A STUDY ON “RATIO ANALYSIS” OF AZMI PLYWOOD INDUTRIES CHAKOLI (AZAMGARH) SUBMITTED TO UNIVERSITY OF PUNE
SUBMITTED BY MOHAMMAD AZEEZ MBA II (2010-2012)
UNDER THE GUIDANCE OF PROF. PORINITIA BANERJEE
Poona Institute of Management Sciences and Entrepreneurship (PIMSE)
8
ACKNOWLEDGEMENT
“Perseverance inspiration and motivation have always played a key role in success of any venture”. I hereby express my deep sense of gratitude to all the personalities involved directly and indirectly in my project work. The 60 days with AZMI PLYWOOD INDUSTRIES has been full of learning and sense of contribution towards the organization. I would like to thanks Mr. Shakeel Ahmed, the Director of Azmi Plywood Industries, for giving me an opportunity of learning and contributing through this project. With immense pleasure, I would like to express my thanks to Prof. Porinita Banerjee (project guide) for having given me this privilege of working under him and completing this study. I would like to express my sincere gratitude to other faculty members who have taught me in my entire MBA curriculum and our Director Prof. Anwar Sheikh who has always been a source of guidance, inspiration and motivation. However, I accept the sole responsibility for any possible errors of omission and would be extremely grateful to the readers of this project report if they bring such mistakes to my notice.
9
DECLARATION
I Mohammad Azeez, declare that project titled “RATIO ANALYSIS” of AZMI PLYWOOD INDUSTRIES” is an original piece of research work carried out by me under the guidance and supervision of Prof. Porinita Banerjee. The information has been collected from genuine & authentic sources. The work has been submitted in partial fulfillment of the requirement of MBA to our college.
Place:
Mohammad Azeez
Date
Poona Institute of Management Sciences and Entrepreneurship
10
CERTIFICATE TO WHOMSOEVER IT MAY CONCERN
This is to certify that Mr. Mohammad Azeez who is pursuing his Master in Business Administration (MBA) degree from Poona Institute of Management Sciences and Entrepreneur, Pune has successfully completed his project work on “Ratio Analysis” in partial fulfillment of his requirement, prescribed by the institute for the academic year 2010-11. He has worked on the project from 10th june 2011 to 10th august 2011.
Date:- 3/09/2011
Mr. Shakeel Ahmed
Place:-
(Manager)
11
INDEX SR
NAME OF THE CHAPTER
NO.
PAGE NO.
1
EXECUTIVE SUMMARY
2
COMPANY PROFILE
3
OBJECTIVES OF THE STUDY
4
RESEARCH METHODOLOGY
5
PROJECT WORK UNDERTAKEN
6
DATA ANALYSIS & PRESENTATION
7
CONCLUSIONS AND SUGGESTIONS
8
BIBLIOGRAPHY
12
CHAPTER 1 EXECUTIVE SUMMARY
13
EXECUTIVE SUMMARY
This study was carried out at Azmi Plywood industries during the month of June to Aug 2011. This report is an outcome of a study undertaken in API on the topic “A study on the Ratio Analysis of the Azmi Plywood Industries” The analysis of API fills me with academic and industrial exposure.
Figures were obtained from comparative balance sheets and profit and loss statements from the relevant years as well as additional information that were forwarded by the board. This information enabled the development of percentage and ratio analysis, which was then used to create the report.
The investigation revealed that the company had improved its position compared to previous years. The profitability of the company was significantly better whilst the liquidity had remained reasonably steady. The solvency of the company had declined however, which affected the longterm obligations of the business.
14
CHAPTER 2 COMPANY PROFILE
15
COMPANY PROFILE Azmi Plywood Industries was established in 1996, with an aim to provide the most durable plywood in the Indian market. The unit was in Chakoli, Uttar Pradesh. The company have large stake in the market as one of the leading Plywood Manufacture and Supplier
Infrastructure Supported with strong infrastructure the company a huge manufacturing unit, which is installed with latest technology machines. Our Cutting edged technology machines are capable of to manufacture the plywood in bulk orders to fulfill the instant demand of the customers.
Quality assurance To ensure the quality, we follow stringent procedure right from procuring the raw material to the production of end products. Beside that, we have a very efficient quality check team that surveillance production procedures and randomly checks unit under adverse conditions to ensure the durability of Plywood.
Customer satisfaction As we are a customer centric company, we give high importance to our customers and their requirements. We offer optimal standard plywood to our valued clients in order to provide enormous satisfaction to them. Valuing our customers‟ time and money, we provide them Plywood at very affordable prices, along with timely and safe delivery assurance.
16
Our forte : Eco Friendly products Having a great sense of social responsibility, we manufacture the range of our products which are eco friendly and don‟t harm the nature. Therefore, we use Chemicals, Raw materials, Glue and every other substance which are harmless on environment.
Name of CEO/Owner : Mr. Shakeel Ahmed Year of Establishment : 1996 Primary Business Type :
Manufacturer & Exporter
Number of Employees : 300+ Quality Assurance Certificate :
ISO : 9001
Focus Markets : Worldwide Markets Product/Service Offered :
All types of Plywood like Film Faced Shuttering Plywood, WBP Marine Plywood & Boards.
LOCATION: At post Chakoli, Tal. Phoolpur, Dist. Azamgarh.
17
VISION To be most preferred destination for sourcing plywood, boards etc in chosen geographical area.
MISSION To provide the most durable plywood in the Indian market.
PRODUCTS Azmi Plywood Industries has made an indelible impression in the hearts of the masses with the unmatchable performance and be the only one to serve complete satisfaction to the clients. Azmi Plywood Industries are proud to proclaim that they are the exclusive brand that sales optimum quality plywood that is rare in other brands. In addition, they are an environment friendly organization and that is why they use only natural material in plywood. They offer widest array of plywood in multifarious patterns and themes. Their plywood is known for their stiffness and ability to hold in diverse dilatations. To make plywood superior, they use the finest raw material availed in the nature. That is why, their plywood is highly demanded in both international and domestic markets.
PLYWOODS We are a trusted Plywood Supplier in the nation, offering a branded range. The premium Plywood that we offer is known for its durability. Our Plywood is processed using highest quality standards that ensure its optimum quality. The Plywood that we supply is widely acclaimed by the clients owing to its unique and impressive look. In addition, for the convenience of the clients, we offer different dual varieties of this Plywood.
18
BLOCK BOARDS We are the most reliable Supplier of Block Boards that is efficiently tested by experts before their dispatch. This Block Board is highly acclaimed by the clients due to its exceptional durability. The Block Board offered by us has an exceptional strength due to which the clients it is a dependable product for manufacturing furniture, doors, etc. Our Block Board is extremely resistant to termites and moisture and due to that, it is widely used for home and offices.
MEDIUM DENSITY FIBRE BOARDS Fiberboard is a type of engineered wood product that is made out of wood fibers. Types of fiberboard include particle board, medium-density fiberboard, and hardboard Plywood is not a type of fiberboard, as it is made of thin sheets of wood, not wood fibers or particles. Fiberboard, particularly medium-density fiberboard (MDF), is heavily used in the furniture industry. For pieces that will be visible, a veneer of wood is often glued onto fiberboard to give it the appearance of conventional wood. 19
DECORATIVE PLYWOOD LAMINATES
\
DECORATIVE PLYWOOD VEENERS
20
WOODEN PANEL DOORS
WOODEN FLUSH DOORS
21
CHAPTER 3 OBJECTIVES OF THE STUDY
22
OBJECTIVES OF THE STUDY
1. To evaluate the performance of the company by using ratios analysis yardstick. 2. To analyze the financial strength and weakness of the firm using analytical tools like Ratio Analysis. 3. To understand the financial policies and procedures of the company. 4. To suggest ways and means to improve the financial performance. 5. To make periodic comparison of the firm.
SCOPE This study was undertaken at Azmi Plywood Industries. The scope of this study is to understand the importance of the annual business plan and financial ratios in the functioning of the company
LIMITATIONS 1. The period of study is limited to data of 3 years 2. The study is based on secondary data provided by the unit. 3. The time available for understanding and comprehending the data in depth was less. 4. During the period of analysis, the company‟s current financial Information was not available.
23
NEED FOR THE STUDY Ratio analysis is an important technique of analyzing the financial statement and it helps the analyst to make quantitative judgment with regard to concern‟s financial position and performance. The followings are the main points of importance of ratio analysis: 1. The study has great significance and provides benefits to various parties whom directly or indirectly interact with the company. 2 . It is beneficial to management of the company by providing crystal clear picture regarding important aspects like liquidity, leverage, activity and profitability. 3. The study is also beneficial to employees and offers motivation by showing how actively they are contributing for company‟s growth. 4. The investors who are interested in investing in the company‟s shares will also get benefited by going through the study and can easily take a decision whether to invest or not to invest in the company‟s shares.
24
CHAPTER 4 RESEARCH METHODOLOGY
25
RESEARCH DESIGN
TYPE OF STUDY: Descriptive Research The study is primarily based on the internal records and the annual records of the company. Besides, information is gathered through discussions held with the officers of the company
NATURE OF STUDY: Quantitative The objective of research is to develop and employ mathematical models, theories and hypotheses pertaining to phenomena.
TYPE OF QUESTIONAIRE: Structured The aim of this approach is to ensure that each interview is presented with exactly the same questions in the same order. This ensures that answers can be reliably aggregated and that comparisons can be made with confidence between sample subgroups or between different survey periods.
TYPEOF QUESTIONS: Limited probing When seeking more detail, there are a number of types probes you can use, depending on what they are saying and what you want to discover.
TIME DIMENSION: Cross- sectional Cross-sectional studies form a class of research methods that involve observation of all of a population, or a representative subset, at one specific point in time
26
TYPE OF ANALYSIS: Statistical Collection, examination, summarization, manipulation, and interpretation of quantitative data to discover its underlying causes, patterns, relationships, and trends.
SAMPLE SIZE Financial data which is relevant to 3 years is taken as the sample size.
SAMPLE METHOD Convenience sampling method is used to collect data for the study.
PERIOD OF STUDY The study was conducted for 60 days.
DATA COLLECTION The data for the study were collected from secondary and primary sources. The study mainly depends on secondary data.
SOURCES The primary data have been collected with the help of informal discussion with Account Officers
SECONDARY DATA • Annual Report of Azmi Plywood Industries •Informal discussion with Account Officers •Journals and Magazines
27
CHAPTER 5 PROJECT WORK UNDERTAKEN
28
INDUSTRY PROFILE Plywood Manufacture in India In 1916, Government of India set up a committee to explore the feasibility of manufacturing tea chest plywood in Bengal and Assam and the other in North Bengal were set up in 1917 to manufacture the same, but they stopped production owing to non-availability of suitable bonding materials, indigenous lead lining nails and bands for packing. Both the imported plywood and sawn wood chest were used together. No development took place for some time until two factories in Assam took up the matter as a challenge and started making plywood for tea chest by around 1924 – 1925. These were resistance from the tea industry for the use of locally made plywood on the ground that quality of timber used was not suitable. Since independence, the plywood industry has regained strength and has grown to a fullpledged industry in spite of some setbacks faced by the industry in the post war period. In 1947, India was a net imports of plywood, mainly tea-chest plywood compared to the plywood production in 1947 which was negligible, the present day production has grown up to 62 Million M2. These have been a steady growth in the plywood industry. Since the last 3-4 years. The plywood industry consumes about 15 million M3 of timber. The other main raw materials used by plywood industry in the synthetic rain, which is available within the country. In Kerala, there are more than 500 plywood industries including large scale industries such as Hindustan New Print and Western India Plywood Ltd. In India Plywood industry are mainly located in Assam, Karnataka, Kerala, Maharashtra, Madhya Pradesh and Andaman & Nicobar Islands.
29
Role of Plywood Industries in India:-
Plywood industries have played a significant role in the Socio-economic development of the country. They provided various types of plywood products that are required for various infrastructural developments. This industry means the strategic needs of our country like portion plywood, plywood for pre-fabricated houses required for soldiers on the Himalayan frontiers and other government needs. This industry also means the packaging requirements of the country export. The industry also provides employment to a large number of people directly and indirectly, through various sales outlets.
Problems regarding Plywood: Wood based industries in India faces a lot of problems. Major are in the underutilization of installed capacity due to the non-availability of required timber in India. Most wood based industries depend upon the government owned forest for their raw material. But due to the shortage in the effective forest cover, which was needed for maintaining ecological stability, the central goal controls the falling of trees. Thus the diminishing forest covers inadequate natural degeneration and subsequent for falling of trees, led the industries into hardships. Due to nonavailability the big industrial consumers resorted to import, which increased their cost of production. However plantation would have the inherent deficiency of susceptibility to bio deterioration and therefore expanded use of preservation like Borax, and Boric acid is imperative. But this may lead to environmental pollution. High cost of production due to increased cost of gilth logs, urea formaldehyde and phenol formaldehyde, competition from private and public sector, import restriction imposed by government, mismanagement labour,
30
and unrest are other factors which adversely affected growth and profitability of these industries. The wood based industry also face strict competition from the metal and plastic make industries.
RATIO ANALYSIS (conceptual exposition) To evaluate the financial position and performance of a firm, the financial analyst needs a yardstick known as “ratio analysis”. The construction of ratios is a major analytical tool in the hand of the financial executives. Mostly financial statements are expressed in absolute rupee figures. The use of ratio aids the financial manager and other analyst in pointing up the relative importance of the various items appearing in the financial statements. Each major item in the balance sheet and in the income statement has a relationship with one or more items in either or both statements which can be expressed in ratios. By using ratios, comparisons with financial statements of other firms are facilitated and comparison of firm‟s financial performance can too be made over a period of time. The analysis of financial statement is, thus, an important aid to financial analysis of the various methods of financial statement analysis, ratio analysis is most widely used to appraise the financial position of concern.
Significance of Ratio Analysis: The significance of Ratio Analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. The use is not confined the finance managers alone. They are different parties interested in the ratio analysis for knowing the financial position of a firm for different purpose. The suppliers of goods on credit,
31
banks, financial institutions, investors, shareholders and the management all make use of ratio analysis as a tool of evaluating the financial position and the performance of a firm.
1.1 MEANING OF RATIOS Ratios are supply means of highlighting in arithmetical terms the relationship between figures drawn from various financial statements. Robert Anthony defines a ratio as- simply one number is expressed in terms of another. A large number of ratios can be computed from the basis financial statements, balance sheet and profit and loss account. Objectives of Ratio Analysis •
Standardize financial information for comparisons
•
Evaluate current operations
•
Compare performance with past performance
•
Compare performance against other firms or industry standards
•
Study the efficiency of operations
•
Study the risk of operations
RATIO ANALYSIS Ratio analysis involves three steeps. First the financial analyst selects from the statements those sets of data which are relevant to his objective of analysis and calculates appropriate ratios for the firm. The second steep involves comparison either with the industry standards or with the ratios of the same firm relating to past. In third steep after such comparisons conclusions may be withdrawn and presented in the shape of reports.
32
Ratio analysis is a powerful tool of financial analysis. Ratio is defined as “the indicated question of two mathematical expression” and as “the relationship between two or more things”. In financial analysis a ratio is used as a bench mark for evaluating the financial passion and performance of the firm. The absolute accounting figures reported in the financial statements do not provide a meaningful understanding of the performance and financial passion of a firm. The point to note is that a ratio reflecting a quantities relationship helps to form an analytical judgment. Such is due nature of all the financial ratios.
PURPOSE Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company‟s shares. Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
33
Ratios generally hold no meaning unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
1.2 CLASSIFICATION OF RATIOS The use of ratio analysis is not confined to financial manager only. They are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various users of ratios, there many types, which can be calculated from the information given in the financial statements. The particular purpose of the user determines the particular ratios that might be used for financial analysis. Ratios can be classified for the purposes of exposition into four broad groups 1) Liquidity ratios 2) Capital structure/leverage ratios 3) Profitability ratios 4) Activity ratios
These ratios can be further classified into: 1. Solvency Ratio: a)
Current ratio
b)
Liquid/quick/acid test ratio
c)
Proprietor's ratio.
2. Capital structure ratios: a)
Debt-equity ratio
b)
Capital gearing ratio 34
3. Turnover ratio: a)
Inventory turnover ratio
b)
Inventory velocity
c)
Debtor's turnover ratio
d)
Debtors' velocity
e)
Fixed assets turnover ratio
f)
Working capital turnover ratio
4. Profitability ratios in relation to sales: a)
Gross profit ratio
b)
Operating net profit ratio
c)
Material consumption ratio
d)
Conversion cost ratio
e)
Expense ratio.
35
Ratios can be classified as follows Ratios
.
Traditional Classification
Functional classification
1. Liquidity ratios 1.Balance Sheet Ratios
2. Leverage ratios
2. Profit and Loss A/c Ratios
3. Activity ratios
4. Profitability ratios 3. Composite /Mixed Ratio
36
1.2.1 LIQUIDITY RATIOS: This ratios measure the liquid passion of enterprise i.e. whether the current assets are sufficient to pay of current liabilities as and when they mature. Thus this ratio indicates the short term solvency of the business. The ratio which indicate the liquidity of the firm are; 1) net working capital, 2) current ratio, 3) acid test/quick ratios, 4) super quick ratios and 5) turn over ratios.
1) Net working capital Net working capital (nwc) represents the excess of current assets over current liability. the term current asset refers to assets which are in the normal course of business get converted into cash over a short period, usual not exceeding one year. Current liabilities are those liabilities which are required to be paid in short period, normally a year although nwc is really not a ratio, it is frequently employed as a measure of a company‟s liquidity position.
NET WORKING CAPITAL NWC RATIO =
------------------------------------------NET ASSETS
Net Working Capital = Current Assets - Current Liabilities
37
2) Current ratio Another liquidity ratio is the current ratio. the current ratio is the ratio of total current assets total current liabilities. It is calculated by dividing by current assets by current liabilities.
Current Ratio =
Current Assets -----------------------Current Liabilities
The current assets of the firm represents those assets which can be in the ordinary course of business, converted into cash within a short period of time, normally not exceeding one year and include cash and bank balances, marketable securities inventory of raw materials, semi finished (work in progress) and finished goods, debtors net provisions for bad and doubtful debts, bill receivable and prepaid expensed. The current liabilities defined as “liabilities which are short term maturing obligations to meet, as originally contemplated, within a year and include trade creditors, bills payable, bank credit, and provision for taxation, dividends payable and outstanding expenses.
SIGNIFICANCE: Current ratio indicates the solvency of the business, i.e., ability to meet the liabilities of the business as and when they fall due. The current assets are the sources from which the current liabilities have to meet. It is also a major of safety that management maintains in order to allow for the inevitable in the flow of funds through the current asset and liability accounts. Though 2:1 ratio is considered desirable, it is not must it depends upon the nature of the industry. The excessive current ratio is treated as a sign of a managerial efficiency. Window dressing or presence of mounting stocks may show good current ratio. Low ratio suggests the week financial 38
policy. In capital reach countries where long term funds from the capital market are available in abundance, firms depends on current liabilities for financing a relatively a small part of their current assets requirements and it is not unusual for a firm to finance to two third to three quarters of its current assets by long term sources.
PRECUTIONS: A. The ratio is sensitive to a number of factors which must be taken into account if dependable results are to be obtained, some of which are to be given below. B. It must be ascertained whether the current assets and current liabilities are properly valued or not under valuation or over valuation of current assets or current liabilities distorted the ratio to that extend. C. Window dressing: it means to show the financial position better than it actually exists. This is done by resorting to malpractices, such as inflating the value of inventory omitting certain liabilities, treating a short term liability as long term liability etc. the analyst must therefore, get himself assured that such window dressing is not resorted to. D. A company with a high percentage of its current assets in cash is more liquid than one with high percentage inventory. Large stocks may have free accumulated only for seasonal trade.
39
3) Liquid ratio or acid test ratio or quick ratio: Acid test ratio establishes a relationship between quick or liquid, assets and current liabilities. Un asset is liquid if it can be converted into cash immediately. The quick ratio is found out by dividing by quick assets by current liabilities
Quick Assets Quick Ratio =
---------------------Current Liabilities
Significance: Normally quick ratio must be 1:1. If there is low liquid ratio, the concern may be put into difficulties at the maturity date of liabilities. A quick ratio 1:1 or more does not necessarily imply sound liquidity position. It should be remembered that all debtors may not be liquid, and cash may be immediately needed to pay operating expenses it should be noted that inventories are not absolutely no liquid. To measurable extent, inventories are available to meet current obligations. Thus a company with high value liquid ratio can suffer from the shortage of funds if it has slow paying, doubtful and long duration outstanding debtors. On the other hand a company with allow value of quick ratio may really be prospering and paying its current obligations in time. Nevertheless, the quick ratio remains unimportant idea of due firm‟s liquidity.
1.2.1 capital structure /leverage ratios: Financial leverage refers to the use of debt finance. While debt capital is a riskier and cheaper source of finance. Structural and coverage ratios are commonly use to analyze financial leverage.
40
Structural ratios are debt equity ratio and debt assets ratio. The important coverage ratios are interest coverage ratio, fixed charges coverage and debt service coverage ratio. Leverage ratio help in assessing the risk arising from the use of debt capital. Debt equity ratio shows the relative contributions of creditors and owners.
Debt equity Debt equity ratio = ---------------------------Owner‟s equity
Debt equity: Long-term, short term and current liabilities. Owner’s equity: Long term, short term and current liabilities. Significance: This ratio is acceptable as 1:1 .in general, lower the debt equity ratio the higher the degree of protection enjoyed by the creditors.
2) Debt ratio: The debt ratio measures the extent to which borrowed fund support the firm assets. It is defined as: Debt Debt ratio = -------------------Assets
The numerator of this ratio includes all liabilities, short term as well as long-term, and the denominator of this ratio is the total of all assets.
41
A high ratio means that claims of creditors are greater than those of owners. A high debt company is able to borrow funds on very restrictive terms and conditions. the loan agreement may required a firm to maintain a certain level of working capital or a minimum current ratio, or restrict the payment of dividend or fix limit to the officers and employers salaries and so on .heave indebtedness leads to creditors pressure and constraints on the management independent functioning and energies .when the company earns low profit, and having high debt ratio, it cannot even pay the interest charges of the creditors. A low debt equity ratio implies greater safety for creditors
3) Interest coverage ratio: Debt ratios are static in nature and fail to indicate the firm‟s ability to meet interest and other fix charges, obligations. The interest coverage ratio or the times interest earned is use to test the firms debt servicing capacity. The interest coverage ratio is computed by dividing earnings before interest and tax (DEBIT) by interest charges.
Interest coverage =
Debit -------------------Interest
Depreciation is a noncash item. Therefore, funds equal to depreciation are also available to pay interest charges. We can thus calculate the interest coverage ratio as earnings before depreciation, interest and taxes (DEBIT) divided by interest. A higher coverage ratio is desirable, but too high a ratio indicates that the firm is very conservative in using debt, and that it is not using credit to the best advantage of share holder. A
42
lower ratio indicates excessive use of debt. The firm should make efforts to provide the operating efficiency, or to retire debt to have a comfortable coverage ratio.
1.2.3 Profitability Ratios: Profitability reflects the final results of business operations. There are two types of profitability ratios: Profit margins ratios of profitability in relation to sales and rate of return ratios or profitability in relation to investment profit margin ratio show the relationship between profit & sales. The two profit popular margin ratios are: Gross profit margin ratio and net profit margin ratio. Rate of return ratios reflect the relationship between profit and investment. The important rate of return measures are: Return on total assets earning power, and return on equity.
A company should earn profit to survive and grow over a long period of time, but it would be wrong to assume that every action initiated by management of company should be aimed at maximizing profit, irrespective of social consequences. It is unfortunate that the word “Profit” is looked upon as a term of abuse since some firms always want to maximize profit at the cost of employees, costumer and society. Except such infrequent cases, it is a fact that sufficient profits must be earns to sustain the corporations of business to be able to obtain funds from investors for expansion and growth and to contribute towards the society overheads in the welfare of the society.
1) Gross Profit Margin Ratio : Gross profit is defined as difference between net sales and goods sold cost of the ratio of profit to sales plays an important role in two management areas. In the areas of financial management, the ratio serves as a valuable indicator of the firm‟s ability to utilize effectively outside source of funds secondly in marketing, the profit ratio also serves as an important tool in
43
shaping the pricing policy of the firms. A high gross profit margin ratio is sign of good management. A gross margin ratio may increase due to any of the following factors. a) Higher sales price, cost of goods sold remaining constant. b) Lower cost of goods sold, sales prices, remaining constant, c) a combination of variation in sales prices and cost, the margin widening, d) An increase in the proportionate volume of higher margin items. The analysis of this sector reveals to management how depressed gross profit margin can be improved. This ratio is calculated by dividing gross profit by net sales.
Gross Profit Gross Profit Ratio = ---------------------- x 100 Net Sales
This ratio shows the margin left after meeting manufacturing costs. It measures the efficiency of production as well as pricing. To analyze the factors underlying the variation in gross profit margin the proportion of various elements of cost (labour, material and manufacturing overheads) to sales may be studied in detail.
2) Net Profit/Margin Ratio: The net profit ratio is determined by dividing the net income after taxes to the net sales for the period and measures the profit per rupee of sales. The ratio shows these things left for share holders (both equity and preference) as a percentage of net sales. The net profit ratio measures the overall efficiency of production, administration, selling, financing, pricing and tax 44
management. Jointly considered, the gross and net profit margin ratios provide a valuable understanding of the cost and profit structure of the firm and the enable to analyst to find at the sources of efficiency.
Net Profit Net Profit Ratio = --------------------
x 100
Net Sales
An analyst will be able to interpret the firms profitability more meaningfully if evaluates both the ratios gross margin and net margin jointly. To illustrate, if the gross profit margin has increase over years, but the net profit margin has either remained constant or declined, or has not increased as fact as gross margin, this implies that the operation expenses relative to sales have been increasing. The increasing expanses should be identified and controlled. Gross profit margin may decline due to fall in sales price or increase in the cost of production. As a consequence, net profit margin will decline unless operating expenses decrease significantly. Therefore, both the ratios should be jointly analysed and each item of expense should be thoroughly investigated to find out the causes of decline in any or both the ratios.
3) Return On Total Asset Here the profitability ratio is measured in terms of the relationship between net profit and asset. The Return on total asset may also be called profit assets ratio. The return on total asset is defined as: Net Income (Profit) Return on Total Asset= ----------------------------Average Total Asset 45
The net income to
total assets ratio suppose by a measure of how efficiently the capital is
employed. Though widely used, this is an old measure because the numerator measures the return to share holders (equity and preference) and the denominator represents the contribution of shareholders as well as creditors. To ensure internal consistency, the following formula may be used.
Net Income + Interest Return on Total Asset =
-----------------------------Average Total Asset
4) Earnings Power: A measure of operating of profitability the earning power of firm is calculated as follows:
Earnings before Interest and Taxes Earning Power = -------------------------------------------Average Total Asset
The earning power is a measure of business performance which is not affected by tax and payment of interest. It focuses only on operating performance. Hence, it is useful for inter-firm comparison.
46
5) Return On Equity: A measure of great interest to equity share-holders, the return on equity is defined as: Equity Earnings Return on Equity= ---------------------------Average Net Worth
The numerator of this ratio is equal to profit after tax less preference dividends. The denominator includes all contributions made by equity share holders i.e. paid up capital + reserves and surplus. The ratio is also called the return on Net Worth. The Return on Equity measures the profitability of equity funds invested in the firm. This ratio reflects the productivity of the ownership (or risk) capital employed in the firm. This ratio is influenced by several factors: average cost at debt funds, earning power, debt equity ratio and tax rate.
6) Operating Expenses Ratio: The operating expenses ratio is computed by dividing operating expense viz. cost of goods sold and general and administrative expenses (excluding interest) by sales.
Cost of goods sold+ operating expenses Operating Expenses Ratio = --------------------------------------------------- x 100 Net sales
47
Operating expenses consists of: i.
Factory expenses like factory rent, wages, factory insurance etc.
ii.
Administrative expenses like rent, insurance office staff salaries, printing and stationery etc
iii.
Selling and distribution expense like salesman salaries, traveling expenses, advertising, and delivery van expenses etc.
The ratio shows the percentage of net sales that is absorbed by cost of goods sold and operating expenses. Naturally higher the ratio, the less favorable it is because it would become a small margin to meet interest, dividends and other corporate needs. The ratio is an index of the operating efficiency of the enterprise .It is advisable to study the ratio over a number of years so as to view the direction of the operating efficiency.
7) Return on Investment (ROI) For calculating Return on investment is to divide by profit after tax (PAT) by investment. Investment includes pool of funds supplied by shareholders and lenders, while profit after tax represents residue income of shareholders; therefore, it is conceptually unsound to use PAT in the calculation of ROI. It is, therefore, more appropriate to use one of the following measures of ROI for comparing the operating efficiency of firms.
EBIT (I-t) ROI = ROTA = -------------------------Total Assets
48
Where ROTA & RONA are respectively return on total assets and return on net assets. RONA is equivalent of return on capital employed.
8) Tobin’s q: Tobin‟s q is the ratio of the market value of a firm‟s assets (or equity or debt) to its assets replacements costs. Thus Market value of assets Tobin‟s q = ----------------------------------------Replacement cost of assets
This ratio differs from the market value of book value ratio in two respects: it includes both debt and equity in the numerator, and all assets in the denominator, not just the book value of equity. It is argued that firms will have incentive to interest when q is greater 1. They will be reluctant to invest once q becomes equal to 1.
1.2.4 Activity Ratio: The best category of ratios is the activity ratio. The liquidity ratios and the leverage ratios, it may be recalled, are relevant for the short term and the long term creditors of the firm. The profitability ratios are useful in assessing the profitability of the firm to its owner as also the operational efficiency of firm to its owners as also the operational efficiency of a firm. Activity ratios are concerned with measuring the efficiency in asset management. Sometimes, these ratios are also called efficiency ratios. The efficiency with which the asset is used would be reflected in the speed and rapidity with which assets are converted in sales the greater the rate of turnover, the more efficiency management, after things being equal. As activity ratio may, 49
therefore, be defined as a test of the relationship between sales and the various assets of a firm. Activity ratios thus, involve a relationship between sales owned assets. A proper balance between sales and assets generally reflects that assets are managed well. Several activity ratios can be calculated to judge the effectiveness of assets utilizations.
1) Inventory Turnover: Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is computed by dividing the cost of goods sold by average inventory. Cost of goods sold Inventory Turnover
=
-----------------------------Average Inventory
The Average inventory is the average of the opening and closing balances of inventory. When the number of days in year (say 360) is divided by inventory turnover, we obtain days of inventory holdings. (DIH) Average inventory DIH
=
360
-------------------------------
=
--------------------------
Cost of goods sold
Inventory turnover
The inventory turnover reflects the efficiency of inventory management. The higher ratio, the more efficient, the management of inventories and vice versa. However, this may not always be true. A high inventory turnover may be caused by a low level of inventory which may result in frequent stock-outs and loss of sales and costumer goodwill.
50
2) Debtors (Accounts Receivable) Turnover Ratios: This ratio shows how many times receivable (Debtors) turnover accounts during year. Debtors‟ turnover is found out by dividing net credit sales by average account receivables (Debtors).
Net Credit Sales DTR = -------------------------------------Average accounts receives
If the figure if net credit is not available, one may have to make do with the net sales figure. To outside analyst information about credit sales and opening and closing balances of debtors may not be available. Therefore, debtor‟s turnover can be calculated by dividing total sales by the year-end balance of debtor.
Sales Debtor Turnover =
------------------Debtors
Average collection period = the average collection period represents the number of days worth of credit sales that is locked in debtors. It is defined as:
Average accounts receivable Average collection period = --------------------------------------------Average daily credit sales
51
If the figure of credit sales is not available, one may have to make do with the net sales figure. The average collection period and the accounts receivable turn over are calculated as follows:
365 Average collection period = ------------------------------------------Accounts receivable turnover
The average collection period may be compared with the firm‟s credit terms to judge the efficiency of credit management. For example, if the credit terms are 2/3, net 45, an average collection period of 85 days means that the collection is slow and an average collection period of 40 days means that collection is prompt. An average collection period which is shorter than the credit period allowed by the firm needs to be interpreted carefully. It may mean efficiency of credit management or excessive conservatism in credit granting that may result in the loss of some desirable sales. The objective of the comparison implied in the debtor‟s turnover ratio is to learn how old accounts are and partly to learn how fast cash will flow from their collection.
52
3) Fixed Assets Turnover Ratio: The ratio is arrived at as under: Sales Fixed Assets Turnover Ratio = -------------------------------
=
No. of times
Average net fixed assets
This ratio measures sales per rupee of investment in fixed assets. Again this ratio measures the efficiency in the utilization of fixed assets. This ratio indicates weather the fixed assets are being fully utilized. It is an important measure of the efficient and profit earning capacity of the business. A debtor‟s turnover ratio is an index of the over-trading while a low ratio suggests idle capacity and excessive investment in fixed assets. However, in interpreting this ratio, one caution should be born in mind. When the fixed assets of the firm are old and substantially depreciated, the fixed assets turnover ratio tends to be high because the denominator of the ratio is very low. The collection period ratio thus helps an analyst in two respects. 1. In determining the collectability of debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firm‟s comparative strength and advantage relative to its credit policy and performance vis-à-vis the competitors credit policies and performance.
1.3 Utility/Advantages Of Ratio Analysis: Ratio analysis is an important and useful technique to check upon the efficiency with which working capital is being used in the organization. Some ratios indicate the trend or progress or downfall of the firm. It helps financial analyst in evaluating the financial position and
53
performance of firm. The use of ratio analysis is not confined to the financial manager or financial analyst only. The bank, credit supplier, leading institutions and experienced investor all use ratio analysis as their initial tool in evaluating the firms as a desirable borrower or as potential investment outlet. It functions as a sort of health test. With the help of ratio analysis financial analyst can measure weather the firm is at present financial healthy or not. The following are some of the advantages/utility of ratio analysis.
1) Trend Analysis: Ratio analysis enables a firm to take the time dimension into account. It indicates weather the financial position of a firm in improving or deteriorating over the years.
2) Inter-firm Comparison: Ratio analysis not only shows light on the financial position of a firm but also serves as a stepping stone to remedial measures. This made possible due to inter-firm comparison. Comparison with industry averages. It is expected that of industry to which it belongs. Such comparison demonstrates the relative strength of the firm.
3) Makes Intra-Firm Comparison: Ratio analysis provides also makes possible comparison of the performance of the different division of the firm. The ratio are helpful deciding about their efficiency or otherwise in the past and likely performance in the future.
54
4) Aids in Financial Forecasting: Ratio analysis is very helpful in financial forecasting. Ratios relating to past sales, profit and financial position Is base in the future trends.
5) Aids in cost control: Ratios are very useful for measuring the performance and very useful in cost contract. Ratio analysis throws light on the degree of the efficiency in management and utilization of its assets.
6) Aid in comparison: With the help of ratio analysis ideal ratios can be composed and they can be used for comparison of a particular firm‟s progress and performance.
7) Communication Value: Different financial ratios communicate the strength and financial standing of the firm to the internal and external parties.
8) Simplifies Financial Statements: Ratio analysis simplifies the comprehension if financial statements. Ratios tell the whole story of changes in the financial conditions of the statements.
9) Helps in Planning: Ratio analysis helps in planning and forecasting over a period of time a firm develops certain norms that may indicate future success or failure. If relationship changes in firms data over different time periods, the ratios may provide clues on trend and future problems. Thus “ratio can assist management in its basic functions of forecasting, planning, co-ordination, control and communication.”
55
1.4 PROBLEMS/ LIMITATIONS IN RATIO ANALYYSIS: Though the ratios are to calculate and easy to understand, they must be used very carefully. However financial statement analysis can be a very useful tool for understanding firm‟s performance and condition. If due care is not taken, they must confuse rather than clarify the situation. Ratio never provides definite answer to financial problems. There is always the question of judgment as to what significance should be given to the figures. So one must rely upon one‟s own good sense in making ratio analysis and an analyst must use this technique keeping in the mind the following short comings of this technique.
1) Limited use of Single Ratio: Ratio can be useful only when they are computed in sufficient large number. A single ratio would not be able to convey anything. At the same time if too many ratios are calculated, they are likely to confuse instead of revealing any meaningful conclusion.
2) Ratios are composite of many figures: Ratios are a composite of many different figures. Some cover time period, others are at an instant of time while still others are only overages. Many of the figures used in the ratio analysis are no more meaningful than the average temperature of the room in which this man sits. A balance sheet figure shows the balance of the account at one movement of day. It certainly may not be representative of typical balances during the year.
3) Effects of inherent limitations of accounting: Because ratios are computed from historical records, so they possess those elimination‟s and weaknesses as accounting records possess.
56
4) Lack of qualitative analysis of the problem: Ratio analysis gives only a good basis for quantitative analysis of financial problems. But it suffers from qualitative aspects. 5) Lack of proper standards: While making comparisons, it is always a challenging job to find out an adequate standard. For example, current ratio is generally considered to be ideal if current assets are twice the current liabilities. However, in case of those concerns which have adequate arrangements with their bankers for providing funds when they acquire, it may perfectly ideal if current assets are equal to slightly more than current liabilities. It is therefore, necessary to avoid many rules of thumb. Financial analysis is an individual matter and value for a ratio which will be perfectly acceptable for one company or one industry may not be all acceptable in case of another.
6) Window-Dressing: Firms may resort to window dressing to show a favorable financial position. For example a firm may prepare its balance sheets at a point when its inventory level is very low. As a result, it may appear that the firm has a very comfortable liquidity position and a high turnover of inventories. When window dressing of this kind is suspected. The financial analyst should look at the average level of inventory over a period of time and not the level of inventory of just one point of time.
7) Ratios alone are not adequate: Ratio is only indicator. They cannot be taken as final regarding good or bad financial position of the business. For example a high current ratio, does not necessarily mean that the concern has a good liquid position in case current assets mostly comprise of outdated stocks. It has been 57
correctly observed “Ratios must be used for what they are financial tools. Too after they are looked upon as ends in themselves rather than as a mean to an end it may be an indication that a firm is weak or strong in a particular area but it must never be taken as proof.”
8) Heuristic Inflictive character: As Harrigan says “From a negative view point the most striking aspects of ratio analysis is the absence of an explicit theoretical structure under the dominant approach of “Pragmatically empiricism” the user of ratio required to rely upon the authority of an author‟s experience. As a result, the subject of ratio analysis reflects with untested assertions about which ratio should be used and what their proper levels should be.
9) Effect to personal ability and bias of the analyst: Ratios are only means of financial analysis not an end in themselves. They can be affected with the personal ability and bias of the analyst.
10) Differences in definitions: Comparisons are also made difficult due to differences in definitions of various financial terms. The term like gross profit, net profit, operating profit etc. have not precise definitions and well accepted procedure for their comparison.
11) No allowance for change in price level: While making comparisons of ratios, no allowance for changes in general price level is made. A change in price level can seriously affect the validity of comparisons of ratios computed for different time periods.
58
12) Limited uses: Ratio analysis is not a substitute for sound judgment rather is a helpful tool to and in applying judgment to otherwise complex situations. So conclusion drawn with the help of ratios should be verified with other techniques too. It may therefore, be concluded that ratio analysis, if done mechanically, is not only misleading but also dangerous. It is indeed a double edged sward which requires a great deal of understanding and sensitive of the management process rather than mechanical financial skill. It has rightly been observed, the ratio analysts are an aid to management to correct decisions, but as a mechanical substitute for thinking and judgment, it is worse than useless. The ratios if discriminately calculated and wisely interpreted can be a useful tool of financial analyst.
59
CHAPTER 6 DATA ANALYSIS & PRESENTATION
60
1. Current ratio Current assets Current ratio = -------------------------Current liabilities Year
Current assets
Current liabilities
Ratio
2008
4561922.67
608171
7.5
2009
6621088.14
2365624.64
2.7
2010
370864.29
2908662
1.28
8 7 6 5 4
Current Ratio
3 2 1 0 2008
2009
2010
Comments: The above graph shows that the current ratio for the year 2008-09 is 7.5:1 it indicates that the short term liabilities can be easily paid off but the ratio is above standard i.e. 2:1, it shows that much more capital is blocked in current assets and same is the case with the year 2009-10 but in 2010-11 current ratio is 1.28:1.
61
2 Quick ratio
Quick assets Quick ratio = -------------------------Quick liabilities
Year
Quick Assets
Quick Liabilities
Quick ratio
2008
1552700.76
602727
2.57
2009
2638073.42
2365624.64
1.12
2010
3237297.33
2905485
1.11
3 2.5 2 Quick Ratio 1.5
Quick Ratio Quick Ratio
1 0.5 0 2008
2009
2010
Comment: The standard liquid Ratios is1:1 the above graph shows in the year 2008-09, 2009-10, 2010-11 the ratios are 2.57:1, 1.11:1 and 1.11:1, which are nearer to the standard Ratio it shows goods management. But still company has to improve its liquid assets 62
3 Inventory or Stock Turnover Ratio
Sales Inventory Turnover Ratio = --------------------------Closing stock
Year
Sales
Closing stock
Ratio
2008
4136183
3009881.91
1.3
2009
7053350.29
3983014.72
1.8
2010
7229363.99
3710864.29
1.9
2 1.8 1.6 1.4 1.2 Inventory Turnover Ratio
1 0.8 0.6 0.4 0.2 0 2008
2009
2010
Comment: From above table we can see that sales and closing stock is increasing but the sales is increasing in less speed which shows company has to focus on sales. 63
4 Debtors Turnover Ratio Average sales Debtor Turnover Ratio =
-----------------------------------------Debtors + Bills receivable
Year
Average sales
Debtors
Bills
Ratio
receivable 2008
41,36,183
9,60,803
0
4.3
2009
70,53,350.29
1505032
0
4.7
2010
72,29,363.99
2238442
0
3.2
5 4 3
Debtors Turnover Ratio
2 1 Debtors Turnover Ratio
0 2008
2009
2010
Comment: In above table we can see that a sale is increasing but in credit with sales, debtors are also increasing so it‟s not a good sign for company. Hence company has to reduce the period of debtors.
64
5 Fixed Assets Turnover Ratio Sales Fixed Assets Turnover Ratio = -----------------------Fixed assets
Year
Sales
Fixed assets
Ratio
2008
4136183
3877966.25
1.1
2009
7053350.29
3624042.25
1.9
2010
7229363.99
3459781.25
2.0
2 1.8 1.6 1.4 1.2 1
Fixed Asset Turnover Ratio
0.8 0.6 0.4 0.2 0 2008
2009
2010
Comment: In above table we can see that the sales are increasing but on the other hand fixed assets are decreasing. This is not a good sign company has to concentrate on its fixed assets.
65
6 Total assets turnover ratio Sales Total assets turnover ratio = ------------------Total assets
Year
Sales
Total assets
Ratio
2008
4136183
8439888.92
0.5
2009
7053350.29
10245130.39
0.7
2010
7229363.99
10407943.01
0.7
0.8 0.7 0.6 0.5 Total Asset Turnover Ratio
0.4 0.3 0.2 0.1 0 2008
2009
2010
Comment: In above table sales as well as total assets are increasing which shows company is in a good position. Sales has shown a good sign almost 200% increase in it.
66
7 Gross profit ratio Gross profit Gross profit ratio = ----------------------- * 100 Sales
Year
Gross profit
Sales
Ratio
2008
1054730
4136183
25.5
2009
1797800
7053350.29
25.4
2010
1836858
7229363.99
25.4
25.5 25.48 25.46 25.44 25.42 25.4 25.38 25.36 25.34 2008
2009
2010
Comment: In above table gross profit shows a positive sign it is approximately up to 25% of sales so company should concentrate to increase the gross profit rate.
67
8 Net profit ratio
Net profit Net profit ratio = -------------------------- * 100 Sales
Year
Net profit
Sales
Ratio
2008
-303319.16
4136183
-7.3
2009
334705.90
7053350.29
4.7
2010
43028.91
7229363.99
0.6
6 4 2 0 Net Profit Ratio
-2 -4 -6 -8 2008
2009
2010
Comment: In above table we can see in the year 2008 net profit was negative but in further years it has shown a good positive comeback. so company is in a good position.
68
9 Working capital turnover ratio
Net sales Working capital turnover ratio = ---------------------------------Net working capital
Year
Net sales
Net working capital
Ratio
2008
4136183
3953751.67
1.04
2009
7053350.29
4255463.5
1.65
2010
7229363.99
4039499.62
1.78
1.8 1.6 1.4 1.2 1 net working capital turnover ratio
0.8 0.6 0.4 0.2 0 2008
2009
2010
Comment: In above table we can see that the working capital shows a positive balance which is not good for company. Lots of its current assets is engaged in working capital.
69
10
Current assets to fixed assets
Current assets Current assets to fixed assets = ------------------------Fixed assets
Year
Current assets
Fixed assets
Ratio
2008
4561922.67
3877966.25
1.18
2009
6621088.14
3624042.25
1.80
2010
6948161.62
3459781.39
2.00
2 1.8 1.6 1.4 1.2 1
current assets to fixed assets
0.8 0.6 0.4 0.2 0 2008
2009
2010
Comment: In the above table fixed assets as well as current assets shows a positive balance so company can relax. There is no need to think much about the assets.
70
CHAPTER 7 SUGGESTIONS & CONCLUSIONS
71
SUGGESTIONS
To improve the short term solvency, the company should try to reduce the investment in current assets and try to recover the amount from debtors as early as possible to maintain the current ratio as per the standard. The management should not use the short term loan for acquiring the fixed assets. The management should try to improve their debt Equity ratio to reduce their interest and tax liabilities. Such policy strengthened the long term financial solvency of the company. The company must maintain spindle utilization at maximum possible levels so as to minimize the cost of overheads. The company must ensure that no surplus labour is engaged in any of the departments and the labour productivity should be maintain at maximum possible levels for the type of machine available in the company. Lastly, there should be full co-operation from various suppliers, unsecured creditors and other, who are interested in improvement of financial position of the company and particularly from the employees.
72
CONCLUSIONS Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use. Ratio analysis has a major significance in analyzing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company. accounting data relationships, which give the decision-maker insights into the financial performance of a company. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm„s position and performance. The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis. 73
CHAPTER 8 BIBLIOGRAPHY
74
BIBLIOGRAPHY 1)
By Raiyani J R
Financial Ratios And Financial Statement Analysis Publisher: New Century Publications (Sep 17, 2008) 2)
By Bernstein
Analysis Of Financial Statements Publisher: Mcgraw-hill Education India Ltd. (15 March, 2002) 3)
M.F.Morley
Ratio analysis Publisher: Gee & Co., 1984 4)
Joseph E. Palmer
Financial ratio analysis Publisher: American Institute of Certified Public Accountants, 1983 5)
Richard Bull
Financial ratios Publisher: Elsevier, 2007
75
WEBLIOGRAPHY 1. http://www.cyberessays.com/search_results.php?query=executive+summary+on+ratio+analysis date 25 sept
2. www.plywoodplantmachinery.com 3. www.indiaplywood.in/ 4. en.wikipedia.org/wiki/Plywood 5. www.ipirti.gov.in/
76
