ABB's Ratio Analysis 2011
88
SUMMER PROJECT 2011 PROJCT TITLE: RATIO ANALISYS PROJECT ON: ABB LTD. PROJECT GUIDE: Mr. SUNIL RATNAPARKHI PROJECT BY: 1} Mr. PRAKASH GITE 2} Mr. KISHOR JADHAV 3} Mr. PRAYAG ROKADE 4} Mr. BHUSHAN BORSE 1 | Page
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Transcript of ABB's Ratio Analysis 2011
SUMMER PROJECT 2011
PROJCT TITLE: RATIO ANALISYS
PROJECT ON: ABB LTD.
PROJECT GUIDE: Mr. SUNIL RATNAPARKHI
PROJECT BY:
1} Mr. PRAKASH GITE
2} Mr. KISHOR JADHAV
3} Mr. PRAYAG ROKADE
4} Mr. BHUSHAN BORSE
1 | P a g e
Introduction to the Topic:
I have chosen the topic named as ratio analysis to study the performance of the ABB. Ltd.
Because it is very necessary to check the performance of any firm / company, there is always need of
tool like ratio analysis which gives real information about any firm / company and which is very
beneficial to shareholders, creditors and general public to take some important decisions regarding to
their own interest.
The financial statements may not be realistic because certain basic concepts and
conventions prepare them. These statements are interim reports and not the final reports. The
final picture can be known only when the business is closed.
Therefore, there is need of analysis and interpretation of financial statements. This is
necessary to find out the realistic picture of the business. This is also necessary to analyze the
business from various angles like liquidity, profitability, solvency etc.
2 | P a g e
Company Profile:
Highlights:
Company dedicated to supply quality products to varied clientele, embracing an
assortment of market segments. Quality in product being innate company try to focus on the
opportunity in business associations. Buoyed by a dedicated & diligent task force to meet the
most stringent standards & commitment schedules. Companies accomplishment an increasing
number of very satisfied clients.
The Organization:
A vanguard establishment with state of the art machinery, R & D backed by world
class manufacturing facilities & stringent quality control ERDA certifies products for Indian
Standards for their quality & performance. ABB (www.abb.com) is a leader in power and
automation technologies that enable utility and industry customers to improve performance while
3 | P a g e
lowering environmental impact. The ABB Group of companies operates in around 100 countries
and employs about 124,000 people.
Products:
1. Automatic Power Factor Control (APFC) / RTFC Panels
2. Low Voltage (LV) & Medium Voltage (MV) Panels
3. Energy monitoring systems for lighting
4. Compact secondary substation
5. Electrical & Telecommunication Towers
6. Scaffolding
7. Hot dip Galvanizing
4 | P a g e
8. AERATED Concrete Panels (ACP)
9. Export & Merchandising
Corporate Mission Statement:
Availability of sufficient quality energy for nation with sage & green environment
as adherent part of bus, building profits by providing measured solutions in the field of Energy
Transmission& Distribution, Infrastructure & international Business activities.
To company’s customers:
An organization to the phenomenon of bringing in & incorporating the latest in
technology, in its products. At ABB, the company understands the meaning of the word
“Prompt”, & knows that company’s customers want accurate advice today- not a response later,
hence a nationwide marketing & service network- providing a high level of customer interaction
& efficient attendance to the service requirements.
5 | P a g e
To company’s values:
Maintain customer satisfaction throughout the product life cycle & create an environment
of immeasurable value based on mutual trust & high standard of business conduct.
Company’s Specialization:
1. Thyristor Switched Automatic Power Factor correction system
2. Energy Monitoring system
3. Compact Power station
4. Structural Steel Towers & Hardware
5. Panels as per customer specification
6 | P a g e
6. AERATED Concrete Panels (ACP)
7. International Business Activities
Quality Policy:
ABB. Ltd. Is engaged in design & development, manufacture, supply & serving of
APFC Panels & in manufacturing, supplying of automotive sheet metal components & its
assemblies, transmission & distribution products such as switchgear, LV, HV & MV electrical
control panels, telecommunications & transmission towers, substation structures & other similar
structures & scaffoldings.
The company shall increase satisfaction of its valuable customers by supplying products
7 | P a g e
at optimum price as per their specifications, packaging them & delivering as per agreed schedule
all the time. This shall be achieved through:
Continual improvement in all the areas of operations.
Establishing & reviewing measurable quality objectives.
Ensuring minimum waste generation, proper disposal of waste generated during
various processes & safe operating practices for & through all employees.
Emphasis on employee involvement & empowerment.
Objectives of Study:
An objective of project shows purpose of project. Design of project is totally depend
upon objectives of that project.
The important objectives of project are as under:
1} to explain importance of Analysis of Financial Statement as well to find out different
8 | P a g e
ratios of company.
2} To know the profile of ABB. Ltd.
3} To study Financial Statement & prepare Comparative Balance Sheet.
4} To prepare Comparative Income Statement.
5} To study application of various ratios.
6} To assess the financial stability of concern.
Limitations of the Project:
1]. Due to confidentiality some important information, which are important for the
project, could not be collected.
2].Some of the information is lack of accuracy, due to which approximately values
where used for the analysis. Hence, the results also reveal approximate values.
3]. As the duration of project was only two months, therefore it was not sufficient
for the study.
9 | P a g e
Research Methodology:
Intensive research has been done during this project to find out the necessary information
regarding both the Ratio analysis in ABB. Ltd. While working in the organization, I could gather
much information during practical work being carried out by me. Apart from this, the
methodology applied to collect the necessary information is discussed below.
Research can be done primarily with the help of two types of data: -
Primary Data: -
This is mainly concerned with first hand information. It consists of preparing the
taking interviews, Based on the information received from the answer in the interviews detailed
reports is being prepared.
Secondary Data: -
This is mainly concerned with first hand information. It consists of collecting the
10 | P a g e
relevant information from different documents, books, journals, previous reports etc.
During my project, there was a use of the second method i.e. Secondary data for my
research. I used books, documents, previous year reports etc to get the detailed information
regarding financial statements.
Questionnaire Method:
To study the project, Critical Analysis of Financial Statements of, questionnaire was used
as I asked few questions to the Finance Executive and other staff for the relevant information.
The history of the company
Numbers of staff working for the company.
Other company related information.
Areas of operations.
11 | P a g e
Financial Statements:
Meaning:
Financial statements are prepared for the purpose of presenting a periodical review
or report on the progress by the management and deal with the status of the investment in the
business & result achieved during the period under review. The data exhibited in these financial
statements are the result of combined effect of:
Recorded facts;
Accounting conventions;
Assumptions made to implement conventional procedures;
Personal judgments used in the applications of conventions & assumptions;
Accounting standards and guidance notes.
Characteristics of Financial Statements:
1) Financial Statements provide reliable financial information about economics resources
and obligations of a business enterprise.
2) Financial Statements provide reliable information about the net resources (resources
12 | P a g e
less obligations) of an enterprise that result from its activities.
3) Financial Statements provide financial information that assist in estimating the earning
potentials of a business.
4) Financial Statements provide other needed information about changes in economic
resources or obligation.
5) Financial Statements disclose, to the extent possible, other information related to the
financial statements that is relevant to the needs of the users of these statements.
Importance of Analysis & Interpretation:
Published financial statements are only the source of information about the activities &
affairs of a business entity available to the public, share holder, investors & creditors, & the
governments. These various groups are interested in the progress, position & prospects of such
entity in various ways. But these statements however, correctly & objectively prepared, by
themselves do not reveal the significance, meaning & relationship of the information contained
therein. For this purpose, financial statements have to be carefully studied, dispassionately
analyzed & intelligently interpreted. This enables a forecasting of the prospects for future
earnings, ability to pay interest, debts maturities both current as well as long-term, & probability
13 | P a g e
of sound financial & dividend policies.
Comparative Statements:
These financial statements are so designed as to provide time perspective to the various
elements of financial position contained therein.
i. Absolute money values of each items separately for each of the period stated.
ii. Increase & decrease in absolute data in terms of money values.
iii. Increase & decrease in terms of percentages.
iv. Comparison expressed in ratios.
v. Totals of percentages.
Such comparative statements are necessary for the study of trends & direction of
movement in the financial position & operating results. This call for a consistency in the practice
of preparing these statements, otherwise comparability may be distorted. Comparative statements
enable horizontal analysis of figures.
14 | P a g e
There are two important types of comparative statements:
A]. Comparative Balance Sheet:
A comparative balance sheet shows the balance of accounts of assets &
liabilities & different date & also the extent of their increase & decrease between these dates
throwing light on the trends & direction of the changes in the position over period. This help in
predicting about the position of the business in future.
B]. Comparative Profit & Loss Account or Income Statements:
Comparative income statement shows the operating result for a number of
accounting periods & change in data significantly in absolute money terms as well as in relative
percentage.
15 | P a g e
Ratio Analysis:
Introduction:
Ratio can be defined as numerical or an arithmetical relationship between two figures. It
is expressed when one figure is divided by the other.
For example: if 5000 is divided by 10000, the ratio can be expressed as 0.5 or 50%.
Absolute figures are no doubt, valuable but standing alone, they do not convey
any meaning unless they are compared with each other. Accounting ratios show an
interrelationship, which exists among various figures shown in the financial statements?
Importance of Ratio Analysis:
1]. The ratios are very useful in inter-firm & intra-firm comparisons. Inter-firm
comparison is necessary to find out the exact position of a firm / company as compared to other
firm / companies in the same industry. Intra-firm comparison is also necessary to compare the
16 | P a g e
performance of a firm of current year with that of previous years.
2]. The ratios are calculated for a number of years, which helps in setting future plans &
forecasting. I.e. Net Profit as expressed as a percentage of sales can be forecasted on the basis of
the past percentage of the same.
3]. The ratios are of great assistance in locating the weak spots in the business. This
weakness may exist in a business in spite of a satisfactory performance otherwise. i.e. if a firm /
company finds that increase in selling & distribution expenses is more than proportionate to the
results expected or achieved, remedial steps can be taken to overcome this situation.
4]. Accounting ratios reveal the financial position of a business firm / company. This
helps banks, insurance companies as well as other financial institutions in assessing a firm /
company before sanctioning any loan to them. Similarly, the ratios are also helpful to investors
for finding the profitability of a firm / company.
Classification of Ratios:
Profitability Ratio
17 | P a g e
Turnover Ratio
Financial Ratio
ABB. Ltd
18 | P a g e
Comparative Balance Sheet (As on 31st March, 2007 & 2008)(Rs. In ,000)
Particulars
Sc
h. 31-03-2007 31-03-2008
Increase or
decrease in
Amts.
Increase or
decrease in
%
Sources of funds
Share Capital 423,817 423,817 _ _
Reserve & surplus 15,839,626 20,765,715 _ _
Secured loans 5,660 202 _ _
Unsecured loans 0 0 _ _
Deferred tax liabilities 128,034 38,034 _ _
Total 16,397,137 21,227,768 4,830,631 29.46
19 | P a g e
Application of
funds
Fixed Assets
Gross Block 5,769,125 7,664,819 _ _
Less: Depreciation 2,249,827 2,206,494 _ _
Net Block 3,519,298 5,458,325 1,939,027 55.09
Capital work in
progress 1,059,418 1,375,145 _ _
Total Fixed Assets 4,578,716 6,833,470 2,254,754 49.24
Investments 704,546 611,244 (-)93302 (-)13.24
20 | P a g e
Current Assets &
Loans & Advances
Inventories 5 4,887,102 6,426,534
Sundry debtors 6 24,235,625 29,758,869 5,523,244 22.79
Cash and bank 7 6,428,636 3,482,313 _ _
Other current assets 8 2,753,603 3,812,881 _ _
Loans & advances 9 2,802,023 3,517,663 _ _
Less: Current liabilities
and Provision
Current liability 29,314,878 31,618,924 2,304,046 7.86
Provision 678,236 1,596,282 _ _
21 | P a g e
Net Current Assets 29,993,114 33,215,206 _ _
Total 16,397,137 21,227,768 4,830,631 29.46
ABB. Ltd
22 | P a g e
Comparative Income Statement (For the year ended 31st March 2007 & 2008)
(Rs. In ,000)
Particulars
Sch
.
31-03-2007
31-03-2008
Increase or
decrease in
Amts.
Increase or
decrease in
%
INCOME
Sales and Services 63,832,682 73,402,391 9,569,709 14.99
Less - Excise duty 4,529,568 5,032,076 _ _
Sales and Services(Net) 12 59,303,114 68,370,315 9,067,201 15.28
Other Income 13 710,454 1,304,192 593,738 83.57
Total 60,013,568 69,674,507 16.09
23 | P a g e
Expenditure
Cost of Material And
erection Services
42,920,333 49,504,181 _ _
Personal Exp 14 3,060,684 4,029,637 _ _
Other exp. 15 6,075,802 7,138,790 _ _
Depreciation/
Amortization
324,057 366,805 _ _
Interest Expenses 68,123 346,600 278477 408.78
Total 52,448,999 61,342,067 8,875,068 16.92
Profit Before Tax 7,564,569 8,332,440 767,871 10.15
Provision for Tax:
24 | P a g e
Current Tax 2,563,879 2,858,210 _ _
Deferred tax (11,000) (90,000) _ _
Fringe Benefit tax 95,000 90,100 _ _
Profit After Tax 4,916,690 5,474,130 557,440 11.33
Add: Balance brought
forward
519,255 627,930 _ _
Appropriation
General Reserve 4,250,000 5,000,000
Proposed Dividend 466,198 466,198
Corporate Dividend Tax 79,230 79,230
25 | P a g e
Corporate Dividend Tax
-2006
12,587 -
Balance carried forward 627,930 556,632
Basic and Diluted
Earnings per Equity
Share(in Rs.)
23.20 25.83 2.63 11.33
26 | P a g e
ABB. Ltd
Comparative Balance Sheet (As on 31st March, 2008 & 2009) (Rs. In ,000)
Particulars
Sch
. 31-03-2008 31-03-2009
Increase or
decrease in
Amts.
Increase or
decrease in
%
Sources of funds
Share Capital 1 423,817 423,817 _ _
Reserve & surplus 2 20,765,715 23,813,515 3,047,800 14.67
Secured loans 3 202 0 _ _
Unsecured loans 4 0 0 _ _
Deferred tax liabilities 38,034 0 _ _
27 | P a g e
Total 21,227,768 24,237,332 _ _
Application of
funds
Fixed Assets
Gross Block 7,664,819 8,792,636 _ _
Less: Depreciation 2,206,494 2,061,340 _ _
Net Block 5,458,325 6,731,296 1,272,971 23.32
Capital work in
progress 1,375,145 1,163,391 _ _
Total Fixed Assets 6,833,470 7,894,687 1,061,217 15.53
Investments 611,244 168,792 -442,452 -72.38
28 | P a g e
Current Assets &
Loans & Advances
Inventories 5 6,426,534 7,294,061 _ _
Sundry debtors 6 29,758,869 28,577,298 _ _
Cash and bank 7 3,482,313 5,241,405 _ _
Other current assets 8 3,812,881 3,203,027 _ _
Loans & advances 9 3,517,663 3,176,861 _ _
Less: Current
liabilities and
Provision
Current liability 10 31,618,924 29,869,326 -1,749,598 -5.53
Provision 11 1,596,282 1,450,439 _ _
29 | P a g e
Net Current Assets 13,783,054 16,172,887 2,389,833 17.34
Total 21,227,768 24,237,332 _ _
ABB. Ltd
Comparative Income Statement
(For the year ended 31st March, 2008 & 2009) (Rs. In ,000)
Particulars
Sch. 31-03-2008
31-03-2009
Increase or
decrease in
Amts.
Increase or
decrease in
%
INCOME
Sales and Services 73,402,391 64,945,710 _ _
30 | P a g e
Less - Excise duty 5,032,076 2,573,696 _ _
Sales and Services(Net) 68,370,315 62,372,014 -5,998,301 -8.77
Other Income 1,304,192 725,696 -578,496 -44.35
Total 69,674,507 63,097,710 _ _
Expenditure
Cost of Material And
erection Services
49,504,181 45,178,728 -4,325,452 -8.73
Personal Exp 4,029,637 3,892,346 _ _
Other exp. 7,138,790 8,026,815 _ _
Interest Expenses 366,805 256,242 _ _
31 | P a g e
Capitalized Exp. _ 15,473 _ _
Depreciation/
Amortization
346,600 485,058 _ _
Total 61,342,067 57,823,716 -3,518,351 -5.73
Profit Before Tax 8,332,440 5,273,994 _ _
Provision for Tax:
Current Tax 2,858,210 1,805,255 _ _
Deferred tax (90,000) (39,000) _ _
Fringe Benefit tax 90,100 (38,652) _ _
Profit After Tax 5,474,130 3,546,391
32 | P a g e
Add: Balance
brought forward
627,930 556,632 _ _
Appropriation
General Reserve 5,000,000 _ _
Proposed Dividend 466,198 423,817 _ _
Corporate Dividend
Tax
79,230 72,028 _ _
Balance carried
forward
556,632 607,178 _ _
Basic and Diluted
Earnings per Equity
Share(in Rs.)
25.83 16.74 -9.09 -35.19
33 | P a g e
Interpretation of Comparative Balance Sheet:
Analysis of balance sheet changes between 2008 and 2009 reveal as under:
There is increase both in fixed assets and current assets. The total fixed assets have
increase by Rs.1,061,217 i.e. by 15.53 % and the total current assets by Rs.494,392i.e by 1.05 %
because of there is increase in current assets such as increase in inventories and cash balance the
company remains excess working capital for meeting their requirements.
The current liabilities have been decreased by Rs.1,749,598 i.e. by 5.53% because of
there is decrease in sundry creditors as well as bills payable whereas the increase in current
assets of Rs.2,389,833 i.e.by17.34%. Though from the view point of absolute figures the total
current assets have been increased more than the total current liabilities.
The proprietor’s funds have been increased by Rs.3,047,800 because of increase in
Reserve and Surplus. So far as the current liabilities are concerned, the creditors have been
decreased by Rs.1,716,352 by 10.40 %.
Total investment have decreased by Rs.442,452 i.e. by 72.38 %, & Net Current Assets
increased by Rs.2,389,833 i.e. by 17.34%
34 | P a g e
Interpretation of Comparative Income Statement:
The turnovers for the year 2009 have been decreased by Rs.3,518,351 i.e. by 5.37 % over
the turnover for 2008. Thus the turnover indicates the unfavorable position. Material decreased
by Rs.4,325,452 i.e. by 8.73 %.
Other incomes have decreased by Rs.578,496 i.e. by 44.35 %.
1}. Profitability Ratio:
This ratio gives an idea about the profitability of a business firm / company. Profit &
Profitability differ from each other as profit is the difference between income & expenditure
while profitability is measured by comparing the profit with some other parameter like sales,
capital employed, total assets etc. The ratios falling under this category are usually expressed in
percentage.
I].Gross Profit Ratio:
35 | P a g e
Gross Profit is the difference between the net sales (sales less sales returns) & the cost of
goods sold. This ratio is calculated with the help of the following formulae:
Gross Profit Ratio = Gross Profit / Net Sales * 100
Year 2007 = 7,564,569 / 59,303,114 * 100
= 12.75%
Year 2008 =8,332,440 / 68,370,315* 100
= 12.18%
Year 2009 = 5,273,994/62,372,014 * 100
= 8.45%
36 | P a g e
2007 2008 20090
2
4
6
8
10
12
14
Gross Profit Ratio
Gross Profit Ratio
This ratio shows the margin left after meeting the purchases & manufacturing costs. It
measures the efficiency of production as well as pricing. A high gross profit ratio means a high
margin for covering other expenses like administrative, selling & distribution expenses, i.e. other
than the cost of goods sold. Therefore, higher the ratio, the better it is.
Interpretation:
Gross Profit Ratio shows that company has unable to maintained the cost arises
for the production, & this is almost same for the all three years. It is not good sign for the
company to maintain the profitability.
37 | P a g e
II]. Net Profit Ratio:
This ratio shows the earnings left for shareholders (equity & preference) as a percentage
of net sales. It measures efficiency of all the functions of a business firm / company like
production, administration, selling, financing, pricing, tax management etc. This ratio is very
useful for prospective investors because it reveals the overall profitability of the firm / company.
Higher the ratio, the better it is because it gives an idea of overall efficiency of the firm /
company. This ratio is calculated as follows:
Net Profit Ratio = Net Profit / Net Sales * 100
Year 2007 = 4,916,690/59,303,114 * 100
= 8.29%
Year 2008 = 5,474,130/68,370,315 * 100
= 8%
38 | P a g e
Year 2009 = 3,546,391/ 62,372014 * 100
= 5.69%
2007 2008 20090
1
2
3
4
5
6
7
8
9
Series 2
Interpretation:
Net Profit Ratio shows that the company has unable to controlled all direct as well
as indirect expenses so that the ratio is decreases from year 2007 to 2009, it rapidly declines in
39 | P a g e
year 2009 because there is decrease in net profit due to increase in expenses.
III]. Return on Capital Employed:
This ratio indicates the percentage of net profits before interest & tax to total capital
employed. The capital employed is calculated as follows.
(Capital Employed = Equity Capital + Preference Capital + Reserve & Surplus + Long
Term Debt – Fictitious Assets)
This ratio is calculated as follows,
Return on Capital Employed =
Net Profit before Interest & Tax / Capital Employed * 100
Year 2007 = 7,564,569 / 16,263,443 * 100
= 46.51%
Year 2008 = 8,332,440 /21,189,532 * 100
40 | P a g e
= 39.32%
Year 2009 = 5,273,994 /24,237,332* 100
= 21.76%
2007 2008 20090
5
10
15
20
25
30
35
40
45
50
Return on Capital employed
Return on Capital employed
This ratio is considered to be a very important one because it reflects the overall
efficiency with which capital is used. This ratio of a particular business should be compared with
other business firms / companies in the same industry to find out the exact position of the
business.
41 | P a g e
Interpretation:
This ratio gives healthy sign in the year 2007, but it drastically decreases in next year
from 46.51% to 39.32%. And in next year it again decline from39.32% to 21.76%
IV] Return on Equity:
This ratio, also known as return on shareholders’ funds or return on proprietor’s funds or
return on net worth, indicates the percentage of net profit available for equity shareholders to
equity shareholders funds.
Return on Equity =
Net Profit after Interest, Income tax & Preference dividend if any / Equity shareholders
fund * 100
Note: Equity shareholders fund = Equity capital + Reserve & surplus
Year 2007 = 4,916,690/ 16,263,443* 100
= 30.23%
42 | P a g e
Year 2008 = 5,474,130/ 21,189,532 * 100
= 25.83%
Year 2009 = 3,546,391/24,237,332* 100
= 14.63%
2007 2008 20090
5
10
15
20
25
30
35
Return on Equity
Return on Equity
This ratio indicates the productivity of the owned funds employed in the firm / company.
43 | P a g e
However, in judging the profitability of a firm / company, it should not be overlooked that during
inflationary periods, the ratio may show an upward trend because the numerator of the ratio
represents current values whereas the denominator represents historical values.
Interpretation:
This ratio again shows good % in the year 2007 & after that it decreases slightly
& again decrease drastically. Where net profit increases but not in that proportion actually it
requires. So that starting with 30.23% it goes down to 14.63%.
V]. Return on Total Assets:
This ratio compares the net profit after tax with the total assets. The formulae for
calculation of this ratio are as follows:
Return on Total Assets = Net Profit After Tax / Total Assets * 100
Year 2007 = 4,916,690/ 5,769,125 * 100
44 | P a g e
= 85.22%
Year 2008 = 5,474,130/7,664,819 * 100
= 71.42%
Year 2009 = 3,546,391/8,792,636 * 100
= 40.33%
2007 2008 20090
10
20
30
40
50
60
70
80
90
Return on Total Assets
Return on Total Assets
45 | P a g e
Interpretation:
This ratio again shows good % in the year 2007 i.e. 85.22% & after that it decreases to
i.e. 71.42% & again decline drastically i.e. 40.33% due to the merger. Where net profit increases
as well as total assets also increases, But when we considering total assets it goes up
tremendously so that it affects the overall returns on total assets.
VI] Earnings per Share (EPS):
This indicates the amount of profit available for distribution amongst the equity
shareholders. This ratio is calculated as shown below:
Earnings per Share =
Net Profit after Interest, Income Tax & Preference Dividend / Number of Equity Shares
Year 2007 = 4,916,690,000/ 211,908,375
46 | P a g e
= Rs.23
Year 2008 = 5,474,130,000/ 211,908,375
= Rs.25
Year 2009 =3,546,391,000 / 211,908,375
= Rs.16
2007 2008 20090
5
10
15
20
25
30
EPS
EPS
If EPS increases, the possibility of a higher dividend per share also increases. However,
47 | P a g e
the dividend payment depends on the policy of the company.
Interpretation:
This ratio shows positives sign for the company where starting with Rs.23 it goes
up to Rs.25 dues to increase in Net Profit. But this rally stop and EPS start falling in 2009 which
is not as per expectation.
2}. Turnover Ratio:
These ratios are also known as activity ratios or asset management ratios. These
ratios are very important for a business concern to find out how well the facilities at the disposal
of the concern are being used. These ratios are usually calculated on the basis of sales or cost of
goods sold. High turnover ratios indicate better utilization of resources.
Required figures for Turnover Ratio are as follows:
Particulars Year 2007 Year 2008 Year 2009
Working Capital 8,990,088 11,861,673 14,446,465
48 | P a g e
Average Debtors 15,702,677+24,235,625 / 2
=19969151
24,235,625+29,758,869 / 2
= 26,997,247
29,758,869+90110473 / 2
= 59,934,671
I}. Working Capital Turnover Ratio:
This ratio compares the net sales with net working capital of the business firm /
company. The indication given by this ratio is the number of times working capital is turned
around in a particular period. The ratio is calculated with the help of the following formulae:
Working Capital Turnover Ratio = Net Sales / Net Working Capital
(Net Working Capital = Current Assets – Current Liabilities)
Year 2007 = 59,303,114 / 8,990,088
= 6.60 Times
Year 2008 = 68,370,315 / 11,861,673
= 5.76 Times
49 | P a g e
Year 2009 = 62,372,014/ 14,446,465
= 4.31Times
2007 2008 20090
1
2
3
4
5
6
7
Working Capital Turnover Ratio
Working Capital Turnover Ratio
The higher this ratio, the better is the utilization of the working capital & also indication
of lower working capital. However, a very high working capital turnover ratio is a sign of over
trading & a firm / company may face shortage of working capital. A firm / company should
compare this ratio with the ratio of other firm / company’s in the same industry & also with the
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industry average to find out its position as compared to other firm / company’s.
Interpretation:
This shows net sales are 6.60 times more than the net working capital in the year
2007 & it decreases 5.76 Times in the year 2008 & after that it again decreases as it shows that
how the net working capital is used with the net sales as it decreases means there is no better
utilization of net working capital.
3} Financial Ratios:
These ratios are calculated to judge the financial position of a business firm /
company from the long- term as well as the short- term angle.
Required figures for Financial Ratios are as follows:
Particulars Year 2007 Year 2008 Year 2009
Current Assets 38,304,966 43,480,597 44,315,691
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Current Liabilities 28,336,307 31,618,924 29,829,326
Quick Assets 38,304,966 - 4,887,102 =
33,417,864
43,480,597 - 6,426,534 =
37,054,063
44,315,691 - 7,294,061 =
37,021,730
I] Current Ratio:
This ratio is calculated by dividing current assets by current liabilities. Current
ratio is also known as solvency ratio as it indicates how the expected current claims are covered
by current assets. This ratio is calculated with the help of the following formulae:
Current Ratio = Current Assets / Current Liabilities
Year 2007 = 38,304,966/ 28,336,307
= 1.35 Times
Year 2008 = 43,480,597/ 31,618,924
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= 1.38 Times
Year 2009 =44,315,691 / 29,829,326
= 1.49 Times
2007 2008 20091.25
1.3
1.35
1.4
1.45
1.5
1.55
Current Ratio
Current Ratio
Normally it expected that the current ratio should be 2:1, which indicates that current
assets should be twice as compared to the current liabilities. A very high current ratio will not
indicate a favorable position as it means that there is an excessive investment in current assets is
made. This will result in decrease in profitability due to blocking of large funds in working
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capital.
Interpretation:
This ratio indicates the proportion of current assets available for meeting the
current liabilities. Here in the year 2007, the current assets are 1.35 times than current liabilities,
after that it gradually increases from 1.38 times to 1.49 times respectively in the year 2008 &
2009, It indicates company is in good position.
II] Liquid / Quick / Acid Test Ratio:
This ratio is used to measure the ability to honor day-to-day commitments. It is
the ratio between the liquid assets & liquid liabilities. From the Balance Sheet, liquid assets are
calculated by deducting inventories from current assets. Liquid liabilities are current liabilities
less bank overdraft & cash credit. The formulae for calculation of this ratio are as follows:
Liquid / Quick / Acid Test Ratio =
Liquid Current Assets / Liquid Current Liabilities
(Current Assets, Loans & Advances – Inventories / Current Liabilities & Provisions -
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Bank Overdraft - Cash Credit)
Year 2007 = 33,417,864/
= 1.25 Times
Year 2008 = 37,054,063/
= 1.11 Times
Year 2009 =37,021,730 /
= 1.11 Times
Year 2007 Year 2008 Year 2009
1.25
1.11 1.11
Liquid / Quick / Acid Test Ratio
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The ideal liquid ratio is considered to be 1:1, which means that liquid current assets
should be equal to the liquid current liabilities.
This ratio indicates whether the firm / company has the ability to pay its short-term
liabilities or not.
Interpretation:
The ideal liquid ratio should be 1:1, but here in 2007, it indicates the liquid
current assets are 1.25 times than liquid current liabilities; Means Company
III] Debt-Equity Ratio:
This ratio is calculated to measure the comparative proportion of borrowed funds
& shareholders’ funds invested in the firm / company. A firm / company raises funds through
owned funds, which are also called as shareholders funds or proprietor’s funds as well as
borrowed funds. The proportion between these two sources should be properly balanced;
otherwise the firm / company may face problems. This ratio indicates this proportion &
calculated as shown below:
Debt-Equity Ratio = Long Term Debt / Shareholders Funds
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Year 2007 = 0/ 16,263,443
= 0:1
Year 2008 = 0 / 21,227,768
= 0:1
Year 2009 = 0 / 24,237,332
= 0:1
Ideally this ratio should be 2:1, which means that debt can be twice as compared
to the owned funds. A ratio less than 2:1 will indicate that the firm / company is not taking any
risk & is mainly using shareholders funds for financing its requirements. However, if this ratio is
above 2:1, it will indicate that the firm / company is using mainly borrowed funds to finance its
requirements. This may prove to be more risky in the future & hence a firm / company should
keep a constant watch on this ratio.
Interpretation:
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This ratio in 2007,2008and 2009 shows total safe position, there was no long term
debt, there may be short term loans. Means company is using more shareholders funds than
borrowed fund. Means company doesn’t want take any risk in the business.
IV] Proprietary Ratio:
It is primarily the ratio between the proprietor’s funds & total assets. This ratio is
calculated with the help of the following formulae:
Proprietary Ratio = Proprietors Fund / Total Assets
Year 2007 = 16,263,443 / 46,290,251
= 0.35 Times
Year 2008 = 21,227,768/ 54,442,974
= 0.39 Times
Year 2009 = 24,237,332 /55,557,097
= 0.44 Times
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2007 2008 20090
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Proprietary Ratio
Proprietary Ratio
This ratio indicates the proportion of proprietors funds used for financing the total
assets. As a very rough measure, it is suggested that 2/3 rd to ¾th of the total assets should be
financed through the proprietor’s funds while the balance may be financed through borrowings.
A high ratio will indicate high financial strength but a very high ratio will indicate that the firm /
company is not using external funds adequately.
Interpretation:
The proprietor’s funds should be 0.35 times than total assets to finance the total
assets; this is ideal proportion. In 2007, the ratio indicates almost ideal proportion i.e. 0.35 times.
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But in 2008, ratio i.e. 0.39 times indicates that the firm / company is using more proprietors’
funds. Similarly in 2009, ratio is again 0.44 times which means the firm / company is using more
proprietors’ funds & is not using external funds adequately. The ratio suggest that firm picking
up more proprietor’s on year on year basis.
V]. Current Assets to Fixed Assets:
This ratio shows the proportion of current assets to fixed assets. As described in
current ratio, current assets are held for converting them into cash in a short period of time while
fixed assets are held for long-term purposes, i.e. to enhance the earning capacity of the firm /
company. This ratio indicates the proportion between the two & is calculated with the help of the
following formulae:
Current Assets to Fixed Assets = Current Assets / Fixed Assets
Year 2007 = 41,106,989 / 4,578,716
= 8.98 Times
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Year 2008 = 46,998,260 / 6,833,470
= 6.88 Times
Year 2009 = 47,492,652 / 7,894,687
= 6.01 Times
2007 2008 20090
1
2
3
4
5
6
7
8
9
10
Current Assets to Fixed Assets
Current Assets to Fixed Assets
Interpretation:
This ratio shows the proportion between current assets & fixed assets where in
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2007, current assets are 8.98 times than fixed assets means company has more short term asset
which can be converted into cash within period of time; but in 2008, the ratio directly goes down
to 6.88 times where major proportion of fixed assets than current assets. In 2009, it slightly goes
up by 6.01 times. In short it shows the proportion between current assets & fixed assets.
Limitation of Ratio Analysis:
1].There are difficulties in the comparison between various firm / companys through
ratio. This difficulty is due to the:
I]. There may be a difference between inventory valuation methods followed by various
firm / companys.
II]. Firm / companys follow various methods for providing depreciation.
III]. There may be a difference in the capital structures of firm / companys.
Due to these variations, the financial statements of various firm / companys are not
comparable & hence comparison through ratios becomes difficult.
2]. Inflationary factors are not taken into account in computing ratio analysis.
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3]. Several concepts like capital employed, net worth, shareholders funds are not defined
clearly & hence there may be differences in the practices followed across business firm /
companys.
4]. Another objection to ratio analysis is that ratios show position only on a particular day
& not the picture of the entire year. i.e. Current ratio which is calculated by dividing current
assets by the current liabilities takes into account the figures of current assets & current liabilities
on a particular day. It does not take into account the position, which was there throughout the
year.
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Bibliography:
Financial Management
Author: Mr. Vechalekar
ABB India Annual Report 2007-08-09
www.abb.co.in
www.google.com
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