Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Scope/Elements
1. Investment decisions includes investment in fixed assets (called as capital budgeting).
Investment in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and
the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized
in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs and
profits and future programmes and policies of a concern. Estimations have to be made in
an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity
analysis. This will depend upon the proportion of equity capital a company is possessing
and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices likea. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.
FINANCIAL ANALYSIS

Financial statement analysis is an important part of overall financial

analysis, based on the statements which are the end products of
accounting system, viz., Balance Sheet and Profit and Loss Account.

Analysis of Financial Statements is a systematic process of the critical examination the financial
information contained in the financial statements in order to understand and make decisions
regarding the operations in the firm. The Analysis of Financial Statements is a study of
relationships among various financial facts an figures as set out in the financial statements i.e.,
Balance sheet and Profit and Loss Account . the complex data given in these financial statements
is divided/broken into simple and valuable elements and relationships are established between
the elements of the same statement or different financial statements.
Financial statements indicate certainabsolute information about assets, liabilities,
equity,revenues,expenses and profit or loss of an enterprise. They are not readily understandable
to the external users of financial statements . A financial analyst can adopt the following tools
and techniquesfor analysis of the financial statements.
Comparative financial statements are the statements in which figures for two or more periods are
placed side by side along with change in figures in absolute and percentage terms to facilitate
omparision. Both Profit and Loss Account andBalance Sheet are prepared in the form of
Comparative Financial Statements.
Financial statement analysis gives structural relationships of the various items in the financial
statements . the main functions which are used in the process of analysis and interpretation are:
1)Rearrangement of financial Statements
For analysis, it is necessary to reclassify the data contained in the financial statements into
purposive classes so that maximum information from very data for analysis can be obtained .
reclassification and rearrangement of different data depend upon the purpose of analysis
2)Comparision:
After the classification of data of financial statements into different categories, it is necessary to
derive comparative data of the same enterprise of the past periods if it is a time series analysis. In
case of cross-sectional analysis, it is necessary to derive comparative data of the same accounting
period of similar of comparable enterprises. For this, a comparative study is necessary.
3)Analysis:
Comparative financial data are then analysed with reference ti financial characteristics like
profitability , solvency and liquidity.

4)Interpretation:
The concluding part of financial statement analysis is interpretation of financial information
generated in the process of financial statement analysis.The interpretation should be precise and
directed towards indicating the movement of various financial characteristics.

COMPANY PROFILE
We PRAKASA SPECTRO CAST(P) LTD , an ISO 9001:2008 certified company, estd in 1996
take the pleasure in introducing ourselves as the manufacturers of various grades of CAST
STEEL, CAST IRON ALLOY STELL, MANGANESE STEEL , S.G. IRON , Ni-Hard &
High Chrome cast upto 10 MT single piece as per customers requirement .
We are located in the most important junction in South India i.e., VIJAYAWADA, connecting
south to the other parts in INDIA. Ours is an Associate concern of M/S KRISTNA
ENGINEERING WORKS one of the leading Manufacturers of the systems and spares for Sugar
Industries, Cement Industries, Thermal Power Plants, Mining plants and other Allied Industries
for more than 4 decades.
We at heart have a strong commitment to quality and progress enabling us to keep up with
Global developments in the field of Castings. In addition to satisfying the demand for extending
the types and dimensions of the castings produced, it does its utmost to provide the best of the
services.
Prakasa Spectro Cast has state-of-the-art manufacturing equipment and facilities to
produce quality steel castings supplying to leading OEMS and pioneers in Sugar ,Cement,
Power Generation sectors in India and across the world. We are backed by our experienced
professional work force comprising of highly skilled workmen and engineers supported by most
sophisticated machine tools meeting the customer's requirement in terms of quality, quantity and
delivery.
PSC believes in establishing and maintaining close and long-lasting relationship with its
employees, customers, and the community in which it is located.

Pattern Shop:
A team of experienced draftsmen and pattern makers work with expertise Methodist on pattern
design and making, seeding the production of sound quality and dimensionally accurate castings.

Bearing Pedastal

GB Carrier

Turbine Outer Casing

Valve Body

Moulding and Melting:

Sl.No

Description

Make/Model

Size/Capacity

Qty

Medium Frequency Induction

Furnace (With Dual Track Power
Pack of 2250KW)

Inductotherm
AHMEDABAD

6 MT

2 Nos

Medium Frequency Induction

Furnace (With Dual Track Power
Pack of 450KW)

Inductotherm
AHMEDABAD

2 MT & 1MT

1 No
each

Medium Frequency Induction

Furnace (Power Pack of 3000KW)

Inductotherm
AHMEDABAD

8MT

2 No

Continuous Sand Mixer

Wesman

13 MT/Hr

1No

Sand Muller

VME Foundry
Equipment

2 MT/Hr

1No

We are equipped fettling tools like Pneumatic chippers, grinders and a shot blasting machine
with chamber size of 4m X 4m

HEAT TREATMENT

Description

Make/Model

Bogie Type Electric Heat Treatment

Furnace

8 MT capacity
JOMIND FURNACECS
2.5 X 2 X 1.6 Mts (L 1No
Bangalore
X B X H)

Bogie Type Electric Heat Treatment

Furnace

Self

Trench for Water Quenching

7m x 4m x 5m(depth)
pit

Trench for Oil Quenching(With Heat

Exchanger and Cooling Tower)

2m x 3m x 2m(depth)
pit

Sl.No

Size/Capacity

40 MT Capacity
4.5 X 6 X 3 Mts

Qty

1 No

Heat treatment is carried out as per the documented international Standards or as per the
client requirement and specification.

MACHINE SHOP :
We are very much pleased say that major portion of our production is supplied in either proof
machined or finished machined condition. In house we are equipped with most precesive
machinery with DRO(Digital Read Outs ) installed.

Description

Make/Model

Size/Capacity

Qty

8 Lathe Machine

Kirloskar

C.H:215mm
ABC:1425mm

1No

12 Lathe (Heavy Duty) Machine

Sigma Machine Tools,

Batala

C.H: 485mm
ABC:1650mm

2Nos

18 Lathe Machine

Sigma Machine Tools,

Batala

C.H.435mm,
ABC:4100mm

1No.

10 Lathe Machine

Mysore Kirloskar

C.H:285mm
ABC:200mm

1No.

Sl.No

8 Planning Machine

Kamala Machine Tools,

Batala

2400mm stoke

1No.

24 Shaping Machine

Imported

600mm stoke

1No.

Vertical Turning Lathe (Double

Head)

Imported

Maximum Dia 950mm 1No.

Radial Drilling Machine

White Star NDM-50B

60mm In Steel Swing

1No.
1500mm

Pillor Drilling Machine

RP Engg. Company,
BATALA

20mm Dia In Steel

1No.

10

Slotting Machine

Klopp , Germany

600mm Stroke

1 No

11.

Universal Milling Machine

3AB (USSR)
PE3EPHbIX
(TAHKOB)

Max. Length 760mm

Max. Width 280mm 1 No.
Max. Height 380mm.

12.

Vertical Milling Machine

FRITZ WERNER,
Germany

Max. Length 1200mm

Max. Width 420 mm 1 No.
Max. Height 530mm.

13.

Plano Miller

Cooper, Germany

Max. Length 2600mm

Max. Width 1300mm 1 No.
Max. Height 1000mm.

14.

Universal Milling Machine

STANKOIMPORT,
MOSCOW, USSR

Max. Length 1.2 M.

Max. Width 500mm 1 No.
Max. Height 400mm.

15.

Radial Drilling Machine

White Star,

Max. Drill

1 No.

Faiz Engineering Works.

Size:100mm
Swing Dia: 6 M.

16.

Vertical Turning Lathe

KPACHOAAR, Germany

Max. Dia: 2.3 Meter

Max.Height:1.5 M.

17.

180 Spindle Floor Boring Machine

SCHARMANN,
GERMANY

Max. Bore Dia:1.2 M

1 No.
Max. Length: 4 M.

18.

130 Spindle Horizontal Boring

Machine

SCHARMANN,
GERMANY.

Max. Bore Dia:600

mm
Max.Length:1.2 M.

1 No.

19

24 Shaping Machine

Cooper ,Germany

Dia:100mm

1 No

PLANO MILLER1

VTL1

VTL2

Quality Assurance
With a passion to deliver a impeccable casting to our customer , we can proudly say that we at
PSC craft rather than manufacture. Circuit monitoring on the quality of inputs and stage wise
inspection during production gives us a unassailable output. We are equipped with state of art
equipment for Quality assurance and testing of castings. Majority of our castings are certified by
third party Agencies like M/s. Lloyds Register, Intertek, BVQI, TPL etc..

1 No.

All the testing Equipments are calibrated in regular intervals by the leading calibration agencies
such as M/S Lloyds register, Blue Star etc

Chemical analysis room

Mechanical Lab

Microscope

Sugar Mill Spares

We are catering our services to all Major OEMS and pioneers in Sugar Industry in India since
the last 15yrs. We supply major spares of the sugar mill from Cane Preparatory Equipment ,
Head Stock , Bearing Housing Assemblies to Trash Plates.

Cane Cutter Assmbly

Side Cap Assmbly

TopCap Assembly

Head_Stock

Trash Beam Assembly

team Turbine Castings

We manufacture Steam Turbine castings of various grades which are heat resistant and creep
resistant.

Bearing Housings

Bell Mouth

G.B Carrier

Cement
Supplies to the major cement OEMs in India make a significant volume of our annual
production. We are manufacturing and supplying support roller, Thrust roller and Bearing
Housing Assemblies to various cement plants across India.

Bearing Assemblies

Bearing Assemblies(2)

Support Roller

Prakasa Spectro Cast Private Limited is a Private Company incorporated on 09

November 1994. It is classified as Indian Non-Government Company and is
registered at Registrar of Companies, Hyderabad. Its authorized share capital is Rs.
80,000,000 and its paid up capital is Rs. 77,279,688.It is inolved in Other business
activities n.e.c.
Prakasa Spectro Cast Private Limited's Annual General Meeting (AGM) was last held
on 29 September 2014 and as per records from Ministry of Corporate Affairs (MCA),
its balance sheet was last filed on 31 March 2014.
Directors of Prakasa Spectro Cast Private Limited are Raja Sekhar Bahudodda,
Venkata Surya Prasad Tipirneni, Pardha Saradhi Tipirneni and Venkatasivachalapathi
Rao Yalamanchili.
Prakasa Spectro Cast Private Limited's Corporate Identification Number is (CIN)
U74999AP1994PTC018720 and its registration number is 18720.Its Email address is
csguntur@gmail.com and its registered address is PRAKASH NAGAR,ENIKEPADU
VIJAYAWADA., ANDHRA PRADESH - 521108, Andhra Pradesh INDIA.
Current status of Prakasa Spectro Cast Private Limited is - Active.

Company Information

Corporate Identification Number

U74999AP1994PTC018720

Company Name

PRAKASA SPECTRO CAST PRIVATE

LIMITED

RoC

RoC-Hyderabad

Registration Number

18720
Other business activities n.e.c.

Company Category

Company limited by shares

Company Sub Category

Indian Non-Government Company

Class of Company

Private Company

Authorised Capital (in Rs.)

80,000,000

Paid up capital (in Rs.)

77,279,688

Number of Members(Applicable only in case of

company without Share Capital)

Date of Incorporation

09 November 1994

Email ID

csguntur@gmail.com

Address 1

PRAKASH NAGAR,ENIKEPADU

Address 2

VIJAYAWADA.

City

ANDHRA PRADESH

State

Andhra Pradesh

Country

INDIA

PIN

521108

Whether listed or not

Unlisted

Date of Last AGM

29 September 2014

Date of Balance sheet

31 March 2014

Company Status (for eFiling)

Active

*Industry classification is derived from National Industrial Classification. If the

company has changed line of business without intimating the Registrar or is a
diversified business, classification may be different. We make no warranties about
accuracy of industrial classification.

Comparative Financial Statements: It is an important method of analysis which is used to

make comparison between two financial statements. Being a technique of horizontal analysis and
applicable to both financial statements, income statement and balance sheet, it provides
meaningful information when compared to the similar data of prior periods. The comparative
statement of income statements enables to review the operational performance and to draw
conclusions, whereas the balance sheets, presenting a change in the financial position during the
period, show the effects of operations on the assets and liabilities. Thus, the absolute change
from one period to another may be determined.
Statement of Changes in Working Capital: The objective of this analysis is to extract the
information relating to working capital. The amount of net working capital is determined by
deducting the total of current liabilities from the total of current assets. The statement of changes
in working capital provides the information in relation to working capital between two financial
periods.
Common Size Statements: The figures of financial statements are converted to percentages. It
is performed by taking the total balance sheet as 100. The balance sheet items are expressed as
the ratio of each asset to total assets and the ratio of each liability to total liabilities. Thus, it
shows the relation of each component to the whole - Hence, the name common size.
Trend Analysis: It is an important tool of horizontal analysis. Under this analysis, ratios of
different items of the financial statements for various periods are calculated and the comparison
is made accordingly. The analysis over the prior years indicates the trend or direction. Trend
analysis is a useful tool to know whether the financial health of a business entity is improving in
the course of time or it is deteriorating.
Ratio Analysis: The most popular way to analyze the financial statements is computing ratios. It
is an important and widely used tool of analysis of financial statements. While developing a
meaningful relationship between the individual items or group of items of balance sheets and
income statements, it highlights the key performance indicators, such as, liquidity, solvency and
profitability of a business entity. The tool of ratio analysis performs in a way that it makes the
process of comprehension of financial statements simpler, at the same time, it reveals a lot about
the changes in the financial condition of a business entity.

It must be noted that Financial analysis is a continuous process being applicable to every
business to evaluate its past performance and current financial position. It is useful in various
situations to provide managers the information that is needed for critical decisions. The process
of financial analysis provides the information about the ability of a business entity to earn
income while sustaining both short term and long term growth.

Comparative Financial Statements

Comparative Financial Statement Analysis is a form of horizontal analysis where Financial
Statements of two or more years or of two or more different companies or of a company and its
industry are compared, analyzed and interpreted. Therefore, this technique of analysis is also
called Inter-period Analysis (when Financial Statements of two or more years are taken into
consideration) or Inter-firm Analysis (when Financial Statements of two or more companies are
taken into consideration).
The following are the most commonly used forms of such analysis

Comparative Balance Sheet

Comparative Income Statement

Comparative Cash Flow Statement

In order to increase the usefulness of financial statements, many enterprises include financial
Statements for one or more prior years in their annual re ports. Some also include five or ten year
summaries of condensed financial information. These comparative financial statements allow
investment analysts and other interested readers to perform comparative analysis of pertinent
information. The presentation of comparative financial statements in annual reports enhances the
usefulness of such reports and brings out more clearly the nature and trends of current changes
affecting the enterprise. That presentation emphasizes the fact that the Financial Statements for a
series of periods are far more significant than those for a single period and that the accounts for
one period are but an installment of what is essentially a continuous history.
In case of Inter-period Analysis, it should be borne in mind that uniformity in accounting
concepts and conventions is maintained during all the years taken into consideration for
comparison. On the other hand, in case of Inter-firm Analysis, size of the firms taken into
consideration for comparison must be more or less the same. otherwise meaningful conclusions
cannot be drawn. For more accurate results. external factors like market conditions, business
risk, etc. should also be considered.

Under year to year change analysis, all the elements of Balance Sheet or Income Statement are
compared and absolute changes as well as percentage changes are calculated on the basis of
previous year as the base year. Changes in Fixed Assets, Investments, Current Assets, proprietor
Fund, Current Liabilities, etc. are compared to determine long-term solvency position of the
firm, growth, etc. of the firm. From Comparative Income Statement, we are able to know
absolute and percentage changes in gross profit, operating profit, net profit, etc. A comparative
statement exhibits the following pertinent information:

Absolute figures for two or more years of the items appearing in Financial Statements
(i.e., in the Balance Sheet and in Income Statement).

Changes in absolute figures of the current year as compared to the previous year taken as
the base year (or firm-wise changes).

Percentage changes in absolute figures of the current year on the basis of the base year
(or percentage of firm-wise changes).

An example of Comparative Financial Statements

Smart Ways International
Balance Sheet
12/31/2014
1
Assets
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expense
Other Current Assets
Total Current Assets
Total Fixed Assets
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Accrued Expenses
Interest Payable
Notes Payable
Total Current Liabilities
Long Term Debt

12/31/2013

% of increase or
(Decrease)

$120,000
$213,000
$150,000
$3,000
$30,000
$516,000
$848,000
$1,364,000

$110,000
$195,000
$120,000
$3,000
$10,000
$438,000
$654,000
$1,092,000

9%
9%
25%
0%
200%
18%
30%
25%

$250,000
$12,000
$42,000
$60,000
$364,000
$400,000

$212,000
$15,000
$64,000
$76,000
$367,000
$325,000

18%
-25%
-52%
-27%
-1%
23%

12/31/2014
Total Liabilities
Shareholders Equity
Total Liabilities and Equity

$764,000
$600,000
$1,364,000

12/31/2013
$692,000
$400,000
$1,092,000

% of increase or
(Decrease)
10%
50%
25%

Common Size Financial Statements

Common size ratios are used to compare financial statements of different-size companies, or of
the same company over different periods. By expressing the items in proportion to some sizerelated measure, standardized financial statements can be created, revealing trends and providing
insight into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:

Item of Interest
Common Size Ratio

Reference Item

For example, if the item of interest is inventory and it is referenced to total assets (as it normally
would be), the common size ratio would be:

Inventory
Common Size Ratio for Inventory

Total Assets

The ratios often are expressed as percentages of the reference amount. Common size statements
usually are prepared for the income statement and balance sheet, expressing information as
follows:

Income statement items - expressed as a percentage of total revenue

Balance sheet items - expressed as a percentage of total assets

The following example income statement shows both the dollar amounts and the common size
ratios:
Common Size Income Statement

Income Statement

Common-Size
Income Statement

Revenue

70,134

100%

Cost of Goods Sold

44,221

63.1%

Gross Profit

25,913

36.9%

SG&A Expense

13,531

19.3%

Operating Income

12,382

17.7%

Interest Expense

2,862

4.1%

Provision for Taxes

3,766

5.4%

Net Income

5,754

8.2%

For the balance sheet, the common size percentages are referenced to the total assets. The
following sample balance sheet shows both the dollar amounts and the common size ratios:
Common Size Balance Sheet

Balance Sheet

Common-Size
Balance Sheet

Cash & Marketable Securities

6,029

15.1%

Accounts Receivable

14,378

36.0%

Inventory

17,136

42.9%

Total Current Assets

37,543

93.9%

ASSETS

Property, Plant, & Equipment

2,442

6.1%

Total Assets

39,985

100%

Current Liabilities

14,251

35.6%

Long-Term Debt

12,624

31.6%

Total Liabilities

26,875

67.2%

Shareholders' Equity

13,110

32.8%

Total Liabilities & Equity

39,985

100%

LIABILITIES AND SHAREHOLDERS' EQUITY

The above common size statements are prepared in a vertical analysis, referencing each line on
the financial statement to a total value on the statement in a given period.
The ratios in common size statements tend to have less variation than the absolute values
themselves, and trends in the ratios can reveal important changes in the business. Historical
comparisons can be made in a time-series analysis to identify such trends.
Common size statements also can be used to compare the firm to other firms.
Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the same point
in time. A common-size analysis is especially useful when comparing companies of different
sizes. It often is insightful to compare a firm to the best performing firm in its industry
(benchmarking). A firm also can be compared to its industry as a whole. To compare to the
industry, the ratios are calculated for each firm in the industry and an average for the industry is
calculated. Comparative statements then may be constructed with the company of interest in one
column and the industry averages in another. The result is a quick overview of where the firm
stands in the industry with respect to key items on the financial statements.
Limitations

As with financial statements in general, the interpretation of common size statements is subject
to many of the limitations in the accounting data used to construct them. For example:

Different accounting policies may be used by different firms or within the same firm at
different points in time. Adjustments should be made for such differences.

Different firms may use different accounting calendars, so the accounting periods may
not be directly comparable.

Meaning:

Ratio analysis is the process of determining and interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick that provides a measure of the relationship
between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are simple to calculate
and easy to understand. The persons interested in the analysis of financial statements can be
grouped under three heads,
i) owners or investors
ii) creditors and
iii) financial executives.
Although all these three groups are interested in the financial conditions and operating results, of
an enterprise, the primary information that each seeks to obtain from these statements differs
materially, reflecting the purpose that the statement is to serve.
Investors desire primarily a basis for estimating earning capacity. Creditors are concerned
primarily with liquidity and ability to pay interest and redeem loan within a specified period.
Management is interested in evolving analytical tools that will measure costs, efficiency,
liquidity and profitability with a view to make intelligent decisions.
Classification of Ratios:

Financial ratios can be classified under the following five groups:

1) Structural
2) Liquidity
3) Profitability
4) Turnover

5) Miscellaneous.
1. Structural group:

The following are the ratios in structural group:

i) Funded debt to total capitalisation:
The term total capitalisation comprises loan term debt, capital stock and reserves and surplus.
The ratio of funded debt to total capitalisation is computed by dividing funded debt by total
capitalisation. It can also be expressed as percentage of the funded debt to total capitalisation.
Long term loans
Total capitalisation (Share capital + Reserves and surplus + long term loans)
ii) Debt to equity:
Due care must be given to the; computation and interpretation of this ratio. The definition of debt
takes two foremost. One includes the current liabilities while the other excludes them. Hence the
ratio may be calculated under the following two methods:
Long term loans + short term credit + Total debt to equity = Current liabilities and provisions
Equity share capital + reserves and surplus (or)
Long-term debt to equity =
Long term debt / Equity share capital + Reserves and surplus
iii) Net fixed assets to funded debt:
This ratio acts as a supplementary measure to determine security for the lenders. A ratio of 2:1
would mean that for every rupee of long-term indebtedness, there is a book value of two rupees
of net fixed assets:
Net Fixed assets funded debt
iv) Funded (long-term) debt to net working capital:
The ratio is calculated by dividing the long-term debt by the amount of the net working capital. It
helps in examining creditors contribution to the liquid assets of the firm.
Long term loans Net working capital

2. Liquidity group:

It contains current ratio and Acid test ratio.

i) Current ratio:
It is computed by dividing current assets by current liabilities. This ratio is generally an
acceptable measure of short-term solvency as it indicates the extent to which he claims of short
term creditors are covered by assets that are likely to be converted into cash in a period
corresponding to the maturity of the claims. Current assets / Current liabilities and provisions +
short-term credit against inventory
ii) Acid-test ratio:
It is also termed as quick ratio. It is determined by dividing quick assets, i.e., cash, marketable
investments and sundry debtors, by current liabilities. This ratio is a bitterest of financial strength
than the current ratio as it gives no consideration to inventory which may be very a low- moving.

3. Profitability Group:

It has five ratio, and they are calculated as follows:

4. Turnover group:

It has four ratios, and they are calculated as follows:

5. Miscellaneous group:

It contains four ratio and they are as follows:

Standards for comparison:

For making a proper use of ratios, it is essential to have fixed standards for comparison. A ratio
by itself has very little meaning unless it is compared to some appropriate standard. Selection of

proper standards of comparison is a most important element in ratio analysis. The four most
common standards used in ratio analysis are; absolute, historical, horizontal and budgeted.
Absolute standards are those which become generally recognised as being desirable regardless of
the company, the time, the stage of business cycle, or the objectives of the analyst. Historical
standards involve comparing a companys own past performance as a standard for the present or
future.
In Horizontal standards, one company is compared with another or with the average of other
companies of the same nature.
The budgeted standards are arrived at after preparing the budget for a period Ratios developed
from actual performance are compared to the planned ratios in the budget in order to examine the
degree of accomplishment of the anticipated targets of the firm.
Limitations:

The following are the limitations of ratio analysis:

1. It is always a challenging job to find an adequate standard. The conclusions drawn from the
ratios can be no better than the standards against which they are compared.
2. When the two companies are of substantially different size, age and diversified products,,
comparison between them will be more difficult.
3. A change in price level can seriously affect the validity of comparisons of ratios computed for
different time periods and particularly in case of ratios whose numerator and denominator are
expressed in different kinds of rupees.
4. Comparisons are also made difficult due to differences of the terms like gross profit, operating
profit, net profit etc.
5. If companies resort to window dressing, outsiders cannot look into the facts and affect the
validity of comparison.
6. Financial statements are based upon part performance and part events which can only be
guides to the extent they can reasonably be considered as dues to the future.
7. Ratios do not provide a definite answer to financial problems. There is always the question of
judgment as to what significance should be given to the figures. Thus, one must rely upon ones
own good sense in selecting and evaluating the ratios.