1

Internship project report

RATIO ANALYSIS

With special reference to

LINKTECH ENGINEERING PVT. LTD.

No. 41 (P), EAST MUGAPAIR,
VAVIN ROAD,
CHENNAI
A report submitted in partial fulfilment of the requirements for the POST GRADUATE
PROGRAMME IN MANAGEMENT- FINANCE SPECIALISATION

-SIET institute of management

SIET tower, no. 25 bull temple road,

Bangalore, Karnataka-5600004

Submitted by:

SHAHUL HAMEED.N

Enrolment number: PGPM: 2008-2010

09PS019

Index
1
2

Serial no Particulars Page number

Declaration
Acknowledgment
1. Executive summary
2. Introduction
3. Methodology
4. analysis and
interpretation
5. Findings and
suggestions
6. Learning experience
7. Conclusion

2
3

DECLARATION

I, Shahul hameed P, hereby declare that project work titled for

LINKTECH ENGINEERING PVT. LTD. is the original work done by me

and submitted to SIET Institute of management, in fulfilling of the requirements

for the award of Post Graduate Programme in management in finance under the

supervision of Mr. V.JACKSON [M.D] LINKTECH ENGINEERING PVT

LTD.

I hereby submit this project FINANCIAL RATIO ANALYSIS and for

partial fulfilment of the requirements of POST GRADUATE PROGRAMME

IN MANAGEMENT [FINANCE] to ‘SIET INSTITUTE OF

MANAGEMENT’.

3
4

09PS019

N.SHAHUL HAMEED

ACKNOWLEDGEMENT

I would like to thank Mr.shanta kumar,Assistant Finance Manager,

LINKTECH ENGINEERING PVT.LTD, without whom an internship
with, LINKTECH ENGINEERING would not have been possible. I
am grateful to him for having taken time off his busy schedule and
spoken to the concerned person to get me this internship. I express my
gratitude to the( LINKTECH ENGINEERING PVT LTD) for having
given me an opportunity to work with them and make the best out of
my internship. I thank my trainer, Mrs.Kalaivani for having trained
me and constantly guided and supported me throughout the training
period. My heartfelt gratitude also goes out to the staff and employees
at LINKTECH for having co-operated with me and guided me
throughout the one months of my internship period. I thank my
school, Bhavan SIET Institution & Management for having given me
this opportunity to put to practice, the theoretical knowledge that I
imparted from the program. I thank the internship co-coordinators, for
having guided and supported me through the course of the internship.
I take this opportunity to thank my parents and friends who have been
with me and offered emotional strength and moral support.
4
5

Executive summary

This is my internship project report, worked at LINKTECH ENGINEERING PVT.LTD,

Who has got vast experience in the field of plastic injection moulded components and joining
of
Extruded rubber products and trading of engineering metal components for general
engineering applications management. They have grown in these years to the extend to cater
to the Tooling, Components manufacturing and other Precision Engineering needs of more
than 100 big and small companies including Multinational companies. The company has put
the efforts to establish as the best among the industries and to serve our customers. I did
financial ratio analysis ,

In this world lot of companies in various sector were declined due to financial crises and
recession in the global market. So every firm were eager to know their financial health. Some
of the companies got bad results and balance of them got good results depends up on their
performance. To find the financial strength of the firm, the ratio analysis is one of the tools.

Ratio analysis is a process of identifying the financial strength and weaknesses of the firm.
The main objective of this study lies in understanding the organization and studying the
financial analysis on inventory control Management. Inventory management plays an
important role in every organization. It also enables companies to closely analyze point-of-
sale data, profile buying behaviors and trends, and quantify risks and variability. Inventory
Management provides multiple optimization options to minimize cost, Maximize
performance and redistribute inventory.

I did the ratio analysis for the year 2007-09 with the reference of books. The financial health
of the company is in good position, because lot of company made huge loss during this
5
6

recession but they maintain the profit level and improve in sales percent at the same time the
company maintain the customer’s satisfaction level at the maximum point regularly. The
company should follow any other method to follow the inventory control and its operations.
By this analysis, I learned the working of financial ratios practically and about the importance
of customer satisfaction to a company and how to maintain it and I got a good exposure by
visiting to Customer Company. Not only this, I also become practically skilled at a trading,
profit &loss a/c, balance sheet and income statement and tax calculation by preparing those
things for company purpose.

6
7

CHAPTER-1
INTRODUCTION:

FINANCIAL RATIO ANALYSIS:

Financial ratio analysis is a fascinating topic to study because it can teach us so much about
accounts and businesses. When we use ratio analysis we can work out how profitable a
business is, we can tell if it has enough money to pay its bills and we can even tell whether its
shareholders should be happy!
Ratio analysis can also help us to check whether a business is doing better this year than it
was last year; and it can tell us if our business is doing better or worse than other businesses
doing and selling the same things.
In addition to ratio analysis being part of an accounting and business studies syllabus, it is a
very useful thing to know anyway!

UTIITY OF RATIO ANALYSIS:

The ratio analysis is the most powerful tool of the financial analysis. With the help of ratio’s
one can determine:
 the ability of the firm to meet its current obligations

 the extent to which the firm has used its long-term solvency by borrowing funds

 the efficiency with which the firm is utilising its assets in generating sales revenue

 The overall operating efficiency and performance of the firm.

I. ADVANTAGES OF RATIO ANALYSIS:

a. Helpful in analysis of financial statements

b. Helpful in comparative sturdy

c. Helpful in locating the weak spots of the business

d. Helpful in forecasting

7
8

e. Estimate about the trend of the business

f. Fixation of ideal standards

g. Effective control

h. Sturdy of financial soundness

I. LIMITATIONS OF RATIO ANALYSIS:

 Comparison not possible in different firms adopt different accounting

Policies

 Ratio analysis become less effective due to price level changes

 Ratio may be misleading in the absences of absolute data

 Limited use of single data

 Lack of proper standards

 False accounting data gives false ratio

Ratios alone are not adequate for proper conclusion

RESEARCH METHODOLOGY

The study is based entirely on the data that has colleted. This data for every study is
of 2 types.

1. Primary Data 2. Secondary Data

Primary data as it is known as synonymous to first hand information that is

exclusively collected for the sake of the study. Secondary data that has been already
collected for some other purpose and now which is being for the study.

Initially preliminary discussion with the general managers and chief accountant was
carried on.

Information of the theoretical part was taken from reference book.

Profit/Loss and Balance Sheets are taken from company’s annual reports.

8
9

The various concepts covered in the report are calculated by studying Balance Sheet and
Profit/Loss Accounts.

OBJECTIVES:

 To estimate earning capacity of the concern

 To determine the debt capacity of the concern

 To analyse the financial position of the company. To provide their customers

feedback and their response to the concern authority.

 Determine the ability of the firm to meet its current obligations

 Determine the extent to which the firm has used its long-term solvency by borrowing
funds

 Determine the efficiency with which the firm is utilising its assets in generating sales
revenue

 To Determine the overall operating efficiency and performance of the firm

NEED OF THE STUDY

Financial statements are prepared for the purpose of presenting a periodical review or
report by the management and deal with the state of investment in business and result
achieved during the period under review. They reflect a combination of recorded facts,
accounting conventions and personal judgments.

The Ratio Analysis is the most powerful tool of the financial analysis. These people
use rations to determine those financial characteristics of the firm in which they are
interested. With the help of ratios, one can determine:

1) The ability of the firm to meet its current obligations.

2) The extent to which the firm has used its along-term solvency by borrowing funds.

9
10

3) The efficiency with which the firm is utilizing its assets ingenerating sales revenue.

4) The overall operating efficiency and performance of the firm.

5) This study is also useful to know the strengths and weakness of the company

Importance

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 and enables the drawing
inference 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 and

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 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 reflected in the liquidity ratio of a
firm. The liquidity ratios are particularly used for in credit analysis by banks and other
suppliers and other short-term loans.

10
11

2. Long-term Solvency

Ratio analysis is equally useful for assessing the long-term financial liability 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 capital structure and profitability ratios which focus on earning power and
operating efficiency. Ratio analysis reveals the strengths and weaknesses of a firm in this
respect.

3. Operating Efficiency

Yet another dimension of the usefulness of the ratio analysis, relevant from the view point of
management, is that 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.
In fact the solvency of a firm is in the ultimate analysis is dependent upon the sales revenues
generated by the use of its assets-total as well as its components.

4. Overall profitability

Unlike the outside parties which are interested in one aspect of financial position of the firm,
the management is constantly concerned about the overall 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
obligation 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 considered together.

5. Inter-firm comparison:

Ratio Analysis not only throws light on the financial position of the 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

11
12

it is related to some standard or norm. One of the popular techniques is to compare the ratios
of firm with the industry average.

6. Trend Analysis

Finally, Ratio Analysis enables a firm to take the time dimension into account in other word,
whether the financial 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 analysts can know the direction of moment, that is, whether the moment is favorable or
unfavorable.

SCOPE OF THE STUDY

 This project is as a reference guide or as a source of information. It gives the

idea about the financial analysis of a firm.

 To put into practical the theoretical aspect of the study in to real life work
experience.

 The study aims to study the liquidity position of the firm. Ratio Analysis has
been used to analyses the financial position of a firm.

12
13

2. COMPANY PROFILE:

About the company:

 A professional who has got vast experience in the field of Tooling & Precision
Engineering including production and management, established the company in 2000.

 They have grown in these years to the extend to cater to the Tooling, Components
manufacturing and other Precision Engineering needs of more than 100 big and small
companies including Multinational companies. The company has put the efforts to
establish as the best among the industries and to serve our customers

 Location is a prime spot in mugapair industrial area, and is close to National

Highway. Total area is one acre. Current built up area is about 60000 Sq. ft.

 They have about 300 KVA power connection and 200 KVA capacity generators for
captive power generation

Activities:

 The company LINKTECH ENGINEERING is engaged in design, manufacture and

sale of Press tools, pressed components Injection Moulds, Special purpose
components, Die Casting dies, Jigs, Fixture or any type of tool elements in producing
either sheet metal or plastic components. We also supply sub assemblies for
Electrical, Electronic and Automobile components manufacturing industry.

 They have a Press shop with the capacity from 10 tons to 500 tons Power presses.

 They are a manufacturing the other sub products were the plastic hollow core plug,
pvc cover block, plastic welding rods, expansion bolt, lanchor bolt, lifting socket,
metal to rubber bonded products, rubber rings, etc profiled components

 The company has eight CNC wire EDM Machines including latest linear motion
technology machine of SODIK, JAPAN. We undertake any sort of the profiles as per
the requirement of the customers. About 50 to 60% of the capacity of EDM machines
is used for the job work. Apart from this the company has acquired a Super EDM
Drill, Which can make deep and small holes on either hardened or soft materials
.Besides the above we have 4 Spark Erosion (Conventional Electro Discharge
Machining) machines. This is used in manufacturing various punches dies and inserts
for press tools, moulds and other special engineering components

VISION:

13
14

 Our vision is to give the highest degree of quality is always top of our mind when we
serve our valued customer satisfaction. While offering them in the very best prices
and the most reliable services.

MISSION:

 To achieve our vision by becoming the most preferred supplier among the tools and
component manufacturing industries in India.

Resources:

Work force

 The Company employs a work force of qualified and trained people. All Employees
get on job training in their respective areas.
Other than on job training class room training is planned and conducted to develop the
skills and give knowledge on safety, housekeeping, quality management system etc.
and to orient them towards the focus of customer needs. Also the Company train Tool
& Die makers leading to NCVT Examination, Govt. of India. At present the Company
employs about 100 employees

Training

 They have a permanent management consultant working with us, who conducts
regular training and work on continual improvement projects and QMS

Employee benefits

 The Company has made arrangements to provide to all its employees Provident Fund,
Employees State Insurance, and Gratuity etc. The welfare of the employees is looked
in to systematically and carefully

Customer base

 The Company has the vast customer base and also enjoys a bond between customer
and the company. These customers due to satisfactory services rendered appreciate
the Company as good vendor

• QUALITY OBJECTIVES

 To achieve 95% overall satisfaction rating at customer end

 To achieve 100% delivery rating

14
15

 To be given 15 hrs on job training to each employee every year

 Increase one customer every year

Customer Focus:

Quality:

 Quality is the prime concern of the Company. The main object of the company is to
supply the components and tools defect free.

Cost:

 The Company is alert to the Global competition and strive to give the Value for
Money to the customer. Cost reduction through waste elimination, Process
improvement, Design changes etc. are pro-actively suggested to the customer.

Delivery:

 The Company will strive to keep the delivery performance as committed; all efforts
are taken to see the commitments are met in the scheduled time frame.

Diversification and modernisation:

 The Company has set for modernization by acquiring latest sophisticated machinery
and employing modern techniques with regard to precision tooling, machining and
component manufacturing.

CERTIFICATION:

LINKTECH ENGINEERING PVT. Ltd has obtained ISO 9001:2000 Certification from
“TUV; the company is religiously following the systems and documentation as per the above
standard. They also conduct audit as per the prescribed norms

SUPERIORS IN THE ORGANISATION:

 Mr. V.Jakshan [chairman]

 Mr. K.N.Dharman [Managing Director]

 Mrs. Shanthakumar [Financial department head]

 Mr. Kalaivani [Management consultant]

15
16

 Executives of each department:

 Mr. kumar

 Mr. Aravind

 Mr. Prakash

LIST OF CUSTOMERS:

 APW President Systems Ltd

 Rittal (India) Pvt. Ltd

 Bimetal Bearings Ltd

 GE Power Controls India Pvt. Ltd

 IFB Automotive Pvt. Ltd

 NTTF Industries Ltd

 Molex (India) Ltd

 Continental Corporation India Pvt. Ltd

 KHMDL

 Ambattur polymer

 M.I.traders

 Cool tech

 T.Nagadi

 Global source trading.east

 JJ Glasstronics

 SVS industries Pvt. Ltd.

DETAILS OF MACHINERY:

TOOL ROOM Machines-

 Milling, Drilling, Lathe, Surface Grinding, Spark Erosion, Super EDM Drilling And
Wire Cutting Machines

Assembly Machines-

16
17

 We have machines for Spot Welding, Projection Welding, Arc Welding Tig-elding,

Drilling and Tapping

Handling Machines-

 Over Head Crane,

 Zib crane, Fork Lifts, Trolley Etc

Inspection Measuring and Testing Equipments.

 They have digital venires, Plunger Dials, digital Height Gauges, Surface Plates, Pin
Gauges, Slip gauges, Rockwell Hardness Tester, Profile Projector etc

 They manufacture and use gauges for in process and final inspection

 They have an “OPTICAL MEAUSRING” device for high accuracy and help us in
reverse engineering.

3.METHODOLOGY:
The following is the method plan for my project ratio analysis, which was built while my
project started time.

 Collecting the data:

I collected the data required for my project from the finance department.

 Analysing the data:

After collecting that analyse the data which were collected and compare it to previous
year.

 Finding the ratios :

By using those data’s calculate the ratios.

RATIO ANALYSIS
It refers to the systematic use of ratios to interpret the financial statements in terms of the
operating performance and financial position of a firm. It involves comparison for a
meaningful interpretation of the financial statements.In view of the needs of various uses of

17
18

ratios the ratios, which can be calculated from the accounting data are classified into the
following broad categories

A. Liquidity Ratio
B. Turnover Ratio
C. Solvency or Leverage ratios
D. Profitability ratios

LIQUIDITY RATIO:

It measures the ability of the firm to meet its short-term obligations, that is capacity of the
firm to pay its current liabilities as and when they fall due. Thus these ratios reflect the short-
term financial solvency of a firm. A firm should ensure that it does not suffer from lack of
liquidity. The failure to meet obligations on due time may result in bad credit image, loss of
creditors confidence, and even in legal proceedings against the firm on the other hand very
high degree of liquidity is also not desirable since it would imply that funds are idle and earn
nothing. So therefore it is necessary to strike a proper balance between liquidity and lack of
liquidity.

The various ratios that explains about the liquidity of the firm are

1. Current Ratio
2. Acid Test Ratio / quick ratio
3. Absolute liquid ration / cash ratio

1. CURRENT RATIO
The current ratio measures the short-term solvency of the firm. It establishes the relationship
between current assets and current liabilities. It is calculated by dividing current assets by
current liabilities.
Current Ratio = Current Asset

Current Liabilities

Current assets include cash and bank balances, marketable securities, inventory, and debtors,
excluding provisions for bad debts and doubtful debtors, bills receivables and prepaid
expenses. Current liabilities includes sundry creditors, bills payable, short- term loans,
income-tax liability, accrued expenses and dividends payable.

2. ACID TEST RATIO / QUICK RATIO

It has been an important indicator of the firm’s liquidity position and is used as a
complementary ratio to the current ratio. It establishes the relationship between quick assets
and current liabilities. It is calculated by dividing quick assets by the current liabilities.

18
19

Acid Test Ratio = Quick Assets

Current liabilities

Quick assets are those current assets, which can be converted into cash immediately or within
reasonable short time without a loss of value. These include cash and bank balances, sundry
debtors, bill’s receivables and short-term marketable securities.

3. ABSOLUTE LIQUID RATION / CASH RATIO

It shows the relationship between absolute liquid or super quick current assets and liabilities.
Absolute liquid assets include cash, bank balances, and marketable securities.

Absolute liquid ratio = Absolute liquid assets

Current liabilities

TURN OVER RATIO:

Turnover ratios are also known as activity ratios or efficiency ratios with which a firm
manages its current assets. The following turnover ratios can be calculated to judge the
effectiveness of asset use.

1. Inventory Turnover Ratio

2. Debtor Turnover Ratio
3. Creditor Turnover Ratio
4. Assets Turnover Ratio

1. INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory has been converted into sales during
the period. Thus it evaluates the efficiency of the firm in managing its inventory. It is
calculated by dividing the cost of goods sold by average inventory.

Inventory Turnover Ratio = Cost of goods sold

Average Inventory

The average inventory is simple average of the opening and closing balances of inventory.
(Opening + Closing balances / 2). In certain circumstances opening balance of the inventory
may not be known then closing balance of inventory may be considered as average inventory

2. DEBTOR TURNOVER RATIO

This indicates the number of times average debtors have been converted into cash during a
year. It is determined by dividing the net credit sales by average debtors.

Debtor Turnover Ratio = Net Credit Sales

19
20

Average Trade Debtors

Net credit sales consist of gross credit sales minus sales return. Trade debtor includes sundry
debtors and bill’s receivables. Average trade debtors (Opening + Closing balances / 2)
When the information about credit sales, opening and closing balances of trade debtors is not
available then the ratio can be calculated by dividing total sales by closing balances of trade
debtor

Debtor Turnover Ratio = Total Sales

Trade Debtors

3. CREDITOR TURNOVER RATIO

It indicates the number of times sundry creditors have been paid during a year. It is
calculated to judge the requirements of cash for paying sundry creditors. It is calculated by
dividing the net credit purchases by average creditors.

Creditor Turnover Ratio = Net Credit Purchases

Average Trade Creditor

Net credit purchases consist of gross credit purchases minus purchase return

When the information about credit purchases, opening and closing balances of trade creditors
is not available then the ratio is calculated by dividing total purchases by the closing balance
of trade creditors.

Creditor Turnover Ratio = Total purchases

Total Trade Creditors

4. ASSETS TURNOVER RATIO

The relationship between assets and sales is known as assets turnover ratio. Several assets
turnover ratios can be calculated depending upon the groups of assets, which are related to
sales.

a) Total asset turnover.

b) Net asset turnover
c) Fixed asset turnover
d) Current asset turnover
e) Net working capital turnover ratio

a. TOTAL ASSET TURNOVER

20
21

This ratio shows the firm’s ability to generate sales from all financial resources committed to
total assets. It is calculated by dividing sales by total assets.

Total asset turnover = Total Sales

Total Assets

b. NET ASSET TURNOVER

This is calculated by dividing sales by net assets.

Net asset turnover = Total Sales

Net Assets

Net assets represent total assets minus current liabilities. Intangible and fictitious assets like
goodwill, patents, accumulated losses, deferred expenditure may be excluded for calculating
the net asset turnover.

c. FIXED ASSET TURNOVER

This ratio is calculated by dividing sales by net fixed assets.

Fixed asset turnover = Total Sales

Net Fixed Assets

Net fixed assets represent the cost of fixed assets minus depreciation.

d. CURRENT ASSET TURNOVER

It is divided by calculating sales by current assets

Current asset turnover = Total Sales

Current Assets

e. NET WORKING CAPITAL TURNOVER RATIO

A higher ratio is an indicator of better utilization of current assets and working capital and
vice-versa (a lower ratio is an indicator of poor utilization of current assets and working
capital). It is calculated by dividing sales by working capital.

Net working capital turnover ratio = Total Sales

21
22

Working Capital

Working capital is represented by the difference between current assets and current liabilities.
SOLVENCY OR LEVERAGE RATIOS:

The solvency or leverage ratios throws light on the long term solvency of a firm reflecting it’s
ability to assure the long term creditors with regard to periodic payment of interest during the
period and loan repayment of principal on maturity or in predetermined installments at due
dates. There are thus two aspects of the long-term solvency of a firm.

a. Ability to repay the principal amount when due

b. Regular payment of the interest.

The ratio is based on the relationship between borrowed funds and owner’s capital it is
computed from the balance sheet, the second type are calculated from the profit and loss a/c.
The various solvency ratios are

1. Debt equity ratio

2. Debt to total capital ratio
3. Proprietary (Equity) ratio
4. Fixed assets to net worth ratio
5. Fixed assets to long term funds ratio
6. Debt service (Interest coverage) ratio

1. DEBT EQUITY RATIO

Debt equity ratio shows the relative claims of creditors (Outsiders) and owners (Interest)
against the assets of the firm. Thus this ratio indicates the relative proportions of debt and
equity in financing the firm’s assets. It can be calculated by dividing outsider funds (Debt)
by shareholder funds (Equity)

Debt equity ratio = Outsider Funds (Total Debts)

Shareholder Funds or Equity

The outsider fund includes long-term debts as well as current liabilities. The shareholder
funds include equity share capital, preference share capital, reserves and surplus including
accumulated profits. However fictitious assets like accumulated deferred expenses etc should
be deducted from the total of these items to shareholder funds. The shareholder funds so
calculated are known as net worth of the business.

2. DEBT TO TOTAL CAPITAL RATIO

Debt to total capital ratio = Total Debts

Total Assets

22
23

3. PROPRIETARY (EQUITY) RATIO

This ratio indicates the proportion of total assets financed by owners. It is calculated by
dividing proprietor (Shareholder) funds by total assets.

Proprietary (equity) ratio = Shareholder funds

Total assets

4. FIXED ASSETS TO NET WORTH RATIO

This ratio establishes the relationship between fixed assets and shareholder funds. It is
calculated by dividing fixed assets by shareholder funds.

Fixed assets to net worth ratio = Fixed Assets X 100

Net Worth

The shareholder funds include equity share capital, preference share capital, reserves and
surplus including accumulated profits. However fictitious assets like accumulated deferred
expenses etc should be deducted from the total of these items to shareholder funds. The
shareholder funds so calculated are known as net worth of the business.

5. FIXED ASSETS TO LONG TERM FUNDS RATIO

Fixed assets to long term funds ratio establishes the relationship between fixed assets and
long-term funds and is calculated by dividing fixed assets by long term funds.

Fixed assets to long term funds ratio = Fixed Assets X 100

Long-term Funds

6. DEBT SERVICE (INTEREST COVERAGE) RATIO

This shows the number of times the earnings of the firms are able to cover the fixed interest
liability of the firm. This ratio therefore is also known as Interest coverage or time interest

23
24

earned ratio. It is calculated by dividing the earnings before interest and tax (EBIT) by
interest charges on loans.

Debt Service Ratio = Earnings before interest and tax (EBIT)

Interest Charges

PROFITABILITY RATIOS:

The profitability ratio of the firm can be measured by calculating various profitability ratios.
General two groups of profitability ratios are calculated.

a. Profitability in relation to sales.

b. Profitability in relation to investments.

Profitability in relation to sales

1. Gross profit margin or ratio
2. Net profit margin or ratio
3. Operating profit margin or ratio
4. Operating Ratio
5. Expenses Ratio

1. GROSS PROFIT MARGIN OR RATIO

It measures the relationship between gross profit and sales. It is calculated by dividing gross
profit by sales.
Gross profit margin or ratio = Gross profit X 100

Net sales

Gross profit is the difference between sales and cost of goods sold.

2. NET PROFIT MARGIN OR RATIO

It measures the relationship between net profit and sales of a firm. It indicates management’s
efficiency in manufacturing, administrating, and selling the products. It is calculated by
dividing net profit after tax by sales.

Net profit margin or ratio = Earning after tax X 100

Net Sales

24
25

3. OPERATING PROFIT MARGIN OR RATIO

It establishes the relationship between total operating expenses and net sales. It is calculated
by dividing operating expenses by the net sales.

Operating profit margin or ratio = Operating expenses X 100

Net sales

Operating expenses includes cost of goods produced/sold, general and administrative

expenses, selling and distributive expenses.

4. EXPENSES RATIO

While some of the expenses may be increasing and other may be declining to know the
behavior of specific items of expenses the ratio of each individual operating expenses to net
sales should be calculated. The various variants of expenses are

Cost of goods sold = Cost of goods sold X 100

Net Sales

Administrative Expenses Ratio = Administrative Expenses X 100

Net sales

Selling and distribution expenses ratio = Selling and distribution expenses X 100

Net sales

5. OPERATING PROFIT MARGIN OR RATIO

Operating profit margin or ratio establishes the relationship between operating profit and net
sales. It is calculated by dividing operating profit by sales.

Operating profit margin or ratio = Operating Profit X 100

Net sales

Operating profit is the difference between net sales and total operating expenses. (Operating
profit = Net sales – cost of goods sold – administrative expenses – selling and distribution
expenses.)

25
26

EARNINGS PER SHARE

IT measures the profit available to the equity shareholders on a per share basis. It is
computed by dividing earnings available to the equity shareholders by the total number of
equity share outstanding

Earnings per share = Earnings after tax – Preferred dividends (if any)

Equity shares outstanding

RETURN ON ASSETS:

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as
to how efficient management is at using its assets to generate earnings. Calculated by
dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.
Sometimes this is referred to as "return on investment".

The formula for return on assets is:

Net income / total assets

Some investors add interest expense back into net income when performing this calculation
because they'd like to use operating returns before cost of borrowing.

RETURN ON EQUITY:

Return on Equity (ROE, Return on average common equity, return on net worth) (requity)
measures the rate of return on the ownership interest (shareholders' equity) of the common
stock owners. It measures a firm's efficiency at generating profits from every unit of
shareholders' equity (also known as net assets or assets minus liabilities). It shows how well a
company uses investment funds to generate earnings growth. ROE is equal to a fiscal year's
net income (after preferred stock dividends but before common stock dividends) divided by
total equity (excluding preferred shares), expressed as a percentage.

CASH FLOW TO ASSETS:

A financial ratio that measures how well a company is able to generate cash from its current
operations. Calculate cash flow to assets by subtracting net cash flows from operating
activities and dividing the resulting number by average total assets. This ratio measures a

26
27

company Â’s cash-generating efficiency using cash flow to assets. Other ratios accomplish a
similar objective by using cash flows and cash flows to sales.

Cash flow to asset = Cash from Operations / Total Assets

This ratio indicates the cash a company can generate in relation to its size.

PROFIT GROWTH:

Profit growth ratio = current net profit / last year net profit

SALES GROWTH:

Sales growth ratio = current sales / last year sales

ASSET GROWTH:

Asset growth = current period asset / last period asset

CURRENT ASSET TO PROPRIETORY FUND RATIO:

Current Assets to Proprietors' Fund Ratio establish the relationship between current assets
and shareholder's funds. The purpose of this ratio is to calculate the percentage of
shareholders funds invested in current assets.

Current asset to proprietor fund ratio= current asset / proprietor fund

RAW MATERIAL HOLDING PERIOD:

Raw material holding period is calculated for finding the days of raw material holdings. The
reciprocal of raw material turnover gives average raw material holding period in percentage
term. When the numbers of days in a year are divided by raw material turnover, we obtain
days of raw material holding period.

Formula:

Raw material holding period = 360/ raw material turnover

DEBTOR COLLECTION PERIOD:

Indicates the average time taken to collect trade debts. In other words, a reducing period of
time is an indicator of increasing efficiency. It enables the enterprise to compare the real
collection period with the granted/theoretical credit period.

Debtor Collection Period = (Average Debtors / Credit Sales) x 365 ( = No. of days) (average
debtors = debtors at the beginning of the year + debtors at the end of the year, divided by 2)

27
28

Credit Sales are all sales made on credit (i.e. excluding cash sales) A long debtors collection
period is an indication of slow or late payments by debtors.

INVENTORY HOLDING PERIOD:

Inventory holding period is calculated for finding the days of inventory holdings. The
reciprocal of inventory turnover gives average inventory holding period in percentage term.
When the numbers of days in a year are divided by inventory turnover, we obtain days of
inventory holding.

Inventory holding period ratio = 360/ inventory turnover ratio

CREDITORS PAYMENT PERIOD:

Average payment period = 360 / creditors turnover ratio

EARNINGS PER SHARE

It measures the profit available to the equity shareholders on a per share basis. It is computed
by dividing earnings available to the equity shareholders by the total number of equity share
outstanding

Earnings per share = Earnings after tax – Preferred dividends (if any)

Equity shares outstanding

OTHER FORMULAS :

 Debt = Long term borrowed fund = debentures + long term loan from financial
institution.

 Equity= owners fund=equity capital + preference capital + reserve and surplus –

accumulated loss.

 Share holders fund= net fixed asset + networking capital – external liability

 Net working capital= current asset – current liability

 Total asset = net fixed asset + total current asset [tangible]

 Profit and loss statement:

• Sales xxxx

• Less CGS xxx

• G/P or EBITDA xx

28
29

• Less Dep./ Amortization xx

• EBIT( operating profits) xx

• Less Interest xx

• EBT/PBT xx

• Less Taxes xx

• PAT xx

• Less Preference dividends xx

• Profit available to Equity S/H x

• No. of Equity shares y

• Earnings per share x/y

4.FINDING AND ANALYSIS

LIQUIDITY RATIO:
It is extremely essential for a firm to be able to meet its obligations as they become
due. Liquidity ratios measure the ability of the firm to meet its current obligations (liabilities).
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 provide 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.

Current ratio:
The current ratio is a measure of the firm’s short-term solvency. It indicates the availability of
current assets in rupees for every one rupee of current liability.

Formulae:
Current ratio = current assets / current liabilities.

Calculated figed asset ures:

Year Current asset Current liability Current ratio

204,593,631 80,449,484 2.54
2007-2008
53,590,391 78,733,605 6.8
2008-2009

29
30

Explanation:

A ratio of greater than one means that the firm has more than current assets against them. But
above it was just below to the one. It seems the firm have almost equivalent value of current
asset against current liabilities.

Inference:

Actually the firm reach the ideal point 1 and little improvement in the ratio comparing to the
previous years. So company should increase their current assets. By adding more efficient in
production and managing and in material control, making stocks of finished goods etc. If the
firm increase the current assets against the current liabilities the firm would solvent for long
period.

Quick Ratio:
Quick ratio is also called as acid test ratio. It establishes a relationship between quick or
liquid, assets and current liabilities. An asset is qualified if it can be converted in to cash
immediately or reasonably soon without loss of value.

Formula:

Quick ratio = current assets – inventories / current liabilities

Calculated figures:

YEAR CURRENT LIABILITIES Quick ratio

ASSEST
1.99
2007-2008 160,673,218 80,449,484

2008-2009 106,783,526 78,733,605 1.35

30
31

Chart:

Explanation:

Generally, a quick ratio of 1 to 1 is considered to represent a satisfactory current financial

condition. Although quick ratio is a more penetrating test of liquidity than the current ratio,
yet it should be used cautiously. A quick ratio of 1 to 1 or more does not necessarily imply
sound quality position. It should be remembered that all debtors may not be liquid, and cash
may be immediately needed to pay operating expenses. A company with a high value of
quick ratio can suffer from the shortage of funds if it has slow paying. In other hand, a
company with low value of quick ratio may really be prospering and paying its current
obligation in time if it has been turning over its inventories efficiently. In here, the firm didn’t
reach the bench mark of 1 or 1.33 ideal; it was little down to that. But as per above things, if
the quick ratio is low value, may really be prospering and paying its current obligation in
time if it has been turning over its inventories efficiently. Nevertheless, the quick ratio
remains an important index of the firm liquidity.

Inference:

Quick ratio of this firm is quite good because it try to reach the satisfactory level of 1 by
improvement in year by year. Here the company should not worry about quick ratio. Because
the low ratio value only implies that the company turn over the inventories very efficiently.
So my recommendation is, the firm should maintain quick ratio in this level only. It can
improve up to satisfactory level is good to company. So the company should follow the same
efficient in management and material turnover.

Cash ratio:
Cash ratio is calculated for availability of cash to meet short term commitments. Since cash is
the most liquid asset, a financial analyst may examine cash ratio and its equivalent to current
31
32

liabilities. Trade investment or marketable securities are equivalent of cash therefore they
may be included in the computation of cash ratio.

Formulae:

Cash ratio = cash / current liabilities

Calculation:

Year Cash Current liability Cash ratio

2007-2008 19,519,137 80,449,484 0.24

2008-2009 8,395,713 78,733,605 0.11

Chart

Explanation;

There is no ideal ratio for cash as such. However, a ratio > 1 may indicate that the firm has
liquid resources, which are low in profitability. In here the ratios are less than 1 that is the
company carries a small amount of cash in hand. There is nothing to be worried about the
lack of cash if the company has reserve borrowing power. The chart shows little bit increase
in the cash ratio year to year.

Inference:

I think the firm maintaining the cash in bank by the way of deposits in the bank and also have
a borrowing power from the banks and financial institution. There is nothing to be worried
about the lack of cash, if the company has borrowing power. In India firms have credit limit
sanctioned from cash and easily can withdrew from cash.

32
33

LEVERAGE / FINANCING RATIOS:

The short term creditors, like bankers and suppliers of raw material, are more concerned with
the firm’s current debt paying ability. On the other hand, long term creditors, like debenture
holders, financial institutions etc. are more concerned with the firm’s long-term financial
strength. In fact, a firm should have a 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 owners equity in financing the
firm’s assets.

Debt – equity ratio:

It is clear that from that the total debt ratio that lenders have contributed more funds than
owners; the relationship describing the lenders contribution for each rupee of the owner’s
contribution is called debt equity ratio.

Formula: Debt equity ratio= total debt / equity

Calculated figures:

Year Total Debt Equity Debt-equity ratio

2007-08 197,922,394 60,199,000 3.28

2008-09 737,071,334 160,900,000 4.58

Chart:

Explanation:

It indicates the relationship between debt & equity; ideal ratio is 2:1. Here in 2007-08 the
lenders i.e. debtor’s contribution is 3.28 times and 2008-09, 4.58 times of owner’s
contribution. A ratio greater than one means assets are mainly financed with debt, less than
one means equity provides a majority of the financing. The ratio indicates the aggressive use
of leverage, and a highly leveraged company is more risky for creditors. A low ratio indicates
that the company is making little use of leverage and is too conservative.
33
34

Inference:

A wise mix of debt and equity can increase the return on equity for two reasons, which is
debt is generally cheaper than equity and interest payments are tax-deductable expenses,
whereas dividends are paid from taxed profits. In addition, dividend payment attracts
dividend distribution tax. But excessive use of debt financing is risky. A company has a legal
obligation to make interest payments and to repay the principle at the due dates. Here the
ratio shows the firm the aggressive use of leverage, but it doesn’t use over debts. It used just
above the bench mark. So the firm try to overcome it, by promoting the owners fund or
equity share holders. But the earning capacity and repayment and interest payment is quit
good.

Equity ratio:

Equity ratio indicates the contribution of owners in the firm other than the debts. The equity
ratio is a financial ratio indicating the relative proportion of equity to all used to finance a
company's assets. The two components are often taken from the firm's balance sheet or
statement of financial position (so-called book value), but the ratio may also be calculated
using market values for both, if the company's equities are publicly traded.

Formula:

Equity ratio= equity share holders fund/ total assets

Calculated figures:

Year Share holders fund Total assets Equity ratio

2007-08 31,00,000 10,80,95,94 0.28 or 28%

2008-09 35,64,536 12169814 0.29 or 29%

Chart:

34
35

Explanation:

The equity ratio indicates the contribution part of owners or equity holders other than the
debtors. A low equity ratio will produce good results for stockholders as long as the company
earns a rate of return on assets that is greater than the interest rate paid to creditors. Here the
equity ratios for both the years are same.

Inference:

There is no bench mark for equity ratio. Higher equity ratio reflects less risk. Lower equity
ratio shows higher risk. Here the equity share holders contribution is 29% balance are from
debtors. It shows the firm paying more interest. But the firm’s financial situations is not bad,
it is healthy only, but try to make reducing the debtors and increase the equity by efficient in
production and in inventory management.

Fixed asset net-worth ratio:

Measure of the solvency of a firm, this ratio indicates the extent to which the owners' cash is
frozen in the form of brick and mortar and machinery, and the extent to which funds are
available for the firm's operations.

Formula:

Fixed asset net-worth ratio = fixed asset / net worth

Calculated figures:

Year Fixed assets Net worth Fixed asset NW ratio

2007-08 210158993 60199000 3.49

2008-09 528676778 160900000 3.28

Chart:

35
36

Explanation:

A ratio higher than 0.75 indicates that the firm is vulnerable to unexpected events and
changes in the business climate. By seeing above the results the firm can be affected by some
business changes and unexpected events.

Inference:

The ratio shows the firms money is frozen in somewhere by delay in the receivables or as a
stock or as machinery or any other assets. So only little amount of money is in the owners
fund for operating. To overcome this, the firm should use the increase in production,
materials to stock and turn over it properly and maintaining the receivables properly. And use
the owner’s money in the form of current asset for ease in to liquidity for cash.

ACTIVITY RATIO:

Funds of creditors and owners are invested in various assets to general sales and profits. The
better the management of assets, larger the amount of sales. Activity ratios are employed to
evaluate the efficiency with which the firm manages and utilises its assets. These ratios are
also called as turnover ratios because they indicate the speed with which assets are being
converted or turned over in to sales. Activity ratios, thus, involve a relationship between sales
and assets. A proper balance between sales and assets generally reflects that assets are

36
37

managed well. Several activity ratios can be calculated to judge the effectiveness of asset
utilisation.

Inventory turnover ratio:

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its
product.

Formula:

Inventory turnover ratio = cost of goods sold / average inventory.

Calculated figures:

Year Cost of goods sold Average inventory Inventory turnover

ratio

2007-08 3,24,60,864.21 31,85,849 10.18 times

2008-09 4,01,45,680.88 31,96,406 12.5 times

Chart:

Explanation:

Here the firm turning its inventory of finished goods in to sales (at cost) 10.18 & 12.5 times
in a year. Chart shows the improvement in inventory of finished goods in to sales. Lesser the
inventory, the greater the cash available for meeting operating needs. Besides, lean fast
moving inventory runs a lower risk of obsolescence and reduces interest and storage charges.
High inventory turnover is a sign of efficient inventory management.

Inference:

In recent years, many companies have started following just in time practices whereby they
make purchases at the time of production and sales. The above chart shows the inventory
37
38

level. The inventory ratio is good it was coming down is another good news. I request the
firm should follow the just in time method to avoid the interest and storage charges and
damages also. And must produce a quality of products to for turn inventory to sales.

Inventory holding period ratio:

Inventory holding period is calculated for finding the days of inventory holdings. The
reciprocal of inventory turnover gives average inventory holding period in percentage term.
When the numbers of days in a year are divided by inventory turnover, we obtain days of
inventory holding.

Formula:

Inventory holding period ratio = 360/ inventory turnover ratio\

Calculated figures:

Year Inventory turnover ratio Inventory holding period

2007-08 10.18 36 days

2008-09 12.5 28.8 days

Chart:

Explanation:

38
39

It shows the firms inventory holding periods. Here the inventory holding period decreased
comparing to previous year. Higher the holding period implies there is difficulty in turn
inventory to sales due to various reasons. Lower holding period shows there is free in turning
of inventory in to sales. Lower the holding period make the liquidity.

Inference:

The inventory holding period shows the good results, because the holding periods are coming
down. So the firm does well in inventory turnover and inventory holding period. If the firm
using just in time the firm could avoid some more days of holding period and avoid interest
and storage expenses also.

Raw material turnover ratio:

The manufacturing firm’s inventory consists of two or more components: 1) raw materials
and 2) work in process. The raw material inventory should be related to materials consumed
and work in process to the cost of production. Raw material turnover ratio indicates the
efficiency of the firm with which the firm converts raw materials into work in process and
work in process into finished goods.

Formula:

Raw material turnover ratio= material consumed / average raw material inventory

Calculated figures:

Year Material consumed Average raw Raw material

material inventory turnover ratio

2007-08 2,48,76,175 8,12,704 30.6 times

2008-09 3,65,14,867 8,44,073.5 43.2 times

Chart:

39
40

Explanation:

Inventories of raw material turn an average of 30.6 and 43.2 times for the two years. Higher
ratio shows the efficiency of the firm in converting raw materials in to finished goods without
any defects. Lower ratio shows the inefficiency of the firm in converting raw materials into
finished goods due to business climate etc.

Inference:

The firm’s efficiency in turning its inventories and raw materials is good but the year 08-09 is
gone down. It shows the company’s utilisation of inventories in generating sales is quite
good. So the firm should maintain this level by efficient operating inventory raw material in
to sales. To maintain this or improve the raw material turnover the firm should efficient in the
production of quality of goods.

Raw material holding period:

Raw material holding period is calculated for finding the days of raw material holdings. The
reciprocal of raw material turnover gives average raw material holding period in percentage
term. When the numbers of days in a year are divided by raw material turnover, we obtain
days of raw material holding period.

Formula:

Raw material holding period = 360/ raw material turnover

Calculated figures:

Year Raw material turnover Raw material holding period

2007-08 30.6 11.7 days

2008-09 43.2 8.33 days

Chart:

40
41

Explanation:

The raw material holding period for the firm is 11.7 and 8.33 days. It comes down comparing
the current year with previous year. Holding period of raw material is decreasing means the
raw material in to finished products process is going fast due to market demand.

Inference:

The firm’s raw material holding period shows the firm is efficient in turning raw material in
to finished products. The firm should continue this level by efficient in production of quality
of products and turn in to finished products for sales.

Debtor turnover ratio:

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of
companies. When the firm extend credits to its customers, debtors (account receivables) are
created in the firms accounts. Debtors are convertible in to cash over a short period and
therefore are include in current assets. The liquidity position of the firm depends on the
quality of debtors to great extent. Financial analysis applies three ratios to judge the quality or
liquidity of debtors: debtors turn over, collection period and aging schedule of debtors.

Debtor’s turnover indicates the number of times debtors turn over each year. Generally, the
higher value of debtor’s turnover, the more efficient is the management of credit.

Formula:

Debtors turn over = sales/ average account receivables

YEAR SALES DEBTORS DEBTORS

TURNOVER
RATIO
2007-2008 396,840,597 71,991,950 5.51

2008-2009 379,867,875 52,455,656 7.24

Chart:
41
42

Explanation:

Actually the higher value of debtors turn over, the more efficient is the management of credit.
Here comparing both years the 08-09 turnover were little bit down. That is there is some
restrictions happen in the speed of account receivables.

Inference:

Generally there is no bench point to reach high level. It differs to firm to firm. Here the firm’s
accounts receivable is satisfied in 2007-08. But it downs in 2008-09. So the firm is not
constant in the accounts receivable and maintaining. So the firm should try to efficient in
managing of credit.

Debtor’s collection periods:

The average number of days for which debtors remain outstanding is called the average
collection period.

Formula:

Debtors collection period = days (360)/ debtors turnover

Calculated figures:

Year Debtors turnover Debtors collection period

2007-08 5.51 65 days

2008-09 7.24 49 days

Chart:

42
43

Explanation:

The collection period measures the quality of debtors since it indicates the speed of their
collection. Shorter the average collection period, the better the quality of debtors, since the
short collection period implies the prompt payment by debtors

Inference:

The period, on average, that a business takes to collect the money owed to it by its trade
debtors. Here the collection of debtors is too long. If doing like this the firm may incur
financial risks. So the firm should concentrate in collecting the debtors wit in a month it will
give the best result.

Creditor’s turnover ratio:

Creditors are the businesses or people who provide goods and services in credit terms. That
is, they allow us time to pay rather than paying in cash. It compares creditors with the total
credit purchases. It signifies the credit period enjoyed by the firm in paying creditors.

Formula:

Creditors turnover ratio = credit purchases/ average accounts payable

Calculated figures:

Year Credit purchases Average account Creditor’s turnover

payable ratio

2007-08 3,24,97,135.08 66,78,373.45 4.86 times

2008-09 4,01,55,050.78 1,37,11,609.11 2.92 times

Chart:

43
44

Explanation:

Creditor turnover ratio is likely down in 08-09. It shows the payment to creditors is slow
compare to the previous year. A high ratio implies velocity of payment to creditors and low
the other side.

Inference:

There are good reasons why we allow people to pay on credit even though literally it doesn't
make sense! If we allow people time to pay their bills, they are more likely to buy from your
business than from another business that doesn't give credit. The length of credit period
allowed is also a factor that can help a potential customer deciding whether to buy from your
business or not: the longer the better, of course. So the firm should make payment speed for
further purchases.

Creditors average payment period:

Average payment period ratio gives the average credit period enjoyed from the creditors.

Formula:

Average payment period = 360 / creditors turnover ratio

Calculated figures:

Year Creditors turnover ratio Average payment period

2007-08 4.86 74 days

2008-09 2.92 124 days

Chart:

44
45

Explanation:

The average payment period ratio represents the number of days by the firm to pay its
creditors. A high creditor’s turnover ratio or a lower credit period ratio signifies that the
creditors are being paid promptly. This situation enhances the credit worthiness of the
company. However a very favourable ratio to this effect also shows that the business is not
taking the full advantage of credit facilities allowed by the creditors. Here the period took for
payment is more than the previous year.

Inference:

The period taken for the payment is quit high for both the years, in current year it is higher
than previous year. My request is to make a payment shortly for future purchases by efficient
production and sales and account receivables and by maintaining a credit reserve.

Operating ratio:
Operating profit margin or ratio establishes the relationship between operating profit and net
sales. A ratio that shows the efficiency of a company's management by comparing operating
expense to net sales.

Formula:

Operating ratio = EBIT / sales

Calculated figures:

Year EBIT Sales Operating ratio

2007-08 70,943,636 396,840,597 0.17

45
46

2008-09 157,253,086 379,867,875 0.41

Chart:

Explanation:

The smaller the ratio, the greater the organization's ability to generate profit if revenues
decrease. When using this ratio, however, investors should be aware that it doesn't take debt
repayment or expansion into account.

Inference:

The ratio shows the operating profit and net sales relationship. It is healthy, so the firm is
now little bit low in operating expenses as year to year. If reducing the inventory, raw
material holdings and manage the materials efficiently, and avoiding the unnecessary charges
the firm could able to earn more profit by net sales.

Gross profit margin:

The first profitability ratio in relation to sales is the gross profit margin ratio. It reflects the
efficiency with which management produces each unit of product. This ratio indicates the
average speed between the cost of goods sold and the sales revenue.

Formula:

Gross profit margin = gross profit / sales

Calculated figures;

Year Gross profit Sales Gross profit ratio

46
47

2007-2008 135,897,816 396,840,597 0.34

2008-2009 240,846,024 379,867,875 0.63

Chart:

Explanation:

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 profit may increase due to higher sales price, cost of goods sold
remaining constant or lower cost of goods sold, sales prices remaining constant or a
combination of variations in sales prices, costs the margin widening and an increase in the
proportionate volume of higher margin items.

A lower gross profit margin may reflect higher cost of goods sold due to the firm’s inability
to purchase raw materials at favourable terms, inefficient utilisation of plant and machinery
or over investment in plant and machinery, result in gin higher cost of production. The ratio
will also be low due to fall in prices in the market, the cost of goods sold remain unchanged,
market reduction selling price by the firm to obtain large sales volume. Here the gross profit
ratio is came down compare to last year.

Inference:

Gross profit margin ratio is good for both the years. But for the current year it comes down
compare to last year. It may be any reasons which said in above. The finance manager should
able to detect the causes of a falling gross margin and initiate action to improve the situation.
For my point of view the problem may be higher cost of production, and fall in market. To
recover, the firm should produce quality of products by minimum cost and better utilisation
of machinery, try to sold unsold goods and maintain the material control effectively.

47
48

Net profit margin:

Net profit is obtained when operating expenses, interest and taxes are subtracted from the
gross profit. Net profit margin establishes a relationship between net profit and sales and
indicates management’s efficiency in manufacturing, administering and selling the products.
This ratio is overall measurement of the firm’s 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 firm’s capacity to withstand adverse
economic conditions.

Formula:

Net profit margin = profit after tax / sales

Calculated figures:

Year Profit after tax Sales Net profit margin

2007-08 12,687,091 396,840,597 0.03

2008-09 8,244,178 379,867,875 0.02

Chart:

Explanation:

A firm with a high net profit 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 profit margin firm to withstand these
advertises. Similarly, a firm with high net profit margin can make a better use of favourable
conditions, such as rising selling prices, falling costs of production or increase in demand for
the product. Such a firm will be able to accelerate it profits at a faster rate than a firm with
low net profit margin.

Inference:

If the gross profit margin has increased over years, but the net profit margin has either
constant or decreasing, or has not increased as fast as the gross margin, this implies that the
48
49

operating expenses relative to sales have been increasing. The increasing expenses should be
identified and controlled. Gross profit margin may decrease due to fall in sales price or
increase in the cost of production. As a consequence, net profit margin will decrease unless
operating expenses decreasing significantly. The crux of the argument of both the ratios
should be jointly analysed at each time of expense should be thoroughly investigated to cause
of decrease in both or any ratios. The firm should control the expenses, efficient use of
machinery’s for production, to improve the earnings.

Earnings per share:

The profitability of the share holder’s investment can also be measured in many other ways.
One such measure is to calculate the earnings per share. EPS calculations made over years
indicate whether or not the firms earnings power on per share basis has changed over that
period.

Formula:

EPS = profit after tax / number of shares

YEAR PROFIT AFTER NO.OF SHARES EPS

TAX

11,078,667 60,199,000
2007-2008 0.18

2008-2009 8,244,178 160,900,000 0.05

Explanation:

EPS shows profitability of the firm in share basis. Here the EPS is gone up to 104 in 07-08
but it comes down to 76 on current year.
49
50

Inference:

The earning price of the share is reached the maximum level in 07-08 but it was gone nearly
40% of that in08-09. The reason is, because of global market recession and sudden fall in
market in my point of view. To retain the same earning the firm must improve the efficiency
in operating, make cost cutting , cost reduction and efficient use of technologies.

Cash flow to assets:

This ratio indicates the cash a company can generate in relation to its size. Comparing to
previous years is important; if the company's ratio is decreasing then they may eventually run
into cash problems.

Formula:

Cash flow to assets = cash from operations / total assets

Calculated figures:

Year Cash from operations Total assets Cash flow to assets

2007-08 32,80,057.42 3,20,05,770.59 0.10

2008-09 30,54,270.2 3,72,93,432.97 0.08

Chart:

Explanation:

A ratio of 0.1 is quite good but here it below then .1 so the firm is in cash problems. And also
the currents year is low compared to previous year.

Inference:

50
51

In my point of view the firm incurred in cash problems in the way of bad debts and due to
lower in returns etc. To overcome this and the firm become healthy without any cash problem
they should efficient in operations, inventory turnover to sales and managing the receivables,
maintaining of reserves for some percentage, controlling the expense, increase in production
and in sales leads the company without cash trouble.

RECOMMENDATIONS:

• The firm should follow the just in time method to avoid unnecessary expenses.

• The firm should reduce the expenses by reducing the holding periods, by turning the
inventory in to sales, efficiency in operations.

• The firm should improve the solvency ratio by introducing some capital or inviting
new share holders and maintain such percentage of reserves.

• The firm should reduce the debtors by inviting new share holders, because it helps to
increase the profit margin and decrease interest payment expenses.

• Introduce new technologies in machines for increasing the production.

• Provide better allowances to the employees for their efficient performance in

production.

• The raw materials and inventories should manage properly.

• The firm should improve in their resolving customer’s problem area.

• It should make necessary step to improve the communication with customer.

Conclusions:

These ratio analyses gave the clear picture of firm’s financial condition. The financial
condition and inventory of finished, semi-finished, raw material, returns in the all the aspects
and in solvents area and assets, owners fund area the condition is quite healthy. In 2007-08
the all the aspects were very good comparing to 2008-09. The 08-09 is little bit down in most
of the areas comparing to previous year. But the sales, turnover’s in all the aspects were
increased than previous years. In these financial crises itself the firm shows more than sales
compare to last year reflects the efficiency of the firm in all the operations. So overall
financial condition is not very good but it is a good while in this financial crises and global
recession. As well as the company maintain the customer satisfaction level with all their
51
52

customers strongly. While in the internship I learned lot of the things. I got a very good
feedback from the chair person and from MD. I really happy for did the internship in the
LINKTECH ENGINEERING PVT. LTD. what are I learned in that company is all are very
useful to my future

BIBILEOGRAPHY:

 Financial accounting, N.NARAYANSWAMY.

 Income tax , law and practice, HARI HARAN,

 Cost accounting and financial management, SARAVAN PRASAD.

52