Ratio Analysis

A STUDY ON
“RATIO ANALYSIS”
IN
RASTHRIYA ISPATH NIGAM LIMITED
A project report Submitted in partial fulfillment for the award of the

degree of
“BACHELOR OF BUSINESS MANAGEMENT”
CHAPTERISATION
Chapter I Introduction.
Chapter II Steel industry in India.
Chapter III Profile of the Visakha Steel Plant.
Chapter IV Theoretical frame work of Ratio Analysis.
Chapter V Practical aspects of Ratio Analysis in
Visakha Steel Plant.
Chapter VI Summary and suggestions

INTRODUCTION
Steel comprises one of the most important inputs in
all sectors of economy. Economy of any country depends on the strong base of
the iron and steel industry. Steel is a versatile material with multitude of useful
properties, making it indispensable for furthering and achieving continual
growth of the economy- be it construction, manufacturing, infrastructure or
consumables. The level of steel consumption’s has long been regarded as an
index of industrialization and economic maturity attained by country. Keeping
in view the importance of steel, the integrated steel plants with foreign
collaborations were set up in the public sector in the post-independence era.
The growth of any organization depends on the overall performance such
as Production, Marketing, Human resource and Financial performance of the
organization. The financial performance of the any organization reflects the
strength, weakness, opportunities and threats of the organization with respect
to profits earned, investments, sales realization, turnover, return on investment,
net worth of capital. Efficient management of financial resources and deliberate
analysis of financial results are pre requisite for success of an enterprise. For
the achievement of that, Ratio analysis acts as one of the major and important
tool of effective financial management. Every organization requires ratio
analysis for evaluation of the performances of business.
Strengths and weaknesses:
Strengths:
• Land and layout for expansion up to 16mt with proximity to port.
• Quality producer image.
• High standing for customer service.
• Committed work force.
• Ability to raise funds.
Weaknesses:
• No in-in house key raw materials-iron ore/coal..
• Lack of level playing field.

• Single location company-only long products , expose to cyclic markets.
• Major capital repairs and modernization-nor overdue.
• High cost of servicing huge equity.
• Consumption cooking coal contractor at the higher cost in 2008-09.
Opportunities and threats:
Opportunities:
• Potential for growth in domestic steel demand-low per capita consumption in

India.
• Huge investment planned in infrastructure in 11th plan.
• Ease of imports and exports with adjacent up coming gangvaram port(deep
draft), VSP and VSPL
Threats:
• High raw material prices and shift of value chain towards raw materials
• Oligopolistic coal supply side
• Single iron ore supplier-located in disturbance prone areas
• Predominant sec ordinarily sector in long products
• VSP-high earning island
NEED FOR THE STUDY:

The study concentrates on the financial state of affairs of the
company. It involves the study of Ratio Analysis. It helps to present a broader
picture of the financial position of the Company through ratios. This helps the
company’s success in meeting its requirements and production of steel in
India, which has been supported eventually.
Visakhapatnam Steel Plant is a multi-product steel-manufacturing unit.
The capital employed in a large organization like VSP is huge; so the effective
management of this capital is required. For which continuos’ monitoring of the
various operations is needed for the organization. So in order to achieve its
objectives the organization with the help of evaluation of ratios should
implement the best course of action.
Ratio Analysis is useful in the following ways:
1. Short-term and long-term planning.
2. Measurement and evaluation of financial performance.
3. Study of financial trends.
4. Decisions making for investments and operations.
5. Diagnosis of financial skills.
Thus a detailed study regarding the Ratio Analysis in Visakhapatnam

Steel Plant is to be done to well understand the performance of various
Operations identify the shortcoming in management and to suggest for
improvement in those areas.
OBJECTIVES OF THE STUDY:
The study is focused with the following objectives:
1. To describe the Organizational Profile of RINL (VSP)
2. To discuss the significance of the management of ratio analysis in RINL (VSP);
3. To evaluate the ratio analysis management in RINL (VSP) and
4. To summarize and to suggest for the better performance of RINL (VSP).
METHODOLOGY:
There are two general types of data primary data and secondary
classified on the basis of purpose of collection or source.
Primary Data:
Primary data are those are collected specifically for the resort
situation at hand. Both exploratory and conclusive research situations
necessitate using a high proportion of primary data. The major sources of
primary data include respondents, analogous and research experiments.
Primary sources usually provide more detailed information than the secondary
source. This is partly because methods of data collection and the tools used
can be tailored more precisely to the informational needs of the researcher.
This also contributes to the flexibility of aliases for the research purpose at
hand.
Secondary Data:
Secondary data are already published data collected for
purposes other than the specific research needs at hand. On the basis of
location of sources, secondary data may again be classified as internal or
external data. The data originating with the or available with the organization
as a by product of the MIS or the routine reporting system is called internal
data of any given marketing research problem initial data collected for
purpose other than that specific problem could be termed internal secondary
data.
Secondary data generated out side the organization is termed secondary data
and can be collected from a multitude of sources like government publication,
trade association publications, official reports, journals and periodicals and
publication of marketing research agencies. Secondary data can also be
though from research an agency through this is a fairly expensive preposition.
For the proposed project the secondary will be collected form annual reports
of the company.
LIMITATIONS OF STUDY:
1. The major limitation is the short span available for the study.
2. Reliability on usage of secondary data is another limitation.
3. Some aspects of financial information are held due to confidentially of the

company.
4. There was no scope of gathering current information, as the auditing has not
been done by the time of project work.
Industry PROFLE in India
Iron had occupied an important place in the service of mankind, Not only in India but
also abroad. From time immemorial steel is in dispensable to modern civilization in
peace and war. In order to Understand the background of the entry of iron and steel into
the public Sector in India, it would be desirable to trace it briefly, the history of iron And
steel making in India through the centuries.
The development of steel industry in India should be viewed in conjunction
With the type and system of government that had been ruling the country. The
production of steel in significant quantity started after 1900. The growth of steel
Industry can be conveniently studied by dividing the period into pre &post
Independence era (or before 1950 & after 1950). The total installed capacity for
in-got steel production during pre-independence era was 1.5 million tones/year,
which has risen to about 8 million tones of ingot by the seventies. This is the
result of the bold steps taken by the government to develop this sector.
The growth in chronological order is as follows:
1830 - Josiah Marshall Health constructed the first

Manufacturing plant at pot in Madras Presidency
1874 - James Erskin Founded the Bengal Iron Works.
1899 - Jamshedji Tata initiated the scheme for an
Integrated steel plant
1906 - Formation of TISCO
1911 - Tata Iron & Steel Company started production
1916 - TISCO was founded.
1944 - Formation of mysore iron.
1951-56 - First Five-Year Plan
No new Steel Plant came up. The Hindustan Steel Ltd. (HSL)
was born on 19th January, 1954, with the decision of setting up three steel plants
each with one million tone input steel per year at Rourkela, Bhilai and Durgapur,
TISCO stated its expansion programmed.
1956-61 - Second Five-Year Plan

 A bold decision was taken up to increase the ingot steel output India
to 6 million tones per year and production at Rourkela, Bhilai and Durgapur Steel
Plants started.
1961-66 - Third Five-Year Plan
 During the Third five-year Plan the three steel plants under HSL,
TISCO & HSCO were expanded as shown.
Original Expanded
(MT/Year) (MT/Year)
Steel Plant
Rourkela 1.0 1.8
Bhilai 1.1 2.5
Durgapur 1.0 1.6
TISCO 1.0 2.0
HSCO 0.5 1.0
1966-69-Recession period:
The entire expansion programmes was actively executed during the period .
1969-74- Fourth Five-Year Plan Salem Steel Plant started.
 Licenses were given for setting up of many mini Steel plants and rerolling mills.
Govt.of India accepted setting up two more steel plants in South: One each at Visakhapatnam
(Andhra Pradesh) and Hospet (Karnataka). SAIL was formed during the period on 24th January
1973. The total installed capacity from 6 integrated plants was 106 MT.
1979 - Annual Plan
 The erstwhile Soviet Union agreed to help in setting up the
Visakhapatnam Steel Plant.
1980-85 - Fifth-Year Plan

 Work on Visakhapatnam Steel Plant was started with a big bang and
top priority was accorded to start the plant.
 Scheme for modernization of Bhilai Steel Plant, Rourkela, Durgapur
Steel Plant and TISCO were initiated.
1985-91 - Seventh Five-Year Plan

 Expansion work of Bhilai and Bokaro Steel Plants completed
 Progress on Visakhapatnam Steel Plant picked-up and the
rationalized concept has been introduced to commission the plant with 3.0MT liquid
steel capacity by 1990.
1991-96 - Eighth Five-Year Plan

 Visakhapatnam Steel Plant started its production Modernization of
other steel plants is also duly envisaged.
1997-2002 - Ninth Five-Year Plan

 Visakhapatnam Steel Plant had foreseen a 7%
Growth during the entire plan period.
2002-2007 - Tenth Five-Year Plan

 Steel industry registers a growth of 9.9%. Visakhapatnam
Steel Plant has high regime targets and achieved the best of them.
2007-2009 - Eleventh Five-Year Plan

 Huge investment plan in infrastructure
Out look:
The Steel companies in India are looking up amidst a tough the global
competition when the market is crisis-crossed with a variety of tariff and non-
tariff barriers. The dexterity with which the Indian exporters diversified their
markets, modified the composition of their export basket to suit the changing
global demands and affected reduced production costs by adopting the state-
of-the-art technologies provides ample testimony to the maturity of this
industry. From a highly protected inward-looking enterprise of the pre-
liberalization years, it has turned into a modern and globally integrated
industry in an astonishingly short span of time. The economic reforms have
brought with it immense opportunities for market-led growth of this industry,
once a symbol of state control.
On the supply side, deregulation meant access to domestic private capital

and low-cost overseas funds, advanced technology and cheap inputs. On the
demand side, the new policy regime meant opportunities to sell steel in an
expanding domestic market and, most importantly, in the large international
marts.
The Indian steel industry is at an important juncture today. The global
strengthening of the market, the potential growth in domestic steel
consumption and the global shortage of critical raw materials like iron ore and
scrap have raised issues like the need to further boost in the production
capacities of the plants by modernization, creation of a strong base of raw
materials and industry-specific development of the infrastructure.
The Government has been fostering a harmonious growth of the industry

on the principles of competitiveness and economic efficiency. It has also paid
the highest attention to help the industry in overcoming structural rigidities
within the sector, remove scarcities of essential inputs, develop infrastructure
and remove the market-distorting forces commonly experienced by the
developing countries in the course of industrialization. The industry is being
protected from unfair competition from domestic and overseas sources.
Innovation:
The Government proposes to bring in a new steel policy. It would define the
framework of government action in each relevant area as also to create ground
conditions for private sector initiative wherever possible. The Ministry of Steel has
strive to provide an effective interface between he industry and the various
economic agencies like government departments, financial institutions, providers of
input materials and essential services and multilateral agencies.
The steel industry’s growth and development trajectory will be heavily

dependent on its ability t mobilize the necessary resources for investment in the
coming years. Till recently, when the steel industry was passing through one of the
most turbulent phases, even the strong companies in the industry would have
encountered difficulty in mobilizing financial resources from the capital market. The
perceived risks that hindered the industry’s resource mobilization efforts are now
being replaced by a general feel good factor. This will help the industry significantly.
The turn-around in the industry has come at a very Opportune time
The Indian steel industries continue to remain focused on the emerging

opportunities in the world market. China is offering great opportunities to the Indian
industry. Despite the massive growth in steel output in China, there will always be
opportunities for the Indian exporters. The international business has to be carried
out consistently. Else the market will be lost at the first sign of a downturn.
The Indian steel industry has come a long way from the days of control and
strives to remain globally competitive. This is the age of technology and we have
the requisite resources to the lead in take the steel sector.
PROFILE OF VISAKHAPATNAM STEEL PLANT
Introduction:
Steel occupies the foremost place among the materials in use today and
pervades all walks of life. All key discoveries of human genius, for instance,
Steam Engine, Railway, means of Communication and Connection, Automobile,
Aero Plane and Computers are in one way or other, fastened together with Steel
and its sagacious and Multifaceted applications.
Steel is versatile material with multitude of useful properties, making it
indispensable for furthering and achieving continual growth of economy be it
Construction, manufacturing, infrastructure or consumables. The level of steel
consumption has long been regarded as an index of industrialization and
economic maturity attained by a country.
Keeping in view of the importance of steel, the following integrated steel
plants with foreign collaborations were set up in public sector in post
independence era (Table 2.0)
INTEGRATED STEEL PLANTS IN INDIA
STEEL PLANT COLLABORATION
1. Durgapur Steel Plant Britain
2. Bhilai Steel Plant Erstwhile USSR
3. Bokaro Steel Plant Erstwhile USSR
4. Rourkela Steel Plant Germany
Background of Visakhapatnam Steel Plant:

To meet growing domestic needs of steel, Government of India decided to set
up an Integrated Steel Plant at Visakhapatnam. An agreement was signed with
erstwhile USSR in 1979 for co-operation in setting up 3.4 MT integrated steel
plant at Visakhapatnam.
The project profile of 3 MT Stage in Table 2.1
Description 3 MT STAGE
Original First Second Third
Sanction Revisi Revisio Revisio
on n n
Implementing Agency SAIL RINL RINL RINL
Date of sanction by GOI 19.6.79 30.07. 24.06.8 12.07.
82 8 95
Zero Date Not 01.02. 01.02.8 01.02.
specified 82 2 82
Gestation period 6 years 6 8 ½ 10 ½
years years yrs
Anticipated Date of Not Dec 87 June 90 July 92
Commissioning specified
Capital Cost (Rs crores) 2256.00 3897.2 6849.7 8593.2
8 0 9
Base Date 1 qtr 79 4 qtr 4 qtr 87 Jan 94
81
FE Component (Rs. Crores) 500.20 679.59 1214.8 1521.5
6 5
Cost Escalation Rs. Crores -- 1641.2 2952.4 1743.5
8 2 9
Capacity (MT liquid steel per 3.40 3.40 3.00 3.00
annum)
The Company started its commercial production in 1990-91 and its financial results in
Table 2.2
Z Gross Operatin Interest Depreciat Net Profit
90-91 Sales
245 g Profit
-88 192 ion
197 -478
91-92 772 -101 437 449 -987
92-93 1185 -31 198 340 -568
93-94 1751 114 346 340 -573
94-95 2209 416 366 415 -364
95-96 3039 633 407 430 -204
96-97 3135 606 430 422 -246
97-98 3071 460 198 439 -177
98-99 2761 15 361 111 -457
99-00 2973 252 382 432 -562
00-01 3436 504 351 445 -291
01-02 4081 690 290 475 -75
02-03 5058 1162 187 455 521
03-04 6169 2053 49 457 1547
04-05 8181 3271 11 1006 2254
05-06 8482 2336 31 416 1890
06-07 9151 2054.34 49 362 1363
07-08 10433 2790 32 488 1943
08-09 10411 1552 88 240 1336

It can be seen from the above table, during the year 2002-03, the
company turned around by earning a net profit of Rs. 521 Crores. In
the same year, it bagged the PRIME MINISTER TROPHY for its excellent
performance in the Steel Industry. In September 2003, RINL became a
DEBT FREE COMPANY.
TECHNOLOGY:
VSP was equipped with state of the art technology of steel
making, large scale computerization and automation was incorporated in the
plant to achieve International Level of Efficiency and Productivity, the
organizational manpower has been rationalized.
The following are some of the important technologies used in the plant.
• 7 meter tall coke over batteries with coke dry quenching plant
• 3200 cubic meter blast furnace, biggest in the country.
• Bell-less top charging system in blast furnace
• 100% slag granulation at BF cast house
• Suppressed combustion LD gas recovery
• 100% continuous casting of liquid steel
• “TEMPCORE” and “STELMORE” cooling process
• Extensive Waste Heat Recovery System
• Comprehensive Pollution Control Measures

Raw Material Source
Iron Ore lumps and fines Bailadilla, MP
BF Limestone Jaggayyapeta, AP
BF Dolomite Madharam, Andhra Pradesh
SMS Dolomite Madharam, Andhra Pradesh
Manganese Ore Chipurupalli, Andhra Pradesh
Boiler Coal Talcher, Orissa
Coking Coal Australia
Medium Coking coal (MCC) Gidi/swang/rajarappa/kargali
Major Sources of Inputs:
Water Supply:
Operational water requirement of 36 MGD is being met from Yeleru Water

Supply Scheme.
Power Supply:
Operational power requirement of 180-200 MW is being met through

captive power plant. The capacity of captive power plant is 286.5 MW. The
plant is selling around 60 MW of power to APSEB (Andhra Pradesh State
Electricity Board).
Major Units of VSP
DEPARTMENTS ANNUAL CAPACITY UNITS (0. 3 MT STAGE)
(‘000T)
COKE OVENS 2261 3 batteries each of 67
ovens of 7 Meters heights.
BLAST FURNACE 3400 2 furnaces of 3200 m3
each
SINTER PLANT 5256 2 sinter machines of 312
sq meter grate area each
STEEL MELTING 3000 3 LD converters each of
SHOP 150 M3 volume and six
four strand bloom caster.
LMMM 710 Four strand finishing mill
WRM 850 2x10 strand finishing mill
MMSM 850 6 strand finishing mill
PROCESSES
COKE OVENS SINTER
PLANT
BLAST FURANCE STEEL MELTING
SHOP
CONTINUOUS CASTING ROLLING MILLS
PRODUCT MIX OF VSP
Main Products:
1. PIG IRON Low Silicon basic grades

2. BLOOMS 245x245 mm 5.5 6.08
meters
315x245 mm 5.8 6.40 meters
3. BILLETS 125x125 mm 9.8 10.4 meters
90x90 mm 6.0 12 meters
4. WIRE RODS 5.5 mm, 6 mm, 6.5 mm, 7 mm, 7.5 mm,
8 mm, 9 mm, 10 mm, 11
mm, 12 mm,
12.7 mm, 13 mm & 14 mm
5. REINFORCEMENT BAR
BRAND: VIZAG TMT 8 mm, 10 mm, 12 mm, 16 mm, 18
mm,
(In straightened or coil form) 20 mm, 22 mm, 25 mm, 28 mm, 32
mm,
36 mm & 40 mm
6. ROUNDS 16 mm, 16.5 mm, 18 mm, 20 mm, 20.64 mm,
22 mm, 25 mm, 28 mm, 32 mm, 33.5 mm,

34 mm, 36 mm, 40 mm, 42 mm, 45 mm,
46.5 mm, 50 mm, 53 mm, 56 mm, 60 mm,
63 mm, 65 mm, 71 mm, 75 mm, 77 mm
& 80 mm
7. EQUAL ANGLES 50x50 x 5/6 mm, 60x60 x 6 mm,
65x65 x 6mm, 75x75 x 6/8 mm,
90x90 x 6/8mm, 100x100 x
8/10mm
& 110x110 x 8/10 mm
8. CHANNELS ISMC- 40x32x5 mm, 75x40x4.8mm,
100x50x5mm, 125x65x5.3mm,
150x75x5.7mm & 150x76x6.5mm
9. BEAMS IPE – 175x85 mm, 150x75 mm &180x91 mm
120x114 mm (HE-BEAMS)
10. FLATS 150x10 mm & 150x12 mm
By-Products
1. FERTILIZER “PUSKALA” Brand Ammonium Sulphate
2. COALCHEMICALS & Coal Tar Pitch (Soft)
TAR PRODUCTS Coal Tar Pitch (Hard)
Anthracene Oil
HP Naphthalene
Pitch Cresote Mixture
Coal Tar Wash Oil
Phenol fractions
3. COKE FRACTIONS Nut Coke (15-25 mm)
Coke Dust (Coke Breeze)
4. BENZOL PRODUCTS Caprolactum grade Benzene
NG Toluene/IG Toluene
Light Solvent Naphtha (LSN)
5. MISCELLANEOUS PRODUCTS Granulated BF Slag
Calcined Lime Fines
Fly ash, Liquid Argon
Liquid Oxygen
Liquid Nitrogen
Boiler Coat Dust
SMS Slag
FUTURE PLANS:
1.0 VISION:
To be a continuously growing world-class company.
• Harness our growth potential & sustain profitable growth
• Deliver high quality and cost competitive products and be the first choice of
customers
• Create an inspiring work environment to unleash the creative energy of
people
• Achieve excellence in enterprise management
• Be a respected corporate citizen, ensure clean and green environment and
develop vibrant communities around us
2.0 MISSION
To attain 16 million ton liquid steel capacity through technological up

gradation, operational efficiency and expansion to produce steel at
international standards of cost and quality, and to meet the aspirations
of stakeholders.
3.0 OBJECTIVES:
• Expand plant capacity to
6.3 Mt by 2008-09
8.5 Mt by 2010-11
13.0 Mt by 2014-15
16.0 Mt by 2017-18
With the mission to expand further in subsequent phases as per the

Corporate Plan.
• Sustain gross margin to turnover ration >25%
• Be amongst the top five lowest cost liquid steel producers in the world
by 09-10
• Achieve higher levels of customer satisfaction than competitors
• Instill right attitude amongst employees and facilitate them to excel in
their professional, personal and social
• Be recognized as a excellent business organization by 2008-09

• Be proactive in conserving environment, maintaining high levels of
safety and addressing social concerns.
4.0 CORE VALUES
# Commitment
# Customer Satisfaction
# Continuous improvement
# Concern for Environment
# Creativity & Innovation
Achievements and Awards:
 ISO 9002 for SMS and all the down stream units – it is a unique distinction in the
Indian steel industry.
 Received Indira Priya Darshini Vriskha Mitra Award: 1992-1993.
 Nehru Memorial National Award for Pollution Control: 1992=93 &1993-94
 EEPC Export Excellence Award: 1994-1995 CII (Southern Region) Energy
Conservation Award: 1995-1996.
 Golden Peacock (1st prize) “National Quality Award –1996”
 Steel Ministers Trophy for “Best Safety Performance” in 1996.
 Selected for “ World Quality Commitment Award –1997” of J*BAN, Spain.

 Udyog Excellence Gold Medal Award for Excellence in Steel Industry.
 Ispat Suraksha Puraskar (1st prize) for longest accident free period, 1991-1994.
 Best Labour Management Award from the Government of AP.
 SCOPE Award for the best turnaround for 2001.
 Environment Excellence Award from Greentech Foundation for energy
conservation in 2002.
 Best Enterprise award from SCOPE, WIPS for 2001-2002.
 “ SAIL chairman`s silver plaque” for No Fatal Accident for the year 1999.
 PRIM MINISTER`S award for the best performance in 2002-2003.
 ISTD Award for “Best HR Practices” – 2002.
 “World Quality Commitment International Star Award” in the Gold category
conferred by Business Initiative Directions, Paris
 “Organizational Excellence Award” for 2003-04 conferred by INSSAN
 National Energy Conservation Award, 2004 and Special Prize from Ministry of
Power, Govt. of India.
 QCFI-NMDC Award for best quality circle implementatiom in PSU category in
2007-08.
 RINL has been awarded “Enterprise excellence award –2007” in 2008-09.
The above awards are besides a number of awards at the local,

regional & national level competitions in the area of Quality Circles, Suggestion
Schemes etc.
HALLMARK OF VIZAG STEEL AS AN ORGANISATION
Today, VSP is moving forward with aura of confidence and with pride
amongst its employees who are determined to give their best for the company to
enable it to reach new heights in organizational excellence.
At the same time, no single advantage accruing from a knowledge society

if found wanting by the neighborhood community with the growth & development
of a phenomenon called VIZAG STEEL existing so close to its proximity. Futuristic
enterprises, academic activity, planned & progressive residential localities but few
of the plentiful ripple effects of this transformation and each one of us take
immense pride to uphold the philosophy of mutual (i.e., individual and societal)
progress.
As a “NET POSITIVE COMPANY” in January, 2006 by wiping out all it’s

accumulated losses during 2008-09.
STATISTICAI INFORMATION
PRODUCTION PERFORMANCE – (‘000 TONS)
2007- 3913 3322 3074 420

LABOUR
2008 YEAR HOT LIQUID SALEABLE
METAL STEEL STEEL PRODUCTIVIT
2008- 3546 3145 2701 423Y
(Tones/man
2009 year)
1999-2000 2943 2656 2382 192
2000-2001 3165 2909 2507 211
2001-2002 3485 3083 2757 228
2002-2003 3941 3356 3056 253
2003-2004 4055 3508 3169 262
2004- 39 3560 3173 398

2005 20
2005- 41 3603 3237 414

2006 53
2006- 4046 3606 3290 413

2007
COMMERCIAL PERFORMANCE – (Rupees in Crores)
Year Sales Domestic Exports
Turnover Sales
2000-01 3436 3122 322
2001-02 4081 3710 371
2002-03 5059 4433 626
2003-04 6174 5406 768
2004-05 8181 7933 248
2005-06 8469 8026 443
2006-07 9126 8702 425
2007-08 10433 9878 555
2008-09 10411 9733 767

FINANCIAL PERFORMANCE (RUPEES IN CRORES)
Year Gross Margin Cash Profit Net profit
2000-01 504 153 (-) 291
2001-02 690 400 (-) 75
2002-03 1049 915 521
2003-04 2073 2024 1547
2004-05 3271 3260 2008
2005-06 2383 2355 1251
2006-07 2633 2584 9363
2007-08 3515 3483 1943
2008-09 2355 2267 1336

INTRODUCTION TO FINANCIAL MANAGEMENT
About three decades ago, the scope of financial management was confined to
raising of funds, whenever needed and little significance used to be attached to
financial decision-making and problem solving. As a consequence, the
traditional finance texts were structured around this theme and contained
description of the instruments and institutions of raising funds and of the major
events, such as promotion, reorganization, readjustment, merger, consolidation
etc., when funds were raised. In the mid-fifties, the emphasis shifted to the
judicious utilization of funds. The modern thinking in financial management
accords a far managers do not perform the passive role of scorekeepers of
financial data and top management areas and play a dynamic rote in solving
complex management problems. They are now responsible for shaping the
fortunes of the enterprise and are involved in the most vital management
decision of allocation of capital. It is their duty to ensure that the funds are
raised most economically and used in the most efficient and effective manner.
Because of this change in emphasis, the descriptive treatment of the subject of
financial management is being replaced by growing treatment of the subject of
financial management is being replaced by growing analytical content and sound
theoretical underpinnings.
Financial management is that managerial activity which is concerned with the
planning and controlling of the firm`s financial resources. Though it was a
branch of economics till 1890, as a separate activity or discipline it is of recent
origin. Still, it has no unique body of knowledge of its own, and draws heavily on
economics for its theoretical concepts even today.
SCOPE OF FINANCE:
What is Finance? What are a firm’s activities? How are they

related to the firm’s other activities? Firms create manufacturing capacities for
production of goods; some provide services to customers. They sell their goods
or services to earn profits. They raise funds to acquire manufacturing and other
facilities.
Financing decision is an important function to be performed by the financial

manager. Broadly, he or she must decide when, where and how to acquire funds
to meet the firm’s investment needs. The central issue before him or her is to
determine the proportion of equity and debt. The mix of debt and equity is
known as the firm’s capital structure. The financial manager must strive to
obtain the best financing mix of the optimum capital structure for his of her firm.
Once the financial manager is able to determine the best combination of debt
and equity, he or she must raise the appropriate amount through the best
available sources. In practice, a firm considers many other factors such as
control, flexibility, loan convenience, legal aspects etc., in deciding its capital
structure.
FINANCIAL RATIO ANALYSIS
INTRODUCTION:
As observed, a basic limitation of the traditional financial statement comprising
the balance sheet and the profit and loss account is that they do not give all the
information related to the financial operation of the firm. Nevertheless, they
provide some extremely useful information to the extent that the Balance Sheet
mirrors the financial position on a particular date in terms of the structure of
assets, liabilities and owner’s equity and so on. The profit and loss account shows
the results of operations during a certain period of time in terms of the revenues
obtained and the cost incurred during the year. Therefore, much can be learnt
about a firm from a careful examination of its financial statements as invaluable
documents/performance analysis. Users of financial statements can get further
insight about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. Management should be
particularly interested in knowing financial weakness of the firm to take suitable
corrective actions. The future plans of the firm should be laid down in view of the
firm’s financial strengths and weaknesses. Thus, financial analysis is the starting
point for making plans, before using any sophisticated forecasting and planning
procedures. Understanding the past is a pre-requisite for anticipating the future.
MEANING AND RATIONALE:
Ration analysis is a widely – used tool of financial analysis. It is defined as the

systematic use of ration to interpret the financial statements so that the strengths
and weaknesses of the firm as well as its historical performance and current
financial condition can be determined. Ratio analysis is a powerful tool of financial
analysis. A ratio is defined as “the indicated quotient of two mathematical
expressions” and as the “the relationship between two or more things”.
In financial analysis, a ratio is used as a benchmark for evaluating the financial
position and performance of a firm.
The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as:
Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of Rs.25,000
and Sales of Rs.1,00,000),
1. Fraction (Net profit is 1/4th of Sales) and
2. Proportion of numbers (the relationship between Net profits and Sales is 1:4).
These alternative methods of expressing items, which are related to each other,
are, for purpose of financial analysis, referred to as ratio analysis. It should be
noted that computing the ratios does not add any information already inherent in
the above figures of profits and sales. What the ratios do is that they reveal the
relationship in a more meaningful way so as to enable us to draw conclusions from
them. The rationale of ratio analysis lies in the fact that it makes related
information comparable. A single figure by itself has no meaning but when
expressed in terms of a related figure, it yields significant inferences. For
instance, the fact that the Net profits of a firm amount to, say Rs. Ten Lakhs
throws no light on its adequacy or otherwise.
The figure of Net profit has to be considered in relation to other variables. How
does it stand in relation to sales? If, therefore, Net profits are shown in terms of
their relationship with items such as Sales, Assets,Capital employed, Equity capital
and so on, meaningful conclusions can be drawn regarding their adequacy.
To carry the above example further, assuming the capital employed to be
Rs.50 lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively.
Ratio analysis, thus, as a quantitative tool, enables analysts to draw
quantitative answers to questions such as; are the Net profits adequate? Are
the assets being used efficiently? Is the firm solvent? Can the firm meet its
current obligations and so on?
IMPORTANCE AND LIMITATIONS OF RATIO ANALYSIS
Importance:
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that is presents facts on a
comparative basis and enables the drawing inference regarding the
performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect to the following aspects.
i. Liquidity position
ii. Long-term solvency
iii. Operational efficiency
iv. Overall profitability
v. Inter-firm comparison, and
vi. Trend analysis
Liquidity position: - With the help of ratio analysis conclusions can

be regarding the liquidity position of a firm. The liquidity position of a firm
would be satisfactory if it is able to meet its current obligations when they
become due. A firm can be said to have the ability to meet its short-term
liabilities if it has sufficient liquid funds to pay the interest on its short-
maturing debt usually within a year as well as to repay the principal. This
ability is reflected in the liquidity ratio of a firm. The liquidity ratios are
particularly useful in credit analysis by banks and other suppliers of short-
term loans.
Long-term solvency: - Ratio analysis is equally useful for assessing the
long-term financial viability of a firm. This aspect of the financial position of a
borrower is of concern to the long-term creditors, security analysts and the
present and potential owners of a business. The long-term solvency is
measured by the leverage/capital structure and profitability ratios, which focus
on earning power and operating efficiency. Ratio analysis reveals the strength
and weaknesses of a firm in this respect. The leverage ratios, for instance, will
indicate whether a firm has a reasonable proportion of various sources of
finance or if it is heavily loaded proportion of various sources of finance or if it is
heavily loaded with debt in which case its solvency is exposed to serious strain.
Similarly the various profitability ratios would reveal whether or not the firm is
able to offer adequate return to its consistent with the risk involved.
Operating Efficiency: - Another dimension of the usefulness of the
ratio analysis, relevant from the view point of management, is that it
throws light on the degree of efficiency in the management and utilization
of its assets. The various activity ratios measure this kind of operational
efficiency.
Overall Profitability: - Unlike the outside parties, which are interested in

one aspect of financial position of a firm, the management is constantly
concerned about the over-all profitability of the enterprise. That is, they are
concerned about the ability of the firm to meet its short-term as well as long-
term obligations to its creditors, to ensure a reasonable return to its owners and
secure optimum utilization of the assets of the firm. This is possible if an
integrated view is taken and all the ratios are considered together.
Inter-firm Comparison: - Ratio analysis not only throws light on the

financial position of a firm but also serves as a stepping stone to remedial
measures. This is made possible due to inter-firm comparison and comparison
with industry averages. A single figure of a particular ratio is meaningless
unless it is related to some standard or norm. One of the popular techniques is
to compare the ratios of a firm with the industry average. An inter-firm
comparison would demonstrate the firm’s position vis-à-vis its competitors.
Trend Analysis: - Finally, ratio analysis enables a firm to take the time
dimension into account. In other words, whether the financial position of a firm is
improving or deteriorating over the years. This is made possible by the use of
trend analysis. The significance of a trend analysis of ratios lies in the fact that
the analysis can know the direction of movement, the is, whether the movement
is favorable or unfavorable. For example, the ratio may be low as compared to
the norm but the trend may be upward. On the other hand, though the present
level may be satisfactory but the trend may be a declining one.
Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from
various limitations. The operational implication of this is that while using ratios,
the conclusions should not be taken on their face value. Some of the limitations,
which characterize ratio analysis, are
i. Difficulty in comparison.
ii. Impact of Inflation, and
iii. Conceptual Diversity
Difficulty in comparison: - One serious limitation of ratio analysis arises

out of the difficulty associated with there comparability. One technique that is
employed is inter-firm comparison. But such comparison is vitiated by different
procedures adopted by various firms.
 Differences in basis of inventory valuation (e.g.:- last in first out, average cost
and cost);
 Different depreciation methods (i.e. straight line Vs. written down basis);
 Estimated working life of assets, particularly of plant and equipment;
 Amortization of deferred revenue expenditure such as preliminary expenditure
and discount on issue of shares;
 Capitalization of lease;
 Treatment of extraordinary items of income and expenditure; and so on.
Secondly, apart from different accounting procedures, companies may have
different accounting procedures, implying differences in the composition of
assets, particularly current assets. For these reasons, the ratios of two firms may
not be strictly comparable.
Impact of Inflation: - The second major limitation of the ratio analysis is

a tool of financial analysis is associated with price level changes. This infact is a
weakness of the traditional financial statements, which are based on historical
cost. An implication of this feature of the financial statements as regards ratio
analysis is that assets acquired at different periods are, in effect, shown at
different prices in the balance sheet, as they are not adjusted for changes in the
price level. As a result, ratio analysis will not yield strictly comparable and
therefore, dependable results.
Conceptual Diversity: -
The factor that influences the usefulness of ratios is that there is

difference of opinion regarding the various concepts used to compute the ratios.
There is always room for diversity of opinion as to what constitutes
shareholder`s equity, debt, assets, profit and so on.
Finally, ratios are only a post-mortem analysis of what has happened
between two balance sheet dates. For one thing the position in the interim
period is not revealed by ratio analysis. Moreover, they give no clue about the
future.
In brief, ratio analysis suffers from serious limitations. The analyst should
not be carried away by its over simplified nature, easy computation with high
degree of precision. The reliability and significance attached to ratios will
largely depend upon the quality of data on which they are based. They are as
good as the data itself. Nevertheless, they are an important tool of financial
analysis.
Precautions for use of ratios:
The calculation of ratios may not be a difficult task but their use is not easy.
The information on which these are based, the constraints of financial
statements, objectives for using them, the caliber of the analyst, etc, are
important factors, which influence the use of ratios. Following guidelines/factors
may be kept in mind interpreting various ratios.
 The reliability of ratio is linked to the accuracy of information in financial statements.

Before calculating ratios one should see whether proper concepts and conventions are
used for preparing financial statements of not. Competent auditors should properly
audit the statements.
The purpose of the user is also important for the analysis of ratios. A creditor, a
banker, an investor, a shareholder, all has different objects for studying ratios.
The purpose (or) object for which ratios are required to be studied should
always be kept in mind for studying various ratios. Different objects may
require the study of different ratios.
 Another precaution in ratio analysis is the proper selection of appropriate ratios. The
ratios should match the purpose for which these are required.
Calculating a large number of ratios without determining their need in the
present context may confuse the things instead of solving them. Only those
ratios should be selected which can throw proper light on the matter to be
discussed.
 Unless otherwise the ratios calculated are compared with certain standards one
will not be reach at conclusions. These standards may be a rule of thumb as in
current ratio (2:1), may be industry standards, may be projected ratios etc. The
comparison of calculated ratios with the standards will help the analyst in
forming his opinion about financial situation of the concern.
 The ratios are only the tools of analysis but their interpretation will depend upon
the caliber and competence of the analyst. He should be familiar with various
financial statements and the significance of changes etc.
 A wrong interpretation may create havoc for the concern since wrong
conclusions may bad to wrong decisions. The utility of ratios is linked with
expertise of the analyst.
 The ratios are only guidelines for the analyst; he should not base his decisions
entirely on them. He should study any other relevant information, situation in
the concern, general economic environment etc., before reaching final
conclusions.
The study of ratios in isolation may not always prove useful. The interpretation
should use the ratios as guide and may try to solicit any other relevant
information which helps is reaching a correct decision.
Users of financial analysis:
Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the items
of balance sheet and profit and loss account. Financial analysis can be
undertaken by management of the firm, or by parties outside the firm, viz.,
owners, investors and others.
The nature of analysis will differ depending on the purpose of the analyst.
 Trade creditors are interested in firm’s ability to meet their claims over a very short
period of time. Their analysis will, therefore, confine to the evaluation of the firm’s
liquidity position.
 Suppliers of long-term debt on the other hand are concerned with the firm’s long-term
solvency and survival. They analyze the firm’s profitability over time, its ability to
generate cash to be able to pay interest and repay principle and the relationship
between various sources of funds. (Capital structure relationship).
 Investors, who have invested their money in the firm’s share, are most concerned
about the firm’s earnings. They restore more confidence in those firms that show
steady growth in earnings. As such, they concentrate on the analysis of the firm’s
present and future profitability. They are also interested in the firm’s financial
structure to the extent it influences the firm’s earnings ability and risk.
 Management of the firm would be interested in every aspect of the financial analysis. It
is their overall responsibility to see that the resources of the firm are used most
effectively and efficiently, and that the firm`s financial condition is sound.
Types of Ratios
Several ratios, calculated from the accounting data, can be grouped into various
classes according to financial activity or function to be evaluated. As stated
earlier, the parties interested in financial analysis are short-term and long-term
creditors, owners and management. Short-term creditors` main interest is in
the liquidity position or the short-term solvency of the firm. Long-term
creditors`, on the other hand, are more interested in the long-term solvency and
profitability of the firm. Similarly, owners concentrate on the firm’s profitability
and financial condition. Management is interested in evaluating every aspect of
the firm’s performance. They have to protect the interests of all parties and see
that the firm grows profitably. In view of the requirements of the various users
of ratios, we may classify them into the following four important categories:
 LIQUIDITY RATIOS
 LEVERAGE RATIOS
 ACTIVITY RATIOS
 PROFITABILITY RATIOS
LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations as they

become due. Liquidity ratios measure the firm’s ability to meet current
obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and
cash and Fund Flow statements; but liquidity ratios, by establishing a
relationship between cash and other current assets to current obligations
provided a quick measure of liquidity. A firm should ensure that it does not
suffer from lack of liquidity, and also that it does not have excess liquidity. The
failure of a company to meet its obligations due to lack of sufficient liquidity, will
result in a poor creditworthiness, loss of creditors` confidence, or even in legal
tangles resulting in the closure of the company. A very high degree of liquidity
is also bad; idle assets earn nothing. The firm’s funds will be unnecessarily tied
up in current assets. Therefore, it is necessary to strike a proper balance
between high liquidity and lack of liquidity. The most common ratios, which
indicate the extent of liquidity or lack of it, are:
1. CURRENT RATIO
2. QUICK RATIO
3. CASH RATIO
CURRENT RATIO:
The current ratio is calculated by dividing current assets by current
liabilities.
Current assets
CURRENT RATIO =
Current liabilities
Current assets include cash and those assets, which can be converted into
cash within a year, such as Marketable Securities, Debtors and Inventories.
Prepaid expenses are also include in current assets as they represent the
payments that will not be made by the firm in future. Current Liabilities include
Creditors, Bill payable, Accrued expenses, Short-term bank loan, and Income
Tax Liability and Long-term debt maturing in the current year.
The current ratio is a measure of the firms` short-term solvency. The higher the
current ratio, the larger is the amount of rupees available per Rupee of current
liability, the more is the firms` ability to meet current obligations and the
greater is the safety of funds of short-term creditors.
QUICK RATIO:
The Quick ratio is calculated by dividing quick assets by quick liabilities.
Quick assets
QUICK RATIO =
Quick liabilities
Quick assets or Liquid assets means those assets which are immediately
convertible into cash without much loss. All current assets except prepaid
expenses and inventories are categorized in liquid assets. Quick liabilities
means those liabilities, which are payable within a short period. Normally, Bank
overdraft and Cash credit facility, if they become permanent mode of financing
are in quick liabilities.
As this ratio concentrates on cash, marketable securities and receivables in
relation to current obligation, it provides a more penetrating measure of
liquidity than current ratio.
CASH RATIO:
The cash ratio is calculated by dividing cash + marketable securities by

current liabilities.
Cash + Marketable Securities
CASH RATIO =
Current liabilities
Since cash is most liquid asset, a financial analyst may examine cash ratio and
its equivalent to current liabilities. Trade investment or marketable securities
are equivalent of cash; therefore, they may be included in the computation of
cash ratio.
LEVERAGE RATIOS
The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, long-
term creditors like debenture holders, financial institutions etc., are more
concerned with the firms` long-term financial strength. In fact, a firm should
have strong short-as well as long-term financial position. To judge the long-
term financial position of the firm, financial leverage, or Capital structure, ratios
are calculated. These ratios indicate mix of funds provided by owners and
lenders. As a general rule, there should be an approximate mix of debt and
owner’s equity in financing the firms` assets.
The manner in which assets are financed has a number of implications. First,
between debt and equity, debt is more risky from the firms` point of view. The
firm has a legal obligation to pay interest on debt holders, irrespective of the
profits made or losses incurred by the firm. If the firm fails to debt holders in
time, they can take legal action against it to get payment and in extreme cases,
can force the firm into liquidation.
Secondly, use of debt is advantageous for shareholders in two ways:

a. They can retain control of the firm with a limited stake and
b. Their earnings will be magnified, when the firm earns a rat of return on the total
capital employed higher than the interest rate on the borrowing funds. The process of
magnifying the shareholders return through the use of debt is called “financial
leverage” or “financial gearing” or “trading on equity”.
Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but
all these ratios indicate the same thing-the extent to which the firm has relied
on debt in financing assets. Leverage ratios are also computed from the profit
and loss items by determining the extent to which operating profits are
sufficient to cover the fixed charges.
DEBT – EQUITY RATIO
The relationship describing the lender contribution for each rupee of the owner’s
contribution is called DEBT-EQUITY RATIO. DEBT – EQUITY RATIO is directly
computed by the following formula.
DEBT
DEBT-EQUITY RATIO =
EQUITY
Proprietary Ratio:
This ratio states relationship between share capital and total assets.
Proprietors equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called capital employed to total
assets.
EQUITY SHARE CAPITAL

PROPRIETORY RATIO =
TOTAL TANGIBLE ASSETS
PROPRIETORS EQUITY
(OR)
INTEREST COVERAGE RATIO:
This ratio indicates the extent to which earnings can decline without resultant
financial hardship to the firm because of its inability to meet annual interest cost.
For example, coverage of 5 times means that a fall in earnings unto (1/5th ) level
would be tolerable, as earnings to service interest on debt capital would be
sufficiently available. This ratio is measured ad follows:
EARNINGS BEFORE INTEREST &
TAXES (EBIT)
INTEREST COVERAGE RATIO =
INTEREST CHARGES
FIXED ASSETS TO NET WORTH:
This ratio indicates the extent to which Equity capital is invested in the net fixed
assets. It is expressed as follows:
FIXED ASSETS
FIXED ASSETS TO NET WORTH =
NET WORTH
NET WORTH is represented by Equity Share Capital plus Reserves and Surpluses.
If the fixed assets are more than the Net Worth, difficulties may arise, as the
depreciation will reduce profit. This also means that creditors have contributed
to fixed assets. The higher this ratio, the less will be the protection to creditors.
If this ratio is too high, the firm may find itself handicapped, as too much capital
is tied up in fixed assets but not circulating
ACITIVITY RATIOS
Funds creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales.
Activity ratios are employed to evaluate the efficiency with which the firm
managers and utilizes its assets. These ratios are also called Turnover Ratios
because they indicate the speed with which assets are being converted or turned
over into sales. Activity ratios, thus, involve a relationship between sales and
assets. A proper balance between sales and assets generally reflects that assets
are managed well. Several activity ratios can be calculated to judge the
effectiveness of asset utilization.
INVENTORY TURNOVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of goods sold by the
average inventory.
The average inventory is the average of opening and closing balance of
inventory.
In a manufacturing company inventory of finished goods is used to calculate
inventory turnover.
Cost of goods sold
INVENTORY TURNOVER RATIO =
Average inventory
DEBTORS TURNOVER RATIO:
A firm sells goods for cash and credit. Credit is used marketing tool by a
number of companies. When the firm extends credits to its customers, debtors
(accounts receivables) are created in the firms` accounts. The debtors are
expected to be converted into cash over a short period and, therefore, are
included in current assets. The liquidity position of the firm depends on the
quality of debtors to a greater extent. Financial analysts apply three ratios to
judge the quality or liquidity of debtors:
a. Debtors turnover,
b. Collection period and
c. Aging schedule of debtors
Credit Sales
DEBTORS COLLECTION PERIOD RATIO =
Avg.Accounts Receivable
DEBTORS COLLECTION PERIOD RATIO:

This ratio indicates the extent to which the debts have been collected in time.
The debt collection period indicates the average debt collection period. This ratio
is a good indicator to the lenders of the firm, because it explains to them whether
their borrower is collecting from its debt in time. An increase in this period
indicates blockage of funds in debtors.
Months/Days (in a year)

Debtors turn over
Debtors X Months/Days(in a year)

(or)
Sales
FIXED ASSETS TURNOVER RATIO:
The fixed assets turnover ratio measures the efficiency with which the firm is
utilizing its investments in fixed assets, such as land, building, plant and
machinery, furniture, etc. It also indicates the adequacy of sales in relation to
the investment in fixed assets. The fixed assets turnover ratio is sales divided by
net fixed assets. The firm assets turnover ratio should be compared with past
and future ratios and also with ratio of similar firms and the industry average.
The high fixed assets turnover ratio indicates efficient utilization of fixed assets in
generating sales, while low ratio indicates inefficient management and utilization
of fixed assets.
Sales
FIXED ASSETS TURNOVER RATIO =
Net fixed assets
WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the utilization of net
working capital. This ratio indicates the number of times the working capital is
turned over in the course of a year. This ratio measures the efficiency with which
the working capital is being used by a firm. A higher ratio indicates efficient
utilization of working capital and low ratio indicates otherwise. But a very high
working capital turnover ratio is not a good situation for any firm and hence care
must be taken while interpreting the ratio. Making of comparative and Trend
Analysis can at best use this ratio for different firms in the same industry and for
various periods. This can be calculated as follows:
Sales
WORKING CAPITAL TURNOVER RATIO =
Net Working Capital
NET WORKING CAPITAL = Current Assets - Current Liabilities
(Excluding short-term bank borrowings)
PROFITABILITY RATIOS
A company should earn profits to Survive and Grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated
by management of a company should be aimed at maximizing profits, irrespective
of social consequences.
Profit is the difference between revenues and expenses over a period of time
(usually a year). Profit is the ultimate “Output” of a company, and it will have no
future if it fails to make sufficient profits. Therefore, the financial manager should
continuously evaluate to the efficiency of the company in term of profits. The
profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owners are also
interested in the profitability of the firm. Creditors want to get interest and
repayment of principle regularly. Owners want to get a required rate of return on
their investment. This is possible only when the company earns enough profits.
Generally two major types of profitability ratios are calculated.
PROFITABILITY IN RELATION TO SALES
 PROFITABILITY IN RELATION TO INVESTMENT
PROFITABILITY RATIOS IN RELATION TO SALES

1. GROSS PROFIT MARGIN
2. CASH MARGIN
3. OPERATING MARGIN
4. NET PROFIT RATIO
GROSS PROFIT MARGIN:

Gross profit margin reflects the efficiency with which the management
produces each unit of product. This ratio indicates the average spread between
the cost of goods sold and the sales revenue. When we subtract the gross profit
margin from 100%, we obtain the ratio of Cost of goods to Sales.
Both this shows profits relative to sales after the deduction of production costs,
and indicates the relation between Production costs and Selling price. A high
gross profit margin relative to the industry average implies that the firm is able
to produce at relatively lower cost.
A high gross profit margin ratio is a sign of good management. A gross margin
ratio may increase due to any of the following factors.
Higher sales prices, cost of goods sold remaining constant,
i. Lower cost of goods sold, sales prices remaining constant,
ii. A combination of variations in sales prices and costs, the margin widening, and
iii. Increases in the proportionate volume of higher margin items.
The analysis of these factors will reveal to the management that how a
depressed gross profit margin can be improved.
A low gross profit margin may reflect higher cost of goods sold due to the firms`
inability to purchase raw materials at favorable terms, inefficient utilization of
plant and machinery, resulting in higher cost of production. The ratio will also be
low due to fall in prices in the market, or market reduction in selling price by the
firm in an attempt to obtain large sales volume, the cost of goods sold remaining
unchanged. The financial manager must be able to detect the causes of a falling
gross margin and initiate action to improve the situation.
Sales – Cost of goods sold
(or) Gross profit
GROSS PROFIT MARGIN RATIO =

Sales
NET PROFIT MARGIN RATIO:
Net profit is obtained when operation expenses, interest and taxes are
subtracted from the gross profit.
If the non-operating income figure is substantial, it may be excluded from PAT

to see profitability arising directly from sales. Net profit margin ratio establishes a
relationship between net profit and sales and indicated management’s efficiency
in manufacturing, administering and selling the products. This ratio is the overall
measure of the firms` ability to turn each rupee sales into net profit. If the net
margin is inadequate, the firm will fail to achieve satisfactory return on
shareholder`s funds.
This ratio also indicates the firms` capacity to withstand adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous
position to survive in the face of falling selling prices, rising costs of production or
declining demand for the product. It would really be difficult for a low net margin
firm to withstand these adversities. Similarly, a firm higher net profit margin can
make better use of favorable condition, such as rising selling prices; fall in costs of
production or increasing demand for the product. Such a firm will be able to
accelerate its profits at a faster rate than a firm with a low net profit margin will.
An analyst will be able to interpret the firm’s profitability more meaningfully if

he/she evaluates both the ratios-gross margin and net margin-jointly. To
illustrate, if the gross profit margin has increased over years, but the net profit
margin has either remained constant or declined, or has not increased as fast as
the gross margin, this implies that the operating expenses relative to sales have
been increasing. The increasing expenses should be identified and controlled.
Gross profit margin may decline due to fall in sales price or increase in the cost of
production.
Profit after tax
NET PROFIT MARGIN RATIO = Sales
CASH MARGIN RATIO:

Cash profit excludes depreciation. It means Net profit after interests and taxes
but before depreciation. This ratio indicates the relationship between the profit,
which accrues in cash and sales. Greater percentage indicates better position
and Vice-Versa as it shows the correct profit earned by the firm.
This ratio is expressed as cash profit to sales.
Cash profit
CASH MARGIN RATIO = X 100
Sales
OPERATING MARGIN RATIO:
Operating margin ratio is also known as Operating Net profit ratio. It is the ratio
of operating profit to sales. This ratio establishes the relationship between the
total cost incurred and sales. Operating profit is the Net profit after depreciation
but Before Interests and Taxes. The purpose of computing this ratio is to find out
the overall operational efficiency of the business concern. It measures the const
of operations per rupee of sales.
This ratio is expressed as operating profit to sales.
Operating profit
OPERATING MARGIN RATIO = X 100

Sales
PROFITABILITY RATIOS IN RELATION TO INVESTMENT
1. RETURN ON INVESTMENT
2. RETURN ON NET WORTH
3. RETURN ON CAPITAL
4. RETURN ON GROSS BLOCK
RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets
are known as Capital Employed. Net assets equal net fixed assets plus current
assets minus Current liabilities excluding Bank loans. Alternatively, Capital
employed in equal to Net worth plus total debt.
The conventional approach of calculating return on investment (ROI) is to divide

PAT by Investment. Investment represents pool of funds supplied by
shareholders and lenders, while PAT represents residual income of shareholders;
therefore, it is conceptually unsound to use PAT in the calculation of ROI. Also, as
discussed earlier, PAT is affected by capital structure. It is, therefore more
appropriate to use one of the following measures of ROI for comparing the
operating efficiency of firms.
EBIT (1-T)
ROI = ROTA =
Total Assets
EBIT (1-T)
ROI = RONA =
NET Assets
Where ROTA and RONA respectively Return on Total assets and Return on Net
assets.RONA is equivalent of Return on Capital Employed.
RETURN ON NET WORTH:
NET Worth is also known proprietors Net Capital Employed. The Return should
be calculated with reference to profits belonging to shareholders, and therefore,
profit shall be Net profit after interest and tax. The profit for this purpose will
include even non-trading profit. This is given as follows:
Net profit after interest & tax
RETURN ON NET WORTH = X 100
Shareholders funds
RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers to long-
term funds supplied by the creditors and owners of the fund. It can be computed
in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus
owner’s equity. Alternatively, it is equivalent to Net Working Capital plus Fixed
Assets. Thus, the Capital Employed provides a basis to test the profitability
related to the sources of long-term funds. A comparison of this ratio with similar
firms, with the industry average and overtime would provide sufficient insight
into how efficiency the long-term funds of owners and creditors are being used.
The higher the ratio, the more efficient is the use of Capital Employed.
NET PROFIT AFTER TAX/EBIT
ROCE = X 100
Average Total Capital Employee
RETURN ON GROSS BLOCK:
This ratio establishes a relationship between net profit and gross fixed assets.
This ratio emphasizes the profit on investment in Fixed Assets. This ratio is
expressed as follows:
Net profit
RETURN ON GROSS BLOCK = X 100
Gross Block
NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e.,
Fixed assets before deducting depreciation.
RATIO ANALYSIS IN VSP/RINL
LIQUIDITY RATIOS
Liquidity ratios judge the firm’s ability to meet short-term obligations. These
ratios give a good insight into a firm’s ability to remain solvent in the events of
adversities. For this purpose, short-term resources are compared with short-term
obligations.
CURRENT RATIO:
CURRENT ASSETS
CURRENT RATIO =
CURRENT LIABILITIES
This ratio relates current assets to current liabilities. It is found out dividing
current assets by current liabilities. It is the most commonly used measure of
short-term solvency.
Table 4.1: Year wise current assets and current liabilities.(Rs. in Crore)
S.
N 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
PARTS
o.
1216.45 3215
A Inventory 1111.37 857.55 706.34 1255.31 1203.24 1761
49.30 93.41 191.27

Sundry
B 212.49 217.57 85.62 165.65 216.80
Debtors
6624.1
3932.60 7699.1
Cash & 7
C 161.12 541.57 1359.71 5621.70 7194.68
Bank
100.17 292.44 258.91

Other
D 5.41 5.26 24.32 184.36 314.48
assets
1569.6
1958.49
Loans & 9
E 223.38 241.63 550.90 710.12 1063.84 1518.90
advances
11859.
11804.59
CURRENT 32
1713.76 1863.58 2726.88 6047.50 8252.00 10448.10
F ASSETS
Current 4181.5
3191.62
liabilities 2
G 1220.99 1229.74 1235.35 1424.15 1587.86 2104.30
&
provision
1.52
CURREN
H 1.40 2.21 4.25 5.20 4.97 3.69 2.83
T RATIO
Current Ratio
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Interpretation:
The Current ratio for the year 2008-09 was 2.83. That is, for every rupee of
Current Liability the firm is holding 2.83 of Current Assets. It shows that the firm
was able to meet its obligations.
Observations:
1. There is a decrease in the Current Liabilities until 2009.
2. The company’s Current Liabilities were more or less the same in comparison with
the previous year.
3. The company’s Current assets have been increasing every year.
4. There is a constant increase in sales, which was responsible for increase in
debtors.
5. Also the company was maintaining more cash balances when compared to
previous years which could be due to increase in turnover.

The Current Ratio for the year 1.40 in 2001-02 and then to 1.52 in 2002-03 and
then to 2.21 in 2003-04 and then to 4.25 in 2004-05 and then to 5.20 in 2005-06
and then 4.97 in 2006-07 and then to 3.69 in 2007-08 and then to 2.83 in 2008-
09. It means that the company was improving its short-term solvency position
despite increase in its competition from all around.
QUICK RATIO:
LIQUID ASSETS
QUICK RATIO/LIQUID RATIO =
CURRENT LIABILITIES
LIQUID ASSETS = CURRENT ASSETS – INVENTORY
This is a narrow measure of liquidity. This ratio concentrates on cash,

marketable receivables in relation to current obligation. So, it provides a more
penetrating measure of liquidity than current ratio.
Table 4.2: Year wise liquid assets and current liabilities.
(Rs. in Crore)
PARTICULARS 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
Sundry
Debtors 212.49 217.58 85.62 49.30 165.65 216.80 93.41 191.27
Cash & Bank 161.12 541.57 1359.71 3932.61 5621.7 7194.68 7669.11 6624.17
Other assets 5.40 5.26 24.31 100.18 184.36 314.48 292.43 258.91
LIQUID 379.01 764.11 1469.64 4082.09 5971.71 7725.96 8084.95 7074.35
ASSETS
CURRENT
LIABILITIES 1220.99 1229.74 1235.35 1424.15 1587.86 2104.3 3191.62 4181.32
2
QUICK 0.31 0.62 1.19 2.87 3.76 3.67 .53 1.69
RATIO
4 QUICK RATIO
3.5
3
2.5
2
1.5
1 QUICK RATIO
0.5
0
Interpretation:
The Quick ratio for the year 2008-2009 was 1.69. That is, for every one
rupee of Quick Liabilities the firm is holding 1.69 RS of Quick Assets.
Observations:
1. There is a decrease in the total liquid assets.
2. There is a decrease in the quick liabilities until 2009.
3. There is a decrease of Quick liabilities in the last two years.
4. There is a constant increase in sales, which was responsible for increase in
debtors.
5. Also the company was maintaining low cash balances when compared to
previous years, which could be due to decrease in turnover.
The Quick Ratio has gradually increased from 0.310 to 0.621 in 2003, and then
to 1.19 in 2004, and then to 2.87 in 2005 and then to 3.76 in 2006 and then to
3.67 in 2007 and then to 2.53 in 2008 and then to 1.69 in 2009. It means that
the company has not recovered its short-term solvency position despite all
around increased competition.
CASH RATIO:
Cash & Marketable Securities
CASH RATIO =
Current Liabilities
This ratio is also known as super quick ratio. It reflects only the absolute
liquidity available with the firm.
Table 4.3: Year wise Cash position and current liabilities.

(Rs. in Crores)
PARTICUL 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09

ARS
Cash &
161.12 541.57 1359.71 3932.60 5621.70 7194.66 7699.11 6624.17
Bank
Current
1172.25 1173.02 1116.25 1335.55 1587.86 2104.30 3191.62 4181.32
Liabilities
CASH
0.13 0.44 1.10 2.76 3.54 3.42 2.41 1.58
RATI
O
CASH RATIO
2 CASH RATIO
Interpretation:
The Cash ratio for the year 2008-2009 was 1.58. That is, for every one rupee of
Current Liabilities the firm is holding 1.58. Cash in its Current Assets. That is,
the firm is able to maintain nearly 50% of Cash reserves in its current assets.
This could be obtained due to increase in its turnover.
Also, the ratio was almost satisfying the ideal Cash Ratio i.e., 1:2. This indicates
that the firm’s Cash position is satisfactory.
Observations:
1. There is an increase in the total Current Assets.
2. There is a decrease in the Current Liabilities until 2009.
3. There is a constant maintenance of the Current liabilities in the last couple of
years.
4. There is constant increase in sales, which was responsible for increase in
debtors.
5. Also the company was maintaining low cash balances when compared to
previous years, which could be due to decrease in turnover.
The Cash Ratio which was low during the year 2001-02 and increased from 0.13
to 0.44 in 2003, and then to 1.10 in 2004, and then to 2.76 in 2005 and then to
3.54 in 2006 and then to 3.42 in 2007 and then to 2.41 in 2008 and then to 1.58
in 2009. It means that the company has not recovered its Cash reserves position
to a greater extent. This is due to decrease in cash reserve rather due to
increase in its Current liabilities.
LEVERAGE RATIOS
Leverage ratios indicate to what extent the firm has financed its
investments by borrowing. Use of debt financing increases the risk of the firm.
Leverage ratios reflect the financial risk exposure of the firm.
DEBT – EQUITY RATIO:

DEBT
DEBT – EQUITY RATIO =
EQUITY
Debt-equity ratio is the ratio of the total debt in the firm (both long-term
and short-term) to equity; where equity is the sum of ordinary share capital
and preferential share capital.
Table 4.4: Year wise Debt and Equity position. (Rs. in Crore)
PARTICULA
2001-02 2002-03 2003- 2004- 2005- 2006- 2007- 2008-
RS
04 05 06 07 08 09
Secured 1373.48 711.07 37.17 88.94 88.15 604.45 332.78 907.95

Loans
Unsecured 615.89 474.83 - 442.42 369.44 312.51 107.95 100.04

Loans
Deferred 1.21 1.33 - - - - - -

Loans
DEBT 1990.58 1187.23 37.17 531.36 457.59 916.96 440.73 1007.7

6
EQUITY 7827.31 7827.31 7827.3 7827.3 7827.3 7827.3 7827.3 7827.3

1 1 1 1 1 1
DEBT- 0.254 0.152 0.005 0.067 0.059 0.117 0.056 0.128

EQUITY
RATIO
LEVERAGE RATIO
0.3
0.25
0.2
0.15 DEBT-EQUITY RATIO
0.1
0.05
Interpretation:
The Debt-Equity ratio for the year 2008-09 was 0.128. It is clear that from debt-
equity ratio that VSP`s lenders have contributed fewer funds than owners have.
Lender’s contribution is times of owner’s contribution for 2008-09. This
relationship describes the lender’s contribution for each rupee of the owner’s
contribution.
Public sector companies are expected to maintain 1:1 ratio. Under unfavorable
conditions, firms desire to use a low debt-equity ratio. This ratio shows that debt
is of the equity. This less debt indicates less risk to shareholders.
Observations:
1. There is a constant increase in the debt level.
2. The equity level is constant.
The debt-equity ratio has increased from 0.254 in 2001, but it decreased to 0.152
in the year 2002 and to 0.005 in 2003 and to 0.067 in 2004 and to 0.059 in 2005-
06 and 0.117 in 2006-07 and to 0.056 in 2008 and to 0.128 in 2009. This increase
in the ratio is due to increase in the debt level. This shows that the firm is able to
decrease its interest burden by clearing its debt.
PROPRIETORY RATIO:
EQUITY SHARE CAPITAL
PROPRIETORY RATIO =
This ratio states relationship between share capital and total assets.
Proprietary equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called Capital employed to total
assets.
Table 4.5: Year wise shareholders fund (Net Worth) and total Net Assets.(Rs. in
Crore)
PARTICULARS 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-09

02 03 04 05 06 07 08
SHAREHOLDER 7827.3 7827.31 7827.3 7827.3 7827.31 7827.31 7827.1 7827.31
S FUND 1 1 1
TOTAL NET 5956.0 5702.99 6124.2 8549.8 1051.99 12836.6 - -

ASSETS 3 4 9
PROPRIETARY 131.41 137.24 127.8 91.54 744.04 60.97 - -

RATIO
PROPRIETORY RATIO
800
700
600
500
400 PROPRIETARY
RATIO
300
200
100
0
Interpretation:
The Proprietary ratio for the year 2006-2007 was 60.97. This relation describes
shareholders contribution for each rupee of the total net assets. This ratio
reflects that the shareholder’s contribution was 60.97 of the total net assets.
This shows that the firm has increased its contribute to the assets.
Observations:
1. There is a constant decrease in the Total Net Assets.
2. There is significant improvement in shareholder’s fund when compared to the
previous years.
Earlier the proprietary ratio was in a declining trend. That is, in 2001-02 it was
131% in 2002-03 it was 137%. Later it improved in the year 2003-04 to 127%
and to 91% in 2004-05 and to 744% in 2005-06 and to 60% in 2006-07. This
shows that the firm improved its proprietary fund, by way of earning profits.
EBIT
INTEREST COVERAGE RATIO =
INTEREST CHARGES
EBIT = (+/-) Net Profit/Loss + Interest

Interest = Interest and Finance charges
Interest coverage ratio indicates the extent to which earnings can decline
without resultant financial hardship to the company because of its inability to
meet annual interest cost.
Table 4.6: Year wise Interest Coverage Ratio.

(Rs. in Crores)
PARTICULARS 2001-02 2002-03 2003-04 2004-05 2005-06
EBIT 215.31 706.51 1596.07 2019.20 1283.43
INTEREST 290.46 185.83 48.89 11.11 31.06

CHARGES
INTEREST 0.741 3.80 32.65 181.75 41.32

COVERAGE
RATIO
INTEREST COVERAGE RATIO
200
150
INTEREST
100 COVERAGE
RATIO
50
Interpretation:
The interest coverage ratio for the year 2006-07 was 29.18. It shows that the
profits of the firm are nearly 29 times of its interest liability. The higher the ratio,
better it is both for the firm and for the lenders. Also, it shows the firm’s ability to
handle fixed charge liabilities. This is obtained due to two reasons that is increase in
the earnings of the firm and also due to decrease of the interest charges; which is
due to decrease in the debt level.
Observations:
1. There is almost 29-fold increase in the Earnings before Interest and Taxes (EBIT).
2. There is significant improvement in declining of the interest charges.
The ratio has increased to 0.74 in 2001-02, and then to 3.80 in 2002-03, and then
there was a increase in the ratio to 32.65 in 2003-04 and to 181.75 in 2004-05 and
decreased to 41.32 and 29.16 in the year of 2006-07. This shows that the firm is
increasing its efficiency by increasing its EBIT and decreasing its interest burden.
FIXED ASSETS
FIXED ASSETS TO NETWORTH =
NET WORTH
FIXED ASSETS = GROSS BLOCK – DEPRICIATION
NET WORTH = SHAREHOLDERS FUND (PAIDUP CAPITAL)

(+/-) NET PROFIT/LOSS (+/-) RESERVES &SURPLUS/
MISCELLANEOUS EXPENDITURE
Fixed assets to Net Worth indicate the extent to which equity capital is invested in
net fixed assets.
Table 4.7:Year wise fixed assets to net worth position.

(Rs. in Crore)
PARTICU 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

LAR
S
FIXED 4235.03 3827.57 3372.12 2441.30 2078.26 1790.46

ASSETS
NET 2744.47 3286.02 4851.79 6878.32 7546.33 7533.54

WORTH
FIXED
ASSETS
TO NET 1.54 1.16 0.69 0.35 0.27 0.24
WORTH
FIXED ASSET TO NET WORTH
1.6
1.4
1.2
1
0.8 FIXED ASSETS TO
NET WORTH
0.6
0.4
0.2
0
Interpretation:
The Fixed Assets to Net worth ratio for the year 2006-07 was 0.24. It shows that
the ratio is more than one. It means that fixed assets are part financed from
outsiders` funds. Higher this ratio, the less will be the protection to creditors.
So, the current year ratio could be identified as improvement in its position.
Observations:
1. There is increase in the Fixed Assets.
2. There is improvement in the Net worth when compared to the previous years.
The ratio was 1.5 in 2001-02 and to 1.16 in 2002-03 and 0.69 in 2003-04 and
0.35 in 2004-05 and 0.27 in 2005-06 and 0.24 in 2006-07. The higher this ratio,
the less will be the protection to creditors. But in the current year ratio there is
decrease in the ratio it is due to increase in the Net worth which could not be
depicted as improvement in the ratio.
ACTIVITY RATIOS
Activity ratios indicate how well the firm is managing various classes of assets
such as inventory or fixed assets. These ratios also referred to as turnover ratio;
because they show how quickly assets are being converted into sales. It is very
difficult to make a general statement in this regard. Still, high turnover ratios are
usually associated with good assets management and low turnover ratios are
associated with bad assets management.
SALES
INVENTORY TURNOVER RATIO =
INVENTORIES
This ratio indicates how efficiently the firm is managing its inventory. This ratio
roughly indicates how many times per year the inventory is replaced.
Table 4.8: Year wise inventory turnover ratio.

(Rs. in Crore)
2001 2002- 2003- 2004- 2005 2006- 2007- 2008-

PARTICUL -02 03 04 05 -06 07 08 09
ARS
SALES 4080. 5058.2 5462. 7359. 7305. 7932. 1088.3 9128.3

94 5 90 84 71 66 7 8
INVENTORI 1159. 984.46 781.9 980.8 1236. 1210. 1761.5 3215.3

ES 42 5 2 99 80 0 8
INVENTORY
3.52 5.14 6.99 7.50 5.91 6.55 5.16 2.83
TURNOVER
RATIO
INVENTORY TURNOVER RATIO
INVENTORY
4
TURNOVER RATIO
Interpretation:
The Inventory turnover ratio for the year 2008-09 was 2.83 times. That is, the
firm is able to convert its inventory for nearly 2 times within a year.
Normally, higher the ratio indicates the better inventory management. Though
the ratio is not so high it is reasonably high. It shows that there is a rapid turning
of the inventory into receivables through sales. Hence, it is evident that the
decrease in the ratio is obtained due to decrease in its turnover.
Observations:
1. There is an increase in the sales year after year.

2. There are fluctuations in the inventory. The inventory has decreased
during the last couple of years.
This indicated that more sales are generated with high investment in inventory.
This shows bad signs. Also, this is even identified from non-improvement in the
Ratio year after year. That is, 4.28 times in 2003, and from 6.98 times in 2004,
and then to 7.50 times in 2005, and then to 5.91 times in 2006 and 6.55 in 2007,
and then to 5.1 times in 2008, and then to 2.83 in 2009.
DEBTORS TURNOVER RATIO:

SALES
DEBTORS TURNOVER RATIO =
DEBTORS
Debtors constitute an important constituent of current assets. Quality of

debtors determines to a great extent a firm’s liquidity. Debtor’s turnover ratio is
very important as it depicts the efficiency of the staff entrusted with the task of
collection from debtors.
Table 4.9: Year wise debtors turnover ratio. (Rs. in Crore)
PARTIC 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-

UL- 02 03 04 05 06 07 08 09
AR
SALES 4080.94 5058.25 5462.90 7359.84 7305.71 7932.66 9088.37 9128.38
SUNDRY 193.16 215.03 151.59 67.46 107.48 191.54 93.41 191.27

DEBTORS
DEBTORS 21.13 23.52 36.04 109.10 67.97 44.42 97.27 47.72

TURNOVE
R RATIO
DEBTORS TURNOVER RATIO
120
100
80
60 DEBTORS
TURNOVER RATIO
40
20
0
Interpretation:
The Debtors turnover ratio for the year 2008-09 was 47.72 times. That is, the
firm is able to convert Credit Sales (Debtors) into Cash in 47 times in a year.
It shows that the debtors are collected soon.
Observation:
1. There is an increase in the sales in all the years.
2. There is constant increase in debtors.
The Debtors Turnover Ratio was fluctuating all the years` i.e. 23.52 in 2002,
36.04 in 2003, 109.10 in 2004, 67.97 in 2005, 44.42 in 2006-07, 97.29 in 2008,
47.72 in 2009
DEBTORS COLLECTION PERIOD RATIO :
365

Debtors Turnover Ratio
This ratio indicates the extent to which the debts have been collected in time.
The debt collection period indicates the average debt collection period. This ratio is
a good indicator to the lenders of the firm, because it explains to them whether their
borrower is collection from its debt in time. An increase in this period indicates
blockage of funds in debtors.
Table 4.10: Year wise fixed assets to net worth position.

(Rs. in Crore)
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-

PARTICULARS 02 03 04 05 06 07 08 09
DAYS 365 365 365 365 365 365 365 365
DEBTORS
TURNOVER RATIO 21.13 23.52 36.04 109.10 67.97 44.42 97.39 47.72
DEBTORS 17.27 5.52 10.13

3.35 5.37 8.22 3.75 7.64
COLLECTION
PERIOD
DEBTORS COLLECTION PERIOD
20
15
10 DEBTORS
COLLECTION PERIOD
Interpretation:
The firm is able to turnover its Debtors for 47.72 times in a year. This shows
that the debt from the debtors is collected very soon. Increasing the sales with
less credit period is said to be a very good position. . So, it is clear that the firm is
managing its debtors efficiently.
Observations:
2. There is an decrease in debtors before but there is a increased ratio in current
year.
The Debtors collection period was varying for every year but it was less in all the
years. That is, it has varied from 15 days to 10 in 2003, to 3 days in 2004, to 5
days in 2005, and then to 8 days in 2006, to 3 days in 2007, to 7 days in 2008.
But the credit period maintained was low and it has improved its performance by
decreasing the credit period from the last couple of years. This shows that the
firm improved its position further by increasing its turnover.
Table that though the sales has shown substantial increase, the company was
able to maintain the debtors at more or less the same level, which indicates
efficient management of debtors/credit sales.
FIXED ASSETS TURNOVER RATIO :
SALES
FIXED ASSETS TURNOVER RATIO =
NET FIXED ASSETS
This ratio depicts the turnover of fixed assets during the course of business.
The ratio indicates, whether capitalization is proper. If disproportionate amount has
been invested in assets, this ratio will communicate this message.
Table 4.11: Year wise fixed assets turnover ratio.
(Rs. in Crore)
PARTIC 2001- 2002- 2003- 2004- 2005- 2006- 2007- 200

UL 02 03 04 05 06 07 08 8-09
AR
SALES 4080.94 5058.25 5462.90 7359.84 7305.71 7932.66 9088.37 9128.38
NET 4235.03 3827.57 3372.12 2441.30 2078.26 1790.46 1384.64 1256.25

FIXED
ASSETS
FIXED
ASSETS
TURNOVE 0.96 1.32 1.62 3.01 3.52 4.43 6.56 7.26
R RATIO
FIXED ASSET TURNOVER RATIO
4 FIXED ASSETS
TURNOVER RATIO
2
Interpretation:
The ratio for the year 2008-09 was 7.26 times. Interpreting the reciprocal of
this ratio, one may say that for generating a sale of one rupee, the company needs
0.26 times investment in fixed assets.
Observations:
2. There is an increase in the Fixed Assets.
There is an increase in the ratio in all the years. That is, the Ratio has increased
from 1.32 in 2002, 1.62 in 2003, 3.01 in 2004, 3.52 in 2005, and 4.43 in 2006, 6.56 in
2007, 7.26 in 2008. This indicates that the company had improved its performance
in managing its fixed assets.
WORKING CAPITAL TURNOVER RATIO:
SALES
WORKING CAPITAL TURNOVER RATIO = NET WORKING CAPITAL
The Working Capital Turnover Ratio studies the velocity or utilization of the
working capital of the firm during a year.
NET WORKING CAPITAL [CURRENT ASSETS – SHORT TERM

= BANK BORROWINGS] - CURRENT
(OR) WORKING CAPITAL LIABILITES
Table 4.12: Year wise Working Capital Turnover Ratio
(Rs. in Crore)
PARTICU
L
2001-
A 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
R 02
S
4080.9
SALES 5058.25 5462.90 7359.84 7305.71 7932.66 9088.37 9128.38
5
NET
WORKING
CAPITAL 492.79 633.86 1491.33 4623.37 6664.14 8343.80 8612.97 7678.00
WORKING
CAPITAL
TURNOVE
R RATIO 8.28 7.98 3.66 1.59 1.10 0.95 1.05 1.18
WORKING CAPITAL TURNOVER RATIO
10
6
WORKING CAPITAL
TURNOVER RATIO
4
Interpretation:
The ratio for the year 2008-09 was 1.18 times. Interpreting the reciprocal for
the year 2006-07 only 0.95 of net current assets are used to generate 1 rupee of
sales.
Observations:
2. There is a constant increase in the Net Working Capital.
The Ratio has decreased from 8.28 to 7.98 in 2003, to 3.66 in 2004, to 1.59 in 2005, and then to 1.10 in
2006 and then to 0.95 in 2007,and then to 1.05 in 2008, and then to 1.18 in 2009. From the table we can
say that there is an increase in the capital invested in working capital but this increase is corresponding the
increase in sales, which has increased about 24%
PROFITABILITY RATIOS
Profits are the ultimate test of management effectiveness. These ratios

communicate the profitability of events that have already taken place.
BASED ON SALES
GROSS PROFIT RATIO :
GROSS PROFIT
GROSS PROFIT RATIO = X 100
SALES
Gross profit is considered to be a reliable guide as regards adequacy of selling

prices. Further is acts as an indicator of the efficiency of inventory control.
Table 4.13: Year wise Gross profit ratio.
(Rs. in Crore)
PARTIC 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-

ULARS 02 03 04 05 06 07 08 09
2271 3027 2116

GROSS 1500.7 2811.2 1882.6
-47.43 518.12
PROFIT 6 0 9
8343.8 9088.3
9128.38
4080.9 5058.2 5462.9 7359.8 7305.7 0 7
SALES
4 5 0 4 1
GROSS
-1.16 10.24 27.47 38.20 25.77 27.21 33.30 23.18
PROFIT
RATIO
PROFITABILITY RATIO
40
30
20
GROSS PROFIT
10 RATIO
-10
Interpretation:
The Gross profit margin reflects the efficiency with which management
produces each unit of product. The Gross profit margin for the year 2008-09
was 23.18%. It shows that for every 1 rupee of sales of the Gross profit
obtained to 0.27. The decrease in the ratio is due to increase sales and also
decrease in the Gross profit.
Observation:
1. There is an increase in the Sales year after year.
2. There is in-consistent growth in the Gross profit.
The ratio has been increasing every year. It has increased from 10.24% in 2002-
03, and then to 27.47% in 2003-04, and then to 38.20% in 2004-05 and then
25.77% in 2005-06 and then to 27.98% in 2006-07 and then 33.30% in 2008 and
then to 23.18% in 2009.. This decrease in the ratio is due to decrease in the
Gross profit. It shows that the firm has not improved its efficiency in managing
and utilizing the plant and machinery.
OPERATING MARGIN:
OPERATING PROFIT
OPERATING MARGIN = X 100
SALES
The Operating margin establishes the relationship between the total cost incurred
excluding interest and sales. This ratio is used to find out the overall operational
efficiency of the business concern.
Table 4.15: Year wise Operating profit ratio. (Rs. in Crore)
PARTIC 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

ULARS
OPERATI 215.37 703.98 1549.72 2822.43 1913.93 2268.17 2790.25 1552.57

NG
PROFIT
SALES 4080.94 5058.25 5462.90 7359.84 7305.71 7932.66 9088.37 9128.88
OPERAT
ING
MARGIN 5.27 13.92 28.36 38.40 26.20 28.59 30.70 17.00
RATIO
OPERATING MARGIN RATIO
40
35
30
25
20 OPERATING MARGIN
RATIO
15
10
5
0
Interpretation:
The Operating margin is the profit before interest and taxes. This ratio shows
the operating efficiency of the company. The ratio for the year 2008-09 was
17.00%. This ratio reflects that there is consistent growth in the operating ratio
though there is involvement of more operating expenses.
Observations:
1. There is an increase in the Sales year after year.
2. There is in-consistent growth in the Operating Profit.
3. There is also decrease in expenses.
There was decrease from 2008-09 to substantial from year after

year. This shows the non-efficient management of the business affairs.
NET PROFIT RATIO :
NET PROFIT
NET PROFIT RATIO = X 100
SALES
The Net Profit ratio reveals the overall profitability of the concern. It reveals
the efficiency of management in manufacturing, selling and administrative and other
activities of the firm.
Table 4.16: Year wise Net Profit ratio.

(Rs. in Crore)
PARTIC 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
UL
AR 02 03 04 05 06 07 08 09
S
NET -75.15 520.68 1547.18 2008.09 1252.37 1363.43 1942.74 1335.75

PROFIT
SALES 4080.94 5058.25 5 7359.84 7305.71 7932.66 9088.37 9128.88

5462.90
NET
PROFIT
RATIO -1.84 10.29 28.32 27.28 17.14 17.19 21.37 14.63
NET PROFIT RATIO
30
25
20
15 NET PROFIT
10 RATIO
5
0
-5
Interpretation:
The Net profit is the final profit of the company after deducting all the
expenditures. The profit percentage for the year 2008-09 was 14.63%. Though
there is heavy amount levied on Depreciation and Deferred Revenue
Expenditure. So, this could be further improved by in decreasing the expenditure
or increasing the sales.
Observations:
1. There is positive Net profit in the current year.
2. There is decrease in the interest charges.
The firm was running with negative results before one year, but
turned to maximized level last year and maintained the same strategy of
maximizing in the current year also. This is due to increase in sales and
decrease in the interest burden. So, it could be said that the firm not improved
its overall performance level by decreasing its efficiency levels.
BASED ON INVESTMENT:
PROFIT BEFORE TAX

RETURN ON INVESTMENT = X 100
CAPITAL EMPLOYED
The Return on investment states the efficiency or otherwise with which the firm
is operated.
Table 4.17: Year wise Return on Investment.
(Rs. in Crore)
PROFIT 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

BEFOR
E
TAX
PROFIT BEFORE -75.15 520.68 1547.18 2105.15 1889.51 2222.34
TAX
CAPITAL 4727.82 4461.42 4942.67 7064.66 8742.40 10134.26
EMPLOYED
RETURN ON
INVESTMENT -1.59 11.67 31.81 31.90 21.61 21.93
RETURN ON INVESTMENT
35
30
25
20
RETURN ON
15
INVESTMENT
10
5
0
-5
Interpretation:
The Return on Investment for the year 2006-07 was 21.93%. This shows the
earning capacity of the capital employed by the firm. That is, the firm is able to
generate 21.93% of profit for the capital employed by the firm.
Observations:
1. There is increase in Sales every year.
2. There is improvement in the profitability (EBT).
3. There is increase in the Capital Employed.
The ratios, which were negative before last year i.e., till the year 2002, have
improved there after i.e., from 2003. That is, from –1.57 to 11.67 in 2001-02, then
to 31.81 in 2003-04 and then to 31.90 in 2005 and then to 21.61 in 2006 has been
decreased.. This shows that there is improvement in the ratio. The improvement
in the ratio is due to increase in profitability (EBT), which is due to increase in
sales and decrease in interest charges. This shows that the firm improved a lot in
its profitability with less capital employment. This shows that the firm has
improved its efficiency.
PROFIT AFTER TAX

RETURN ON NETWORTH = X 100
NET WORTH
The Return on Net Worth is also known as proprietors` net capital employed.
The return should be calculated with reference to profits belonging to
shareholders, and therefore, profits shall be net profit after interest and tax.
Table 4.18: Year wise Return on Net Worth (Rs. in Crore)
PARTICULARS 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
EARNINGS AFTER -75.15 520.66 1547.18 2008.09 1252.37 1363.43

TAX
NET WORTH 2744.47 3286.02 4851.79 6878.32 7546.33 7533.54
RETURN ON -2.74 15.85 31.88 29.19 16.59 18.09

NET WORTH
RETURN ON NETWORTH
35
30
25
20
15 RETURN ON NET
WORTH
10
5
0
-5
Interpretation:
The Return on Net worth ratio for the year 2006-07 was 18.09%. This shows
that the firm is able to generate a return of 15% (app.) on the funds of
shareholders. This indicates that the firm has well the utilized the resources of
owners to generate return on the funds of owners.
Observations:
1. There is increase in Sales every year.

2. There is improvement in the profitability (EAT).
3. There is decrease in Net Worth.
The ratio had fallen to –2.74% in 2001-02, and then increased to 15.88% in 2002-
03, and then to 31.88% in 2003-04 and then 29.19% in 2004-05 and then 16.59%
in 2005-06 and then 18.09 in 2006-07. This shows that there is a greater
improvement in the ratio. The improvement in the ratio is due to increase in
profitability.
NET PROFIT AFTER INTEREST

BEFORE TAX
RETURN ON CAPITAL = X 100

SHARE CAPITAL
The Return on Capital (Equity) ratio indicates what kind of rate of return was
earned on Book value of owners` equity.
Table 4.19: Year wise Return on capital employed.

(Rs. in Crore)
PARTICULAR
S 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
PROFIT -75.15 520.68 1547.18 2253.77 1889.51 2222.34 2995 2027

BEFORE
TAX
SHARE 7827.31 7827.31 7827.31 7827.31 7827.31 7827.31 7827.31 7827.31

CAPITAL
RETURN ON
CAPITAL
-0.96 6.65 19.77 28.79 24.14 28.39 38.26 25.89
EMPLOYED
RETURN ON CAPITAL
40
35
30
25
20 RETURN ON
15 CAPITAL EMPLOYED
10
5
0
-5
Interpretation:
The Return on capital in the year 2008-09 was 25.89%. This ratio
indicates that the firm is able to generate 29.89% of return earned on the book
value of share capital.
Observations:
1. There is improvement in the firm’s profitability (EAT) when compared to previous years.
2. The share capital was constant in all the years.
The performance of the firm was low in the previous years. But it turned out to
profitability position in the current year. The improvement in the ratio is due to
increase in profitability (EAT) of the firm. This shows that the firm is able to
increase the return of its shareholders.
NET PROFIT BEFORE TAX

RETURN ON GROSS BLOCK = X 100
GROSS BLOCK
The Return on Gross Block establishes a relationship between Net profit and
Gross Fixed asset.
Table 4.20: Year wise Return on Gross Block(Rs. in Crore)
PARTICUL 2001- 2002- 2003-04 2004- 2005- 2006-07 2007-08 2008-09

ARS 02 03 05 06
PROFIT -75.15 520.6 1547.18 2253.7 1889.5 2222.34 2995 2027

BEFORE 8 7 1
TAX
GROSS 8702.7 8730. 8709.71 8763.4 8832.1 8875.62 8900.83 9005.99

BLOCK 9 76 9 3
RETURN -0.86 5.96 17.76 25.72 21.39 25.04 33.64 22.50

ON GROSS
BLOCK
RETURN ON GROSS BLOCK
35
30
25
20
15 RETURN ON
GROSS BLOCK
10
5
0
-5
Interpretation:
The Return on Gross Block for the year 2008-09 was 22.50%. This ratio shows
that a return of 25%(app) earned on the investment of capital in fixed assets.
Observations:
1. There is increase in the Gross Block year after year.
2. There is improvement in the profitability (EBT).

The Return on Gross Block was negative before 2003, but there was a constant
betterment in the ratio every year. It has increase from negative value to 5.96%
in 2003, and then to 17.76 in 2004 and then to 25.72 in 2005 and then 21.39 in
2006 and 25.04 in 2007 and then to 33.64 in 2008 and then to 22.50 in 2009.
This shows that the firm has not been improved its efficiency.
SUMMARY
The Visakhapatnam Steel Plant is the most modern integrated steel plant. It is
the only shore-based plant in India for producing 3 million tones of steel from India.
Visakhapatnam Steel Plant produces a variety of products using the fastest
technology available. Visakhapatnam Steel Plant has only the technology but also
the knowledge of its customer needs. The RINL has also established a dealer
network to effectively serve the growing demand for Vizag Steel.
Financial management is that managerial activity, which is concerned with the
planning and controlling of the firm’s financial resources, its activities, and the mix
of debt and equity which is nothing but its Capital Structure. The financial manager
must strive to obtain the best financing mix or the optimum capital structure for his
or her firm.
The analysis of financial statements is, thus, an important aid to financial
analysis. Users of financial statements can get further insight about financial
strengths and weaknesses of the firm if they properly analyze information reported
in these statements. The future plans of the firm should be laid down in view of the
firm’s financial strengths and weaknesses.
Ratio analysis is a widely – used tool of financial analysis. Ratio is used as a
benchmark for evaluating the financial position and performance of a firm. As a tool
of financial management, ratios are of crucial significance. Ratio analysis is relevant
in assessing the performance of a firm in respect to the following aspects:
• Liquidity position
• Long – term solvency
• Operational efficiency
• Overall profitability
• Inter – firm comparison, and
• Trend analysis
SUMMARY OF RATIOS ANALYSIS IN VSP/RINL:
Ratio analysis is the technique to know the financial position of the company.
Ratio analysis in Visakhapatnam Steel Plant is very important as it indicates the
liquidity, solvency and profitability position of the VSP.
 Liquidity ratios i.e., Quick ratio and Cash ratio are up to the conventional ratios. So, it
could be further improved by decreasing its Current liabilities and increasing its Current
assets in par with its requirements.
 Although Debt – Equity ratio is low, it is in a satisfactory position. Under unfavorable

conditions lower Debt/Equity is desirable. The increase in the interest coverage ratio shows
that the firm has improved its ability to a greater extent in handling fixed charge liabilities.
Also the Proprietary ratio is in satisfactory state.
 Inventory turnover ratio has improved in the current year, shows the operational
efficiency of the firm in managing the inventories. The increase in the Debtors turnover
ratio and decrease in the Debtors collection period shows the effective management of
debtors/credit sales.
 There is a Net Profit in the current year. All the profitability ratios basing on investment
like return on investment, net worth, capital and gross block which were negative in the
previous years. But turned positive and has yielded reasonable results in the current year.
 The analysis for the purpose of the investing in shares generally concentrates on the
return on equity of VSP, which is increasing; therefore the shares may be purchased.
SUGGESTIONS
Some of the Suggestions drawn from the findings of the ratio analysis for the
better performance of VSP/RINL are as follows.
 The liquidity Position of the firm is increasing, which is evident from the findings. Even
though the Current ratio is increasing steadily every year. It is still far from satisfaction.
As against the conventional ratio 2:1. It is still only 1.59:1. The same way the quick ratio
needs to be improved further.
 Though the company has recorded very good improvement in managing the
inventories and Debtors. The firm was not able to generate the reasonable turnover over
the fixed assets. So, this calls for further improvement in the ratio, by generating more
sales.
 The company has recorded profits in the current year for the last 5 years. It is due to
the fact that vast improvement in Gross profit ratio. The company may put some more
special efforts to further consolidate its position by concentrating on more market share.
 Another reason for the company to have the less Net Profit is, due to the increase in its
expenditure and operating expenses. The company may consider by that efficiency can
be improved further by reducing the operating expenses.
 The other main area where VSP has tremendous scope for improvement is in
manufacturing of value added products and concentrating on the Exports. This will result
in better sales realization and higher profit.
BIBLOGRAPHY
1. Financial Management: Theory & Practice (4th Edition)
Eugene F. Brigham and Michael C. Ehrhardt
2. Elements of Management Accounting
Leslie Chadwick
3. Principles of Corporate Finance (7th Edition)
Richard Brealey Stewart Myers
4. Accounting & Finance for Managers
Barry J. Cooper
WWW.VIZAGSTEEL.COM

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A STUDY ON

A project report Submitted in partial fulfillment for the award of the

Chapter II Steel industry in India.

Chapter III Profile of the Visakha Steel Plant.

Chapter IV Theoretical frame work of Ratio Analysis.

Chapter V Practical aspects of Ratio Analysis in

Visakha Steel Plant.

Chapter VI Summary and suggestions

• Land and layout for expansion up to 16mt with proximity to port.

• Quality producer image.

• High standing for customer service.

• Committed work force.

• Ability to raise funds.

• No in-in house key raw materials-iron ore/coal..

• Lack of level playing field.

• Major capital repairs and modernization-nor overdue.

• High cost of servicing huge equity.

• Consumption cooking coal contractor at the higher cost in 2008-09.

Opportunities and threats:

• Potential for growth in domestic steel demand-low per capita consumption in

• Oligopolistic coal supply side

• Single iron ore supplier-located in disturbance prone areas

• Predominant sec ordinarily sector in long products

• VSP-high earning island

NEED FOR THE STUDY:

Ratio Analysis is useful in the following ways:

1. Short-term and long-term planning.

2. Measurement and evaluation of financial performance.

3. Study of financial trends.

4. Decisions making for investments and operations.

5. Diagnosis of financial skills.

Thus a detailed study regarding the Ratio Analysis in Visakhapatnam

The study is focused with the following objectives:

1. To describe the Organizational Profile of RINL (VSP)

2. To discuss the significance of the management of ratio analysis in RINL (VSP);

3. To evaluate the ratio analysis management in RINL (VSP) and

4. To summarize and to suggest for the better performance of RINL (VSP).

2. Reliability on usage of secondary data is another limitation.

3. Some aspects of financial information are held due to confidentially of the

also abroad. From time immemorial steel is in dispensable to modern civilization in

steel making in India through the centuries.

The development of steel industry in India should be viewed in conjunction

1830 - Josiah Marshall Health constructed the first

1874 - James Erskin Founded the Bengal Iron Works.

1899 - Jamshedji Tata initiated the scheme for an

Integrated steel plant

1906 - Formation of TISCO

1911 - Tata Iron & Steel Company started production

1916 - TISCO was founded.

1944 - Formation of mysore iron.

1951-56 - First Five-Year Plan

1956-61 - Second Five-Year Plan

1961-66 - Third Five-Year Plan

Rourkela 1.0 1.8

Bhilai 1.1 2.5

Durgapur 1.0 1.6

TISCO 1.0 2.0

HSCO 0.5 1.0

1969-74- Fourth Five-Year Plan Salem Steel Plant started.

1980-85 - Fifth-Year Plan

1985-91 - Seventh Five-Year Plan

1991-96 - Eighth Five-Year Plan

1997-2002 - Ninth Five-Year Plan

Growth during the entire plan period.