Ratio Analysis

RATIO ANALYSIS 1. INTRODUCTION

The ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and interpret the financial health of enterprise. With the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. Financial analysis is the process of identifying the financial strengths and weakness of the firm y properly establishing relationship between the items of balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements. By the use of ratio analysis one can measure the financial conditions of a firm and can point out whether the conditions is strong, good, questionable or poor. Analysis and interpretation of financial statement with the help of ratio is termed as Ratio analysis. It is process of identifying the financial strengths and weakness of the firm. This may be accomplished either through a trend analysis of the firm over a period of time or through a comparison of the firm ratios with its nearest competitors and with the industry averages Ratio analysis was pioneered by Alexander Wall, who presented a system of ratio analysis in the year 1909. Alexanders contention was that interpretation of financial statements can be made either by establishing quantitative relationships between various items of financial statements.

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Ratio Analysis

Standards of comparison
The ratio analysis involves comparison for a use of full interpretation. A single ratio in itself does not indicate favourable or unfavourable condition. It should be compared with some standards. Standards of comparison may consist. 1. Ratios calculated from the past financial statement of the firm. 2. Ratios developed using the projected, or proforma of financial statements of the same firm. 3. Ratios of some selected firms, especially the most progressive and successful, at same point in the time, and 4. Ratios of the industry to which the firm belongs. The easiest way to evaluate the performance of a firm is to compare its ratios with the past ratios. When financial ratios over a period of time are compared it is known as the time series. It gives an indication of the direction of change and reflects whether the firms financial performance has improved, deteriorated or remained constant over time. The analyst should not simply determine the change, but more importantly, he should understand why ratios have changed. The change may be affected by changes in the accounting polices without a material changes in the firms performance. Sometimes ratios are used as the standard of comparison. Future ratios can be developed from the projected or proforma of financial statements. The comparison of

past ratios with future ratios shows the firms relative strengths and weakness in the past
and future. If the ratios indicate weak financial position, corrective actions should be initiated. Another way of comparison is to compare ratios of firm with some selected firms in the same industry at the same point in time. This kind of comparison indicates the relative financial position and performance of the firm.

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Ratio Analysis

To determine the financial condition and performance of a firm, its ratios compare with average ratios of the industry analysis, helps to ascertain the financial standing and capability of the firm in the industry to which it belong. Industry ratios are important standards in view of the fact that each industry has its characteristics, which influence the financial and operating relationship.

1.1 Meaning of ratios

A ratio is a mathematical relationship between two items expressed in a quantitative form. Ratio can be defined as Relationship in quantization forms, between figures which have cause and effect relationship or which are connected with each other in some manner or the other. Ratio analysis is an age old technique of financial analysis. The information provided by the financial statements in absolute form is and conveying very little meaning to the users.

Advantage or Importance of ratio analysis

1. The Ability of corporation to meet its current obligations i.e., liquidity position. 2. Ratio analysis provides data for inter firm comparison. Ratios highlights the factors associated with successful & unsuccessful firms corporations. 3. The efficiency of .the Corporation is. Utilizing its various assets in generating sales revenue. 4. The extent to which the firms has used its ling-term solvency for borrowing funds. 5. The overall operating efficiency & performance of the corporation

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Limitations of ratio analysis

1. Comparison between two variables, prove worth provided their basis of valuation is identical. But in reality, it is not possible, such as method of valuation of stockin-trade, or charging different methods of depreciation of fixed assets etc. 2. Ratio depends on the figure of the financial statement. But in most cases, the figures are window dressed. 3. Ratio analysis became more meaningful and significant if trend analysis (i.e., the analysis over a number of years) is possible, but in practice, it is difficult all the time. 4. Ratio are calculated jointly on the basis of past result which may not be suited to implement to the present business polices. 5. It is very difficult to ascertain the normal or standard ratio in order to make proper comparison. Because, it differs from firm to firm, industry to industry.

1.2 Types of ratios

Several ratios, calculated from the accounting data, can be grouped into classes according to financial activity or function to be evaluated. The parties interested in financial analysis are short-term and long-term creditors, owners and management. Shortterm creditors main interest is in the liquidity position or short-term solvency of the firm, long-term solvency and profitability of the firm. Similarly, concentrate on the firms profitability and financial condition. Management is interested in evaluation of every aspect of the firms performance. They have to protect the interests of all parties and see that the firm grows profitably.

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The requirement of the various of ratios, we may classify them into the following four important categories. 1. Liquidity ratios 2. Leverage ratios 3. Activity ratios 4. Profitability ratios

1. Liquidity ratios
It is extremely essential for a firm to meet its obligations as they become due. Liquidity ratios measure the ability of the firm to meet its current obligations. In fact, analysis of liquidity needs the preparation of cash budgets and fund flow statements, but liquidity ratios, by establishing a relationship between cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that if not suffer from lack of liquidity, and also it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in a poor credit worthiness, loss of creditors confidence, or even legal tangles resulting in the closure of the company. A very high degree of liquidity is also bad, idle assets earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. The most common ratios, which indicate the extent of liquidity or lack of it, are: y

Current ratio
The current ratio is the ratio of the total current assets to total current

liabilities. It is calculated as: Current ratio = current assets/current liabilities. SSITS, RAYACHOTY Page 5

Ratio Analysis

The current assets of the firm include cash and bank balances and those assets which can be converted into cash within a year, such as marketable securities, debtors and inventories. Pre-paid expenses, bills receivable accrued income are also included in current assets. Current liabilities include creditors bills payable, accrued expenses, short term bank loan, income tax liability and long debt maturing in current year.

Quick ratio or acid-test ratio

Quick ratio established a relationship between quick or liquid assets and current

liabilities. The quick ratio is found out by dividing quick assets by current liabilities. Quick assets includes assets which can be converted into cash immediately without a loss of value such as cash and bank balance, book debts (debtors and bills receivables) and marketable securities (temporary quoted investments). Inventories are not included in quick assets because they require time for converting into cash and also their value may fluctuate. Liabilities.
y

Quick Ratio = Current Assets Inventories / Current

Cash ratio
Cash ratio establishes a relationship between cash and cash equalent and

current liabilities. To get the cash ratio only absolute liquid assets and readily realizable securities are taken into consideration. A cash ratio of 0.5 to 1 is considered as satisfactory. Cash ratio= cash & bank + marketable securities/current liabilities

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Net working capital ratio

Working capital ratio is the difference between the current assets and

current liabilities. The amount of working capital in some times used as a measure of the firms liquidity. It is considered that if a firm has more working capital ratios has the greater ability to meet its current obligations. Working capital ratio= current assets-current liabilities / net asset

2. Leverage ratios
The process of magnifying the shareholders return through the employment of debt is called trading on equity. To judge the long term financial position of the firm, financial leverage or capital structure ratios are calculated. The ratios indicate funds provided by owners and lenders. As a general rule there should be appropriate mix of debt and owners equity in financing the firms assets. The use of debt magnifies the shareholders earning as well as increases their risk and firms ability of using debt for the benefit of shareholder. Basically these are prepares to know the extent which operating profits are sufficient to cover the fixed charges. The following are the some of the important leverage ratios:

y Debt-equity ratio
The debt equity ratio is an important tool of financial analysis to appraise the financial structure of a firm. Debt equity ratio is the measure of relative claims of creditors and owners the firms assets. So it has an important implication form the creditor and owners point of view of the firm.

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The debt equity ratio cab be calculated by dividing total debt by net worth. Debt Equity Ratio = Total Debt / Net worth.

y Total-debt ratio
The total debt ratio can be calculated by dividing total debt by capital employed or total net assets. The total debt will include short and long term borrowings from financial institutions. Capital employed will include total debt and net worth or net assets consists of net fixed (long term) assets minus current liabilities excluding interest bearing short term debt. Total Debt Ratio= Total Debt/capital employed

y Capital employed to net worth ratio or Equity ratio

The ratio can be calculated by dividing capital employed or net assets by net worthy. Network includes share capital and reserves and surplus. Generally, capital employed or net assets to net worth ratio should be more than one. Capital employed of NA = capital employed / Net worth

3. Activity ratios
The funds of creditors and owners are invested in various assets to generate sales and profits, the better assets management, the large amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called as turnover ratios, because they indicate the speed with which assets are being converted or turned into sales. The following are the important activity ratios, which will evaluate the efficiency of the firm:

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Inventory turnover ratio

This ratio indicates the efficiency of the firm in selling its product and also

shows how rapidly the inventory is turning into receivables through sales. The ratio is calculated by dividing the cost of goods sold by the average inventory. Cost of goods sold is sales- gross profit of purchases + direct expenses+ opening stock+ manufacturing expenses closing stock. Average inventory is the average of opening and closing balances of inventory. Generally a high inventory turnovers indicative of good inventory management and a low inventory turnover suggests an inefficient inventory management. Further a low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slow moving of obsolete inventory, a high level of sluggish inventory amounts to unnecessary tie up of funds, reduced profit and increased costs. Therefore a balance should be maintained between too high and too low inventory turnovers. Inventory Turnover Ratio = Cost of goods sold / Average Stock.

y Working capital turnover ratio

The ratio show the firm is able to generate sales by using its limited resources of working capital. The firm may also take the ratio relating to net current assets to sales. If the ratio is more it indicates efficient working capital management and if it is less we can say it is inefficient in working capital management. The networking capital turnover ratio can be computed by dividing sales by networking capital. Working capital is current assets minus current liabilities. Working Capital Turnover = Sales / Net Working capital.

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y Debtors turnover ratio

A firm sells goods for cash and credit bases, when the firm extends credits to its customers, book debts (debtors or receivables) are created the firms account and they are expected to be converted into cash over a short period of time, so these are included in current assets. The liquidity of the firm depends on the quality of debtors to great extent. To judge the quality of liquidity of debtors, we have to calculate the debt turnover ratio and average collection period. The debt turnover ratio is calculated by dividing credit sales by average debtors. When the information regarding credit sales and opening and closing balance of debtors may not be available, then debtor turnover ratio can be calculated by dividing total sales by the yearend balance of debtors. Generally the higher the value of debtors turnover, the more efficient is the management of credit. Average collection period is calculated to know the nature of the firms credit policy and the quality of the debtors more clearly. It can be calculated by days in a year divided by debtors turnover of debtors by sales multiplied by 360 days. The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors. Debtors turnover ratio = sales/debtors

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y Debtors Collection period

The average number of days for which debtors remain outstanding is called the average collection and can be computed as follows: Debtors collection period = no. of days in a year / debtors turn over ratio (or) Avg debtors /sales*365 The less collection period leads to the worthiness of the debtors.

4. Profitability ratios
Profit is the difference between revenues and expenses over a period of time (usually one year). Profit is the ultimate output of a company, and it will have no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate the efficiency of the company in term of profits. The profitability ratios are calculated to measure the operating efficiency of the company. Besides management of the company, owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owners want to get a required rate of return on their investment. This is possible only when the company earns enough profits. The following are the some of the important profitability ratios:

y Gross profit ratio

It is the first profitability ratio calculated in relation to sales. This ratio can be called as gross profit margin of gross margin ratio. This ratio establishes a relationship between gross profit and sales to measure the efficiency of the firm and it reflects its pricing policy.

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Ratio Analysis The ratio is calculated by dividing the gross profit by sales. A high gross profit margin indicates that the firm is able to produce at relatively lower cost and it is also a sigh of good management. Whereas as a low gross profit margin reflects a higher cost of goods sold due to the firms inefficient management. Gross Profit Margin = Gross Profit / Sales * 100

y Net profit ratio

Net Profit Margin Ratio establishes a relationship between net profit and sales of the firm. It indicates the managements ability to earn sufficient profit on sales to cover all operating expenses, the cost of merchandising of servicing and also should have a sufficient margin to pay reasonable compensation to shareholders. A high ratio shows better and low ratio shows the opposite. The net profit is calculated by dividing the net profit after tax by sales, N.P. is obtained when operating expenses, interest and taxes are deducted from gross profit.

Net Profit Ratio = profit after tax / sales * 100

y Operating profit ratio

The operating profit can be calculated by dividing operating profit by net sales. The operating profits includes net profit = non operating expenses (interest to be paid, income tax, loss on sale of assets) minus non operating income (interest on dividend, profit on sale of asset) or gross profit minus operating expenses (administrative and selling expenses). Operating profit ratio = operating profit / net sales.

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RESEARCH & METHODOLOGY 4.1 NEED FOR THE STUDY

Ratio analysis is a powerful tool of financial analysis. Financial analysis is the process of determining strength and weakness of the industry establishing a strategic relationship between the components of balance sheet and profit and loss account. Financial performance evaluation has great influences on the development and progress of the industry.

4.2 OBJECTIVES

y y y y

To know the financial position of the ZUARI CEMENT Ltd. To study the liquidity position of ZUARI CEMENT Ltd. To Analyze the profitability, of ZUARI CEMENT Ltd. To suggest a better way if any for the business growth.

4.3 Methodology
Source of data
The study is purely based on the secondary data. The data of zuari cement limited for the year 2005 to 2009 is used in this study. The secondary data has been collected from the profit and loss account, balance sheet of zuari cement limited. SSITS, RAYACHOTY Page 13

Ratio Analysis

Financial tools
Ratio analysis.

Period of study
5 year annual reports are used that is 2005 to 2009.

4.4 SCOPE OF THE STUDY The purpose of the study was to know the financial performance of the unit. For this the ratio analysis tool was most suitable. This would reveal the solvency position of the unit. The trend of sales and profitability for the past 5 years was calculated to know if any deviation occurred and to know the reasons for it. However the study hard its own limitation like ratio analysis is a post-mortem analysis and the data utilized were secondary in nature etc. The scope of the present study is limited to the following aspects.

4.5 LIMITATIONS OF THE STUDY

The study is based on the information provided by the organization in the form of various annual reports. Detailed analysis could not be carried for the project work because of the limited time span. Less scope of gathering data The analysis was confined to Zuari cement ltd. Only

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5.1 LIQUIDITY RATIOS

 Current ratio

Current ratio is calculated by dividing the current assets by current liabilities. Current assets include cash and those assets that can be converted into cash within a year , such as marketable securities , debtors and inventories .prepaid expenses also includes in current assets .current liabilities include creditors , bills payable , arrived expenses , short term bank loan , income tax liability and long term debt maturing in the current year.

Current ratio represents a margin of safety for creditors. Current ratio of 2 to 1 or more is considered satisfactory. The higher the current ratio the greater the margin of safety. The larger the amount of current assets in ratio to current liabilities the more the firms ability to meet its current obligations.

Current assets Current ratio= ------------------------Current liabilities

Table 5.1.1 Year 2004-05 2005-06 2006-07 2007-08 2008-09

current ratio Current assets (Rs in lakhs) 8879.5 8167.5 10725.94 27336.1 24288.00 Current liabilities (Rs in lakhs) 3877.84 3509.59 3922.48 14506.15 25214.04 Current ratio ( in times ) 2.29 2.33 2.73 1.88 0.96 Page 15

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Ratio Analysis

Chart 5.1.1
Current ratio
2.73 2.29 2.33 1.88

Percentage
3 2.5 2 1.5 1 0.5 0

0.96

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The Ratio is above standard ratio (2:1) all years i.e. 2004-05 to 2008- 09 Ratios: 2.29, 2.33 , 2.73, 1.88, and 0.96 respectively.

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 Quick ratio
Establishes a relationship between quick or liquid, Assets and liabilities. An asset is a Liquid if it can be converted into cash immediately. Inventories are considered to be less liquid. The quick ratio is found out by dividing quick assets by current liabilities. A quick ratio of 1to1 is considered to represent a satisfactory current financial condition. Current assets-inventories Quick ratio= ------------------------------------Current liabilities

Table 5.1.2 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Quick ratio Quick assets (Rs in lakhs) 6597.58 5664.30 7611.37 23365.09 18216.65 Current liabilities (Rs in lakhs) 3877.84 3509.59 3922.48 14506.15 25214.04 Quick ratio ( in times ) 1.70 1.61 1.94 1.61 0.72

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Chart 5.1.2
Percentage
2.5 2 1.5 1 0.5 0 0.72 1.94 1.7 1.61 1.61

Quick ratio

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The Ratio is above standard ratio (1:1) all years i.e. 2003-04 to 2007- 08 Ratios: 1.7:1, 1.6:1, 1.0:1, 1.6:1, and 0.7:1 respectively.

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 Cash ratio
Cash is the most liquid asset. A financial analyst may examine cash ratio and its Equivalent to current liabilities. Trade investment or marketable securities are Equivalent of cash. The standard ratio is 0.5:1or 50:100(%).

Cash & bank + marketable securities Cash ratio= ------------------------------------------------------Current liabilities

Table 5.1.3 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Cash & bank (Rs in lakhs) 1716.40 1290.71 1383.35 12012.16 4773.47

cash ratio Current liabilities (Rs in lakhs) 3877.84 3509.59 3922.48 14506.15 25214.04 Cash ratio ( in times ) 0.44 0.37 0.35 0.83 0.18

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Chart 5.1.3

Percentage
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Cash ratio
0.83

0.44 0.37 0.35 0.18

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The Ratio is above standard ratio (0.5:1) all years i.e. 2003-04 to 2007- 08 Ratios: 0.44, 0.37, 0.35, 0.83 and 0.18 respectively

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 Networking capital ratio

The difference between current assets and current liabilities excluding short-term bank barrowing is collected net working capital or net current assets. Net working capital ratio is some times used as measure of a firms liquidity. It is considered that between two firms. The one having the larger networking capital has the greater ability to meet its current obligations.

The ratio is calculated as: Net working capital= current assets-current liabilities

Net assets= fixed assets + current assets

Net working capital Net working capital ratio= ---------------------------Net assets

Year 2004-05 2005-06 2006-07 2007-08

Net working capital (Rs in lakhs) 5001.66 4657.91 6803.46 12829.95

Net assets (Rs in lakhs) 45357.34 42070.25 42684.40 107415.94

Net working capital ratio ( in times ) 0.11 0.11 0.16 0.12 Page 21

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Ratio Analysis 2008-09 926.04 Net working capital ratio

150822.72

0.01

Table 5.1.4

Chart 5.1.4
Percentage
0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

Net working capital ratio

0.16 0.12

0.11

0.11

0.01

2004-05

2005-06

2006-07
Year

2007-08

2008-09

INFERENCE
Net working capital ratio is sometimes used as a measure of firms liquidity. During the period from 2003-04 to 2007-08 the ratios are 0.11, 0.11, 0.16, 0.12, 0.01.

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5.2 LEVERAGE RATIOS

Financial leverage refers to the use of debt finance ratios help in assessing the risk arising from the use of debt capital. To judge the long-term financial position of the firm, financial leverage ratios are calculated. The ratios indicate mix of funds provided by owners and lenders.

Debt equity ratio

Several debt equity ratios are utilized to analyze the out siders funds of a firm. And the total shareholders fund Total debt Debt equity ratio= --------------------------Net worth

Total debt = secured loans + unsecured loans

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Ratio Analysis Net worth = share capital + reserves and surplus

Table 5.2.1 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Total debt (Rs in lakhs) 28089.02 27198.47 25198.62 16454.93 24948.24

Debt equity ratio Net worth (Rs in lakhs) 64698.07 64698.07 64698.07 80846.56 100619.28 Debit equity ratio ( in times ) 0.43 0.42 0.39 0.20 0.25

Chart 5.2.1
Percentage
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Debit equity ratio

0.43 0.42 0.39 0.25 0.2

2004-05

2005-06

2006-07

2007-08

2008-09

Years

INFERENCE
The debt equity ratio has been decreased from 0.43 in 2003-04 to 0.25 in 2007-08. This is due to decrease in debt funds. It is good sign for the company.

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Ratio Analysis

 Total debt ratio

The debt-equity ratio is determined to ascertain the soundness of the long term financial policies of the company. It is also known as external internal equity ratio. Total debt = secured loans + unsecured loans Capital employed = share capital + reserves and surplus + total debt Total debt Total debt ratio = ------------------------Capital employed

Table 5.2.2 Year 2004-05 2005-06 2006-07 2007-08 Total debt (Rs in lakhs) 28089.02 27198.47 25198.62 16454.93

Total debt ratio Capital employed (Rs in lakhs) 92787.09 91896.54 89896.69 97301.49 Total debt ratio ( in times ) 0.30 0.30 0.28 0.17 Page 25

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Ratio Analysis 2008-09 24948.24

125567.52

0.20

Chart 5.2.2

Percentage
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.3

Total debt ratio

0.3 0.28 0.2 0.17

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE

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Ratio Analysis The total debt ratio has been decreased from 0.30 in 2003-04 to 0.20 in 200708. This is due to decrease in debt funds. It represents the company having low debt ratio. So, the company is flexible in the firms operation.

 Capital employed to net worth ratio /equity

The ratio can be calculated by dividing capital employed or net assets by net worthy. Network includes share capital and reserves and surplus. Generally, capital employed or net assets to net worth ratio should be more than one. Capital employed Equity ratio = -------------------------Net worth

Capital employed = share capital + reserves and surplus + total debt

Net worth = share capital + reserves and surplus

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Ratio Analysis Table 5.2.3 Capital employed to net worth ratio Year Capital employed (Rs in lakhs) 92787.09 91896.54 89896.69 97301.49 125567.52 Net worth Capital employed to (Rs in lakhs) net worth ratio ( in times ) 64698.07 1.43 64698.07 1.42 64698.07 1.39 80846.56 1.20 100619.28 1.25

2004-05 2005-06 2006-07 2007-08 2008-09

Chart 5.2.3
Percentage
1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1.2 1.25

Capital employed to net worth ratio

1.43 1.42 1.39

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE

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Ratio Analysis The capital employed to net worth ratio has been decreased from 1.43 in 2003-04 to 1.25 in 2007-08. This is due to decrease in debt funds.

5.3 ACTIVITY RATIOS

Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called Turnover ratios. Because they indicate the speed with assets are being converted into sales.

 Inventory turnover ratio

Inventory turnover ratio is a measure of liquidity. It indicates the speed at which the inventory is sold out. A high turnover ratio indicates that the

inventory is out Fast and a low turnover ratio show a sale of inventory. This ratio indicates the efficiency of the firm in selling its products.

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Ratio Analysis Cost of goods sold Inventory turnover ratio = --------------------------------Average inventory Cost of goods sold = sales gross profit Average inventory = opening stock + closing stock / 2

Table 5.3.1 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Inventory turn over ratio Inventory (Rs in lakhs) 2487.69 2392.56 2696.36 3430.26 5021.18 Inventory turnover ratio ( in times ) 10.25 12.22 6.24 10.54 9.24

Cost of goods sold (Rs in lakhs) 25509.56 29237.39 16825.32 36172.58 46374.89

Chart 5.3.1

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Ratio Analysis
Percentage
14 12 10 8 6 4 2 0 6.24 10.25

Inventory turnover ratio

12.22 10.54 9.24

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 10.25, 12.22, 6.24, 10.54 and 9.24 respectively.

 Working capital turn over ratio

In this ratio numerator is sales and denominator is net working capital. It shows how many times net working capital goes into sales. Higher the ratio, the lower the investment tied in working capital and vice versa. Very high working capital turnover is not desirable, since it pushes the enterprise into financial stracts. Lower magnitude of the ratio is a reflection of low utilization of working capital. Sales Working capital turnover ratio = ------------------------------------Working Capital SSITS, RAYACHOTY Page 31

Ratio Analysis Net working capital = total current assets total current liabilities

Table 5.3.2 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Working capital turnover ratio Working capital turnover ratio ( in times ) 5.80 7.00 13.02 7.75 126.90

Sales Net working capital (Rs in lakhs) (Rs in lakhs) 29021.15 32605.16 41516.72 99378.92 117521.84 5001.66 4657.97 3187.96 12829.95 926.04

Chart 5.3.2

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Ratio Analysis
Percentage
140 120 100 80 60 40 20 0 5.8 7 13.02 7.75

Working capital turnover ratio

126.9

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 5.80, 7.00, 13.02, 7.75 and 126.90 respectively.

 Debtors turnover ratio

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Ratio Analysis It indicates the number of times debtors turnover each year. If it is high that indicates the effectiveness of management in collecting debts. Generally, the higher the value of debtors turnover, the more efficient is the management of credit. Sales Debtors turnover ratio = ----------------------Average debtors

Table 5.3.3 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Debtors turn over ratio Sales (Rs in lakhs) 29021.15 32605.16 39689.62 99378.92 117521.84 Debtors (Rs in lakhs) 3109.72 2467.39 943.79 2531.00 2640.09 debtors turnover ratio ( in times ) 9.33 13.21 42.05 39.26 44.51

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Chart 5.3.3

Percentage
50 40 30 20 9.33 10 0

Debtors turnover ratio

42.05 44.51 39.26

13.21

2004-05

2005-06

200-07 Year

2007-08

2008-08

INFERENCE
The Ratios OF all years i.e. 2003-04 to 2007- 08 Ratios: 9.33, 13.21, 42.05, 39.26 and 44.51 respectively.

 Debtors collection period

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Ratio Analysis Debtors collection period indicates the speed of the collection of debts by the firm. If the firm is collecting the debts in time then that will good for the firm. The shorter collection period is the better quality of debtors. No. Of days in a year (360) Debtors collection period = -------------------------------------Debtors turnover ratio (or) Average debtors / credit sales*365

Table 5.3.4 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Debtors collection period Credit sales (Rs in lakhs) 29021.15 32605.16 39689.62 99378.32 117521.84 Debtors Debtors collection period (Rs in lakhs) (in days) 3109.72 2467.39 943.79 2531.00 2640.09 39 27 9 10 8

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Chart 5.3.4

Percentage 45 40 35 30 25 20 15 10 5 0

Debtors collection period (day)

39

27

10

2004-05

2005-06

2006-07 Year

2007-08

2008-09

INFERENCE
The days of all years i.e. 2003-04 to 2007- 08 days: 39, 27, 9, 10and 8 respectively

5.4 PROFITABILITY RATIOS

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Ratio Analysis Profitability ratios are calculated to measure the operating efficiency of the company. Besides management of the company, creditors and owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owners want to get a required rate of return on their investment. This is possible only when the company earns enough profits. Generally two major types of profitability ratios. Profitability in relation to sales. Profitability in relation to investment.

 Gross profit ratio

The gross profit ratio indicates the extent to which sales of goods per unit may decline with out May loss in the operations of the firm. This is also known as Gross profit margin (or) Gross profit margin on sales. The gross profit is the difference between sales and cost of goods sold.

Gross profit (sales-cost of goods sold) Gross profit ratio = ___________________________ Net sales x 100

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Ratio Analysis Table 5.4.1 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross profits (Rs in lakhs) 13172.03 13369.03 18776.27 63206.34 71146.95

Gross profit ratio Net sales (Rs in lakhs) 29021.15 32605.16 39689.62 99378.92 117521.84 Gross profit ratio ( in times ) 45.39 41.06 47.30 63.60 60.54

Chart 5.4.1
Gross profit ratio
63.6 45.39 47.3 41.06 60.54

Percentage
70 60 50 40 30 20 10 0 2004-05

2005-06

2006-07 Year

2007-08

2008-09

INFERENCE
The ratio of all years i.e. 2003-04 to 2007-08 ratios 45.39, 41.06, 47.30, 63.60, 60.54 respectively.

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 Net profit margin ratio

Net profit is obtained when operating expenses; Interest and taxes are subtracted from the gross profit. The net profit margin ratio is measured by dividing profit after tax by sales. The ratio also indicates the firms capacity to withstand adverse economic conditions.

Net profit Net profit margin ratio = ---------------------- x 100 Net sales

Table 5.4.2 Year 2004-05 2005-06 2006-07 2007-08 2008-09

Net profit ratio Net profit (Rs in lakhs) -2747.91 -2104.92 2265.11 18057.74 19772.72 Net sales (Rs in lakhs) 29021.15 32605.16 39689.62 99378.92 117521.84 Net profit ratio ( in times ) -9.47 -6.46 5.71 18.17 16.82

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Chart 5.4.2
Percentage
20 15 10 5 0 -5 -10 -15 2004-05 -9.47 2005-06 -6.46 2006-07 2007-08 2008-09 5.71

Net profit ratio

18.17 16.82

Year

INFERENCE
The first two years the ratios are -9.47, -6.46. After three years the ratios are 5.71, 18.17, 16.82. The net profit ratio of the company is in increased trend. It shows that the net profit is increasing year by year.

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Ratio Analysis

 Operating profit ratio

This ratio establishes the relationship between operating profit and sales. Operating profit Operating profit ratio = --------------------------------- x 100 Net sales Table 5.4.3 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Operating profit ratio Net sales (Rs in lakhs) 29021.15 32605.16 43921.16 99378.92 117521.84 Operating profit ratio ( in times ) -0.12 -0.59 31.61 61.68 64.15

Operating profit (Rs in lakhs) -35.05 -190.94 13883.70 61291.86 75391.89

Chart 5.4.3

Percentage
70 60 50 40 30 20 10 0 -10 -0.12

Operating profit ratio

61.68 64.15

31.61

-0.59

2004-05

2005-06

2006-07 Years

2007-08

2008-09

INFERENCE
The operating profit ratio has been increasing from -0.12 in 2003-04 to 64.15 in 2007-08. This is due to increase in operating profit.

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6.1 FINDINGS
During the study period, the current ratio of the company in the first 3 years was above the standard norm 2:1. But from the year 2007-08, it started decreasing and reached to 0.96 in 2008-09. y In the year 2009, the Quick ratio was decreased to 0.72 from 1.61 times in 2007-08 due to decrease in the cash balance. It was also decreased from 1.94 in 2006-07 to 1.61 in 2007-08. Even in 2005-06, it was decreased to 1.61 from 1.70 in 2004-05. y The standard cash ratio is 0.5:1. In the years 2009, 2007, 2006, and 2005 were 0.18, 0.35, 0.37, and 0.44 were below standard. But in the year 2007-08 the company maintained standard cash ratio. y The Net working capital ratio was 0.11 in the years 2005, 2006. In subsequent years 2007, 2008 and 2009 it was 0.16, 0.12, and 0.01 respectively. It means that company was not in a position to meet its current obligations. y The debt equity ratio was 0.43 in 2004-05 and 0.42 in 2005-06. But in later years it decreased to 0.39 in 2006-07 and to 0.17 in 2007-08. But it was increased to 0.20 in 2008-09. y Total debt ratio has been decreased from 0.30 in 2004-05 to 0.20 in 2008-09. This is due to decrease in debt funds. y The capital employed to net wroth ratio was decreased continuously from 1.43 in 2005-06 to 1.25 in 2008-09. This is due to increase in debt funds.

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Ratio Analysis y Except in 2005-06, the inventory turn over ratio decreased from 10.25 times in 2004-05 to 9.24 in 2008-09. In 2005-06, it was 12.22. y Debtors turn over ratio of the firm for the year 2005 to 2009 was increased continuously from 9.33 in 2004-05 to 44.51 in 2008-09. y Debtors collection period of the firm. In the year 2009 from 39, 27 and 10 (days) in 2005, 2006, and 2008 years. That means the company collection period is good. y Gross profit ratio was 45.39 in the year 2005. In subsequent years 2005 to 2009, it was 41.06, 47.30, 63.60 and 60.54 respectively. y Net profit ratio was -9.47 in the year 2005. In later years 2006 to 2009, it was -6.46, 5.71, 18.17 and 16.82 respectively. The ratios are in increasing trend. The varies between from -9.46 to 16.82.

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6.2 SUGGESTIONS
The company should maintain current assets to improve the liquidity position of the company. The debt equity ratio is to be improved as the low debt equity implies a greater claim of owners than creditors. The company shall reduce its selling and distribution expenses which lead to increase the profitability of the company. Debtors turnover ratio was too high due to increased sales, Hence the company is suggested to take precaution to avoid bad debts.

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CONCLUSION

This study reveals that the over all the performance of the Zuari cement ltd was not satisfactory. The financial position of the company should be fluctuating years. And the company should take necessary steps in order to improve the liquidity and profitability positions.

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2005 SSITS, RAYACHOTY Page 46

Ratio Analysis SLNO 1. PARTICULARS INCOMES Sales(GROSS) LESS: excise duty Sales(net) Other income EXPENDITURE Purchase of finished goods for resale Manufacturing and other expenses Depreciation Interest and other finance charges Decrease in stocks of work-in-process and finished goods Loss before extraordinary item Loss for the year Debit balance brought forward from previous year Debit balance carried to balance sheet AMOUNT Rs in lakhs 35851.44 6830.29 29021.15 236.60 29257.75 155.08 25591.08 2850.33 2949.46 459.71 32005.66 2747.91 2747.91 11756.35 14504.26

2.

BALANCE SHEET AS ON 31st MARCH, 2005 SSITS, RAYACHOTY Page 47

Ratio Analysis SNO 1.

PARTICULARS

AMOUNT Rs in lakhs

AMOUNT Rs in lakhs

2.

SOURCES OF FUNDS: Share holders funds: Share capital Reserves and surplus Loans funds : Secured loans Unsecured loans TOTAL APPLICATION OF FUNDS: fixed assets: Gross block (-) depreciation Net block Capital work-in-progress Investments Current assets Inventories Sundry debtors Cash and bank balances Loans and advances (-)current liabilities and Provisions current liabilities Provisions Net current assets miscellaneous expenditure profit and loss account TOTAL

42796.14 21901.93 19018.51 9070.51

64698.07

28089.02 92789.09

53331.74 16982.13 36349.61 128.23

36477.84 36525.14

2281.92 3109.72 1716.40 1771.46 8879.50 3827.41 50.43 3877.84 5001.66 278.19 14504.26 92787.09

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH,2006 SSITS, RAYACHOTY Page 48

Ratio Analysis SLNO 1. PARTICULARS INCOMES Sales(GROSS) LESS: excise duty Sales(net) Other income EXPENDITURE Purchase of finished goods for resale Manufacturing and other expenses Depreciation Interest and other finance charges Decrease in stocks of work-in-process and finished goods AMOUNT Rs in lakhs 39889.16 7284.81 32605.16 419.40 33024.56 1574.49 28082.30 2839.05 2333.38 92.77 34921.99 Loss before Extraordinary item (for employees) Loss for the year Debit balance brought forward from previous year Debit balance carried to balance sheet

2.

2104.86 2104.92 14504.26 16609.18

BALANCE SHEET AS ON 31st MARCH, 2006

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Ratio Analysis SNO 1.

PARTICULARS

AMOUNT Rs in lakhs

AMOUNT Rs in lakhs

2.

SOURCES OF FUNDS: Share holders funds: Share capital Reserves and surplus Loans funds : Secured loans Unsecured loans TOTAL APPLICATION OF FUNDS: fixed assets: Gross block (-) depreciation Net block Capital work-in-progress investments Current assets Inventories Sundry debtors Cash and bank balances Loans and advances (-)current liabilities and Provisions current liabilities Provisions Net current assets miscellaneous expenditure profit and loss account TOTAL

42796.14 21901.93 17431.03 9767.41

64698.07

27198.44 91896.51

53350.07 19787.74 33762.33 140.42

33902.75 36557.57

2503.20 2467.39 1290.71 1906.20 8167.50 3381.60 127.90 3509.59 4657.91 169.10 16609.18 91896.51

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH,2007 SSITS, RAYACHOTY Page 50

Ratio Analysis SNO 1. PARTICULARS INCOME Sale of manufactured goods (-)excise duty Sale of traded goods Other income 2. Expenditure Cost of goods sold Personnel cost Other expenses Depreciation Amortization of good will Interest and other finance cost Profit before tax Provision for tax Current tax MAT credit of earlier years MAT credit for the year Fringe benefit tax Deferred tax charge Profit for the year Debit balance in profit and loss a/c brought forward Balance in profit and loss a/c carried forward AMOUNT Rs in lakhs 47905.48 6388.76 41516.72 2404.44 432.61 44353.77 16825.32 1777.20 9234.53 2200.41 871.49 30908.95 13444.82 982.00 28.00 12434.82 14344.07 1909.25

BALANCE SHEET AS ON 31st MARCH, 2007 SSITS, RAYACHOTY Page 51

Ratio Analysis SNO 1. SOURCES OF FUNDS shareholders funds: Share capital Reserves and surplus PARTICULARS AMOUNT Rs in lakhs

42796.14 21901.93 64698.07

Loan funds Secured loans Un secured loans Deferred tax liability(net) TOTAL 2. APPLICATION OF FUNDS Fixed assets Gross block (-)accumulated depreciation Net block Capital work-in-progress Investments Current assets, loan and advances inventories Sundry debtors Cash and bank balances Loans and advances Current liabilities and provisions Current liabilities provisions Net current assets Debit balance in profit and loss account TOTAL

6760.49 8943.65 80402.21

53811.03 24043.25 29.767.78 3453.60 33221.38 42083.62 2889.51 1866.11 1576.48 3442.81 9774.91 6020.09 566.95 6586.95 3187.96 1909.25 80402.21

PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2008 SSITS, RAYACHOTY Page 52

Ratio Analysis SNO 1. PARTICULARS INCOME Sale of manufactured goods (-)excise duty Sale of traded goods Other income 2. Expenditure Cost of goods sold Personnel cost Other expenses Depreciation Amortization of good will Interest and other finance cost Profit before tax Provision for tax Current tax MAT credit of earlier years MAT credit for the year Fringe benefit tax Deferred tax charge Profit for the year Debit balance in profit and loss a/c brought forward Balance in profit and loss a/c carried forward AMOUNT Rs in lakhs 116900.24 17521.32 99378.32 1832.29 101211.21 36172.58 3604.81 25119.28 5204.23 1799.20 950.93 72851.03 28360.18 6542.84 982.00 713.59 115.83 5339.36 18057.36 1909.25 16148.49

BALANCE SHEET AS ON 31st MARCH, 2008 SSITS, RAYACHOTY Page 53

Ratio Analysis SNO 1. SOURCES OF FUNDS shareholders funds: Share capital Reserves and surplus PARTICULARS AMOUNT Rs in lakhs

42796.14 38050.42 80846.56

Loan funds Secured loans Un secured loans Deferred tax liability(net) TOTAL 2. APPLICATION OF FUNDS Fixed assets Gross block (-)accumulated depreciation Net block Capital work-in-progress Investments Current assets, loan and advances inventories Sundry debtors Cash and bank balances Loans and advances Current liabilities and provisions Current liabilities provisions Net current assets Debit balance in profit and loss account TOTAL

4168.45 12286.48 5659.36 102960.85

89683.71 29850.93 59832.78 20247.06 80079.84 10051.06 3971.01 2531.00 12012.16 8821.93 27336.10 13132.52 1373.63 14506.15 12829.95 102960.85

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Ratio Analysis PROFIT AND LOSS ACCOUNT OF THE ON 31st MARCH, 2009 SNO 1. PARTICULARS INCOME Sale of manufactured goods, gross (-)excise duty Sale of traded goods Other income 2. Expenditure Cost of goods sold Personnel cost Other expenses Depreciation Amortization of good will Interest Profit before tax Provision for tax Current tax MAT credit of earlier years MAT credit for the year Fringe benefit tax Deferred tax(credit)/ charge Profit after tax Balance in profit and loss a/c brought forward Balance in profit and loss a/c carried forward AMOUNT Rs in lakhs 137728.95 20207.11 117521.84 1807.18 119329.02 46374.89 4030.09 29017.00 5377.68 1799.20 534.19 87133.05 32195.97 12881.45 60.00 518.20 19772.72 16148.49 35921.21

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Ratio Analysis BALANCE SHEET AS ON 31st MARCH, 2009 SNO 1. SOURCES OF FUNDS shareholders funds: Share capital Reserves and surplus PARTICULARS AMOUNT Rs in lakhs

42796.14 57823.14 100619.28

Loan funds Secured loans Un secured loans Deferred tax liability(net) TOTAL 2. APPLICATION OF FUNDS Fixed assets Gross block (-)accumulated depreciation Net block Capital work-in-progress Investments Current assets, loan and advances inventories Sundry debtors Cash and bank balances Loans and advances Current liabilities and provisions Current liabilities provisions Net current assets Debit balance in profit and loss account TOTAL

10342.31 14605.93 5141.16 130708.68

91539.87 36353.10 55186.77 71347.95 126534.72 5100.00 6071.35 2640.09 4773.47 10803.09 24288.00 22479.86 2734.18 25214.04 926.04 130708.68

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BIBLIOGRAPHY
 AMES C.VANN HORNE, Financial Management, 9th edition Prentice Hall of India Private Limited, New Delhi, 1994.  KHAN M.Y. & JAIN P.K, Financial Management, 2nd Edition Tata Mc. GrawHill Publishing Co. Ltd., New Delhi.  PANDEY I.M., Financial Management, 7th Edition, Vikas Publishing House Pvt. Ltd., New Delhi, 1995.  KOTHARI C.R., Research Methodology, 2nd Edition, Wishwa Prakasham, New Delhi, 1990.  MAHESWARI S.N., Financial Management, 4th Edition, Sultan Chand & Sons, New Delhi. 1997.  PRASANNA CHANDRA., Financial Management, 3rd Edition, Tata McGrawHill Publishing Co., Ltd., New Delhi, 1984.

WEBSITE BROWSED
www.google.com www.zuaricementltd.com

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