PROJECT REPORT ON THE STUDY AND

ANALYSIS OF DIFFERENT RATIOS

IN AN ORGANISATION

Submitted by

Mr. Nitin S Kaulgud.

Diploma in Business Management Semester - IV

Academic Year 2005-2006

TO

THE UNIVERSITY OF PUNE

THROUGH

INSTITUTE OF BUSINESS MANAGEMENT AND RESEARCH

(IBMR)

CHINCHWAD PUNE – 411033

2005-2006
 Acknowledgement:

I am greatly and by heart thankful to Director of Prin. Mrs.

Asha Pachpande & Our course co-ordinator Mr. S. Ramesh Kumar

Mehta of Institute of Business Management & Research, Chinchwad

,Pune – 411030. Who helped me in completion of the project by their

guidance & most valued knowledge during the study of ratio analysis

and helping in preparation of this final report.

I am also very much grateful to Mr. Avinash Puntambekar,

Managing Director, Avirat Enterprises Pvt. Ltd., for giving me the

chance to work in the organization and giving me all the related

documents required for preparing this report.

Nitin S.

Kaulgud.
 I N D E X

I. Title

II. Introduction to Ratio Analysis

III. Importance of Ratio Analysis

IV. Objectives of Ratio Analysis

V. Company Profile

VI. Financial Statements of the Company

VII. Application of Different Ratios.

VIII. Methodology

IX. Suggestions

X. Conclusions
TITLE
 TITLE

Study and analysis of the different ratios

that can be applied in an organization for knowing

the financial as well as creditability position of the

said organization on the basis of its Balance Sheet.

INTRODUCTION
 INTRODUCTION:

The information contained in funds and cash flow

statements is used by the Management, Creditors, Investors and other to

form judgment about the operating performance and financial position of

the firm. Users of these statements can get further insight about financial

strength and weaknesses of the firm, if they properly analyze

information reported in these statements. Management should be

particularly interested in knowing financial strength of the firm to make

their best use and to be able to spot out financial weaknesses of the firm

to take suitable corrective actions. The future plans of the firm should be

laid down in view of the firms financial strength and weaknesses. Thus,

financial analysis is the sophisticated forecasting and planning

procedures. Understanding the past is a pre-requisite for anticipating the

future.
IMPORTANCE
 IMPORTANCE

Financial Analysis is the process of identifying the financial

strengths and weaknesses of the firm by properly establishing

relationships between the items of the Balance Sheet, Trading and Profit

& Loss Accounts.

The reasons for selecting this topic can mentioned with

the help of its different users as follows: 

1. Creditors:

Creditors are interested in firms ability to meet their

claims over a very short period of time. Their analysis will, therefore,

confine to the evaluation of the firms liquidity position.

2. Financial Institutions:

Financial Institutions includes Banks, Long Term

Moneylenders, etc. They analyze the firms profit ability over time, its

ability to generate cans to be able to pay interest and repay principle and

the relationship between various sources of funds.

3. Investors:

Investors who have invested their money in the firms

shares, are most concern about the firm's earnings. They restore more

confidence in those firms that shows steady growth in earnings. As such,

they concentrate on the analysis of the firm's present and future

profitability. They are also interested in the firm's financial structure to

the extent it influences the firm's earnings, ability and risk.

4. Management:

Management of the firm would be interested in every

aspect of the financial analysis. It is their overall responsibility to see

that the resources of the firm are used most effectively and efficiently

and that the firm's financial condition is sound.

 OBJECTIVE OF

RATIO ANALYSIS
OBJECTIVE OF RATIO ANALYSIS

1. With help of various ratios, one can get the information about the

ability of the firm to meet its current as well as future obligations.

2. Ratio Analysis helps the Management and other interested parties to

get the information about long term solvency against the funds

borrowed.

3. It helps to know the revenue generated from the utilization of funds.

4. Basically, ratio analysis is useful in judging the overall operating

efficiency and performance of the firm.

COMPANY

PROFILE
 COMPANY PROFILE:

Company Name : Avirat Enterprises Private Limited.

Registered Office : 9, Sant Nagar, Sevanand Society,

Near Aryaneshwar, Pune - 411 009.

Marketing Office : 26A, Rajdhani Complex,

Near Shankar Maharaj Math,

Pune - Satara Road, Pune - 411 043.

Telephone No. : +91-20-437 5433.

Fax No. : +91-20-436 4586.

Works : Gat No. 401, S. No. 138, Wadgaon Road,

Charoli Khurd, Taluka Rajgurunagar,

Dist. Pune.

Telephone No. : +91-2135-32 132.

Area of Plot : 2 Acres with Fencing.

Workshop Shed : 2 Nos. of 12 mtrs. X 30 mtrs. X 12.5 mtrs.

Avirat Enterprises Private Limited is one of the

associate companies of Unipan Group. Established in 1991, the company

has capabilities of executing challenging jobs of heavy fabrications,

required by cement and sugar factories, distilleries, material handling

projects, etc. The entire staff of the company is been in the heavy

fabrication field for almost two decades.

The Company's fabrication shop is located at Alandi, 14

kms from Pimpri / Chinchwad industrial belt and 20 kms from Pune, on

a acre plot owned by the Company. The sustained healthy association

between the staff and the management has created a very congenial work

environment, leading to freedom from the stress of labor problems. The

company also have an advance hydraulic mobile crane of 8 Ton

capacity.
 The company is in the process of establishing in-house

machining facilities in the near future, with sophisticated machinery and

equipment.

On the other hand the company is also engaged in

erection and commissioning of sugar plants in Maharashtra. The

company has completed Lokmangal Sakhar Karkhana, Mohal, Solapur

in November 2000 and Loknete Baburao Patil Sahakari Sakhar

Karkhana, Angar, Solapur in January 2002.

In the company, currently 16 fabrication workers and 4

Office Staff are working. The fabrication workers include skilled, semi-

skilled and unskilled workers. Out of the 4 office staff, one is as

Manager, two are Accounts Personnel and one is Head Foreman.

 APPLICATION OF
DIFFERENT RATIOS
APPLICATION OF DIFFERENT RATIOS

1. Current Ratio:

Current Ratio is calculated with the help of the following

formula:

Current Assets
Current Ratio = -------------------------
Current Liabilities

Current Assets include cash and those assets which can be

converted in cash within a year i.e. marketable securities, debtors and

inventories. All obligations maturing within a year are included in

Current Liabilities. Current Liabilities include creditors, bills payable,

short term bank loan, income tax liability and long term debt maturing in

the current year.

Current Ratio is a measure of firm's short term solvency. It

indicates the availability of current assets in rupees for every one rupee

of current liability. A ratio of greater than one means the firm has more

current assets than current claims against them.

2. Net Working Capital Ratio:

The difference between the current assets and the current liabilities

excluding short term bank borrowings is called net working capital. Net

Working Capital is sometimes used as a measure of a firm's liquidity. It

is considered that, between firms, the one having the larger net working

capital has the greater ability to meet its current obligations. The Net

Working Capital is calculated with the help of the following formula.

Net working capital

Net Working Capital Ratio = ---------------------------
Net Assets
3. Debt Ratio:

Several debt ratios may be used to analyse the long term solvency

of a firm. The firm may be interested in knowing the proportion of the

interest bearing debt in the capital structure. It may be therefore,

compute debt ratio by dividing the total debt by capital employed or net

assets. Total debt will include short term and long term borrowings from

financial institutions, debenture / bonds, deferred payment arrangements

for buying capital equipments, bank borrowings, public deposits and any

other interest bearing loans. The formula for finding the debt ratio is as

under:

Total Debt
Debt Ratio = -----------------------
Capital Employed
4. Gross Profit Ratio:

The Gross Profit Ratio reflects the efficiency with which the

management produces each unit of product. This ratio indicates the

average spread between the cost of goods sold and the sales revenue.

When we subtract the gross profit margin from 100%, we obtain the

ratio of cost of goods sold to sales. The formula for the calculation will

be as follows.

Gross Profit
Gross Profit Ratio = ----------------
Sales
5. Net Profit Ratio:

Net Profit is obtained when operating expenses, interest and taxes

are subtracted from the gross profit. The formula for calculating the net

profit ratio is:

Profit after Tax

Net Profit Ratio = -------------------
Sales
METHODOLO
GY
Methodology:
The project has been performed with the help and the
references as stated below:
 The theoretical part required for the working and the analysis of
the different ratios were referred from the text book, "Financial
Management" by Prof. I. M. Pandey.

 I have worked in the said organization for the period of 2 weeks in

the finance department.

 Undergone through the balance sheets of the organization for last 4

years.

 Notation of relevant data required for the calculation of the ratios

being used by the said organization for various purposes.

 Sorting of the required data for the calculation of the respective

ratios.
 Different ratios were calculated and represented in tabular form.

 The calculated ratios were further represented in a graphical form.

Suggestion
s
 Suggestions

1. In the respect of the current ratio, there is not much fluctuations

and should be stable in all respects. The idle current ratio to be
kept for any organization is to in between 2 : 1 to the maximum
and 1.5 : 1 to the minimum. In the first year, the company has
distributed more advance and investments in the inventories are
higher. It is suggested that these two things be reduced. It is also
seen that the same has risen in the 2nd year but good work done
by the company that it has reduced same in the subsequent year.

2. With reference to the net working capital ratio, it is observed

that the borrowings are much higher than the capital invested
 which has been affected adversely to the liquidity of the
company. The liquidity of the company has drastically changed
from first year to second and then it is stabilized in the
subsequent years but on the lower side. The standard net
working capital ratio or liquidity be maintained between 0.40 to
0.60. It is suggested that the company should try hard to reduce
its liabilities and short term loans.

3. Regarding the debt ratio, it is seen that due to the newly

commencement of the company, the outside borrowings are on
higher side than the capital invested. The company has
struggled and reduced the borrowings in the next two years but,
in the last year the same has risen due to enhanced cash credit
limit and loss sustained in the same year. It is observed that the
loss has been occurred due to large amount of depreciation and
excess interest paid. It is suggested to reduce the interest
payment on the cash credit limits by reducing the excess usage
of the limits.

4. With respect to the gross profit ratio, it is observed that even

that the turnover has increased to double compare to the first
year, the gross profit has not increased to that extent due to the
 drastic increase in the labour and wages. The only thing that can
be suggested is to reduce the expenses made on labour and
wages to the maximum to ensure the gross profit is achieved to
the same extent as to the sales.

5. As far as the net profit is concerned, it is affected in second year

due to excess expenses made on travelling. In third year, the
company has reduced the same expenses which has affected the
net profit positively. Unfortunately, in the last year the company
has sustained loss due to the reason of high depreciation and
excess interest payment. It is suggested to the company to
ensure that the administrative or indirect expenses be reduced to
the minimum it can be reduced.

6. Overall with respect to the all ratios, it is suggested that the

company should try to reduce the liabilities, reduce the
advances, excess payments on labour and wages and to reduce
the administrative expenses. It is felt necessary to have
monitoring on all the expenses i.e. direct expenses as well as the
indirect expenses so that the company can have a better liquidity
position, a better current ratio and maximum profits.
Conclusion
s
Conclusions
 The theoretical applications of Ratio Analysis as been taught
to us while the lectures and through the text books is been applied by the
said organization for the purpose practical usage to some extent i.e.
80%. The company has maintained all the above ratios. The company is
trying hard to come out from the past losses and to improve the liquidity
situations and to stabilize in the market.