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COMPARATIVE RATIO

ANALYSIS OF TWO
COMPANIES
BBM 504
SUBMITTED TO:
AASHISH SIR

SUBMITTED BY:
SHIKHA AGARWAL
BBM 5TH SEM.
SEC B
ICG/2009/ 9334

WHAT IS RATIO ?
Ratio can be define as between
relationship between two figures
expressed
in
arithmetical
terms
called ratio.
ACCORDING TO R.N ANTHONY:
A
Ratio
is
simply
one
number
expressed in terms of another .It is
found by dividing one number into
another.

ADVANTAGES OF RATIO

Helpful
in
analysis
of
financial
statements.
Simplification of accounting data.
Helpful in comparative study.
Helpful in forecasting.
Effective control
Study of financial soundness

LIMITATIONS OF RATIO

False accounting data gives false ratio.


Comparison not possible if different
firms adopt
different accounting
policies.
Limited use of single ratio.
Lack of proper standards.
Ratio alone are not adequate for
proper conclusions.

The following income statement and balance


sheets relate to PANASONIC and VOLTAS.
Income statement
PANASONIC

VOLTAS

SALES

40,00,000

48,00,000

Less: Cost of Sales

32,00,000

37,44,000

GROSS PROFIT

8,00,000

10,56,000

Less: Operating exp.(administrative and selling exp.)

2,50,000

3,00,000

OPERATING INCOME (A)

5,50,000

7,56,000

Less: other exp.:


depreciation on plant and machinery
interest on debentures
preliminary Exp. Written off

2,20,000
75,600
4,000

2,76,000
90,000
4,000

TOTAL OTHER EXP. (B)

2,99,600

3,70,000

Net income before tax (A-B)

2,50,400

3,86,000

Less: provision for tax

36,000

56,000

NET INCOME AFTER TAX

2,14,400

3,30,000

BALANCE
SHEETS
Liabilities

Panasonic

Voltas

Equity share capital


shares of rs.10 each

15,00,000

19,20,000

Reserves & surplus

8,00,000

10,00,000

Secured loans:
9% debentures
Unsecured loans
Current liabilities &
provisions:
(a)Current liabilities
creditors
(b)provisions
Income tax provision

8,40,000

Panasonic

Voltas

Fixed assets:
land
Plant & machinery

5,00,000
19,16,000

6,00,000
18,50,000

investments

1,00,000

3,00,000

7,20,000
8,00,000
80,000

11,00,000
12,00,000
1,00,000

24,000

20,000

41,40,000

51,70,000

10,00,000

9,64,000

10,64,000

36,000

56,000

41,40,000

ASSTES

51,70,000

Current assets, loans


& advances:
(A)Current assets
Stock
Debentures
Cash and bank
(B) Loans & advances

Miscell. expenditure
Preliminary exp.

Question

You are required to prepare a project report


commenting upon the performance and
financial position of the firm on the basis of
ration analysis.

Liquidity ratios

Current ratio : current ratio / current liabilities


Panasonic: 16,00,000/ 10,00,000 = 1.6 : 1
Voltas: 24,00,000/ 11,20,000 = 2.14 : 1

Quick ratio: liquid assets / current liabilities


Panasonic: 8,80,000/ 10,00,000 = 0.88 : 1
Voltas: 13,00,000/ 11,20,000= 1.16 : 1

COMMENT: short term financial position of the


company is quite satisfactory because the current
ratio of the company is 2.14 : 1, which is more
then the ideal ratio of 2: 1. the fact is also
supported by quick ratio, which more then the
ideal ratio of 1: 1.

Solvency ratios:

Debt equity ratio : long term debts/


shareholder's fund
Panasonic: 8,40,000/ 15,00,000 + 8,00,000
24,000 = 0.37 : 1
Voltas : 10,00,000 / 19,20,000 + 11,30,000
20,000 = 0.33 : 1

Total assets to debt ratio : total assets/ long


term debts
Panasonic : 41,40,000 24,000 / 8,40,000 = 4.9
times
Voltas : 51,70,000 20,000 = 5.15 times

COMMENT:

debt equity ratio indicates


that proportion of funds provided by long
term lenders in comparison to the owners is
only .37 in the
Panasonic company . This
proportion has further come down to .33 in
Voltas company. It shows that the long term
solvency position of the companies is very
sound.
The fact is also supported by total assets to
debt ratio. It indicates that long term debts
are covered
4.9 times by assets in the
Panasonic and this margin of safety has
increased to 5.15 times in the Voltas.

Activity ratio

Fixed assets turnover ratio : net sales /


fixed assets
Panasonic :40,00,000 / 24,16,000 = 1.66
times
Voltas : 48,00,00 / 224,50,000 = 1.96
times

COMMENTS : fixed assets turnover ratio


has improved. It indicates better
utilization of fixed assets generating
sales.

Profitability ratios

Gross profit ratio : gross profit / sales * 100


Panasonic : 8,00,000/ 40,00,000 * 100 = 20 %
Voltas : 10,56,000 / 48,00,000 * 100 = 22%

Operating ratio: cost of sales + operating exp. /


sales * 100
Panasonic = 32,00,000 + 2,50,000 / 40,00,000 * 100=
86.25 %
Voltas = 37,44,000 + 3,00,000 / 48,00,000 * 100 =
84.25 %

Net profit ratio : net profit / sales * 100


Panasonic : 2,14,400 / 40,00,000 * 1oo = 5.36 %
Voltas : 3,30,000 / 48,00,000 * 100 = 6.88 %

Return on equity : net profit after tax /


shareholder s funds
Shareholders funds = equity share capital +
reserves & surplus preliminary expenses
Panasonic : 15,00,000 + 8,00, 000 24,0000 =
22,76,000
Voltas : 19,20,000 + 11,30,000 20,000 = 30,30,000
R.O.E. for Panasonic = 2,14,4000/ 22,76,000 * 100 =
9.42 %
R.O.E. for Voltas = 3,30,000 / 30,30,000 * 100 =
10.89 %

Earning per share (E.P.S.): net profit after tax /


no. of equity shares
Panasonic : 2,14,400 / 1,50,000 = 1.43 per shares
Voltas : 3,30,000 / 1,92,000 = 1.72 per shares

COMMENT: Gross profit ratio has improved by 2 %


which reflects an increase in the sales price of goods
sold without corresponding increase in the cost of
sales.
Operating ratio has also come down by 2 %. Lowering
of operating ratio has resulted in higher margin of
profit on sales.
Net profit ratio has gone up from 5.36 % to 6.88 %
which is an indication of improvement in the overall
efficiency and profitability of the firm.
Return on equity has also gone up from 9.42 % to 10.89
% which indicates that shareholders funds are being
utilized more efficiently. There are better prospects of
declaration and creation of reserves.
Earning per share has also gone up from 1.43 to 1.72
which indicates that overall profitability of the company
is improving . This ratio also indicates that market price
of these companies share is likely to go up.

Conclusion : overall profitability and


financial position of Voltas has improved in
comparison of Panasonic.

THANK
YOU