SUBMITTED TO: AASHISH SIR

SUBMITTED BY: SHIKHA AGARWAL BBM 5TH SEM. SEC B ICG/2009/ 9334

WHAT IS RATIO ?
Ratio can be define as between relationship between two figures expressed in arithmetical terms called ratio. ACCORDING TO R.N ANTHONY: A Ratio is simply one number expressed in terms of another .It is found by dividing one number into another.

ADVANTAGES OF RATIO
Helpful in analysis of financial statements. Simplification of accounting data. Helpful in comparative study. Helpful in forecasting. Effective control Study of financial soundness

LIMITATIONS OF RATIO
False accounting data gives false ratio. Comparison not possible if different firms adopt different accounting policies. Limited use of single ratio. Lack of proper standards. Ratio alone are not adequate for proper conclusions.

The following income statement and balance sheets relate to PANASONIC and VOLTAS.

Income statement
PANASONIC SALES Less: Cost of Sales GROSS PROFIT Less: Operating exp.(administrative and selling exp.) OPERATING INCOME (A) Less: other exp.: depreciation on plant and machinery interest on debentures preliminary Exp. Written off TOTAL OTHER EXP. (B) Net income before tax (A-B) Less: provision for tax NET INCOME AFTER TAX 40,00,000 32,00,000 8,00,000 2,50,000 5,50,000 2,20,000 75,600 4,000 2,99,600 2,50,400 36,000 2,14,400 VOLTAS 48,00,000 37,44,000 10,56,000 3,00,000 7,56,000 2,76,000 90,000 4,000 3,70,000 3,86,000 56,000 3,30,000

BALANCE SHEETS
Liabilities Equity share capital shares of rs.10 each Panasonic Voltas ASSTES Fixed assets: land Plant & machinery Panasonic Voltas

15,00,000 8,00,000

19,20,000 10,00,000

5,00,000 19,16,000

6,00,000 18,50,000

Reserves & surplus

Secured loans: 9% debentures Unsecured loans Current liabilities & provisions: (a)Current liabilities creditors (b)provisions Income tax provision

investments 8,40,000 10,00,000 Current assets, loans & advances: (A)Current assets Stock Debentures Cash and bank (B) Loans & advances

1,00,000

3,00,000

7,20,000 8,00,000 80,000 -

11,00,000 12,00,000 1,00,000 -

9,64,000

10,64,000 Miscell. expenditure Preliminary exp.

36,000

56,000

24,000 41,40,000 51,70,000 41,40,000

20,000 51,70,000

Question

You are required to prepare a project report commenting upon the performance and financial position of the firm on the basis of ration analysis.

Liquidity ratios

Current ratio : current ratio / current liabilities Panasonic: 16,00,000/ 10,00,000 = 1.6 : 1 Voltas: 24,00,000/ 11,20,000 = 2.14 : 1 Quick ratio: liquid assets / current liabilities Panasonic: 8,80,000/ 10,00,000 = 0.88 : 1 Voltas: 13,00,000/ 11,20,000= 1.16 : 1

COMMENT: short term financial position of the company is

quite satisfactory because the current ratio of the company is 2.14 : 1, which is more then the ideal ratio of 2: 1. the fact is also supported by quick ratio, which more then the ideal ratio of 1: 1.

Solvency ratios:

Debt equity ratio : long term debts/ shareholder's fund Panasonic: 8,40,000/ 15,00,000 + 8,00,000 24,000 = 0.37 : 1 Voltas : 10,00,000 / 19,20,000 + 11,30,000 20,000 = 0.33 : 1

Total assets to debt ratio : total assets/ long term debts Panasonic : 41,40,000 24,000 / 8,40,000 = 4.9 times Voltas : 51,70,000 20,000 = 5.15 times

 COMMENT: debt equity ratio indicates that proportion of

funds provided by long term lenders in comparison to the owners is only .37 in the Panasonic company . This proportion has further come down to .33 in Voltas company. It shows that the long term solvency position of the companies is very sound. The fact is also supported by total assets to debt ratio. It indicates that long term debts are covered 4.9 times by assets in the Panasonic and this margin of safety has increased to 5.15 times in the Voltas.

Activity ratio

Fixed assets turnover ratio : net sales / fixed assets Panasonic :40,00,000 / 24,16,000 = 1.66 times Voltas : 48,00,00 / 224,50,000 = 1.96 times

COMMENTS : fixed assets turnover ratio has improved. It indicates better utilization of fixed assets generating sales.

Profitability ratios

Gross profit ratio : gross profit / sales * 100 Panasonic : 8,00,000/ 40,00,000 * 100 = 20 % Voltas : 10,56,000 / 48,00,000 * 100 = 22%

Operating ratio: cost of sales + operating exp. / sales * 100 Panasonic = 32,00,000 + 2,50,000 / 40,00,000 * 100= 86.25 % Voltas = 37,44,000 + 3,00,000 / 48,00,000 * 100 = 84.25 % Net profit ratio : net profit / sales * 100 Panasonic : 2,14,400 / 40,00,000 * 1oo = 5.36 % Voltas : 3,30,000 / 48,00,000 * 100 = 6.88 %

Return on equity : net profit after tax / shareholder s funds Shareholders funds = equity share capital + reserves & surplus preliminary expenses Panasonic : 15,00,000 + 8,00, 000 24,0000 = 22,76,000 Voltas : 19,20,000 + 11,30,000 20,000 = 30,30,000 R.O.E. for Panasonic = 2,14,4000/ 22,76,000 * 100 = 9.42 % R.O.E. for Voltas = 3,30,000 / 30,30,000 * 100 = 10.89 %

Earning per share (E.P.S.): net profit after tax / no. of equity shares Panasonic : 2,14,400 / 1,50,000 = 1.43 per shares Voltas : 3,30,000 / 1,92,000 = 1.72 per shares

COMMENT: Gross profit ratio has improved by 2 % which

reflects an increase in the sales price of goods sold without corresponding increase in the cost of sales. Operating ratio has also come down by 2 %. Lowering of operating ratio has resulted in higher margin of profit on sales. Net profit ratio has gone up from 5.36 % to 6.88 % which is an indication of improvement in the overall efficiency and profitability of the firm. Return on equity has also gone up from 9.42 % to 10.89 % which indicates that shareholders funds are being utilized more efficiently. There are better prospects of declaration and creation of reserves. Earning per share has also gone up from 1.43 to 1.72 which indicates that overall profitability of the company is improving . This ratio also indicates that market price of these companies share is likely to go up.

Conclusion : overall profitability and financial position of

Voltas has improved in comparison of Panasonic.