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Khed.
It is a crucial topic to me to study the procedure, methods, merit, demerit of the ratio analysis under study I referred various resource persons like Mr. C. A. Pujari (Sr. Executive Accounts ) & I got lot of information on the topic. Familiar with the working environment in an organization, deal with at least some of the problem or aspects practically and tackle them or at least understand and analyze them. This of course paves a road for the where they have to lead later. Customers are satisfied with the performance of the company and expect the after sales service to be more efficient.
Company Profile
Flamingo Industries Limited has come a long way since its origin in a kitchen laboratory in 1941.
Over the years, Flamingo came to be known as an industry leader in the area of agro-chemicals and agro-chemical intermediates. Using its expertise in Chemistry and Chemical technology, Flamingo also expanded its chemicals manufacturing range to include Water treatment chemicals and Polymer Additives and few other speciality chemicals.
Flamingos commitment to sustainable development led us to venture into the field of Environment and Bio-technology. Flamingo is a Pioneer and Technology leader in rapid conversion of Municipal Solid Waste to organic compost. Our organic plant protection and soil/crop productivity enhancers are well accepted in the market.
In order to ensure focused attention to the expanded range of activities, the agro business division was spun off as a separate company, Flamingo Crop Care Limited in 2003. Today, Flamingo is organized into two divisions i.e. a. Chemicals, b. Environment and Biotech.
Ever since our inception, we have built up a solid history and reputation of
developing, manufacturing and exporting chemicals. We have achieved over 100 product and process breakthroughs that even now are serving the specific needs of various clients.
We have excellent research facilities in Mumbai and at our manufacturing locations. During the last six decades, we have received numerous awards in recognition of our dedication and excellence in the field of chemicals.
From the very beginning, in 1941, when our founder Mr. C. C. Shroff established Flamingo, we have believed that in every interaction we have with our clients, our individual as well as our corporate character, integrity and professionalism is under scrutiny.
We have always kept the virtues of high quality, cost effectiveness, consumer need fulfillment, fair prices and fair trade practices uppermost in our minds.
VISION
We the Members of Flamingo Parivaar Visualise Flamingo as a Responsible, Respected and Sound Corporate Citizen Serving India and World through Its knowledge, Services, Products and Solutions Through holistic approach Integrating chemistry, Chemical Technology, Pharma Technology, Biology, Soil Management, Water Management, City and Farm Waste Management To serve Industry, Agriculture and Horticulture With Growth, Value Addition, Wealth Generation, Customer Joy, Investor fulfillment, Society Satisfaction and Enrichment of its people.
Quality Policy
We at Flamingo Industries Limited, manufacturer and supplier of Industrial Chemicals, Intermediates and Crop Protection Chemicals are committed to :
Board Of Directors
Awards
2004
National Energy Conservation Award (Second Prize) in chemical sector for the year 2004 from Ministry of Power, New Delhi. (For Roha Site)
2004
International Spirit at work award for nurturing the human spirit at work and inspiring others by your example.
2004
2004
2003
National Safety Council Maharashtra Chapter Maharashtra Safety Award for achieving Lowest Accident Frequency Rate During The Year 2003 in Chemicals and Fertilizers Sector. (For Lote Parshuram, Ratnagiri).
1998-99
GPFA Prestige Award for outstanding contribution in developing indigenous technology for manufacture of pesticides and winning recognition in domestic as well as international market and giving thrust to Indias Export contribution
1995-96
To find out the utility of financial ratios in credit analysis and determining the financial Capacity.
RESEARHCH METHODOLOGY:-
A research design is the detailed blue print used to guide a research study towards its objective. It helps to collect, measure and analysis of data. The study undertaken is of Descriptive Historical Research Method. Descriptive research is those which are connected with The focus of this chapter is on the methodology used for the collection of data for research. Data constitutes the subject matter of the analyst. The primary sources of the collection of sources of the collection of data are observations, Interviews and the questionnaire technique. The secondary sources are collections of data are from the printed and annually published materials. A questionnaire form is prepared to secure responses to certain questions. It is device for securing answers to questions by using a form. The questionnaire technique is economical and time saving and is an important tool of collecting information.
Research Design:
Secondary data:
Secondary data highlights the contextual familiarities for primary data collection. It provides rich insights into the research process. Secondary data is collected through magazine, reference books, journal, articles, websites etc. Secondary data like balance sheet and profit and loss account and cash flow statement collected through company and company websites and part of theory from reference book.
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Ratios are relationships expressed in mathematical terms between figures which are connected with each other in some manner. Obviously, no purpose will be served by comparing two sets of figures which are not at all connected with each other. Moreover, absolute figures are also unfit for comparison.
(1). Times: - When one value is divided by another, the unit used to express the quotient is termed as Times. For example, if out of 100 students in a class, 80 are present, the attendance ratio can be expressed as follows: = 80 / 100 = .8 Times
(2). Percentage: - If the quotient obtained is multiplied by 100, the unit of expression is termed as Percentage. For instance, in the above example, the attendance ratio as a percentage of the total number of students is as follows: = .8 X 100 = 80% Accounting ratio are, therefore mathematical relationships expressed between interconnected accounting figures.
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A financial ratio is a relationship between two financial variables. It helps to ascertain the financial condition of a firm.
In ratio analysis, the liquidity ratio measures the firms ability to meet current obligations and is calculated by establishing relationships between current assets and current liabilities.
The profitability ratio measure the overall performance of the firm by determining the effectiveness of the firm in generating profit and are calculated by establishing relationship between profit figures on the one hand and sales and assets on the other.
The main objective of using this technique to judge the performance of the business. Ratio throws light on the profitability of the business, solvency position of the business, liquidity of the business etc.
Comparisons of ratios of a business enterprise either with ratios of the same concern for past periods or with ratio of the concern for same period or both, reveals the weakness of the business and the point of its strengths. Points of weakness are further investigated and corrective action is taken. Thus, ratios are useful and perhaps the indispensable part of financial analysis. They provide the analyst of underlying conditions.
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Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects:
Liquidity position
Operating efficiency
Overall profitability
Trend analysis We can use ratio analysis to try to tell us whether the business is profitable
As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects:
y Liquidity Position:With the help of ratio analysis conclusions can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short-maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans.
y Long-term Solvency:Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analyst and the present and potential owners of a business. The
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long-term solvency is measured by the leverage or capital structure and profitability ratios which focus on earning power and operating efficiency. Ratio analysis reveals the strengths and weaknesses of a firm in this respect. The leverage ratios for instance will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved.
y Operating Efficiency:Yet another dimension of the usefulness of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets-total as well as its components.
y Overall Profitability:Unlike the outside parties which are interested in one aspect of the financial position of a firm, the management is constantly concerned about the overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short-term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
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y Inter-firm Comparison:Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter-firm comparison and comparison with industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An inter-firm comparison would demonstrate the firms position vis-a-vis its competitors. If the results are at variance either with the industry average or with those of the competitors, the firm can seek to identify the probable reasons and in that light, take remedial measures. Ratio analysis provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firms. They also reveal strong firms and weak firms, over-valued and under-valued firms.
y Make Intra-firm Comparison Possible:Ratio analysis also makes possible comparison of the performance of the different division of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
Trend Analysis:-
Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of affirm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of trend analysis of ratio lies in the fact that the analysts can know the direction of movement,
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that is, whether the movement is favourable or unfavourable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.
Ratio analysis simplifies the comprehension of financial statements. Ratios tell the whole story of change in the financial condition of the business.
Help in Planning:-
Ratio analysis helps in planning and forecasting. Over a period of time a firm or industry develops certain norms that may indicate future success or failure. If relationship changes in firms data over different time periods, the ratios may provide clues on trends and future problems. Thus, ratios can assist management it its basic function of forecasting, planning, coordination, control and communication.
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Ratio analysis is a widely used tool of financial analysis. Yet, it suffers from various limitations. The operational implication of this is that while using ratios, the conclusions should not be taken on their face value. Some of the limitations which characterise ratio analysis are as follows:
Difficulty in Comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated with their comparability. One technique that is employed is inter-firm comparison. But such comparisons are vitiated by different procedures adopted by various firms. The differences may relate to:
y y y y y
Differences in the basis of inventory valuation Different depreciation methods Estimated working life of assets, particularly of plant and equipments Amortization of intangible assets like goodwill, patents and so on Amortization of deferred revenue expenditure such as preliminary expenditure and discount on issue of shares
y y
Capitalization of lease Treatment of extraordinary items of income and expenditure and so on.
Secondly, apart from different accounting procedures, companies may have different accounting periods, implying differences in the composition of the assets particularly current assets. For these reasons, the ratios of two firms may not be strictly comparable.
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Another basis of comparison is the industry average. This presupposes the availability, on a comprehensive scale, of various ratios for each industry group over a period of time. If, however, as is likely, such information is not compiled and available, the utility of ratio analysis would be limited.
y Impact of Inflation:The second major limitation of the ratio analysis as a tool of financial analysis is associated with price level changes. This, in fact, is a weakness of the traditional financial statements which are based on historical costs. And implication of the is feature of the financial statements as regards ratio analysis is that assets acquired at different periods are, in effect, shown at different prices in the balance sheet, as they are not adjusted for changes in the price level. As a result, ratio analysis will not yield strictly comparable and therefore dependable results. To illustrate, there are two firms which have identical rates of returns on investments, say 15 per cent. But one of these had acquired its fixed assets when prices were relatively low, while the other one had purchased them when prices were high. As a result the book value of the fixed assets of the former type of firm would be lower, while that of the latter higher. From the point of view of profitability, the return on the investment of the firm with a lower book value would be over-stated. Obviously, identical rates of returns on investment are not indicative of equal profitability of the two firms. This is a limitation of ratios.
Conceptual Diversity:-
Yet another factor which influences the usefulness of ratios is that there is difference of opinion regarding the various concepts used to compute the ratios. There is always room for diversity of opinion as to what constitutes shareholders equity, debt, assets, and profit and so on. Different firms may use these terms in different senses or the
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same firm may use them to mean different things at different times. Reliance on a single ratio for a particular purpose may not be a conclusive indicator. For instance, the current ratio alone is not an adequate measure of short-term financial strength; it should be supplemented by the acid-test ratio, debtor turnover ratio and inventory turnover ratio to have a real insight into the liquidity aspect.
Ratios are based only on the information which has been recorded in the financial statements. Financial statements suffer from a number of limitations, the ratios derived there from, therefore, are also subject to those limitations. For example, nonfinancial changes through important for the business are not revealed by the financial statements. If the management of the company changes, it may have ultimately adverse effects on the future profitability of the company but this cannot be judged by having a glance at the financial statements of the company. Similarly, the management has a choice about the accounting policies. Different accounting policies may be adopted by management of different companies regarding valuation of inventories, depreciation, research and development expenditure and treatment of deferred revenue expenditure, etc. The comparison of one firm with another on the basis of ratio analysis without taking into account the fact of companies having different accounting policies, will be misleading and meaningless. Moreover, the management of the firm itself may change its accounting policies form one period to another. It is, therefore, absolutely necessary that financial statements are they subjected to close scrutiny before an analysis attempted on the basis of accounting ratio. The financial analyst must carefully examine the financial statements and make necessary adjustments in the financial statements on the basis of
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disclosure made regarding the accounting policies before undertaking financial analysis. The growing realization among accountants all over the world, that the accounting policies should be standardized, has resulted in the establishment of International Accounting Standards Committee which has issued a number of International Accounting Standards. In our country, the Institute of Chartered Accountants of India has established Accounting Standards Board for formulation of requisite accounting standards. The accounting Standards Board had already issued nineteen standards including AS-1: Disclosure of accounting Policies. The standard AS-1 has been made mandatory in respect of accounting periods beginning on or after 1.4.1991. It is hoped that in the years to come, with the progressive standardization of accounting policies, this problem will be solved to a great extent.
Ratios are only indicators; they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen. For example, a high current ratio does not necessarily mean that the concern has a good liquid position in case current assets mostly comprise outdated stocks. It has been correctly observed, Ratio must be used for what they are financial fools. Too often they are looked upon as ends in themselves rather than as a means to an end. The value of a ratio should not be regarded as good or bad inter se. It may be an indication that a firm is weak or strong in a particular area, but it must never be taken as proof. Ratios may be linked to railroads. They tell the analyst, Stop, look, and listen.
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Window Dressing:-
The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statement in a way to show a better position that what is actually is. On account of such a situation, presence of a particular ratio may not be a definite indicator of good or bad management. For example, a high stock turnover ratio is generally considered to be an indication of operational efficiency of the business. But this might have been achieved by unwarranted price reductions or failure to maintain proper stock of goods. Similarly, the current ratio may be improved just before the Balance Sheet date by postponing replenishment of inventory. For example, if a company has got current assets of Rs. 4000 and current liabilities of Rs. 2000, the current ratio is 2, which is quite satisfactory. In case the company purchases goods of Rs. 2000 on credit, the current assets would go up to Rs. 6000 and current liabilities to Rs. 4000. Thus, reducing the current ratio to 1.5. The company may, therefore, postpone the purchases for the early next year so that its current ratio continues to remain at 2 on the Balance Sheet date. Similarly, in order to improve the current ratio, the company may pay off certain pressing current liabilities before the Balance Sheet date. For example, if in the above case the company pays current liabilities of Rs. 1000, the current liabilities would stand reduced to Rs. 1000, current assets would stand reduced to Rs. 3000 but the current ratio would go up to 3.
No Fixed Standards:-
No fixed standards can be laid down for ideal ratios. For example, current ratio is generally considered to be ideal if current assets are twice the current liabilities.
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However, in case of those concerns which have adequate arrangements with their bankers for providing funds when they require, it may be perfectly ideal if current assets are equal to slightly more than current liabilities. It is, therefore, necessary to avoid many rules of thumb. Financial analysis is an individual matter and value for a ratio which is perfectly acceptable for one company or one industry may not be at all acceptable in case of another.
Ratios are a composite of many different figures. Some cover a time period, others are at an instant of time while still others are only averages. It has been said that, a man who has his head in the oven and his feet in the ice-box is on the average, comfortable! Many of the figures used in the ratio analysis are no more meaningful than the average temperature of the room in which this man sits. A balance sheet figure shows the balance of the account at one moment of one day. It certainly may not be representative of typical balance during the year. It may, therefore, be concluded that ratio analysis, if done mechanically, is not only misleading but also dangerous. It is indeed a double edged sword which requires a great deal of understanding and sensitivity of the management process rather than mechanical financial skill. It has rightly been observed: The ratio analysis is an aid to management in taking correct decisions, but as a mechanical substitute for thinking and judgment, it is worse than useless. The ratio if discriminately calculated and wisely interpreted can be a useful tool of financial analysis. Finally, ratios are only a post-mortem analysis of what has happened between two balance sheet dates. For one thing, the position in the interim period is not revealed by ratio analysis. Moreover, they give no clue about the future.
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In brief, ratio analysis suffers from some serious limitations. The analyst should not be carried away by its oversimplified nature, easy computation with a high degree of precision. The reliability and significance attached to ratios will largely depend upon the quality of data on which they are based. They are as good as the data itself. Nevertheless, they are an important tool of financial analysis.
Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.
Leverage Ratios which show the extent that debt is used in a company's capital structure.
Liquidity Ratios which give a picture of a company's short term financial situation or solvency.
Operational Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.
Profitability Ratios which use margin analysis and show the return on sales and capital employed.
Solvency Ratios which give a picture of a company's ability to generate cash flow and pay it financial obligations.
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Types of Ratios:-
Liquidity Ratios
Liquidity refers to the ability of a firm to meet its short-term financial obligation 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.
Current Ratio
The Current Ratio expresses the relationship between the firms 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).
The rule of thumb says that the current ratio should be at least 2 that are the current assets should meet current liabilities at least twice.
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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
Clearly this ratio will be lower than the current ratio, but the difference between the two (the gap) will indicate the extent to which current assets consist of stock.
Turnover Ratio
The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Another way of examining the liquidity is to determine how quickly certain current assets are converted into cash. The ratios to measure these are referred to as turnover ratios. In fact, liquidity ratios are not independent of activity ratios. Poor debtor or inventory turnover ratios limit the usefulness of the current and acid-test ratios. Both obsolete / unsalable inventory and uncollectible debtors are unlikely to be sources of cash. Therefore, the liquidity ratios should be examined in conjunction with relevant turnover ratios affecting liquidity.
It is computed by dividing the cost of goods sold by the average inventory. Thus, Inventory Turnover Ratio = Cost of Goods sold / Average Inventory. 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 the cost of goods sold by the average inventory. The ratio shows a relatively high stock turnover which would seem to suggest that the business deals in fast moving consumer goods.
y
The trend shows a marginal increase in days which indicates a slowdown of stock turnover.
The high stock turnover ratio would also tend to indicate that there was little chance of the firm holding damaged or obsolete stock.
It is determined by dividing the net credit sales by average debtors outstanding during the year. Thus,
Net credit sales consist of gross credit sales minus returns, if any, from customers. Average debtors are the simple average of debtors including bills receivable at the beginning and at the end of the year. The analysis of the debtors turnover ratio supplements the information regarding the liquidity of one item of current assets of the firm. The ratio measures how rapidly receivables are collected. A high ratio is indicative of shorter time-lag between credit sales and cash collection.
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It is a ratio between net credit purchases and the average amount of creditors outstanding during the year. It is calculated as follows: Creditors Turnover Ratio = Net credit purchases / Average Creditors A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on suppliers credit. The extent to which trade creditors are willing to wait for payment can be approximated by the creditors turnover ratio.
The ratios indicate the degree to which the activities of a firm are supported by creditors funds as opposed to owners.
The relationship of owners 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 proportion of funds contributed by the owners indicate a cushion (surplus) which shields creditors against possible losses from default in payment.
The greater the proportion of equity funds, the greater the degree of financial strength.
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Financial leverage will be to the advantage of the ordinary shareholders as long as the rate of earnings on capital employed is greater than the rate payable on borrowed funds.
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 companys policy on the mix of capital funds. The debt to equity ratio is calculated as follows:
Profitability Ratios
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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 maximising profits, irrespective of social consequences.
The ratios examined previously have tendered to measure management efficiency and risk. Profitability is a result of a larger number of policies and decisions. The profitability ratios show the combined effects of liquidity, asset management (activity) and debt management (gearing) on operating results. The overall measure of success of a business is the profitability which results from the effective use of its resources.
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It can also be useful to compare the gross profit margin across similar businesses although there will often be good reasons for any disparity.
This indicates that the rate in increase in cost of goods sold are less than rate of increase in sales, hence the increased efficiency.
Whatever income remains in the business after all prior claims, other than owners claims (i.e.ordinary dividends) have been paid, will belong to the ordinary shareholders who can then make a decision as to how much of this income they wish to remove from the business in the form of a dividend, and how much they wish to retain in the business. The shareholders are particularly interested in knowing how much has been earned during the financial year on each of the shares held by them. For this reason, earnings per share figure must be calculated. Clearly then, the earning per share calculation will be:
EPS = Net Profit available to Equity holders / Number of ordinary shares outstanding
D/P Ratio = Dividend per ordinary Share (DPS) / Earnings per share (EPS) X 100
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Activity Ratios
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.
The total asset turnover indicates the efficiency with which the firm uses all its assets to generate sales.
Generally, the higher the firms total asset turnover, the more efficiently its assets have been utilized.
Total Assets Turnover Ratio = Cost of Goods Sold / Average Total Assets
The fixed assets turnover ratio measures the efficiency with which the firm has been using its fixed assets to generate sales.
Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in fixed assets utilization.
It appears that the activity of the business is relatively constant, with a slight upward trend.
The ratio also confirms that the business places a much greater reliance on working capital than it does on the fixed assets as the fixed assets (2001 and 2002) turned over more quickly than stock turnover.
The methodology opted for carrying out project was by way of collection of data from the company s annual reports for the past three years i.e. from 2006-2007 to 2008-2009, for the calculation of ratios. The theory related to ratios was gathered from various financial management books, which served the purpose of calculation and analysis of ratios. Further based on the above statements ratios related to liquidity, turnover, solvency, profitability and over profitability groups and miscellaneous groups have been calculated and interpreted in an intra firm comparison method. Similarly the ratios have been presented in graphical format to have clear understanding of it during three financial years and changes in it. ( we are taking all figurers in lack )
LIQUIDITY GROUP
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1) Current Rati :Formula Current Assets/Current Liabilities Current assets 2006-07 1.35 2007 -08 1.38 2008 -09 1.48
38304.97
43480.60
44315.79
Current liabilities
28336.31
31618.92
29869.3
1.6
1.4 1.2 1
0.8 0.6 0.4
0.2 0
2006 - 07 2007 - 08 2008 - 09
nterpretation : 37
This ratio is calculated for knowing short term solvency of the organization. This ratio indicates the solvency of the business i.e. ability to meet the liabilities of the business as and when they fall due. The Current Assets are the sources from which the current liabilities are to be met. Certain authorities have suggested that in order to ensure solvency of a concern current assets should be twice the current liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon the nature of industry. The standard Current Ratio applicable to the Indian industries is 1.33:1. Here the Current Ratio of Flamingo industries Ltd indicates that it has got sufficient assets to pay off short term liabilities as and when they fall due. The company has maintained its short term solvency through out the years and it is improving its short term solvency status which is appreciable
Formula
2006 - 07
2007 - 08
2008 - 09
38
Li ui Assets/Li ui Liabilities
1.20
1.20
1.20
Li ui Assets
33417.87
37054.04
37021.73
Li ui Liabilities
28336.31
31618.92
29869.33
1.2 1
0.8 0.6
0.4 0.2
0
2006 - 07 2007 - 08 2008 - 09
nterpretation: -
Thi rati serves as a realisti gui e t the short term solvency of the
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company. It is a measure of the extent to which liquid resources are immediately available to meet current obligation.In so far as it eliminates inventories as part ofcurrent ratio, this is a more rigorous test of liquidity than the Current Asset Ratio and when used in conjunction with it, gives a better picture of the firms ability to meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is considered to be ideal and standard. Here the Acid Ratios of Flamingo industries Ltd through out the years considered in dicates that it has adequate assets which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off immediately. It must be remembered that the company is improving its Acid Test Ratio year by year at a constant rate which is appreciable as such higher liquid ratio better the situation.
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T R
VER GR UP
2006 - 07 12.83
2007 - 08 10
2008 - 09 8
58761.14 et sales
68370.32
62372.01
Fi ed Asset
4578.72
6833.47
7894.69
14
12 10
8
6 4
2
0
2006 - 07
2007 - 08
2008 - 09
nterpretation: -
This ratio measures the efficiency in the utili ation of fi ed assets. This ratio
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indicates whether the fixed assets are being fully utilized. It is an important measure of the efficient and profit earning capacity of the business. Normally standard ratio is taken as five times. The financial year 2009 had not so good fixed asset turnover ratio. The financial year 2008 had an appreciable fixed assets turnover ratio indicating fixed assets are turned over more number of times. This was due to around 72% growth in sales. This shows better asset management policy as compared to the past year. The same ratio came raised in the financial year 2007 due to increasing in sells.
2006 - 07 5.60
2007 - 08 5.80
2008 - 09 4.30
Net Sales
58761.14
68370.32
62372.01
Working capital
9968.66
11861.68
14446.46
42
6
5
4
3
2
1 0
2006 - 07
2007 - 08
2008 - 09
nterpretation: -
This ratio signifies achievement of maximum sales with less investment in working capital. As such higher the ratio better will be the situation. In present situation companys working capital ratio is decreasing in 2008 09.
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2006 - 07 1.50
2007 - 08 1.57
et sales
58761.14
68370.32
62372.01
Current Assets
38304.97
43480.60
44315.79
44
Interpretation : -
This ratio indicates capability of the organization in efficient use of current assets. This ratio indicates whether current assets are fully utilized. It indicates the sales generated per rupee of investment in current asset. The financial year 2007-08 had good current asset turnover ratio because it had excellent sales in that year. It must remembered that investments in current assets are increasing year by year at constant rate but the company failed to register growth in sales and its sales fell down by year 2008 09 .
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2006 - 07 3.61
2007 - 08 3.22
2008 - 09 2.57
58761.14
68370.32
62372.01
Capital Employed
16269.11
21189.24
24237.32
2006 - 07
2007 - 08
2008 - 09
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Interpretation : -
This ratio indicates whether capital employed is turned over in the form of sales more number of times. As such higher the capital turnover better will be situation. The financial year 2006-07 had acceptable ratio because it had better sales as compared to other two years. Due to addition or purchase of fixed assets and heavy investments in working capital due to rise in activity, the capital turnover ratio for 2008-09 came down as compared previous years.
47
Formula
2006 -07
2007 - 08
2008 - 09
3.70
3.80
5.00
4.5 4
3.5 3
2.5 2
1.5 1 0.5
0
2006 - 07 2007 - 08 2008 - 09
Interpretation: -
Indicates how fast inventory is used / sold. A higher turnover ratio generally indicates fast moving material while low ratio may mean dead or excessive stock. In 2008 09 companys ratio is high as compare 2006 07 & 2007 08.
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6) Interest Coverage : -
Formula Earning before Interest & Tax / Interest Earning before Interest & Tax
2006 - 07
2007 - 08
2008 - 09
25
21
41
6429.23
7374.85
4804.54
Interest
256.24
346.60
117.09
45 40 35
30 25 20 15 10
49
Interpretation: -
Indicates ability to meet interest obligation of the current year should be generally greater than 1. Company have good position to meet interest obligation.
Formula
2006 - 07
2007 - 08
2008 - 09
112.50
108.10
105.70
120
100 80
60 40 20
2006 - 0
200 - 08
2008 - 09
50
Interpretation : Indicates velocity of debt payment. Companys. Higher creditor turnover ratio or a lower credit period enjoyed signifies that the trade creditors are being paid promptly. It enhances credit worthiness of the company. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditor.
Profitability ratio
1) Gross profit :- ( % )
Formula
2006 - 07
2007 - 08
2008 - 09
18.70
18.77
18.13
11005.50
12839.02
11313.20
Sales
58761.14
68370.32
62372.01
51
20 18
16 14 12
10 8 6
4 2 0
2006 - 07
2007 - 08
2008 - 09
Interpretation: -
This ratio indicates the degree to which selling prices of goods per unit may decline without resulting in losses on operations for the firm. A high gross profit ratio as compared with that of the other firm in the same industry implied that the firm in question produces its products at lower cost. It is a sign of good management. A low gross profit ratio may indicate unfavorable purchasing and make policies, the -up inability of management to develop sales volume, theft, damage, bad maintenance, market reduction in selling prices not accompanied by proportionatedecrease in the cost of goods etc. The company is growing at a constant rate as far as gross profit is concernedwhich is appreciable indicating efficiency in production of g oods at relatively lower costs.
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2006 - 07 8.40
2007 - 08 8.00
2008 - 09 5.7
Net profit
4916.69
5474.13
3546.39
ales
58761.14
68370.32
62372.01
9 8 7 6 5 4 3 2 1 0
2006 - 07
2007 - 08
2008 - 09
Interpretation: -
This ratio differs from the ratio of operating profits to net sales in as much as it is calculated after adding non-operating incomes, like interest, dividends on investments
53
etc to operating profits and deducting non-operating expenses such as loss on sale of old assets, provisions for legal damage etc. from such profits. The ratio is widely used as a measure of over-all profitability and is very useful to the proprietors. Reading along with the operating ratio it gives an idea of the efficiency as well as profitability of the business to a limited extent. The company has decrease its net profits by the year 2008-09 from the 2006-07 which is not appreciable which shows not considerable proportion of net sales to the owners and shareholders after all costs, charges and expenses including income tax, have been deducted. Company ratio decreasing contunasoly.
54
2006 - 07 9.20
2007 - 08 9.20
2008 - 09 9.40
53844.45
62896.19
58825.62
ales
58761.14
68370.32
62372.01
10
9 8 7
6 5 4
3 2 1
0
2006 - 07 2007 - 08 2008 - 09
55
Interpretation : Indicator of operating performance of business. It is a test of the efficiency of the management or in other words, operating efficiency of the business is assessed by this ratio. operating profit ratio of the company is a satisfactory level.
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OVER PROFITABILIT
GROUP
1) Return on Assets: - ( % )
2006 - 07 10.60
2007 - 08 10
2008 - 09 6.40
4916.69
5474.13
3546.39
Assets
46390.25
54442.98
55557.09
12
10
8
6
2
0
2006 - 07
2007 - 08
2008 - 09
57
Interpretation : -
The ratio is a measure of the return on the total resources of the business enterprise. It shows how efficiently management has used the funds provided be the creditors and the owners. It can be referred that the financial year 2008-09 had not so good ratio because of high operating expenses. However the company is decrease year by year at a constant rate. The financial year 2006-07 had good as returns on its various resources which is appreciable.
Formula
2006 - 07
2007 - 08
2008 - 09
PAT+Int*100/Capital Employed
63.50
54.40
30
11537.35
7257.84
Capital Employed
16269.11
21189.24
24237.32
58
70
60 50
40
30 20
10
0
2006 - 07
2007 - 08
2008 - 09
Interpretation: -
Return on capital employed measures the profitability of the capital employed in the business. A high business return on capital employed indicates better and profitable use of long term funds of owners and creditors. As such a high return capital employed will always be preferred. The company has not rising trend of return on capital employed indicating not efficient use of funds of the creditors and owners by the management which isnot appreciable.
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Formula
2006 - 07
2007 - 08
2008 - 09
17.84
19.66
12.44
PTA
7564.56
8332.44
5274.00
423.82
423.82
423.82
30
25
20
15 10
5
0
2006 - 07 2007 - 08 2008 - 09
60
Interpretation: Earning per share represent earning of the company whether or not dividends are decaled. Return or income per share, whether or not distributed as dividends. In 2007 08 company gave good return on his stock holder.
Formula
2006 - 07
2007 - 08
2008 - 09
2.20
2.20
2.00
2.5
1.5
0.5
61
Interpretation : -
Higher ratio signifies that the company has utilized larger portion of its earning for payment of dividend to equity share holders. Lower ratio indicates that smaller portion of earning has been utilized for payment of dividend and large portion has been retain. Amount of dividend distributed per share. in 2007 & 2008 company paid Rs.2.20 as dividend. 2009 company paid Rs. 2 as a dividend. Comparatively less to 2007 & 2008.
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Findings
As Companys current ratio is satisfactory so it is a good balance of current assets and current liabilities.
As companys fixed assets turnover ratio is continuously decreasing it means it has under utilization of available resources. So it can expand its activity level without any additional capital investment.
Company utilized its resources efficiently having high inventory turnover ratio and operating with reduced cost.
working capital by availing credit period from suppliers. Period of working capital is satisfactory not changes in previous 3 years.
Company is not making optimum utilization of fixed assets as its fixed assets turnover ratio is continuously decreasing.
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LIMITATIONS
Limitations:
While doing the project I was unable to collect the data from primary source which restricted me in developing various outcomes from this study. Through interviews with the concerned authorities, I could have got first hand information about the company and this could have certainly given me a broader perspective on the companys future plans.
Future changes are largely unpredictable; more so when the economic and business environment is buffeted by frequent winds of change. In an environment characterized by discontinuities, the past record proves to be a poor guide to future performance.
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BIBLIOGRAPHY
Financial Management
M Y Khan/ P K Jain
Financial Management
I M Pandey
Financial Management
S M Inamdar
Management Accounting
M G Patkar
www.Flamingo ind.com
www.moneycontrol.com
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31-Dec31-Dec-09(12) 08(12) Profit / Loss A/C Net Sales (OI) Material Cost Increase Decrease Inventories Personnel Expenses Manufacturing Expenses Gross Profit Administration Selling and 6023.60 Distribution Expenses EBITDA Depreciation Depletion and 485.06 Amortisation EBIT Interest Expense 4804.54 256.24 7374.85 346.60 366.81 5289.60 7741.66 5097.36 Rs mn 62372.01 321.28 0.00 3892.35 46845.18 11313.20 Rs mn 68370.32 338.60 0.00 4029.64 51163.07 12839.02
4252.21
6753.29
324.06
6429.23 117.09
66
Other Income Pretax Income Provision for Tax Extra Ordinary and Prior
0.00 Period Items Net Net Profit Adjusted Net Profit Dividend - Preference Dividend - Equity 3546.39 3546.39 0.00 423.82
0.00
0.00
67
31-Dec09 Equity Capital Preference Capital Share Capital Reserves and Surplus Loan Funds Current Liabilities Provisions Current Liabilities and 31319.76 Provisions Total Liabilities and Stockholders Equity (BT) Tangible Assets Net Intangible Assets Net 6623.92 107.38 55557.09 423.82 0.00 423.82 23813.51 0.00 29869.33 1450.44
33215.21
29993.11
54442.98
46390.25
5349.81 108.52
3358.04 137.23
68
6731.30
5458.32
3519.30
1375.14
1059.42
7894.69
168 79
6833.47
611.24
4578.72
704.55
Inventories
7294.06
6426.53
4887.10
Accounts Receivable
28577.30
29758.87
24235.63
3482.31
6428.64
3203.03
3812.88
2753.60
Current Assets
44315.79
43480.60
38304.97
3176.86
3517.66
2802.02
55557.09
54442.98
46390.25
69