A PROJECT REPORT ON ANALYSIS OF FINANCIAL STATEMENTS
Project Report Submitted To Delhi Institute of Advanced Studies For the Partial fulfillment of the degree of MBA (2006-08)
Submitted by:
Under the Supervision of:
PALKA
Mr. Kamal Ahuja
ROLL NO.- 0551233906 MBA (A)- 3rd Sem.
DELHI INSTITUTE OF ADVANCE STUDIES GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY NEW DELHI
ACKNOWLEDGEMENT I would like to express my deep sense of gratitude to my project guide Mr. Kamal Abuja, my mentor at Indiabulls for his immerse support, help & cooperation at every step of my project. Without his support this project would not have taken in present form in reality. I would like to thank all the faculty members of Delhi Institute of Advanced Studies (DIAS) for extending time to time to help for the fulfillment of this project. Their invaluable guidance all through this project has enabled me to complete project work in systematic manner. I also want to extend my deep sense of gratitude to all the members of Accounts payable team who helped me to understand the intricacies of working of the organisation & lent full cooperation & guidance, which was necessary for successful completion of project. I thank especially my parents for giving me monumental support and inspiration during the course of this project. Last but not the least to all my friends who helped me in every possible manner during the course of my project.
Palka
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Executive Summary In any country; more so far a developing country like India; there is a great need for capital formation through saving & investments. To achieve this objective individuals as well as groups savings and investments are to be properly planned, promoted & channeled. When an individual or group saves some money and decides to invest the same in various schemes provided by the financial institutions /companies, they directly participate in economic development. On the other hand Financial Institutions/ Companies fulfills the credit needs of a large percentage of population in India. They offer consumer loans, personal loans, securities, brokerage and other financial products and services to the customers and helps to fulfill their dreams. With the rapid growth and maturation of Indian financial markets provide a unique opportunity to create a leader in diversified financial services, who is able to offer a one stop shop for all investment & credit needs of retail clients and builds a long term relationship with customers. It is believed that ultimately a hand full of big players will emerge as winners as the credits and securities business continue to grow and consolidate, and barriers to entry & scale advantages dominate the business. Technology, analytics and national scale provide unique advantage to a business model when combined with strong sales & marketing and local presence. Only a handful of financial institutions are building a national brand & serving the customer across product needs. With the power of information, technology and strong local presence Indiabulls Financial Services Ltd. group, have built as winning national scale credit and securities business.
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Indiabulls has built one of the largest customer franchises in India with almost 3,00,000 customers as of March 2006. It is leading financial services and Real estate company having presences over 414 locations in more then 124 cities.
It serves the customers with wide range of financial services and products from securities, derivatives, trading, depository services, research & advisory services, insurance, consumer secured and unsecured credit, loans against share & mortgage and housing finance. The project has been undertaken to study the financial position of the company, with a view to understand the functioning & the whole ambit of the Indiabulls Financial Services Ltd. Group including the Analysis of Financial Statements of four subsidiaries viz. Indiabulls Financial Services Limited, Indiabulls Credit Services Limited, Indiabulls Securities Limited & Indiabulls housing Finance Limited. The project has been divided into 4 chapters. First chapter deals with the theoretical aspects of the ‘Analysis of Financial statements’ including the Types of financial statements, Types of financial analysis, Steps involved in financial statement analysis, Nature & limitations of financial statements, Tools of Financial Analysis. Second Chapter explains the theoretical aspect of ‘Ratio Analysis ‘, the tool that has been used for the analysis of financial statements in the project including the Definition of ratios, Classification of ratios, explanation of ratios covered by each category, Advantages & Limitations of Ratio Analysis. Third Chapter has exclusively been devoted to Calculation, analysis & interpratation of ratios of four companies namely Indiabulls Financial Services Limited, Indiabulls Credit Services Limited, Indiabulls Securities Limited & Indiabulls housing Finance Limited for last 3 years. Chapter 4 exclusively deals with the inter-firm comparisons. The ratios of the four companies have been compared.
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PALKA
Table of Contents Acknowledgement………………………………………………. 2 Executive Summary…………………………………………….. 3-4 1. Introduction………………………………………….….6 2. Company Profile………………………………………..7-13 3. Analysis of Financial statements-An overview……... .14-22 3.1 Meaning of Financial statements.……………….……14 3.2 Different types of financial statements………….……14-16 3.3 Nature of Financial Statements………………………16-17 3.4 Limitations of financial statements…………………..17-18 3.5 Various Techniques of Financial Analysis…………...18-21 3.6 Types of Financial Analysis………………………….21-22 4. Ratio Analysis – An overview………………………….23-34 4.1 Introduction…………………………………………..23 4.2 Categories of Ratio…………………………………..23-32 4.3 Advantages of Ratio Analysis………………………. 32-33 4.4 Limitation of Ratio Analysis.………………………...33-34 5. Analysis & Interpretation of Ratios…………………..35-77 5.1 Ratio Analysis of Indiabulls Financial Services………35-43 5.2 Ratio Analysis of Indiabulls Securities Limited………43-53 5.3 Ratio Analysis of Indiabulls Credit Services Limited…53-63 5.4 Ratio Analysis of Indiabulls Housing Finance Limited.63-72 5.5 Inter-firm comparison………………………………….72-78 5
6. Bibliography ...……………………………………………79
INTRODUCTION Every country in the world tries to attain the economic development irrespective of the degree of development. The economic development is influenced by economic and non-economic factors. The economic factors include capital stocks and its role of accumulation, capital output ratio in various sectors. Of course non-economic factors include political freedom social organizations, general education etc. So among all the economic developments finance has its key importance. It helps in economic development, which is necessary for the growth of all economies. Adequate finance is absolutely necessary to lubricate industrial machines to insure its smooth working. On going discussion led us to visualize the growth & development of companies involved or engaged in providing financial services. Indiabulls Financial Services Ltd. is one of the companies actively engaged in providing financial services. The company has 8 subsidiary companies, which are engaged in various areas of financial services sector and real estate. Indiabulls has emerged as one of the leading and fastest growing in less than two years since its initial public offering in September 2004. It has a market capitalization of around US $ 800 million and consolidated net worth of around US $500 million. Indiabulls has an extra ordinary financial performance as its revenues more than tripled to Rs. 613.15 crores & it’s net profit after tax more than quadrupled to Rs.253.36 crores. The project has been undertaken in order to understand the changes in financial position of the organisation over the last three years, brief explanation of the financial services provided by the Financial Services Limited Group and real estate arm of the 6
oraganisation.. An effort has been made through this study to look into the growth story of the organisation Indiabulls Financial Services Ltd. & also through its subsidiaries over last 3 years
Company Profile Indiabulls is India’s leading Financial Services and Real Estate company having 15000 employees with presence over 414 locations in more than 124 cities. Indiabulls serves the financial needs of more than 3,00,000 customers with its wide range of financial services and products from securities, derivatives trading, depositary services, research & advisory services, insurance, consumer secured & unsecured credit, loan against shares and mortgage & housing finance. With around 5000 Relationship Managers, Indiabulls helps its clients to satisfy their customized financial goals. Indiabulls through its group companies has entered Indian Real Estate business in 2005. It is currently evaluating several large-scale projects worth several hundred million dollars. Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay Stock Exchange, Luxembourg Stock Exchange and London Stock Exchange. The market capitalization of Indiabulls is around USD 800 million, and the consolidated net worth of the company is around USD 500 million. Indiabulls and its group companies have attracted USD 300 million of equity capital in Foreign Direct Investment (FDI) since March 2000. Some of the large shareholders of Indiabulls are the largest financial institutions of the world such as Fidelity Funds, Capital International, Goldman Sachs, Merrill Lynch, Lloyd George and Farallon Capital. Indiabulls is ranked 82nd in the list of most valuable companies in India in BT500. Business of the company has grown in leaps and bounds since its inception. It hass been rated as ‘Fastest Growing Large Cap Company’ in India in a report by Business Today magazine in April, 2006 as revenue of the company grew at a CAGR of 184% from FY03 to FY06. During the same period, profits of the company grew at a CAGR of 268%. 7
Indiabulls became the first company to bring FDI in Indian Real Estate through a Joint Venture with Farallon Capital Management LLC, a respected US based investment firm. Indiabulls has demonstrated deep understanding and commitment to Indian Real Estate market by winning competitive bids for landmark properties in Mumbai and Delhi. In April 2006, Indiabulls announced demerger of its real estate division to a separate entity. Financial year 2006 was a transformational year for Indiabulls as the company executed on its vision to be a leader in diversified financial services and branch out beyond their heritage in securities business. It has launched its Housing Finance Company, Indiabulls Housing Finance Limited, strengthened the position of Indiabulls Credit Services Limited, and continued to show its leadership and momentum in Securities business. Indiabulls Retail brokerage and securities business continued to generate exceptional results. Every business metric exceeded expectations and delivered record revenues and profits in each quarter of the year. Indiabulls client acquisition strategy has been bearing fruit as it ramped up its monthly consumer adds from few thousands to over 25000 per month by the end of the fiscal year, providing fastest growing & most valuable customer franchise in India. Indiabulls consumer credit and housing loan products have been well established in the market place and are now offered out over 165 locations. It has strong credit sales team in place across the country and its sales volume and credit performance has been ahead of business expectations. Indiabulls entered into real estate development through its associate companies 2005 to exploit the huge opportunity in an unconsolidated industry with fat margins and huge market opportunities, where they can bring its strong execution skills and create a national leader. Indiabulls partnered with strong international investors to acquire projects in Delhi and Mumbai and have seen significant appreciation in the value of holdings. Company kicked off strategic diversification by foraying onto booming real estate sector by: 8
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Winning bids for Jupiter and Elphinstone mills in Mumbai as part of the NTC Mills auction
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Forming joint venture with DLF Universal to acquire 35.8 acres of prime land in south Delhi by putting in the highest bid of 450 crore in the auction carried out by Delhi Development Authority
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Acquiring over 150 acres of land in Sonepat in national Capital Region ( NCR) to develop prime residential housing complex Milestones of Indiabulls 2000-01
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Indiabulls Financial Services Ltd. established India’s one of the first trading platforms with
2001-03
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the development of an in house team Indiabulls expands its service offerings to include Equity, F&O, Wholesale Debt, Mutual fund, IPO distribution and Equity Research.
2003-04
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Indiabulls ventured into Insurance distribution and commodities trading.
2004-05
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Company focused on brand building and
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franchise model. Indiabulls came out with its initial public offer (IPO) in September 2004.
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Indiabulls started its consumer finance business.
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Indiabulls entered the Indian Real Estate market and became the first company to bring FDI in Indian Real Estate.
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Indiabulls won bids for landmark properties in Mumbai
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2005-06
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Indiabulls has acquired over 115 acres of land in Sonepat for residential home site development.
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Merrill Lynch and Goldman sac, one of the renowned investment banks in the world have increased their shareholding in Indiabulls.
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Indiabulls is a market leader in securities brokerage industry, With around 31% share in online trading,
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Farallon Capital and its affiliates, the world’s largest hedge fund committed Rs. 2000 million for Indiabulls subsidiaries Viz. Indiabulls Credit Services Ltd. and Indiabulls Housing Finance Ltd.
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Steel Tycoon Mr. LN Mittal promoted LNM India Internet venture Ltd. acquired 8.2% stake in Indiabulls Credit Services Ltd.
2006-07
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Indiabulls entered in a 50/50 joint venture with DLF, Kenneth Builders & Developers (KBD). KBD has acquired 35.8 acres of land from Delhi Development Authority through a competitive bidding process for Rs 450 crore to develop residential apartments.
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Indiabulls Financial Services Ltd. is included in the
prestigious
Morgan
Stanley
Capital
International Index (MSCI). •
Farallon Capital has agreed to invest Rs. 6,440 million in Indiabulls Financial Services Ltd.
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Indiabulls
ventured
into
commodity
brokerage business. •
Indiabulls
has 10
received
an
“in
principle
approval” from Government of India for development of multi product SEZ in the state of Maharashtra. •
Dev Property Development plc., has subscribed to new shares and has also acquired a minority shareholding from the Company.
Indiabulls Financial Services Ltd. Board resolves to Amalgamate Indiabulls Credit Services Limited and demerge Indiabulls Securities Limited. CORPORATE STRUCTURE
INDIABULLS
Financial Services Group-1
Indiabu lls Securiti es Ltd.
Indiabu lls Credit Service s
100%
Limited 53.02%
Indiabu lls Housin g Finance Ltd. 66.66%
Real Estate Group
Indiabu lls Finance Compa ny Private Ltd. 57.50%
Indiabu lls Estate Ltd. 40%
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Indiabu lls Properti es Pvt. Ltd. 40%
Indiabu lls Real Estate Compa ny Private Ltd. 40%
Indiabu lls Infrastr ucture Limited 40%
PRODUCT PORTFOLIO Financial Services Group 1. Indiabulls Securities Limted(ISBL): It is India’s largest retail brokerage and securities related company with a client base of over 2,36,000 customers & the market share of 6.73% in calendar 2005 on the cash segment of NSE. ISBL provides various types of brokerage accounts & services related to purchase and sale of securities such as equity, debt, and derivatives listed on BSE & NSE. 2. Indiabulls Credit Services Ltd. (IBCSL): It provides secured and unsecured consumer loans to the individuals in the middle-income sector of Indian consumer credit market. It operates many credit products including direct consumer loans, loans for two wheelers and cars, loans for commercial trucks, loan against property and home equity products. 3. Indiabulls Housing Finance Limited (IBHFL): It provides housing loans to middle income segment under the national housing bank guidelines. The company is focused on middle income segment and finances both primary purchase of property & refinancing of existing propertied to provide access to liquidity and credit to its customers base. 4. Indiabulls Finance Company Private Limited (IBFCPL): It provides financing loans to retail customers. Real Estate Group: 1. Indiabulls Estate Ltd.: The real estate sector has been extremely fragmented with local developers dominating the market. In March 2005 govt. opened real estate sector to FDI. Indiabulls has positioned its real estates business to benefit the national scale players who have the relationships with financers and large corporate customers on one hand and have deep local market knowledge. 7 expertise to execute the projects in time and under the budget on the other hand.Company has three major projects under development. 12
2. Indiabulls Properties Private Ltd. (IBPPL): This Company has acquired successfully 11-acre site of Jupiter Mills auctioned by NTC in Mumbai. It is currently developing a world class IT office complex at the acquired place. 3. Indiabulls Real Estate Company Private Ltd. (IBRECPL): This company successfully acquired 8 acres site of Elphinstone Mills auctioned by NTC in Mumbai and currently developing a world class IT office complex on the site with an expected lea sable square footage of around 1.5 million square feet.
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Chapter 3 Analysis of Financial statements-An overview 3.1 MEANING OF FINANCIAL STATEMENTS According to Himpton John, “ A financial statement is an organized collection of data according to logical & consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment of time as in the case of balance sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement”. On the basis of the information provided in the financial statements, management makes review of the progress of the company and decides the future course of action. The term financial statements refers to two basic statements: (i)
The income statement and (ii) the Balance Sheet. Of course, a business
may also prepare (iii) Statement of Retained earnings, and (iv) a statement of change in financial Position. 3.2 DIFFERENT TYPES OF FINANCIAL STATEMENTS 3.2.1 Income Statement: The income statement or profit & loss account is considered as a very useful statement of all financial statements. It depicts the expanses incurred on production, sales and distribution and sales revenue and the net profit or loss for particular period. It shows whether the operations of the firm resulted in profit or loss at the end of a particular period. 3.2.2 Balance Sheet: Accounting Standards Board, India has defined balance sheets as, “ a statement of financial position of an enterprise as at a given date which exhibits its assets, liabilities, capital reserves and other account balances at their respective book values”. Balance sheet is a statement, which shows the financial position of a business as on a particular date. It represents the assets owned by the business and the claims of the owners and creditors against the assets in the form of liabilities as on the date of statement. According to Harry G. Guthmann, “ the balance sheets might be described as financial cross section taken at certain 14
intervals and earning statements as condensed history of the growth and decay between the cross sections”. 3.2.3 Statement of Retained Earnings: The statement of retained earnings is also called profit & loss appropriation account. It is a link between income statement & balance sheet. Retained earnings are the accumulated excess of earnings over losses and dividends. The balance shown by the income statements is transferred to the balance sheet through this statement after making the necessary appropriations. 3.2.4 Fund Flow Statement: According to Anthony,” The funds Flow Statement described the sources from which the additional funds were derived and the use to which these funds were put”. Funds flow statements help the financial analyst in having amore detailed analysis and understanding the changes in the distribution of resources between two balance sheet periods. The statement reveals the sources of funds and their application for different purposes. 3.2.5 Cash Flow Statements: A cash flow statement depicts the changes in cash position from one period to another. It shows the inflow and outflow of cash and helps the management in making plans for immediate future. An estimated cash flow statement enables the management to ascertain the availability of cash to meet business obligations. This statement is useful for short term planning by management. 3.2.6 Schedules & Note to Financial Statements: Schedules are the statements, which explains the items given in the income statement and balance sheet. Schedules are a part of financial statement, which give detailed information about the financial position of a business organisation. Certain notes are often used to supplement the information comprised in basic financial statements. These are virtually a part of financial statements. 3.2.7 Annual Reports / Corporate reports: Apart from the financial statements annual report contains other relevant information such as Management discussion & 15
analysis, Reports on corporate Governance, Director’s report, details of the subsidiary companies. These reports play as important role as financial statements of the company in understanding of the complete financial position. 3.3 NATURE OF FINANCIAL STATEMENTS According to the American Institute of Certified Public Accountants, financial statements reflect “ a combination of recorded facts, accounting conventions and personal judgments and conventions applied affect them materially”. It means that data presented in financial statements is affected by recorded facts, accounting concepts & conventions and personal judgments. a) Recorded facts: The term-recorded facts refer to the figures, which are shown in the book of accounts. The figures, which are not recorded in the books, are not depicted in financial statements, no matter how important or unimportant those facts are. b) Accounting policies, Assumptions, concepts & conventions: Accounting policies encompasses the principles, bases, conventions, rules and procedures adopted by in preparing and presenting financial statements. Accounting policies of the organisation are consistently followed over along period of time and are reported as schedule to financial statements or as notes to financial statements in the annual report. As per accounting standards Board, India, fundamental accounting assumptions mean “ basic accounting assumptions which underline the preparation & presentation of financial statements. Usually, they are not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed”. Some fundamental accounting assumptions are Going concern concept, consistency, accrual etc. Accounting concepts are basic framework on the basis of which accounting work is carried out. Some accounting concepts are Business entity concept, Money measurement concept, going concern concept, cost concept, matching concept, Dual aspect concept etc. 16
Accounting conventions are the principles, which enjoy the sanctity of application on account of long usage, are termed as accounting conventions. E.g. consistency, conservatism, materiality, full disclosure. c) Personal Judgments: Personal judgments of the accountant are of importance despite of properly laid down concepts, conventions, policies and assumptions. The judgment needs to be exercised in proper classification of assets, classification of expenditure into capital & revenue, creation of provisions and reserves. 3.4 LIMITATIONS OF FINANCIAL STATEMENTS i)
Financial statements disclose only monetary facts. There are certain assets and liabilities, which are not disclosed in the balance sheets. For example the most tangible assets of the company is its management force and its dissatisfied labor force is its liability which are not disclosed in the balance sheet.
ii) The financial statements are generally prepared with from the point of view of shareholders and their use is limited in the decision making by the management, investors and creditors. iii) An investor likes to analyze the present and future prospects of the business while the balance sheet show the past position. As such the use of balance sheet is limited. iv) Even the audited financial statement does not provide complete accuracy. v) The net income is the result of personal judgment and bias of accountants cannot be removed in the matters of depreciation and stock valuation. . vi) Profit arrived at by profit & loss account is interim in nature. Actual profits can be ascertained only after the firm achieves the maximum capacity. vii) The profit & loss account does not disclose the factors like quality of product and efficiency of management.
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viii) The accounting year may be fixed to show a favorable picture of business. In case of sugar industry a balance sheet prepared in off-season depicts a better liquidity than in the crushing season. 3.5 VARIOUS TECHNIQUES OF FINANCIAL ANALYSIS 3.5.1
Comparative Financial Statements: Comparative financial statements are statements of financial position of a business designed to provide time perspective to the to the consideration of various elements of financial position embodied in such statements. Comparative statements reveal the following: (i) Absolute data (Money value or rupee amounts) (ii) Increase or reduction in absolute data (in terms of money values) (iii) Increase or reduction in absolute data (in terms of percentage) (iv) Comparison (in terms of ratios) (v) Percentage of totals Comparative balance sheets, comparative income statements and comparative statements of changes in financial position can be prepared. American Institute of Certified Public accountants have explained the utility of preparing the comparative statements, thus:
“ The presentation of comparative statements is annual and other reports enhance the usefulness of such reports and brings out more clearly the nature and trend of current changes affecting the enterprise. Such presentation emphasis the fact that statements for a series of period are far more significant that those of a single period and that the accounts of one period are but an installment of what is essentially a continuous history. In any one year, it is ordinarily desired that the balance sheet, the Income statement and the surplus statement be given for one or more preceding years as well as for the current years”. 3.5.2
Common size Statements: The figures shown in financial statements viz. Profit & loss account and balance sheet are converted to percentages so as to establish each element to the total figure of the statement and theses statement are called common size statements. These statements are useful in analysis of the performance of the company by analyzing each individual element to the 18
total figure of the statement. Theses statements will also assist in analyzing the performance over years and also with the figures of the competitive firm in the industry for making analysis of relative efficiency. 3.5.3
Trend Analysis: In trend analysis ratios different items are calculated for various periods for comparison purposes. Trend analysis can be done by trend percentages, trend ratios and graphic and diagrammatic representation. The trend analysis is a simple technique and does not involve tedious calculations. However, comparisons would be meaningful only when accounting policies are uniform and price level changes do not present a distorted picture of phenomenon. The trend analysis conveys a better understanding of management’s philosophies, policies and motivations, which have bought about the changes revealed over the years. Thus method is a useful analytical device for the management since by substitution of percentages for large amounts, the brevity and readability are achieved. However trend percentages are not calculated only for major items since the purpose is to highlight important changes.
3.5.4 Fund flow analysis: Fund Flow Statement: Fund flow analysis reveals the changes in working capital position. Working capital is of paramount importance in any business so this kind of a analysis proves to be very useful. According to Anthony,” The funds Flow Statement described the sources from which the additional funds were derived and the use to which these funds were put”. Funds flow statements help the financial analyst in having amore detailed analysis and understanding the changes in the distribution of resources between two balance sheet periods. The statement reveals the sources of funds and their application for different purposes. Fund flow analysis has become an important tool for any financial analyst; credit granting institutions and financial managers.
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3.5.5 Cash Flow Analysis: A cash flow statement depicts the changes in cash position from one period to another. It shows the inflow and outflow of cash and helps the management in making plans for immediate future. An estimated cash flow statement enables the management to ascertain the availability of cash to meet business obligations. This statement is useful for short term planning by management. 3.5.6 Ratio Analysis: Ratio analysis is very important analytical tool to measure performance of an organisation .The ratio analysis concentrates on the interrelationship among the figures appearing in the financial statements. The ratio analysis helps the management to analyze the past performance of the firm and to make further projections. Ratio analysis allows interested parties like shareholders, investors, creditors, government and analysts to make an evaluation of certain aspects of firm’s performance. It is a process of comparison of one figure against another, which make a ratio, and the appraisal of the ratios to make proper analysis about the strength and weakness of firm’s operations. This tool of financial has been discussed in detail in next chapter. 3.5.7 Value Added Analysis: ‘Value Added’ is a basic and important measurement to judge the performance of an enterprise. It indicates the net value or wealth created by the manufacturer during a specified period. No enterprise can survive or grow if it fails to generate wealth. An enterprise can survive without making profits but cannot survive without adding value. ‘Value added’ is described as “ the wealth created by the reporting entity by its own and its employees’ efforts and comprises salary, wages, fringe benefits, interest, dividend, tax, depreciation and net profit (Retained). Value added is the increase in the market value brought by an alteration in the form, location or availability of a product or service excluding the cost of bought in material or services used in that product or service. To carry out the Value added analysis, a typical statement of added value is prepared as routine
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part of management information system. The value added statement is basically rearrangement of information given in income statement. 3.6 Types of Financial Analysis (i) On the basis of Material Used: The analysis can be of following types: (a) Internal Analysis: It indicates the analysis carried out by those parties who have the access to the book and records of the company. Naturally, it indicates basically the analysis carried out by management of the company to enable the decision making process. This may also indicate the analysis carried out in legal or statutory matters where the parties which are not a part of management of the company may have the access to the books and records of the company. (b) External Analysis: It indicates the analysis carried out by those parties who do not have the access the books an\d records of the company. This may involve the analysis carried out by creditors, prospective investors, and other outsiders. Naturally, those outsiders are required to depend upon the published financial statements. As such, the depth & correctness of the external analysis is restricted, though some of the recent amendments of the statutes like Companies Act, 1956 have made it mandatory for the companies to reveal maximum information relating to the operations & financial position, in order to facilitate the correct & proper analysis & interpretation of the Financial statements by the readers. (ii) On the basis of Modus Operandi: The analysis can be of following types: (a) Horizontal Analysis: The horizontal analysis consists of the study of the behavior of each of the item in the financial statement- that is, its increase & decrease with the passage if time. It is also known as dynamic type of analysis since it shows the changes, which have taken palace. The comparison of the items is made across the year, , the eyes look at the comparative analysis is at the horizontal level , hence the analysis id termed as horizontal analysis. 21
(b) Vertical Analysis:
In vertical analysis a study is made of the
quantitative relationship between he various items in the financial statements on a particular date. It’s a static type of analysis or study of position. Such an analysis is useful in comparing the performance of several companies in the same group or divisions or department in the same company. Since this analysis depends on the data for one period, this is not very conducive to a proper analysis of the company’s financial position. It is also called ‘ Static’ analysis as it is frequently used for referring to ratio developed on the date or for one accounting period. Analysis can be done both horizontally and vertically. As a matter of fact one type of analysis is incomplete in itself. Both are complementary to each other. Both these analysis form the backbone of the technique of financial statement analysis.
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Chapter 4 Ratio Analysis – An overview 4.1 DEFINITION The term ratio implies arithmetical relationship between two related figures. The technique of ‘Ratio Analysis’ as technique for interpretation of financial statements deals with the computation of various ratios, by grouping or regrouping the various figures and/or information appearing on the financial statements (either profitability statements or balance sheet or both) with the intention to draw the fruitful conclusion thereform. Ratios, depending on the nature of ratio, may be expressed in either of the following ways: (a) Percentage for example, Net Profit as 10% of Sales (b) Fractions for example, retained earnings as 1/3 rd of share capital (c) Stated comparison between numbers for example, Current assets as twice the current liabilities. The ratio can be defined as the qualitative or mathematical relationship that persists between two similar variables. In other words it is the precise relationship between two comparative variables in terms of quantitative figures (either in percentage or proportion). Comparative variable should have the same unit of measurement. This technique is based on the premise that a single accounting figure by itself does not communicate any meaningful information but expressed as a relative to some other figure. It may definitely give some significant information. 4.2 CLASSIFICATION OF RATIOS Ratios are classified into different categories depending upon the basis of classification. 1. Structural Classification/ Traditional Classification: The classification on the basis of items in the financial statements to which the determinant of a ratio belongs is known as structural classification. The ratios are classified as: (a) Balance Sheet ratio: The ratio which are calculated by using the figures given in the balance sheet only are known as balance sheet ratios. 23
(b) Income Statement Ratio: The ratio, which are computed by using the figures in the income statements i.e. profit & loss account only are called income statement ratios. (c) Inter-statement Ratio: The ratios which are computed by using the figures given in balance sheet as well as income statement both at a time are regarded as inter-statement or composite ratios. The above classification can be put as under also: (a) Financial ratios: Ratios which are derived from comparisons of balance sheet items, or of balance \sheet items with profit & loss items are known as financial ratios. (b) Operating ratios: Ratios, which are derived from comparisons of items of income & expanse, are termed as operating ratios. 2. Functional Classification: The classification according to the purpose of computing the ratio is known as functional classification. On this basis, the ratio may be classified in the following categories: (a) Profitability Ratio: Ratio, which measures the profitability of a business, is termed as profitability ratio. These highlight the significance of end results of business activities. The main objective is to judge the efficiency of the business. (b) Turnover or Activity ratio: It is used to measure the effectiveness of the use of capital/ assetsRATIOS are termed as turnover or activity ratio. (c) Solvency ratio: The ratio which test the financial position / status of an enterprise are called solvency ratio. They can be further subdivided into two parts: --Short term Solvency Ratio --Long term Solvency Ratio Profitability Turnover Ratios Ratios
1.Operating Ratio 2. Net Profit Ratio 3. ROI (Return on Investment)
1.Fixed Asset Turnover Ratio 2. Current Assets Ratio 3. Working 24 TurnCapital over Ratio 4. Capital Turnover Ratio
Solvency Ratios
1.Debt- Equity Ratio 2. Proprietary Ratio 3. Current Ratio
Functional Classification of Ratios I
Profitability Ratios: The purpose of study & analysis of profitability ratio are to help assess the
adequacy of profits earned by the company & also to discover whether profitability is increasing or decreasing. The profitability of the firm is the net result of a large number of policies & decisions. The profitability ratios show the combined effects of liquidity, asset management & debt management on operating results. Profitability ratio are measured with reference to sale, capital employed, total assets employed, shareholders fund etc. The major profitability ratios are following:
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(a) Operating Ratio: The ratio of all operating expanses (i.e. material used, labor, factory overheads, administration & selling expanses) to sales is the operating ratio. A comparison of the operating ratio would indicate whether the cost content is high or low in the figure of sales. If an annual comparison show that the sales has increased the management would be naturally interested & concerned to know as to which element of the cost has gone up. It is not necessary that the management should be concerned only when the operating ratio goes up. If the operating ratio has fallen, through the unit selling price has remained the same. Still the position needs analysis, as it may be the some total of efficiency in certain departments & in efficiency in others. A dynamic management should be interested in making a complete analysis. Significance: The ratio is the test of operational efficiency with which the business being carried. The operating ratio should be low enough to leave a portion of sales to give affair return to investors. A comparison of operating ratio will indicate whether the cost component is high or low in the figure of sales. In case the comparison shows that there is increase in this ratio, the reason for such increase should be found out & management be advised to check the increase. (b) Net Profit ratio: Net profit ratio relates net profit to net sales. Net profit is “the excess of revenue over expanses during a particular accounting period”. It is the net result of the working of a company during a period. The ratio may be computed on the basis of net profit after tax or before tax or both. Net Profit Ratio = Net Profit x 100 Net Sales This ratio could be compared with that of the previous years and with that of competitors to determine the trend in Net profit Margins of the company & its performance in the industry. This measure will depict the correct trend of performance where there are erratic fluctuations in the tax provisions from year to year. It is to be observed that majority of the cost debited to the profit & loss account are fixed in nature & many increase in sales will cause the cost per unit to
26
decline because of the spread of same fixed cost over the increased number of units sold. Significance: This ratio help in determining the efficiency with which affairs of the business are being managed. An increase in the ratio over the previous period indicates the improvement in the operational efficiency of the business provided the gross profit ratio is constant. The ratio is thus an effective measure to check the probability of business. ( c) ROI (Return on Investment): The main objective of a business enterprise is to earn a return on capital employed. The rate of return on investment is determined by dividing net profit or income by the capital employed or investment made to achieve the profit. Capital employed includes all the long-term funds in the balance sheet that is shareholders’ funds plus long-term loans plus miscellaneous long-term funds. The ROI is calculated as: ROI = Net profit before Interest & taxes Capital Employed Return on investment analysis provides a strong incentive for optimal utilization of the assets of the company. This encourages managers to obtain assets that will provide a satisfactory return on investment and to dispose of assets that are not providing an acceptable return. Thus ROI provides a suitable measure for assessment of profitability of each proposal. Significance: The return on Capital Employed invested is a concept that measures the profit, which a firm earns on investing a unit of capital. ‘Yield on capital’ is another term employed to present the same concept. It is advised to ascertain it periodically. The profit being the net result of all the operations, the return on capital expresses all efficiencies or inefficiencies of the business collectively and thus is a dependable basis for judging its overall efficiency or inefficiency. The business can survive only when the return on capital employed is more than the cost of capital employed in the business.
27
II. Turnover Ratios: Turnover ratios are used to measure the effectiveness of the employment of resources are termed as activity ratios. Since they relate to the use of assets for generation of income through turnover, they are known as turnover ratios. How many times the assets turnover during business operations – is to be measured by these ratios. The greater the rotation of assets to generate sales, the better it is for the business. The business would be more profitable if greater turnover is achieved with lesser use of funds. Hence it is an indirect measure of profitability. More efficient the operations of an undertaking, the quicker and more number of times the rotation is. The rate of rotation of capital employed is a significant contributor of to the profitability of an enterprise. (a) Fixed Assets Turnover Ratio: This measures the company’s ability to generate sales revenue in relation to fixed asset investment. In other words it indicates the extent to which the investment in fixed assets contribute towards sales. A low asset turnover may be remedied by increasing sales or by disposing of certain assets or both. This is a difficult set of ratios to interpret as asset values are based on historic cost. An increase in the fixed asset figure may result from the replacement of an asset at an increased price. Or the purchase of an additional asset intended to increase production capacity. The later transaction might be expected to result in increased sales whereas the former would more probably be reflected in reduced operating cost. It is calculated as: Fixed Assets Turnover = Net Sales Fixed Assets Significance: A high fixed asset turnover ratio indicates the capability of the organisation to achieve maximum sales with minimum investment in fixed assets. It in indicates that the fixed assets are turned over in the form of sales more number of times. So higher the fixed asset turnover ratio better will be the situation.
28
(b) Current Asset Turnover Ratio: The way fixed asset turnover ratio is calculated, similarly Current Assets turnover Ratio is computed, since the total assets can be divided into two major parts- fixed assets & current assets. Current assets are composed of broadly Receivables (Debtors + B/R), stock and cash. The turnover of even these three can be calculated separately to analyze which part of the working capital or current assets is efficiently put to operations and which part not. Net sales includes sales after returns, if any, both cash as well as credit. Current asset ratio is calculated as: Current asset Turnover Ratio = Net Sales Current Assets Significance: A high current Asset turnover ratio indicates the capability of the organization to achieve minimum sales with the minimum investment in current assets. It indicates that the current assets are turned over in the form of sales more number of times. As such higher the current asset turnover ratio better will be the situation. (c) Working Capital Turnover Ratio: Working Capital turnover ratio indicates the extent of working capital turned over in achieving sales of the firm. It tells the management of the oraganisation that to what extent the working capital funds have been fruitfully employed in the business towards sales. The decline in the number of times of working capital turnover means that either the working capital is in excess of the requirements or there have been operational inefficiencies. It is calculated as: Working Capital Turnover Ratio = Net Sales Working Capital Significance: A high working capital turnover ratio indicates the capability of the organisation to achieve maximum sales with the minimum investment in working
29
capital. It indicates that working capital is turned over in the form of sales more number of times. As such, higher the ratio, better will be the situation. (d) Capital Turnover Ratio: Capital turnover ratio indicates, efficiency in utilization of capital employed in generating revenue. This ratio indicates the efficiency with which the capital employed is being utilized. It is calculated as: Capital turnover Ratio = Sales Capital Employed
Significance: As this ratio the management of the organisation about the efficiency or inefficiency in the utilization of capital, a high capital turnover indicates the capacity of the organisation to achieve maximum sales with minimum amount of capital employed. It indicates that the capital employed is turned over in the form of sales more number of times. As such higher the capital turnover ratio, better will be the situation. III. Solvency Ratio: (i) Long term Solvency Ratios: The long-term financial stability of the firm may be considered dependent upon its ability to meet all its liabilities, including those not currently payable. The ratios which are important in measuring the long term solvency are: (a) Debt Equity Ratio: The debt-equity ratio is determined to ascertain the soundness of the long-term financial policies of the company. It is also known as “External-Internal” Equity ratio. The ratio indicates the pattern of financing of the business. The ratio can be computed by putting longterm debt in relation to shareholder’s fund. A proper proportion must be maintained between proprietors’ (owners’) funds and long-term loans. It is calculated as follows: Debt- Equity Ratio = External Equity Internal Equity 30
The ratio may be 2:1. It implies that outside long-term loans may be twice the shareholder’s fund. If the ratio is more than two, the business would become risky. The ideal ratio may be 0.67. However, if the business is flourishing and there is high profitability ever after repayment of interest and liquidity position is not adversely affected by repayment of interest & principal sum, it is definitely advisable to have greater debt-equity ratio. Significance: Debt-Equity ratio indicates the stake of shareholders or owners in the oraganisation vis-à-vis that of the creditors. It indicates the cushion available to the creditors on liquidation of the organizations. A high debtequity ratio may indicate that the financial stake of the creditors is more than that of the owners. A very high debt-equity ratio may make the proposition of investment in the oraganisation very risky one. On the other hand, a very low debt-equity ratio may mean that the borrowing capacity of the organisation is being underutilized. (b) Proprietary Ratio: Proprietary ratio indicates the relationship between the owners’ fund and total assets. It is a slight variant of the debt-equity ratio. The general financial strength or the weakness of the concern is reflected by this ratio as this ration as it shows the proportion of proprietor’s fund invested in assets employed in the business. The ratio can be calculated as: Proprietary Ratio = Owners’ Fund Total Assets
Significance: The ratio indicates the extent to which the owners’ funds are sunk in different kinds of assets. The high ratio is indicative of the sound financial status of the company and the creditors are relatively at a comfortable position. Financing of assets to the extent of more than 50% through the use of outside funds may be dangerous for the enterprise.
31
(ii) Short term Solvency Ratios (a) Current Ratio: Current ratio measures the solvency of the company in the short term. Current assets are those assets, which can be converted into cash with in one year. Current Liabilities and provisions are those liabilities that are payable within a year. A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing working capital finance. A very high current ratio will have adverse impact on the profitability of the organisation. A high current ratio may be due to the piling up of inventory, inefficiency in collection of debtors, high balances in cash and bank accounts without proper investment. It can be calculated as: Current Ratio = Current Assets, Loans & Advances Current Liabilities & Provisions
Significance: It indicates the backing available to current liabilities in the form of current assets. In other words, a higher current ratio indicates that there are sufficient assets available with the organisation, which can be converted into cash, without any reduction in value, in a short span of time, i.e. current assets, to pay off the liabilities, which are to be paid off in the short span of time, i.e. current liabilities. As such higher the current ratio , better will be the situation. 4.3 ADVANTAGES OF RATIO ANALYSIS ‘Ratio Analysis is to a business what a score board is to a game’. The ratios are useful in the following ways: (i) Assessment of Financial health & operational efficiency: Ratios reveal useful trends for assessment of financial strength and operational efficiency of an enterprise. (ii) Facilitates inter-firm Comparison: For inter-firm comparison, ratio analysis is of immense importance. Suitable relationships can be established between
32
various relevant factors in a concern and these can be compared with the same in other units in the industry or average for the industry as a whole. (iii)Intra firm comparison possible: The performance of different divisions of the enterprise can also be compared suitably with the help of ratio analysis. The departmental efficiency can be judged and appropriate decisions taken in several directions. (iv) Planning & Forecasting: Ratios not only perform post mortem operations, but also serve as barometers for future. Ratios have predatory value and they are very helpful in forecasting and planning the business activities for a future period. The ratio analysis is one of the most popular techniques employed to diagnose the financial edifice and flow of funds of a firm. The ratios are used to locate symptoms of problems. 4.4 LIMITATIONS OF RATIO ANALYSIS It is said “ ratios like statistics have an air of precision and finality about them which at times may be misleading.” Ratios can at times be quite deceptive since they are precise in numbers mathematically. Therefore, the limitations of ratio analysis must be kept in mind, which are as under: (i) Only Indicators: Ratios are simply indicators, too much reliance should not be put on figures. Ratios are at best only symptoms and there is always a need to investigate the facts revealed by them further, since the malady may be deep seated. (iii) Dependence of financial statements: The base of ratio analysis is financial statement. Whatever limitations financial statements have, those automatically apply to ratio analysis too. There may be differing accounting policies pursued in different years or different firms. Comparisons, horizontal or vertical, will become vicious, in case, say, valuation of inventories or charge of depreciation is on different basis. Careful examination of the statements disclosing accounting policies, if any, is necessary. Suitable adjustments should be made in the financial statements before attempting ratio analysis. (iv) No precise terminology: Accounting ratios and terms used to calculate such ratios have no standard and precise definitions as yet. For example, net profit 33
ratio is calculated on the basis of operating profit by one and net profit before tax by the other and the net profit after tax by the third. (v)
Effect of inflation: Comparisons become meaningless since, on account of change in the level of prices, the values shown in the financial statements loose their significance. Adjustment in the values is required before undertaking ratio analysis.
(vi) Accuracy of accounts: If the accounts have not been correctly prepared, the ratio cannot be correctly computed.
Ratios are only as accurate as the
accounts on the basis of which these are established. The effect of window dressing should be eliminated after proper adjustments in case the ratio analysis is to serve any useful purpose. (vii) Cause-and-Effect Relation missing: The relationship of cause & effect is necessary to be established before relating two variables. If ratios of not significantly related figures are calculated, these will give misleading results. The exact cause & the exact effect should also be very clear at the outset. (viii) Correct Interpretation: Ratio computation leads us nowhere; accept to some summarized figures only after studying the realities behind the financial statements, the ratio can be correctly interpreted. (ix) No suitable standards: Suitable standards for comparison are missing. In the absence of a single standard, it becomes very difficult to apply the technique to serve any effective purpose.
Chapter 5 Analysis & Interpretation of Ratios 34
5.1 RATIO
ANALYSIS
&
INTERPRETATION
OF
INDIABULLS
FINANCIAL SERVICES LIMITED I. Profitability Ratios (i) Operating Ratio (ii) Net Profit Ratio (ii) ROI (Return on investment) Operating Ratio Formula: Operating Costs X 100 Net Sales Calculation: For 2004-05 43,384,674 = 0.0836 518,906,568 For 2005-06
382,572,697 = 0.1858 2,058,627,680
For 2006-07
584,297,562 = 0.1659 3,521,811,800 Operating Profit
Ratios
0.2 0.15 0.1
0.1659
0.1858 0.0836
0.05 0 2005
2006
2007
Years Interpretation: From the above bar graph, it can be concluded that the operating ratio of the company has increased to a great extent in the year 2006 & 2007 as compared to 2005. From the figures it can be interpreted that the company’s operating expanses has gone up considerably in the year 2005-06, which can be because of business 35
expansion spree. Increase in the operating expanses in 2005-06 was 781.8% while increase in the sales was mere 296.72%. The operating expanses increased to 52.72% in 2006-07 while sales increased to a higher proportion of 71%, indicating a better operational efficiency achieved in 2006-07. (i)
Net Profit Ratio Formula = Net Profit after tax x100 Net sales
Calculation: For year 2004-05
236,057,575 = 0.4549 518,906,568
For 2005-06
742,569,096 = 0.3607 2,058,627,680
For 2006-07
1,531,031,869 = 0.4347 3,521,811,800
Net Profit Ratio 0.5
0.4549
Ratio
0.4
0.3607
0.4347
0.3 0.2 0.1 0 2005
2006
Years
2007
Interpretation: From the bar graph showing the Net profit ratio, it can be very well concluded that the net profit ratio is showing almost same trend as operating cost ratio. The figure for net profit has obviously gone up by 214.57 % in the year 2005-06 but it was not proportionate to increase in sales that were approx. 296.72%, resulting in a decrease in Net profit ratio. This decrease can again be apportioned to increase 36
operating costs in the same year. While situation has been improved to in the year 2006-07 as an increase of 71 % in sales has bought about 106.18 % increase in Net profits making the picture better. But Net profit ratio for the year 2006-07 has not yet crossed the 2004-05 mark. But if the trend continues, 2007-08 will see an improving figure. (ii) Returns on Capital Employed: Formula = Net profit before Interest & Taxes Total Capital Employed Capital Employed = Share capital + Reserves and surplus + Long term liabilities (Non-Business Assets +Fictitious Assets) Calculation: For 2004-05 = 479,915,565 = 0.0586 8,177,880,088 For 2005-06 = 1,730,199,899 = 0.085 20,242,008,142 For 2006-07 = 2,940,626,689 = 0.1408 R.O.C.
Ratios
0.15 0.1
0.1408
0.0850 0.0586
0.05 0 2005
2006 Years
2007
20,873,998,850
Interpretation: From the figure shown above, the increasing trend of Return on capital employed in clearly visible, which is obviously a good sign. In the year 200506, 149.74 % increase in capital employed bought about 260.52 % increase in net 37
profit. While in year 2006-07 a mere 3.09% increase in capital employed bought 69.95 % increase in Net profit. It shows better fund management by the company & overall increase in the efficiency of the business. It shows that borrowing policy of the company was wise & economic and capital has been employed fruitfully. II. Turnover Ratios (i) Fixed Assets Ratio (ii) Current Assets Ratio (iii) Working Capital Turnover Ratio. (iv) Capital Turnover ratio (i) Fixed Assets Ratio: Formula = Net Sales Fixed Assets (net) Calculation: For 2004-05 = 518906568 1,138,680
= 455.708 times
For 2005-06 = 2,058,627,680 = 12.862 times 160,052,625 For 2006-07 = 3,521,811,800 = 18.750 times 187,828,422 Fixed asset turnover ratio 500 455.708
Ratios
400 300 200 100
12.862
18.75
2006
2007
0 2005
Years
38
Interpretation: A high fixed asset turnover ratio indicates the capability of the organisation to achieve maximum sales with minimum investment in fixed assets and vice-versa. A high fixed asset turnover in year 2004-05 shows better utilization of fixed assets. But in year 2006-07, 13.956 % increase in fixed assets could bring about an increase of mere 296.72 % in sales reducing the ratio to a great extent. It could be because of high investment made by the organisation for business expansion. The situation has slightly improved in the year 2006-07 as an increase of 17% in fixed assets caused 71.07 % increase in sales. Hence the figures are moving to a better end. (ii) Current Assets Turnover Ratio: It is calculated as follows: Formula = Net Sales Current Assets Calculation: For 2004-05 = 518,906,568 = 0.0662 7,832,695,451 For 2005-06 = 2,058,627,680 = 0.1407 14,622,116,651 For 2006-07 = 3,521,811,800 = 0.2198 16,015,707,358
0.25
Current assets turnover ratio 0.2198
Ratios
0.2
0.1407
0.15 0.1
0.0662
0.05 0 2005
2006 Years
2007
Interpretation: The current ratio figures are showing an increasing trend over the years. A high & increasing current ratio figure indicates capability of the organisation to achieve maximum sales with minimum investment in current assets. Here current 39
assets include Interest accrued, sundry debtors, cash & bank balances, Loans & advances. In year 2005-06, an increase in 86.68 % in current assets resulted in 296.72% increase in sales. While an increase of 9.53 % in current assets in year 2006-07, increased the sales to 71%. It shows a better current assets management i.e efficient cash management & debtors management by the company. (iii) Working Capital Turnover Ratio Formula =
Net Sales Working Capital
Calculation: For 2004-05 = 518,906,568 = 0.0679 7,635,103,324 For 2005-06 = 2,058,627,680 = 0.1499 13,726,337,642 For 2006-07 = 3,521,811,800 = 0.2378 14,809,844,853
Ratios
Working Capital Turnover Ratio 0.25 0.2 0.15 0.1 0.05 0
0.2378 0.1499 0.0679
2005
2006
2007
Years
Interpretation: Working capital ratio is also showing an upward trend over three years. It indicates the higher increase in sales with less than proportionate increase in working capital. Hence an increasing working capital turnover ratio shows better efficiency in utilizing working capital for achieving maximum sales. In year 2005-06, 40
an increase of 79.77 % in working capital showed approx. 292% increase in sales. While in 2006-07 increase in working capital brought about almost proportional increase in sales. The situation on this front is improving year by year. (iii)Capital Turnover ratio: This is calculated as: Formula = Sales Capital Employed Calculation: For 2004-05 = 518,906,568 = 0.0634 8,177,880,088 For 2005-06 = 2,058,627,680 = 0.1017 20,242,008,142 For 2006-07 = 3,521,811,800 = 0.1687 20,873,998,850
Ratios
Capital Turnover Ratio 0.2 0.15 0.1 0.05 0
0.1017
0.1687
0.0634
2005
2006 Years
2007
Interpretation: Capital turnover ratio indicates the efficiency of the organisation with which the capital employed is being utilized. A high turnover ratio indicates the capability of the organisation to achieve maximum sales with minimum amount of capital employed. From the above figure, it is clearly visible that the capital turnover ratio is showing an increasing trend. In the year 2005-06,the ratio has increase 60% as compared to year 2004-05, while the increase in approx. 65 % in the year 2006-.07.
41
As in year 2005-06, 147.52 % increase in capital employed, increased the sales to 296.72%. While in year 2006-07 a mere 3.122% increase in capital employed caused 71% increase in sales. III. Solvency Ratios (i) Debt-Equity Ratio (ii) Proprietory Ratio (iii)Current Ratio (i) Debt-Equity Ratio: Formula = Long term Liabilities Shareholders’ funds Calculation: For 2004-05 = 4,673,428,516 = 1.333 3,504,451,572 For 2005-06 = 10,242,900,000 = 1.024 9,999,108,142 For 2006-07 = 8,803,895,386 = 0.6486 13,572,959,124
Ratio
Debt Equity Ratio 1.400 1.200 1.000 0.800 0.600 0.400 0.200 0.000
1.333
1.024 0.6486
2005
2006 Years
2007
Interpretation: Debt-Equity ratio indicates the stake of shareholders in the organisation vis-à-vis that of creditors. The debt-equity ratio of the company is showing a decreasing trend over the years. The ratio is very near to ideal figure in 42
2006. Further the decrease in 2007 to .64 indicates debt repayment or decreased dependence on external liabilities while there is an increase in the shareholder’s fund. (ii) Proprietary Ratio Formula = Total assets Owners fund
Calculation: For 2004-05= 3,504,451,572 = 0.4184 8,375,478,888 For 2005-06 = 9,999,108,142 = 0.4730 21,137,787,151 For 2006-07 = 13,572,959,124 = 0.5755 23,582,717,015
Proprietory Ratio
Ratios
0.8 0.6 0.4
0.5755 0.4184
0.473
2005
2006
0.2 0 2007
Years
Interpretation: The above figure shows an increasing trend of proprietary ratio over the years. An increasing Proprietary ratio is indicative of strong financial position of the business. However a ratio below 50% is regarded as alarming for the creditors. The ratio has shown an increase of 13% in the year 2005-06 as compared to 2004-05. While the ratio increased by 22 % in 2006-07. The increasing proprietary ratio is a satisfactory indication of organization’s financial health. 43
(iii)
Current Ratio:
Current ratio = Current assets Current Liabilities Calculation: For 2004-05= 7,832,615,451 = 157.855 49,619,014 For 2005-06 = 14,622,116,651= 50.39 290,166,741 For 2006-07 = 16,015,707,358 = 86.869 184,364,862 Current Ratio 200
157.855
Ratio
150 86.869
100
50.39
50 0 2005
2006
2007
Years
Interpretation: Current ratio measures the short-term solvency of the business. Current ratio indicates the backing available to current liabilities in the form of current assets. The ideal current ratio is 2:1. The current ratio figure is very high in all the three years, which indicates that the current liabilities are very less as compared to current assets. The company needs to lower down its current ratio as it indicates poor utilization of current assets.
44
5.2 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS SECURITIES LIMITED Profitability Ratios (i) Operating Ratio (ii) Net Profit Ratio (iii) ROI (Return on investment) (i) Operating Ratio Operating Costs X 100 Net Sales For 2004-05= 586,059,770 = 0.5126 1,143,112,652 For 2005-06= 1,244,234,043 = 0.3914 3,178,627,596 For 2006-07= 2,182,119,545 = 0.5160 4,228,287,659
Ratios
Operating Ratio 0.6 0.5 0.4 0.3 0.2 0.1 0
0.5126
2005
0.5160 0.3914
2006 Years
2007
Interpretation: From the figure give above, it can be seen that operating ratio has decreased in the year 2005-06 & showed again an increasing trend in year 2006-07 & reached a figure even more than year 2004-05. In the year 2005-06, 112.30 % increase in operating cost resulted in 178.06% increase in sales, thus reducing the ratio. Although the ratio decreased but it was high in absolute terms. In year 2006-07, 33% increase in sales was bought about by 75.38 % increase in operating cost. 45
(ii) Net Profit Ratio: Net Profit after tax x100 Net sales Calculation: For year 2004-05 = 312,272,496 = 0.2731 1,143,112,652 For year 2005-06 = 1,192,219,615 = 0.3750 3,178,627,596 For year 2006-07 = 1,380,887,469 = 0.3265 4,228,287,659 Net Profit Ratio
Ratios
0.4 0.3
0.2731
0.3750
0.3265
0.2 0.1 0 2005
2006 Years
2007
Interpretation: Net profit ratio is showing a trend almost similar to operating cost ratio. In year 2005-06, increase in sales was 178.06%, while there was more than proportionate increase in net profit i.e. 281.78%, resulting in a maximum net profit ratio of 37.50% over three years. However during the year 2006-07, due to increase in operating expanses as shown by operating cost ratio, profits increased to mere 15.82 % while sales increased to 33%. Hence it can be concluded that the heavy operating expanses in the 2006-07, resulted in a high operating cost ratio & lower net profit ratio. (iii) ROI (Return on investment) It is calculated as: 46
Net profit before Interest & Taxes Total Capital Employed Capital Employed = Share capital + Reserves and surplus + Long term liabilities (Non-Business Assets +Fictitious Assets) Calculation: For 2004-05= 541,152,367 = 0.2782 1,945,224,984 For 2005-06 = 1,869,955,267 = 0.3502 5,339,804,196 For 2006-07 = 2,136,627,267 = 0.5956 3,587,133,659 Returns on Capital Employed
Ratios
0.8 0.5956
0.6 0.4
0.2782
0.3502
0.2 0 2005
2006 Years
2007
Interpretation: Return on capital employed ratio is showing an increasing trend, depicting a positive situation. The return on capital employed increased by 25.88% in the year 2005-06 while increase was approx. 70% in 2006-07. The capital employed increased by 174.51 % in year 2005-06 while increase in profits was more than proportionate i.e. 245.55%. Though the capital employed decreased in year 2006-07 because of repayment of secured loans, net profit increased by 14.26%. The organisation has managed to earn increasing returns over the years. II. Turnover Ratios (ii) (iii)
(i) Fixed Assets Ratio Current Assets Ratio Working Capital Turnover Ratio. 47
(iv)
Capital Turnover ratio
(i) Fixed Assets Turnover Ratio: The ratio is calculated as follows: Net Sales Fixed Assets (net) Calculation: For 2004-05= 1,143,112,652 = 5.5159 times 207,236,343 For 2005-06= 3,178,627,596 = 6.1815 times 514,215,779 For 2006-07 = 4,228,287,659 = 3.8913 times 1,086,579,538
Fixed Assets Turnover Ratio
Ratios
8 6
5.5159
6.1815 3.8913
4 2 0 2005
2006
2007
Years Interpretation: Fixed asset ratio indicates efficiency of using the fixed assets by the organisation. Higher the fixed asset ratio better will be the position. In year 2005-06, 148.13 % increase in fixed assets resulted in more than proportionate increase in sales i.e. 178.06%. While in year 2006-07, an increase of 111.3 % in fixed assets bought only 33% increase in sales. It can be because of investment in fixed assets, which could not bring immediate increase in the sales. (ii) Current Assets Turnover Ratio: It is calculated as follows: Net Sales Current Assets
48
Calculation: For 2004-05= 1,143,112,652 = 0.3581 3,191,843,980 For 2005-06= 3,179,725,601 = 0.3477 5,339,804,196 For 2006-07 = 4,228,287,659 = 0.7542 5,606,212,698 Current Assets Turnover Ratio
Ratios
0.8 0.7542
0.6 0.4
0.3581
0.3477
2005
2006 Years
0.2 0 2007
. Interpretation: This ratio tests the efficiency or inefficiency in utilizing the investment in current assets made by the organization. Higher ratio indicates the better efficiency of firm investment i.e. the company can able to utilize their current assets effectively for generating more sales/revenue. In 2005-06 the ratio decreased by approx 3% while in 2006-07 the ratio again increased to 0.7542. It indicates that the current assets utilization is done efficiently in the year 2006-07 as compared to 2005-06. The current assets increase by 33% in year by 2006-07, resulting in a proportionate increase in sales i.e. 33%. As the current ratio has improved in the recent years, the figures are showing appositive movement. (iii) Working Capital Turnover Ratio: This ratio is calculated as follows: Net Sales Working Capital Calculation: For 2004-05= 1,148,763,391 = 1.3559 49
847,182,769 For 2005-06= 3,179,855,601 = 0.6726 4,727,410,061 For 2006-07 = 4,466,135,091 = 1.8945 2,357,336,042
Working Capital Turnover Ratio 2 1.5 Ratios
1.8945
1.3559
1
0.6726
0.5 0 2005
2006
2007
Years
Interpretation:
Working Capital turn over ratios indicates the efficiency in
utilization of working capital. In the year 2005-06 the increase in working capital was 5.6 times, which resulted in 2.8 times increase in sales. While in year 2006-07, in spite of 50% decrease in
working capital, there is 3% increase in sales. It indicates that
organization has managed to achieve increased sales in spite of a decrease in working capital. It shows a better working capital management by the company in year 200607. (iv) Capital Turnover ratio: It is calculated as: Sales Capital Employed Calculation: For 2004-05= 1,143,112,652 = 0.5876 1,945,224,984 For 2005-06= 3,179,725,601 = 0.5954 50
5,339,804,196 For 2006-07 = 4,228,287,659 = 1.1787 3,587,133,659
Ratios
Capital Turnover Ratio 1.4 1.2 1 0.8 0.6 0.4 0.2 0
1.1787 0.5876
0.5954
0.5876
0.5954 Years
1.1787
Interpretation: Capital turnover ratio indicates the amount of capital turned over to achieve the sales/ revenues. In year 2005-06 capital employed increased to 2.74 times which resulted in almost proportionate increase in sales i.e. 2.78times. While in year 2006-07 capital employed decreased, but sales increase by 33%, resulting in approx 2 times increase in Capital employed turnover ratio.
It indicates the efficiency of
organisation in utilizing the capital resources. Capital employed ratio is increasing over the years, indicating the improving situation, as higher the ratio better will be the position. III. Solvency Ratio (i) Debt-Equity Ratio (ii) Proprietary Ratio (iii) Current Ratio (i)
Debt-Equity Ratio: It is calculated as External Liabilities Shareholders’ funds 51
Calculation: For 2004-05= 860,893,605 = 0.7939 1,084,331,379 For 2005-06= 3,522,114,194 = 1.9376 1,817,690,002 For 2006-07 = 395,501,234 = 0.1239 3,191,632,425
Ratios
Debt-Equity Ratio 2.5 2 1.5 1 0.5 0
1.9376 0.7939 0.1239 2005
2006 Years
2007
Interpretation: Debt-Equity ratio indicates the stake of shareholders in the organisation vis-à-vis that of creditors. The debt-equity ratio of the company is has increased in ear 2005-06 while again decreased in year 2007. External liabilities increased to 4 times in 2005-06 while shareholder’s funds increased by only 1.6 times, resulting in a 2time increase in Debt-equity ratio. In year 2006-07 external liabilities again decreased due to repayment of loans while shareholder’s fund increased almost by 1.75 times resulting in improving the debt-equity mix situation.
(ii) Proprietary Ratio: This ratio is calculated as: Shareholders’ / Owner’s fund Total assets * Here we have considered F.A.+C.A. = Total Assets. Calculation: For year 2004-05 = 1,084,331,379 = 0.3190 3,399,080,323 52
For year 2005-06 = 1,817,690,002 = 0.1881 9,659,152,087 For year 2006-07 = 3,191,632,425 = 0.4768 6,692,792,236
Ratios
Proprietary Ratio 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000
0.4768 0.3190 0.1881
2005
2006
2007
Years
Interpretation: An increasing Proprietary ratio is indicative of strong financial position of the business. However a ratio below 50% is regarded as alarming for the creditors. Although in all the three years, the proprietary ratio is below 50% mark, but it has improved in year 2006-07 & the figure is quite near to satisfactory level. In year 2007 total assets have decreased by 1.44 times while shareholders funds have increased to 1.75 times, thus increasing the proprietary ratio, but this figure is required to be improved further. (iii) Current Ratio: It is calculated as: Current ratio = Current assets Current Liabilities * C.A. include C.A.’s + loans and advances. * C.L. includes C.L.’s + Provisions. Calculation: For year 2004-05 = 3,191,843,980 = 2.2245 1,434,832,894 53
For year 2005-06 = 9,144,936,308 4,278,809,843
= 2.1372
For year 2006-07 = 5,606,212,698 3,010,384,947
= 1.8622
Ratios
Current Ratio 2.4 2.2
2.2245
2.1372
2 1.8 1.6
1.8622
2005
2006
2007
Years
Interpretation: Current ratio measures the short-term solvency of the business. Current ratio indicates the backing available to current liabilities in the form of current assets. The ideal current ratio is 2:1. The current ratio figure is showing a decreasing trend over the years & figure is very near to the satisfactory level. It indicates that the organisation is maintaining a proper balance between the current liabilities & current assets. The current ratio has decreased by 4% in year 2005-06, while it decreased by 12.86 % in year 2006-07. 5.3 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS CREDIT SERVICES LIMITED Profitability Ratios (i) Operating Ratio (ii) Net Profit Ratio (iv) ROI (Return on investment)
54
(i) Operating Ratio Operating Costs X 100 Net Sales For 2005 = 198,467 = 0.0158 12,483,090 For 2006 = 357,966,291 = 0.4582 781,143,954 For 2007 = 1,842,446,409 = 0.5902 3,121,564,463 Opertaing Ratio
Ratios
0.8
0.5902
0.6
0.4582
0.4 0.2
0.0158
0 2005
2006
2007
Years
Interpretation: The operating ratio indicates the operational efficiency of the business. The operating cost ratio is showing an upward trend over the years, which is not a positive sign. In the years 2005-06 operating costs became 1804 times the 200405 figure, while increase in sales was mere 62.57 times. In the year 2006-07, the an increase of 51.22 times was seen in operating cost resulting in an increase of 3.996 times in sales. Increase is operating cost is more steep during the year 2005-06 as compared to year 2006-07.This huge increase in operating costs can be attributed to initial investments required to be made in business. (ii)
Net Profit Ratio: It can be calculated as: Net Profit after tax x100 Net sales Calculation: For year 2004-05 = 14,179,477 = 1.1358 55
ii)
12,483,090 For year 2005-06 = 281,077,091= 0.3598 781,143,954 For year 2006-07 = 797,914,368 = 0.2556 3,121,564,463 Net Profit Ratio Ratios
1.5 1.1358
1
0.5
0.3598
0.2556
2006 Years
2007
0 2005
Interpretation: Net profit ratio is reflecting the increasing trend of operating cost. As operating costs are increasing, net profit figure is decreasing resulting in a decrease in Net profit ratio, which is also not a positive sign for the organisation. Sales increased 62.57 times in year 2005-06 while increase in profit was less than proportionate i.e. 19.82 times. While in year 2006-07, sales increase to 3.996 times, making net profits increase to 2.84 times, which was very near to proportionate. But increase is sales was lesser than the last year. The net profit ratio is required to increase in the coming years, as decreasing ratio is reflecting inefficiencies in business operations. ROI (Return on investment): It is calculated as: Net profit before Interest & Taxes Total Capital Employed Capital Employed = Share capital + Reserves and surplus + Long term liabilities (Non-Business Assets +Fictitious Assets) Calculation: For 2004-05 = 22,339,445 = 0.0168 1,327,914,843
56
For 2006-07 = 425,490,819 = 0.0902 4,716,634,402 For 2006-07 = 1,270,764,665 = 0.1737 7,315,454,695 Return on investment
Ratios
0.2
0.1737
0.15 0.0902
0.1 0.05
0.0168
0 2005
2006 Years
2007
Interpretation: Return on Investment indicates the Net profit earned on the total capital employed. Return on capital employed is showing an increasing trend over the years. In year 2005-06 increase in capital employed was 3.55 times which resulted in more than proportionate increase in net profit before interest & taxes i.e. 19.07 times. In year 2006-07, Capital employed increased to 1.55 times of previous year, while sales increased to 2.98 times. The increase has been steeper in year 2005-06 as compared to year 2006-07. It is good indicator for the organisation because in spite of increasing operating costs, it is able to give increasing returns on capital employed. II. Turnover Ratios (i) Fixed Assets Turnover Ratio: The ratio is calculated as follows: Net Sales Fixed Assets (net) Calculation: For 2004-05 = 12,483,090 = Nil Nil For 2005-06 = 781,143,954 = 18.18 42,949,828
57
For 2006-07 = 3,121,564,463 = 15.675 199,133,425
Ratios
Fixed Assets Turnover Ratio 19 18 17
18.18 15.675
16 15 14 2006
Years
2007
Interpretation: It indicates the efficiency of utilizing fixed assets to attain the sales/revenues, hence higher the ratio better the position is. The available financial information shows that the company didn’t own any fixed assets in the year of its inception. The fixed asset ratio decreased in the year 2006-07 as fixed assets increased by 4.64 times as compared to 2005-06 while increase in sales is slightly less than proportionate i.e. 3.996, keeping the fixed assets ratio low. It can be because of investment in fixed assets, which could not bring immediate increase in the sales. (ii) Current Assets Turnover Ratio: It is calculated as follows: Net Sales Current Assets Calculation: For 2004-05 = 12,483,090 = 0.00934 1,336,200,011 For 2005-06 = 781,143,954 = 0.1559 5,009,014,889 For 2006-07 = 3,121,564,463 = 0.3693 8,450,405,011 58
Current Assets Turnover Ratio
Ratios
0.4 0.3693
0.3 0.1559
0.2 0.1
0.00934
0 2005
2006 Years
2007
Interpretation: It indicates the efficiency in utilizing the current assets to achieve the sales/ revenue. The current assets turnover ratio is showing an increasing trend, showing that company is improving in utilizing its current assets. In year 2005-06, the current assets had increased by 3.75 times while the increase in sales was more than proportionate i.e. 62.57 times. In year 2006-07, an increase of 1.69 times sin current assets bought about 3.996 times increase in sales. It can be concluded that the company in improving upon the current asset utilization & managing them in efficient manner. (iii) Working Capital Turnover Ratio: This ratio is calculated as follows: Net Sales Working Capital Calculation: For 2004-05 = 12,483,090 = 0.0094 1,327,849,811 For 2005-06 = 781,143,954 = 0.1637 4,770,479,328 For 2006-07 = 3,121,564,463 = 0.5148 6,062,813,229 59
Working Capital Turnover Ratio
Ratios
0.6
0.5148
0.4 0.2
0.1637 0.0094
0 2005
2006 Years
2007
Interpretation: Working capital Turnover ratio indicates the efficiency in utilizing the working capital in increasing sales/ revenues. This ratio is also showing an increasing trend, which is again a positive sign for the organisation. An increase of 3.5 times in working capital had brought about an increase of 62.57 times in sales, in year 2005-06. While the increase in working capital turnover ratio is steeper in year 200607 than in year 2005-06.In year 2006-07, 1.27 times increase in working capital resulted in3.996 times increase in working capital. (iv)
Capital Turnover ratio: It is calculated as: Sales Capital Employed Calculation: For 2004-05 = 12,483,090 = 0.0094 1,327,914,843 For 2005-06 = 781,143,954 = 0.1656 4,716,634,402 For 2006-07 = 3,121,564,463 = 0.4267 7,315,454,695
60
Ratio
Capital Turnover Ratio 0.5 0.4 0.3 0.2 0.1 0
0.4267 0.1656 0.0094 2005
2006 Years
2007
Interpretation: Capital turnover ratio indicates the amount of capital turned over to achieve the sales/ revenues. In year 2005-06 capital employed increased to 3.552 times, which resulted in more than proportionate increase in sales i.e. 62.57 times. While in year 2006-07 capital employed increased by 1.55 times while sales increase by 3.996 times resulting in approx 2.5 times increase in Capital turnover ratio. It indicates the efficiency of organisation in utilizing the capital resources. Capital employed ratio is increasing over the years, indicating the improving situation, as higher the ratio better will be the position. III. Solvency Ratio (i) Debt-Equity Ratio: It is calculated as: External Liabilities Shareholders’ funds Calculation: For 2004-05 = Nil = Nil 1,327,914,843 For 2005-06 = 568,748 = 0.00012 4,716,065,654 For 2006-07 = 1,809,564,673 = 0.32865 5,505,890,022 61
Debt-Equity Ratio
Ratios
0.4
0.32865
0.3 0.2 0.1 0
0.00012 Years
2006
2007
Interpretation: The leverage reflects the company’s capital structure, which is a very important financial decision take by company. From the above information we can say that in the year 2005 company had no debt in their total capital employed whereas in year 2006 it had increased it to Rs. 568,748 out of the total capital employed. In year 2006-07, external liabilities increased 3182 times while shareholders funds increased only by 1.17 times resulting in a high debt-equity ratio. (ii) Proprietary Ratio: It is calculated as Shareholders’ / Owner’s fund Total assets Calculation:
For year 2004-05 = 1,327,914,843 = 0.9937 1,336,200,011 For year 2005-06 = 4,716,065,654 = 0.9335 5,051,964,717 For year 2006-07 = 5,505,890,022 = 0.5477 10,050,963,114
62
Proprietary Ratio
Ratios
1.5 1
0.9335
0.9937
0.5477
0.5 0 2005
2006 Years
2007
Interpretation: This ratio indicates the relationship between the owners’ fund and total assets. An increasing Proprietary ratio is indicative of strong financial position of the business. However a ratio below 50% is regarded as alarming for the creditors. The ratio is showing a decreasing trend over the years with minimum ratio in 2006-07, however the ratio in more than 50%, reflecting a satisfactory position. The decrease in proprietary ratio had been steeper in year 2006-07,as shareholder’s wealth increased 0.85 times while, total assets became 2 times of previous year. (iii) Current Ratio: It is calculated as: Current ratio = Current assets Current Liabilities NOTE: C.A. include C.A.’s + loans and advances. C.L. includes C.L.’s + Provisions. Calculation: For year 2004-05 = 1,336,200,011 = 160.02 8,350,200 For year 2005-06 = 5,009,014,889 238,535,561
= 20.999
For year 2006-07 = 8,450,405,011 2,387,591,782
= 3.539
63
Current Ratio
Ratio
200
160.02
150 100 50
20.999
3.539
0 2005
2006
2007
Years Interpretation: The current ratio indicates the short-term solvency position of a company. The ideal ratio is 2:1 for current ratio. The ratio of company is showing a decreasing trend and moving towards ideal figure. In the initial year i.e. 2005 & 2006 the ratio had been very high indicating improper balance between current assets & current liabilities. The ratio is required to be further lowered down by financing current liabilities from current assets.
5.4 RATIO ANALYSIS & INTERPRETATION OF INDIABULLS HOUSING FINANCE LIMITED I. Profitability Ratios Operating Ratio: It is calculated as:
Operating Costs X 100 Net Sales For 2005-06 = 1,835,382 33,726,534
= 0.0544
For 2006-07 = 303,549,376 = 0.2850 1,065,237,712
64
Operating Ratio
Ratio
0.3
0.2850
0.2 0.1
0.0544
0 2006
2007
Years
Interpretation: Operating ratio has become 5 times in year 2006-07 as compared to year 2005-06. Operating costs have increased 165.38 times while corresponding increase in Net sales is less than proportionate i.e. only 31.6 times. Increasing operating ratio is not appositive indicator. The reason behind such increase could be the initial investment required in the beginning of the business. (ii) Net Profit Ratio: It is calculated as: Net Profit after tax x100 Net sales Calculation: For Year 2005-06 = 23,783,546 = 0.7052 33,726,534 For Year 2006-07 = 539,737,692 = 0.5066 1,065,237,712
0.8
Net Profit Ratio 0.7052
Ratios
0.6
0.5066
0.4 0.2 0 2006
Years 65
2007
Interpretation: The Net profit ratio is reflecting the trend showed by operating cost ratio. As Operating cost is increasing over the years, Net profit ratio is showing a decreasing trend, which is not a good indicator. In year 2006-07, the net sales have gone up by 31.6 times, while corresponding Net Profit after Tax figure increased less than proportionate i.e. 23 times. (iii) ROI (Return on investment): It is calculated as: Net profit before Interest & Taxes Total Capital Employed Capital Employed = Share capital + Reserves and surplus + Long term liabilities (Non-Business Assets +Fictitious Assets) Calculation: For 2005-06 = 31,891,152 = 0.0156 2,039,654,198 For 2006-07 = 826,991,568 = 0.3206 2,579,236,690
Ratios
Return on Investment 0.4 0.3 0.2 0.1 0
0.3206
0.0156 2006
Years
66
2007
Interpretation: Return on Investment is showing an increasing trend, which is positive sign. It shows that in spite of decreasing Net profit ratio & increasing Operating cost ratio, company’s Return on Investment is increasing. In the year 200607, Total Capital Employed increased only 1.26 times, while Net Profit before interest & Taxes increased to 26 times the net profit figure of 2005-06. II. Turnover Ratios (i) Fixed Assets Turnover Ratio: The ratio is calculated as follows: Net Sales Fixed Assets (net) Calculation: For 2005-06 = 33,726,534 Nil
= Nil
For 2006-07 = 1,065,237,712 = 19.38 times. 4,955,396 (ii) Current Assets Turnover Ratio: It is calculated as follows: Net Sales Current Assets Calculation: For 2005-06 = 33,726,534 = 0.0165 2,049,514,715 For 2006-07 = 1,065,237,712 = 0.3162 3,368,499,830
67
Ratios
Current Ratio 0.4 0.3 0.2 0.1 0
0.3162
0.0165 2006
2007 Years
. Interpretation: As we know that current ratio indicates the efficiency of current asset utilization, an increasing current assets turnover ratio reflects a positive picture. Current assets have increased to 1.64 times in year 2006-07, while sales have increased to 31.6 times which is very high as compared to increase in current assets. (iii) Working Capital Turnover Ratio: This ratio is calculated as follows: Net Sales Working Capital Calculation: For 2005-06 = 33,726,534 = 0.0165 2,039,574,952 For 2006-07 = 1,065,237,712 = 0.3862 2,758,118,387
Ratios
Working Capital Turnover Ratio 0.5 0.4 0.3 0.2 0.1 0
0.3862
0.0165 2006
Years 68
2007
Interpretation: It indicates the efficiency in working capital utilization in making sales/Revenues. Working capital turnover ratio is showing an increasing trend. Working Capital is showing an increase of 1.35 times, while sales have increased by 31.6 times. (iii) Capital Turnover ratio: It is calculated as: Sales Capital Employed Calculation: For 2005-06 = 33,726,534 = 0.1653 2,039,654,198 For 2006-07 = 1,065,237,712 = 0.4130 2,579,236,690
Ratios
Capital Turnover Ratio 0.5 0.4 0.3 0.2 0.1 0
0.4130 0.1653
2006
Years
2007
Interpretation: It indicates the efficiency in utilization of capital employed in achieving the sales/revenue targets of the organisation. Capital turnover ratio is showing an increasing trend. Capital Employed is showing an increase of 1.35 times, while sales have increased by 31.6 times.
69
III Solvency Ratio (i)
Proprietary Ratio: It can be calculated as: Shareholders’ / Owner’s fund Total assets
Calculation: For Year 2005-06 = 2,039,654,198 = 0.9952 2,049,514,715 For Year 2006-07 = 2,579,236,690 = 0.7534 3,423,455,226
Ratios
Proprietary Ratio 1.2 1 0.8 0.6 0.4 0.2 0
0.9952
2006
0.7534
Years
2007
Interpretation: The above figure shows a decreasing trend of proprietary ratio over the years. An increasing Proprietary ratio is indicative of strong financial position of the business. However a ratio below 50% is regarded as alarming for the creditors. The ratio has shown a decrease of 24% in the year 2006-07 as compared to 2005-06. Shareholder’s wealth increased to 1.26 times, while the total assets increased to 1.67 times. (ii)
Current Ratio: It is calculated as: Current ratio = Current assets Current Liabilities
NOTE: C.A. include C.A.’s + loans and advances. C.L. includes C.L.’s + Provisions. 70
Calculation: For year 2005-06 = 2,049,514,715 9,939,763
= 20.62
For year 2006-07 = 3,368,499,830 610,381,443
= 5.520
Ratios
Current Ratio 25 20 15 10 5 0
20.62 5.52
2006
Years
2007
Interpretation: Current ratio measures the short-term solvency of the business. Current ratio indicates the backing available to current liabilities in the form of current assets. The ideal current ratio is 2:1. The current ratio figure is very high in both the years, which indicates that the current liabilities are very less as compared to current assets. The company needs to lower down its current ratio as it indicates poor utilization of current assets.
71
5.5 INTER-FIRM COMPARISON
I.
Operating Cost Ratio Years 2005 2006 2007
IFSL 8.36 18.58 16.59
ISL 51.25 39.14 51.6
ICSL 1.58 (Min) 45.82 59.02 (Max.)
IHFL NIL 5.44 28.5
Operating Cost Ratio Ratio (in %)
80 60
51.25
59.02
39.14
40 20
51.6
45.82
28.5 8.36
0
18.58
5.44
1.58 0
2005 IFSL
2006 ISL Years ICSL
16.59
2007 IHFL
Net Profit Ratio: Years
IFSL
ISL
ICSL
IHFL
2005
45.49
27.31
113.58 (Max)
NIL
2006
36.07
37.5
35.98
70.52
2007
43.47
32.65
25.56 (Min)
50.66
72
Net Profit Ratio
120 100 Ratio (in%)
113.58
80
70.52
60
50.66 45.49
40
36.07
27.31
20
43.47
35.98
32.65 25.56
0
0
2005 IFSL
2006 Years ISL ICSL IHFL
2007
Return on Investment Years
IFSL
ISL
ICSL
IHFL
2005
5.86
27.82
1.68
Nil
2006
8.5
35.02
9.02
1.56 (Min)
2007
14.08
59.56 (Max)
17.37
32.06
Return on Investment 80 Ratios (in %)
I.
37.5
59.56
60 40 20 0
35.02
27.82 5.86
1.68
8.5
9.02
0
2005
32.06 14.08 1.56
2006 IFSL
ISLYears ICSL
73
17.37
2007 IHFL
IV. Fixed Assets Turnover Ratios Years 2005 2006 2007
IFSL 455.71(Max) 12.86 18.75
ISL 5.52 6.18 3.89 (Min)
ICSL Nil 18.18 15.68
IHFL Nil Nil 19.38
Fixed Assets Turnover Ratio Ratio (times)
500.00
455.71
400.00 300.00 200.00 100.00
5.52
0.00
0
6.18 18.18 15.68 19.38 12.86 0 18.75 3.89
0
2005
2006 ISL Years ICSL
IFSL
2007 IHFL
Current Assets Turnover Ratio Years
IFSL
ISL
ICSL
IHFL
2005
6.62
35.81
0.93 (Min)
Nil
2006
14.07
34.77
15.59
1.65
2007
21.98
75.42 (Max)
36.93
31.62
Current Asset Turnover Ratio Ratio (in%)
80.00
75.42
60.00 40.00 20.00 0.00
35.81 6.62
14.07 0.93
36.93 31.62
34.77 21.98
15.59 1.65
0
2005
2006 IFSL
ISLYears ICSL
74
2007 IHFL
Working Capital Turnover Ratio Years
IFSL
ISL
ICSL
IHFL
2005
6.79
135.59
0.94 (Min)
Nil
2006
14.99
67.26
16.37
1.65
2007
23.78
189.45 (Max)
51.48
38.62
Working Capital Turnover Ratio Ratio (in %)
200.00 189.45 150.00
135.59
100.00 50.00
67.26 6.79
14.99
0.94 0
0.00
2005
23.78 16.37 1.65 2006
IFSL
ISL Years ICSL
51.48 38.62
2007 IHFL
VII Capital Employed Turnover Ratio Years
IFSL
ISL
ICSL
IHFL
2005
6.34
58.76
0.94 (Min)
Nil
2006
10.17
59.54
16.56
16.53
2007
16.87
117.87 (Max)
42.67
41.30
Capital Turnover Ratio Ratio (in %)
140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00
117.87 59.54
58.76 6.34
0.94 0
10.17
2005
16.56 16.53 16.87
2006 IFSL
ISL Years ICSL
75
42.6741.30
2007 IHFL
Debt-Equity Ratio Years
IFSL
ISL
ICSL
2005
133.33
79.39
0.00 (Min)
2006
102.40
193.76 (Max)
0.012
2007
64.86
12.39
32.86
Debt-Equity Ratio Ratio (in %)
II.
250.00 193.76 200.00 150.00 133.33 102.40 79.39 100.00 64.86 12.39 32.86 50.00 0.012 0.00 0.00 2005 2006 2007 IFSL Years ISL
ICSL
oprietary Ratio Years
IFSL
ISL
ICSL
IHFL
2005
41.84
31.90
99.37
Nil
2006
47.30
18.81(Min)
93.35
99.52 (Max)
2007
57.55
47.68
54.77
75.34
Properietary Ratio 120.00
99.37
Ratio (in %)
100.00
93.35 99.52 75.34 54.77 57.55 47.68
80.00 60.00 40.00
41.84
47.30 31.90
20.00
18.81 0
0.00
2005
2006 IFSL
Years ISL ICSL
76
2007 IHFL
Current Ratio Years 2005 2006 2007
IFSL 157.86 50.39 86.87
ISL 2.22 2.14 1.86 (Min)
ICSL 160.02 (Max) 20.99 3.54
IHFL Nil 20.62 5.52
Current Ratio Ratio (times)
200.00 150.00
157.86
160.02 86.87
100.00 50.00
50.39 2.22
0.00
0
2005
20.99 20.62 2.14
2006 IFSL
ISL ICSL Years
77
1.86
3.54 5.52
2007 IHFL
Bibliography (i)
Walsh, Ciaran, “Key Management Ratios-How to Analyze, Compare and Control
the figures that Drive the Company Value”, Macmillan India
Limited, 1997 (ii)
Mittal, S.N., “Management Accounting and Financial Management”, Mahavir Publication, 4th Edition, pp. 576-693
(iii)
Mahesgwari, S.N., “ Management Accounting and Financial Control”, Sultan Chand & Sons, 1999, pp. B.1-B.96
(iv)
Kishore, Ravi M., “ Cost & Management Accounting” Taxmann’s Paublication, 2nd Edition, pp.2.537-2.545 Website http://www.indiabnulls.com/ www.nseindia.com www.investopedia.com
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