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The term ratio analysis refers to the analysis of the financial statements in
conjunction with the interpretations of financial results of a particular period of
operations, derived with the help of 'ratio'. Ratio analysis is used to determine the
financial soundness of a business concern.
DEFINITION
Ratio analysis is defined as. "The systematic use of ratio to interpret the financial
statement so that the strength and weakness of the firm as well as its historical
performance and current financial condition can be determined.
To know the financial position of the B.D.K. Process Control Private Ltd.
To know the liquidity position of the B.D.K. Process Control Private Ltd.
Research Methodology:
A) Primary Data
1) Annual reports.
2) Company Website.
B) Secondary data: Secondary data consists of readily available information in different
financial texts and company database. And also through annual reports of the company.
Analysis of Ratio
Analysis using ratios can be done in following ways.
2. Budgeting:
Budget is an estimate of future activities on the basis of past experience. Accounting
ratios help to estimate budgeted figures. For example, sales budget may be prepared with
the help of analysis of past sales.
3. Measurement of Operating Efficiency:
Ratio analysis indicates the degree of efficiency in the management and utilisation of its
assets. Different activity ratios indicate the operational efficiency. In fact, solvency of a
firm depends upon the sales revenues generated by utilizing its assets.
4. Communication:
Ratios are effective means of communication and play a vital role in informing the
position of and progress made by the business concern to the owners or other parties.
5. Control of Performance and Cost:
Ratios may also be used for control of performances of the different divisions or
departments of an undertaking as well as control of costs.
6. Inter-firm Comparison:
Comparison of performance of two or more firms reveals efficient and inefficient firms,
thereby enabling the inefficient firms to adopt suitable measures for improving their
efficiency. The best way of inter-firm comparison is to compare the relevant ratios of the
organization with the average ratios of the industry.
7. Indication of Liquidity Position:
Ratio analysis helps to assess the liquidity position i.e., short-term debt paying ability of a
firm. Liquidity ratios indicate the ability of the firm to pay and help in credit analysis by
banks, creditors and other suppliers of short-term loans.
LIMITATION OF RATIO ANALYSIS:Ratio analysis is a widely used tool of financial analysis. Though ratios are simple to
calculate and easy to understand, they suffer from some serious limitations:
1. Limited use of Single Ratio:A single ratio usually does not convey much of a sense. To make a better interpretation a
number of ratios have to be calculated which is likely to confuse the analyst than help
him in making any meaningful conclusion.
2. Lack of Adequate Standards:There are no well accepted standards or rules of thumb for all ratios which can be
accepted as norms. It renders interpretation of the ratio difficult.
3. Change of Accounting Procedure:Change in accounting procedure by a firm often makes ratio analysis misleading e.g. a
change in the valuation of methods of inventories, from FIFO to LIFO increases the cost
of sales and reduces considerably the value of closing stocks which makes stock turnover
ratio to be lucrative and an unfavorable gross profit ratio.
4. Window Dressing:-
Financial statements easily can be window dressed to present a better picture of its
financial and profitability position to outsiders. Hence one has to be very careful in
making a decision from ratios calculated from such financial statements. But it may be
very difficult for an outsider to know about the window dressing made by a firm.
5. Personal Bias:Ratio is only means of financial analysis and not an end in itself. Ratios have to be
interpreted and different people may interpret the same ratio in different ways.
6. Incomparable:Not only industries differ in their nature but also the firms of the similar business widely
differ in their size and accounting procedure etc.. It makes comparison of ratios difficult
and misleading. Moreover, comparisons are made difficult due to differences in
definitions of various financial terms used in the ratio analysis.
7. Absolute Figures Distortive:Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a
quantitative analysis and not a qualitative analysis.
8. Price Level Changes:While making ratio analysis, no consideration is made to the changes in price levels and
this makes the interpretation of ratios invalid.
9. Ratios No Substitutes:Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if
separated from the statements from which they are computed.
CLASSIFICATION OF RATIOS:
1) BALANCE SHEET RATIO
Current Ratio
Liquid Ratio
Stock To Working Capital Ratio
Proprietary Ratio
Debt Equity Ratio
Capital Gearing Ratio
3) Composite Ratio:
Return On Capital Employed
Return On Proprietors Funds
Return On Equity Capital
Dividend Payout Ratio
Debt Service Ratio
Debt Service Coverage Ratio
Debtors Turnover
Creditors Turnover
CURRENT
RATIO :
The current ratio is the ratio of current assets to the current liabilities .It is
calculated by dividing current assets by current liabilities.
The current ratio of total current assets to total current liabilities.
Current Ratio
Current Assets
Current Liabilities
QUICK RATIO:
It is a measure of liquidity calculated dividing current assets minus inventory
And prepaid expenses by current liabilities
Quick ratio =
Quick assets
Quick liabilities
Sales
Net Working Capital
PROPRIETORY RATIO:
It establishes relationship between the propitiator or shareholders funds & total tangible
assets. The ratio indicates properties stake in total assets. Higher the ratio lowers the risk
and lower the ratio higher the risk. Debt equity ratio & current ratio affects the
proprietary ratio.
Proprietary Ratio
Shareholders Funds
Total Assets
DEBT-EQUITY RATIO
It measures the relation between debt and equity in the capital structure of the firm. In
other words, this ratio shows the relationship between the borrowed capital and owners
capital.
Debt-Equity Ratio =
Total Debt
Net Worth
Gross Profit
Sales
OPERATING RATIO
10
100
It is the relation between cost of goods sold & operating expenses on one hand & the
sales on the other hand. It measures the cost of operations per rupee of sales.
Operating Ratio =
Operating Cost
X 100
Sales
OR
Avg. Inventory
Sales
Closing Stock
X 100
Net Sales
This ratio indicates companys capacity to withstand adverse economic conditions.
PBT
11
Capital employed
:-
This is a measure of the protection available to creditors for payment of interest charges
by the company. The ratio shows whether the company has sufficient income to cover its
interest requirements by a wide margin. The interest coverage ratio is computed by
dividing profit before interest and tax by the interest expenses.
Profit before Interest and Tax (EBIT)
Interest
Credit Sales
12
Account Receivable
Credit Purchase
Account Payable
COMPANY PROFILE.
Lakshmi Vilas Bank (LVB) was founded eight decades ago in 1926 by seven people of
Karur under the leadership of VSN Ramalinga Chettiar, mainly to cater to the financial
needs of varied customer segments. The bank was incorporated on November 03, 1926
under the Indian companies act, 1913 and obtained the certificate to commence business
13
on November 10, 1926, the bank obtained its license from Reserve Bank of India (RBI)
in June 1958 and in August 1958 it became a scheduled commercial bank.
During 196165 LVB took over nine banks and raised its branch network considerably.
To meet the emerging challenges in the competitive business world, the bank started
expanding its boundaries beyond Tamil Nadu from 1974 by opening branches in the
neighboring states of Andhra Pradesh, Karnataka, Kerala, Maharashtra, Madhya Pradesh,
Gujarat, West Bengal, Uttar Pradesh, Delhi and Pondicherry.
Mechanization was introduced in the head office of the bank as early as 1977. At present,
with a network of 249 branches, 3 satellite branches and 6 extension counters, spread
over 14 states and the union territory of Pondicherry, the bank focus is on customer
delight, by maintaining high standards of customer service and amidst all these new
challenges, the bank is progressing admirably. LVB has a strong and wide base in the
state of Tamil Nadu, one of the progressive states in the country, which is politically
stable and has a vibrant industrial environment. LVB has been focusing on retail banking,
corporate banking and bank assurance.
The bank business crossed Rs. 12,606 crores as on March 31, 2009. The bank earned a
net profit of Rs. 50.30 crores. The net owned fund of the bank reaches Rs 453.70 crore.
14
Chairman
Company Secretary
Legal Status
Genesis
Date of Incorporation
Registered Office
Authorized Capital
Paid-up Capital
Number of Employee
22,446
Number of Branches
1208
Phone-PABX
FAX
88-02-9561410, 9552007
SWIFT
BSONBDDH
Website
www.Laxmivilasbank.com
15
MAR'16
MAR'15
( Cr.)
( Cr.)
%Chang
e
SOURCES OF FUNDS
Share Capital
179.46
179.17
0.16%
0.00
0.00
0.00%
Total Reserve
1,584.13
1,376.98
15.04%
Shareholder's Funds
1,763.59
1,556.14
13.33%
Deposits
25,430.9
21,964.2
15.78%
Borrowings
723.01
458.10
57.83%
814.60
726.98
12.05%
TOTAL LIABILITIES
28,732.1
24,705.4
16.30%
1,286.50
1,143.44
12.51%
82.11
175.28
-53.16%
Investments
6,545.40
6,051.16
8.17%
Advances
19,643.7
16,352.0
20.13%
609.37
449.10
APPLICATION OF FUNDS:
notice
Gross Block
16
35.69%
242.38
205.69
17.84%
0.00
0.00
0.00%
Net Block
367.00
243.41
50.77%
Lease Adjustment
0.00
0.00
0.00%
0.00
0.00
0.00%
Other Assets
807.41
740.13
9.09%
TOTAL ASSETS
28,732.1
24,705.4
16.30%
Contingent Liability
3,687.01
2,903.12
27.00%
884.43
632.38
39.86%
17
Profit And Loss For The Year Ended 31st March, 2016
Parameter
I. INCOME
Interest Earned
Other Income
Total Income
II. EXPENDITURE
Interest Expended
Operating Expenses
PBIDT
Provisions and Contingencies
Profit Before Tax
Taxes
Total
III. Profit & Loss
PAT
Extraordinary Items
Profit brought forward
Adjusted Net Profit
Total Profit & Loss
Appropriations
Equity Dividend (%)
Earnings Per Share (in )
Book Value (in )
I. INCOME
Interest Earned
Other Income
Total Income
II. EXPENDITURE
Interest Expended
Operating Expenses
PBIDT
Provisions and Contingencies
Profit Before Tax
Taxes
Total
MAR'16
MAR'15
( Cr.)
( Cr.)
2,568.30
304.53
2,872.83
2,214.53
284.03
2,498.56
15.97%
7.22%
14.98%
1,922.99
542.71
407.12
176.89
230.24
50.00
2,692.60
1,687.88
442.28
368.41
180.20
188.21
55.92
2,366.28
13.93%
22.71%
10.51%
-1.84%
22.33%
-10.59%
13.79%
180.24
0.00
0.08
0.00
180.24
180.32
30.00
10.04
88.70
132.29
0.00
0.07
0.00
132.29
132.35
20.00
7.38
82.48
36.25%
0.00%
20.35%
0.00%
36.25%
36.24%
50.00%
36.02%
7.55%
2,568.30
304.53
2,872.83
2,214.53
284.03
2,498.56
15.97%
7.22%
14.98%
1,922.99
542.71
407.12
176.89
230.24
50.00
2,692.60
1,687.88
442.28
368.41
180.20
188.21
55.92
2,366.28
13.93%
22.71%
10.51%
-1.84%
22.33%
-10.59%
13.79%
18
Change %
180.24
0.00
0.08
0.00
180.24
180.32
30.00
10.04
88.70
132.29
0.00
0.07
0.00
132.29
132.35
20.00
7.38
82.48
36.25%
0.00%
20.35%
0.00%
36.25%
36.24%
50.00%
36.02%
7.55%
Ratio
Current
Ratio (x)
0.99
Quick
Ratio (x)
26.6
9
Dividend
Yield (%)
1.89
Good/Not
Description
Good
> 2 is Good, A liquidity ratio that measures a companys ability to
< 2 is Not pay short-term obligations. The higher the current ratio,
Good
the more capable the company is of paying its
obligations.
> 1 is Good, The quick ratio measures a company's ability to meet its
< 1 is Not short-term obligations with its most liquid assets. For
Good
this reason, the ratio excludes inventories from current
assets
> 1.5 is A financial ratio that shows how much a company pays
Good,
out in dividends each year relative to its share price.
< 1.5 is Not Dividend yield is calculated as annual dividends per
Good
share divided by market price per share.
19
Interest
Coverage
Ratio (x)
1.23
> 2 is Good,
< 2 is Not
Good
(For Banks
&
NBFC
this is not
Valid)
Debt
15.9 < 2 is Good,
Equity
8
> 2 is Not
Ratio (x)
Good
(For Banks
&
NBFC
this is not
Valid)
Return On 17.9 > 5% is
Asset (%) 7
Good,
< 5% is Not
Good
Return On 11.32 > 18% is
Equity
Good,
(%)
< 18% is
Not Good
SOLVED QUESTIONS
The following illustration explains composition and quality of Current Assets are more important
to comment on adequacy of current ratio, not merely basing on crude figures of current ratio.
20
Liabilities
Assets
Share Capital
400
600
Fixed Assets
Sundry
Creditors
600
400
1,000
100
100
Cash
50
10
Stock
150
700
Debtors
700
190
1,00
0
1,00
0
1,000
Current Assets
Current Ratio
=
Current Liabilities
Cash +Stock + Debtors
=
Creditors
Current Ratio of X
= 50 150 700
21
600
= 1.5
Current Ratio of Z
= 10 700 190
400
= 2.25
Illustration 1
(A) The only current assets possessed by a firm are cash Rs. 1,05,000, inventories Rs. 5,60,000
and debtors Rs. 4,20,000. If the current ratio for the firm is 2:1, determine its current liabilities.
(B) At the close of the year, a company has an inventory of Rs. 1,50,000 and cost of goods sold
Rs. 9,75,000. If the companys turnover ratio is 5, determine the opening balance of
inventory.
(B.U. -MBA -2004)
Solution:
Rs.
(A) Current Assets
Cash
1,05,000
Inventories
5,60,000
Debtors
4,20,000
10,85,000
Current ratio of the firm is 2:1. If current assets are 2, Current liabilities are 1.
Current Assets
Current Ratio = Current Liabilities
=2
10,85,000
Current Liabilities = 2
22
23
Illustration 2
The only current assets possessed by a firm are cash Rs. 1,05,000, inventories Rs. 5,60,000 and
debtors Rs. 4,20,000. If the current ratio for the firm is 2:1, determine its current liabilities.
At the close of the year, a company has an inventory of Rs. 1,50,000 and cost of goods sold Rs.
9,75,000. If the companys turnover ratio is 5, determine the opening balance of inventory.
Solution:
Rs.
(A) Current Assets
Cash
1,05,000
Inventories
5,60,000
Debtors
4,20,000
10,85,000
Current ratio of the firm is 2:1. If current assets are 2, Current liabilities are 1.
Current Assets
Current Ratio = Current Liabilities
=2
10,85,000
Current Liabilities = 2
Current liabilities = 10,85,000
2
= 5,42,500
ILLUSTRATION NO. 3
The capital employed in a business has been financed, as below:
Rs.
Equity Share Capital
6,00,000
4,00,000
6% Debentures
8,00,000
2,00,000
20,00,000
The company earns a profit of Rs. 4,00,000 before interest. Tax rate may be taken 50%. You are
required to:
(A) Explain the principles of Trading on Equity and Test the data for the principle.
(B) Elaborate the impact of changes in EBIT, both increase and decrease, on Return on capital employed
(ROCE) and Return on equity (ROE) with suitable examples, making the required valid assumption.
(B.U. (MBA) - 2003)
Solution:
(A) The process of using the debt in capital employed to magnify the return of equity shareholders
is called Trading on Equity.
The extent of benefit of debt depends on capital gearing ratio. If capital gearing of the company is
more than one, with the increase of EBIT, there would be a similar corresponding increase in ROCE.
Similarly, ROE also increases. But, the important point is the % increase of ROE would be more than %
increase of EBIT. The reverse also is true. To explain further, if EBIT increases by 10%, ROCE increases
by 10%. But, ROE increases more than by 10%. If EBIT falls by 10%, the ROCE also falls, similarly, by
10%. But, ROE falls more than 10%.
12,00,000
8,00,000
= 1.5
(B) Impact of Change in EBIT on ROCE and ROE
Capital Employed = Equity Share Capital + Reserves + Preference Share Capital + Debentures
+Long-term Loan
=
20,00,000
EBIT
4,00,000
48,000
3,52,000
Tax @ 50%
1,76,000
1,76,000
7% Preference Dividend
on Rs. 4,00,000
28,000
1,48,000
100
= 30%
6,00,000
48,000
5,52,000
Tax @ 50%
2,76,000
2,76,000
7% Preference Dividend
on Rs. 4,00,000
28,000
2,48,000
= 31%
8,00,000
So, if EBIT increases by 50%, ROCE also has increased by similar 50% (from 20% to
12.5
has increased by 67.57% (increased from 18.5% to 31% i.e. 18.5 100 )
2, 00, 000
100
2,00,000
48,000
1,52,000
Tax @ 50%
76,000
76,000
7% Preference Dividend
on Rs. 4,00,000
28,000
48,000
48,000
8,00,000
6%
100
ILLUSTRATION NO. 4
From the following information of Cherry & Cherry Company Ltd., prepare the balance sheet and
compute the return on capital employed (ROCE), Return on Total Assets (ROTA) and Return on Equity
(ROE):
Rs.
1,00,000
Current Assets
Investments in Treasury Bonds
Fixed Assets
Sales
Cost of Goods Sold
10% Debentures
Income from Treasury Bonds
Interest on Debentures
10% Preference Share Capital
Equity Share Capital
Capital Reserve
Provision for Tax at 30% of Net Profits
1,00,000
5,00,000
5,00,000
3,00,000
1,00,000
10,000
10,000
1,00,000
2,00,000
1,00,000
Rs.
3,00,0
00
10,000
60,000
1,40,0
00
5,10,0
00
By Sales
By Income from
Treasury bonds
Rs.
5,00,0
00
10,000
5,10,0
00
Liabilities
Assets
Share Capital
600
Fixed Assets
Sundry Creditors
400
Cash
10
Stock
700
Debtors
190
1,000
100
1,000
EBIT**
Capital Employed (ROCE) =
Employed
Capital
5,
40,000
100 = 37.03
EBIT
ROTA = Total Assets
2, 00, 000
= 6, 00, 000 * 100= 33.33%
=
4,40,000
* Provision for tax is calculated as under: