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A STUDY ON FINANCIAL PERFORMANCE USING


RATIO ANALYSIS AT EMAMI LTD

SUMMER PROJECT REPORT


Submitted by
A.GAYATHRIDEVI
REGISTER NO: 27348311
Under the guidance of
Mrs. R. HEMALATHA, M.B.A.,
Faculty of management studies

In partial fulfilment for the award of the degree


of
MASTER OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT STUDIES


SRI MANAKULA VINAYAGAR ENGINEERING COLLEGE
PONDICHERRY UNIVERSITY
PUDUCHERRY, INDIA
SEPTEMBER 2007

SRI MANAKULA VINAYAGAR ENGINEERING COLLEGE


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PONDICHERRY UNIVERSITY

DEPARTMENT OF MANAGEMENT STUDIES

BONAFIDE CERTIFICATE

This to certify that the project work entitled “ A STUDY ON FINANCIAL


PERFORMANCE USING RATIO ANALYSIS AT EMAMI LTD” is a bonafide work
done by A.GAYATHRIDEVI [REGISTER NO: 27348311] in partial fulfilment of the
requirement for the award of Master of Business Administration by Pondicherry University
during the academic year 2007-2008.

GUIDE HEAD OF THE DEPARTMENT

Viva-Voce Examination held On _______________

EXTERNAL EXAMINER

TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………….i
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ABSTRACT……………………………………………...ii
LIST OF TABLES………………………………………..iii
LIST OF CHARTS………………………………………..iv

CHAPTER TITLE PAGE NO


I INTRODUCTION
1.1 COMPANY PROFILE 1
1.2 INTRODUCTION TO THE STUDY 9

II REVIEW OF LITERATURE 10

III OBJECTIVES OF STUDY 24

IV RESEARCH METHODOLOGY 25

V DATA ANALYSIS AND INTERPRETATION 26

VI FINDINGS OF THE STUDY 69

VII 7.1 SUGGESTION AND RECOMMENDATIONS 70


7.2 CONCLUSION 71

VIII 8.1 LIMITATIONS OF THE STUDY 72


8.2 SCOPE FOR FURTHER STUDY 73

ANNEXURE

BIBLIOGRAPHY……………………………………

ACKNOWLEDGEMENT
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I would like to express my heartfelt gratitude to our chairman Mr.N.KESAVAN, Sri


Manakula Vinayagar Engineering College for the extension of the college facilities which
enabled me to complete this project.

I feel obliged to our Managing Director Mr.DHANASEKARANE, Sri Manakula


Vinayagar Engineering College for his support and encouragement.

I would like to express my sincere thanks to our principal


Dr.V.S.K.VENKATACHALAPATHY, for providing the college facilities for the completion
of this project.

I also thank Mr. JAYAKUMAR, H.O.D, Department of Management Studies, for his
valuable suggestion and assistance throughout the project.

I owe my achievement to the inspiration and kind guidance to my respected


Mrs.R.HEMALATHA, Lecturer, Department of Management Studies, and I am thankful for
her sincere guidance as my Internal Guide to successfully complete my project.

I express my sincere thanks to the advisory committee members and staffs, Department
of Management Studies for their continuous monitoring and assessment.

I thank Mr.T.RajaRajan (GM) Emami Ltd. for helping and guiding me through out
the project.

I express my deep sense of gratitude to my family members and to my dear friends for
their support and encouragement during the entire course of study.

ABSTRACT
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In this project, titled “A STUDY ON FINANCIAL PERFORMANCE USING


RATIO ANALYSIS AT EMAMI LTD”. This aim is to analysis the liquidity and profitability
position of the company using the financial tools.

This study based on financial statements such as Ratio Analysis, Comparative balance
sheet. By using this tools combined it enables to determine in an effective manner.

The study is made to evaluate the financial position, the operational results as well as
financial progress of a business concern.

This study explains ways in which ratio analysis can be of assistance in long-rang
planning, budgeting and asset management to strengthen financial performance and help
avoid financial difficulties.

The study not only throws on the financial position of a firm but also serves as a
stepping stone to remedial measures for Emami Limited.

This project helps to identify and give suggestion the area of weaker position of
business transaction in “EMAMI LTD”.

LIST OF TABLES
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Table No Name of Tables Page No.


5.1 Current Ratio 27
5.2 Quick ratio 29
5.3 Cash ratio 31
5.4 Average Collection Period 34
5.5 Inventory Turnover Ratio 35
5.6 Working Capital Turnover Ratio 37
5.7 Fixed Assets Turnover Ratio 39
5.8 Proprietary Ratio 42
5.9 Debt to Equity Ratio 43
5.10 Interest Coverage Ratio 45
5.11 Gross Profit Ratio 48
5.12 Net Profit Ratio 49
5.13 Return on Investment 51
5.14 Return on Equity 53
5.15 Return on Total Assets 55
5.16 Comparative Balance Sheet as on 31st March 58
2001– 2002

5.17 Comparative Balance Sheet as on 31st March 60


2002– 2003

5.18 Comparative Balance Sheet as on 31st March 62


2003– 2004
5.19 Comparative Balance Sheet as on 31st March 64
2004– 2005

5.20 Comparative Balance Sheet as on 31st March 66


2005– 2006
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LIST OF CHARTS

Chart No. Name of Charts Page No.


5.1 Current Ratio 28
5.2 Quick ratio 30
5.3 Cash ratio 32
5.4 Average Collection Period 34
5.5 Inventory Turnover Ratio 36
5.6 Working Capital Turnover Ratio 38
5.7 Fixed Assets Turnover Ratio 40
5.8 Proprietary Ratio 42
5.9 Debt to Equity Ratio 44
5.10 Interest Coverage Ratio 46
5.11 Gross Profit Ratio 48
5.12 Net Profit Ratio 50
5.13 Return on Investment 52
5.14 Return on Equity 54
5.15 Return on Total Assets 56

CHAPTER - I
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INTRODUCTION

1.1 COMPANY PROFILE


1.1.1 HISTORY OF THE COMPANY :
Emami, which started as a cosmetics manufacturing company in the year 1974, advancing
with increased momentum has expanded into Emami Group of Companies of today. Even
though cosmetics and toiletries continue to be the main thrust area, the other companies in the
Emami Group are performing equally brilliantly. From health care institution to medicines,
from real estate to retailing and, from paper to writing instruments, Hospital, Emami is
creating one success story after another.

1.1.2 Vision and Mission :

Vision
A company, which with the help of nature, caters to the consumers’ needs and their inner
cravings for dreams of better life, in the fields of personal and health care, both in India and
throughout the world.

Mission
 To sharpen consumer insights to understand and meet their needs with value-added
differentiated products which are safe, effective & fast.
 To integrate our dealers, distributors, retailers and suppliers into the Emami family,
thereby strengthening their ties with the company.
 To recruit, develop and motivate the best talents in the country and provide them with
an environment which is demanding and challenging.
 To strengthen and foster in the employees, strong emotive feelings of oneness with the
company.
 To uphold the principals of corporate governance and move towards
decentralization to generate long term maximum returns for all stake owners.
 To contribute whole heartedly towards the environment and society and to emerge as a
model corporate citizen.
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1.1.3 Values:
Respect for people:
We treat individuals with dignity and respect. We continue to be honest, open and ethical in
all our interactions with dealers, distributors, retailers, suppliers, shareholders, customers and
with each other.

Consumers delight:
We maximizing that our business can succeed only if we can create and keep customers. We
manufacture products that offer value for money, which are differentiated and deliver safe,
effective and fast solutions.

Integrity:
People at every level are expected to adhere to the highest standards of business ethics.
Anything less is unacceptable. Our ethical conduct transcends beyond policies. It is ingrained
in our corporate tradition that is transferred from one generation of employees to another. We
comply with applicable government laws and regulations in the geographies where we are
present.

Quality:
We are committed to excellence in everything we do. Our credo: There is always a better
way- We must think creatively, continuously innovate and pursue new ideas to achieve
uncommon solutions to common problems.

Teamwork:
Teamwork is the cornerstone of our business that helps deliver value to our customers. We
work together across titles, job responsibilities and organizational structure to share
knowledge and expertise.

The right environment:


It is our responsibility to create an environment that helps employees realize their full
potential.
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Leadership:
We recognize that we can be a leading company through active delegation and by creating
leaders at every level of the organisation.

Community development:
We continue to contribute to the communities in which we operate and address social issues
responsibly. Our products are safe to make and use. We conserve natural resources and
continue to invest in a better environment.

Transparency and shareholder value:


We are committed to be driven by our conscience and regulatory standards, to deliver value
to our shareholders, commensurate with our management and financial strength.

Board of Directors

The efficient functioning of this reputed company rests with the following personalities.

Shri R S Agarwal, Chairman


Shri R S Goenka, Director
Shri Sushil Kr. Goenka, Managing Director
Shri A V Agarwal, Director
Shri Mohan Goenka, Director
Shri H V Agarwal, Director
Shri Viren J Shah, Director
Shri K K Khemka, Director
Shri S N Jalan, Director
Shri Vaidya S Chaturvedi, Director
Shri K N Memani, Director
Shri S K Todi, Director
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Management team

 Smt. P. Sureka, Brand Director


 Shri Manish Goenka, Brand Director

 Shri Prasant Goenka, Brand Director

 Shri Dhiraj Agarwal, Media Director

 Shri Hari Gupta, President – Sales

 Shri Ashok Dasgupta, President – Operation

 Shri R.D. Daga, Chief of Legal Affairs

 Shri R.K. Surana, Sr. V.P. – Purchase & Development

 Shri N.H. Bhansali, Sr. V.P. – Finance

 Shri S. Rajagopalan, Sr. V.P. – Production

 Shri R.C. Gattani – Sr. V.P. – Projects & Development

 Shri D. Poddar, V.P. – Co-ordination

 Shri A.B. Mukherjee, V.P. – Logistics

 Shri A. Ghose, V.P. – Ayurvedic Division

 Shri A.K. Rajput, V.P. –Operations

 Shri S. Grover, V.P. – Rural Marketing

 Shri S.K. Mandal, G.M. – Systems

 Shri Vimal Kr. Pande, G.M. – Sales

 Shri P.N. Balakrishnan, G.M. –Technical

 Shri A.K. Joshi, Company Secretary


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 Shri H.K.Goenka, G.M. – Works

 Dr. Neena Sharma, G.M. – Ayurveda (R&D)

 Shri Raj Kr. Gupta, G.M. – Purchase

 Shri T.R. Rajan, G.M. – Production

 Ms. Ratna Sinha – Head HR

The most fascinating fact about the team is that though individual member of the team
functions independently and professionally in their own areas but actually they are very
closely knit by a bond of fellow feeling. All the members of the Emami team happily co-exist
as if family members.

1.1.4 Profile of the Organization:

Emami Limited is in the business of manufacturing personal, beauty and health care products.
The company manufactures herbal and Ayurvedic products through the use of modern
scientific laboratory practices. This blend enables the company to manufacture products that
are mild, safe and effective. The company's product basket comprises over 20 products, the
major being Boroplus Antiseptic Cream, Navratna Oil, Boroplus Prickly Heat Powder, Sona
Chandi Chyawanprash and Amritprash, Mentho Plus Pain Balm, Fast Relief, Golden Beauty
Talc, Madhuri Range of Products and others. The products are sold across all states in India
and in countries like Nepal, Sri Lanka, the Gulf countries, Europe, Africa and the Middle
East, among others.

1.1.5 Manufacturing:

Emami’s products are manufactured in Kolkata, Puducherry, Guwahati and Mumbai.


The company commenced operations at its fully automated manufacturing unit in Amingaon,
Guwahati in 2003-04.

1.1.6 Network:
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The company's dispersed manufacturing facilities are complemented with a strong product
throughput, facilitated by a robust distribution network of over 2100 direct distributors and
3.9 lakhs retail outlets. With a view to reach its products deeper into the country, direct selling
has been extended to rural villages. As a result, rural sales increased substantially in 2003-04
compared to the previous year. Emami is headquartered in Kolkata. The company's branch
offices are located across 27 cities in India.

1.1.7 Promoters:

Emami is promoted by Shri R.S.Agarwal and Shri R.S.Goenka, Kolkata based industrialists.
Emami’s shares are listed on the Calcutta Stock Exchange, Bombay Stock Exchange and
National Stock Exchange.

1.1.8 IT BACKBONE

INTEGRATED INFORMATION TECHNOLOGY

An efficient information technology network is necessary for a dynamic FMCG company


where the market demands change faster than perhaps in any other industry. At Emami, the
integration of information technology transpires on a continuous basis. This ensures that the
company responds to changing market place realities faster than its competitors and that its
products reach retail shelves just when they are required. In turn, this enhances brand loyalty
and retains customers.

A successful implementation of the ERP in the offices, factories and depots increased the
company’s overall efficiency. It enabled single-point data entry and multi-point information
access. The status of raw materials, packing materials, finished goods, indents and sales
information gets constantly updated through ERP. This has become possible due to the Point
to Point Leased Line connections.

As Emami is growing rapidly, the augmented business requirement calls for a Standard ERP
system. This would provide Real-Time information to the Management, which would
facilitate to take quick decision. The information could also be available through email and
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Mobile phones. So Emami would be implementing a Standard ERP system very shortly. Sales
Forecasting, Demand Planning, Process Management, Supply Chain Management, Primary
and Secondary Sales, I-Supplier, I-Expenses, I-Sales will be an integral part of the Standard
ERP system.

Emami adopts the latest Technology for IT and communication system.

1.1.9 SALES AND DISTRIBUTION NETWORK

Our Marketing & Distribution Network:

Wide, penetrative and all encompassing. That is how Emami has planned its distribution
network. The success of Emami has been largely due to its superior products that have
reached the consumers even in the remotest regions of the country and abroad.

Current Distribution Infrastructure:

 5 Regions
 25 Depots / C&F Agents

 2,182 Direct Distributors

 899 Distributors for Rural Coverage

 Over 3,86,940 Retail outlets

Distribution Network

Four Mother depots

 Kolkata
 Vijayawada

 Delhi

 Nagpur

1.1.10 INTERNATIONAL MARKETING DIVISION


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Vision:

To contribute profitably to the growth of the company, representing it with pride across the
globe, with a single-minded focus and dedication to establishing and building global brands.

Global Presence of Emami:

Over the last 7 years, Emami’s presence has increased from merely few countries in CIS to
over 50 countries spanning across SAARC, Gulf, CIS, North America, Europe and Africa.
The company now is shifting its focus from broad basing (entering new markets) to increasing
the number of successful products in existing markets to improve upon its operational
efficiency.

Product Portfolio: The Product Portfolio can be broadly divided into three Umbrellas’.

 Emami – The products under this Umbrella Brand promise care for the skin. The range
consists of Skin care, Hair care, Dental care & Men’s care products.
 Himani – Products under this Umbrella Brand promise cure. The range consists of
OTC medicines.

 Ayucare – A range of new Life style enhancing products comprising of Single


ingredient herbs, food supplements, Neem & Aloe Vera range, Ayurvedic tea, Massage
oil, Essential oils & blends.
 Emma – This range comprises of customized products as per the specific needs put-up
by the consumer. Typically these are all mass marketed products sold to price
conscious buyers. The range presently consists of Creams, Lotions & Shampoos.

Future Strategy: Company’s business plan for International market comprises of the
following key factors.

 Investment in potential markets for key Brands leading to Higher Possibility of


Returns in terms of Turnover and Market Development in the long run.

 Adding new products for various key markets.

 Customization of product offerings under the same brand – clubbing of familiar


products under the same brand.
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 Manufacturing facilities in High Tariff markets to make prices more consumer-


friendly.
 Acquisition – In certain markets, company may consider buying existing brands
instead of trying to build one.
Brand Building Activities: Company spends on Media (TV and/or Press) Advertising in select
countries in CIS, SAARC, Indo-China and USA, Australia & UK. All the markets are
supported with POPs, Displays and other promotional material as per the requirement.

1.2 INTRODUCTION TO THE STUDY

Financial Management is that managerial activity which is concerned with the planning
and controlling of the firm’s financial resources. Though it was a branch of economics till
1890 as a separate or discipline it is of recent origin.

Financial Management is concerned with the duties of the finance manager in a business
firm. He performs such varied tasks as budgeting, financial forecasting, cash management,
credit administration, investment analysis and funds procurement. The recent trend towards
globalization of business activity has created new demands and opportunities in managerial
finance.

Financial statements are prepared and presented for the external users of accounting
information. As these statements are used by investors and financial analysts to examine the
firm’s performance in order to make investment decisions, they should be prepared very
carefully and contain as much investment decisions, they should be prepared very carefully
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and contain as much information as possible. Preparation of the financial statement is the
responsibility of top management. The financial statements are generally prepared from the
accounting records maintained by the firm.

Financial performance is an important aspect which influences the long term stability,
profitability and liquidity of an organization. Usually, financial ratios are said to be the
parameters of the financial performance. The Evaluation of financial performance had been
taken up for the study with “EMAMI LIMITED” as the project.

Analysis of Financial performances are of greater assistance in locating the weak spots at
the Emami limited eventhough the overall performance may be satisfactory. This further helps
in

 Financial forecasting and planning.

 Communicate the strength and financial standing of the Emami limited.

 For effective control of business.

CHAPTER – II
REVIEW OF LITERATURE
2.1 Financial statements Analysis:
The financial statements provide some extremely useful information to the extent that
the balance sheet mirrors the financial position on a particular date in terms of the structure of
assets, liabilities and owners’ equity, and so on and the profit an loss account shows the results
of operations during a certain period of time in terms of the revenues obtained and the cost
incurred during the year. Thus, the financial statements provide a summarized view of the
financial position and operations of a firm. Therefore, much an be learnt about a firm from a
careful examination of its financial statements as invaluable documents performance reports.
The analysis of financial statements is thus, an important aid to financial analysis.
The focus of financial analysis is on key figures in the financial statements and the
significant relationship that exists between them. The analysis of financial statements is a
process of evaluating the relationship between component parts of financial statements to
obtain a better understanding of the firm’s position and performance. The first task of the
financial analyst is to select the information relevant to the decision under consideration from
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the total information contained in the financial statements. The second step is to arrange the
information in a way to highlight significant relationships. The final step is interpretation and
drawing of inferences and conclusion. In brief, the financial analysis is the process of
selection, relation and evaluation.

2.2 Ratio Analysis:


Ratio analysis is a widely-use tool of financial analysis. It can be used to compare the risk
and return relationships of firms of different sizes. It is defined as the systematic use of ratio
to interpret the financial statements so that the strengths and weakness of a firm as well as its
historical performance and current financial condition can be determined. The term ratio
refers to the numerical or quantitative relationship between two items and variables. These
ratios are expressed as (i) percentages, (ii) fraction and (iii) proportion of numbers. These
alternative methods of expressing items which are related to each other are, for purposes of
financial analysis, referred to as ratio analysis. It should be noted that computing the ratios
does not add any information not already inherent in the above figures of profits and sales.
What the ratio do is that they reveal the relationship in a more meaningful way so as to enable
equity investors, management and lenders make better investment and credit decisions.
2.3 TYPES OF RATIOS:

2.3.1 Liquidity Ratios:

The importance of adequate liquidity in the sense of the ability of a firm to meet
current/short-term obligations when they become due for payment can hardly be overstresses.
In fact, liquidity is a prerequisite for the very survival of a firm. The short-term creditors of
the firm are interested in the short-term solvency or liquidity of a firm. The short-term
creditors of the firm are interested in the short-term solvency or liquidity of a firm. But
liquidity implies from the viewpoint of utilization of the funds of the firm, that funds are idle
or they earn very little. A proper balance between the two contradictory requirements, that is,
liquidity and profitability, is required for efficient financial management. The liquidity ratios
measures the ability of a firm to meet its short-term obligations and reflect the short-term
financial strength and solvency of a firm.

A. Current Ratio:
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The current ratio is the ratio of total current assets to total current liabilities. It is
calculated by dividing current assets by current liabilities:

Current assets
Current Ratio = ________________

Current liabilities

The current assets of a firm, as already stated, represent those assets which can be, in the
ordinary course of business, converted into cash within a short period of time, normally not
exceeding one year and include cash and bank balances, marketable securities, inventory of
raw materials, semi-finished (work-in-progress) and finished goods, debtors net of provision
for bad and doubtful debts, bills receivable and prepaid expenses. The current liabilities
defined as liabilities which are short-term maturing obligations to be met, as originally
contemplated, within a year, consist of trade creditors, bills payable, bank credit, provision for
taxation, dividends payable and outstanding expenses.

B. Quick Ratio

The liquidity ratio is a measure of liquidity designed to overcome this defect of the current
ratio. It is often referred to as quick ratio because it is a measurement of a firm’s ability to
convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is a
measure of quick or acid liquidity.
The acid-test ratio is the ratio between quick assets and current liabilities and is calculated
by dividing the quick assets by the current liabilities.

Quick assets
Quick Ratio = ____________________

Current liabilities

The term quick assets refers to current assets which can be converted into cash
immediately or at a short notice without diminution of value. Included in this category of
current assets are ( i ) cash an bank balance ; (ii) short-term marketable securities and (iii)
debtors/receivables. Thus, the current which are included are: prepaid expenses and inventory.
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The exclusion of expenses by their very nature are not available to pay off current debts. They
merely reduce the amount of cash required in one period because of payment in a prior period.

C. Cash Ratio:

This ratio is also known as cash position ratio or super quick ratio. It is a variation of
quick ratio. This ratio establishes the relationship absolute liquid asserts and current liabilities.
Absolute liquid assets are cash in hand, bank balance and readily marketable securities. Both
the debtors and bills receivable are excluded from liquid assets as there is always an
uncertainty with respect to their realization. In other words, liquid assets minus debtors and
bills receivable are absolute liquid assets. In this form of formula:

Cash in hand & at bank + Marketable securities


Cash Ratio = ________________________________________

Current liabilities

2.3.2 Activity Ratios:

Activity ratios are concerned with measuring the efficiency in asset management. These
ratios are also called efficiency ratios or asset utilization ratios. The efficiency with which the
assets are used would be reflected in the speed and rapidity with which assets are converted
into sakes. The greater is the rte of turnover or conversion, the more efficient is the utilization
of asses, other thongs being equal. For this reason, such ratios are designed as turnover ratios.
Turnover is the primary mode for measuring the extent of efficient employment of assets by
relating the assets to sales. An activity ratio may, therefore, be defined as a test of the
relationship between sales and the various assets of a firm.

A. Average collection period:

In order t know the rate at which cash is generated by turnover of receivables, the debtors
turnover ratio is supplemented by another ratio viz., average collection period. The average
collection period states unambiguously the number of days’ average credit sales tied up in the
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amount owed by the buyers. The ratio indicates the extent to which the debts have been
collected in time. In other words, it gives the average collection period. Prompt collection of
book debts will release such funds which may, then, put to some other use. The ratio may be
calculate by

360 days
Average collection period = _____________________

Debtors turnover ratio

B. Inventory Turnover Ratio:

This ratio indicates the number of times inventory is replaced during the year. It measures
the relationship between the cost of goods sold and the inventory level. The ratio can be
computed in
Cost of goods sold
Inventory Turnover Ratio = ___________________

Average Inventory
The average inventory figure may be of two types. In the first place, it may be the monthly
inventory average. The monthly average can be found by adding the opening inventory of
each month from, in case of the accounting year being a calendar year, January through
January an dividing the total by thirteen. If the firm’s accounting year is other than a calendar
year, say a financial year, (April and March), the average level of inventory can be computed
by adding the opening inventory of each month from April through April and dividing the
total by thirteen. This approach has the advantage of being free from bias as it smoothens out
the fluctuations in inventory level at different periods. This is particularly true of firms in
seasonal industries. However, a serious limitation of this approach is that detailed month-wise
information may present practical problems of collection for the analyst. Therefore, average
inventory may be obtained by using another basis, namely, the average of the opening
inventory may be obtained by using another basis, namely the average of the opening
inventory and the closing inventory.

C. Working Capital Turnover Ratio:


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This ratio, should the number of times the working capital results in sales. In otherwords,
this ratio indicates the efficiency or otherwise in the utilization of short tern funds in making
sales. Working capital means the excess of current over the current liabilities. In fact, in the
short run, it is the current liabilities which play a major role. A careful handling of the short
term assets and funds will mean a reduction in the amount of capital employed, thereby
improving turnover. The following formula is used to measure this ratio:

Sales
Working capital turnover ratio = _____________________

Net Working Capital

D. Fixed Assets Turnover Ratio:

As the organisation employs capital on fixed assets for the purpose of equipping itself with
the required manufacturing facilities to produce goods and services which are saleable to the
customers to earn revenue, it is necessary to measure the degree of success achieved in this
bearing. This ratio expresses the relationship between cost of goods sold or sales and fixed
assets. The following is used for measurement of the ratio.
Sales
Fixed Assets Turnover =________________

Net fixed assets

In computing fixed assets turnover ratio, fixed assets are generally taken at written down
value at the end of the year. However, there is no rigidity about it. It may be taken at the
original cost or at the present market value depending on the object of comparison. In fact, the
ratio will have automatic improvement if the written down value is used.
It would be better if the ratio is worked out on the basis of the original cost of fixed assets.
We will take fixed assets at cost less depreciation while working this ratio.

2.3.3 Financial Leverage (Gearing) Ratios

The long-term lenders/creditors would be judge the soundness of a firm on the basis of the
long-term financial strength measured in terms of its ability to pay the interest regularly as
well as repay the instalment of the principal on due dates or in one lump sum at the time of
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maturity. The long term solvency of a firm an be examined by using leverage or capital
structure ratios. The leverage or capital structure ratios may be defined as financial ratios
which throw light on the long-term solvency of a firm as reflected in its ability to assure the
long-term lenders with regard to (i) periodic payment of interest during the period of the loan
and (ii) repayment of principal on maturity or in predetermined instalments at due dates.

A. Proprietary Ratio:

This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity
ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’
funds and total tangible assets. The formula for this ratio may be written as follows.

Proprietors’ funds
Proprietary Ratio = _____________________

Total tangible assets

Proprietors funds mean the sum of the paid-up equity share capital plus preference share
capital plus reserve and surplus, both of capital and revenue nature. From the sum so arrived
at, intangible assets like goodwill and fictitious assets capitalized as “Miscellaneous
expenditure” should be deducted. Funds payable to others should not be added. It may be
noted that total tangible assets include fixed assets, current assets but exclude fictitious assets
like preliminary expenses, profit & loss account debit balance etc.

B. Debt to Equity Ratio

The relationship between borrowed funds and owner’s capital is a popular measure of the
long-term financial solvency of a firm. The relationship is shown by the debt-equity ratios.
This ratio reflects the relative claims of creditors and shareholders against the assets of the
firm. The relationship between outsiders’ claims and owner’s capital can be shown in different
ways and, accordingly, there are many variants of the debt-equity ratio.

Total debt
Debt to Equity Ratio = ____________

Total equity
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The debt-equity ratio is, thus, the ratio of total outside liabilities to owners’ total funds. In
other words, it is the ratio of the amount invested by the owners of business.

C. Interest Coverage Ratio

It is also known as ‘time interest-earned ratio’. This ratio measures the debt servicing
capacity of a firm insofar as fixed interest on long-term loan is concerned. It is determined by
dividing the operating profits or earnings before interest and taxes (EBIT) by the fixed interest
charges on loans. Thus,

EBIT
Interest Coverage Ratio =_______________

Interest charges

It should be noted that this ratio uses the concept of net profits before taxes because
interest is tax-deductible so that tax is calculated after paying interest on long-term loan. This
ratio, as the name suggests, indicates the extent to which a fall in EBIT is tolerable in that the
ability of the firm to service its interest payments would not be adversely affected. For
instance, an interest coverage of 10 times would imply that even if the firm’s EBIT were to
decline to one-tenth of the present level, the operating profits available for servicing the
interest on loan would still be equivalent to the claims of the lendors. On the other hand, a
coverage of five times would indicate that a fall in operating earnings only to upto one-fifth
level can be tolerated. Form the point of view of the lenders, the larger the coverage, the
greater is the ability of the firm to handle fixed-charge liabilities and the more assured is the
payment of interest to tem, However, too high a ratio may imply unused debt capacity. In
contrast, a low ratio is a danger signal that the firm is using excessive debt and does not have
to offer assured payment of interest to the lenders.

2.3.4 Profitability Ratios

The main object of a business concern is to earn profit. A company should earn profits to
survive and to grow over a long period. The operating efficiency of a business concern is
ultimately adjudged by the profits earned by it. Profitability should distinguished from profits.
Profits refer to the absolute quantum of profit, whereas profitability refers to the ability to
25

earn profits. In other words, an ability to earn the maximum from the maximum use of
available resources by the business concern is known as profitability. Profitability reflects the
final result of a business operation. Profitability ratios are employed by the management in
order to assess how efficiently they carry on business operations. Profitability is the main base
for liquidity as well as solvency. Creditors, banks and financial institutions are interest
obligations and regular and improved profits enhance the long term solvency position of the
business.

A. Gross Profit Margin

The gross profit margin is also known as gross margin. It is calculated by dividing gross
profit by sales. Thus,

Gross profit
Gross Profit Margin = ________________ *100

Sales

Gross profit is the result of the relationship between prices, sales volume and cost. A
change in the gross margin can be brought about by changes in any of these factors. The gross
margin represents the limit beyond which fall in sales price are outside the tolerance limit.
Further, the gross profit ratio/margin can also be used in determining the extent of loss caused
by theft, spoilage, damage, and so on in the case of those firms which follow the policy of
fixed gross profit margin in pricing their products.
A high ratio of gross profit to sales is a sign of good management as it implies that the cost
of production of the firm is relatively low. It may also be indicative of a higher sales price
without a corresponding increase in the cost of goods sold. It is also likely that cost of sales
might have declined without a corresponding decline in sales price. Nevertheless, a very high
and rising gross margin may also be the result of unsatisfactory basis of valuation of stock,
that is, overvaluation of closing stock and/or undervaluation of opening stock.
A relatively low gross margin is definitely a danger signal, warranting a careful and
detailed analysis of the factors responsible for it. The important contributory factors may be
(i) a high cost of production reflecting acquisition of raw materials and other inputs on
unfavorable terms, inefficient utilization of current as well as fixed assets, and so on; and (ii)
a low selling price resulting from severe competition, inferior quality of the product, lack o f
26

demand, and so on. A through investigation of the factors having a bearing on the low gross
margin is called for. A firm should have a reasonable gross margin to ensure adequate
coverage for operating expenses of the firm and sufficient return to the owners of the
business, which is reflected in the net profit margin.

B. Net Profit margin:

It is also known as net margin. This measures the relationship between net profits and sales
of a firm.

Earnings after interest and taxes


Net Profit Margin =______________________________ *100

Net Sales

A high net profit margin would ensure adequate return to the owners as well as enable a
firm to withstand adverse economic conditions when selling price is declining, cost of
production is rising and demand for the product is falling.
A low net profit margin has the opposite implications. However, a firm with low profit
margin can earn a high rate of return on investment if it has a higher turnover. This aspect is
covered in detail in the subsequent discussion. The profit margin should, therefore, be
evaluated in relation to the turnover ratio. In other words, the overall rate of return is the
product of the net profit margin and the investment turnover ratio. Similarly, the gross profit
margin and the net profit margin should be jointly evaluated.

C. Return on Investment:

The basic objective of making investments in any business is to obtain satisfactory return
on capital invested. The nature of this return will be influenced by factors such as, the type of
the industry, the risk involved, the risk of inflation, the comparative rate of return on gilt-
edged securities and fluctuations in external economic conditions. For this purpose, the
shareholders can measure the success of a company in terms of profit related to capital
employed. The return on capital employed can be used to show the efficiency of the business
as a whole. The overall performance and the most important, therefore, can be judged by
working out a ratio between profit earned and capital employed. The resultant ratio, usually
27

expressed as a percentage, is called rate of return or return on capital employed to express the
idea, the purpose is to ascertain how much income the use of Rs.100 of capital generates. The
return on “capital employed” may be based on gross capital employed or net capital
employed. The formula for this ratio may be written as follows.

Operating profit
Return on Investment =_________________

Capital Employed

D. Return on Equity (ROE)

This is also known as return on net worth or return on proprietors’ fund. The preference
shareholders get the dividend on their holdings at a fixed rate and before dividend to equity
shareholders, the real risk remains with the equity shareholders. Moreover, they are the
owners of total profits earned by the firms after paying dividend on preference shares.
Therefore this ratio attempts to measure the firm’s profitability in terms of return to equity
shareholders. This ratio is calculated by dividing the profit after taxes and preference dividend
by the equity capital. Thus

Net profit after taxes and preference dividend


Return on Equity =__________________________________________

Equity capital

E. Return on Total Assets

This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship
between net profits and assets. As these two terms have conceptual differences, the ratio may
be calculated taking the meaning of the terms according to the purpose and intent of analysis.
Usually, the following formula is used to determine the return on total assets ratio.

Net profit after taxes and interest


Return on Total Assets =_________________________________ *100

Total assets
28

2.4 Comparative Balance sheet:

Comparative balance sheets as on two or more different dates can be used for comparing
assets, liabilities, capital and finding out any increase or decrease in those items. In the words
of Foulke “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”. Such analysis often yields valuable information as regards
progress of business concern. While the single balance sheet represent balances of accounts
drawn at the end of an accounting period, the comparative balance sheet represent not nearly
the balance of accounts drawn on two different dates, but also the extent of their increase or
decrease between these two dates. The single balance sheet focuses on the financial status of
the concern as on a particular date, the comparative balance sheet focuses on the changes that
have taken place in one accounting period. The changes are the direct outcome of operational
activities, conversion of assets, liability and capital form into others as well as a various
interactions among assets, liability and capital.

2.5 Tips to improve your financial health.


Author: Bill Hudley

Spend less money, or save more money or do both. If the annual income does nothing
more than remain constant, your financial condition will improve.
The above statement may sound come across as flippant, but it’s a fact of life, regardless.
Needless to say we all have different personalities and different responses to needs and desires
in life.
A very important yardstick, in my view, is the growth rate of personal assets. If you sit down
to all of the savings accounts, investment accounts and properly values and the total value is
greater than the same time of the previous year, it stands to improve that the financial health
in tact and possibly improved.

2.6 Steps to Improve Financial Performance


Author: Terry Peltes
29

Given the challenges facing physicians, successful practices must take proactive steps to
combat negative trends and improve their overall financial performance.
To improve practice operations, processes can be streamlined to reduce costs; productivity
improvements can be implemented by physicians and employees to increase revenue; a
reporting structure can be created that allows for better decision making by physicians and
employees; and a rewards system can be implemented to recognize hard-working employees.
To determine how you can improve your medical practice's performance, consider the
following management procedures.

1) Internal Cost Reduction Strategies

Cost reduction strategies focus on reducing the internal costs generated by medical
services provided to the marketplace.

2) External Cost Reduction Strategies

These strategies include the cost of services purchased from outside consultants or
vendors.

3) Asset and Credit Management Strategies

These strategies ensure that you are getting the most value from the resources invested in
your practice.
4) Personnel Resources

When managed properly, personnel costs and productivity can have a substantial impact
on practice profitability.

5) Management Reporting
30

The use of timely, relevant, properly formatted reports to manage your practice cannot
be overstated. This is a crucial link between setting financial and operational goals and
managing the practice to achieve them.

6) Revenue Enhancement

Physicians can improve their financial performance by improving their ability to negotiate
favorable managed care contracts and reducing practice expenses as a percentage of revenue.

2.7 Excellence in Financial Management


Author: Matt H. Evans

Ratio analysis can be used to determine the time required to pay accounts payable
invoices.
If the average number of days is close to the average credit terms, this may indicate
aggressive working capital management; i.e. using spontaneous sources of financing.
However, if the number of days is well beyond the average credit terms, this could indicate
difficulty in making payments to creditors.
2.8 Analyze Investments Quickly With Ratios
Author: Jonas Elmerraji

The information you need to calculate ratios is easy to come by: Every single number or
figure you need can be found in a company's financial statements. Once you have the raw
data, you can plug in right into your financial analysis and put those numbers to work for you.
Everyone wants an edge in investing but one of the best tools out there frequently is
frequently misunderstood and avoided by new investors. When you understand what ratios
tell you, as well as where to find all the information you need to compute them, there's no
reason why you shouldn't be able to make the numbers work in your favor.
31

CHAPTER – III
OBJECTIVES

3.1 Primary Objective:

To evaluate the financial efficiency of “EMAMI LIMITED”.

3.2 Secondary Objectives:

i. To analyse the liquidity solvency position of the firm.

ii. To study the working capital management of the company.


32

iii. To understand the profitability position of the firm.

iv. To assess the factors influencing the financial performance of the organisation.

v. To understand the over all financial position of the company.

CHAPTER – IV
RESEARCH METHODOLOGY

4.1 METHODOLOGY:
The project evaluates the financial performance one of the company with help of the most
appropriate tool of financial analysis like ratio analysis and comparative balance sheet. Hence,
it is essentially fact finding study.

4.2 Primary Data:


Primary data is the first hand information that is collected during the period of research.
Primary data has been collected through discussions held with the staffs in the accounts
33

department. Some types of information were gathered through oral conversations with the
cashier, taxation officer etc.

4.3 Secondary Data:


Secondary data studies whole company records and company’s balance sheet in which the
project work has been done. In addition, a number of reference books, journals and reports
were also used to formulate the theoretical model for the study. And some information were
also drawn from the websites.

4.4 Tools used in analysis:


 Ratio analysis
 Comparative balance sheet

4.5 Period of study:


The study covers the period of 2001-2002 to 2005-2006 in Emami Limited.

CHAPTER – V
DATA ANALYSIS AND INTERPRETATION

5.1 FINANCIAL PERFORMANCE EVALUATION USING RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “The Indicated
Quotient of Two Mathematical Expressions” and as “The Relationship between Two or More
Things”. In financial analysis, a ratio is used as a benchmark for evaluating the financial
position and performance of firm. The absolute accounting figures reported in the financial
statement do not provide a meaningful understanding of the performance and financial
position of a firm. The relationship between two accounting figures, expressed
mathematically is known as a financial ratio. Ratios help to summaries large quantities of
financial data and to make qualitative about the firm’s financial performance.
34

The point to note is that a ratio reflecting a quantitative relationship helps to form a
qualitative judgment. Such is the nature of all financial ratios.

5.1.1 Significance of Using Ratios:


The significance of a ratio can only truly be appreciated when:
1. It is compared with other ratios in the same set of financial statements.
2. It is compared with the same ratio in previous financial statements (trend analysis).
3. It is compared with a standard of performance (industry average). Such a standard
may be either the ratio which represents the typical performance of the trade or
industry, or the ratio which represents the target set by management as desirable for
the business.

5.2 Types of Ratios

5.2.1 Liquidity Ratios


 Liquidity refers to the ability of a firm to meet its short-term financial obligations
when and as they fall due.
 The main concern of liquidity ratio is to measure the ability of the firms to meet their
short-term maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation.

A. Current Ratio

The Current Ratio expresses the relationship between the firm’s current assets and its
current liabilities. Current assets normally include cash, marketable securities, accounts
receivable and inventories. Current liabilities consist of accounts payable, short term notes
payable, short-term loans, current maturities of long term debt, accrued income taxes and
other accrued expenses (wages).

Current assets
Current Ratio = ________________

Current liabilities

Significance:
35

It is generally accepted that current assets should be 2 times the current liabilities. In a
sound business, a current ratio of 2:1 is considered an ideal one. If current ratio is lower than
2:1, the short term solvency of the firm is considered doubtful and it shows that the firm is not
in a position to meet its current liabilities in times and when they are due to mature. A higher
current ratio is considered to be an indication that of the firm is liquid and can meet its short
term liabilities on maturity. Higher current ratio represents a cushion to short-term creditors,
“the higher the current ratio, the greater the margin of safety to the creditors”.

Table: 5.1 CURRENT RATIO


Current Current
Year Ratio Liabilities Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 9956.81 775.49 12.83

2002 – 2003 8825.79 644.26 13.69

2003 – 2004 9726.73 1154.12 8.43

2004 – 2005 9884.64 1501.76 6.56

2005 – 2006 11949.47 3905.45 3.06


Interpretation:
As a conventional rule, a current ratio of 2:1 is considered satisfactory. This rule is
base on the logic that in a worse situation even if the value of current assets becomes half, the
firm will be able to meet its obligation. The current ratio represents the margin of safety for
creditors. The current ratio has been decreasing year after year which shows decreasing
working capital.
From the above statement the fact is depicted that the liquidity position of the Emami
limited is satisfactory because all the five years current ratio is not below the standard ratio
2:1.

Chart no.: 5.1 CURRENT RATIO


36

B. Quick Ratio

Measures assets that are quickly converted into cash and they are compared with current
liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.
inventories.
The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover
its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick ratio is
calculated as follows
Quick assets
Quick Ratio = ____________________

Current liabilities

Significance:
37

The standard liquid ratio is supposed to be 1:1 i.e., liquid assets should be equal to current
liabilities. If the ratio is higher, i.e., liquid assets are more than the current liabilities, the short
term financial position is supposed to be very sound. On the other hand, if the ratio is low, i.e.,
current liabilities are more than the liquid assets, the short term financial position of the
business shall be deemed to be unsound. When used in conjunction with current ratio, the
liquid ratio gives a better picture of the firm’s capacity to meet its short-term obligations out
of short-term assets.

Table: 5.2 QUICK RATIO


Quick Current
Year Assets Liabilities Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 6918.43 775.49 8.92

2002 – 2003 4848.16 644.26 7.52

2003 – 2004 6629.47 1154.12 5.74

2004 – 2005 6210.06 1501.76 4.13

2005 – 2006 8287.01 3905.45 2.12


Interpretation:

As a quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current
claims. It is a more rigorous and penetrating test of the liquidity position of a firm. But the
liquid ratio has been decreasing year after year which indicates a high operation of the
business.

From the above statement, it is clear that the liquidity position of the Emami limited is
satisfactory. Because the entire five years liquid ratio is not below the standard ratio of 1:1.

Chart no.: 5.2 QUICK RATIO


38

C. Cash ratio:

This is also known as cash position ratio or super quick ratio. It is a variation of quick
ratio. This ratio establishes the relationship between absolute liquid assets and current
liabilities. Absolute liquid assets are cash in hand, bank balance and readily marketable
securities. Both the debtors and the bills receivable are exclude from liquid assets as there is
always an uncertainty with respect to their realization. In other words, liquid assets minus
debtors and bills receivable are absolute liquid assets. The cash ratio is calculated as follows

Cash in hand & at bank + Marketable securities


Cash Ratio = ________________________________________

Current liabilities

Significance:
39

This ratio gains much significance only when it is used in conjunction with the first two
ratios. The accepted norm for this ratio is 50% or 0.5:1 or 1:2(i.e.,) Re. 1 worth absolute liquid
assets are considered adequate to pay Rs.2 worth current liabilities in time as all the creditors
are not expected to demand cash at the same time and then cash may also be realized from
debtors and inventories. This test is a more rigorous measure of a firm’s liquidity position.
This type of ratio is not widely used in practice.

Table: 5.3 CASH RATIO


Cash in Hand Current
Year & at Bank Liabilities Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 130.54 775.49 0.17

2002 – 2003 141.15 644.26 0.22

2003 – 2004 46.11 1154.12 0.04

2004 – 2005 34.43 1501.76 0.02

2005 – 2006 82.12 3905.45 0.02


Interpretation:

The acceptable norm for this ratio is 50% or 1:2. But the cash ratio is below the accepted
norm. So the cash position is not utilized effectively and efficiently.

Chart no.: 5.3 CASH RATIO


40

5.2.2 Activity Ratio:


If a business does not use its assets effectively, investors in the business would rather
take their money and place it somewhere else. In order for the assets to be used effectively,
the business needs a high turnover.
Unless the business continues to generate high turnover, assets will be idle as it is impossible
to buy and sell fixed assets continuously as turnover changes. Activity ratios are therefore
used to assess how active various assets are in the business.

A. Average Collection Period:


41

The average collection period measures the quality of debtors since it indicates the speed
of their collection.
 The shorter the average collection period, the better the quality of debtors, as a short
collection period implies the prompt payment by debtors.
 The average collection period should be compared against the firm’s credit terms and
policy to judge its credit and collection efficiency.
 An excessively long collection period implies a very liberal and inefficient credit and
collection performance.
 The delay in collection of cash impairs the firm’s liquidity. On the other hand, too low
a collection period is not necessarily favorable, rather it may indicate a very restrictive
credit and collection policy which may curtail sales and hence adversely affect profit.

360 days
Average collection period = _____________________

Debtors turnover ratio

Significance:

Average collection period indicates the quality of debtors by measuring the rapidity or
slowness in the collection process. Generally, the shorter the average collection period, the
better is the quality of debtors as a short collection period implies quick payment by
debtors. Similarly, a higher collection period implies as inefficient collection performance
which, in turn, adversely affects the liquidity or short term paying capacity of a firm out of
its current liabilities. Moreover, longer the average collection period, larger is the chances
of bad debts.
Table: 5.4 AVERAGE COLLECTION PERIOD
Debtors Turnover Ratio
Year Days Rs. in lakhs Days
2001 – 2002 360 4211.03 0.09

2002 – 2003 360 3100.98 0.12

2003 – 2004 360 4405.70 0.08

2004 – 2005 360 3524.79 0.10

2005 – 2006 360 3667.52 0.10


42

Interpretation:
The shorter the collection period, the better the quality of debtors. Since a short
collection period implies the prompt payment by debtors. Here, collection period decrease
from 2003-2004 and increased slightly in the year 2005-2006. Therefore the average
collection period of Emami ltd for the five years are satisfactory.

Chart no.: 5.4 AVERAGE COLLECTION PERIOD

B. Inventory Turnover Ratio:


This ratio measures the stock in relation to turnover in order to determine how often the
stock turns over in the business.
It indicates the efficiency of the firm in selling its product. It is calculated by dividing he cost
of goods sold by the average inventory.

Cost of goods sold


Inventory Turnover Ratio = ___________________

Average Inventory
43

Significance:
This ratio is calculated to ascertain the number of times the stock is turned over during the
periods. In other words, it is an indication of the velocity of the movement of the stock during
the year. In case of decrease in sales, this ratio will decrease. This serves as a check on the
control of stock in a business. This ratio will reveal the excess stock and accumulation of
obsolete or damaged stock. The ratio of net sales to stock is satisfactory relationship, if the
stock is more than three-fourths of the net working capital. This ratio gives the rate at which
inventories are converted into sales and then into cash and thus helps in determining the
liquidity of a firm.

Table: 5.5 INVENTORY TURNOVER RATIO


Cost of goods Average
Year sold Inventory Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 11209.73 3732.19 3.0

2002 – 2003 11939.46 3508.00 3.4

2003 – 2004 13708.36 3537.44 3.88

2004 – 2005 12609.33 3385.92 3.72

2005 – 2006 17543.71 3668.52 4.78

Interpretation:
A higher turnover ratio is always beneficial to the concern. In this the number of times
the inventory is turned over has been increasing from one year to another year. This
increasing turnover indicates immediate sales. And in turn activates production process
and is responsible for further development in the business. This indicates a good inventory
policy of the company.

Thus the stock turnover ratios of Emami Limited, for the five years are satisfactory.
44

Chart no.: 5.5 INVENTORY TURNOVER RATIO

C. Working capital turnover ratio:

This ratio shows the number of times the working capital results in sales. In other words,
this ratio indicates the efficiency or otherwise in the utilization of short term funds in making
sales. Working capital means the excess of current assets over current liabilities. In fact, in the
short run, it is the current assets and current liabilities which pay a major role. A careful
handling of the short term assets and funds will mean a reduction in the amount of capital
employed, thereby improving turnover. The following formula is used to measure this ratio:
45

Sales
Working capital turnover ratio = _____________________

Net Working Capital

Significance:
This ratio is used to assess the efficiency with which the working capital has been utilized
in a business. A higher working capital turnover indicates either the favorable turnover of
inventories and receivables and/or the inadequate of net working capital accompanied by low
turnover of inventories and receivables. A low ratio signifies either the excess of net working
capital or slow turnover of inventories and receivables or both. This ratio can at best be used
by making of comparative and trend analysis for different firms in the same industry and for
various periods.

Table: 5.6 WORKING CAPITAL TURNOVER RATIO


Sales Net Working Capital
Year Rs. in lakhs Rs. in lakhs Ratio
2001 – 2002 18262.60 9181.32 1.99

2002 – 2003 19808.5 8181.53 2.42

2003 – 2004 21612.94 8572.61 2.52

2004 – 2005 21885.20 8382.88 2.61

2005 – 2006 30087.56 8044.02 3.74

Interpretation:

The Working Capital Turnover Ratio is increasing year after year. It can be noted that the
change is due to the fluctuation in sales or current liabilities. These higher ratio are indicators
of lower investment of working Capital and more profit.

Thus, Working Capital Turnover ratios for the five years are satisfactory.
46

Chart no.: 5.6 WORKING CAPITAL TURNOVER RATIO

D. Fixed Assets Turnover Ratio:


The fixed assets turnover ratio measures the efficiency with which the firm has been
using its fixed assets to generate sales. It is calculated by dividing the firm’s sales by its net
fixed assets as follows:
Sales
Fixed Assets Turnover =________________

Net fixed assets


47

Significance:
This ratio gives an ideal about adequate investment or over investment or under
investment in fixed assets. As a rule, over-investment in unprofitable fixed assets should be
avoided to the possible extent. Under-investment is also equally bad affecting unfavorably the
operating costs and consequently the profit. In manufacturing concerns, the ratio is important
and appropriate, since sales are produced not only by use of working capital but also the
capital invested in fixed assets. An increase in this ratio is the indicator of efficiency in work
performance and a decrease in this ratio speaks of unwise and improper investment in fixed
assets.

Table: 5.7 FIXED ASSETS TURNOVER RATIO


Net Fixed
Year Sales Assets Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 18262.60 25169.20 0.73

2002 – 2003 19808.50 23599.92 0.84

2003 – 2004 21612.94 23293.33 0.93

2004 – 2005 21885.20 21863.99 1.00

2005 – 2006 30087.56 20245.48 1.49

Interpretation:
The fixed assets turnover ratio is increasing year after year. The overall higher ratio
indicates the efficient utilization of the fixed assets.

Thus the fixed assets turnover ratio for the five years are satisfactory as such there is no
under utilization of the fixed assets.
48

Chart no.: 5.7 FIXED ASSETS TURNOVER RATIO

5.2.3 Financial Leverage (Gearing) Ratios

 The ratios indicate the degree to which the activities of a firm are supported by
creditors’ funds as opposed to owners.
 The relationship of owner’s equity to borrowed funds is an important indicator of
financial strength.
 The debt requires fixed interest payments and repayment of the loan and legal action
can be taken if any amounts due are not paid at the appointed time. A relatively high
49

proportion of funds contributed by the owners indicates a cushion (surplus) which shields
creditors against possible losses from default in payment.

A. Proprietary Ratio:

This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity
ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’
fund and total tangible assets. The formula for this ratio may be written as follows.

Proprietors’ funds
Proprietary Ratio = _____________________

Total tangible assets

Significance:

This ratio represents the relationship of owner’s funds to total tangible assets, higher the
ratio or the share of the shareholders in the total capital of the company, better is the long term
solvency position of the company. This ratio is of importance to the creditors who can
ascertain the proportion of the shareholders’ funds in the total assets employed in the firm. A
ratio below 50% may be alarming for the creditors since they may have to lose heavily in the
event of company’s liquidation on account of heavy losses.

Table: 5.8 PROPRIETARY RATIO


Proprietors Fund Total Tangible Assets
Year Rs. in lakhs Rs. in lakhs Ratio
2001 – 2002 27653.24 35932.12 0.77

2002 – 2003 27629.57 33237.8 0.83

2003 – 2004 27906.09 33710.84 0.83


50

2004 – 2005 31683.74 37139.68 0.85

2005 – 2006 33521.63 40904.75 0.82

Interpretation:
This ratio is particularly important to the creditors and it focuses on the general financial
strength of the business. A ratio of j50% will be alarming for the creditors. As such the
proprietary ratio of the five years is above 50%.
Therefore it indicates relatively little danger to the creditors, etc. And a better
performance of the company.
Chart no.: 5.8 PROPRIETARY RATIO

B. Debt to Equity ratio

This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects
the relative position of the equity holders and the lenders and indicates the company’s policy
on the mix of capital funds. The debt to equity ratio is calculated as follows:

Total debt
Debt to Equity Ratio = ____________

Total equity
51

Significance:

The importance of debt-equity ratio is very well reflected in the words of Weston and
brigham which are reproduced here: “Debt-equity ratio indicates to what extent the firm
depends upon outsiders for its existence. For the creditors, this provides a margin of safety.
For the owners, it is useful to measure the extent to which they can gain the benefits of
maintaining control over the firm with a limited investment:” The debt-equity ratio states
unambiguously the amount of assets provided by the outsiders for every one rupee of assets
provided by the shareholders of the company.

Table: 5.9 DEBT TO EQUITY RATIO

Total Debt Total Equity


Year Rs. in lakhs Rs. in lakhs Ratio
2001 – 2002 7241.39 27653.24 0.26

2002 – 2003 4628.27 27629.57 0.17

2003 – 2004 4221.63 27906.09 0.15

2004 – 2005 3474.18 31683.74 0.11

2005 – 2006 3216.67 33521.63 0.10


Interpretation:

The debt to equity ratio is decreasing year after year. A low debt equity ratio is considered
favorable from management. It means greater claim of shareholders over the assets of the
company than those of creditors. For the company also, the servicing of debt is less
burdensome and consequently its credit standing is not adversely affected. Therefore debt to
equity ratio is satisfactory to the company.
52

Chart no.: 5.9 DEBT TO EQUITY RATIO

C. Interest coverage ratio


The times interest earned shows how many times the business can pay its interest bills
from profit earned. Present and prospective loan creditors such as bondholders, are vitally
interested to know how adequate the interest payments on their loans are covered by the
earnings available for such payments. Owners, managers and directors are also interested in
the ability of the business to service the fixed interest charges on outstanding debt. The ratio is
calculated as follows:
EBIT
Interest Coverage Ratio =_______________

Interest charges
53

Significance:
It is always desirable to have profit more than the interest payable. In case profit is either
equal or lesser than the interest, the position will be unsafe. It will show that there this nothing
left for the shareholders and the position of the lendors is also unsafe. A high ratio is a sign of
low burden of dept servicing and lower utilization of borrowing capacity. From the points of
view of creditors, the larger the coverage, the greater the ability of the firm to handle fixed
charges liabilities and the more assessed the payment of interest to the creditors. In contrast
the low ratio signifies the danger the signal that the firm is highly dependent on borrowings
and its earnings cannot meet obligations fully. The standard for this ratio for an industrial
undertaking is 6 to 7 times.

Table: 5.10 INTEREST COVERAGE RATIO


EBIT Interest on Fixed Loans
Year Rs. in lakhs Rs. in lakhs Ratio
2001 – 2002 1767.75 7241.39 0.24

2002 – 2003 2087.49 4628.27 0.45

2003 – 2004 2260.62 4221.63 0.54

2004 – 2005 3037.66 3474.18 0.87

2005 – 2006 5030.58 3216.67 1.56


Interpretation:

The Interest coverage ratio is increasing year after year. A high ratio is a sign of low
burden of dept servicing and lower utilization of borrowing capacity. Therefore this ratio is
satisfactory to the company.

Chart no.: 5.10 INTEREST COVERAGE RATIO


54

5.2.4 Profitability Ratios


Profitability is the ability of a business to earn profit over a period of time. Although the
profit figure is the starting point for any calculation of cash flow, as already pointed out,
profitable companies can still fail for a lack of cash.
 A company should earn profits to survive and grow over a long period of time.
 Profits are essential, but it would be wrong to assume that every action initiated by
management of a company should be aimed at maximizing profits, irrespective of
social consequences.
The ratios examined previously have tendered to measure management efficiency and risk.
55

A. Gross Profit Margin


 Normally the gross profit has to rise proportionately with sales.
 It can also be useful to compare the gross profit margin across similar businesses
although there will often be good reasons for any disparity.

Gross profit
Gross Profit Margin = ________________ *100

Sales

Significance:
The gross profit ratio helps in measuring the results of trading or manufacturing
operations. It shows the gap between revenue and expenses at a point after which an
enterprise has to meet the expenses related to the non-manufacturing activities, like
marketing, administration, finance and also taxes and appropriations.
The gross profit shows the gap between revenue and trading costs. It, therefore, indicates
the extent to which the revenue have a potential to generate a surplus. In other words, the
gross profit reveals the mark up on the sales. Gross profit ratio reveals profit earning capacity
of the business with reference to its sale. Increase in gross profit ratio will mean reduction in
cost of production or direct expenses or sale at a reasonably good price and decrease in the
will mean increased cost of production or sales at a lesser price. Higher gross profit ratio is
always in the interest of the business.

Table: 5.11 GROSS PROFIT MARGIN


Year Gross Profit Net Sales Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 7052.87 18262.60 38.62

2002 – 2003 7925.86 19808.5 40.01

2003 – 2004 7904.58 21612.94 36.57

2004 – 2005 9275.87 21885.20 42.38


56

2005 – 2006 12543.85 30087.56 41.69

Interpretation:
In the year 2002, the Gross Profit Ratio was 39% but then it increased to 40%, which
shows a good profit earning capacity of the business with reference to its sales. But in the year
2004, it decreased to 37% which may be due to increase in cost of production or due to sales
at lesser price. But thereafter, for the succeeding two years, it has increased considerably,
which indicates that the cost of production has reduced. Therefore the Gross Profit Ratio for
the five years reveals a satisfactory condition of the business.

Chart no.: 5.11 GROSS PROFIT MARGIN

B. Net Profit Margin


This is a widely used measure of performance and is comparable across companies in
similar industries. The fact that a business works on a very low margin need not cause alarm
because there are some sectors in the industry that work on a basis of high turnover and low
margins, for examples supermarkets and motorcar dealers. What is more important in any
trend is the margin and whether it compares well with similar businesses.

Earnings after interest and taxes


Net Profit Margin =______________________________ *100

Net Sales
57

Significance:
An objective of working net profit ratio is to determine the overall efficiency of the
business. Higher the net profit ratio, the better the business. The net profit ratio indicates the
management’s ability to earn sufficient profits on sales not only to cover all revenue operating
expenses of the business, the cost of borrowed funds and the cost of merchandising or
servicing, but also to have a sufficient margin to pay reasonable compensation to shareholders
on their contribution to the firm. A high ratio ensures adequate return to shareholders as well
as to enable a firm to with stand adverse economic conditions. A low margin has an opposite
implication.

Table: 5.12 NET PROFIT MARGIN


Net Profit Sales Ratio
Year Rs. in lakhs Rs. in lakhs
2001 – 2002 2848.84 18262.60 15.60

2002 – 2003 2800.13 19808.5 14.14

2003 – 2004 2871.54 21612.94 13.29

2004 – 2005 3752.3 21885.20 17.15

2005 – 2006 5937.78 30087.56 19.74


Interpretation:

In the year 2002 the Net Profit is 15.60%, but in the year 2002-2003 it was decreased to
14.14 and 13.29. Which may due to excessing selling and distribution expenses. But thereafter
for the succeeding years it has been increasing which indicates a better performance of the
company. Therefore the performance of the management should be appreciated. Thus an
increase in the ratio over the previous periods indicates improvement in the operational
efficiency of the business.

Chart no.: 5.12 NET PROFIT MARGIN


58

C. Return on Investment (ROI)

Income is earned by using the assets of a business productively. The more efficient the
production, the more profitable the business. The rate of return on total assets indicates the
degree of efficiency with which management has used the assets of the enterprise during an
accounting period. This is an important ratio for all readers of financial statements.
Investors have placed funds with the managers of the business. The managers used the
funds to purchase assets which will be used to generate returns. If the return is not better than
the investors can achieve elsewhere, they will instruct the managers to sell the assets and they
will invest elsewhere. The managers lose their jobs and the business liquidates.
Operating profit
Return on Investment =_________________
59

Capital Employed

Significance:
Return on capital employed shows overall profitability of the business. At first minimum
return on capital employed should be determined and then the actual rate of return on capital
employed should be determined and compared with the normal return. The return and capital
employed is a fair measure of the profitability of any concern with the result that even the
result of dissimilar industries may be compared.

Table: 5.13 RETURN ON INVESTMENT


Operating Profit Capital Employed
Year Rs. in lakhs Rs. in lakhs Ratio
2001-2002 2531 35803 7.07

2002-2003- 2434 33355 7.30

2003-2004 2437.54 32556.72 7.49

2004-2005 3190.73 35637.92 8.95

2005-2006 4733.93 36999.30 12.79

Interpretation:

This ratio indicates that how much of the capital invested is returned in the form of net
profit. This ratio is increasing year after year which indicates the capital employed is returned
in the form of net profit. In the same manner, returns from capital employed for the
succeeding years are good.

Thus, the Return on Investment ratio for the five years shows the efficiency of the business
which is very much satisfactory.
60

Chart no.: 5.13 RETURN ON INVESTMENT

D. Return on Equity (ROE)


This ratio shows the profit attributable to the amount invested by the owners of the
business. It also shows potential investors into the business what they might hope to receive
as a return. The stockholders’ equity includes share capital, share premium, distributable and
non-distributable reserves. The ratio is calculated as follows:
Net profit after taxes and preference dividend
Return on Equity =__________________________________________

Equity capital

Significance:
61

This ratio measures the profitability of the capital invested in the business by equity
shareholders. As the business is conducted with a view to earn profit, return on equity capital
measures the business success and managerial efficiency. It reveals whether the firm has
earned a reasonable profit to its equity shareholders or not by comparing it with its own past
records, inter-firm comparison and comparison with the overall industry average. This ratio is
of significant use in the ratio analysis from the standpoint of the owners of the firm.

Table: 5.14 RETURN ON EQUITY


Net Profit after Tax
Year and Preference Equity Capital Ratio
Dividend Rs. in lakhs
Rs. in lakhs
2001 – 2002 2848.84 561.50 5.07

2002 – 2003 2800.13 561.50 4.99

2003 – 2004 2871.54 1123.00 2.56

2004 – 2005 3752.3 1223.00 3.07

2005 – 2006 5937.78 1223.00 4.86

Interpretation:

In the year 2002, the return on equity ratio is 5.07 but in the year 2003 it reduced to 4.99,
which may due to capital investment . And in the year 2005-2006 it increased to 3.07 to .86.
Therefore the return on equity ratio for the five years reveals a satisfactory condition of the
business.

Chart no.: 5.14 RETURN ON EQUITY


62

E. Return on Total assets


This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship
between net profits and assets. As these two terms have conceptual differences, the ratio may
be calculated taking the meaning of the terms according to the purpose and intent of analysis.
Usually, the following formula is used to determine the return on total assets ratio.

Return on total assets = (Net profit after taxes and interest / Total assets) * 100

Significance:
This ratio measures the profitability of the funds invested in a firm but doe not reflect on the
profitability of the different sources of total funds. This ratio should be compared with the
63

ratios of other similar companies or for the industry as a whole, to determine whether the
rate of return is attractive. This ratio provides a valid basis for inter-industry comparison.

Table: 5.15 RETURN ON TOTAL ASSETS


Net Profit after
Year Taxes and Interest Total Assets Ratio
Rs. in lakhs Rs. in lakhs
2001 – 2002 2848.84 35156.63 8.10

2002 – 2003 2800.13 32593.54 8.59

2003 – 2004 2871.54 32556.72 8.82

2004 – 2005 3752.3 35637.92 10.53

2005 – 2006 5937.78 36999.3 16.05


Interpretation:

The return on total assets ratio is increasing year after year . This increasing ratio indicates
the effective funds invested. Therefore the return on Total Assets ratio for the five years
reveals a satisfactory condition of the business.

Chart no.: 5.15 RETURN ON TOTAL ASSETS


64

5.3 Comparative statement:


Comparative study of financial statement is the comparison of the financial statement of
the business with the previous year’s financial statements and with the performance of other
competitive enterprises, so that weaknesses may be identified and remedial measures applied.

Comparative statements can be prepared for both types of financial statements i.e., Balance
sheet as well as profit and loss account. The comparative profits and loss account will present
a review of operating activities of the business. The comparative balance shows the effect of
operations on the assets and liabilities that change in the financial position during the period
under consideration.
65

Comparative analysis is the study of trend of the same items and computed items into or
more financial statements of the same business enterprise on different dates.

The presentation of comparative financial statements, in annual and other reports,


enhances the usefulness of such reports and brings out more clearly the nature and trends of
current changes affecting the enterprise.

While the single balance sheet represents balances of accounts drawn at the end of an
accounting period, the comparative balance sheet represent not nearly the balance of accounts
drawn on two different dates, but also the extent of their increase or decrease between these
two dates. The single balance sheet focuses on the financial status of the concern as on a
particular date, the comparative balance sheet focuses on the changes that have taken place in
one accounting period. The changes are the direct outcome of operational activities,
conversion of assets, liability and capital form into others as well as various interactions
among assets, liability and capital.

Table: 5.16 Comparative Balance Sheets as on 31st March 2001 – 2002

Change in
31st March 31st March Absolute Percentage
Particulars 2001 2002 Figure Increase or
Rs. in lakhs Rs. in lakhs Rs. in lakhs Decrease
Fixed Assets (A) 27150 25169.20 (1980.8) 7.29
66

Investment ( B ) 214 806.11 592.11 276.68


Current Assets :
Inventories 4426 3038.38 (1387.62) 31.35
Sundry Debtors 4151 4211.03 60.03 1.45
Cash and Bank Balance 93 130.54 37.54 40.37
Loans and Advances 2331 2576.86 245.86 10.55
Total current Assets (C) 11001 9956.81 (1044.19) 9.49

Total Assets ( A+B+C ) 38365 35932.12 (2432.88) 6.34


Shareholders Funds :
Share Capital 812 561.50 (250.5) 30.85
Reserves and Surplus 27924 27091.4 (832.26) 2.98
Deferred Tax 202 262.00 60 29.70

Total Shareholders 28938 27915.24 (1022.76) 3.53


Funds(A)
Loan Funds :
Secured loans 6769 6716.08 (52.92) 0.78
Unsecured loans 1968 525.31 (1442.69) 73.31
Total Loan Funds ( B ) 8737 7241.39 (1495.61) 17.12
Current Liabilities and 690 775.49 85.49 12.39
Provision( C)
Total Liabilities (A+B+C ) 38365 35932.12 (2432.88) 6.34

Interpretation:
The comparative balance sheet of the company reveals during 2002, that there has
been a decrease in the fixed assets of Rs.(1980.8) lakhs, which indicates sale of fixed assets.
The cash or fund received through sale of fixed assets have increased the cash balance of the
company. This excess cash balance is utilized for the repayment of loan, which is reduced
from Rs.8737 lakhs to Rs.7241.39 lakhs for meeting out current liabilities and provision and
also for making investment, which has been increased from Rs.214 lakhs to Rs.806 lakhs.
67

The investment has increased from Rs.214 lakhs to Rs.806.11 lakhs, which indicates the
investment has been properly made.
The overall financial position of the company for the year (2001-2002) is satisfactory.

Table: 5.17 Comparative Balance Sheet as on 31st March 2002 – 2003


68

Change in
31st March 31st March Absolute Percentage
Particulars 2002 2003 Figure Increase or
Rs. in lakhs Rs. in lakhs Rs. in lakhs Decrease
Fixed Assets (A) 25169.20 23599.92 (1569.28) 6.23
Investment ( B ) 806.11 812.09 5.98 0.74
Current Assets :
Inventories 3038.38 3977.63 939.25 30.91
Sundry Debtors 4211.03 3100.98 (1110.05) 26.36
Cash and Bank Balance 130.54 141.15 10.61 8.13
Loans and Advances 2576.86 1606.03 (970.83) 37.67
Total current Assets (C ) 9956.81 8825.79 (1131.02) 11.36

Total Assets ( A+B+C ) 35932.12 33237.8 (2694.32) 7.50


Shareholders Funds :
Share Capital 561.50 561.50 - -
Reserves and Surplus 27091.74 27068.07 (23.67) 0.09
Deferred Tax 262.00 335.70 73.7 28.12

Total Shareholders 27915.24 27965.27 50.03 0.18


Funds ( A )
Loan Funds :
Secured loans 6716.08 4505.38 (2210.7) 32.92
Unsecured loans 525.31 122.89 (403.42) 76.61
Total Loan Funds ( B ) 7241.39 4628.27 (2613.12) 36.09

Current Liabilities and 775.49 644.26 (131.23) 16.92


Provision (C)
Total Liabilities(A+B+C) 35932.12 33237.8 (2694.32) 7.50

Interpretation:
The comparative balance sheet of the company reveals during 2003, that there has been
a decrease in the fixed assets of Rs.(1569.28) lakhs, which indicates sale of fixed assets. The
69

cash or fund received through sale of fixed assets have increased the cash balance of the
company.

The current assets have decreased by Rs.(1131.02) lakhs; this indicates firms better credit
policy. Further the current liability also decreased by Rs.(131.23) lakhs, it indicates that firm
have good liquidity position therefore they are able to pay liabilities within stipulated period.

The fact depicts that the policy of the company is to pay all liabilities both in current and
long-term liabilities within the stipulated period using both current assets and fixed assets.

The investment has increased from Rs.806.11 lakhs to Rs.812.09 lakhs, which indicates the
investment has been properly made.

The overall financial position of the company for the year (2002-2003) is satisfactory.

Table: 5.18 Comparative Balance Sheet as on 31st March 2003 – 2004


Change in
31st March 31st March Absolute Percentage
70

Particulars 2003 2004 Figure Increase or


Rs. in lakhs Rs. in lakhs Rs. in lakhs Decrease
Fixed Assets (A 23599.92 23293.33 (306.59) 1.30
Investment ( B ) 812.09 690.78 (121.31) 14.94
Current Assets :
Inventories 3977.63 3097.26 (880.37) 22.13
Sundry Debtors 3100.98 4405.70 1304.72 42.07
Cash and Bank Balance 141.15 46.11 (95.04) 67.33
Loans and Advances 1606.03 2177.66 571.63 35.59
Total current Assets ( C ) 8825.79 9726.73 900.94 10.21
Total Assets( A+B+C ) 33237.8 33710.84 473.04 1.42
Shareholders Funds :
Share Capital 561.50 1123.00 561.50 100
Reserves and Surplus 27068.07 26783.09 (284.98) 1.05
Deferred Tax 335.70 429.00 93.3 27.79
Total Shareholders 27965.27 28335.09 369.82 1.32
Funds ( A )
Loan Funds :
Secured loans 4505.38 4104.48 (400.9) 8.90
Unsecured loans 122.89 117.15 (5.74) 4.67
Total Loan Funds ( B ) 4628.27 4221.63 (406.64) 8.79
Current Liabilities and 644.26 1154.12 509.86 79.14
Provision( C)
Total Liabilities( A+B+C ) 33237.8 33710.84 473.04 1.42

Interpretation:
The comparative balance sheet of the company reveals during 2004, that there has
been a decrease in the fixed assets of Rs.(306.59) lakhs, which indicates sale of fixed assets.
The cash and bank balance have also decreased by Rs.(95.04) lakhs. This fact indicates that
the firm has utilized both current and fixed assets for the repayment of long term loans as such
there loan amount has reduced by Rs.(406.64) lakhs.
71

The current assets have increased by Rs.900.94 lakhs; this indicates firms flexible credit
policy as such the debtors have been increase by Rs.1304.72. Further the current liability also
increased by Rs.509.86 lakhs, it indicates that firm has not paid the liabilities within the
stipulated period.

The investment has reduced by Rs.(121.31) lakhs, which indicates an inflow of fund.

The overall financial position of the company for the year (2003-2004) is satisfactory.

Table: 5.19 Comparative Balance Sheet as on 31st March 2004 – 2005


Change in
31st March 31st March Absolute Percentage
Particulars 2004 2005 Figure Increase or
Rs. in lakhs Rs. in lakhs Rs. in lakhs Decrease
Fixed Assets (A) 23293.33 21863.99 (1429.34) 6.14
Investment ( B ) 690.78 5391.05 4700.27 680.43
Current Assets :
72

Inventories 3097.26 3674.58 577.32 18.64


Sundry Debtors 4405.70 3524.79 (880.91) 19.99
Cash and Bank Balance 46.11 34.43 (11.68) 25.33
Loans and Advances 2177.66 2650.84 473.18 21.73
Total current Assets (C) 9726.73 9884.64 157.91 1.62
Total Assets ( A+B+C ) 33710.84 37139.68 3428.84 10.17
Shareholders Funds :
Share Capital 1123.00 1223.00 100 8.90
Reserves and Surplus 26783.09 30460.74 3677.65 13.73
Deferred Tax 429.00 480.00 51 11.89
Total Shareholders 28335.09 32163.74 3828.65 13.51
Funds(A)
Loan Funds :
Secured loans 4104.48 3375.82 (728.66) 17.75
Unsecured loans 117.15 98.36 (18.79) 16.04
Total Loan Funds(B) 4221.63 3474.18 (747.45) 17.71
Current Liabilities and 1154.12 1501.76 347.64 30.12
Provision(C)
Total Liabilities (A+B+C) 33710.84 37139.68 3428.84 10.17

Interpretation:

The comparative balance sheet of the company reveals during 2005, that there has been a
decrease in the fixed assets of Rs.(1429.34) lakhs, which indicates sale of fixed assets and an
inflow of cash. This cash is utilized in meeting out long term liabilities as such the loan
amount has reduced by Rs.(747.45) lakhs.

Current assets have been increased by Rs.157.91 lakhs, which indicates that its working
capital position is good, but the debtors have decreased, by Rs.(880.91) lakhs which indicates
by Rs.347.64 lakhs, which indicates that the liabilities have not paid within the stipulated
period.
73

The investment has increased by Rs.4700.27 lakhs, which indicates an outflow of fund and
a timely investment by the company.

The overall financial position of the company for the year (2004-2005) is satisfactory.

Table: 5.20 Comparative Balance Sheet as on 31st March 2005 – 2006


Change in
Particulars 31st March 31st March Absolute Percentage
2005 2006 Figure Increase or
Rs. in lakhs Rs. in lakhs Rs. in lakhs Decrease
Fixed Assets (A) 21863.99 20245.48 (1618.51) 7.40
Investment ( B ) 5391.05 8709.80 3318.75 61.56
Current Assets :
Inventories 3674.58 3662.46 (12.12) 0.33
Sundry Debtors 3524.79 3667.52 142.73 4.05
Cash and Bank Balance 34.43 82.12 47.69 138.51
74

Loans and Advances 2650.84 4537.37 1886.53 71.17


Total current Assets ( C ) 9884.64 11949.47 2064.83 20.89
Total Assets ( A+B+C ) 37139.68 40904.75 3765.07 10.14
Shareholders Funds :
Share Capital 1223.00 1223.00 - -
Reserves and Surplus 30460.74 32298.63 1837.89 6.03
Deferred Tax 480.00 261.00 (219) 45.63
Total Shareholders Funds 32163.74 33782.63 1618.89 5.03
(A)
Loan Funds :
Secured loans 3375.82 3124.08 (251.74) 7.46
Unsecured loans 98.36 92.59 (5.77) 5.87
Total Loan Funds ( B ) 3474.18 3216.67 (257.51) 7.41
Current Liabilities and 1501.76 3905.45 2403.69 160.06
Provision( C)
Total Liabilities (A+B+C) 37139.68 40904.75 3765.07 10.14

Interpretation:

The comparative balance sheet of the company reveals during 2006, that there has
been a decrease in the fixed assets of Rs.(1618.51) lakhs, which indicates sale of fixed assets
and an inflow of cash. The long term loan has reduced by Rs.(257.51) lakhs, which indicates
the repayment of loan. This fact depicts that the loan is relayed through the cash received by
sale of fixed assets.

The current asset has increased by Rs.2064.83 lakhs which indicate a firm’s better credit
policy. The current liability has also increased by Rs.2403.69 lakhs, which indicates that the
payment of liabilities is not made within the stipulated period.

The investment has increased by Rs.3318.75 lakhs as such the investment of the company
on the shares in its subsidiary company has increased, which indicates on outflow of cash.
75

The overall financial position of the company for the year (2005-2006) is satisfactory.

CHAPTER – VI
FINDINGS OF THE STUDY
1) The current ratio is above 2 in all the five years. The same level of current assets and
current liabilities may be maintained since the current assets are less profitable, when
compared to fixed assets.
2) The liquid ratio is decreasing year after year. Though the ratio is above 1 in all the five
years, it is preferable to improve upon the situation. This may be due to the fact that
the stock is major composition of current assets, which excludes liquid assets. The
firm should try to clear the stocks.
3) The cash ratio is decreasing year after year. So it shows that the cash position is not
utilized effectively and efficiently.
4) The average collection period is decreasing year after year so it shows the better is the
quality of debtors as a short collection period and implies quick payment by debtors.
76

5) The inventory turnover ratio fro the five years indicated a good inventory policy and
efficiency of business operations of the company.
6) The working capital turnover ratio has been increasing during the five years, which
indicates that there is lowest investment of the working capital and more profit. More
profit is in the sense that there is higher ratio.
7) The proprietary ratio in all the five years is above the satisfactory level, that is, 50%. It
indicates the creditors are in a safer side and there is no pressure from them.
8) The debt to equity ratio is decreasing year after year, which indicates , the servicing of
debt is less burdensome and consequently its credit standing is not adversely affected.
9) The Net Profit for the five years has been increasing which shows that the selling and
distribution expenses are under control and there is a good operational efficiency of
the business concern.
10) Comparative balance sheet proves that the financial performance for each succeeding
year is very much satisfactory as compared with its previous year during the period of
2001-2006.
11) It can be stated that the working capital management of the company seems to be
satisfactory. But in certain years there is decrease in working capital, which is due to
higher amount of current liabilities especially, increasing in provision for dividend and
taxation and creditors. The company should try to decrease the current liabilities and
provision by making timely payment.
CHAPTER – VII
SUGGESTION, RECOMMENDATION AND CONCLUSION

7.1 SUGGESTION AND RECOMMENDATION


1. The liquidity position of the company can be utilized in a better or other effective
purpose.
2. The company can be use the credit facilities provided by the creditors.
3. The debt capital is not utilized effectively and efficiently. So the company can extend
its debt capital.
4. Efforts should be taken to increase the overall efficiency in return out of capital
employed by making used of the available resource effectively.
5. The company can increase its sources of funds to make effective research and
development system for more profits in the years to come.
77

7.2 CONCLUSION

The study is made on the topic financial performance using ratio analysis with five years
data in Emami Limited.

The current and liquid ratio indicates the short term financial position of Emami Ltd.
whereas debt equity and proprietary ratios shows the long term financial position.

Similarly, activity ratios and profitability ratios are helpful in evaluating the efficiency of
performance in Emami Ltd.

The financial performance of the company for the five years is analyzed and it is proved
that the company is financially sound.
78

CHAPTER –VIII
LIMITATIONS AND SCOPE FOR FURTHER STUDY

8.1 LIMITATIONS

As the study is based on secondary data, the inherent limitation of the secondary data
would have affected the study.

The figures in a financial statements are likely to be a least several months out of date, and
so might not give a proper indication of the company’s current financial position.
79

This study need to be interpreted carefully. They can provide clues to the company’s
performance or financial situation. But on their own, they cannot show whether performance
is good or bad. It requires some quantitative information for an informed analysis to be made.

8.2 SCOPE FOR FURTHER STUDY

This study covers the financial performance of the company and activity engaged in
manufacturing cables.

Financial performance covers the aspects like liquidity, leverage, activity, and profitability
of “EMAMI LIMITED”.

This study further compares the financial statement to know the relative financial position
of the company.

Finally, a trend analysis also is carried out to evaluate the trends in financial statements of
the company.
80

BIBLOGRAPHY

BOOKS

M Y Khan and P K Jain Financial Management Fourth Edition-2006,


Tata McGraw-Hill Publishing Company Limited, New Delhi.

A. Murthy Management Accounting First Edition-2000, S. Viswanathan (Printers


&Publishers), PVT., LTD.

S.M. Maheswari Management Accounting, Sultan Chand & Sons Educational


Publishers, New Delhi.
81

WEBSITES
www.encyclopedia.com

www.emamigroup.com

Balance Sheet ------------------- in Rs. Cr. -------------------

Mar '15 Mar '14 Mar Mar Mar '11


'13 '12
12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds
Total Share Capital 22.70 22.70 15.13 15.13 15.13
Equity Share 22.70 22.70 15.13 15.13 15.13
Capital
Reserves 1,189.46 906.00 762.18 682.12 667.89
82

Networth 1,212.16 928.70 777.31 697.25 683.02


Secured Loans 8.38 16.29 43.47 107.43 152.48
Unsecured Loans 0.00 0.04 0.08 0.10 29.25
Total Debt 8.38 16.33 43.55 107.53 181.73
Total Liabilities 1,220.54 945.03 820.86 804.78 864.75
Mar '15 Mar '14 Mar Mar Mar '11
'13 '12
12 mths 12 mths 12 mths 12 mths 12 mths
Application Of Funds
Gross Block 589.47 520.74 495.71 513.36 578.88
Less: Accum. 165.52 147.09 121.22 112.36 96.44
Depreciation
Net Block 423.95 373.65 374.49 401.00 482.44
Capital Work in 24.97 8.44 44.11 65.63 6.48
Progress
Investments 501.73 296.31 163.58 80.80 7.08
Inventories 118.45 136.62 112.26 109.41 121.91
Sundry Debtors 56.90 75.22 80.48 78.93 91.08
Cash and Bank 326.09 264.84 279.09 272.48 204.15
Balance
Total Current 501.44 476.68 471.83 460.82 417.14
Assets
Loans and 103.78 105.38 97.95 149.24 166.65
Advances
Total CA, Loans & 605.22 582.06 569.78 610.06 583.79
Advances
Current Liabilities 213.79 178.08 159.63 190.65 142.17
Provisions 121.55 137.36 171.48 162.06 72.87
Total CL & 335.34 315.44 331.11 352.71 215.04
Provisions
Net Current Assets 269.88 266.62 238.67 257.35 368.75
Total Assets 1,220.53 945.02 820.85 804.78 864.75
Contingent 116.95 107.48 93.37 29.25 129.95
Liabilities
83

Book Value (Rs) 53.41 40.92 51.37 46.08 45.14