REPORT ON FINANCIAL STATEMENT ANALYSIS

INTRODUCTION

OBJECTIVE:

To understand the information contained in financial statements with a view

to know the strength or weaknesses of the firm and to make forecast about
the future prospects of the firm and thereby enabling the financial analyst
to take different decisions regarding the operations of the firm.

RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the general
(qualitative) factors of a company. The other side considers tangible and
measurable factors (quantitative). This means crunching and analyzing
numbers from the financial statements. If used in conjunction with other
methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet,
income statement, and cash flow statement. It's comparing the number against
previous years, other companies, the industry, or even the economy in general.
Ratios look at the relationships between individual values and relate them
to how a company has performed in the past, and might perform in the
future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical

yardstick that measures the relationship two figures, which are related to each
other and mutually interdependent. Ratio is express by dividing one figure
by the other related figure. Thus a ratio is an expression relating one
number to another. It is simply the quotient of two numbers. It can be
expressed as a fraction or as a decimal or as a pure
ratio or in absolute figures as “ so many times”. As accounting ratio is an
expression relating two figures or accounts or two sets of account heads or
group contain in the financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items

or group of items in the financial statement are computed, determined and
presented.

Ratio analysis is an attempt to derive quantitative measure or guides

concerning the financial health and profitability of business enterprises. Ratio
analysis can be used both in trend and static analysis. There are several
ratios at the disposal of an annalist but their group of ratio he would prefer
depends on the purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of this

section, we will focus on a technique, which is easy to use. It can provide
you with a valuable investment analysis tool.

This technique is called cross-sectional analysis . Cross-sectional analysis

compares financial ratios of several companies from the same industry. Ratio
analysis can provide valuable information about a company's financial health.
A financial ratio measures a company's performance in a specific area. For
example, you could use a ratio of a company's debt to its equity to
measure a company's leverage. By comparing the leverage ratios of two
companies, you can determine which company uses greater debt in the
conduct of its business. A company whose leverage ratio is higher than a
competitor's has more debt per equity. You can use this information to make
a judgment as to which company is a better investment risk.

However, you must be careful not to place too much importance on one
ratio. You obtain a better indication of the direction in which a company is
moving when several ratios are taken as a group.
OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A. Solvency-
1)Long term
2)Short term
3)Immediate
B. Stability
C. Profitability
D. Operational efficiency
E. Credit standing
F. Structural analysis
G. Effective utilization of resources
H. Leverage or external financing

FORMS OF RATIO:

Since a ratio is a mathematical relationship between to or more

variables / accounting figures, such relationship can be expressed in different
ways as follows –

A]As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the
preference share capital is Rs. 5,00,000, the ratio of equity share capital to
preference share capital is 20,00,000: 5,00,000 or simply 4:1.

B]As a rate of times:

In the above case the equity share capital may also be described as 4 times
that of preference share capital. Similarly, the cash sales of a firm are Rs.
12,00,000 & credit sales are Rs. 30,00,000. sothe ratio of credit sales to cash
sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that
the credit sales are 2.5 times that of cash sales.
C]As a percentage:

In such a case, one item may be expressed as a percentage of some other

item. For example, net sales of the firm are Rs.50,00,000 & the amount of
the gross profit is R s . 1 0 , 0 0 , 0 0 0 , t h e n t h e g r o s s p r o f i t m a y b e
d e s c r i b e d a s 2 0 % o f s a l e s [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1]Calculation of ratio

2]Comparing the ratio with some predetermined standards. The standard

ratio may be the past ratio of the same firm or industry’s average ratio or a
projected ratio or the ratio of the most successful firm in the industry. In
interpreting the ratio of a particular firm, the analyst cannot reach any
fruitful conclusion unless the calculated ratio is compared with some
predetermined standard. The importance of a correct standard is oblivious as
the conclusion is going to be based on the standard itself.

TYPES OF COMPARISONS

The ratio can be compared in three different ways –

1]Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare
them with the ratio or ratios of some other selected firm in the same
industry at the same point of time. So it involves the comparison of two or
more firm’s financial ratio at the same point of time. The cross section
analysis helps the analyst to find out as to how a particular firm has performed
in relation to its competitors. The firms performance may be compared with
the performance of the leader in the industry in order to uncover the major
operational inefficiencies. The cross section analysis is easy to be undertaken
as most of the data required for this may be available in financial statement
of the firm.
2]Time series analysis:

The analysis is called Time series analysis when the performance of a firm is
evaluated over a period of time. By comparing the present performance of a
firm with the performance of the same firm over the last few years, an
assessment can be made about the trend in progress of the firm, about the
direction of progress of the firm. Time series analysis helps to the firm to
assess whether the firm is approaching the long-term goals or not. The Time
series analysis looks for (1) important trends in financial performance (2)
shift in trend over the years (3) significant deviation if any from the other
set of data\

3]Combined analysis:

If the cross section & time analysis, both are combined together to study
the behavior & pattern of ratio, then meaningful & comprehensive
evaluation of the performance of the firm can definitely be made. A trend of
ratio of a firm compared with the trend of the ratio of the standard firm can give
good results. For example, the ratio of operating expenses to net sales for
firm may be higher than the industry average however, over the years it
has been declining for the firm, whereas the industry average has not shown
any significant changes.

The combined analysis as

depicted in the above
diagram, which clearly
shows that the ratio of the
firm is above the industry
average, but it is
decreasing over the years
& is approaching the
industry average.
PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions,

there are certain pre-requisites, which must be taken care of. It may be
noted that these prerequisites are not conditions for calculations for
meaningful conclusions. The accounting figures are inactive in them & can
be used for any ratio but meaningful & correct interpretation & conclusion can
be arrived at only if the following points are well considered.

1) The dates of different financial statements from where data is taken

must be same.

2) If possible, only audited financial statements should be considered,

otherwise there must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case

of cross section analysis otherwise the results of the ratio analysis
would be distorted.

4) One ratio may not throw light on any performance of the firm.
Therefore, a group of ratios must be preferred. This will be conductive
to counter checks.

5) Last but not least, the analyst must find out that the two figures
being used to calculate a ratio must be related to each other,
otherwise there is no purpose of calculating a ratio.

CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO
BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET
1] LIQUIDITY RATIO
1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] ACTIVITY
RATIOCREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO RATIO SHAREHOLDER

3] COMPOSITE 5]
COVERAGE 3]
RATIOS FOR
RATIO RATIO MANAGEMENT
4] RATIO FOR LONG
TERM CREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet, P& P A/C, or
both. One-way of classification of ratios is based upon the sources from which
are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called
Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio
of debt to equity. While calculating these ratios, there is no need to refer to
the Revenue statement. These ratios study the relationship between the
assets & the liabilities, of the concern. These ratio help to judge the liquidity,
solvency & capital structure of the concern. Balance sheet ratios are Current
ratio, Liquid ratio, and Proprietory ratio, Capital gearing ratio, Debt equity
ratio, and Stock working capital ratio.

2]Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratio study the relationship between the profitability
& the sales of the concern. Revenue ratios are Gross profit ratio, Operating
ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover
ratio.

3]Composite ratio:

These ratios indicate the relationship between two items, of which one is
found in the balance sheet & other in revenue statement.

There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits

& the investments of the concern. E.g. return on capital employed,
return on proprietors fund, return on equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover

ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to

liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover
ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of
the concern e.g. liquid ratios & current ratios.
2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in financing
the assets of the concern e.g. capital gearing ratios, debt equity ratios, &
Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors
turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating ratios,
gross profit ratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on

investment, return on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of
the outsiders to be paid out of such profit e.g. dividend payout ratios & debt
service ratios.

BASED ON USER:

1]Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2]Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3]Ratios for management:

Return on capital employed, turnover ratios, operating ratios,

expenses ratios

4]Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

LIQUIDITY RATIO: -Liquidity refers to the ability of a firm to meet its
short-term (usually up to 1 year) obligations. The ratios, which indicate the
liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and Cash
ratio. These ratios are discussed below
CURRENT RATIO
Meaning:

This ratio compares the current assests with the current liabilities. It is also
known as ‘working capital ratio’ or ‘ solvency ratio’. It is expressed in the
form of pure ratio.

E.g. 2:1

Formula :

Current assets

Current ratio =

Current liabilities

The current assests of a firm represents those assets which can be, in the
ordinary course of business, converted into cash within a short period
time, normally not exceeding one year. The current liabilities defined as
liabilities which are short term maturing obligations to be met, as originally
contemplated, with in a year.
Current ratio (CR) is the ratio of total current assets (CA) to total current
liabilities (CL).
Current assets include cash and bank balances; inventory of raw
materials, semi-
finished and finished goods; marketable securities; debtors (net of provision
for bad and
doubtful debts); bills receivable; and prepaid expenses. Current liabilities
consist of trade creditors, bills payable, bank credit, provision for taxation,
dividends payable and outstanding expenses. This ratio measures the
liquidity of the current assets and the ability of a company to meet its short-
term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets
converted into cash in the operating cycle of the firm and provides the funds
needed to pay for CL. The higher the current ratio, the greater the short-term
solvency. This compares assets, which will become liquid within
approximately twelve months with liabilities, which will be due for payment
in the same period and is intended to indicate whether there are sufficient
short-term assets to meet the short- term liabilities. Recommended current
ratio is 2: 1. Any ratio below indicates that the entity may face liquidity
problem but also Ratio over 2: 1 as above indicates over trading, that is the
entity is under utilizing its current assets.

LIQUID RATIO: Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare
the quick assets with the quick liabilities. It is expressed in the form of pure
ratio. E.g. 1:1.

The term quick assets refer to current assets, which can be converted
into, cash immediately or at a short notice without diminution of value.

Formula:

Quick assets

Liquid ratio =

Quick liabilities
Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA
refers to those current assets that can be converted into cash immediately
without any value strength. QA includes cash and bank balances, short-term
marketable securities, and sundry debtors. Inventory and prepaid expenses
are excluded since these cannot be turned into cash as and when required.

QR indicates the extent to which a company can pay its current liabilities
without relying on the sale of inventory. This is a fairly stringent measure of
liquidity because it is based on those current assets, which are highly liquid.
Inventories are excluded from the numerator of this ratio because they are
deemed the least liquid component of current assets. Generally, a quick ratio
of 1:1 is considered good. One drawback of the quick ratio is that it ignores
the timing of receipts and payments.

CASH RATIO Meaning:

This is also called as super quick ratio. This ratio considers only the absolute
liquidity available with the firm.

Formula:

Cash + Bank + Marketable securities

Cash ratio =

Total current liabilities

Since cash and bank balances and short term marketable securities are the
most liquid assets of a firm, financial analysts look at the cash ratio. If the
super liquid assets are too much in relation to the current liabilities then it
may affect the profitability of the firm.
 INVESTMENT / SHAREHOLDER

EARNING PER SAHRE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the
organization. An earnings per Share represents earning of the company
whether or not dividends are declared. If there is only one class of shares, the
earning per share are determined by dividing net profit by the number of
equity shares.

EPS measures the profits available to the equity shareholders on each share
held.

Formula:

NPAT

Earning per share =

Number of equity share

The higher EPS will attract more investors to acquire shares in the company
as it indicates that the business is more profitable enough to pay the dividends in
time. But remember not all profit earned is going to be distributed as dividends
the company also retains some profits for the business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share held.
Formula:

Dividend Paid to Ordinary Shareholders

Dividend per Share =

Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to
equity

shareholders out of the profit available to the equity shareholders.

Formula:

Dividend per share

Dividend Pay out ratio = ___________________ *100

Earning per share

D/P ratio shows the percentage share of net profits after taxes and after
preference
dividend has been paid to the preference equity holders.
GEARING

CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders return

through the use of debt. Equity shareholders earn more when the rate of the
return on total capital is more than the rate of interest on debts. This is also
known as leverage or trading on equity. The Capital-gearing ratio shows the
relationship between two types of capital viz: - equity capital & preference
capital & long term borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loan

Capital gearing ratio =

Equity capital & reserve & surplus

Capital gearing ratio indicates the proportion of debt & equity in the
financing of assets of a concern.

PROFITABILITY

These ratios help measure the profitability of a firm. A firm, which

generates a substantial amount of profits per rupee of sales, can
comfortably meet its operating expenses and provide more returns to its
shareholders. The relationship between profit and sales is measured by
profitability ratios. There are two types of profitability ratios: Gross Profit
Margin and Net Profit Margin.

GROSS PROFIT
RATIO:- Meaning:

This ratio measures the relationship between gross profit and sales. It is
defined as the excess of the net sales over cost of goods sold or excess of
revenue over cost. This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of production
as well as pricing. This ratio helps to judge how efficient the concern is I
managing its production, purchase, selling & inventory, how good its control
is over the direct cost, how productive the concern , how much amount is
 left to meet other expenses & earn net profit.

Formula:

Gross profit

Gross profit ratio = * 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is
usually expressed in the form of a percentage.

Formula:

NPAT

Net profit ratio = ______ * 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and
preference shareholders) as a percentage of net sales. It measures the
overall efficiency of production, administration, selling, financing, pricing
and tax management. Jointly considered, the gross and net profit margin
ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of the
total funds employed in the firm. The term fund employed or the capital
employed refers to the total long-term source of funds. It means that the
capital employed comprises of shareholder funds plus long-term debts.
Alternatively it can also be defined as fixed assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors and
the owners of a firm. It is the sum of long-term liabilities and owner's equity.
ROCE indicates the efficiency with which the long-term funds of a firm are
utilized.

Formula:

NPAT

Return on capital employed = *100

Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted
into cash. They are also called efficiency ratios or asset utilization ratios as
they measure the efficiency of a firm in managing assets. These ratios are
based on the relationship between the level of activity represented by sales
or cost of goods sold and levels of investment in various assets. The
important turnover ratios are debtors turnover ratio, average collection
period, inventory/stock turnover ratio, fixed assets turnover ratio, and total
assets turnover ratio. These are described below:
DEBTORS TURNOVER RATIO
(DTO) Meaning:

DTO is calculated by dividing the net credit sales by average debtors

outstanding during the year. It measures the liquidity of a firm's debts. Net
credit sales are the gross credit sales minus returns, if any, from customers.
Average debtors are the average of debtors at the beginning and at the end
of the year. This ratio shows how rapidly debts are collected. The higher the
DTO, the better it is for the organization.

Formula:

Credit sales

Debtors turnover ratio =

Average debtors

INVENTORY OR STOCK TURNOVER RATIO

(ITR) Meaning:

ITR refers to the number of times the inventory is sold and replaced
during the accounting period.

Formula:
 COGS

Stock Turnover Ratio =

Average stock

ITR reflects the efficiency of inventory management. The higher the ratio,
the more efficient is the management of inventories, and vice versa.
However, a high inventory turnover may also result from a low level of
inventory, which may lead to frequent stock outs and loss of sales and
customer goodwill. For calculating ITR, the average of inventories at the
beginning and the end of the year is taken. In general, averages may be
used when a flow figure (in this case, cost of goods sold) is related to a stock
figure (inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed
assets. Formula:

Net sales

Fixed assets turnover =

Net fixed assets

This ratio measures the efficiency with which fixed assets are employed. A
high ratio indicates a high degree of efficiency in asset utilization while a low
ratio reflects an inefficient use of assets. However, this ratio should be used
with caution because when the fixed assets of a firm are old and substantially
depreciated, the fixed assets turnover ratio tends to be high (because the
denominator of the ratio is very low).

PROPRIETORS
RATIO: Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It

relates shareholders fund to total assets. This ratio determines the long
term or ultimate solvency of the company.

In other words, Proprietary ratio determines as to what extent the owner’s

interest & expectations are fulfilled from the total investment made in the
business operation.

Proprietary ratio compares the proprietor fund with total liabilities. It is

usually expressed in the form of percentage. Total assets also know it as net
worth.

Formula:

Proprietary fund

Proprietary ratio = _________________ OR

Total fund

Shareholders fund

Proprietary ratio =

Fixed assets + current liabilities

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the working
capital. It helps to judge the quantum of inventories in relation to the
working capital of the business. The purpose of this ratio is to show the
extent to which working capital is blocked in inventories. The ratio highlights
 the predominance of stocks in the current financial position of the company.
It is expressed as a percentage.

Formula:

Stock

Stock working capital ratio =

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition &
quality of the working capital. This ratio also helps to study the solvency
of a concern. It is a qualitative test of solvency. It shows the extent of funds
blocked in stock. If investment in stock is higher it means that the amount of
liquid assets is lower.

DEBT EQUITY
RATIO: MEANING:

This ratio compares the long-term debts with shareholders fund. The
relationship between borrowed funds & owners capital is a popular
measure of the long term financial solvency of a firm. This relationship is
shown by debt equity ratio. Alternatively, this ratio indicates the relative
proportion of debt & equity in financing the assets of the firm. It is usually
expressed as a pure ratio. E.g. 2:1

Formula:

Total long-term debt

Debt equity ratio =

Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process
of the increasing the equity shareholders return through the use of debt.
Leverage is also known as ‘gearing’ or ‘trading on equity’. Debt equity ratio
shows the margin of safety for long-term creditors & the balance between
debt & equity.

RETURN ON PROPRIETOR
FUND: Meaning:

Return on proprietors fund is also known as ‘return on proprietors equity’ or

‘return on shareholders investment’ or ‘ investment ratio’. This ratio
indicates the relationship between net profit earned & total proprietors
funds. Return on proprietors fund is a profitability ratio, which the
relationship between profit & investment by the proprietors in the concern.
Its purpose is to measure the rate of return on the total fund made
available by the owners. This ratio helps to judge how efficient the
concern is in managing the owner’s fund at disposal. This ratio is of
practical importance to prospective investors & shareholders.

Formula:

NPAT

Return on proprietors fund = ____________________ * 100

Proprietor’s fund

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which payments are
made to the supplier for purchase made from them. It is a relation between
net credit purchase and average creditors

Net credit purchase

 Credit turnover ratio =

Average creditors

Months in a year

Average age of accounts payable =

Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher

creditors turnover ratio or a lower credit period enjoyed signifies that the
creditors are being paid promptly. It enhances credit worthiness of the
company. A very low ratio indicates that the company is not taking full
benefit of the credit period allowed by the creditors.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial

significance. The importance of ratio analysis lies in the fact that it presents
facts on a comparative basis & enables the drawing of interference
regarding the performance of a firm. Ratio analysis is relevant in assessing
the performance of a firm in respect of the following aspects:

1]Liquidity position,

2]Long-term solvency,

3]Operating efficiency,

4]Overall profitability,

5]Inter firm comparison

6]Trend analysis.

1]LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligation 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 ratio are particularly useful in credit
analysis by bank & other suppliers of short term loans.

2]LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial

viability of a firm. This respect of the financial position of a borrower is of
concern to the long-term creditors, security analyst & the present & potential
owners of a business. The long-term solvency is measured by the leverage/
capital structure & profitability ratio Ratio analysis s that focus on earning
power & operating efficiency.

Ratio analysis reveals the strength & 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
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 owners consistent with the risk involved.

3]OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of
efficiency in management & utilization of its assets. The various activity ratios
measures this kind of operational efficiency. In fact, the solvency of a firm
is, in the ultimate analysis, dependent upon the sales revenues generated
by the use of its assets- total as well as its components.

4]OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial
position of a firm, the management is constantly concerned about overall
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meets its short term as well as long term obligations to its creditors,
to ensure a reasonable return to its owners & secure optimum utilization of
the assets of the firm. This is possible if an integrated view is taken & all the
ratios are considered together.

5]INTER – FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also
serves as a stepping-stone to remedial measures. This is made possible due
to inter firm comparison & comparison with the 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. It should be reasonably expected that the performance
of a firm should be in broad conformity with that of the industry to which it
belongs. An inter firm comparison would demonstrate the firms position vice-
versa its competitors. If the results are at variance either with the industry
average or with the those of the competitors, the firm can seek to identify the
probable reasons & in light, take remedial measures.

6]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 the trend analysis of ratio lies in the fact that
the analysts can know the direction of movement, that 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.

ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant

accounting data relationships, which give the decision-maker insights into the
financial performance of a company. The advantages of ratio analysis can be
summarized as follows:

> Ratios facilitate conducting trend analysis, which is important for

decision making and forecasting.

> Ratio analysis helps in the assessment of the liquidity, operating

efficiency, profitability and solvency of a firm.

> Ratio analysis provides a basis for both intra-firm as well as

inter-firm comparisons.

> The comparison of actual ratios with base year ratios or standard
ratios helps the management analyze the financial performance of
the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are

described below:

1] Information problems

> Ratios require quantitative information for analysis but it is not decisive
about analytical output .

> The figures in a set of accounts are likely to be at least several months
out of date, and so might not give a proper indication of the company’s
current financial position.
 > Where historical cost convention is used, asset valuations in the
balance sheet could be misleading. Ratios based on this information will
not be very useful for decision-making.
> When comparing performance over time, there is need to consider the
changes in price. The movement in performance should be in line with
the changes in price.

> When comparing performance over time, there is need to consider the
changes in technology. The movement in performance should be in line
with the changes in technology.

> Changes in accounting policy may affect the comparison of results

between different accounting years as misleading.

3] Inter-firm comparison

> Companies may have different capital structures and to make

comparison of performance when one is all equity financed and another
is a geared company it may not be a good analysis.

> Selective application of government incentives to various companies

may also distort intercompany comparison. Comparing the performance
of two enterprises may be misleading.

> Inter-firm comparison may not be useful unless the firms compared
are of the same size and age, and employ similar production methods
and accounting practices.

> Even within a company, comparisons can be distorted by changes in

the price level.

> Ratios provide only quantitative information, not qualitative information.

> Ratios are calculated on the basis of past financial statements. They
do not indicate future trends and they do not consider economic
conditions.
PURPOSE OF RATIO ANLYSIS:

1] To identify aspects of a business’s performance to aid decision making

2] Quantitative process – may need to be supplemented by

qualitative Factors to get a complete picture.

3] 5 main areas:-

Ø Liquidity – the ability of the firm to pay its way

Ø Investment/shareholders – information to enable decisions to be

made on the extent of the risk and the earning potential of a business
investment

Ø Gearing – information on the relationship between the exposure of

the business to loans as opposed to share capital

Ø Profitability – how effective the firm is at generating profits given sales

and or its capital assets

Ø Financial – the rate at which the company sells its stock and the
efficiency with which it uses its assets

ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creative technique in

the sense that it uses the same figure & information, which is already
appearing in the financial statement. At the same time, it is true that what
can be achieved by the technique of ratio analysis cannot be achieved by
the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability &
efficiency of performance, either individually or in relation to those of other
firms in the same industry. The process of this appraisal is not complete
until the ratio so computed can be compared with something, as the ratio
all by them do not mean anything. This comparison may be in the form of
intra firm comparison, inter firm comparison or comparison with standard
ratios. Thus proper comparison of ratios may reveal where a firm is placed as
compared with earlier period or in comparison with the other firms in the
same industry.

Ratio analysis is one of the best possible techniques available to the

management to impart the basic functions like planning & control. As the
future is
closely related to the immediate past, ratio calculated on the basis of historical
financial statements may be of good assistance to predict the future. Ratio
analysis also helps to locate & point out the various areas, which need the
management attention in order to improve the situation.

As the ratio analysis is concerned with all the aspect of a firms financial
analysis i.e. liquidity, solvency, activity, profitability & overall
performance, it enables the interested persons to know the financial &
operational characteristics of an organisation & take the suitable decision.
EVALUATION OF APLAB LIMITED THROUGH RATIO

COMPANY PROFILE

THE COMPANY –

APLAB Limited is a professionally managed Public

Limited company quoted on the Bombay Stock Exchange. Since its inception
in 1962, APLAB has been serving the global market with wide range of
electronic products meeting the international standards for safety and
reliability such as UL, VDE etc. They specialize in Test and Measurement
Equipment, Power Conversion and UPS Systems, Self-Service Terminals for
Banking
Sector and Fuel Dispensers for Petroleum Sector. APLAB enjoys worldwide
recognition for the quality of its products, business integrity and innovative
engineering skills.

ABOUT APLAB:
 • Aplab started its operation in October 1962.

• It is a professionally managed 40 years old public

limited company. It is quoted on BOMBAY STOCK
EXCHANGE.

• It serves customer global customer par excellence.

• It specialized in Test & measurement instruments, power

conversion, & UPS & fuel dispensers for petroleum sector.

• It enjoys worldwide recognition for the quality of its business

integrity & innovative engineering skills.

MISSION:

• To deliver high quality, carefully, engineered products, on time, with

in budget, as per the customer specification in a manner profitable
to both, our customers & so to us.

VISION:

• To be a global player, recognized for quality & integrity.

• To be the TOP INDIAN COMPANY as conceived by our

customers. + To be “ THE BEST ” company to work for, as
rated by our employees.

GOAL:

• Goal at Aplab is extract ordinary customer service as we provide our

customer needs in the personal service industry.
CORPORATE MISSION –

1]To achieve healthy and profitable growth of the company in the

interest of our customers & the shareholders.

2]To encourage teamwork, reward innovation and maintain healthy

interpersonal relations within the organization.

3]To expand knowledge and remain at the leading edge in technology to

serve the global market.

4]To understand the customer’s needs and provide solutions than merely
selling products.

5]To create intellectual capital by investing in hardware and embedded

software development.

VALUES & BELIEFS:

Their values & beliefs required that they -

 • Treat employees with respect & give them an opportunity for input
on how to continuously improve their service goals.

• Offer opportunities for growth, professional development &

recognition.

• Provide most effective & corrective action, to resolve customer

service issues, to ensure customer satisfaction.

• Foster an open door policy, which encourages interaction, discussion

& ideas to improve work environment & increase productivity.

• “Do it right the first time & every time” is their team commitment
* our way of doing business, it ensures as growth & prosperity.

THE 21 ST CENTURY SUCCESS –

APLAB had planned to enter the 21st Century with a program for a fast and
healthy growth in the global market based on company’s high technology
foundation and the reputation of four decades for prompt customer service
and as a reliable solution provider. After completing three years in the new
era, we can say with pride that we have been delivering our promises to our
customers and the shareholders.

APLAB has entered the field of Professional Services starting with the
Banking and the Petroleum Industry. Focus on developing embedded system
software has been also enhanced. We believe that professional services
sector is poised to grow at a very rapid pace.

QUALITY IS OUR WORK CULTURE - ISO 9001:2000

Quality at APLAB is a part of our people’s attitude. Entire organization is

committed to create an environment that encourages individual
excellence and a personal commitment to quality. In APLAB, “Quality is
everybody’s responsibility” and all strive to “do it right the first time”. It is
therefore natural that APLAB Limited is certified for quality with ISO
9001:2000 registration.
 QUALITY POLICY:

• Aplab will deliver to its customer products & services that

consistently meet or exceed their requirement.

• Aplab will achieve this by total commitment & involvement of

every individual.

• Aplab will encourage its employees & suppliers to develop

quality products prevent defects & make continual
improvement in all processes.
QUALITY OBJECTIVE:

• Aplab is an ISO 9001:2000 certifies company.

• 100% customer satisfaction.
• On time delivery every time reduction is out going PPM to 10,000
[4 sigma]

RESEARCH AND DEVELOPMENT

Developing innovative products with the latest technology is the core

strength of APLAB. The Science & Technology Ministry of the Govt. of
India accredits our R&D Laboratories. We have a large team of dedicated,
highly qualified skilled engineers who excel in the latest state-of-the-
art-technology. APLAB is recognized not only for manufacturing
standard products but also in providing solutions and services as per the
customer specifications. We spend more than 4% of the company
revenue in Research & Development activities.

Specific areas in which the company carries out R&D

1. Development of new product especially hi-tech intelligent product

& electronic transaction control system.
 2. Improvement in the existing products & production
processes, import substitution.

3. Development of products to suit exports markets.

4. Customizing the products to the customer’s specifications &

adaptation of imported technology.

The company has achieved its position of leadership in the

Indian instrumentation industry & continuous to maintain it
through its strong grip of technology. Almost all the products
manufactured by the company are import substitution items, which
are fully developed in house. It has resulted in considerable saving of
foreign exchange. With the company, R&D is an ongoing process.
The ministry of science & technology, Government of India, recognizes
the company’s R&D.

Through a continuous interaction with production& Quality

Assurance Department takes up redesign of existing products. This is
done to achieve state of the art in our design & to bring about
improvement to get maximum performance / cost ratio.

FUTURE PLAN OF ACTION

Major R&D activity is concentrated around up gradation of product

design & realignment of production processes to bring about improved
quality at lower cost. This will greatly help the company in facing
competition in local markets from foreign companies.

EXPORT
APLAB currently exports over 25% of its production to Western Europe,
Canada & USA. Over 30 million U.S. Dollars, Sweden, Belgium, Canada,
and USA & Australia.

PRODUCTS OF APLAB:
 a. TEST & MEASUREMENT INSTRUMENTS

b. HIGH POWER AC SYSTEMS (UPS, Frequency Converter,

Inverter, Isolation Transformer)

c. HIGH POWER DC SYSTEMS (DC Power Supply, DC

Uninterruptible Power Supply)

d. ATM INSTACASH

0. POWER SUPPLIES, AC-DC POWER SUPPLY, DC/DC CONVERTERS,

SMPS, INVERTERS, STABILIZER, LINE CONDITIONER,
ISOLATION TRANSFORMER

ATM INSTACASH

The Banking Automation Division of APLAB was launched in 1993, when we

introduced INSTACASHIndia’s first indigenously manufactured ATM INSTACASH
demonstrated APLAB’s skills in design, hardware manufacturing and software
integrations. Our in house R&D group is constantly striving to scan the rapidly
changing technology and offer suitable end to end solutions. We are into Self
Service Delivery Systems, MICR Cheque Processing and Smart Card based
solutions.