REVIEW OF LITERATURE

Business as we know is concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as the financial statements. Financial statements refers to two statements which are prepared by a business concern at the end of the year. These are (i) income statement or trading and Profit and Loss Account which is prepared by a business concern in order to know the profit earned and loss sustained during a specified period; (ii) position statement or balance sheet which is prepared by a business concern on a particular date in order to know its financial position. 1. Income statement: trading concerns, whose financial activities are restricted to purchases and sales of goods prepare trading and Profit and Loss Account. The trading and Profit and Loss Account in order to ascertain their net income/net loss. Manufacturing concern require information regarding the cost of production also, so they prepare one more additional Account, known as the manufacturing Account. In case of joint Stock Companies profit and loss appropriation is also prepared to show the disposal of profit earned by the company. It furnishes the information regarding purchases, sales, direct expenses, gross profit or gross loss and net profit and net loss. 2. Position statement; it is a mirror which reflects the true position of the assets and liabilities of the business on a particular date. Assets include all current and non-current assets and the liabilities include creditors equities and proprietors equities. It is traditionally known as the balance sheet.

Financial analysis
Financial analysis is the systematic numerical calculation of the relationship of one financial fact with the other to measure the profitability, operational efficiency, solvency and the growth potential of the business. The analysis serves the interests of shareholder, debenture-holders, potential investors, creditors, bankers, journalists, legislators, politicians, researchers, stock exchanges, taxations authorities and economists. The analysis of financial statements makes it simple, intelligible, and meaningful for all concerned parties. Financial statements are split into simple statements by the process of rearranging, regrouping and calculations of various ratios. The analysis simplifies, summarizes and systematizes the monotonous figures. Financial analysis in this way is the purposeful and systematic presentation of financial statements. Various items of income and position statements are compared and their inter relationship is established. According to Kennedy and MemullarThe analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statements data, so that a

forecast may be made of the prospects for future earning, ability to pay interest and debt maturities (both current and long term) and profitability of sound dividend policy To these statements added are the statement of retained earnings and some other statements (as fund flow statement, cash flow statement, etc.) and schedule of fixed assets (as investments, current assets etc) to give a full view of the financial affairs. All these statements are collectively called as a package of financial statements. Statement of retained earnings (When prepared separately) or profit and loss appropriation Account shows the utilization of profits of the company i.e., dividend declared, amount transferred to general reserve or any other reserve are show in this Account. Funds flow statement summarizes the changes in working capital in a specified period and indicates the various sources and applications of funds. Cash flow statement gives the various items of inflow and outflow of cash. Various schedules of fixed assets are prepared by companies to show as to how the figures shown in the balance sheet have been arrived at. TOOLS USED FOR THE ANALYSIS OF FINANCIAL STATEMENTS 1. 2. 3. 4. 5. 6. 7. Comparative financial statements Common size statements Trend analysis Funds flow statement Cash flow statement Ratio analysis Cost profit volume analysis

COMPARATIVE FINANCIAL STATEMENTS

In the words of FLAUKE Comparative analysis is the study of trend of the same items and computed from two or more financial statements of the same business enterprise of different dates. The Comparative financial statements are statements of the financial position at different periods of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in a comparative form will be covered in comparative statements.

The two comparative statements are 1. 2. Comparative balance sheet Comparative income statement

Comparative balance sheet

The comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes in periodic balance sheet items reflect the conduct of the business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and these changes can help in forming an opinion about the progress of an enterprise.

Comparative income statement

The income statement gives the result of the operations of a business. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentages can be determined to analyzed the profitability of the business. COMMON SIZE STATEMENT The common size statements, balance sheet and income statement,are shown as analytical percentages. The common size statements may be prepared in the following way: 1. The total assets or liabilities are taken as 100 2. The individual assets are expressed as a percentage of total assets. i.e., 100 and different liabilities are calculated in relation to total liabilities.

Common size balance sheet

A statement in which balance sheet items are expressed as the ratio of each asset to total assets and in the ratio of each liability is expressed as a ratio of each asset to total liabilities is called common size balance sheet.

Common size income statement

The items in income statement are shown as percentages of sales to show the relation of each item to sales. This relationship is helpful in evaluating operational activities of the enterprise.

TREND ANALYSIS
The financial statements may be analyzed by computing trends of series of information. The information for a number of years is taken up and one year, generally in the first year, is taken as a base year. The figures of the base year are taken as 100 and trend ratios for the other years are calculated on the basis of year. The analyst is able to see the trend figures, whether upward or downward.

RATIO ANALYSIS
Systematized, simplified and summarized presentation of the information from financial statements in the form of ratios is termed as ratio analysis.

CASH FLOW STATEMENT

It is a statement of changes in the short term financial position of the business due to inflow and outflow of cash.

FUND FLOW STATEMENT

The fund flow statement is a statement which shows the movement of funds and is a report of the financial operations of the business undertaking. It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed.

RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial analysis. It is the process of establishing and interpreting various ratios (quantitative relationship between figures and group of figures). It is with the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis.

Meaning of ratio

Ratio is the simple arithmetic expression of a relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to accountants handbook by Wixon, kell and/Bedford a ratio is an expression of the quantitative relationship between two numbers. According to Kohler ratio is he relation, of the amount, a to another, be, expressed as the ratio of a to b; a: bor as a simple fraction, integer, decimal, fraction or percentage. In simple language ratio is one number expressed in terms of another and can be worked out by dividing one number into the another. It is the relation which one quantity bears to another of the same kind with regards to their magnitudes and the comparison is made by considering what multiple, part or parts, the first quantity is of the second. A financial ratio is the relationship between two accounting figures expressed mathematically. A ratio can be expressed as percentage, proportion, rate or time. Ratios provide clues to the financial position of a concern. These are the pointers or indicators of financial strength soundness, position or weakness of an enterprise. One can draw conclusions about the exact financial position of the concerns with the help of ratios.

Ratio accounting
Ratio accounting signifies the technique and methodology of analysis and interpretation of financial statements by means of accounting ratios. Accounting ratios imply such ratios which have accounting significance.

Ratio analysis
It impels analysis of financial statements with the aid of accounting ratios. Financial statements like the Trading a/c and Balance Sheet reflect the profit or loss and financial stability of a concern. It is difficult to deduct any inference form the massive pile of numerical figures, contained in such financial statements, as to the financial health of the concern. Thus, in order to accurately assess the financial health of the concern, it is necessary to regroup and analyses the figures as disclosed by these financial statements. Accounting ratios enable a person to draw a conclusion from the redrafted figures, regarding the financial health and earning capacity of the concern.

The systematic use of ratio helps to interpret the financial statements so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined and assessed. The ratios (i.e.,) financial or accounting) describe the significant relationship between figures shown on Balance Sheet, in a Profit &Loss Account, in a Trading Account, in a Manufacturing Account, in a budgetary control system or in any part of financial statement. Ratios make the related information comparable. A single figure by itself has no meaning. But when expressed in terms of related figure, it yields significant inferences. Thus, ratios are relative figures reflecting the relationship between related variable. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not much use. Three types of comparisons are generally involved: i. Trend analysis ii. Inter-firm comparison iii.Comparison with standards/industry average

i. Trend ratios: Trend ratios involve the comparison of ratios of a firm over a period of time, i.e, present ratios are compared with the past ratios of the same firm. It indicates the direction of change in the performance improvement, and may deterioration or consistency over the years.

ii.

Inter-firm comparison:

An inter-firm comparison involves a comparison of the ratios of a firm with those of other in the same line of business or for the industry as a whole. Thus, it reflects the firms performance in relation to its competitors. iii. Comparison with standard/industry average:

Other types of comparisons may relate to the comparison of items within a single years financial statement of a firm with standards or plans. Figures provided by Trading and Profit and Loss Account and Balance Sheet are not self explanatory in nature. These figures do not convey much meaning. It, therefore, becomes necessary to study some figures in relation to any other relevant figures to arrive at certain conclusions. For example, the figure of Net Profit can be compared with figures of other company and profitability can be judged properly.

Nature of ratio analysis

Ratio analysis is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weaknesses of firm. Calculation of mere ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios form the same keeping in mind the objective of analysis. The ratios may be used as a symptom like blood pressure. The pulse rate or the body temperature and their interpretation depends upon the caliber and competence of the analyst. The following are the four steps involved in the ratio analysis: i. Selection of relevant data from the financial statements depending upon the objective of the analysis ii. Calculation of appropriate ratios from the above data iii. Comparison of the calculated ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firm or the comparison with the ratios of the industry to which the firm belongs iv.Interpretation of the ratios

INTERPRETATION OF RATIOS

The interpretation of ratios is an important factor. Though calculation of ratios is also important but it is only a clerical task whereas interpretation needs skill, intelligence and foresightedness. The inherent limitations of ratio analysis should be kept in mind when attempting to interpret ratios. A single ratio in itself does not convey much of the sense. To make ratios useful, they have to be further interpreted. For example, say, the current ratio is 3:1 does not convey any sense unless it is interpreted and conclusion is drawn from it regarding the financial condition of the firm as to whether it is very strong, good, questionable or poor. The interpretation of ratios can be made in the following ways: 1) Single absolute ratio:

Generally speaking one cannot draw any meaningful conclusion when a single ratio is considered in isolation. But single ratios may be studied in relation to certain rules of thumb which are based upon well proven conventions as for example 2:1 is considered to be a good ratio for current assets to current liabilities. 2) Group of ratios: Ratios may be interpreted by calculating a group of related ratios. A single ratio supported by other related additional ratios becomes more understandable and meaningful. For example, the ratio of current assets to current liabilities may be supported by the ratio of liquid assets to liquid liabilities to draw more dependable conclusions. 3) Historical comparison:

One of the easiest and most popular ways of evaluating the performance of the firm is to compare its present ratios with the past ratios called comparison overtime. When financial ratios are compared over a period of time, It gives an indication of the direction of change and reflects whether the firms performance and financial position has improved, deteriorated or remained constant over a period of time. But while interpreting ratios form comparison over time, one has to be careful about the changes, if any, in the firms policies and procedure. 4) Projected ratios: Ratios can also be calculated for future standards based upon the projected or proforma financial statements. These future ratios may be taken as standard for comparison and the ratios calculated on actual financial statements can be compared with the standard ratios to find out the variances, if any. Such variances help in interpreting and taking corrective action for improvement in future. 5) Inter-firm comparison: Ratios of one firm can also be compared with the ratios of some other selected firms in the same industry at the same point of time. This kind of comparison helps in evaluating relative financial position and performance of the firm. But while making use of such comparison one has to be very careful regarding the different accounting methods, policies, and procedures adopted by different firms. GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS The calculation of ratios may not be difficult task but their use is not easy. The information on which these are based, the constraints of financial statements, objectives for using them, the caliber of the

analyst, et are important factors which influence the use ratios. Following guidelines or factors may be kept in mind while interpreting various ratios: Accuracy of financial statements:

The ratios are calculated from the data available in financial statements. The reliability of ratios is linked to the accuracy of information in these statements. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. These statements should also be properly audited by competent auditors. The precautions ill establish the reliability of data given in financial statements. Objective or purpose of analysis:

The type of ratios to be calculated will depend upon the purpose for which these are required. If the purpose is to study the current financial position then ratios relating to current assets and current liabilities will be studied. The purpose of user is also important for the analysis of ratios. A creditor, a banker, an investor, a shareholder, all has different objects for studying ratios. The purpose or objects for which ratios are required to be studied should always be kept in mind for studying various ratios. Different objects may require the study of different ratios. Selection of ratios:

Another precaution in ratio analysis is the proper selection of appropriate ratios. The ratios should match the different purpose for which these are required. Calculation of larger number of ratios without determining their need in the present context may confuse the things instead of solving them. Only those ratios should be selected which can throw proper light on the matter to be discussed. Use of standards: The ratios will give an indication of financial position only when discussed with certain standards. Unless otherwise these ratios are compared with certain standards one will not be able to reach at conclusions. These standards may be rule of thumb as in case of current ratio (2:1) and acid- test ratio (1:1), may be industry standards, may be budgeted or projected ratios, etc. The comparison of calculated ratios with the standards will help the analyst in forming his opinion about financial situation of the concern.

Calibre of the analyst: The ratios are only the tools of analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and the significance of changes, etc. A wrong interpretation may create have for the concern since wrong conclusions may lead to wrong decisions. The utility of ratios is linked to the expertise of the analyst. Ratios provide only a base: The ratio are only guidelines for the analyst, he should not base his decisions entirely on them. He should study any other relevant information, situation in the concern, general economic environment, etc before reaching final conclusions. The study of ratios in isolation may not always prove useful. A businessman will not afford a single wrong decision because it may have farreaching consequences. The interpreter should use the ratios as guide and may try to solicit any other relevant information which helps in reaching a correct decisions.

Use and significance of ratio analysis

Ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyses and interpret the financial health of enterprise. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc before making his conclusion regarding the illness and before giving his treatment, a financial analyst analyses the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise. A ratio is know as a symptom like blood pressure, the pulse rate or the temperature of an individual. It is with the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. The use of ratios is not confined to financial managers only. There are different parties interested in ratio analysis for knowing the financial position of a firm for different purposes. The supplier of good on credit, banks, financial institutions, investors, shareholders and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investment in the firm. With the use of ratio analysis one can measure the financial condition of a firm and can point out whether the condition is strong, good, questionable or poor. The conclusions can also be drawn as to whether the performance of the firm is improving or deteriorating. Thus, ratios have wide applications and are of immense use today. The followings are the main points of importance of ratio analysis.

(a) Managerial uses of ratio analysis: Helps in decisions- making: Financial statements are prepared primarily for decision-making. But the information provided in financial statements is not an end in itself and no meaningful conclusion can be drawn from these statements alone. Ratio analysis helps in making decisions from the information provided in these financial statements. Helps in financial forecasting and planning: Ration analysis is of much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn for future from these ratios. Thus, ratio analysis helps in forecasting and planning. Helps in communications: The financial strength and weakness of a firm are communicated in a more easy and understandable manner by the use of ratios. The information contained in the financial statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios help in communication and enhance the value of the financial statements. Helps in co-coordinating: Ratios even help in co-ordination which is of utmost importance in effective business management. Better communication of efficiency and weakness of an enterprise results in better co-ordination in the enterprise. Helps in control: Ratio analysis even helps in making effective control of the business. Standard ratios can be based upon proforma financial statements and variances or deviations, if any, can be found by comparing the actual with the standards so as to take a corrective action at the right time. The weaknesses or otherwise, if any, come to the knowledge of the management which helps in effective control of the business. Other uses: There are so many uses of the ratio analysis. It is an essential part of the budgetary control and standard costing. Rations are of immense importance in the analysis and interpretation of financial statements as they bring the strength or weakness of a firm. (b) Utility to shareholders/investors:

An investor in the company will like to access the financial position of the concern where he is going to invest. His first interest will be the security of his investment and then a return in the form of divided or interest. For this purpose he will try to access the value of fixed assets. The investor will feel satisfied only if the concern has sufficient amount of assets. Long-term solvency ratios will help him in accessing financial position of the concern. Profitability ratios, on the other hand, will be useful to determine profitability position Ratio analysis will be useful to the investor in making up his mind whether present financial position of the concern warrants further investment or not. (c) Utility to Creditors: The creditors or suppliers extend short-term credit to the concern. They are interested to know whether financial position of the concern warrants their payments at a specified time or not. The concern pays short-term creditors out of its current assets. If the current assets are quite sufficient to meet current liabilities, Then the creditor will not hesitate in extending credit facilities. Current and acid test ratio will give an idea about the current financial position of the concern. (d) Utility to Employees: The employees are also interested in the financial position of the concern, especially profitability. Their wage increases and the amount of fringe benefits are related to the volume of profits earned by the concern. The employees make use of information available in the financial statements. Various profitability ratios relating to Gross profit, operating profit, net profit, etc. enable employees to put forward their viewpoint for increase of wages and other benefits. (e) Utility to Government: Government is interested to know the overall strength of the industry. Various financial statements published by industrial units are used to calculate ratios for determining short-term, long-term and overall financial position of the concern. Profitability indexes can also be prepared with the help of ratios. Government may base its future policies on the basis of industrial information available from various units. The ratios may be used a indicators of overall financial strength of public as well as private sector. In the absence of reliable economic information, government plans and policies may not prove successful. (f) Tax Audit Requirements: Section 44 AB was inserted in the Income Tax Act by the Finance act, 1984. Under this act every assesse engaged in any business and having turnover or gross receipts exceeding Rs.40 lakh is required to get the accounts audited by a Chartered Accountant an submit the tax audit report before the due date of filing the return of income u/s 139(1) in case of a profession, a similar report

is required if gross receipts exceed Rs.10 lakh. Clause 32 of the Income Tax Act require that the following accounting ratios should be given: i. ii. iii. iv. Gross profit/Turnover Net profit/Turnover Stock-in-trade/Turnover Material consumed/Finished goods produced.

Further, it is advisable to compare the accounting ratios for the year under consideration with the accounting ratios for the earlier two years so that the auditor can make necessary enquiries, if there is any major variation in the accounting ratios.

Precautions while using ratio analysis

While conducting the ratio analysis, the following precautions are required to be taken: I. The cause and effect relationship should always be considered while forming and establishing a ratio. For example, the ratio of sales to net profit is a useful one, for it tells us the return (in terms of net period) obtained from the sale of one rupee where the ratio of sales to the authorized capital is quite meaningless since there exists no relationship between the two. Useful conclusion can be arrived at only if the ratios are calculated between such figures as are meaningfully related to each other. ii. The particular characteristic of the industry should always be kept in mind while the firm is being studied. For example, the ratio of a seasonal concern during the season period shall differ from the ratios during the non-season period. iii. While conducting an inter-firm comparison, the factors such as age, size, industry, etc should also be kept in mind. Besides this, it must be ensured that ratios to be compared haven been worked out on the same basis.

LIMITATIONS OF RATIO ANALYSIS The ratio analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from some serious limitations: 1. Limited use of a single ratio:

A single ratio, usually, does not covey much of a sense. To make a better interpretation a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any meaningful conclusion. 2. Lack of adequate standards: There are no well accepted standards or rules of thumb for all ratios which can be accepted as norms. It renders interpretation of the ratios difficult. 3. Inherent limitations of accounting: Like financial statements, ratios also suffer from the inherent weakness of accounting records such as their historical nature. Ratios of the past are not necessarily true indicators of the future. 4. Change of accounting procedures: Change in accounting procedures by a firm often makes ratio analysis misleading. That is, a change in the valuation methods of inventories, from FIFI to LIFO increase the cost of sales and reduces considerably the value of closing stock turnover ratio to be lucrative and an unfavorable gross profit ratio. 5. Window dressing: Financial statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios calculated from such financial statements. But is may be very difficult for an outsider to know about the window dressing made by a firm. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways. 7. Incomparable: Not only industries differ in their nature but also the firms of the similar business widely differ in their size and accounting procedure, etc. It makes comparison of ratios difficult and misleading. Moreover, comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis. 8. Absolute figures distortive: Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a qualitative analysis.

9. Price level changes: While making ratio analysis, no consideration is made to the changes in price levels and this makes the interpretation of ratios invalid. 10. No substitutes: Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if separated from the statements from which they are computed.

CHAPTER 5 DATA ANALYSIS AND INTERPRETATION RATIOS Ratios are broadly classified into four groups; STRUCTURAL RATIOS TURNOVER RATIOS PROFITABILITY RATIOS LIQUDITY RATIOS STRUCTURAL RATIOS Structural ratios are indicators of the financial strength of the business. It brings out the relationship between debt and equity as a measure of the financial risk of the business. The ability of the business to service its financial commitments in the long run is measured by the solvency ratio. The share of the owners in the capital employed is another indicator of the strength. Financial strength is also measured in terms of debt servicing ability of the business. The important structural ratios are; DEBT EQUITY RATIO Debt Equity ratio is an indicator of the relationship between owned funds and borrowed funds that are used in business. Debt has its own advantages. Capital, particularly in developing countries like India, is scare and costly. By its nature, even the scare capital is shy of investment. The everincreasing need for funds, therefore, has to be met though borrowed funds. Even when an entrepreneur can raise adequate volume of owned funds, he might decide to use borrowed funds,

as debt brings an added benefit by way of financial leverage. Financial leverage is the added benefit accruing to equity by mixing a judicious dose of debt to the pattern of funding. In case the return on investment of a business is higher than the cost of borrowings, financial leverage benefits accrue to the business. However, higher the debt component in the capital employed, greater is the risk of the undertaking. Any business with a higher risk rating would not have easy access to the market for additional funds. If it wants to raise additional resources, either by way of debt or equity it can do so only at an enhanced cost. Indian industry is prone traditionally to high risk. Having regard to the high debt sensitivity of the Indian industry, governmental agencies have fixed the maximum debt equity ratio 2:1. That is, the share of debt in funding any proposal could at the most be twice the equity. But in developed countries, the ratio is reverse; equity is generally more than debt.

Debt Equity Ratio= Debt/Equity TABLE DEBT EQUITY RATIO Year 2007 2008 2009 2010 2011 Debt 171033479 174488667 162983916 148894016 135802354 Equity 30103497 32278774 25214002 25288799 39571365 Ratio 5.17 5.40 6.46 5.88 3.43

DIAGRAM

Inference: Debt equity ratio is higher than 2:1 it means higher debt component in the capital employed, greater is the risk of the undertaking. SOLVENCY RATIO It indicates the overall ability of the business to meet its financial commitments in the long run. Equity, as a percent of total outside liabilities yields solvency ratio. It is an extension of the debt

equity ratio, in the sense that debt equity ratio reveals the relationship between equity and long term debts, whereas solvency ratio shows the proportion of equity to total outside liabilities of the business- both long term. Higher the proportion of solvency, sounder is the financial position of the company. Solvency Ratio= long term debt+ short term debt/total equity TABLE SOLVENCY RATIO Year 2007 2008 2009 2010 2011 Total Debt 405564734 410440301 438009894 397487283 398620714 Equity 30103497 32278774 25214002 25288799 39571365 Ratio 13.47 12.71 17.37 15.71 10.07

DIAGRAM Inference: solvency ratio shows higher rate so the company has sound financial position. PROPRIETARY RATIO Proprietary ratio relates the proportion of owners fund to the total funds deployed in the business. Proprietors funds are net worth of a business and total funds are capital employed. It measure the extend of shareholders stake in the business. Higher the ratio, l arger is the financial commitment of the owners to the business and better its financial strength. Proprietary Ratio= Equity/Capital Employed PROPRIETARY RATIO

Year 2007 2008 2009 2010 2011

Equity 30103497 32278774 25214002 25288799 39571365

Capital Employed 195374340 192093900 225772862 219606577 199062604

Ratio 0.14 0.16 0.11 0.12 0.19

DIAGRAM Inference: proprietary ratio is low so the financial commitment of the owners to the business is not satisfactory and its financial strength is not better. DEBT CAPITALIZATION RATIO Debt Capitalization ratio is also called leverage ratio. It reveals the extend of exposure of the business to financial risk. It is the percentage of debt to capital employed. It is the other side of proprietary ratio. Higher the debt capitalization ratio, greater is the degree of financial risk of the business. Debt Capitalization Ratio= Debt/Capital Employed TABLE DEBT CAPITALIZATION RATIO Year 2007 2008 2009 2010 2011 Dept 171033479 174488667 162983916 148894016 135802354 Capital Employed 195374340 192093900 225772862 219606577 199062604 Ratio 0.87 0.90 0.72 0.67 0.68

DIAGRAM Inference: Debt Capitalization ratio is low so the degree financial risk of the business is low.

DEBT SERVICE CONVERAGE RATIO (DSCR)

This ratio measures the ability of the business to service its debt obligations. Debt service obligation comprises interest on fixed liabilities and repayment of installments during an accounting period. Servicing ability of the business is gauged by its cash generation before payment of interest. It is profit after tax less preference dividend and dividend tax, if any, with depreciation and interest on term loans added back. Dividing the servicing ability of the firm by its service obligations gives debt service coverage ratio.

Debt service Coverage Ratio= PAT (Pref. dividend +Dividend tax)+ Depreciation+ Interest on term liability /interest on term liabilities +Installments.

A debt service coverage ratio of more than 1.5:1 is reasonable. It can range between to 1.5 to 2. if the ratio is less than 1.5:1, it indicates that the unit is on a hamstrung cash budget. DSCR= FUND for Service/service obligation. TABLE DEBT SERVICE COVERAGE RATIO

Year 2007 2008 2009 2010 2011

Fund for service 14347093 20866264 8738375 58117432 54904213

Service Obligation 13500788 13431767 17409004 15680783 18278301

Ratio 1.06 1.55 0.50 3.70 3.01

DIAGRAM Inference: DSCR is more than 2:1, it is an indication of excess repayment capacity.

INTEREST COVERAGE RATIO Interest referred to in this ratio is restricted to interest on fixed liabilities. Coverage has the same meaning with a difference. Here, profit before tax, depreciation and interest is the coverage. Coverage divided by only interest yields interest coverage ratio. This ratio indicates the ability of the business to service only interest obligations, the use of this ratio is limited as it applies to business houses that use perpetuities for raising funds. Perpetuities are securities that do not have specific maturity dates.

Interest Coverage Ratio= fund for service/Interest TABLE

INTEREST COVERAGE RATIO

Year 2007 2008 2009 2010 2011

Fund for service 14347093 20866264 8738375 58117432 54904213

I Interest 13500788 13431767 17409004 15680783 18278301

Ratio 1.06 1.55 0.50 3.70 3.01

DIAGRAM

Inference: interest obligations of the company can meet easily in the year 2011 and 2010. TURNOVER RATOS Turnover ratios are also known as activity ratios as they measure the level of activity in a business. Activity is related to fixed assets, current assets and capital employed. In current assets, components such as inventories and debtors have definite relationship with turnover. Fixed Asset Turnover Ratio Working Capital Turnover Ratio Inventory Turnover Ratio Debtors Turnover Ratio Turnover to Capital Employed

FIXED ASSET TURNOVER RATIOS

Turnover ratios are activity ratios. They indicate the velocity of circulation of assets in generating income. Fixed asset turnover ratio is arrived at by dividing turnover by gross fixed assets. The ratio indicates the effective utilization of fixed assets in the generation of income. Every unit aspires to have a higher turnover ratio. But, the ratio differs from industry to industry, depending upon its nature. Usually, the ratio is very high in value added industries. Fixed asset turnover ratio= turnover/fixed asset

TABLE FIXED ASSET TRUNOVER RATIO

Year 2007 2008 2009 2010 2011

Turnover 1319070430 1514964974 1724377103 2120879966 2309117620

Fixed assets 149617718 156185436 165782349 178542909 184617402

Ratio 8.81 9.69 10.4 11.88 12.5

DIAGRAM

Inference: fixed asset turnover ratio has an increasing trend. WORKING CAPITAL TURNOVER RATIO It indicates the number of times working capital has turned over. Working capital here means networking capital, that is, current assets minus current liabilities. The contribution of working capital to the generation of income is direct, compared to that of fixed assets, which is indirect. It is also the fact that working capital forms between 30 to 60 percent of the capital employed in Indian industries. Therefore, lower the working capital, higher would be the reduction in financing cost and consequently better would be the performance. Higher the working capital ratio, better is the utilization of working capital. However, very high ratio, compared to the industrial average, mighty mean overtrading by the business. Overtrading is a condition where the company works with thin working capital margin. It is a state of riskiness, as any delay or shortage in expected cash inflow might adversely affect short- term liquidity.

Working capital turnover ratio= Turnover/ working capital TABLE

WORKING CAPITAL TURNOVER RATIO

Year 2007 2008 2009 2010 2011

Turnover 1319070430 1514964974 1724377103 2120879966 2309117620

Working capital 45756622 35908463 59990513 41063667 14445202

Ratio 28.82 42.18 28.74 51.65 159.85

DIAGRAM Inference: Working Capital turn over ratio is satisfactory so there is a better utilization of working capital. INVENTORY TURNOVER RATIO Turnover divided by inventory is the inventory turnover ratio.The ratio measures the rapidity with which inventory has turned over. Higher the ratio, more efficient is inventory management. By way of caution, it might be added that inventory turnover ratio, much higher than that of the industry norm, means overtrading and is risky. Inventory turnover ratio= Turnover/Inventory TABLE

INVENTORY TURNOVER RATIO

Year 2007 2008 2009 2010 2011

Turnover 1319070430 1514964974 1724377103 2120879966 2309117620

I Inventory 29470217 29777873 32814013 44812972 19169840

Ratio 44.75 50.87 52.55 47.34 120.45

DIAGRAM Inference: Inventory turnover ratio is high so inventory management of the company is efficient. DEBTORS TURNOVER RATIO

The ratio is analogous to the average collection period. Credit sales divided by average debtors would give the ratio. This ratio has to be analyzed having the credit policy of the company in mind. Debtors are a generic term comprising bills receivable and sundry debtors. Inventory and debtor are the major subdivisions of gross working capital.

Debtors turnover ratio= turnover/debtor TABLE DEBTORS TURNOVER RATIO

Year 2007 2008 2009 2010 2011

Turnover 1319070430 1514964974 1724377103 2120879966 2309117620

Debtors 189423029 189002345 175206175 154472302 190423832

Ratio 6.96 8.01 9.84 13.75 12.13

DIAGRAM Inference: Debtors turnover ratio is increasing so there is efficient collection set up. TURNOVER TO CAPITAL EMPLOYED

Turnover, divided by capital employed, would give the ratio. It indicates the effective use of funds made available to the business. Preference is for a higher ratio. Although there is no standard fixed for the businesses as a whole, it is customary to consider a ratio of less than 1:1 as wanting. It might be pointed out that higher turnover ratio would reduce fixed cost per unit of production and would make the unit more competitive. Turnover to capital Employed= turnover/capital employed TABLE TURNOVER TO CAPITAL EMPLOYED

Year 2007 2008 2009 2010 2011

Turnover 1319070430 1514964974 1724377103 2120879966 2309117620

Capital Employed 195374400 192093900 225772862 219606577 199062604

Ratio 6.75 7.88 7.63 9.65 11.59

DIAGRAM

Inference: turnover ratio is higher so there is a effective use of funds make available to the business. PROFITABILITY RATIOS Profitability is the yardstick of success or failure of an enterprise. Profitability is directly related to turnover. Higher the turnover, greater should be the profits of the business. In fact the ratio of profit should increase higher than that of sales, as every increase in sale beyond breakeven point less variable cost is profit. The indirect factors that influence profits are increase in assets, increase in working capital and increase in capital employed. Profit is also related to the owned funds of shareholders or equity. Gross profitability Ratio Gross profitability measures the surplus of the sales over the cost of its production (in manufacturing) and service charges (in service industries). Gross profitability ratio is worked out by dividing gross profit by cost of sales. It indicates the production efficiency of a manufacturing or service organization. In a trading enterprise, the ratio would roughly indicate the margin on purchases.

GROSS PROFITABILITY RATIO

Year 2007 2008 2009 2010 2011

Gross profit 126269160 128852804 138691586 248254072 229482505

Cost of sales 1195344487 1388767814 1587873223 2080800450 1780959770

Ratio 0.11 0.1 0.09 0.12 0.13

DIAGRAM Inference: Gross profit ratio is low it reveals that the production efficiency in manufacturing is not good. RETURN ON INVESTMENT (ROI) ROI is an important measure of operating profit. It is also called yield on capital employed. It reveals the operational efficiency of the business. ROI is worked out by dividing operating profit by capital employed. The ratio justifies the continuation or otherwise of a line of activity, ROI should at least cover average cost of funds for the business. ROI, when it is more than average cost of funds, increases the wealth of the enterprise to the shareholders. Return On Investment= EBIT/Capital Employed. TABLE

RETURN ON INVESTMENT Year 2007 2008 2009 2010 2011 EBIT - 8572676 2079011 - 34689971 32418227 23004645 Capital Employed 195374340 192093900 225772862 219606577 199062604 ROI 0.04 0.01 0.15 0.15 0.12

DIAGRAM

Inference: The ROI does not cover the average cost of funds so it does not increase the wealth of the company. NET PROFITABILITY RATIO Net profit is the surplus after meeting all costs, both operational and non-operational and after deducting taxes. If the business has preference capital, divided on preference capital is to be deducted. With the introduction of dividend tax, dividend tax should also be deducted to arrive at net profit. The net profit frequently referred to as PAT is thus profit after tax, after preference dividend and dividend and dividend tax. PAT is as divisible profit belonging to the owners. The value of equity or intrinsic value of the business depends on the volume of net profit. This ratio indicates

how profitable the working of the business is to the owners during the concerned accounting period.

Net Profitability Ratio= Net profit/Turnover TABLE NET PROFITABILITY RATIO Year 2007 2008 2009 2010 2011 Net Profit -8572676 2079011 -34689971 32418227 23004645 Turnover 1319070430 1514964974 1724377103 2120879966 2309117620 Ratio 0.006 0.001 0.02 0.015 0.009

DIAGRAM Inference: Net profitability ratio is not satisfactory so the working of the business is not profitable. EARNINGS PER SHARE It is the earning of each share in the divisible profit pool and is the basis for strategic decisions, such as dividend payout, plough back, growth rate etc. Profit after tax divided by the number of equity shares outstanding yields earnings per share (EPS).

EPS=PAT/NO of Equity shares

EPS also exerts its weight on the market price of the shares, in income stocks, EPS divided by the desired rate of return of the investor, would determine the purchase price of the shares. TABEL EARNINGS PER SHARE Year 2007 2008 2009 2010 2011 PAT - -8572676 2079011 -34689971 32418227 23004645 No. of shares 1902720 1907380 1914080 198830 194238 EPS 0 1.08 0 163.04 118.43

DIAGRAM

LIQUIDITY RATIOS Liquidity is the ability of the business to meat its short-term commitments for cash without affecting operations. Short-term requirements for cash arise on account of working capital needs such as payments for materials, wages, salaries, rents, administrative and selling expenses, payment of interest, tax, and dividend and repayment of borrowings. Liquidity is basically the relationship between short-term assets (current assets) and short-term liabilities (current liabilities) Current Ratio

Quick Ratio Average Collection Period

CURRENT RATIO Of the three important ratio that reveal the short-term liquidity of the business, current ratio is the most important. Current assets divided by current liabilities and provisions give the ratio. The safer norm is 1.5:1 that is, 1.5 units of current assets back up every one unit of current liability. Liquidity is the ability of the business to meet its short-term commitments as and when they arise.

Current Ratio- Current Assets/Current Liabilities

TABLE CURRENT RATIO Year 2007 2008 2009 2010 2011 Current Assets 280287877 217860099 281016490 289656935 276897406 Current Liabilities 234531255 235951635 275025977 248593268 262452204 Ratio 1.19 1.15 1.02 1.16 1.05

DIAGRAM Inference: The current ratio is less than 1.5:1 so the company is facing tight liquidity condition. QUICK RATIO In the groups of current assets, certain assets are nearer to cash in the working capital cycle (also called operating cycle) than others. Thus, liquid assets are current assets less inventories. The ratio of these assets to the current liabilities is called quick ratio or acid test ratio. A quick ratio of 1:1 is considered adequate to ensure uninterrupted operations. Quick Ratio= Current Assets-(stock +prepaid expenses) /Current Liabilities

TABLE QUICK RATIO Year 2007 2008 2009 2010 2011 Current Assets 258075432 234922306 242868950 244384007 217847268 Current Liabilities 234531255 235951635 275025977 248593268 262452204 Ratio 1.1 0.99 0.88 0.98 0.83

DIAGRAM

Inference: The company has the minimum quick ratio adequate to ensure uninterrupted operation. AVERAGE DEBT COLLECTION PERIOD Average collection period indicates the time taken by the business to realize receivable. Early collection of receivable with the permissible period would improve liquidity and profitability. The ratio is worked out by dividing the average receivables by credit sales of the period. Average receivable is adding receivable as on the opening date and that on closing date of the accounting period and dividing the product period by two. Average collection period has to be compared with the credit policy of the business. Average debt Collection Period= Average Account Receivable/Net credit sales*365

TABLE AVERAGE DEBT COLLECTION PERIOD Year 2007 2008 2009 2010 2011 Avg. accountant 189423029 189002345 175206175 154472302 190423832 Credit sales 1319070430 1514964974 1724377103 2120879966 2309117620 Period 52 45 37 40 30

DIAGRAM Inference: Average collection period was decreased year by year, it is beneficial to the liquidity position of the company.