales manager. The factory has sold the sugar
according to central government notifcation. The central government
sends the notice to the factory every month regarding sale of sugar,
without notice the sugar is not sold to anybody. The government is
giving permission for a particular period, particular for sale of sugar.
The sugar is sold to the buyer who quotes highest price. ,n this
section, some records like sale of sugar register, molasses register,
-agasse registers and scrap material registers are maintained.
,RO"UCT O+ SA*E
The organi;ation undertakes selling activities in two methods2
! +REE SA*E2 free sale of sugar is being done to bulk purchases
on the basis of tenders called, collected, negotiated and sold.
" *EVY SA*E2 This is being sold to the government of 1arnataka
on levy basis. The government then distributes the same to the
public through public distribution outlets at predetermined
reasonable price.
15
Ratio Analysis
,RO"UCTIO! ,ROCESS
Ste$ 3) weighing of sugar cane, it means, when the sugar cane comes
to the factory. After weighing of sugar cane the unloaded carrier cane
weigh bridge.
Ste$ 6) ,n the ne6t step sugar cane go to the cane cutter machine
and it cuts the fne pieces after that, there are ' mills and * mills
tandem that is sequential mill.
Ste$ 9) After the milling of sugar cane there is a separation of
baggasse and Guice milk, baggasse will be used as a fuel. There are 8
boilers. They used as a fuel and there is production steam and steam is
used to produce the electricity.
Ste$ :. The Guice, weighing takes place and there are mi6ing the Guice
and there is addition of phosphoric. After heated of Guice milk 8* <
that Guice is called as Raw Guice.
Additional of milk of lime and %@" is called %ulfur and this again
goes to Guice heater it heated up to !.) <.
Ste$ ;. Then the ne6t step, the Guice sent to clarifer and in that there
is a separation of dust and clear transferals Guice.
16
Ratio Analysis
<lear Guice sends to M-hoomi &abhN. This is the produce fertili;er.
<lear Guice will be thick. ,t calls as syrup. Again add to the milk and
%@" then it is called syrup suplitation.
Ste$ <. sulpitation comes to the pan boiling station and this there are
' categories, A,- and < frst of all the sulpitation goes to the MAN
category.
And the pan boiling directly goes to pan crystal. Raw sugar goes
to the centrifugal machine routed to the high speed of around !"..
rbm. ,t will be separated sugar crystal and molasses.
Ste$ =. ,n this, the sugar crystal downs and passes through grass
happer. ,n the grass happer the sugar goes to the one place to another
place.
After there is gradation, in that there are ' grades. ,t will be divide the
' grades2 high grade, small grade, low grade.
Ste$ >. And then the sugar goes to the di(erent vessels. ,n that,
package of sugar. ,n this there are " types packing e6porting and
domestic is di(erent.
+I!IS.E" ,RO"UCTS
+inished product is sugar. There are ' types of fnished sugars,
Kigh Duality, 3iddle Duality and &ow Duality.
These are ' types of bye products
3olasses
-agasse
+ilters mud
17
Ratio Analysis
"ATA I!TER,RETATIO! ? RATIO A!A*YSIS
I!TRO"UCTIO!
Ratio analysis is a technique of analy;ing the fnancial statement of
industrial concerns. $ow a day this technique is sophisticated and is
commonly used in business concerns. Ratio analysis is not an end but it is
only means of better understanding of fnancial strength and and weakness
of a frm.
Ratio analysis is one of the most powerful tools of fnancial analysis
which helps in analy;ing and interpreting the health of the frm. Ratio4s are
proved as the basic instrument in the control process and act as back bone
in schemes of the business forecast.
#ith the hel$ of %atio &e can dete%'ine
The ability of the frm to meet its current obligation.
The limit or e6tent to which the frm has used its borrowed funds.
The e#ciency with which the frm is utili;ing in generating sales
revenue.
The operating e#ciency and performance of the company .
Classi(cation of Ratios
18
Ratio Analysis
Ratios can be classifed into di(erent categories depending
upon the basis of classifcation.
TRA"ITIO!A* C*ASSI+ICATIO!
Traditional <lassifcation has been on the basis of fnancial
statements, on which ratio may be classifed as follows.
,%o(t ? *oss account %atios)
5.g. ?ross =roft Ratio, $et =roft Ratio, @perating Ratio etc
-alance sheet %atio)
5.g. <urrent Ratio, 0ebt 5quity Ratio, Aorking <apital Ratio etc
Co'$osite@MiAed %atio)
5.g. %tock Turnover Ratio, 0ebtors Turnover Ratios, +i6ed Assets
Turnover Ratio etc
+U!CTIO!A* C*ASSI+ICATIO! O+ RATIOS
+unctional %atios
6) *iBuidity %atios
cC <urrent Ratio
dC Duick Ratio
6) *eve%a0e Ratios
cC 0ebtequity Ratio
19
Ratio Analysis
dC <urrent Asset to =roprietor4s fund Ratio
III) ,RO-A-I*ITY RATIOS
a. ?ross proft Ratio
b. @perating proft Ratio
c. Return on investment

IV) ACTIVITY RATIO
i. ,nventory Turnover Ratio
ii. Asset Turnover Ratio2
c. +i6ed Asset Turnover Ratio
d. <urrent Asset Turnover Ratio
iii. Aorking <apital Turnover Ratio.
A!A*YSIS ? I!TRE,RETATIO!
I) *iBuidity Ratio
&iquidity ratio measures the ability of the frm to meet its
current obligation IliabilitiesC. ,n fact analysis of liquidity needs the
preparation of cash budget and cash and fund Oow statement but
liquidity ratio, by establishing a relationship between cash and other
current asset to current obligation, to provide a quick measure of
liquidity. A frm should ensure that it doesn4t su(er lack of liquidity and
also that it dose not have e6cess liquidity.
The common liquidity ratios are2
20
Ratio Analysis
3) Cu%%ent Ratio
<urrent ratio may be defned as the relationship between
current asset and current liabilities. This is a measure of general
liquidity > is most widely used to make analysis of shortturn fnancial
position or liquidity of frm. ,t is calculated by dividing the total current
assets by total current liabilities.
<urrent Ratio P <urrent Assets
<urrent &iabilities
TA-*EC3)3 Cu%%ent Ratio


Yea%
Cu%%ent Cu%%ent Ratio
Assets *iabilities
"..).* )'..8:./' !)!".**): '..)
"..*.: ')'::*"/' "")8*9.'* !.*
"..:.8 '':'9/'": 9."9:"!.! ..)"
"..8.9 )!89!!":8 9:9*'9!). ..)9
"..9./ ')/')*8:! 88)*'./!9 ..)*
21
Ratio Analysis
CURRENT RATIO
3.04
1.5
0.42
0.48 0.45
0
0.5
1
1.5
2
2.5
3
3.5
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!TER,RETATIO!
The above table shows that $%&4s current ratio has decreased from
'..) to !.* in the year "..* and "..: and in the year "..8 it was
drastically Ouctuated to ..)" and then the year "..9 it raise to ..)9
but again decreased to ..)* in the "../ .
The company had the Ouctuation of ").".7 increase in current assets
and 9.!97 in current liabilities. in the year "../ the current assets has
decreased by !:.'97 and !..9"7 in current liabilities.
An ideal current ratio is "2! for every one rupee of current liabilities,
current assets of doable rupee are available. The current ratio
determines margin of safety for creditors, there has been decrease in
the ratio during "../ compared with "..9.
22
Ratio Analysis
6) Duic/ Ratio@Acid Test Ratio
Duick ratio establishes relationship between quick or liquid
assets > current liabilities. ,t is also known as acid test ratio. An asset is
said to be liquid if it can be converted into case within short period of
time without loss of value. The prepaid e6penses and stock were
e6cluded.
Duick ratio P Duick asset
<urrent &iabilities
TA-*EC3)6 Duic/ Ratio

Lear Duick <urrent Ratio
Assets &iabilities
"..).* "9)"9/"9'8 !)!".**): "..!
"..*.: !88//"/88 "")8*9.'* ..8/
"..:.8 !'9'!'"8: 9."9:"!.! ..!8
"..8.9 !"89!'8/' 9:9*'9!). ..!*
"..9./ !8.8!!9)! 88)*'./!9 ..""
23
Ratio Analysis
QUICK RATIO
2.01
0.79
0.17 0.15 0.22
0
0.5
1
1.5
2
2.5
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
YEAR
R
A
T
I
O
Ratio
I!TER,RETATIO!
The above table shows that the quick assets of $%& has decreased from
"..! to ..8/ in the year "..* and "..: and had drastical Ouctuation to
..!8 and ..!* in the year "..8 and "..9 and had slight raise to .."" in
the year "../.
The company had Ouctuation 8.*/7 decrease in quick asset and and
9.!97 increase in current liabilities and in the year "../ there was
increase in quick asset ''.*:7 and !..9"7 decrease in current
liabilities.
This ratio measures frm4s ability to serve short term liabilities. The
ideal quick ratio is M!N . a low quick ratio represents that frm4s liquidity
poison is not good.
II) *eve%a0e Ratios
&everage ratios are also known as capital structure ratio.
These ratios indicate mi6 of funds provided by owners > lenders. As a
24
Ratio Analysis
general rule these should be appropriate mi6 debt > owners equity in
fnancing the frm4s assets.
&everage ratios are calculated to Gudge the long longterm
fnancial position of the company. %ome of the popular leverage ratios
are2
a) "ebtCEBuity Ratio
0ebt5quity ratio shows the relative contribution of creditors
and owners. 0ebt5quity also known as 56ternal,nternal equity ratio. ,t
is calculated to measure the relative claims of outsiders against frm
assets.
0ebt5quity Ratio P Total 0ebt
$et Aorth
TA-*EC6)3 "ebt EBuity Ratio
25
Lear Total 0ebt $et Aorth Ratio
"..).* **)!!.")/ )'.*")"/ ..:!
"..*.: )//"):"/' :'!8!/)8 ..:"
"..:.8 *)8!:9:)8 *:99"9.8: ..*"
"..8.9 *:*./"8:: *8.!999*9 ..9"
"..9./ :"8'/8!:8 *8!"::.98 ../'
Ratio Analysis
DEBT EQUITY RATIO
0.61 0.62
0.52
0.82
0.93
0
0.2
0.4
0.6
0.8
1
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!TER,RETATIO!
The table shows that the total debt ratio of $%& had increase in
the year "..* and "..: from ..:! to ..:" and had Ouctuation to ..*"
in the year "..8 and further increased to ..9" in the "..9 and ../' in
the year "../. The company had increase in the total debt by '."87
and .."'7 in net worth and in the year "../ the debt was increased by
!!.."7 and ..!997 in net worth.
0ebt equity ratio measures ultimate solvency of the company.,t
provides a margin of safety to creditors,thus when the ratio is smaller
the creditors are more secured . An appropriate debt equity ratio is
..''.A ratio higher than this is an indication of risky fnancial policies.
26
Ratio Analysis
b) Cu%%ent Assets to ,%o$%ieto%1s funds %atio
This ratio is calculated by dividing total current assets by
shareholders funds. ,t indicates the e6tent to which proprietor funds
are invested in current assets. There is no rule of thumb for this ratio >
depending upon the nature of the business there may be di(erent
ratios for di(erent frms.
<A to =+ ratio P <urrent Assets
=roprietors +und
TA-*EC6)6 Cu%%ent Assets to ,%o$%ieto%s +und

Lear <urrent Assets =roprietors +und Ratio
"..).* )'..8:./' "!8''*... !./8
"..*.: ')'::*"/' "!8)..... !.*9
"..:.8 '':'9/'": "!8*'.... !.**
"..8.9 )!89!!":) "!9.!9)/* !./"
"..9./ ')/')*8:! ""'/9'"8) !.*:
27
Ratio Analysis
C/A TO PROPRIETARY RATIO
1.97
1.58 1.55
1.92
1.56
0
0.5
1
1.5
2
2.5
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!TER,RETATIO!
The table of current assets to proprietory ratio shows that the ratio has
been decreased by !./8 to !.*9 in the year "..* and "..: and !.** in the
year "..8 and then raise to !./" in the year "..9 and then decreased to
!.*: in the year "../.
There was raise in current asset by ").".7 in the year "..9 and
proprietary fund by ..""7 and further in "../ there was decrease by
!:.'97 in current asset and there was increase by ".8'7 in proprietary
fund
This ratio indicates the e6tent to which proprietors fund are invested in
current asset
28
Ratio Analysis
III),%o(tablility Ratios
The primary obGective of a business undertaking is to earn
profts. =roft is the di(erence between revenue > e6penses over a
period of time. =roft is output of a company > company will have no
further if it fails to make su#cient proft =rofts are thus a useful
measure of overall e#ciency of a frm.
These ratios are calculated to measure the operating e#ciency
of the company. -eside management, creditors, owners are also
interested in the proftability of the company. ?enerally proftability
ratios are calculated either in relation to sales or in relation to
investment. The various proftable ratios are2
I In Relation to Sales
4%oss ,%o(t Ratio
?.=.Ratio measures the relationship between gross profts >
salesJ it is usually represented in percentage. Thus ?ross proft margin
highlights the production e#ciency at a concern
?.=.Ratio P ?ross =roft Q !..
%ales
?.=.Ratio indicate the e6tent to which selling price of goods per
unit may decline without resulting in losses on operations of frm. ,t
reOect e#ciency with which frm produces the product.
29
Ratio Analysis
TA-*EC9)3 4%oss ,%o(t Ratio

Lear ?ross =roft %ales Ratio
"..).* '".)99): ":/9)")/* ..!!
"..*.: !!///""'" :"":89:)" ..!/
"..:.8 9!8*!!:/ */"*'":9/
!'.9
"..8.9 /9!*:)/8 )*')'*!"' "!.:*
"..9./ 8/*'!9/9 8':".:/98 !..9
GROSS PROFIT RATIO
0.11 0.19
13.8
21.65
10.8
0
5
10
15
20
25
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!RTE,RETATIO!
The above table shows the gross proft ratio of $%& the table indicates
that the ratio in the year "..* was ..!! and in the year "..: it raised
to ..!/.further it had drastical change in gross proft to !'.9 in the year
30
Ratio Analysis
"..8 and "!.:* in the year "..9 ,but decreased to !..9 in the year
"../.
The company had Ouctuated by increase of "...:7 in gross proft and
decrease by "'.)8 7 in the year "..9 and in the year "../ there is
decrease in gross proft by !9./87 and increase in sales by :".':7.
The gross proft indicates the degree to which the selling price of goods
per unit may decline without resulting in losses on operation of the frm
.,t reOects the e#ciency with which frm produces its products.
b5 O$e%atin0 Ratio
,t is the relation between cost of goods sold > operating
e6penses on one hand > the sales on the other hand. ,t measures the
cost of operations per rupee of sales.
@perating Ratio P @perating <ost Q !..
%ales
TA-*EC9)6 O$e%atin0 Ratio
Lear @perating <ost %ales Ratio
"..).* !8/:".":. ":/9)")/* ::.*:
"..*.: )/9*/.''' :"":89:)" 9...8
"..:.8 */"//8*9' */"*'":9/ !...9
"..8.9 ))8"...)/ )*')'*!"' /9.:"
"..9./ *)*'!!*'* 8':".:/98 8)..)
31
Ratio Analysis
I!TRE,RETATIO!
The above table shows the frm4s operating ratio increasing drastically
from ::.*: in the year "..* to 9...8 and !...9 in the years "..: and
"..8 but further Ouctuating to /9.:" in the year "..9 and 8)..) in the
year "../ .
There is a decrease in operating cost by ").*97 and /".')7 in sales but
in the year "../ there was increase by "!./'7 in operating cost and
:".':7 in sales.
An increase in the ratio over a previous period is an indication of
improvement in a operational e#ciency of a concern the higher the ratio
is more successful the business is ,but a lower ratio indicates large
amount of manufacturing e6penses.
6) ,%o(tability in %elation to Invest'ent
a) Retu%n on sha%eholde%s Invest'ent
Return on shareholders investments, popularly known as R@,.
,t is the relationship between net proft after ta6 > shareholders funds.
Thus this ratio is considered as a(ective indicator of the company4s
32
Ratio Analysis
proftability because it reOects the success of management in the
e#cient utili;ation of the owner4s investment.
R@,P. $et =roft after Ta6 Q !..
%hareholders fund

TA-&5'.' Return on shareholder investment
Yea% Sales Cu%%ent Assets Ratio
"..).* ":/9)")/* )'..8:./' ..:"
"..*.: :"":89:)" ')'::*"/' !.9!
"..:.8 */"*'":9/ '':'9/'": !.8:
"..8.9 )*')'*!"' )!89!!":) !../
"..9./ 8':".:/98 ')/')*8:! ".!!
33
Ratio Analysis
I!TRE,RETATIO!
The above table reveals that there is increase in the return on
investment from ".7 in the year "..* to "/7 in the year "..: but fell
down to 8..!7 in the year "..8 .+urther in the year "..9 there was a
drastical raise to ").)!7 but Ouctuated to ...)7 in the year "../.
Through the analysis we found that in the year "../ the net proft was
decreased by //.9"7 and increased shareholders fund by ..8'. This
ratio is used to measure the overall e#ciency of a concern ,the higher
the ratio the better the results will be as this ratio reveals how well the
resources of a concern are being used.
IV) Activity Ratios
+unds are invested in various assets in business to make sales
> earn proft. The e#ciency with which assets are managed directly
a(ects the volume of sales. The better the management of assets, the
larger is the amount of sales > the proft. Activity ratio measures the
e#ciency or e(ectiveness with which a frm manages its resources or
assets. These ratios are also called turnover ratio because they
indicate the speed with which assets are converted or turned over into
sales.
The various activity ratios are2
34
Ratio Analysis
Invento%y Tu%nove% Ratio
,nventory turnover ratio indicates the number of times stock
has been turned over during the period > evaluates e#ciency with
which a frm is able manage inventory.
The ratio is calculated by dividing the net sales divided by
average inventory at.
cost ,TRP $et %ales .
Average ,nventory at <ost
Average inventory should be taken for calculating stock turnover
ratio. Adding the stock in the beginning > at the end of period >
dividing it by " to calculate average inventory.

TA-&5).! ,nventory turnover ratio
Lear $et %ales Average ,nventory Ratio
"..)
.* ":/9)")/* !)/.).**: !.9!
"..*
.: :"":89:)" !!)).)*8' ".))
"..:
.8 */"*'":9/ '!":)..9. !./
"..8
.9 )*')'*!"' )9):"'.)) ../)
"..9 8':".:/98 '8/'!))') !./)
35
Ratio Analysis
./
INVENTORY TURNOVER RATIO
1.81
2.44
1.9
0.94
1.94
0
0.5
1
1.5
2
2.5
3
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!TER,RETATIO!
The table shows the increase in the inventory turnover ratio from !.9!
to ".)) in the year "..* and "..: .,n the year "..8 there was a
Ouctuation to !./ and further to ../) in the year "..9,but in the year
"../ there was a drastical increase to !./).
The company had "'.)87 decrease in net sales and increase by
**...7 in average inventory but in the year "../ there was increase in
net sales by :".':7 and decrease by "!.8'7 in average inventory.
,nventory turnover ratio signifes the liquidity of the inventory. A high
ratio implies good inventory management ,a low ratio results in
blocking of funds in inventory. The reference value of this ratio / and
the ma6imum conversion period is '99.

36
Ratio Analysis
b) Assets Tu%nove% Ratio
Assets are used to generate sales. Therefore a frm should
manage its assets e#ciency to ma6imum sales. Assets turnover ratio
shows relationship between sales > assets. The various assets turnover
ratio are2RR
i) +iAed Assets Tu%nove% Ratio
This ratio establishes the relationship between the costs of goods sold
and f6ed assets. ,t can be calculated by ,
+i6ed Assets Turnover Ratio P %ales
+i6ed Assets
TA-*E :)6 +iAed Assets Tu%nove% Ratio
Lear %ales $et +i6ed Assets Ratio
"..).* ":/9)")/* *"'*9*!'* ..*!
"..*.: :"":89:)" *'":/.*/* !.!:
"..:.8 */"*'":9/ *:99"9:8: !..)
"..8.9 )*')'*!"' *8.!999*9 ..9.
"..9./ 8':".:/98 *8!"::.98 !."/
37
Ratio Analysis
F/A TURNOVER RATIO
0.51
1.16
1.04
0.8
1.29
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2004-05 2005-06 2006-07 2007-08 2008-09
YEAR
R
A
T
I
O
Ratio
I!TRE,RETATIO!
The table reveals that there is increase in f6ed asset turnover ratio from
..*! in the year "..* to !.!: in the year "..: but decreased to !..) in
the year "..8 and drastical Ouctuation to ..9 in the year "..8 and raise
in the year to !."/ in the year "../.
The company had "'.)87 decrease in net sales and increase in f6ed
assets by .."'7 in the year "..9 and further in the year "../ it had
increase net sales by :".':7 and increase by ..!97 in f6ed assets.
@ne of the cautions to be kept in mind that when f6ed assets are old
and substantially depreciated the ratio tenders to be high,because,the
denominator of the ratio will be low.
38
Ratio Analysis
ii) Cu%%ent Assets Tu%nove% Ratio
This ratio is indicates how many net sales are made for every rupee of
investment in current assets.

<urrent
Assets Turnover
Ratio P
%ales
<urrent Assets
TA-*E :)9 Cu%%ent Assets Tu%nove% Ratio

C/A TURNOVER RATIO
0.62
1.81 1.76
1.09
2.11
0
0.5
1
1.5
2
2.5
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
YEAR
R
A
T
I
O
Ratio
I!TRE,RETATIO!
The table reveals that the current ratio has drastical increase from ..:"
the year "..* to !.9! in the year "..: but again there was a decrease
39
"..).* )'.*")"/ "!8''*... ".7
"..*.: :'!8!/)8 "!8)..... "/7
"..:.8 !*")*/'9 "!8*'.... 8..!7
"..8.9 *!.)*8:8 "!9.!9)/* "'.)!7
"..9./ /!)"' ""'/9'"8) ...)7
Ratio Analysis
to !.8: in the year "..8 and !../ in the year "..9. -ut there was a
drastical increase of ratio to ".!! in the year "../.
The company had decrease of "'.)87 in net sales and increase in
current assets by ").".7 . ,n the year "../ there was increase in net
sales by :".':7 and !:.'97 decrease in currents asssets.
d) #o%/in0 Ca$ital tu%nove% Ratio
A frm may also related net current assets to sales. Aorking
capital turnover ratio indicates the velocity of the utili;ation of net
working capital.

Aorking <apital Turnover RatioP %ales
$et <urrent Assets
TA-*E:): #o%/in0 Ca$ital Tu%nove% Ratio

I!TER,RETATIO!
The table reveals that the working capital turnover ratio of $%& in the
year "..* was !."" and increased to '.'8 in the year "..:.but in the
40
Lear %ales $et <urrent Assets Ratio
"..).* ":/9)")/* )*9:)")*!.* !.""
"..*.: :"":89:)" !:"*"/'.:.) '.'8
"..:.8 */"*'":9/ ""9998.*)8 ..!"
"..89 )*')'*!"' !!9/.8"*9.* *."'
"..9./ 8':".:/98 8":/.9*'.) 9.!*
Ratio Analysis
year "..8 there was a drastical Ouctuation to ..!" in the year "..8
further there was a high increase in working capital turnover ratio to
*."' in the year "..9 and 9.!* in "../.
There is decrease in net sales by "'.)87 and /).9.7 in net current
assets in the year "..9 and in the year "../ the net sales increased by
:".':7 and decreased by '9.9:7 in net current assets.
The assets turnover ratio measures the e#ciency of a frm in managing
and utili;ing the assets.Kigher turnover ratio,more e#cient is the
management utili;ation of the assets while low turnover are indicative
of under utili;ation of available resources and presence of idle capacity.
,n operational terms, it implies that frm can e6pand its activity level
without requiring additional capital investments.
+I!"I!4S
?
SU44ESTIO!S
+I!"I!4S

I ) *IDUI"ITY RATIO
!. +rom the current ratio it is found that the ratio is not satisfactory
because the 7 increase in current assets is less than the 7
increase in current liabilities during the year "..*"../.The
highest ratio recorded is '..) in "..* and the lowest ratio
41
Ratio Analysis
recorded is ..)" in the year "..8.And less than the standard
ratio.
". +rom the quick ratio it is found that the ratio is not satisfactory
because the ratios recorded during the year were less than the
standard ratio.,n the year "..9 the ratio recorded is ..!* and the
ratio recorded highest was "..! in the year "..*.
II ) *EVERA4E RATIO
+rom the debt equity ratio it is found that the ratio recorded during the
year "..*,"..:,> "..8 is satisfactory as the ratios are near to the
standard ratio but during the year "..9>"../ it is not satisfactory as
the ratios are very high compared to the standard ratio.
!. +rom the current assets to proprietors fund ratio is not
satisfactory as the proprietory funds invested in the current
assets is less in the year "../ is less compared to previous years
.The highest ratio recorded is !./8 in the year "..* and the
lowest ratio recorded is !.** in the year "..8.
III ) ,RO+ITA-I*ITY RATIOS

!. +rom the gross proft ratio it is found that the ratio is satisfactory
during the last three years from "..8 to "../. The highest ratio
recorded in the year "..9 is "!.:* and the lowest ratio recorded
is ..!! in the year "..*.
42
Ratio Analysis
". +rom the operating proft ratio it is found that the ratio is highly
satisfactory during the considered fnancial years.The highest
ratio recorded is !....9 in the year "..8 and the lowest is ::.*:
in the year "..).
'. +rom the return on investment it is found that the ratio calculated
for the considered fnancial years is good . The ratio is
satisfactory as the return on investment is e(ective and
good,comparing the previous years.
IV ) ACTVTY RATIOS
!. +rom the inventory turnover ratio it is found that the ratio is not
satisfactory as the inventory holding period is very
high,compared during the fnancial years.
". +rom the f6ed assets turnover ratio it s found that the ratio is
satisfactory as the ratios are raising yearly during the
comparative years.
Su00estion
!. The company may improve its current ratio by decreasing the
current liabilities because in the year "..9./ current assets are
decreased and it may also improve its quick ratio.
43
Ratio Analysis
". The company may decrease its total debt as there is increase in
total debt the year "..9./. The company may increase its
investment in current assets.
'. &ong terms solvency of the company has to be improved by
limiting amount invested by outsiders to the amount invested by
the owner of the company . this can be achieved by purchasing
the shares gradually.
). The proper management of the inventory can improve liquidity
position and e#ciency of the company.
44
Ratio Analysis
CO!C*USIO!
%tuday of ratio analysis of nirani sugars &td. Reveals the
performance of the company in terms of fnancial aspects. ,t is found
that there is increase in sales gross proft during "..* to "../. The
cash balance is also increased for the above saied years this is due to
company4s revised policy in debt collection. ,t is also observed that the
current ratio is not so satisfactory which creates chunks in the current
assets in the form of sundry debtors and inventory.
45
Ratio Analysis
Refe%ences
!C. Annual reports of $irani sugars ltd. for "..*, "..:, "..8, "..9,
"../.
"C. S 3adegouda MAccounting for managersN
'C. 1han 3 and =.1. Sain M+inancial managementN
46