A SUMMER PROJECT REPORT ON
RATIO ANALYSIS A REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE MBA PROGRAM
AT FACULTY OF MANAGEMENT STUDIES, MRIU,FARIDABAD
SUBMITTED TO Ms. SHILPA ARORA
SUBMIT BY: SUNNY MITTAL ROLL NO – 055 MBA (III SEM)
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DECLARATION I SUNNY MITTAL hereby declare that the project entitled – “RATIO ANALYSIS submitted to MANAV RACHNA INTERNATIONAL UNIVERSITY in partial fulfillment of the requirements of the MBA program is an original and bonafied work done by me .
SUNNY MITTAL Roll no.055
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ACKNOWLEDGMENTS I would like to express my gratitude to all those who gave me the possibility to complete this interim report. First of all I thank to Mr. PANKAJ KUMAR (Head Accounts ) for his cooperation during this period. He was always there to provide me the judicious judgment, logical thinking, procedure and in nut shell everything. His inspiration and precious guidance did play a key role to complete my work at ease and well within time. I wish my deepest gratitude for his support throughout. I would also like to thank Mr. GOVIND BANSAL who helped me at every stage of the program. I am deeply indebted to my faculty guide Ms. SHILPA ARORA whose help, stimulating suggestions and encouragements helped me in all the times of research and for writing the interim report. I express my profound sense of respect and deepest gratitude to each and everyone. I thank all my well-wishers who helped me directly or indirectly in carrying out this work.
SUNNY MITTAL Roll No. : 055
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TABLE OF CONTENTS S. NO. 1 2 3
4 5 6 7 8 9 10 11 12 13 14 15
TOPIC Introduction Objective and scope of study Research Methodology • Problem statement • Research design • Data collection Industry Profile Company Profile Work done during the internship Importance of ratio Method of Analysis Ratios Parties interested in analysis of financial statement Advantages of ratio Limitations of ratios Conclusion Recommendations and suggestions Bibliography
PAGE NO. 6 7 9
11 14 22 24 25 26 34 35 36 37 38 39
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EXECUTIVE SUMMARY This summer project report is prepared at ‘IMPERIAL AUTO INDUSTRIES LTD. on “RATIO ANALYSIS” as a part of curriculum of the MBA program. I have selected this topic to measures the financial position of the company and firm profit ability as well as its credit policy with the help of ratio analysis. Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. Ratio analysis is useful in determining the solvency of a business and the amount of reliance it has on its creditors. Specific ratios included in this group are current ratio, which measures financial strength by dividing a company's assets by its and, which takes the essence of the current ratio but excludes. By focusing on of a business, a quick ratio can measure its strength even in a worst-case scenario whereby all of its funding was suddenly removed.
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INTRODUCTION A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis Ratio analysis is a method of analyzing data to determine the overall financial strength of a business. Financial analysts take the information off the balance sheets and income statements of a business and calculate ratios that can then be used to make assessments of the operating ability and future prospects of that business. These ratios are useful only when compared to other ratios, such as the comparable ratios of similar businesses or the historical trend of a single business over several business cycles. There are various ratios that measure a company's efficiency, short-term strength, and solvency. The type of ratio analysis that is most effective depends upon who needs the information. Credit analysts are concerned with risk evaluation, and they therefore will concentrate of ratios that Measure whether a company can pay its financial obligations and how much debt is involved in capital structure. On the opposite end of the spectrum, analysts looking at a business in terms of an investment opportunity will employ ratios that determine if a company is efficient and how great is its potential profitability. For example, knowing that a company has a particular as determined by a corresponding ratio is meaningless by itself. Financial analysts know it's more important to determine how that ratio looks in terms of other similar companies, or even how that ratio looks compared to prior profitability levels of that same company. In addition, these ratios must be studied over a proper time period, allowing for major changes within the company to be taken into consideration.
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Objectives of the research Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. For that there are some objectives which are described as under. 1. EARNING CAPACITY OR PROFITABILITY The overall objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. 2. COMPARATIVE POSITION IN RELATION TO OTHER FIRMS The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar business. Such comparison also helps the management to study the position of their firm in respect of sales expenses, profitability and using capital.etc. 3. EFFICIENCY OF MANAGEMENT The purpose of financial statement analysis is to know that the financial policies adopted by the management are efficient or not. Analysis also helps the management in preparing budgets by forecasting next year‘s profit on the basis of past earnings. It also helps the management to find out shortcomings of the business so that remedial measures can be taken to remove these shortcomings. 4. FINANCIAL STRENGTH The purpose of financial analysis is to assess the financial potential of business. Analysis also helps in taking decisions; (a) Whether funds required for the purchase of new machinery and equipments are provided from internal resources of business or not. (b) How much funds have been raised from external sources. 5. SOLVENCY OF THE FIRM The different tools of analysis tell us whether the firm has suffucient funds to meet its short-term and long-term liabilities or not.
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SCOPE OF THE STUDY • The study can be used by the researchers for the further analysis and recommendations.
• The company executives can utilize the project report for the purpose of taking financial decisions.
• The training students can use the report to undergo the various aspects of financial management.
• The banks can utilize it as a manual for determining the financial position of the company and its management.
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RESEARCH METHODOLOGY Problem Statement: How to measure the financial position of the company with the help of ratio analysis?
Research Design: A research design is the specification of method and procedure for accruing the information needed. It is overall operational pattern of frame work of project that stipulates what information is to be collected for source by that procedures Descriptive Research design is appropriate for this study. Descriptive study is used to study the situation. This study helps to describe the situation. A detail descriptive about present and past situation can be found out by the descriptive study. In this involves the analysis of the situation using the secondary data
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Data Collection: This research study is based on secondary data, means data that are already available i.e. the data which have been already collected and analyzed by someone else. Secondary data are used for the study of Ratio analysis of this company. To collect the data I have refer – Company annual report, annual magazine, last year balance sheet, and cash flow statements
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INDUSTRY PROFILE Automotive industry in India
The automotive industry in India is one of the largest in the world and one of the fastest growing globally. India's passenger car and commercial vehicle manufacturing industry is the sixth largest in the world, with an annual production of more than 4.7 million units in 2010. The majority of India's car manufacturing industry is based around three clusters in the south, west and north. THE SOUTHERN CLUSTER CONSISTS OF : CHENNAI AND BANGLORE THE WESTERN HUB COSISTS OF : MUMBAI AND PUNE NORTHERN CLUSTER CONSISTS OF : NATIONAL CAPITAL REGION Exports
Automobile Exports registered a growth of 22.30 percent during the current financial year.
ACMA The Automotive Component Manufacturers Association of India (ACMA) is the nodal agency for the Indian Auto Component Industry. It's active involvement in trade promotion, technology up-gradation, quality enhancement and collection and dissemination of information has made it a vital catalyst for this industry's development. It's other activities include participation in
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international trade fairs, sending trade delegations overseas and bringing out publications on various subjects related to the automotive industry. ACMA is represented on a number of panels, committees and councils of the Government of India through which it helps in the formulation of policies pertaining to the Indian automotive industry.
For exchange of information and especially for co-operation in trade matters, ACMA has signed Memoranda of Understanding with its counterparts in USA, Canada, UK, France, Italy, Spain, Japan, South Korea, Malaysia, Uzbekistan, Pakistan, Australia, Egypt, Iran, Tunisia, South Africa. Thailand & Scandinavia.
SIAM Society of Indian Automobile Manufacturers (SIAM) is the apex Industry body representing 38 leading vehicle and vehicular engine manufacturers in India. SIAM is an important channel of communication for the Automobile Industry with the Government, National and International organisations The Society works closely with all the concerned stake holders and actively participates in formulation of rules, regulations and policies related to the Automobile Industry. SIAM provides a window to the Indian Automobile industry and aims to enhance exchanges and communication, expand economics, trade and technical cooperation between the Automotive Industry and its international counterparts. With its regular and continuous interaction with international bodies and organizations it aims to facilitate up gradation of technical capabilities of the Indian Industry to match the best practice worldwide. SIAM also interacts with worldwide experts to assess the global trends and developments shaping the Automotive Industry. It has been actively pursuing issues like Frontier Technologies viz. Telematics: Promotion of Alternative Fuels including Hydrogen Energy for automotive use through cell vehicles and Harmonisation of Safety and Emission Standards etc. Dissemination of information is an integral part of SIAM'S activities, which it does through various publications, reports, seminars and conferences.
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At present, India is the worlds •
Largest tractor and three-wheel vehicle producer.
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Second largest two-wheel vehicle producer.
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Fourth largest commercial vehicle producer.
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Eleventh largest passenger car producer.
The Industry's Challenge: Even though the automotive industry is robust, car manufacturers are complaining that the government's frequent change in policies is not encouraging the industry. Changing the policies and guidelines frequently severely hurts the companies’ plans. It also affects investment decisions in the country
Future Plans: The Government has prepared a ten-year Automotive Mission Plan (AMP) to draw a future plan of action and remove obstacles in the way of competition, such as that required infrastructure be put in place well in time to alleviate its constraining impact on the growth.
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IMPERIAL AUTO INDUSTRIES LTD. FARIDABAD
COMPANY PROFILE
Opposite Railway Goods Shed, Faridabad ( Old ) 14
Tel 0129-2412311, 2423791 E-mail: pankajiai@vsnl.net
ABOUT US •
Established in year 1969
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Largest integrated manufacturer of ‘FLUID TRANSMISSION PRODUCT” (FTP)
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Eight dedicated manufacturing / assembly plant
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Multi location manufacturing facility have diversified product portfolio
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Expected to cross group turnover of US $ 155 million (700 crores) by FY 2010-2011
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3000 employees
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Strategic and technical alliances with major international players in the industry
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Global presence and scale
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Major supplier to most leading OEM ‘s worldwide
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Overseas warehousing capability and facility
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High level of quality and commitment to continuous improvement
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HISTORY/ KEY MILESTONE IN 1969 •
Incorporated as a partnership firm for manufacturing low pressure fuel hose assemblies and in the year 1998 got converted into limited company Established Plant1.
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IN 1970 • •
Initiated supplies to all the major automotive players – Mahindra &Mahindra , TATA MOTORS, Kirloskar, Fiat and Ambassador Started manufacturing rubber hose in- house
IN 1980 • •
Initiated supplies to international players setting up of operations in India – Maruti ,DCM, TOYOTA, SWARAJ MAZDA , NISSAN JCB etc Included Tubular assemblies in its portfolio of products
IN 1990 •
Started supplies to most of new multinational entering the Indian automotive market -New Holland , Ford, Fiat , JCB, General motors Stared manufacturing high pressure hose assemblies Established a dedicated rubber hose manufacturing unit and a 3rd Plant to manufacture high pressure tubes
• •
IN 2000 • •
Approved global supplier to international trucks , cummins , caterpillar, jcb, john deere and other OEM manufacturers overseas Established 11nd plant for tubular assemblies , a dedicated unit for hydraulic assemblies and added nylon extrusion in its portfolio
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Note: Our Panels have been won appreciations from under mentioned consultants • EEL-Delhi, • MECON - Delhi, • M.N. Dastoor-Delhi, • Howe India Ltd. - Delhi, • Mechawar Beekay – Delhi
DIRECTORS Shri. JAGIT Singh , Chairman cum Joint Managing Director Shri S. B. Sardana, Managing Director Shri C.P.KOHLI
Whole time director
Mr. Vinod Kampania Director Dr. R.N. Malik
Director
Mr. Tarun Lamba
CEO
Mr. Madhav Sardana
CEO
SISTER CONCERN IAI INDUSTRIES LTD, GHAT NO. 243, Nanekarwadi, Chakan, Pune
ACTIVITY: Manufacturing of Automobile Parts.
TURN OVER 2001.2002
73 Crores
2002-2003
92 Crores
2003-2004
156 Crores
2004-2005
230 Crores 17
THE VISION : IAI to become a globally recognized financially strong company. Sustaining undisputed leadership in the Indian Market.
THE BUSINESS The core of our business is dedicated to market (manufacturing of automobile parts). Our product marketing / engineering and service net works is dedicated to provide the best solution as per the customer’s need. The faith of our customer is encouraged us for system integration as a result of which we promoted our business globally.
THE STRENGTHS Right from application engineering, till System Integration, we ensure the best! We understand the importance of highest degree of the customer service hence our technical support, service and inventory are always within your reach. We are a Qs- 9000, ISO / TS 16949 approved company and going to implement OHSAS- 18001
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PRODUCTS 1. RUBBER HOSES AND ASSEMBLIES 1.1 Radiator and Heater hoses 1.2 Fuel and vacuum hoses 1.3 Silicon hoses 1.4 Co extruded hoses 1.5 Branch hoses 2. METAL TUBE ASSEMBLIES 2.1 Fuel injection tubes 2.2 CRDI tubes 2.3 Hydraulic tubes 2.4 EGR and bellows
CUSTMOERS
DOMESTIC CUSTMERS •
BOSCH
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CATER PILLAR
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CUMMIN
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DELPHI TVS
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KILOSKAR
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SUZUKI POWERTRAIN
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TATA CUMMINS
AUTOMOTIVE • • • • • • • • • •
ASHOK LEYLAND BAJAJ AUTO FIAT GENERAL MOTORS HYUNDAI HERO HONDA MAHINDRA&MAHINDRA MARUTI SUZUKI NISAN TOYOTA
OFF HIGHWAY AND FARM EQUIPMENT • • • • • • •
• • • •
CATER PILLAR DEFENCE INDIAN RAILWAYS CLASS ESCORTS CONSTRUCTION EQUIPMENT JCB KOMATSU EXPORT CUSTMERS CATER PILLAR- USA FIAT POWERTRAIN- BRAZIL NAVISTAR- USA CANADA &MEXICO CUMMINS- USA,BRAZIL,MEXICO, U.K , JAPAN &CHINA 20
QUALITY SYSTEM •
Imperial auto group companies are TS 16949 &ISO 14001 certified .We are committed to provide world class products and services with due concern for the environment and safety of our workmen and products
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www.impauto.com
LEARNING DURING THE INTERNSHIP 22
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In Imperial auto industry all their accounting work is done on the TALLY and ERP
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I have done a project on calculation of depreciation
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I have to made a register of FIXED ASSETS
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I have calculated depreciation according to INCOME TAX ACT &COMPANIES ACT
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The main difference between above two is : o In income tax act depreciation is charged according to days and it is calculated if asset is use less than 180 days. o But in companies act depreciation is charged according to no. of period in which asset is being utilized Data given to me is in form of: voucher no, location of customer, details and specifications of the product sold, Amount of invoice
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Assets in the data are : building, plant & machinery , furniture& fixture , tube well , motor vehicles , van etc
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This register helps the chartered accountant in taking various decisions.
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From this register we can know much is opening balance of assets before depreciation and how much is after charging depreciation.
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It clearly shows that how much are the assets in the beginning of the year and how much are left at the end by charging depreciation.
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It shows that at which amount asset is being sold whether it is sold on purchase price or less than price.
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Basically our department will prepare the vouchers of the customers.
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They will also give the payment to various customers and employees.
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They also make the payment to some foreign parties through cheques of Bank of Baroda, HSBC.
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All the transactions of finance in purchase section, storage of material and selling of finished goods are done by our department.
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All the payment of loans of various banks at various dates is managed by our department. 23
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After preparing this fixed asset register I have to match the balances of these assets with the Balance sheet.
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The head of our finance department (Mr. Pankaj) issues daily 1 crore rupees to his junior Mr.Govind Bansal for the disbursement of cash to various dealers.
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Our department will also prepare the bills to be sent to various customers of the company.
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They also have maintained cash reserve amount after which they will not use the balance cash. Cash reserve amount is rupees 5 lakhs after which they will stop giving payment to the suppliers.
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All the payments are done after the lunch because they have to make an estimate of how much payment to be done on a particular day.
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The money of the company is not utilized properly because the raw material in the store gets wasted because the available store is not sufficient to keep all the raw material due to which some raw material gets dispersed and wasted.
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The new store house is under construction but it is taking long time than usual because the company has lack of funds.
.
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IMPORTANCE Ratio analysis is an important technique of financial analysis. It is a means for judging the financial health of a business enterprise. It determines and interprets the liquidity, solvency, profitability, etc. of a business enterprise. It becomes simple to understand various figures in the financial statements through the use of different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures presented in financial statements. with the help of ratio analysis, comparison of profitability and financial soundness can be made between one industry and another. Similarly comparisons of current year figures can also be made With those of previous years with the help of ratio analysis and if some weak points are located, remedial measures are taken to correct them.
If accounting ratios are calculated for a number of years, they will reveal the trend of costs, sales, profits and other important facts. Such trends are useful for planning. Financial ratios, based on a desired level of activities, can be set as standards for judging actual performance of a business. For example, if owners of a business aim at earning profit @ 25% on the capital which is the prevailing rate of return in the industry then this rate of 25% becomes the standard. The rate of profit of each year is compared with this standard and the actual performance of the business can be judged easily. Ratio analysis discloses the position of business with different viewpoint. It discloses the position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. with the help of such a study, we can draw conclusion regarding the financial health of business enterprise
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METHOD OF RATIO ANALYSIS:
OCurrent Ratio O Quick Ratio O Debtor turnover ratio O Creditors turnover ratio O operating ratio O Return on total assets O Fixed asset turnover ratio O Return on capital employed O Working capital turnover ratio O Stock turnover ratio O Gross profit margin ratio O Net profit Ratio
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RATIOS CALCULATION
1
Return on capital Employed Operating Profit Before Interest & taxes* 100 average capital Employed
Year 2011
Year 2010
Operating Profit 208838381
80902064.6
912583598 282048861 2 373307221 0
860595457 241481180 7 327540726 4
118929349 1 45000000 249877871 9
788735024 27500000 245917224 0
*10 208838381 0 249877871
80902064.6 245917224
Average Capital Employed Fixed Asset Current Assets
Less. Current Liabilities Provision Capital employed
ROCE
=
27
ROCE
9
0
8.36%
3.29%
Comment:There is a efficient utilization of capital Invested in the business, Because the ratio Is Increased from 3.29% to 8.36%
2
Return on Total Assets Net profit after Tax & interest*100 Total assets Net Profit After Tax
157966609
50155278.6
Current Assets
912583598 123400000 282048861 2
860595457 108400000 241481180 7
Total Assets
385647221 0
338380726 4
*10 157966609 0 385647221 0
50155278.6 338380726 4
Total assets Fixed assts Investment
ROTA
ROTA
=
4.10%
1.48%
Comment:The funds are fully utilized in the business as the ratio is increased from 28
1.48% to 4.10%
3 Operating ratio COGS + Operating Expenses*100 Net Sales COGS&OPERATING 317140916 8
215689983 0
317140916 8
215689983 0
493097958 4
355797173 6
64.32%
60.62%
Net Sales = Net Fixed Assets
493097958 4 912583598
355797173 6 860595457
FATR
493097958
355797173
EXPENSES
Net Sales Operating ratio
Comment:As our operating ratio is Increase from 60.62% to 64.32% so investor will not get fair return on their investment.
4 . Fixed Assets Turnover ratio Net Sales Fixed assets (net)
=
29
6
FATR
=
4 912583598
860595457
5.40
4.13
Comment:The resources are completely utilized because the ratio has been increased from 4.13% to 5.40% 5 . Debtors Turnover ratio Credit Sales Average Accounts Receivable Credit sales = Debtors
=
DTR
=
DTR
=
493097958 4 126978458 0
355797173 6 113395071 8
493097958 4 126978458 0
355797173 6 113395071 8
3.88
3.14
Comment:The company was able to collect debt promptly from its debtors because the ratio is increasing from 3.14 to 3.88
6 . Creditors Turnover ratio Credit Purchase Average Account Payable Credit Purchase = 30
Raw Material*consumable stores
317140916 8
215689983 0
Total Purchase
317140916 8
215689983 0
Average Payable
102965768 4
682552294
CTR
317140916 8
215689983 0
102965768 4
682552294
3.08
3.16
282048861 2
241481180 7
CTR
=
=
Comment:As ratio is decreasing from 3.16 to 3.08,so its signifies that creditors are not being paid promptly thus decreasing the credit worthiness of the company
7 . Current ratio Current Assets Current Liabilities Current Assets
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Current Liabilities
118929349 1
788735024
282048861 2 118929349 1
241481180 7
2.37
3.06
Debtors cash & bank Other Current Assets
126978458 0 96641159.1 400452248
113395071 8 54149939.6 354477442
Total Quick Assets
176687798 7
154257810 0
Current Liabilities
118929349 1
788735024
CR
CR
=
=
788735024
Comment:This ratio is decreasing from 3.06 to 2.37 so it is not good for the business and the firm ability is decreasing to meet its current obligations.
8 . Quick Ratio/ Liquidity ratio Quick Assets Current Liabilities
Quick Assets :-
QR
QR
=
=
176687798 7 118929349 1
154257810 0
1.49
1.96
788735024
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Comment:The short term solvency of the company is not good. Because the quick ratio is Decreasing and the assets are not easily converted into cash.
YEAR 2011
YEAR 2010
SALES/WORKING 9. WORKING CAPITAL TURNOVER RATIO : CAPITAL NET WORKING CAPITAL = NET CURRENT ASSET NET CURRENT ASSET = CURRENT ASSETS - CURRENT LIABILITIES SALES
4930979584
NET CURRENT ASSETS
1721600437
355797173 6 164807168 1 33
2.86418351
2.15886953
COMMENT: This ratio is increasing from 2.15 to 2.86 it means that the working capital changes very fastly
COST OF GOODS SOLD/AVERAGE INVENTORY 10
STOCK TURNOVER RATIO : COST OF GOODS SOLD : AVERAGE INVENTORY
3171409168 749406002.5
215689983 0 582802338
4.231897206
3.70091142
Comment: This ratio is increasing From 3.70 to 4.23 it means that stock are readily converted into cash.
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11. GROSS PROFIT MARGIN RATIO : GROSS PROFIT(sales- cost of goods sold ) NET SALES COMMENT:
GROSS PROFIT/ NET SALES
4930979584
140107190 7 355797173 6
0.356839931
0.39378388
1759570416
This ratio is decreasing from 0.39 to 0.35 it means that the profit of the company is declining and margin is very less.
12.
NET PROFIT MARGIN RATIO
:
NET PROFIT/NET SALES
NET PROFIT
208838381.3
NET SALES
4930979584
80902064.6 355797173 6
0.042352311
0.02273825
COMMENT: This ratio is increasing from 0.022 to 0.042 it means that net profit of the company is increasing because of increasing sales so it is good for the company. 35
Parties interested in analysis of financial statements Analysis of financial statement has become very significant due to widespread interest of various parties in the financial result of a business unit. The various persons interested in the analysis of financial statements are:Short- term creditors They are interested in knowing whether the amounts owing to them will be paid as and when fall due for payment or not. Long –term creditors They are interested in knowing whether the principal amount and interest thereon will be paid on time or not. Shareholders They are interested in profitability, return and capital appreciation. Management The management is interested in the financial position and performance of the enterprise as a whole and of its various divisions. Trade unions: They are interested in financial statements for negotiating the wages or salaries or bonus agreement with management
ADVANTAGES
Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages of ratio analysis: 1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
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2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. 3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications. 4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.
LIMITATIONS The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. 2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only 37
provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading
CONCLUSION 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. Financial ratios are essentially concerned with the identification of significant 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. 38
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.
RECOMMENDATION AND SUGGESTION •
As the capital employed in the firm is efficiently utilized so the firm can further increase the operating profit by efficiently utilizing the fixed assets which lead to enhancing the goodwill of the company. The company should use same strategies as used presently by the company.
•
Due to increase in return on total assets ratio, it shows that the company is properly utilizing its assets .The Company can further increase the investment in assets which lead to more revenue generation and further improvement.
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Due to increase in operating ratio I suggest the company to reduce the unnecessary expenses incurred while producing product and also reduce the wastage which can lead to decrease in operating cost, increase in net sale and a favourable operating ratio.
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As the fixed asset turnover ratio is increasing I recommend the company to regularly invest in fixed asset which lead to efficiency in production and further increase in fixed asset ratio.
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Due to increase in debtors turnover ratio the company can go for credit selling or the company can extend their credit period which lead to building of good relationship with the customers and a positive image in the society .
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As creditor turnover ratio is decreasing so I recommend the company to timely give the payments to all its suppliers unless the supplier will not supply the raw material and the company will be in a huge loss which can also lead to stoppage in production and decrease in net profit.
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Due to decrease in current ratio I suggest the company to reduce the current obligations and increase the current assets which can help in meeting current liabilities and try to make the current ratio 2:1 which is ideal.
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As quick ratio is decreasing so the company should try to make good the short term solvency which can lead to easily conversion of quick assets into cash for meeting current obligations and try to make it 1:1 which is ideal .
BIBLIOGRAPHY WEBSITES : www.impauto.com Books Referred: Financial Management- Prasanna Chandra Accouting For Managers – R.K.SHARMA &SHASHI.K.GUPTA Annual Reports of the company
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