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A STUDY ON FINANCIAL PERFORMANCE USING
RATIO ANALYSIS AT EMAMI LTD
SUMMER PROJECT REPORT
Submitted by
A.GAYATHRIDEVI
REGISTER NO: !"#$"%%
U&de' t(e )uid*&+e ,-
M'. R. HEMALATHA/ M.0.A./
F*+u1ty ,- m*&*)eme&t tudie
In partial fulfilment for the award of the degree
of
MASTER OF 0USINESS ADMINISTRATION
DEPARTMENT OF MANAGEMENT STUDIES
SRI MANA2ULA VINAYAGAR ENGINEERING COLLEGE
PONDICHERRY UNIVERSITY
PUDUCHERRY/ INDIA
SEPTEM0ER 33!
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SRI MANA2ULA VINAYAGAR ENGINEERING COLLEGE
PONDICHERRY UNIVERSITY
DEPARTMENT OF MANAGEMENT STUDIES
0ONAFIDE CERTIFICATE
This to certify that the project work entitled “ A STUDY ON FINANCIAL
PERFORMANCE USING RATIO ANALYSIS AT EMAMI LTD4 is a bonafide work
done by A.GAYATHRIDEVI 5REGISTER NO: !"#$"%%6 in partial fulfilment of the
requirement for the award of Master of Business Administration by Pondicherry Uniersity
durin! the academic year "##$%"##&'
GUIDE HEAD OF THE DEPARTMENT
Vi7*8V,+e E9*mi&*ti,& (e1d O& (((((((((((((((
ETERNAL EAMINER
TA0LE OF CONTENTS
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AC2NO;LEDGEMENT
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AC2NO;LEDGEMENT
* would like to e+press my heartfelt !ratitude to our chairman M'.N.2ESAVAN, -ri
Manakula .inaya!ar /n!ineerin! 0olle!e for the e+tension of the colle!e facilities which
enabled me to complete this project'
* feel obli!ed to our Mana!in! irector M'.DHANASE2ARANE, -ri Manakula
.inaya!ar /n!ineerin! 0olle!e for his support and encoura!ement'
* would like to e+press my sincere thanks to our principal
D'.V.S.2.VEN2ATACHALAPATHY/ for proidin! the colle!e facilities for the completionof this project'
* also thank M'. JAYA2UMAR/ 2'3', epartment of Mana!ement -tudies, for his
aluable su!!estion and assistance throu!hout the project'
* owe my achieement to the inspiration and kind !uidance to my respected
M'.R.HEMALATHA/ 4ecturer, epartment of Mana!ement -tudies, and * am thankful for
her sincere !uidance as my *nternal 5uide to successfully complete my project'
* e+press my sincere thanks to the adisory committee members and staffs, epartment
of Mana!ement -tudies for their continuous monitorin! and assessment'
* thank M'.T.R*@*R*@*& GMB /mami 4td' for helpin! and !uidin! me throu!h out
the project'
* e+press my deep sense of !ratitude to my family members and to my dear friends for
their support and encoura!ement durin! the entire course of study'
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A0STRACT
*n this project, titled “A STUDY ON FINANCIAL PERFORMANCE USING
RATIO ANALYSIS AT EMAMI LTD7' This aim is to analysis the liquidity and profitability
position of the company usin! the financial tools'
This study based on financial statements such as 8atio Analysis, 0omparatie balance
sheet' By usin! this tools combined it enables to determine in an effectie manner'
The study is made to ealuate the financial position, the operational results as well as
financial pro!ress of a business concern'
This study e+plains ways in which ratio analysis can be of assistance in lon!%ran!
plannin!, bud!etin! and asset mana!ement to stren!then financial performance and help
aoid financial difficulties'
The study not only throws on the financial position of a firm but also seres as a
steppin! stone to remedial measures for /mami 4imited'
This project helps to identify and !ie su!!estion the area of weaker position of
business transaction in “EMAMI LTD7'
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LIST OF TA0LES
T*b1e N, N*me ,- T*b1e P*)e N,.
9'1 0urrent 8atio "$
9'" :uick ratio ";
9') 0ash ratio )1
9'6 Aera!e 0ollection Period )6
9'9 *nentory Turnoer 8atio )9
9'< =orkin! 0apital Turnoer 8atio )$
9'$ >i+ed Assets Turnoer 8atio );
9'& Proprietary 8atio 6"
9'; ebt to /quity 8atio 6)
9'1# *nterest 0oera!e 8atio 69
9'11 5ross Profit 8atio 6&
9'1" ?et Profit 8atio 6;
9'1) 8eturn on *nestment 91
9'16 8eturn on /quity 9)
9'19 8eturn on Total Assets 99
9'1< 0omparatie Balance -heet as on )1st March
"##1@ "##"
9&
9'1$ 0omparatie Balance -heet as on )1st March
"##"@ "##)
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LIST OF CHARTS
CHAPTER 8 I
C(*'t N,. N*me ,- C(*'t P*)e N,.
9'1 0urrent 8atio "&
9'" :uick ratio )#9') 0ash ratio )"
9'6 Aera!e 0ollection Period )6
9'9 *nentory Turnoer 8atio )<
9'< =orkin! 0apital Turnoer 8atio )&
9'$ >i+ed Assets Turnoer 8atio 6#
9'& Proprietary 8atio 6"
9'; ebt to /quity 8atio 66
9'1# *nterest 0oera!e 8atio 6<
9'11 5ross Profit 8atio 6&
9'1" ?et Profit 8atio 9#9'1) 8eturn on *nestment 9"
9'16 8eturn on /quity 96
9'19 8eturn on Total Assets 9<
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INTRODUCTION
%.% COMPANY PROFILE
%.%.% HISTORY OF THE COMPANY :
/mami, which started as a cosmetics manufacturin! company in the year 1;$6, adancin!
with increased momentum has e+panded into /mami 5roup of 0ompanies of today' /en
thou!h cosmetics and toiletries continue to be the main thrust area, the other companies in the
/mami 5roup are performin! equally brilliantly' >rom health care institution to medicines,
from real estate to retailin! and, from paper to writin! instruments, 2ospital, /mami is
creatin! one success story after another'
%.%. Vii,& *&d Mii,& :
Vii,&
A company, which with the help of nature, caters to the consumers needs and their inner
crain!s for dreams of better life, in the fields of personal and health care, both in *ndia and
throu!hout the world'
Mii,&
• To sharpen consumer insi!hts to understand and meet their needs with alue%added
differentiated products which are safe, effectie fast'
• To inte!rate our dealers, distributors, retailers and suppliers into the /mami family,
thereby stren!thenin! their ties with the company'
• To recruit, deelop and motiate the best talents in the country and proide them with
an enironment which is demandin! and challen!in!'• To stren!then and foster in the employees, stron! emotie feelin!s of oneness with the
company'
• To uphold the principals of corporate !oernance and moe towards
decentraliCation to !enerate lon! term ma+imum returns for all stake owners'
• To contribute whole heartedly towards the enironment and society and to emer!e as a
model corporate citiCen'
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%.%." V*1ue:
Ree+t -,' e,1e:
=e treat indiiduals with di!nity and respect' =e continue to be honest, open and ethical in
all our interactions with dealers, distributors, retailers, suppliers, shareholders, customers and
with each other'
C,&ume' de1i)(tD
=e ma+imiCin! that our business can succeed only if we can create and keep customers' =e
manufacture products that offer alue for money, which are differentiated and delier safe,
effectie and fast solutions'
I&te)'ity:
People at eery leel are e+pected to adhere to the hi!hest standards of business ethics'
Anythin! less is unacceptable' 3ur ethical conduct transcends beyond policies' *t is in!rained
in our corporate tradition that is transferred from one !eneration of employees to another' =e
comply with applicable !oernment laws and re!ulations in the !eo!raphies where we are
present'
u*1ity:
=e are committed to e+cellence in eerythin! we do' 3ur credoD There is always a better
way% =e must think creatiely, continuously innoate and pursue new ideas to achiee
uncommon solutions to common problems'
Te*m,':
Teamwork is the cornerstone of our business that helps delier alue to our customers' =e
work to!ether across titles, job responsibilities and or!aniCational structure to share
knowled!e and e+pertise'
T(e 'i)(t e&7i',&me&t:
*t is our responsibility to create an enironment that helps employees realiCe their full
potential'
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Le*de'(i:
=e reco!niCe that we can be a leadin! company throu!h actie dele!ation and by creatin!
leaders at eery leel of the or!anisation'
C,mmu&ity de7e1,me&t:
=e continue to contribute to the communities in which we operate and address social issues
responsibly' 3ur products are safe to make and use' =e consere natural resources and
continue to inest in a better enironment'
T'*&*'e&+y *&d (*'e(,1de' 7*1ue:
=e are committed to be drien by our conscience and re!ulatory standards, to delier alue
to our shareholders, commensurate with our mana!ement and financial stren!th'
0,*'d ,- Di'e+t,'
The efficient functionin! of this reputed company rests with the followin! personalities'
-hri 8 - A!arwal, 0hairman-hri 8 - 5oenka, irector
-hri -ushil Er' 5oenka, Mana!in! irector
-hri A . A!arwal, irector
-hri Mohan 5oenka, irector
-hri 2 . A!arwal, irector
-hri .iren F -hah, irector
-hri E E Ehemka, irector
-hri - ? Falan, irector
-hri .aidya - 0haturedi, irector
-hri E ? Memani, irector
-hri - E Todi, irector
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M*&*)eme&t te*m
• -mt' P' -ureka, Brand irector
• -hri Manish 5oenka, Brand irector
• -hri Prasant 5oenka, Brand irector
• -hri hiraj A!arwal, Media irector
• -hri 2ari 5upta, President @ -ales
• -hri Ashok as!upta, President @ 3peration
• -hri 8'' a!a, 0hief of 4e!al Affairs
• -hri 8'E' -urana, -r' .'P' @ Purchase eelopment
• -hri ?'2' Bhansali, -r' .'P' @ >inance
• -hri -' 8aja!opalan, -r' .'P' @ Production
• -hri 8'0' 5attani @ -r' .'P' @ Projects eelopment
• -hri ' Poddar, .'P' @ 0o%ordination
• -hri A'B' Mukherjee, .'P' @ 4o!istics
• -hri A' 5hose, .'P' @ Ayuredic iision
•
-hri A'E' 8ajput, .'P' @3perations
• -hri -' 5roer, .'P' @ 8ural Marketin!
• -hri -'E' Mandal, 5'M' @ -ystems
• -hri .imal Er' Pande, 5'M' @ -ales
• -hri P'?' Balakrishnan, 5'M' @Technical
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• -hri A'E' Foshi, 0ompany -ecretary
• -hri 2'E'5oenka, 5'M' @ =orks
• r' ?eena -harma, 5'M' @ Ayureda G8H
• -hri 8aj Er' 5upta, 5'M' @ Purchase
• -hri T'8' 8ajan, 5'M' @ Production
• Ms' 8atna -inha @ 2ead 28
The most fascinatin! fact about the team is that thou!h indiidual member of the team
functions independently and professionally in their own areas but actually they are ery
closely knit by a bond of fellow feelin!' All the members of the /mami team happily co%e+ist
as if family members'
%.%.# P',-i1e ,- t(e O')*&i*ti,&:
/mami 4imited is in the business of manufacturin! personal, beauty and health care products'
The company manufactures herbal and Ayuredic products throu!h the use of modern
scientific laboratory practices' This blend enables the company to manufacture products that
are mild, safe and effectie' The companyIs product basket comprises oer "# products, the
major bein! Boroplus Antiseptic 0ream, ?aratna 3il, Boroplus Prickly 2eat Powder, -ona
0handi 0hyawanprash and Amritprash, Mentho Plus Pain Balm, >ast 8elief, 5olden Beauty
Talc, Madhuri 8an!e of Products and others' The products are sold across all states in *ndiaand in countries like ?epal, -ri 4anka, the 5ulf countries, /urope, Africa and the Middle
/ast, amon! others'
%.%.> M*&u-*+tu'i&):
/mamis products are manufactured in Eolkata, Puducherry, 5uwahati and Mumbai'
The company commenced operations at its fully automated manufacturin! unit in Amin!aon,
5uwahati in "##)%#6'
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%.%.? Net,':
The companyIs dispersed manufacturin! facilities are complemented with a stron! product
throu!hput, facilitated by a robust distribution network of oer "1## direct distributors and
)'; lakhs retail outlets' =ith a iew to reach its products deeper into the country, direct sellin!
has been e+tended to rural illa!es' As a result, rural sales increased substantially in "##)%#6
compared to the preious year' /mami is headquartered in Eolkata' The companyIs branch
offices are located across "$ cities in *ndia'
%.%.! P',m,te':
/mami is promoted by -hri 8'-'A!arwal and -hri 8'-'5oenka, Eolkata based industrialists'
/mamis shares are listed on the 0alcutta -tock /+chan!e, Bombay -tock /+chan!e and
?ational -tock /+chan!e'
%.%.$ IT 0AC20ONE
INTEGRATED INFORMATION TECHNOLOGY
An efficient information technolo!y network is necessary for a dynamic >M05 company
where the market demands chan!e faster than perhaps in any other industry' At /mami, the
inte!ration of information technolo!y transpires on a continuous basis' This ensures that the
company responds to chan!in! market place realities faster than its competitors and that its
products reach retail sheles just when they are required' *n turn, this enhances brand loyalty
and retains customers'
A successful implementation of the /8P in the offices, factories and depots increased the
companys oerall efficiency' *t enabled sin!le%point data entry and multi%point information
access' The status of raw materials, packin! materials, finished !oods, indents and sales
information !ets constantly updated throu!h /8P' This has become possible due to the Point
to Point 4eased 4ine connections'
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• ?a!pur
%.%.%3 INTERNATIONAL MAR2ETING DIVISION
Vii,&:
To contribute profitably to the !rowth of the company, representin! it with pride across the
!lobe, with a sin!le%minded focus and dedication to establishin! and buildin! !lobal brands'
G1,b*1 P'ee&+e ,- Em*mi:
3er the last $ years, /mamis presence has increased from merely few countries in 0*- to
oer 9# countries spannin! across -AA80, 5ulf, 0*-, ?orth America, /urope and Africa'
The company now is shiftin! its focus from broad basin! Genterin! new marketsH to increasin!
the number of successful products in e+istin! markets to improe upon its operational
efficiency'
P',du+t P,'t-,1i,D The Product Portfolio can be broadly diided into three Umbrellas'
• /mami @ The products under this Umbrella Brand promise care for the skin' The ran!e
consists of -kin care, 2air care, ental care Mens care products'
• 2imani @ Products under this Umbrella Brand promise cure' The ran!e consists of
3T0 medicines'
• Ayucare @ A ran!e of new 4ife style enhancin! products comprisin! of -in!le
in!redient herbs, food supplements, ?eem Aloe .era ran!e, Ayuredic tea, Massa!e
oil, /ssential oils blends'
•
/mma @ This ran!e comprises of customiCed products as per the specific needs put%up by the consumer' Typically these are all mass marketed products sold to price
conscious buyers' The ran!e presently consists of 0reams, 4otions -hampoos'
Futu'e St'*te)y: 0ompanys business plan for *nternational market comprises of the
followin! key factors'
• *nestment in potential markets for key Brands leadin! to 2i!her Possibility of
8eturns in terms of Turnoer and Market eelopment in the lon! run'
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>inancial statements are prepared and presented for the e+ternal users of accountin!
information' As these statements are used by inestors and financial analysts to e+amine the
firms performance in order to make inestment decisions, they should be prepared ery
carefully and contain as much inestment decisions, they should be prepared ery carefully
and contain as much information as possible' Preparation of the financial statement is the
responsibility of top mana!ement' The financial statements are !enerally prepared from the
accountin! records maintained by the firm'
>inancial performance is an important aspect which influences the lon! term stability,
profitability and liquidity of an or!aniCation' Usually, financial ratios are said to be the
parameters of the financial performance' The /aluation of financial performance had been
taken up for the study with “/MAM* 4*M*T/7 as the project'
Analysis of >inancial performances are of !reater assistance in locatin! the weak spots at
the /mami limited eenthou!h the oerall performance may be satisfactory' This further helps
in
>inancial forecastin! and plannin!'
0ommunicate the stren!th and financial standin! of the /mami limited'
>or effectie control of business'
CHAPTER II
REVIE; OF LITERATURE
.% Fi&*&+i*1 t*teme&t A&*1yi:
The financial statements proide some e+tremely useful information to the e+tent that
the balance sheet mirrors the financial position on a particular date in terms of the structure of
assets, liabilities and owners equity, and so on and the profit an loss account shows the results
of operations durin! a certain period of time in terms of the reenues obtained and the cost
incurred durin! the year' Thus, the financial statements proide a summariCed iew of the
financial position and operations of a firm' Therefore, much an be learnt about a firm from a
careful e+amination of its financial statements as inaluable documents performance reports'
The analysis of financial statements is thus, an important aid to financial analysis'
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The focus of financial analysis is on key fi!ures in the financial statements and the
si!nificant relationship that e+ists between them' The analysis of financial statements is a
process of ealuatin! the relationship between component parts of financial statements to
obtain a better understandin! of the firms position and performance' The first task of the
financial analyst is to select the information releant to the decision under consideration from
the total information contained in the financial statements' The second step is to arran!e the
information in a way to hi!hli!ht si!nificant relationships' The final step is interpretation and
drawin! of inferences and conclusion' *n brief, the financial analysis is the process of
selection, relation and ealuation'
. R*ti, A&*1yi:
8atio analysis is a widely%use tool of financial analysis' *t can be used to compare the risk
and return relationships of firms of different siCes' *t is defined as the systematic use of ratio
to interpret the financial statements so that the stren!ths and weakness of a firm as well as its
historical performance and current financial condition can be determined' The term ratio
refers to the numerical or quantitatie relationship between two items and ariables' These
ratios are e+pressed as GiH percenta!es, GiiH fraction and GiiiH proportion of numbers' These
alternatie methods of e+pressin! items which are related to each other are, for purposes of
financial analysis, referred to as ratio analysis' *t should be noted that computin! the ratios
does not add any information not already inherent in the aboe fi!ures of profits and sales'
=hat the ratio do is that they reeal the relationship in a more meanin!ful way so as to enable
equity inestors, mana!ement and lenders make better inestment and credit decisions'
." TYPES OF RATIOS:
.".% Liuidity R*ti,:
The importance of adequate liquidity in the sense of the ability of a firm to meet
currentJshort%term obli!ations when they become due for payment can hardly be oerstresses'
*n fact, liquidity is a prerequisite for the ery surial of a firm' The short%term creditors of
the firm are interested in the short%term solency or liquidity of a firm' The short%term
creditors of the firm are interested in the short%term solency or liquidity of a firm' But
liquidity implies from the iewpoint of utiliCation of the funds of the firm, that funds are idle
or they earn ery little' A proper balance between the two contradictory requirements, that is,
liquidity and profitability, is required for efficient financial mana!ement' The liquidity ratios
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measures the ability of a firm to meet its short%term obli!ations and reflect the short%term
financial stren!th and solency of a firm'
A. Cu''e&t R*ti,:
The current ratio is the ratio of total current assets to total current liabilities' *t is
calculated by diidin! current assets by current liabilitiesD
0urrent assets
0urrent 8atio K ((((((((((((((((
0urrent liabilities
The current assets of a firm, as already stated, represent those assets which can be, in the
ordinary course of business, conerted into cash within a short period of time, normally not
e+ceedin! one year and include cash and bank balances, marketable securities, inentory of
raw materials, semi%finished Gwork%in%pro!ressH and finished !oods, debtors net of proision
for bad and doubtful debts, bills receiable and prepaid e+penses' The current liabilities
defined as liabilities which are short%term maturin! obli!ations to be met, as ori!inally
contemplated, within a year, consist of trade creditors, bills payable, bank credit, proision for
ta+ation, diidends payable and outstandin! e+penses'
0. ui+ R*ti,
The liquidity ratio is a measure of liquidity desi!ned to oercome this defect of the current
ratio' *t is often referred to as quick ratio because it is a measurement of a firms ability to
conert its current assets quickly into cash in order to meet its current liabilities' Thus, it is a
measure of quick or acid liquidity'
The acid%test ratio is the ratio between quick assets and current liabilities and is calculated
by diidin! the quick assets by the current liabilities'
:uick assets
:uick 8atio K ((((((((((((((((((((
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0urrent liabilities
The term quick assets refers to current assets which can be conerted into cash
immediately or at a short notice without diminution of alue' *ncluded in this cate!ory of
current assets are G i H cash an bank balance L GiiH short%term marketable securities and GiiiH
debtorsJreceiables' Thus, the current which are included areD prepaid e+penses and inentory'
The e+clusion of e+penses by their ery nature are not aailable to pay off current debts' They
merely reduce the amount of cash required in one period because of payment in a prior period'
C. C*( R*ti,:
This ratio is also known as cash position ratio or super quick ratio' *t is a ariation of
quick ratio' This ratio establishes the relationship absolute liquid asserts and current liabilities'
Absolute liquid assets are cash in hand, bank balance and readily marketable securities' Both
the debtors and bills receiable are e+cluded from liquid assets as there is always an
uncertainty with respect to their realiCation' *n other words, liquid assets minus debtors and
bills receiable are absolute liquid assets' *n this form of formulaD
0ash in hand at bank Marketable securities0ash 8atio K ((((((((((((((((((((((((((((((((((((((((
0urrent liabilities
.". A+ti7ity R*ti,:
Actiity ratios are concerned with measurin! the efficiency in asset mana!ement' These
ratios are also called efficiency ratios or asset utiliCation ratios' The efficiency with which the
assets are used would be reflected in the speed and rapidity with which assets are conerted
into sakes' The !reater is the rte of turnoer or conersion, the more efficient is the utiliCation
of asses, other thon!s bein! equal' >or this reason, such ratios are desi!ned as turnoer ratios'
Turnoer is the primary mode for measurin! the e+tent of efficient employment of assets by
relatin! the assets to sales' An actiity ratio may, therefore, be defined as a test of the
relationship between sales and the arious assets of a firm'
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A. A7e'*)e +,11e+ti,& e'i,d:
*n order t know the rate at which cash is !enerated by turnoer of receiables, the debtors
turnoer ratio is supplemented by another ratio iC', aera!e collection period' The aera!e
collection period states unambi!uously the number of days aera!e credit sales tied up in the
amount owed by the buyers' The ratio indicates the e+tent to which the debts hae been
collected in time' *n other words, it !ies the aera!e collection period' Prompt collection of
book debts will release such funds which may, then, put to some other use' The ratio may be
calculate by
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inentory may be obtained by usin! another basis, namely the aera!e of the openin!
inentory and the closin! inentory'
C. ;,'i&) C*it*1 Tu'&,7e' R*ti,:
This ratio, should the number of times the workin! capital results in sales' *n otherwords,
this ratio indicates the efficiency or otherwise in the utiliCation of short tern funds in makin!
sales' =orkin! capital means the e+cess of current oer the current liabilities' *n fact, in the
short run, it is the current liabilities which play a major role' A careful handlin! of the short
term assets and funds will mean a reduction in the amount of capital employed, thereby
improin! turnoer' The followin! formula is used to measure this ratioD
-ales
=orkin! capital turnoer ratio K (((((((((((((((((((((
?et =orkin! 0apital
D. Fi9ed Aet Tu'&,7e' R*ti,:
As the or!anisation employs capital on fi+ed assets for the purpose of equippin! itself with
the required manufacturin! facilities to produce !oods and serices which are saleable to the
customers to earn reenue, it is necessary to measure the de!ree of success achieed in this
bearin!' This ratio e+presses the relationship between cost of !oods sold or sales and fi+ed
assets' The followin! is used for measurement of the ratio'
-ales
>i+ed Assets Turnoer K((((((((((((((((
?et fi+ed assets
*n computin! fi+ed assets turnoer ratio, fi+ed assets are !enerally taken at written down
alue at the end of the year' 2oweer, there is no ri!idity about it' *t may be taken at the
ori!inal cost or at the present market alue dependin! on the object of comparison' *n fact, the
ratio will hae automatic improement if the written down alue is used'
*t would be better if the ratio is worked out on the basis of the ori!inal cost of fi+ed assets'
=e will take fi+ed assets at cost less depreciation while workin! this ratio'
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."." Fi&*&+i*1 Le7e'*)e Ge*'i&)B R*ti,
The lon!%term lendersJcreditors would be jud!e the soundness of a firm on the basis of the
lon!%term financial stren!th measured in terms of its ability to pay the interest re!ularly aswell as repay the instalment of the principal on due dates or in one lump sum at the time of
maturity' The lon! term solency of a firm an be e+amined by usin! leera!e or capital
structure ratios' The leera!e or capital structure ratios may be defined as financial ratios
which throw li!ht on the lon!%term solency of a firm as reflected in its ability to assure the
lon!%term lenders with re!ard to GiH periodic payment of interest durin! the period of the loan
and GiiH repayment of principal on maturity or in predetermined instalments at due dates'
A. P','iet*'y R*ti,:
This ratio is also known as N3wners fund ratio GorH N-hareholders equity ratio GorH N/quity
ratio GorH N?et worth ratio' This ratio establishes the relationship between the proprietors
funds and total tan!ible assets' The formula for this ratio may be written as follows'
Proprietors funds
Proprietary 8atio K (((((((((((((((((((((
Total tan!ible assets
Proprietors funds mean the sum of the paid%up equity share capital plus preference share
capital plus resere and surplus, both of capital and reenue nature' >rom the sum so arried
at, intan!ible assets like !oodwill and fictitious assets capitaliCed as “Miscellaneous
e+penditure7 should be deducted' >unds payable to others should not be added' *t may be
noted that total tan!ible assets include fi+ed assets, current assets but e+clude fictitious assets
like preliminary e+penses, profit loss account debit balance etc'
0. Debt t, Euity R*ti,
The relationship between borrowed funds and owners capital is a popular measure of the
lon!%term financial solency of a firm' The relationship is shown by the debt%equity ratios'
This ratio reflects the relatie claims of creditors and shareholders a!ainst the assets of the
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firm' The relationship between outsiders claims and owners capital can be shown in different
ways and, accordin!ly, there are many ariants of the debt%equity ratio'
Total debt
ebt to /quity 8atio K ((((((((((((
Total equity
The debt%equity ratio is, thus, the ratio of total outside liabilities to owners total funds' *n
other words, it is the ratio of the amount inested by the owners of business'
C. I&te'et C,7e'*)e R*ti,
*t is also known as Ntime interest%earned ratio' This ratio measures the debt sericin!
capacity of a firm insofar as fi+ed interest on lon!%term loan is concerned' *t is determined by
diidin! the operatin! profits or earnin!s before interest and ta+es G/B*TH by the fi+ed interest
char!es on loans' Thus,
/B*T
*nterest 0oera!e 8atio K(((((((((((((((
*nterest char!es
*t should be noted that this ratio uses the concept of net profits before ta+es because
interest is ta+%deductible so that ta+ is calculated after payin! interest on lon!%term loan' This
ratio, as the name su!!ests, indicates the e+tent to which a fall in /B*T is tolerable in that the
ability of the firm to serice its interest payments would not be adersely affected' >or
instance, an interest coera!e of 1# times would imply that een if the firms /B*T were to
decline to one%tenth of the present leel, the operatin! profits aailable for sericin! theinterest on loan would still be equialent to the claims of the lendors' 3n the other hand, a
coera!e of fie times would indicate that a fall in operatin! earnin!s only to upto one%fifth
leel can be tolerated' >orm the point of iew of the lenders, the lar!er the coera!e, the
!reater is the ability of the firm to handle fi+ed%char!e liabilities and the more assured is the
payment of interest to tem, 2oweer, too hi!h a ratio may imply unused debt capacity' *n
contrast, a low ratio is a dan!er si!nal that the firm is usin! e+cessie debt and does not hae
to offer assured payment of interest to the lenders'
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and risin! !ross mar!in may also be the result of unsatisfactory basis of aluation of stock,
that is, oeraluation of closin! stock andJor underaluation of openin! stock'
A relatiely low !ross mar!in is definitely a dan!er si!nal, warrantin! a careful and
detailed analysis of the factors responsible for it' The important contributory factors may be
GiH a hi!h cost of production reflectin! acquisition of raw materials and other inputs on
unfaorable terms, inefficient utiliCation of current as well as fi+ed assets, and so onL and GiiH
a low sellin! price resultin! from seere competition, inferior quality of the product, lack o f
demand, and so on' A throu!h inesti!ation of the factors hain! a bearin! on the low !ross
mar!in is called for' A firm should hae a reasonable !ross mar!in to ensure adequate
coera!e for operatin! e+penses of the firm and sufficient return to the owners of the
business, which is reflected in the net profit mar!in'
0. Net P',-it m*')i&:
*t is also known as net mar!in' This measures the relationship between net profits and sales
of a firm'
/arnin!s after interest and ta+es
?et Profit Mar!in K(((((((((((((((((((((((((((((( O1##
?et -ales
A hi!h net profit mar!in would ensure adequate return to the owners as well as enable a
firm to withstand aderse economic conditions when sellin! price is declinin!, cost of
production is risin! and demand for the product is fallin!'
A low net profit mar!in has the opposite implications' 2oweer, a firm with low profit
mar!in can earn a hi!h rate of return on inestment if it has a hi!her turnoer' This aspect is
coered in detail in the subsequent discussion' The profit mar!in should, therefore, be
ealuated in relation to the turnoer ratio' *n other words, the oerall rate of return is the
product of the net profit mar!in and the inestment turnoer ratio' -imilarly, the !ross profit
mar!in and the net profit mar!in should be jointly ealuated'
C. Retu'& ,& I&7etme&t:
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The basic objectie of makin! inestments in any business is to obtain satisfactory return
on capital inested' The nature of this return will be influenced by factors such as, the type of
the industry, the risk inoled, the risk of inflation, the comparatie rate of return on !ilt%
ed!ed securities and fluctuations in e+ternal economic conditions' >or this purpose, the
shareholders can measure the success of a company in terms of profit related to capital
employed' The return on capital employed can be used to show the efficiency of the business
as a whole' The oerall performance and the most important, therefore, can be jud!ed by
workin! out a ratio between profit earned and capital employed' The resultant ratio, usually
e+pressed as a percenta!e, is called rate of return or return on capital employed to e+press the
idea, the purpose is to ascertain how much income the use of 8s'1## of capital !enerates' The
return on “capital employed7 may be based on !ross capital employed or net capital
employed' The formula for this ratio may be written as follows'
3peratin! profit
8eturn on *nestment K(((((((((((((((((
0apital /mployed
D. Retu'& ,& Euity ROEB
This is also known as return on net worth or return on proprietors fund' The preference
shareholders !et the diidend on their holdin!s at a fi+ed rate and before diidend to equity
shareholders, the real risk remains with the equity shareholders' Moreoer, they are the
owners of total profits earned by the firms after payin! diidend on preference shares'
Therefore this ratio attempts to measure the firms profitability in terms of return to equity
shareholders' This ratio is calculated by diidin! the profit after ta+es and preference diidend
by the equity capital' Thus
?et profit after ta+es and preference diidend
8eturn on /quity K((((((((((((((((((((((((((((((((((((((((((
/quity capital
E. Retu'& ,& T,t*1 Aet
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This ratio is also known as the profit%to%assets ratio' This ratio establishes the relationship
between net profits and assets' As these two terms hae conceptual differences, the ratio may
be calculated takin! the meanin! of the terms accordin! to the purpose and intent of analysis'
Usually, the followin! formula is used to determine the return on total assets ratio'
?et profit after ta+es and interest
8eturn on Total Assets K((((((((((((((((((((((((((((((((( O1##
Total assets
.# C,m*'*ti7e 0*1*&+e (eet:
0omparatie balance sheets as on two or more different dates can be used for comparin!
assets, liabilities, capital and findin! out any increase or decrease in those items' *n the words
of >oulke “comparatie balance sheet analysis is the study of the trend of the same items,
!roup of items and computed items in two or more balance sheets of the same business
enterprise on different dates7' -uch analysis often yields aluable information as re!ards
pro!ress of business concern' =hile the sin!le balance sheet represent balances of accounts
drawn at the end of an accountin! period, the comparatie balance sheet represent not nearly
the balance of accounts drawn on two different dates, but also the e+tent of their increase or
decrease between these two dates' The sin!le balance sheet focuses on the financial status of
the concern as on a particular date, the comparatie balance sheet focuses on the chan!es that
hae taken place in one accountin! period' The chan!es are the direct outcome of operational
actiities, conersion of assets, liability and capital form into others as well as a arious
interactions amon! assets, liability and capital'
.> Ti t, im',7e y,u' -i&*&+i*1 (e*1t('
Aut(,': Bill 2udley
-pend less money, or sae more money or do both' *f the annual income does nothin!
more than remain constant, your financial condition will improe'
The aboe statement may sound come across as flippant, but its a fact of life, re!ardless'
?eedless to say we all hae different personalities and different responses to needs and desires
in life'
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A ery important yardstick, in my iew, is the !rowth rate of personal assets' *f you sit down
to all of the sain!s accounts, inestment accounts and properly alues and the total alue is
!reater than the same time of the preious year, it stands to improe that the financial health
in tact and possibly improed'
.? Ste t, Im',7e Fi&*&+i*1 Pe'-,'m*&+e
Aut(,': Terry Peltes
5ien the challen!es facin! physicians, successful practices must take proactie steps to
combat ne!atie trends and improe their oerall financial performance'
To improe practice operations, processes can be streamlined to reduce costsL productiity
improements can be implemented by physicians and employees to increase reenueL a
reportin! structure can be created that allows for better decision makin! by physicians and
employeesL and a rewards system can be implemented to reco!niCe hard%workin! employees'
To determine how you can improe your medical practiceIs performance, consider the
followin! mana!ement procedures'
%B I&te'&*1 C,t Redu+ti,& St'*te)ie
0ost reduction strate!ies focus on reducin! the internal costs !enerated by medical
serices proided to the marketplace'
B E9te'&*1 C,t Redu+ti,& St'*te)ie
These strate!ies include the cost of serices purchased from outside consultants or
endors'
"B Aet *&d C'edit M*&*)eme&t St'*te)ie
These strate!ies ensure that you are !ettin! the most alue from the resources inested in
your practice'
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tell you, as well as where to find all the information you need to compute them, thereIs no
reason why you shouldnIt be able to make the numbers work in your faor'
CHAPTER III
O0JECTIVES
".% P'im*'y Ob@e+ti7e:
To ealuate the financial efficiency of “/MAM* 4*M*T/7'
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". Se+,&d*'y Ob@e+ti7e:
i' To analyse the liquidity solency position of the firm'
ii' To study the workin! capital mana!ement of the company'
iii' To understand the profitability position of the firm'
i' To assess the factors influencin! the financial performance of the or!anisation'
' To understand the oer all financial position of the company'
CHAPTER IV
RESEARCH METHODOLOGY
#.% METHODOLOGY:
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The project ealuates the financial performance one of the company with help of the most
appropriate tool of financial analysis like ratio analysis and comparatie balance sheet' 2ence,
it is essentially fact findin! study'
#. P'im*'y D*t*:
Primary data is the first hand information that is collected durin! the period of research'
Primary data has been collected throu!h discussions held with the staffs in the accounts
department' -ome types of information were !athered throu!h oral conersations with the
cashier, ta+ation officer etc'
#." Se+,&d*'y D*t*:
-econdary data studies whole company records and companys balance sheet in which the
project work has been done' *n addition, a number of reference books, journals and reports
were also used to formulate the theoretical model for the study' And some information were
also drawn from the websites'
#.# T,,1 ued i& *&*1yi:
• 8atio analysis
• 0omparatie balance sheet
#.> Pe'i,d ,- tudy:
The study coers the period of "##1%"##" to "##9%"##< in /mami 4imited'
CHAPTER V
DATA ANALYSIS AND INTERPRETATION
>.% FINANCIAL PERFORMANCE EVALUATION USING RATIO ANALYSIS
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8atio analysis is a powerful tool of financial analysis' A ratio is defined as “The *ndicated
:uotient of Two Mathematical /+pressions7 and as “The 8elationship between Two or More
Thin!s7' *n financial analysis, a ratio is used as a benchmark for ealuatin! the financial
position and performance of firm' The absolute accountin! fi!ures reported in the financial
statement do not proide a meanin!ful understandin! of the performance and financial
position of a firm' The relationship between two accountin! fi!ures, e+pressed
mathematically is known as a financial ratio' 8atios help to summaries lar!e quantities of
financial data and to make qualitatie about the firms financial performance'
The point to note is that a ratio reflectin! a quantitatie relationship helps to form a
qualitatie jud!ment' -uch is the nature of all financial ratios'
>.%.% Si)&i-i+*&+e ,- Ui&) R*ti,D
The si!nificance of a ratio can only truly be appreciated whenD
1' *t is compared with other ratios in the same set of financial statements'
"' *t is compared with the same ratio in preious financial statements Gtrend analysisH'
)' *t is compared with a standard of performance Gindustry aera!eH' -uch a standard
may be either the ratio which represents the typical performance of the trade or
industry, or the ratio which represents the tar!et set by mana!ement as desirable for
the business'
>. Tye ,- R*ti,
>..% Liuidity R*ti,
• 4iquidity refers to the ability of a firm to meet its short%term financial obli!ations
when and as they fall due'
• The main concern of liquidity ratio is to measure the ability of the firms to meet their
short%term maturin! obli!ations' >ailure to do this will result in the total failure of the
business, as it would be forced into liquidation'
A. Cu''e&t R*ti,
The 0urrent 8atio e+presses the relationship between the firms current assets and its
current liabilities' 0urrent assets normally include cash, marketable securities, accounts
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receiable and inentories' 0urrent liabilities consist of accounts payable, short term notes
payable, short%term loans, current maturities of lon! term debt, accrued income ta+es and
other accrued e+penses Gwa!esH'
0urrent assets
0urrent 8atio K ((((((((((((((((
0urrent liabilities
Si)&i-i+*&+e:
*t is !enerally accepted that current assets should be " times the current liabilities' *n a
sound business, a current ratio of "D1 is considered an ideal one' *f current ratio is lower than
"D1, the short term solency of the firm is considered doubtful and it shows that the firm is not
in a position to meet its current liabilities in times and when they are due to mature' A hi!her
current ratio is considered to be an indication that of the firm is liquid and can meet its short
term liabilities on maturity' 2i!her current ratio represents a cushion to short%term creditors,
“the hi!her the current ratio, the !reater the mar!in of safety to the creditors7'
T*b1e: >.% CURRENT RATIO
ear
0urrent
8atio
8s' in lakhs
0urrent
4iabilities
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
;;9
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creditors' The current ratio has been decreasin! year after year which shows decreasin!
workin! capital'
>rom the aboe statement the fact is depicted that the liquidity position of the /mami
limited is satisfactory because all the fie years current ratio is not below the standard ratio
"D1'
C(*'t &,.: >.% CURRENT RATIO
0. ui+ R*ti,
Measures assets that are quickly conerted into cash and they are compared with current
liabilities' This ratio realiCes that some of current assets are not easily conertible to cash e'!'
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inentories'
The quick ratio, also referred to as acid test ratio, e+amines the ability of the business to coer
its short%term obli!ations from its “quick7 assets only Gi'e' it i!nores stockH' The quick ratio is
calculated as follows
:uick assets
:uick 8atio K ((((((((((((((((((((
0urrent liabilities
Si)&i-i+*&+e:
The standard liquid ratio is supposed to be 1D1 i'e', liquid assets should be equal to current
liabilities' *f the ratio is hi!her, i'e', liquid assets are more than the current liabilities, the short
term financial position is supposed to be ery sound' 3n the other hand, if the ratio is low, i'e',
current liabilities are more than the liquid assets, the short term financial position of the
business shall be deemed to be unsound' =hen used in conjunction with current ratio, the
liquid ratio !ies a better picture of the firms capacity to meet its short%term obli!ations out
of short%term assets'
T*b1e: >. UIC2 RATIO
ear
:uick
Assets
8s' in lakhs
0urrent
4iabilities
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
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C(*'t &,.: >." CASH RATIO
>.. A+ti7ity R*ti,:
*f a business does not use its assets effectiely, inestors in the business would rather
take their money and place it somewhere else' *n order for the assets to be used effectiely,
the business needs a hi!h turnoer'
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Unless the business continues to !enerate hi!h turnoer, assets will be idle as it is impossible
to buy and sell fi+ed assets continuously as turnoer chan!es' Actiity ratios are therefore
used to assess how actie arious assets are in the business'
A. A7e'*)e C,11e+ti,& Pe'i,d:
The aera!e collection period measures the quality of debtors since it indicates the speed
of their collection'
• The shorter the aera!e collection period, the better the quality of debtors, as a short
collection period implies the prompt payment by debtors'
• The aera!e collection period should be compared a!ainst the firms credit terms and
policy to jud!e its credit and collection efficiency'
• An e+cessiely lon! collection period implies a ery liberal and inefficient credit and
collection performance'
• The delay in collection of cash impairs the firms liquidity' 3n the other hand, too low
a collection period is not necessarily faorable, rather it may indicate a ery restrictie
credit and collection policy which may curtail sales and hence adersely affect profit'
).# AVERAGE COLLECTION PERIOD
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I&te''et*ti,&:
The shorter the collection period, the better the quality of debtors' -ince a short
collection period implies the prompt payment by debtors' 2ere, collection period decrease
from "##)%"##6 and increased sli!htly in the year "##9%"##
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This ratio measures the stock in relation to turnoer in order to determine how often the
stock turns oer in the business'
*t indicates the efficiency of the firm in sellin! its product' *t is calculated by diidin! he cost
of !oods sold by the aera!e inentory'
0ost of !oods sold
*nentory Turnoer 8atio K (((((((((((((((((((
Aera!e *nentory
Si)&i-i+*&+e:
This ratio is calculated to ascertain the number of times the stock is turned oer durin! the
periods' *n other words, it is an indication of the elocity of the moement of the stock durin!
the year' *n case of decrease in sales, this ratio will decrease' This seres as a check on the
control of stock in a business' This ratio will reeal the e+cess stock and accumulation of
obsolete or dama!ed stock' The ratio of net sales to stock is satisfactory relationship, if the
stock is more than three%fourths of the net workin! capital' This ratio !ies the rate at which
inentories are conerted into sales and then into cash and thus helps in determinin! the
liquidity of a firm'
T*b1e: >.> INVENTORY TURNOVER RATIO
ear
0ost of !oods
sold
8s' in lakhs
Aera!e
*nentory
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
11"#;'$)
11;);'6<
1)$#&')<
1"
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A hi!her turnoer ratio is always beneficial to the concern' *n this the number of times
the inentory is turned oer has been increasin! from one year to another year' This
increasin! turnoer indicates immediate sales' And in turn actiates production process
and is responsible for further deelopment in the business' This indicates a !ood inentory
policy of the company'
Thus the stock turnoer ratios of /mami 4imited, for the fie years are satisfactory'
C(*'t &,.: >.> INVENTORY TURNOVER RATIO
C. ;,'i&) +*it*1 tu'&,7e' '*ti,:
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This ratio shows the number of times the workin! capital results in sales' *n other words,
this ratio indicates the efficiency or otherwise in the utiliCation of short term funds in makin!
sales' =orkin! capital means the e+cess of current assets oer current liabilities' *n fact, in the
short run, it is the current assets and current liabilities which pay a major role' A careful
handlin! of the short term assets and funds will mean a reduction in the amount of capital
employed, thereby improin! turnoer' The followin! formula is used to measure this ratioD
-ales
=orkin! capital turnoer ratio K (((((((((((((((((((((
?et =orkin! 0apital
Si)&i-i+*&+e:
This ratio is used to assess the efficiency with which the workin! capital has been utiliCed
in a business' A hi!her workin! capital turnoer indicates either the faorable turnoer of
inentories and receiables andJor the inadequate of net workin! capital accompanied by low
turnoer of inentories and receiables' A low ratio si!nifies either the e+cess of net workin!
capital or slow turnoer of inentories and receiables or both' This ratio can at best be used
by makin! of comparatie and trend analysis for different firms in the same industry and for
arious periods'
T*b1e: >.? ;OR2ING CAPITAL TURNOVER RATIO
ear
-ales
8s' in lakhs
?et =orkin! 0apital
8s' in lakhs 8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
1&"
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I&te''et*ti,&:
The =orkin! 0apital Turnoer 8atio is increasin! year after year' *t can be noted that the
chan!e is due to the fluctuation in sales or current liabilities' These hi!her ratio are indicators
of lower inestment of workin! 0apital and more profit'
Thus, =orkin! 0apital Turnoer ratios for the fie years are satisfactory'
C(*'t &,.: >.? ;OR2ING CAPITAL TURNOVER RATIO
D. Fi9ed Aet Tu'&,7e' R*ti,:
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The fi+ed assets turnoer ratio measures the efficiency with which the firm has been
usin! its fi+ed assets to !enerate sales' *t is calculated by diidin! the firms sales by its net
fi+ed assets as followsD
-ales
>i+ed Assets Turnoer K((((((((((((((((
?et fi+ed assets
Si)&i-i+*&+e:
This ratio !ies an ideal about adequate inestment or oer inestment or under
inestment in fi+ed assets' As a rule, oer%inestment in unprofitable fi+ed assets should be
aoided to the possible e+tent' Under%inestment is also equally bad affectin! unfaorably theoperatin! costs and consequently the profit' *n manufacturin! concerns, the ratio is important
and appropriate, since sales are produced not only by use of workin! capital but also the
capital inested in fi+ed assets' An increase in this ratio is the indicator of efficiency in work
performance and a decrease in this ratio speaks of unwise and improper inestment in fi+ed
assets'
T*b1e: >.! FIED ASSETS TURNOVER RATIO
ear -ales
8s' in lakhs
?et >i+ed
Assets
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
1&"
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The fi+ed assets turnoer ratio is increasin! year after year' The oerall hi!her ratio
indicates the efficient utiliCation of the fi+ed assets'
Thus the fi+ed assets turnoer ratio for the fie years are satisfactory as such there is no
under utiliCation of the fi+ed assets'
C(*'t &,.: >.! FIED ASSETS TURNOVER RATIO
>.." Fi&*&+i*1 Le7e'*)e Ge*'i&)B R*ti,
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• The ratios indicate the de!ree to which the actiities of a firm are supported by
creditors funds as opposed to owners'
• The relationship of owners equity to borrowed funds is an important indicator of
financial stren!th'
• The debt requires fi+ed interest payments and repayment of the loan and le!al action
can be taken if any amounts due are not paid at the appointed time' A relatiely hi!h
proportion of funds contributed by the owners indicates a cushion GsurplusH which shields
creditors a!ainst possible losses from default in payment'
A. P','iet*'y R*ti,:
This ratio is also known as N3wners fund ratio GorH N-hareholders equity ratio GorH N/quity
ratio GorH N?et worth ratio' This ratio establishes the relationship between the proprietors
fund and total tan!ible assets' The formula for this ratio may be written as follows'
Proprietors funds
Proprietary 8atio K (((((((((((((((((((((
Total tan!ible assets
Si)&i-i+*&+e:
This ratio represents the relationship of owners funds to total tan!ible assets, hi!her the
ratio or the share of the shareholders in the total capital of the company, better is the lon! term
solency position of the company' This ratio is of importance to the creditors who can
ascertain the proportion of the shareholders funds in the total assets employed in the firm' Aratio below 9#Q may be alarmin! for the creditors since they may hae to lose heaily in the
eent of companys liquidation on account of heay losses'
T*b1e: >.$ PROPRIETARY RATIO
Proprietors >und Total Tan!ible Assets
6;
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ear 8s' in lakhs 8s' in lakhs 8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
"$
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This ratio indicates the e+tent to which debt is coered by shareholders funds' *t reflects
the relatie position of the equity holders and the lenders and indicates the companys policy
on the mi+ of capital funds' The debt to equity ratio is calculated as followsD
Total debt
ebt to /quity 8atio K ((((((((((((
Total equity
Si)&i-i+*&+e:
The importance of debt%equity ratio is ery well reflected in the words of =eston and
bri!ham which are reproduced hereD “ebt%equity ratio indicates to what e+tent the firmdepends upon outsiders for its e+istence' >or the creditors, this proides a mar!in of safety'
>or the owners, it is useful to measure the e+tent to which they can !ain the benefits of
maintainin! control oer the firm with a limited inestmentD7 The debt%equity ratio states
unambi!uously the amount of assets proided by the outsiders for eery one rupee of assets
proided by the shareholders of the company'
T*b1e: >.= DE0T TO EUITY RATIO
I&te''et*ti,&:
ear
Total ebt
8s' in lakhs
Total /quity
8s' in lakhs 8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
$"61');
6
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The debt to equity ratio is decreasin! year after year' A low debt equity ratio is considered
faorable from mana!ement' *t means !reater claim of shareholders oer the assets of the
company than those of creditors' >or the company also, the sericin! of debt is less
burdensome and consequently its credit standin! is not adersely affected' Therefore debt to
equity ratio is satisfactory to the company'
C(*'t &,.: >.= DE0T TO EUITY RATIO
C. I&te'et +,7e'*)e '*ti,
9"
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The times interest earned shows how many times the business can pay its interest bills
from profit earned' Present and prospectie loan creditors such as bondholders, are itally
interested to know how adequate the interest payments on their loans are coered by the
earnin!s aailable for such payments' 3wners, mana!ers and directors are also interested in
the ability of the business to serice the fi+ed interest char!es on outstandin! debt' The ratio is
calculated as followsD
/B*T
*nterest 0oera!e 8atio K(((((((((((((((
*nterest char!es
Si)&i-i+*&+e:
*t is always desirable to hae profit more than the interest payable' *n case profit is either
equal or lesser than the interest, the position will be unsafe' *t will show that there this nothin!
left for the shareholders and the position of the lendors is also unsafe' A hi!h ratio is a si!n of
low burden of dept sericin! and lower utiliCation of borrowin! capacity' >rom the points of
iew of creditors, the lar!er the coera!e, the !reater the ability of the firm to handle fi+ed
char!es liabilities and the more assessed the payment of interest to the creditors' *n contrast
the low ratio si!nifies the dan!er the si!nal that the firm is hi!hly dependent on borrowin!s
and its earnin!s cannot meet obli!ations fully' The standard for this ratio for an industrial
undertakin! is < to $ times'
T*b1e: >.%3 INTEREST COVERAGE RATIO
ear
/B*T
8s' in lakhs
*nterest on >i+ed 4oans
8s' in lakhs 8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
1$
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The *nterest coera!e ratio is increasin! year after year' A hi!h ratio is a si!n of low
burden of dept sericin! and lower utiliCation of borrowin! capacity' Therefore this ratio is
satisfactory to the company'
C(*'t &,.: >.%3 INTEREST COVERAGE RATIO
>..# P',-it*bi1ity R*ti,
96
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Profitability is the ability of a business to earn profit oer a period of time' Althou!h the
profit fi!ure is the startin! point for any calculation of cash flow, as already pointed out,
profitable companies can still fail for a lack of cash'
• A company should earn profits to surie and !row oer a lon! period of time'
• Profits are essential, but it would be wron! to assume that eery action initiated by
mana!ement of a company should be aimed at ma+imiCin! profits, irrespectie of
social consequences'
The ratios e+amined preiously hae tendered to measure mana!ement efficiency and risk'
A. G', P',-it M*')i&
• ?ormally the !ross profit has to rise proportionately with sales'
• *t can also be useful to compare the !ross profit mar!in across similar businesses
althou!h there will often be !ood reasons for any disparity'
•
5ross profit
5ross Profit Mar!in K (((((((((((((((( O1##
-ales
Si)&i-i+*&+e:
The !ross profit ratio helps in measurin! the results of tradin! or manufacturin!
operations' *t shows the !ap between reenue and e+penses at a point after which an
enterprise has to meet the e+penses related to the non%manufacturin! actiities, like
marketin!, administration, finance and also ta+es and appropriations'
The !ross profit shows the !ap between reenue and tradin! costs' *t, therefore, indicates
the e+tent to which the reenue hae a potential to !enerate a surplus' *n other words, the
!ross profit reeals the mark up on the sales' 5ross profit ratio reeals profit earnin! capacity
of the business with reference to its sale' *ncrease in !ross profit ratio will mean reduction in
cost of production or direct e+penses or sale at a reasonably !ood price and decrease in the
will mean increased cost of production or sales at a lesser price' 2i!her !ross profit ratio is
always in the interest of the business'
T*b1e: >.%% GROSS PROFIT MARGIN
99
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This is a widely used measure of performance and is comparable across companies in
similar industries' The fact that a business works on a ery low mar!in need not cause alarm
because there are some sectors in the industry that work on a basis of hi!h turnoer and low
mar!ins, for e+amples supermarkets and motorcar dealers' =hat is more important in any
trend is the mar!in and whether it compares well with similar businesses'
/arnin!s after interest and ta+es
?et Profit Mar!in K(((((((((((((((((((((((((((((( O1##
?et -ales
Si)&i-i+*&+e:
An objectie of workin! net profit ratio is to determine the oerall efficiency of the business' 2i!her the net profit ratio, the better the business' The net profit ratio indicates the
mana!ements ability to earn sufficient profits on sales not only to coer all reenue operatin!
e+penses of the business, the cost of borrowed funds and the cost of merchandisin! or
sericin!, but also to hae a sufficient mar!in to pay reasonable compensation to shareholders
on their contribution to the firm' A hi!h ratio ensures adequate return to shareholders as well
as to enable a firm to with stand aderse economic conditions' A low mar!in has an opposite
implication'
T*b1e: >.% NET PROFIT MARGIN
ear
?et Profit
8s' in lakhs
-ales
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
"&6&'&6
"#'1)
"&$1'96
)$9"')
9;)$'$&
1&"
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*n the year "##" the ?et Profit is 19'.% NET PROFIT MARGIN
C. Retu'& ,& I&7etme&t ROIB
9&
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*ncome is earned by usin! the assets of a business productiely' The more efficient the
production, the more profitable the business' The rate of return on total assets indicates the
de!ree of efficiency with which mana!ement has used the assets of the enterprise durin! an
accountin! period' This is an important ratio for all readers of financial statements'
*nestors hae placed funds with the mana!ers of the business' The mana!ers used the
funds to purchase assets which will be used to !enerate returns' *f the return is not better than
the inestors can achiee elsewhere, they will instruct the mana!ers to sell the assets and they
will inest elsewhere' The mana!ers lose their jobs and the business liquidates'
3peratin! profit
8eturn on *nestment K(((((((((((((((((
0apital /mployed
Si)&i-i+*&+e:
8eturn on capital employed shows oerall profitability of the business' At first minimum
return on capital employed should be determined and then the actual rate of return on capital
employed should be determined and compared with the normal return' The return and capital
employed is a fair measure of the profitability of any concern with the result that een the
result of dissimilar industries may be compared'
T*b1e: >.%" RETURN ON INVESTMENT
ear
3peratin! Profit
8s' in lakhs
0apital /mployed
8s' in lakhs 8atio
"##1%"##"
"##"%"##)%
"##)%"##6
"##6%"##9
"##9%"##<
"9)1
"6)6
"6)$'96
)1;#'$)
6$))';)
)9)
)))99
)"99
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This ratio indicates that how much of the capital inested is returned in the form of net
profit' This ratio is increasin! year after year which indicates the capital employed is returned
in the form of net profit' *n the same manner, returns from capital employed for the
succeedin! years are !ood'
Thus, the 8eturn on *nestment ratio for the fie years shows the efficiency of the business
which is ery much satisfactory'
C(*'t &,.: >.%" RETURN ON INVESTMENT
D. Retu'& ,& Euity ROEB
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This ratio shows the profit attributable to the amount inested by the owners of the
business' *t also shows potential inestors into the business what they mi!ht hope to receie
as a return' The stockholders equity includes share capital, share premium, distributable and
non%distributable reseres' The ratio is calculated as followsD
?et profit after ta+es and preference diidend
8eturn on /quity K((((((((((((((((((((((((((((((((((((((((((
/quity capital
Si)&i-i+*&+e:
This ratio measures the profitability of the capital inested in the business by equity
shareholders' As the business is conducted with a iew to earn profit, return on equity capitalmeasures the business success and mana!erial efficiency' *t reeals whether the firm has
earned a reasonable profit to its equity shareholders or not by comparin! it with its own past
records, inter%firm comparison and comparison with the oerall industry aera!e' This ratio is
of si!nificant use in the ratio analysis from the standpoint of the owners of the firm'
T*b1e: >.%# RETURN ON EUITY
ear
?et Profit after Ta+
and Preference
iidend
8s' in lakhs
/quity 0apital
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
"&6&'&6
"#'1)
"&$1'96
)$9"')
9;)$'$&
9
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*n the year "##", the return on equity ratio is 9'#$ but in the year "##) it reduced to 6';;,
which may due to capital inestment ' And in the year "##9%"##< it increased to )'#$ to '&
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This ratio is also known as the profit%to%assets ratio' This ratio establishes the relationship
between net profits and assets' As these two terms hae conceptual differences, the ratio may
be calculated takin! the meanin! of the terms accordin! to the purpose and intent of analysis'
Usually, the followin! formula is used to determine the return on total assets ratio'
8eturn on total assets K G?et profit after ta+es and interest J Total assetsH O 1##
Si)&i-i+*&+e:
This ratio measures the profitability of the funds inested in a firm but doe not reflect on the
profitability of the different sources of total funds' This ratio should be compared with the
ratios of other similar companies or for the industry as a whole, to determine whether the
rate of return is attractie' This ratio proides a alid basis for inter%industry comparison'
T*b1e: >.%> RETURN ON TOTAL ASSETS
I&te''et*ti,&:
The return on total assets ratio is increasin! year after year ' This increasin! ratio indicates
the effectie funds inested' Therefore the return on Total Assets ratio for the fie years
reeals a satisfactory condition of the business'
ear
?et Profit after
Ta+es and *nterest
8s' in lakhs
Total Assets
8s' in lakhs
8atio
"##1 @ "##"
"##" @ "##)
"##) @ "##6
"##6 @ "##9
"##9 @ "##<
"&6&'&6
"#'1)
"&$1'96
)$9"')
9;)$'$&
)919
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C(*'t &,.: >.%> RETURN ON TOTAL ASSETS
>." C,m*'*ti7e t*teme&t:
0omparatie study of financial statement is the comparison of the financial statement of
the business with the preious years financial statements and with the performance of other
competitie enterprises, so that weaknesses may be identified and remedial measures applied'
0omparatie statements can be prepared for both types of financial statements i'e', Balancesheet as well as profit and loss account' The comparatie profits and loss account will present
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a reiew of operatin! actiities of the business' The comparatie balance shows the effect of
operations on the assets and liabilities that chan!e in the financial position durin! the period
under consideration'
0omparatie analysis is the study of trend of the same items and computed items into or
more financial statements of the same business enterprise on different dates'
The presentation of comparatie financial statements, in annual and other reports,
enhances the usefulness of such reports and brin!s out more clearly the nature and trends of
current chan!es affectin! the enterprise'
=hile the sin!le balance sheet represents balances of accounts drawn at the end of an
accountin! period, the comparatie balance sheet represent not nearly the balance of accounts
drawn on two different dates, but also the e+tent of their increase or decrease between these
two dates' The sin!le balance sheet focuses on the financial status of the concern as on a
particular date, the comparatie balance sheet focuses on the chan!es that hae taken place in
one accountin! period' The chan!es are the direct outcome of operational actiities,
conersion of assets, liability and capital form into others as well as arious interactions
amon! assets, liability and capital'
T*b1e: >.%? C,m*'*ti7e 0*1*&+e S(eet * ,& "%t M*'+( 33% 33
C(*&)e i&
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P*'ti+u1*'
"%t M*'+(
33%
8s' in lakhs
"%t M*'+(
33
8s' in lakhs
Ab,1ute
Fi)u'e
8s' in lakhs
Pe'+e&t*)e
I&+'e*e ,'
De+'e*e
Fi9ed Aet AB "$19# "91
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from 8s'&$)$ lakhs to 8s'$"61'); lakhs for meetin! out current liabilities and proision and
also for makin! inestment, which has been increased from 8s'"16 lakhs to 8s'< lakhs'
The inestment has increased from 8s'"16 lakhs to 8s'
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P*'ti+u1*'
"%t M*'+(
33
8s' in lakhs
"%t M*'+(
33"
8s' in lakhs
C(*&)e i&
Ab,1ute
Fi)u'e
8s' in lakhs
Pe'+e&t*)e
I&+'e*e ,'
De+'e*e
Fi9ed Aet AB "91
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cash or fund receied throu!h sale of fi+ed assets hae increased the cash balance of the
company'
The current assets hae decreased by 8s'G11)1'#"H lakhsL this indicates firms better credit
policy' >urther the current liability also decreased by 8s'G1)1'")H lakhs, it indicates that firm
hae !ood liquidity position therefore they are able to pay liabilities within stipulated period'
The fact depicts that the policy of the company is to pay all liabilities both in current and
lon!%term liabilities within the stipulated period usin! both current assets and fi+ed assets'
The inestment has increased from 8s'
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P*'ti+u1*' 33"
8s' in lakhs
33#
8s' in lakhs
Fi)u'e
8s' in lakhs
I&+'e*e ,'
De+'e*e
Fi9ed Aet A ")9;;';" ")";)')) G)#
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The current assets hae increased by 8s';##';6 lakhsL this indicates firms fle+ible credit
policy as such the debtors hae been increase by 8s'1)#6'$"' >urther the current liability also
increased by 8s'9#;'&< lakhs, it indicates that firm has not paid the liabilities within the
stipulated period'
The inestment has reduced by 8s'G1"1')1H lakhs, which indicates an inflow of fund'
The oerall financial position of the company for the year G"##)%"##6H is satisfactory'
T*b1e: >.%= C,m*'*ti7e 0*1*&+e S(eet * ,& "%t M*'+( 33# 33>
P*'ti+u1*'
"%t M*'+(
33#
8s' in lakhs
"%t M*'+(
33>
8s' in lakhs
C(*&)e i&
Ab,1ute
Fi)u'e
8s' in lakhs
Pe'+e&t*)e
I&+'e*e ,'
De+'e*e
Fi9ed Aet AB ")";)')) "1&
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*nentories
-undry ebtors
0ash and Bank Balance
4oans and Adances
)#;$'"<
66#9'$#
6
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The inestment has increased by 8s'6$##'"$ lakhs, which indicates an outflow of fund and
a timely inestment by the company'
The oerall financial position of the company for the year G"##6%"##9H is satisfactory'
T*b1e: >.3 C,m*'*ti7e 0*1*&+e S(eet * ,& "%t M*'+( 33> 33?
P*'ti+u1*' "%t M*'+(
33>
8s' in lakhs
"%t M*'+(
33?
8s' in lakhs
C(*&)e i&
Ab,1ute
Fi)u'e
8s' in lakhs
Pe'+e&t*)e
I&+'e*e ,'
De+'e*e
Fi9ed Aet AB "1&
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4oans and Adances "
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The oerall financial position of the company for the year G"##9%"##
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9H The inentory turnoer ratio fro the fie years indicated a !ood inentory policy and
efficiency of business operations of the company'
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!. CONCLUSION
The study is made on the topic financial performance usin! ratio analysis with fie years
data in /mami 4imited'
The current and liquid ratio indicates the short term financial position of /mami 4td'
whereas debt equity and proprietary ratios shows the lon! term financial position'
-imilarly, actiity ratios and profitability ratios are helpful in ealuatin! the efficiency of
performance in /mami 4td'
The financial performance of the company for the fie years is analyCed and it is proed
that the company is financially sound'
$$
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CHAPTER VIII
LIMITATIONS AND SCOPE FOR FURTHER STUDY
$.% LIMITATIONS
As the study is based on secondary data, the inherent limitation of the secondary data
would hae affected the study'
The fi!ures in a financial statements are likely to be a least seeral months out of date, and
so mi!ht not !ie a proper indication of the companys current financial position'
$&
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