CHAPTER –IV
INTRODUCTION
A Ratio Analysis is a quantitative analysis of information contained in a company's financial
statements. Ratio analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability, and solvency. The term "ratio
analysis” refers to the analysis of the financial statements in conjunction with the interpretation
of financial results of a particular period of operations, derived with the help of ‘ratio’. Ratio
Analysis is used to determine the financial soundness of a business concern.
STEPS IN RATIO ANALYSIS
The Following are the steps involved in the financial ratio analysis.
♦ An analyst should decide the objectives of ratio analysis
♦ Select the appropriate ratios on the basis of objectives of ratio analysis.
♦ Calculation of the selected ratios.
♦ Comparisons of the calculated ratios with the ratios of the same business concern in the
past.
♦ Comparisons of the calculated ratios with the same types of ratios or other similar
business concerns.
♦ Comparisons of the calculated ratios with the same types of ratios of the industry to
which the business concern belongs.
♦ Interpretation of the ratios
ADVANTAGES OF RATIO ANALYSIS
Ratio analysis is widely used as a powerful tool of financial statement analysis. It establishes the
numerical or quantitative relationship between two figures of a financial statement to ascertain
strengths and weaknesses of a firm as well as its current financial position and historical
performance. It helps various interested parties to make an evaluation of certain aspect of a
firm’s performance. The following are the principal advantages of ratio analysis:
· Forecasting and Planning
The trend in costs, sales, profits and other facts can be known by computing ratios of
relevant accounting figures of last few years. This trend analysis with the help of ratios
may be useful for forecasting and planning future business activities.
· Budgeting
Budget is an estimate of future activities on the basis of past experience. Accounting
ratios help estimate budgeted figures. For example, sales budget may be prepared with
the help of analysis of past sales.
· Measurement of Operating Efficiency
Ratio analysis indicates the degree of efficiency the management and utilization of its
assets. Different activity ratios indicate the operational efficiency. In fact, solvency of a
firm depends upon the sales revenues generated by utilizing its assets.
· Communication
Ratios are effective means of communication and play a vital role in informing the
position of and progress made by the business concern to the owners or other parties.
· Managerial Control
Ratio can be used as ‘instrument of control’ regarding sales, costs and profit.
CLASSIFICATION OF RATIO
This is traditional method of classifying ratios. Under this category, ratios are classified into:
1. Balance Sheet or Position Statement ratios
Balance sheet or position statement ratios are those ratios which are derived from two
variables appearing in the balance sheet. For example, current ratio, debt equity ratio etc.
2. Profit and loss account or income statement ratios
Sometimes also known as operating ratios are derived from the variables appearing in the
manufacturing. Trading and profit and loss account. For example, inventory turnover
ratio, gross profit ratio, expense ratio
3. Inter Statement Ratios
Inter statement ratios also known as combined or mixed ratios are such ratios which
establish relationship between variables picked up from both the statements i.e., balance
sheet and final account. For example, debtor’s turnover, assets turnover, return on capital
etc.
Under this classification, ratios may be grouped in accordance with the type of test they
are supposed to perform. Thus, ratios may be grouped as:
1. Liquidity Ratios
Liquidity ratios are the ratios meant for testing short-term financial position of a business.
These are designed to test the ability of the business to meet its short-term obligation
promptly. For example, current ratio, quick ratio falls under this group.
2 . Solvency Ratios
Solvency ratios are also known as leverage ratios. These are meant for testing long term
financial soundness of any unit. Primarily these establish and study relationship between
owned funds and loaned funds. For example, debt-equity ratio, capital gearing ratio etc,
are covered under this group.
3 . Efficiency Ratios
Efficiency ratios are also known as activity ratios. These are meant to study the efficiency
with which the resources of the unit have been used. These are popularly known turnover.
CHART NO : 4.1
SHORT TERM SOLVENCY RATIO
1. CURRENT RATIO
The ratio of current assets to current liabilities is called “current ratio”. In order to
measure the short-term liquidity or solvency of a concern, comparison of current assets
and current liabilities is inevitable. Current ratio indicates the ability of a concern to meet
its current obligations as and when they are due for payment.
FORMULA
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
TABLE NO : 4.1
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
CURRENT ASSETS
(Rs in Crs ) 91059.17 95635.11 103631.76 122017.86 124540.59
CURRENT LIABILITIES
( Rs in Crs ) 70259.35 81380.28 70889.17 87567.48 90703.14
RATIO
( TIMES ) 1.29 1.17 1.46 1.39 1.37
INTERPRETATION
From the above table it is evident that the ratios are in fluctuating trend, which means that
the company is unable to meet their current obligations. The ideal ratio is 2:1.
2. LIQUID RATIO
This ratio is also called as “Quick Ratio” or “Acid test Ratio”. It is calculated by
comparing the quick assets with current liabilities. Liquid Asset refers to asset which can
be easily converted into cash. Current assets other than stock and prepaid expenses are
considered as liquid assets.
FORMULA
LIQUID RATIO = LIQUID ASSETS*
CURRENT LIABILTIES
*Liquid Assets = Total Current Assets – Stock
TABLE NO : 4.2
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
LIQUID ASSETS 87709.93 92865.21 100773.23 118885.35 121112.03
( Rs in Crs )
CURRENT 70259.35 81380.28 70889.17 87567.48 90703.14
LIABILITIES
( Rs in Crs )
RATIO 1.24 1.41 1.42 1.35 1.33
(TIMES )
INTERPRETATION
From the above table it is evident that the liquid ratios are in fluctuating trend, but the
ideal ratio is 1, which means that the company is not having current liquidity and cash.
ABSOLUTE LIQUIDITY RATIO
Absolute liquidity Ratio is a measure of a company’s liquidity in which it is measured
whether the company has the ability to clear off debts only using the liquid assets (cash
and cash equivalents such as marketable securities). It is used by creditors for
determining the relative ease with which a company can clear short term liabilities.
FORMULA
ABSOLUTE LIQUIDITY RATIO = ABSOLUTE LIQUIDITY ASSET
CURRENT LIABILITIES
*Absolute Liquidity Asset = Cash & Bank Balance + Marketable Securities
TABLE NO : 4.3
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
ABSOLUTE LIQUIDITY 7619.97 3938.39 3763.28 6498.51 4569.64
ASSET (
Rs in Crs )
CURRENT 70259.35 81380.28 70889.17 87567.48 90703.14
LIABILITIES
( Rs in Crs )
RATIO 0.1 0.04 0.05 0.07 0.05
( Times )
INTERPRETATION:
The Ideal Ratio is 0.75:1. From the above table it is understood that the ratio is increasing
trend, which indicates that the company has sufficient cash to meet the short-term
obligations.
PROFITABILITY RATIO
1.GROSS PROFIT RATIO
This ratio is also known as gross margin or trading margin ratio. Gross profit ratio
indicates the difference between sales and direct costs. Gross profit ratio explains the
relationship between gross profit and net sales.
FORMULA
GROSS PROFIT RATIO = GROSS PROFIT
X 100
NET SALES
*GROSS PROFIT = Revenue from operation – Cost of Goods Sold
TABLE NO : 4.4
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
GROSS PROFIT 75383.36 76130.99 66342.55 87792.94 96040.98
( RS in Crs )
NET SALES 81095.9 81617.98 72036.49 100383.8 109204.03
( Rs in Crs )
RATIO 92.95 93.27 92.09 87.45 87.94
(%)
INTERPRETATION
This ratio indicates the difference between sales and direct cost. From the above data it is
observed that there is a consistent decrease in the ratio, thus indicating that there is a
increase in cost of goods sold.
2. NET PROFIT RATIO
The net profit percentage is the ratio of after-tax profits to net sales. It reveals the
remaining profit after all costs of production, administration, and financing have been
deducted from sales, and income taxes recognized. As such, it is one of the best measures
of the overall results of a firm, especially when combined with an evaluation of how well
it is using its working capital.
FORMULA
NET PROFIT RATIO = NET PROFIT AFTER TAX
X100
NET SALES
TABLE NO : 4.5
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
NET PROFIT 6948.33 6024.76 2686.49 7879.45 7848.97
( Rs in Crs )
NET SALES 81095.9 81617.98 72036.49 100383.8 109204.03
( Rs in Crs )
RATIO 8.56 7.38 3.72 7.84 7.18
(%)
INTERPRETATION
From the above table the net profit margin is decreasing which indicates the inefficiency
in operating the income and profits of the business.
TURNOVER RATIO
1. OWNED CAPITAL TURNOVER RATIO
Managerial efficiency is also calculated by establishing the relationship between cost of
sales and sales with the amount of capital invested in the business.
FORMULA
OWNED CAPITAL TURNOVER RATIO = SALES
SHAREHOLDERS FUND
TABLE NO : 4.6
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
SALES 81095.9 81617.98 72036.49 100383.8 109204.03
( Rs in Crs )
SHAREHOLDERS 50048.42 52175.35 60413.54 67114.05 71527.95
FUND
( Rs in Crs )
RATIO 1.62 1.56 1.19 1.49 1.52
( TIMES )
INTERPRETATION
From the above table it is evident that the owned capital turnover ratio are in fluctuating
trend, which means that the company is not properly utilizing the capital.
LONG-TERM SOLVENCY RATIO
1.PROPRIETARY RATIO
This ratio compares the shareholders’ funds or owner capital funds and total tangible
assets. In other words, this ratio expresses the relationship between the proprietor’s funds
and the total tangible assets.
FORMULA
PROPRIETARY RATIO = SHAREHOLDERS FUND
TOTAL TANGIBLE ASSETS
TABLE NO : 4.7
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
SHAREHOLDERS 50048.42 52175.35 60413.54 67114.05 71537.95
FUNDS
( Rs in Crs )
TOTAL TANGIBLE 7982.02 7266.25 7879.58 8328.96 8993.29
ASSETS
( Rs in Crs )
RATIO 6.27 7.18 7.66 8.05 7.95
( TIMES )
INTERPRETATION
From the above table it shows that the creditors fund is lesser of shareholders’ funds in
the total assets, it is alarming. The ideal ratio is 0.50.
2.DEBT-EQUITY RATIO
This ratio is ascertained to determine long- term solvency position of a company. Debt-
Equity ratio is also called external internal equity ratio.
FORMULA
DEBT EQUITY RATIO = TOTAL LONG-TERM DEBT
SHAREHOLDERS FUND
TABLE NO : 4.8
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
TOTAL LONG-TERM 3772.07 7185.71 15868.21 12968.41 9390.85
DEBT
( Rs in Crs )
SHAREHOLDERS 50048.42 52175.35 60413.54 67114.05 71527.95
FUNDS
( Rs in Crs )
RATIO 0.07 0.13 0.26 0.19 0.13
( Times )
INTERPRETATION
From the above table it shows that the ratios are fluctuating and the internal equities
refers to shareholders funds with long-term borrowing as a proportionate of owner’s
funds, the ideal ratio is 1.
SOLVENCY RATIO
1.OVERALL SOLVENCY RATIO
It is a ratio which relates the total tangible assets with the total borrowed funds. In a
sense, it is the ‘other side of the coin’ for proprietary ratio.
FORMULA
OVERALL SOLVENCY RATIO = TOTAL DEBT
TOTAL TANGIBLE ASSETS
*TOTAL DEBT = Long Term Borrowings + Short term borrowings
TABLE NO : 4.9
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
TOTAL DEBT 11989.69 25785.3 23808.71 20298.29 18151.09
( Rs in Crs )
TOTAL TANGIBLE 7982.02 7266.25 7879.58 8328.96 8993.29
ASSETS
( Rs in Crs )
RATIO 1.5 3.54 3.02 2.43 2.01
( Times )
INTERPRETATION
From the above table it shows that the ratios are fluctuating due to borrowing and risk of
debts on the basis of requirement of the company.
EXPENSES RATIO (FINANCIAL EXPENSES)
These ratios are also known as supporting ratios to operating ratio. They indicate the
efficiency with which business as a whole functions. It is better for the concern to know
how it is able to save or waste over expenditure in respect of different items of expenses.
FORMULA
FINANCIAL EXPENSES RATIO = FINANCIAL EXPENSES
X100
NET SALES
TABLE NO : 4. 10
PARTICULARS 2018 - 19 2019 - 20 2020 - 21 2021 - 22 2022 - 23
FINANCIAL EXPENSES 1787.62 2266.56 2419.55 1754.24 2125.23
( Rs in Crs )
NET SALES 81095.9 81617.98 72036.49 100383.8 109204.03
( Rs in Cr )
RATIO 2.2 2.77 3.35 1.74 1.94
(%)
INTERPRETATION
From the above table it shows the efficiency of financial expenses controlled on overall
expenditure.
POHVVB
