RATIO ANALYSIS

ABSTRACT This aim is to analysis the liquidity and profitability position of the company using the financial tools. It is based on financial statements such as Ratio Analysis, Comparative balance sheet. By using this tools combined it enables to determine in an

effective manner .It is made to evaluate the financial position, the operational results as well as financial progress of a business concern. It explains wa ys in which ratio analysis can be of assistance in long-rang planning, budgeting and asset management to strengthen financial perfor mance and help avoid financial difficulties. T h e i s n o t o n l y t hr o w s o n t h e f i na n c i a l p os i t i o n of a f i r m b u t a l s o s er v es a s a stepping stone to remedial measures .T hi s pr oj e c t h el p s t o i d e nt i f y a n d gi v e s u g g e s t i o n t h e a r e a of w ea k er p o s i t i o n o f business transaction . The researchers used the following tools like ,comparative balance sheet ,trend analysis, ratio analysis ,correlation . The main aim of the study is to study the financial performance analysis of the company. forecasting is also done to determine the future trend of the sales and profit . finally findings benefit to the company and valuable suggestions and recommendations are given improving performance in future . to the company for better prospects and

INTRODUCTION Financial Management is that managerial activity which is concer ned with the pla nning and controlling of the fir ms financial resources. Though it was a branch of economics till1890 as a separate or discipline it is of recent origin. Financial Management is concerned with the duties of the finance manager in a business fir m. He performs such varied tasks as budgeting, financial for ecasting, cash management, credit administration, invest ment analysis and funds procur ement. The recent trend towar ds globalization of business activity has creat ed new demands and opportunities in mana gerial finance. Financial statements are prepared and present ed for the external users of accounting infor mation. As thes e stat ements are used by investors and financial analysts to examine the firms perfor ma nce in order to make invest ment decisions, they should be prepared very carefully and contain as much investment decisions, they should be prepared very carefully and contain as much infor mation as possible. . The financial statements are generally prepar ed from the accounting records maintained by the firm. Financial performance is an important aspect which influences the

long term stability, profitability and liquidity of an organization. Usually, financial ratios are said to be the parameters of the financial performance analysis .  Financial forecasting and planning.  Communicate the strength and financial standing of the Emami limited.  For effective control of business. Meaning and definition of ratio analysis: Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and wea knesses of a fir m as well as its historical perfor ma nce and current financial condition can be det er mined. The ter m ratio refers to the numerical or quantitative relationship between two variables. Significance or Importance of ratio analysis: It helps in evaluating the firms performance :With the help of ratio analysis conclusion can be drawn r egarding several aspects such as fina ncial health, profitability and o p e r a t i o n a l e f f i c i e n c y o f t h e u n d e r t a k i n g . R a t i o p o i n t s o u t t h e op erat ing efficiency of t he fir m i . e. w h e t h e r t h e ma n a g e m e nt ha s utilized the firms assets correctly, to increase the investors wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets It helps in inter-firm comparison: R a t i o a na l ys i s h e l p s i n i nt er - f ir m c o m p a r i s o n b y p r o v i d i n g necessary data. An inter firm comparison indicates relative position. It provides the releva nt data for the comparison of the perfor mance of different depart ments. If comparis on shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be intiated immediately to bring them in line. It simplifies financial statement: The infor mation given in the basic financial statements serves n o u s e f u l P u r p o s e u n l e s s i t s i n t e r r u p t e d a n d a n a l y z e d i n s o m e comparable terms. The ratio analysis is one of the tools in the hands of t h o s e w h o w a n t t o k n o w s o m e t h i n g m o r e f r o m t h e f i n a n c i a l statements in the simplified manner.

It helps in determining the financial position of the concern: R a t i o a n a l y s i s f a c i l i t a t e s t h e m a n a g e m e n t t o k n o w whether the firms financial position is improving or deteriorating or isconstant over the years by setting a

trend with the help of ratios Thea nalysis with the help of ratio analysis can know the direction of thet r e n d of s t r a t e g i c r a t i o ma y h e l p t h e ma na g e m e nt i n t h e t a s k o f planning, forecasting and controlling It is helpful in budgeting and forecasting: Account ing ratios provide a reliable data, which can b e compar ed, studied And analyzed.These ratios provide sound footingfor future prospectus. The ratios can also serve as a basis for preparing budgeting future line of action Liquidity position: With help of ratio analysis conclusions can be drawn regardingthe Liquidity position of a firm. The liquidity positon of a firm would be satisfactory if it is able to meet its current obligation when they become due. The ability to met short term liabilities is reflected in theliquidity ratio of a firm. Long term solvency: Ratio analysis is equally for assessing the long term financiala b i l i t y o f t h e F i r m . T h e l o n g t e r m s o l v e n c y s m e a s u r e d b y t h e leverage or capital structure and profitability ratio which shows thee a r n i n g p o w e r a n d o p e r a t i n g e f f i c i e n c y , S o l v e n c y r a t i o s h o w s relationship between total liability and total assets. Operating efficieny: Yet another dimension of usefulness or ratio analysis, relevantfrom the View point of management is that it throws light on thedegree efficiency in the various activity ratios measures this kind of operational efficiency.

Classification of ratios: Different ratios are used for different purpose these ratios can be grouped into various classes according to the financial activity.Ratios are classified into four broad categories. 1. Liquidit y Ratio 2.Leverage Ratio 3. Profit ability Ratio 4.Activity Ratio

1. Liquidit y Ratio: Liquidity ratio measures the firms ability to meet itscurrentobligations i.e. ability to pay its obligations and when they becomedue. Commonly used ratios are: Current ratio: Current ratio is the ratio, which express relationship between currentasset and current liabilities. Current asset are those which can be convertedinto cash within a short period of

time, normally not exceeding one year. Thecurrent liabilities which are short- term maturing to be met

Current Asset

Current ratio Current liabilities

Acid test ratio: The acid test ratio is a measure of liquidity esigned to overcome the Defect of current ratio. It is often referred to as quick ratio because itis a measurement of firms ability to convert its current assets quicklyinto cash in order to meet its current liabilities. Acid test ratio =Current asset -Inventories Current liabilities.

.Leverage or capital structure ratio: L ever a g e or capital str uctur e r at ios ar e t he r at ios , w h i c h i n d i c a t e t h e r el a t i v e i nt er es t of t h e o w n e r s a n d t h e c r e d i t or s i n a n ent erprise. Thes e ratios indicate the funds provided by t he long-ter mcreditors and owners To judge the long term financial position of the firm followingratios are applied.

Debt equity ratio Debt-equity ratio which expresses the relatonship between debt andequityThis ratio explains how far owned funds are sufficient to payoutside liabilities. It is calculated by following formula. Debt equity ratio = long term +short term funds +current liabilities Net worth Total Debt ratio: This ratio explains how far owned and borrowed funds are sufficientto pay debt of the firm = Long term+short term borrowing+current liabilities

Capital employed

3. P r o f i t a b i l i t y r a t i o : Profitability ratio are the best indicators of overall efficiency of t he business concer n, because they compare r eturn of value over andabove the value put int o business with sales or service carried on bythe fir m with the help of assets employed. Profitablity ratio can bedetermined on the basis of. y y SALES INVESTMENT

Profitability ratios related to sale: 1. G r os s p r of i t t o s a l es r a t i o. 2.Net profit to sales ratio or net profit of margin . Gr os s pr o f i t t o s a l es r a t i o: The gross profit to sales ratio establishes relationship betweengross profit And sales to measure the relative operating efficency of the firm to reflect pricing policy Sales-cost of goods sold Gross profit to sales ratio = * 100 Sale

2.Net profit margin;

T h e n e t m a r g i n i n d i c a t e s t h e m a n a g e m e n t s a b i l i t y t o e a r n sufficient profit on sales to earn sufficient profit on sales not only toc o v e r a l l r e v e n u e o p e r a ti n g e x p e n s e s o f t h e b u si n e s s , t h e c o s t o f borrowed funds and the cost of goods or servicing, but also to havesufficient margin to pay reasonable comparison to shareholders ontheir contributions to the firm.

Net profit margin = NET PROFIT AFTER TAX AND INTERREST SALES *100 .

.Profitability ratios relat ed t o invest ments: a.Retur n on assets b. R et u r n o n c a p i t a l e mp l o y e d a. Return on asse ts: The profitability ratio here measures the relationship between net profit and assets Return on asset = Net profit after tax fixed assets.

b. Return on capital employed. : Net profit after taxes . Total capital employed

3.Activity ratio: Activity ratio are sometimes are called efficiency ratios. Activity r a t i o s a r e c o n c er n e d w i t h h o w ef f i c i e n c y t h e a s s et s of t h e f i r m a r e managed.

T h e s e r a t i o e x p r e s s r e l a t o n s h i p b e t w e e n l e v el o f s a l e s a n d t h einvestment in various assets inventores, receivables, fixed assets etc.

he important activity ratios are as follows: 1. Inventory turnover ratio : Raw materials consumed Inventory turnover ratio =Average stock of raw materials

Debtors turn over ratio :

This ratios shows debtors easily converted into cash . Total sales Debtors.

3. Average collection period ratio: This ratio indicates how quickly the inventory is converted into cash . Days in a year debtors turn over .

4. Working capital turnover rat io: T h i s r a t i o s h o w s t h e n u m b e r o f t i m e s t h e w o r k i n g c a p i t a l turns in trading transaction. If it has an increasing trend over the previousyear it shows that the working capital is being used efficiently.

LIQUIDITY RATIOS ; Meaning of liquidity: T h e t er m l i q u i d i t y r ef er s t o a b i l i t y t o p a y i t s ob l i ga t i o ns when they become due. Liquidity ratios measure the ability of a firm t om e e t i t s s h o r t t e r m o b l i g a t i o n s a n d r e f l e c t t h e s h o r t - t e r m f i n a n c i a l strength or solvency of a firm.Liquidity ratios are classified into two types:1 . S h or t t e r m l i q u i di t y and2 . L o n g t er m l i q u i d i t y .

1 . s h o r t t e r m l i q u i d i t y: Short term liquidity refers to finance required by a firm for a p er i o d of o n e y e a r or l es s . S h or t t er m f i na n c e i s a l s o c a l l e d w o r ki n g c a p i t a l f i na nc e a s i t i s r e q u i r e d f o r i n v e s t m e n t i n w or ki n g c a p i t a l or c u r r e n t a s s e t s l i k e c a s h a n d b a n k b a l a n c e s , i n v e n t o r i e s , a c c o u n t s receivables and marketable securities.Further short term liquidity ratios are categories into threetypes they are as follows.