RATIO ANALYSIS

A Summer Project Report

On

Ratio Analysis of RCF LTD.

In the partial fulfillment of the Degree of Master of Management Studies under the University of Mumbai By

MR. Anil Vasudev Koli [Roll No: 024] Specialisation-Finance

Under the Guidance of

Mr.Dilip Deshmukh
(External Guide, RCF LTD.)

Prof. Ketan Vira

(Internal Guide)

GNVS Institute of Management

Sion (East)-400037
Email id : anilkoli91@gmil.com

DECLARATION
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I, Anil Vasudev Koli, hereby declare that the report titled .Ratio Analysis. Is submitted to Mumbai University in partial fulfillment of the requirement for the award of Master of Management Study under the guidance and supervision of Mr Ketan Vira faculty, G.N.V.S IOM SION, MUMBAI This is an original study done by me and no part is taken from any other reports or material or otherwise submitted earlier to any college or university. Date: Place: Mumbai

Anil Vasudev Koli

ACKNOWLEDGEMENT
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The success of project is not with any one person, Its depends upon the encouragement, guidelines and proficiency of many other. I have this chance to express my humble gratitude and regards to the people who have been part in the successful completion of this project. I would like to thank my Institute, GNVS Institute of Management, for giving me such opportunity to show my work and talent. I would also like to give many thanks to my internal mentor, who was there all the way to support and encourage me, Prof. Ketan Vira It would also like to give my greatest appreciation and regards towards RCF LTD., for giving me an opportunity to get exposed to the corporate world and working environment. In particular, I am greatly thankful to my mentor at RCF LTD. it wouldnt have been possible without the support and encouragement of you. Their guidance and motivation inspired me to perform my best. In spite of their busy schedule they spend their precious time with me and also gave exposure to practical world. This experience will be helpful for me in all my future endeavors. I would also express my sincere gratitude towards my colleagues and other staff members of, RCF LTD. for their help and co-operation. Lastly, I would also thank my parents and friends, for their love, support and help.

Anil Vasudev Koli.

CONTENETS

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CHAPTER 1 INTRODUCTION Financial Statements Ratio Analysis Classification Of Ratios

TOPIC

PAGE NO. 6 7 7-10 10-20 21 21 21 21 22 22 22 23 23-24 24-25 26-28 28-30 30-32 32-38 39-40 41 42

RESEARCH METHODOLOGY Statement Of Problem Need For The Study Objectives Of The Study Scope Of the Study Data Collection Limitations Of The Study COMPANY PROFILE RCF Group Businesses DATA ANALYSIS AND INTERPRETATION Liquidity Ratios Leverage Ratios Profitability Ratios FINDINGS AND SUGGESTIONS CONCLUSION BIBLOGRAPHY

5 6

CONTENT OF TABLES

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SL.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 CURRENT RATIO

TITLE OF TABLES

PAGE NO. 28-29 29 30 30-31 31-32 32 33 33-34 34-35 35 36 36-37 37-38

WORKING CAPITAL TURN OVER RATIO FIXED ASSETS TURNOVER RATIO DEBT EQUITY RATIO PROPRIETARY RATIO GROSS PROFIT RATIO NET PROFIT RATIO OPERATING RATIO RETURN ON SHAREHOLDER.S FUND RETURN ON EQUITY RETURN ON ASSETS ADMINISTRATIVE EXPENSE RATIO TOTAL ASSET TURNOVER RATIO

1. INTRODUCTION
Finance is the life blood of business. It is rightly termed as the science of money. Finance is very essential for the smooth running of the business. 45

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According to Wheeler, .Finance is that business activity which is concerned with the organization and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise. Financial management is that managerial activity which is concerned with the planning and controlling of a firm financial reserve. Financial management as a academic discipline, has undergone fundamental changes as regards its scope and coverage. In the early years of its evolution it was treated synonymously with the raising of funds. In the current literature pertaining to this growing academic discipline, a broader scope so as to include in addition to procurement of funds, efficient use of resources is universally recognized. Financial analysis can be defined as a study of relationship between many factors as disclosed by the statement and study of the trend of these factors. The basis for financial planning, analysis and decision-making is the financial information. Financial information is needed to predict, compare and evaluate the firms earning ability. It is also required to aid in economic decision making investment and financing decision making. The financing information of an enterprise is contained in the financial statements or accounting reports. The financial analysis process is identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and profit and loss account. It is the study of the performance of the unit and therefore is aimed at the financial performance in an individual unit. This is therefore aimed at analysing the performance and trend and the areas of strengths and weakness and the financial strength of the firm in its environment. The objective of financial analysis is the analysing of strength and weakness of a business undertaking by regrouping and analysis of figures obtained from a financial statement and balance sheet by the tools and techniques of management accounting. Financial analysis is regarded as the final step of accounting that results in the presentation of final and the exact data that helps the business managers, creditors and investors. In the financial analysis a ratio is used as an index for evaluating the financial position and performance of the firm. The absolute accounting figures reported in the financial statement do not provide a meaningful understanding of the performance and the financial position of a firm. But the accounting figures convey the meaning when it is related to some other related information for example Rs.5 Crores net profit may look impressive, but the firms performance can said to be good or bad only when net profit figures is related to the firms investment. FINANCIAL STATEMENTS: Financial statements contain summaries, information of the firms financial affairs, organized systematically. They are the means to present the firms financial situation to the users. 45

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Preparation of the financial statements is the responsibility of top management. As these statements are used by investors, and financial analysts have to examine the firms performance in order to make investment decisions, they should be well prepared and should have sufficient information. The basic financial statements prepared for the purpose of external Reporting to owners, investors and creditors are 1. Balance sheet or statement of financial position, and 2. Profit and loss account or income statement. RATIO ANALYSIS: Ratio analysis is the most used tool of analysis. A ratio is quotient of two numbers and is expression of relationship between the figures or two amounts. It indicates a quantitative relationship, which is used for qualified judgment and division making. The relationship between two accounting figures is known as ratio. These ratios may be compared with the previous year or base year ratios of the same firm. A comparison may also be made with the selective firms in the same industry i.e. interfirm comparison. Ratio analysis is useful to shareholders, creditors and executives of the company. British institute of management has classified the ratios into two categories- Primary Ratio and Secondary Ratios. Relationship between profits and capital employed are primary ratios. Secondary ratios give the information about the financial position and capital structure of the company. Liquidity ratios and leverage ratios are the secondary ratios. Ratio analysis is a powerful tool of financial analysis it is one of the statistical yardsticks that provide relationships between two accounting figures .Ratio analysis of financial statements refers to the process determining and presenting the relationship of items and group of items in the statement .Ratios may be expressed in 3 forms: a) As a quotient 1:1 or 2:1 etc. b) As a rate i.e. inventory turnover as number of times in a year. c) As a percentage. With the help of ratio analysis, conclusions can be drawn regarding the liquidity position of a firm. The liquidity position of a firm will be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet the short term 45

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liabilities if it has sufficient liquid funds to pay the interest on its short term liabilities if it has sufficient liquid funds to pay the interest on its short-making debt usually within a year as well the principal. The ability is reflected in the liquid ratios of a firm. The liquid ratios are particularly useful in credit analysis by banks and other suppliers of short term loans. Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping-stone to remedial measures. This is made possible from inter-firm comparison with industry averages. An inter-firm comparison would demonstrate the relative position vis--vis its competitors. If the results are at variance either with the industry overage or with those of the competitors, the firm can seek to identify the probable reasons and, in that light, take remedial Measures. OBJECTIVES OF RATIO ANALYSIS: The main objective of ratio analysis is to show the firms relative strengths and weakness. The objectives of ratio analysis are as follows: It determines the financial condition and financial performance of the firm. It involves comparison for a useful interpretation of the financial statements. It helps in finding solutions to unfavourable financial statements. It helps to take suitable corrective measures when the financial conditions and performance are unfavourable to the firm, in comparison to other firms in the same industry. With the help of this analysis, an analyst can determine the The ability of the firm to meet its obligations.

The efficiency with which the firm is utilizing its various assets in generating sales.

The overall operating efficiency and performance of the firm.

NATURE OF RATIO ANALYSIS: Ratio analysis is a technique of analysis and interpreting of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weakness of any institution. The following are the steps involved in ratio analysis: 1. Selection of relevant data from the statements depending upon the objective of the analysis. 2. Calculation of appropriate ratios from the above data. 45

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3. Comparison of the calculated ratios with the past ratios of the same institute, or with the ratios developed from projected financial statements, or the ratios of some other institution. 4. Interpretation of ratios. ADVANTAGES OF RATIO ANALYSIS: There are several advantages of ratio analysis. Some of them are: 1) Helps in financial performance analysis: Ratio analysis is very powerful tool for financial performance analysis. Ratio analysis answers various questions relating to companies profitability, assets utilization, liquidity, financing strategies, capabilities etc. 2) Helps in credit analysis: Ratio analysis reveals the credit worthiness of a firm. Creditors are always interested to know whether the liquidity position of the firm is sound or not. Only those companies, whose liquidity position is sound, will be able to repay the loans and survive in the long run. 3) Helps in security analysis: Ratio analysis also helps in security analysis. The major focus in security analysis is on the long-term profitability, which depends on a number of factors. In this the efficiency with which the firm utilizes its assets and the financial risk to which the firm is exposed are also studied. 4) Helps in planning: Ratio Analysis helps in planning and forecasting over a period of time. A firm or industry has certain norms that may indicate future success or failure. 5) Simplifies Financial Statement: Ratios analysis simplifies the comprehension of financial statements. Ratio tells the whole story of changes in the financial condition of the business. 6) Facilities Inter Firm Comparison and Trend Analysis: It provides data for inter firm comparison and trend analysis ratio and highlights the factors associated with successful and unsuccessful firms. They also reveal strong firms over value and under value firm. LIMITATION OF RATIO ANALYSIS: The ratio analysis is a widely used technique to evaluate the financial position of business. But there are some certain problems in using ratios. The analyst must be aware of these problems. The following are some of the limitations of ratio analysis. 1) Difficulty in comparison: - One serious limitation of ratio analysis arises out of the difficulty associated with their comparison to draw inferences. This may be due to the following: Differences in the basics of inventory valuation. Different depreciation methods. 45

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Estimated working life of assets particularly of plant and equipment. Amortization of intangible of assets like good will patents and so on. Amortization of deferred revenue expenditure such as preliminary expenditure and discount on issue of shares. Treatment of extraordinary items of income and expenditure and so on. 2) Impact of Inflation: - The second major limitation of ratio analysis is associated with price level changes. This impact is a weakness of traditional statements that are based on historical costs. 3) Conceptual Diversity: - Another factor that affects the usefulness of ratios is that there is difference of opinion regarding the various concepts used to compute the ratios. 4) The ratios are generally calculated from past financial statement and thus are no indicators of future. 1.3 CLASSIFICATION OF RATIOS: There are three main types of ratios, namely liquidity ratio, leverage ratios or capital structure, profitability ratio. The ratios in each of these types are as shown below: LIQUIDITY RATIOS: Current ratios Liquid ratio or quick ratio Working capital ratio Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Fixed assets turnover ratio

LEVERAGR RATIOS: Debt equity ratio Proprietary ratio Capital gearing ratio Interest coverage ratio Total or overall coverage ratio PROFITABILITY RATIO: Gross profit Ratio 45

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Net profit Ratio Operating Ratio Return on Investment Return on shareholders Equity Return on Equity capital LIQUIDITY RATIOS: The term liquidity refers to the firms ability to meet its current liabilities. A firm should ensure that it does not suffer from lack of liquidity and that it is not too highly liquid. The failure of a firm to meet its obligations due to lack of sufficient liquidity will result in closure of the firm. A very high degree of liquidity is also bad as idle assets earn nothing. The firms funds will necessarily get locked up in the current assets. Therefore it is necessary to strike a proper balance between liquidity and non-liquidity. The ratios which reflect the short term solvency of a business unit are current ratio, quick ratio, working capital, turnover ratio, stuck turnover ratio, debtors turnover ratio, creditors turnover ratio, fixed assets turnover ratio etc. Current Ratio: Current ratio is defined as the ratio of current assets to current liabilities. It shows the relationship between total current assets and total current liabilities. It is a measure of the firms short-term solvency. Current ratio is also called working capital ratio. It is calculated as follows: Current assets Current ratio = ------------------------Current liabilities Significance of Current ratio: Current ratio is an index of the firms short-term solvency. In other words, it is the index of the strength of working capital. The higher the current ratio, the greater is the firms ability to meet its short-term debts. Usually a high current ratio indicates that funds are not being economically used in the firm. There may be exclusive inventories or account receivable or large idle cash balance. Usually low current ratio indicates that the firm may have some difficulty in paying off its debts. It is essential that a firm should have a reasonable current ratio. Interpretation: Conventionally a current ratio of 2:1 is considered satisfactory. The higher the current ratio the greater is the margin of safety. The larger the amount of current assets in relation to current liabilities the more is the firms ability to meet its current obligations. Liquid ratio or quick ratio: Liquid ratio is the ratio of liquids (quick assets) to current liabilities. It establishes the relationship between quick assets and current liabilities. It is also called acid test ratio. Liquid assets Liquid ratio = -----------------------45

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Current liabilities Where liquid assets = current assets. Stock Significance of liquid ratio: Quick ratio is considered to be superior to current ratio in testing the liquidity position of a firm. An asset is liquid if it can be converted into cash immediately or within a reasonable time without loss of value. Cash is the most liquid asset. The other assets that are considered to be relatively liquid and are included in the quick assets are book debts and marketable securities. Stock or inventory and prepaid expenses are considered to be less liquid . When used in conjunction with current ratio, the liquid ratio gives a better picture of the firms liquidity. Interpretation: A quick ratio of 1: 1 is considered ideal. It is considered that if quick assets are equal to current liabilities then the firm can meet its current obligation. Working capital turnover ratio: Working Capital is the excess of current assets over current liabilities. This ratio is computed to test the efficiency with which the net working capital is utilized. In other words, this ratio indicates whether working capital is effectively used in making sales. It is calculated as follows: Sales Working capital turnover ratio = ---------------------------Net working capital

A low working capital turnover ratio may reflect an inadequacy of working capital and lower turnover of inventories or receivables. A high ratio may be the result of high turnover of inventories or receivables. Current assets mean cash or those assets, which can. be converted into cash within a year, current assets normally include cash in hand and at bank, marketable securities, stock, sundry debtors, bills receivable and prepaid expenses. Current liabilities are those, which are to be repaid within a year. Current liabilities include sundry creditors, bill payable, bank overdraft, and provision for taxation. Interpretation: There is no standard or ideal set for working capital turnover ratio. But one can say that a higher working capital turnover ratio indicates the efficiency of the management in the utilization of the working capital.

Inventory turnover ratio:

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Inventory turnover ratio is also known as stock turnover ratio. This ratio indicates the number of times the inventory is replaced during the year. It shows the rate at which inventories are converted in to sales and then into cash. It establishes the relationship between cost of goods sold and average inventory. Besides, it helps determine the liquidity of a business concern. It is computed as follows:

Cost of goods sold Inventory Turnover Ratio = -------------------------------Average inventory 365 Inventory holding period (days) = ------------------------------------Inventory turnover ratio Significance of Inventory Turn over Ratio: It measures the velocity of the conversion of stock into sales. A high inventory turnover indicates. Interpretation: It measures the velocity of the conversion of stock into sales. A high inventory turnover indicates efficient management of inventory and low inventory turnover indicates inefficient management of inventory. No standards for inventories are laid down. Debtors turnover ratio: Debtors turnover ratio is also called as receivable turnover ratio. It relates net credit sales to sundry debtors. The ratio indicates the relationship between the sales and debtors of a firm. It is a test of the liquidity of the debtors of firm. It is calculated as follows: Net credit sales Debtors turnover ratio = ----------------------------------------------Debtors including bills receivables Where net credit sales = credit sales Returns The second ratio is the average collection period ratio. It brings out the nature of firms credit policy and the quality of the debtors more clearly. This ratio is calculated as: Debtors x Number of days in a year Average collection period = -----------------------------------------------------Credit sales per day The term debtor for this ratio is the debtors plus bills receivables at the end of the accounting period. Sometimes the ratio is computed by taking the overage of opening and

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closing debtors. It should be remembered that provision for bad and doubtful debts should not be deducted from debtors. When the credit sales are not given the total sales may be used. Significance of debtors turnover ratio: The debtor turnover ratio indicates the quality of debtors by measuring the rapidity or slowness in the collection process. A shorter collection period (on higher turnover ratio) indicates prompt payment of debtors while a longer period (lower turnover ratio) indicates the inefficiency of the credit collection. Interpretation: There are no fixed norms for this ratio. As a rule higher ratio indicates better efficiency. Creditors turnover ratio: Creditors turnover ratio is the ratio between net credit purchase and the amount of sundry creditors. It implies the credit period enjoyed by the firm in paying its creditors. It is computed by use the following formula: Net credit purchases Creditors turnover ratio = ---------------------------------------------------Sundry creditors bills payable Where Net credit purchases = credit purchase. Purchase return. The terms creditors for this ratio is the amount plus bills payable at the end of the accounting period. Sometimes the ratio is computed by taking the average of opening and closing creditors. The creditors turnover ratio may also be expressed in days. Then it is known as creditors payment period or creditors velocity. No. of days in a year Creditors velocity = -------------------------------------- x 365 days Net credit purchase Significance of creditors turnover ratio: This ratio reflects whether terms of credit allowed by suppliers are liberal or stringent. A high creditors Turnover ratio (shorter period) shows that creditors are being paid promptly; while a low turn ratio (longer period) reflects liberal credit terms granted by suppliers. Fixed Assets Turnover Ratio: Fixed assets turnover ratio shows the relationship between sales and fixed assets. It shows whether fixed assets are fully utilized, to be clearer, this ratio measures the efficiency with which a firm is utilizing its fixed assets in generating its sales. It is computed as follows: Sales Fixed Assets Turnover Ratio = ----------------------Fixed Assets The term fixed assets for this ratio is the depreciated value i.e. the amount of depreciation is deducted from the value of fixed assets.

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Significance of fixed Assets Turnover Ratio: This ratio measures the efficiency in the utilization of fixed assets. A high ratio reflects over trading. On the other hand, a lower ratio indicates idle capacity and excessive investment in fixed assets. Net sales Fixed assets turnover ratio = ----------------------------Fixed assets Interpretation: There cannot be any norms for these ratios. But as rule, a higher turnover indicates better utilization. LEVERAGE RATIOS: As already observed, the short-term creditors like banks and suppliers of raw materials are interested in the short-term solvency of a firm. For the analysis of short-term solvency or the current financial position, liquidity ratios are used. The shareholders, debenture holders and other long-term creditors like financial institutions are more interested in the long- term financial position or long term solvency of a firm. Leverage or solvency ratios are used for such an analysis. These ratios are also used to analyse the capital structure of a company. That is only these are also called capital structure ratios. The term solvency generally refers to the firm ability to pay the interest regularly and repay the principal amount of debt on due date. There are two aspects of long-term solvency of a firm: 1. Ability to repay the principal amount of loan on the due date and 2. Regular payment of interest. Accordingly, there are two types of leverage ratios. The first type of leverage ratios is based on the relationship between owned capital and borrowed capital. These ratios are calculated from the balance sheet items. The second type of leverage ratios is coverage ratios. These are computed from the profit and loss account. Debt-Equity Ratio: Debt-equity ratio shows the relationship between total debts and owned capital. It is the ratio of the amount invested by outsides to the amount invested by the shareholders. It is known as .External-internal Equity ratio.. This ratio reflects claims of shareholders and creditors against the assets of a company alternatively; this ratio indicates the relative proportion of debt and equity in financing the assets of a company. It may be expressed as follows:

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External Equity Outsides fund Debt-equity ratio = ------------------------ or --------------------------Internal Equity Shareholders funds The term external equity refers to total outside liabilities or borrowed funds. Outside liabilities include all debt whether long term or short term. Internal equity or shareholders funds include equity share capital, preference share capital and reserves and surpluses. Internal equity is equal to net worth. Significance of debt- Equity Ratio:This ratio is one of the most important measures of long-term solvency. It reflects the relative contributions of creditors and owners of business in its financing. It is an index of the degree of protection the creditors have a high ratio shows that the creditors have invested more in the business than the shareholders. Liquidity or quick assets include cash, bank balance debtors, and bills receivable and short-term marketable securities. In order words they are current assets minus stocks and prepaid expenses stock cannot be include in quick assets because it is not easily and readily convertible into cash. Prepaid expenses by their very nature cannot be used for payment of quick liabilities. Current liabilities taken after deducting that it tends to become a permanent mode of financing. Interpretation: A ratio of 1:1 is considered to be a satisfactory ratio, although there cannot be a standard norm for all types of businesses. Proprietary Ratio: This ratio establishes the relationship between shareholders funds and total assets financed by shareholders. This is variant of the debt-equity ratio. This ratio establishes the relationship between shareholders funds and total assets. It indicates the proportion of total assets financed by shareholders. It is usually computed as a percentage. It is computed as follows: Share Holders funds Proprietary Ratio = -------------------------------------------X100 Total assets or Total resources Shareholders funds include equity share capital, preference share capital and all reserves and surpluses. Total assets include all assets including goodwill. Significance of proprietary Ratio: Like debt-equity ratio, proprietary ratio gives results relating to capital structure of a company. It reflects the general financial strength of the company. It enables the creditors to find out the proportion of shareholders funds in the total assets. A high proprietary ratio indicates a relatively favourable position to the creditors at the time of liquidation. On the order hand, a low ratio indicates risk to creditors.

Interpretation: 45

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As proprietary ratio presents a relationship of owners funds to the total assets, the higher the ratio or the share of the shareholders in the total capital of the firm better is the long-term solvency position of the firm. Capital Gearing Ratio: This is one of the important ratios used to analyse the capital structure of a company. The term capital gearing refers to the proportion b/w fixed income bearing funds and equity shareholders funds. Fixed income bearing funds include. Debentures other long term loans and preference share capital. Equity shareholders funds include equity capital and all reserves and surplus that belong to equity shareholders. Preference share carry a fixed rate of dividend on equity shares and are notified. Fixed income bearing funds Capital gearing ratio = --------------------------------------------------------Equity shareholders funds Where Fixed income bearing funds = preference share capital + debentures+Long terms Significance of Capital gearing ratio: Capital gearing ratio reveals the company capital structure. This ratio is important not only to the company but also to investors. The capital gearing ratio may affect the company dividend policy building up of reserves etc. this ratio shows the effects of use of fixed interest dividend funds on the profits available to equity shareholders. Interpretation: If the preference share capital and other fixed interest bearing loans exceed the equity share capital and reserve then, the firm is highly geared and vice versa. Usually both are not preferred. A firm must be evenly geared. Profitability Ratio: The ultimate aim of any business enterprise is to earn maximum profit. Lord keens remarked .profit is the engine that drives the business enterprise. A firm should earn profits to survive and grow over a long period of time. To the management profit is the measure of efficiency and control. To the owners it is to measure of worth of their investment. To the creditors, it is the margin of safety. The management of the company should know how efficiently they carry on business operations. In order words, the management of the company is very much interested in the profitability of the company. Besides management, creditors and owners also are interested in the profitability of the co-creditors want to get interest and repayment of principal regularly. Owners want to get are as on able return on their investment. The profitability ratios measure the ability of the firm to earn an adequate return on sales total assets and invested capital. Profitability ratios are generally calculated either on relation to sales or in a relation to investment. The profitability ratios in relation to sales are gross profit ratio. Net

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profit ratio, operating ratio, expenses ratio etc. the profitability ratios in relation to investment are return on assets on investments, Return on Equity capital etc. Gross profit Ratio: Gross profit ratio is also known as gross margin. This is the ratio of gross profit to net sales. That is usually expressed as percentage. It is computed as follows: Gross profit Gross profit ratio=-------------------------x100 Sales Where, Gross profit= sales - Cost of goods sold. In the case of trading concern, cost of goods sold could be equal to opening stock plus purchase plus all direct expenses charged to trading account minus closing stock. In case of manufacturing concerns, it could be equal to the sum of cost of materials consumed, usage, direct expenses and all factory or manufacturing expenses. Significance of Gross Profit Ratio:Gross profit Ratio indicates the margin of profit on sales. It is useful to ascertain whether the average percentage of mark-up on the goods sold is maintained. Gross Profit is the result of the relationship between price, sales volume and the cost. A change in the gross margin can be brought about by changes in any of these factors. A high Gross Profit Ratio is a sign of good management. An increase in Gross Profit ratio may be due to any of the following factors: Increase in the selling price without any corresponding increase in the cost of goods sold. Decrease in the cost of goods sold without any corresponding decrease in the selling price and Under valuation of opening stock or overvaluation of closing stock A relatively low Gross Profit ratio is a danger signal. The decrease in the Gross Profit Ratio may be due to following factors. Decrease in the selling price without corresponding decrease in the coast of goods sold. Increase in the cost of goods sold without any corresponding increase in the selling price. Overvaluation of opening stock or under valuation of closing stock and Inability of the management to improve the volume of sales. Interpretation: As the gross profit is found by deducting cost of goods sold from the net sales, higher the gross profit ratio the better are the results. A low Gross Profit ratio indicates high cost of goods sold due to unfavourable purchases, polices, excessive competition etc.

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Net profit ratio: Net profit ratio is the ratio of net profit to sales. It is known as profit margin. It is usually expressed as percentage. It is calculated as follows: Net profit Net profit ratio = ------------------------------------x 100 Sales Here, net profit is the balance of profit and loss account after adjusting interests and taxes and all non-operating expenses like less on sale of fixed assets, provision or containment liability etc. Significance of Net Profit Ratio: Net profit ratio indicates managements efficiency is manufacturing, administrating and selling the products. This is a measure of overall profitability. It includes what portion of sales is left to the owners after all expenses have been meet. This ratio also indicates the firms capacity to withstand adverse economic conditions. A high Net Profit ratio could indicate higher overall efficiency of the business, better utilization of limited resources and reasonable return to owners. A low Net profit ratio could mean low efficiency and inadequate return to owners. Interpretation: A high Net Profit ratio indicates that the profitability of the firm is good. If the Net Profit ratio is not sufficient, the firm may not be able to achieve a satisfactory return on its investment. Operating ratio: The Operating Ratio is an important ratio that explains the changes in the Net Profit Margin Ratio. This is calculated by dividing all the operating expenses minus cost of goods sold, selling expenses and general administrative expenses by net sales. Cost of goods sold + Operating profit Operating ratio = --------------------------------------------------------x100 Sales Interpretation: Operating ratio indicates the percentage of net sales that is consumed by operating costs. Higher the operating ratio, the less favourable it is to the firm. This is because it would have a small margin to lower interest, income tax, dividend and reserves. Return on Investment (ROI): The overall objective of a business is to earn a satisfactory return on capital invested. The management and owners are very much interested in the rate of earning on the capital employed. The rate of earning on capital employed (expressed as a percentage) is referred to as ROI. This is the overall profitability as follows:

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Profit before interest and tax ROI = ----------------------------------------------Capital employed Where capital employed is computed from the assets side. It will include: Fixed assets: Land and building Plant and machinery Furniture and fittings Motor vehicle Investment made in business Current assets: Cash Bank balance Book debts Inventories Bills receivable Current liabilities: Sundry creditors Bills payable Bank over draft Interpretation: There cannot be any norms for this ratio. It depends on the industry. Return on Share Holders Fund: This is the ratio of net profit shareholders fund or net worth. It measures the profitability from the shareholders point of view. It is calculated as follows: Profit after interest and tax Return on Shareholders Fund = ------------------------------------------x100 Shareholders fund Here the profit is the profit after tax and preference dividend out of the profit left after tax. The preference dividend is paid first. The remaining profit is said to be available to equity shareholders. Equity shareholders fund includes equity capital and reserves and surplus. Cash Profit Ratio: The net profits of a firm are affected by the amount/method of depreciation charged. Further, depreciation being non-cash expense, it is better to calculate cash profit ratio. This ratio measures the relationship between cash generated from operations and the net sales. Cash profit Cash Profit Ratio = ------------------------------------------x100 Net sales

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Where, cash profit = Net Profit +Depreciation Administrative Expense Ratio: The ratio which establishes the relationship between administrative expense and net sales is called administrative expense ratio. Administrative expense Administrative Expense Ratio = -------------------------------------------x100 Net sales

Total Asset Turnover Ratio: It is relation between sales and total assets. This ratio is calculated to measure the efficiency with which a firm utilizes its assets. Sales Total Assets Turnover Ratio = -----------------------------------------Total Assets

2. RESEARCH DESIGN
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STATEMENT OF PROBLEM: The analysis of the financial statements i.e. income statement and the balance sheet it is very difficult to analyse the complete picture of financial performance. Therefore there is a need of applying the modern tools of management accounting to access the exact financial performance and position of the business enterprise. Accounting ratios are relationships expressed in mathematical terms between the figures that are connected with each other in some manner. All companies whether big or small will prefer to be in good financial position. The balance sheet of the company that has been undertaken for the study, furnishes that the company is in good financial position. But the exact worth of the financial position of the company would be better understandable only if it is subjected to analysis such as .Ratio Analysis in RCF Limited, Bangalore. Hence the topic for the study is chosen as .Analysis of Financial Statement using Ratio Analysis. OBJECTIVES OF THE STUDY: To ascertain the financial ratios which are likely to reflect the liquidity, profitability, solvency as well as the profit of .RCF Limited. To know the profit of .RCF Limited. and understand the movement of profits over the years. To assess the operating efficiency of .RCF Limited. To know the Equity position of .RCF Limited. To know the working capital position of .RCF Limited. NEED FOR THE STUDY: The financial parameters are the ultimate performance indicator of any company. This is because invariability all costs and efficiency activities and solvency position of the company will reflect the financial status of the company. The following are stated to be in the need for the study: To know the financial performance of RCF LIMIMTED. To know the operating efficiency of the company. To know liquidity position of the company. To understand the movements of profits over a period of time. To know the reasons for the variation of profits.

In short, this study is conducted so that the financial performance evaluation will serve as an eye opener to the company. 45

RATIO ANALYSIS

SCOPE OF THE STUDY: This study is about the ratio analysis of .RCF LIMITED. Which is a part of financial analysis? Ratio analysis is perhaps the first financial tool developed to analyse and interpret the financial statement and is still used widely for this purpose. Financial performance analysis is a well-researched area and innumerable studies have proved the utility and usefulness of this analytical technique. This research seeks to investigate and constructively contribute to help: The company in finding out the gray areas for improvement in performance. The Company to understand its own position over time. The managers to understand their contribution to the performance of the company. The present and potential investors, outside parties such as the creditors, debtors, government and many more to get an idea of the overall performance of the firm. The researcher can further analyse the cash flow statement, funds flow statement, working capital analysis, balance sheet analysis, marketing trends to know the financial and liquidity position of the .RCF Limited. DATA COLLECTION: Since the study is restricted only to financial statements of .RCF Limited. There is no scope for the primary collection of data. The data collection is done through Secondary data which is collected by referring annual reports i.e. balance sheets, profit and loss account etc., of .RCF Limited.. LIMITATIONS OF THE STUDY: This study is limited to .GMR Energy Limited., Mumbai. Since, the company is one among the corporate sector so it was a bit tough for me to approach the company at regular intervals. Since the study is an academic effort, availability time was the constraint.

3. COMPANY PROFILE
45

RATIO ANALYSIS

Rashtriya Chemicals & Fertilizers Ltd. (RCF) is one of the leading companies in the area of fertilizers and industrial chemicals in India. It has two production units- one at Trombay in Mumbai and another at Thal near Alibag in Raigad district of Maharashtra. Trombay Unit of RCF produces urea (brand name Ujjwala), complex fertilizers (under the brand name of Suphala 15:15:15 and Suphala 20:20:0) and variety of industrial chemicals such as ammonia, methanol, methyl amines, dilute nitric acid, concentrated nitric acid, sodium nitrite/ nitrate, Ammonium Bicarbonate, sulphuric acid, ammonium nitrate melt. It also produces phosphoric acid for captive use. Thal Unit of RCF produces ammonia, urea, methyl amines, DMF, DMAc and formic acid. RCF has been awarded Mini Ratna status by Government of India and its performance has been adjudged as excellent for last six years on the basis of MoUs signed between Government of India and RCF. RCF is one of the few public sector undertakings making profit almost every year since its inception Both plants at Trombay and Thal are energy intensive. Trombay Unit requires about 1.90 MMSCMD of associated gas and about 950 MWH of power per day to run all its plants at rated capacity. Thal Unit requires 3.80 MMSCMD of associated gas and about 750 MWH of power (partly about 650 MWH met by captive generation) to operate at rated capacity. However, during last ten years, the supply of associated gas from GAIL/ONGC has started dwindling. Thal Unit was the first one to be affected due to gas shortage. To survive under the circumstances, Thal Unit switched over to naphtha as fuel for its service boilers and auxiliary boilers and also supplemented the feed of the ammonia plant with naphtha which is almost three times costlier than naphtha. Trombay Unit started facing problems in gas supply during last five years and used fuel oil as supplementary fuel for its service boilers. However, as per policy of the GoI, the additional cost due to use of fuel oil was not considered in the calculation of Retention Price of urea produced at Trombay. Therefore, in order to optimize the product mix to operate within the available associated gas of about 1.10 MMSCMD, the production of urea along with production of ammonia of 350 MTPD had to be stopped. About 15-20 years back, more emphasis was on production without much concern about energy consumption. However, due to reduced gas availability and increasing trend of its price and higher cost of other options like naphtha/ fuel oil and competition in the changed scenario of liberalization and globalisation, RCF started giving more close attention towards energy conservation. It was soon realised that the fruits of energy conservation cannot be reaped through efforts of few individuals of the company alone unless all employees are involved actively. RCF management devised a multi-pronged strategy to involve employees at all levels to reduce energy consumption of its plants. This paper describes how RCF motivates its employees of Trombay Unit to reduce energy costs and what are the results of such efforts.

RCFs Philosophy in motivating its Employees

45

RATIO ANALYSIS

People become really quite remarkable when they start thinking that they can do things. When they believe in themselves they have the first secret of success. ----Norman Vincent Peale The above quote illustrates the power of an individual when he starts believing in himself and start thinking to produce better results in the terms of productivity for himself and his Company. RCF recognised that the improvement in the work related areas can be brought about by total participation of employees. It formed the root of two schemes being implemented successfully in RCF. RCF put emphasis to develop its employees particularly at workers level to think and give suggestions to reduce energy costs. This was done at two levels

Individual level where an employee can participate by giving his suggestion through Suggestion Scheme. Group levels where a team of employees working in an area study a problem related to energy consumption in their area and give a suggestion to reduce energy cost. This movement is known as Quality Circle. Following are the main objectives of the Suggestion Scheme and Quality Circle Movement in RCF:

To encourage employees to find out solutions to problems in their working areas for a better productivity. To reduce wastage of any kind- man-hours, materials, energy, money, raw materials etc. To involve employees and allow them to participate in the area of productivity improvement. To give opportunity to employees ideas in creativity and fulfil their desire for recognition. To channelize the positive energy of employees thinking into constructive purpose.

Suggestion scheme

45

RATIO ANALYSIS

RCF recognised the idea of utilising individuals creativity through suggestions and started the scheme in 1965. After in operation for last about 38 years, it is still one of the most effective instrument for pooling in the most collective innovative ideas of the employees and translating them into reality by implementation for better and all round productivity awareness. Management Services department in each Unit of RCF is the coordinating agency of the scheme.
Awards for Suggestions

The suggestions are classified in mainly two categories viz. Tangible and intangible benefits. An award for tangible benefits is calculated on the basis of saving potential of the suggestion, payback period of the investment required for implementation of suggestion, originality and technicality and complexity of the idea, ease of implementation etc. Prizes awarded to suggestions accepted are given in cash and the amount depends on expected savings through the sugestion to the company. A prize ranges from Rs. 100 to Rs. 5000. The Suggstion Supreme Award (Best Suggestion of the Year Award) is given out of the suggestions receivedand accepted during a year.The suggestor receives a rotating trophy, Rs. 2500 in cash and a replica of the trophy on 26th January every year. A record is kept of the number of suggestions given by an employee. When 5 suggestions of an employees are accepted, the employee gets a membership of Shreshtha Vichari Sangh (Top Suggestors Club). Every year top three best suggestions of unionised category are selected for sending nominations to Vishwakarma Rashtriya Puraskar instituted by Labour Ministry of Government of India. So far six numbers of employees have been awarded Vishwakarma Rashtriya Purskar.

Mission
RCF as a corporate body and Government of India undertaking is responsible to the people of India, the Government as owner, Government as Government, Consumers, Employees, the Society at large and Posterity. The company is simultaneously accountable to all these agencies that have a stake in its successful operation, growth and welfare.

4. DATA ANALYSIS AND INTERPRETATION

TREND BALANCESHEET 45

RATIO ANALYSIS

in Rs. Cr PARTICULARS Sources Of Funds

Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves 551.69 551.69 0.00 0.00 1,460. 04 0.00 2,011. 73 351.71 129.91 481.62 2,493.35 551.69 551.69 0.00 0.00 1,285. 45 0.00 1,837. 14 258.10 1,072. 74 1,330. 84 3,167.98 551.69 551.69 0.00 0.00 1,121. 35 0.00 1,673. 04 136.01 1,288. 22 1,424. 23 3097.27,

Mar '11

Mar '10

Mar '09

% 100 100 130.20 120.24 258.59 10.08 33.81 80.50 113.06 109.47 119.05 38.39 43.02 77.19 49.83 250.98 60.50 50.95 87.70 60.29 57.62 59.90 58.03 63.22

% 100 100 114.63 109.80 189.76 83.27 93.44 102.28 108.38 104.18 115.36 59.19 42.96 59.13 48.03 214.02 53.68 131.43 191.81 88.10 82.95 54.90 77.93 101.29

% 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 45

Networth
Secured Loans Unsecured Loans Total Debt

SOURCES OF FUNDS Application Of Funds

Gross Block Less: Accum. Depreciation

Net Block
Capital Work in Progress

Investments
Inventories Sundry Debtors Cash and Bank Balance

3,245. 25 1,962. 82 1,282. 43 90.84 15.32 534.75 891.17 99.14 1,525. 06 574.91 320.11 2,420. 08 1,072. 16 243.16 1,315. 32 1,104.

3,110. 69 1,867. 98 1,242. 71 140.05 15.30 409.59 858.98 84.54 1,353. 11 1,482. 97 700.11 3,536. 19 1,543. 43 222.84 1,766. 27 1,769.

Total Current Assets

Loans and Advances Fixed Deposits

Total CA, Loans & Advances Current Liabilities

Provisions

Total CL & Provisions Net Current Assets

2,870. 16 1,793. 00 1,077. 16 236.58 35.61 692.69 1,788. 17 39.50 2,520. 36 1,128. 29 365.00 4,013. 65 1,860. 46 405.89 2,266. 35 1,747.

RATIO ANALYSIS 76 92 30

APPLICATIONOF FUNDS

2,493.3 5

3,167.9 8

3,097.2 7

80.50

102.28

100

P&L A/C in Rs. Cr Mar '11 PARTICULARS Income

Sales Turnover Excise Duty 5,591.42 69.20 5,522.22 156.50 -19.50 5,711.91 55.25 5,656.66 168.08 -92.43 8,467.17 88.93 8,378.24 -132.37 -384.75

Mar '10

Mar '09

Net Sales
Other Income Stock Adjustments

Total Income Expenditure

Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses

5,659.22
3,039.29 871.85 377.35 63.15 650.59 127.79

5,732.31
3,558.53 575.42 358.03 55.65 619.41 74.04

7,861.12
4,714.27 1,369.03 381.30 51.30 681.75 131.11

Selling and Admin Expenses

Miscellaneous Expenses

Total Expenses
Operating Profit PBDIT Interest PBDT Depreciation

5,130.02
372.70 529.20 66.14 463.06 112.62

5,241.08
323.15 491.23 73.05 418.18 105.56

7,328.76
664.73 532.36 121.37 410.99 86.63

Profit Before Tax

Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Equity Dividend Corporate Dividend Tax

350.44
9.34 359.78 114.27 245.12 2,090.73 60.69 9.84

312.62
8.22 320.84 111.73 234.87 1,682.55 60.69 10.08

324.36
4.16 328.52 114.12 211.58 2,614.49 66.20 11.25

45

RATIO ANALYSIS

Cash Flow in Rs. Cr PARTICULARS Net Profit Before Tax

Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents

Mar '11 354.69

650.67 -50.29 -965.78 -365.40 784.54 419.14

Mar '10 344.21

694.14 -72.43 -248.86 372.85 411.80 784.65

Mar '09 325.70

260.72 130.36 -35.89 355.19 49.31 404.50

LIQUIAITY RATIOS: 1] CURRENT RATIO Current assets 2420.08 Current ratio = ------------------------- = --------------- = 1.43 Current liabilities 1315.32 Particulars Current assets Current liabilities Current Ratio
Mar '11 Mar '10 Mar '09

2,420.08 1,315.32 1.43

3,536.19 1,766.27 1.25

4,013.65 2,266.35 1.13

Graph 1 . Current Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The table 1 reveals that the current ratio is 1.13 in the year 2008-2009, it has increased to 1.25 in the year 2009-10. It is again increased to 1.43 in the year 20010-11. The current ratio is increased due to increase in current assets i.e. Inventories, Cash and Bank balances and other Current Assets. Hence, company has to maintain constant position of current Assets in order to meet its short obligation. 2] WORKING CAPITAL TURNOVER RATIO Sales 5522.22 Working capital turnover ratio = ---------------------------- = --------------- = 4.99 Net working capital 1104.76 Particulars Sales Net Working capital Net Working capital ratio
Mar '11 Mar '10 Mar '09

5,522.22 1,104.76 4.99

5,656.66 1,769.92 3.19

8,378.24 1,747.30 4.79

Graph 2 Working Capital Turnover Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The table 2 reveals that the working capital turnover ratio is 4.79 in the year 2008-09; it is decreased to 3.19 in the year 2009-10 and it is increased to 4.99 in the year 2010-11. The working capital turnover ratio is decreased in the year 2009-10 when compared to base year i.e. 2008-09 because of increase in net working capital. 3] FIXED ASSETS TURNOVER RATIO: Sales 5522.22 Fixed Assets Turnover Ratio = ----------------------- = -------------- = 4.30 Fixed Assets 1282.43 Particulars Sales Fixed assets Fixed assets ratio
Mar '11 Mar '10 Mar '09

turnover

5,522.22 1,282.43 4.30

5,656.66 1,242.71 4.55

8,378.24 1,077.16 7.77

Graph 3 . Fixed Assets Turnover Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: From the above table we observe that Fixed Asset Turnover Ratio is 7.77 in the year 2008-09, it is decreased to 4.55 in 2009-10, and it has decreased to 4.30 in the year 2010-11. The fixed assets turnover ratio is decreased because of decrease in sales which indicates assets are not utilized efficiently.

LEVERAGE RATIOS: 4] DEBT EQUITY RATIO: External Equity Outsides fund 481.62 Debt-equity ratio = ------------------------ or ----------------------------- = -------------- = 0.24 Internal Equity Shareholders funds 2011.73

Particulars Outsiders Fund Shareholders Fund Debt Equity Ratio

Mar '11

Mar '10

Mar '09

481.62 2,011.73
0.24

1,330.84 1,837.14
0.72

1,424.23 1,673.04
0.85

Graph 4. Debt Equity Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The table 4 reveals that the debt equity ratio is 0.85 in the year 2008-09, it is decreased to 0.72 in the year 2009-10, and again it is decreased to 0.24 in 2010-11. Therefore, there is a gradual decrease in the debt equity ratio during the 3 years due to repayment of borrowings.

5 ] PROPRIETARY RATIO:

Share Holders funds 2011.73 Proprietary Ratio = -------------------------------------------X100 = ------------- x 100 = 0.80 % Total assets or Total resources 2493.35

Particulars Shareholders Fund Total Assets Proprietary Ratio

Mar '11

Mar '10

Mar '09

2,011.73 2,493.35 0.80

1,837.14 3,167.98 0.57

1,673.04 3097.27 0.54

Graph 5 . Proprietary Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: It is clear from table 5 that proprietary ratio is 0.54 in 2008-09; it is decreased to 0.57 in the year 2009-10, and it is also decreased to 0.80 in the year 2010-11. As there is a gradual increase in the proprietary ratio over the 3 years, the long-term solvency is satisfactory.

PROFITABILITY RATIOS: 6] GROSS PROFIT RATIO: Gross profit 1307.58 Gross profit ratio=-------------------------x100 = ------------ x 100 = 23.67 % Sales 5522.22 Particulars Gross profit Sales Gross Profit Ratio
Mar '11 Mar '10 Mar '09

1307.58 5,522.22 23.67

1184.68 5,656.66 20.94

1345.22 8,378.24 16.05

Graph 6 . Gross Profit Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The table 6 reveals that the Gross Profit Ratio is 16.05 in the year 2008-09, it is increased to 20.94 in 2009-10, and again it is increased to 23.67 in the year 2010-11. The gross profit ratio is gradually increasing every year. It shows that, higher the gross profit ratio the better is the results i.e. the companys profitability has been increased in the past 3 years. Hence it is satisfactory.

7] NET PROFIT RATIO: Net profit 245.12 Net profit ratio = --------------------------x 100 = ------------- x 100 = 4.43 % Sales 5522.22 Particulars Net profit Sales Net Profit Ratio
Mar '11 Mar '10 Mar '09

245.12 5,522.22 4.43

234.87 5,656.66 4.15

211.58 8,378.24 2.52

Graph 7 . Net Profit Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: In above table the net profit is gradually increasing every year i.e.2.52 in the year 200809, 4.15 in 2009-10 and 4.43 in 2010-11. A high Net Profit ratio indicates that the profitability of the firm is good. Since the Net Profit Ratio is satisfactory, the company can see gradual growth in coming days.

8] OPERATING RATIO: Cost of goods sold + Operating profit Operating ratio = --------------------------------------------------------x100 Sales 4351.64 + 372.70 = -------------------------- x 100 = 85.55 % 5522.22 Particulars Cost of goods sold Operating profit Sales
Mar '11 Mar '10 Mar '09

4351.64 372.70 5,522.22

4547.63 323.15 5,656.66

6515.90 664.73 8,378.24 45

RATIO ANALYSIS

Operating Ratio

85.55

86.10

85.70

Graph 8 . Operating Ratio:

Analysis and Interpretation: The above table 8 reveals that the operating ratio is 85.70 in 2008-09, it has increased to 86.10 in the 2009-10 and it is decreased to 85.55 in the year 2010-11. Even though there is a decrease operating ratio in the year 2008-09 & 2010-11 which is an unfavourable situation as it can be 70% to 85%, but it has crossed 85%. So operating ratio is considered to be satisfactory.

9] RETURN ON SHAREHOLDERS FUND: Profit after interest and tax Return on Shareholders Fund = ------------------------------------------x100 Shareholders fund 245.12 = ----------------- x 100 = 44.43 % 551.69 Mar '11 Mar '10 Particulars Profit after interest and 245.12 234.87 tax Shareholders Fund 551.69 551.69 Return on Shareholders 44.43 42.57 Fund

Mar '09

211.58 551.69 38.35

45

RATIO ANALYSIS

Graph 9 ] Return on Shareholders Fund:

Analysis and Interpretation: In the year 2008-09 the return on shareholders fund was 38.35, in 2009-10 it has increased to 42.57 and in the year 2010-11 again it is increased to 44.43. There is a gradual increase in the shareholders fund. Thus, the overall efficiency of a firm has been increased gradually. Hence the company measures its profitability from the shareholders point of view which is good sign for the company.

10 ] RETURN ON EQUITY: Profit Available For Equity Shareholders Return on Equity = ------------------------------------------------------------x 100 Equity shareholders Fund 245.12 = --------------------- x 100 = 12.18 % 2011.73 Particulars Profit after tax Net worth Return on Equity
Mar '11 Mar '10 Mar '09

245.12 2,011.73 12.18

234.87 1837.14 12.78

211.58 1,673.04 12.64

45

RATIO ANALYSIS

Graph 10 . Return on Equity:

Analysis and Interpretation: In the year 2008-09, the Return on Equity is 12.64, it has increased to 12.78 in the year 2009-10 and it has decreased to 12.18 in the year 2010-11. As there is gradual decrease in the past yrs. which shows that the company is performing not well where equity shareholders can get back 11% to 13% return if they invest in the company.

11] RETURN ON ASSETS: Net profit 245.12 Return on assets = -----------------------x 100 = ---------------x 100 = 9.83 % Total assets 2493.35 Particulars Net profit Total assets Return on assets
Mar '11 Mar '10 Mar '09

245.12 2,493.35 9.83

234.87 3,167.98 7.41

211.58 3097.27 6.83

Graph 11 . Return on Assets:

45

RATIO ANALYSIS

Analysis and Interpretation: The above table reveals that the Return on Assets is 6.83 in the year 2008-09, it has increased to 7.41 in 2009-10 and again it is increased to 9.83 in the year 2010-11. There is gradual increase in the return on assets from past 3 years which indicates the assets are not fully utilized and maintained well. 12] ADMINISTRATIVE EXPENSE RATIO: Administrative expense Administrative Expense Ratio = -------------------------------------------x100 Net sales

650.59 = -------------- x 100 = 11.78 % 5522.22 Particulars Administrative expenses Net sales Administrative Expense Ratio
Mar '11 Mar '10 Mar '09

650.59 5,522.22 11.78

619.41 5656.66 10.95

681.75 8378.24 8.13

Graph 12. Administrative Expense Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The above table 12 reveals that the administration expense ratio is 8.13 in the year 200809, it has increased to 10.95 in 2009-10 and it is again increased to 11.78 in the year 2010-11. The administrative expense ratio is having a high increase because the administration cost is more. This ratio has a negative effect on net profit of a company. Hence the company must control the administrative expense.

13] TOTAL ASSET TURNOVER RATIO:

Sales 5522.22 Total Assets Turnover Ratio = -------------------- = --------------- = 2.21 Total Assets 2493.35 Particulars Sales Total assets Total asset turnover ratio
Mar '11 Mar '10 Mar '09

5,522.22 2,493.35 2.21

5656.66 3,167.98 1.78

8378.24 3097.27 2.70

Graph 13 . Total Asset Turnover Ratio:

45

RATIO ANALYSIS

Analysis and Interpretation: The table 14 shows that the Total Turnover Ratio is 2.70 in the year 2008-09, it has decreased to 1.78 in 2009-10 and it has increased to 2.21 in 2010-11. It has decreased in 2009-10 due to decrease in the total assets and sales. This shows that the total assets are not utilized effectively to generate sales.

5. FINDINGS AND SUGGESTIONS

FINDINGS: The ratio has been increased but it has Hence the company must take necessary measures to meet standard ratio. The working capital turnover ratio has decreased to 3.19 in the year 2009-10 when compared to the base year 2008-09 which indicates that the ratio is not satisfactory. The fixed asset turnover ratio has been decreased in the year 2009-10 when compared to base year i.e. 2008-09 but it has got down in the year 2010-11. Hence the company must utilize the assets efficiently. The debt equity ratio has decreased gradually during the 3 years. So the company must repay the borrowings within given time. 45

RATIO ANALYSIS

The proprietary ratio has increased in 3 years. Hence, the long term solvency is satisfactory. Gross profit ratio is increased to 23.67 in the year 2010-11 when compared to the year 2008-09. Hence, the gross profit ratio is highly satisfactory. The net profit ratio is also highly satisfactory. By this the company can enjoy huge profits and it also indicates growth trend of the company. The operating ratio is not favourable because it has not crossed 100%. The return shareholders fund has increased gradually which measure its profitability from the shareholders point of view. The increase in return on equity indicates that the company is performing well and the equity shareholders can get back high returns. This helps the company to gain popularity but in year 2010-11 return on equity ratio decrease. The return on assets has increased gradually which shows the unfavourable situation for the company. Hence the total assets must be utilized effectively. The administration expense ratio is gradually increased in 3 years which is an unfavourable situation for the company because it indicates the negative effect on net profit. Hence, the administration expense must be controlled efficiently

The decrease of total asset turnover ratio in the year 2009-10 when compared to other 2 years i.e. 2008-09 and 2010-11. This indicates that there is decrease in sales. Hence, the company should utilize total assets effectively to generate sales. SUGGESTIONS: The company has to take measures to increase sales and utilize the assets effectively. There is an increase in return on assets. Hence, the company should take measures to maintain with the return on assets. The company must control the administrative expenses so that it does not indicate negative effect on net profit.

45

RATIO ANALYSIS

Optimum utilization of resources will help the company to get more profits. Maintenance of liquid assets will definitely help the company in facing the unexpected situation. In conducting of successful business, shareholders wealth plays a vital role.

6. CONCLUSIONS
Every organization needs the financial manager to manage the financial activities of a company by using different analytical tools, which helps the company in taking managerial and tactical decision. So every manager should make proper analysis of operational performance of the company. The analysis and interpretation of various ratios will help in giving better understanding of the financial conditions and the performance of the organization. It is a perfectly organized company having all the departments well organized to perform the activities that lead to the customers satisfaction. Company is performing satisfactorily as the increasing trend and is expected to grow in the coming years also. Though the company assets are not fully utilized and maintained well, the firm is in a liquidity position as it is earning profit from last 3 years. The company should take some necessary precautions regarding utilizing the assets. 45

RATIO ANALYSIS

Finally I can conclude that the RCF Limited is performing efficiently at the outset satisfactorily.

BIBLOGRAPHY

Text books: 1. Financial Management - Reddy, Appaniah - B.S.Raman 2. Management Accounting - R.K.Sharma and S.K.Gupta Web sites: 45

RATIO ANALYSIS

www.rcfltd.com www.studyfinance.com

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